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BESS SCHOELLKOPF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. L. R. MUNGER AND J. FRED SCHOELLKOPF, EXECUTORS OF THE ESTATE OF LAURA D. WILSON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Schoellkopf v. CommissionerDocket Nos. 71974, 71975.United States Board of Tax Appeals32 B.T.A. 88; 1935 BTA LEXIS 999; February 19, 1935, Promulgated *999 A private corporation, doing business in the State of Texas, and owning a varied assortment of obligations of subdivisions of the States of Texas and New Mexico, created a trust and transferred the municipal obligations to it, the corporation thereupon issuing trust certificates secured by the obligations in trust, the interest upon the trust certificates, except in certain instances, being payable by the trustee out of interest collected on the obligations. Held, the interest paid to the holders of the trust certificates is to be included in gross income, and is not free from tax as interest upon the obligations of a state or political subdivision thereof, under section 22(b)(4) of the Revenue Act of 1928. F. E. Youngman, Esq., and P. W. Phillips, Esq., for the petitioners. George D. Brabson, Esq., for the respondent. VAN FOSSAN *88 These proceedings were brought to redetermine deficiencies in the income tax of the petitioner, Bess Schoellkopf, for the year 1930 in the sum of $928.97 and of the petitioners, L. R. Munger and J. Fred Schoellkopf, executors of the estate of Laura D. Wilson, deceased, for the same year in the sum of $1,037.88. *1000 The sole issue is whether or not the petitioners, as owners of certificates of beneficial interests in trusts whose corpus consists only of obligations of states or political subdivisions thereof, are entitled to exclude from their gross income the interest received in accordance with the terms of such certificates. The facts were stipulated substantially as follows. *89 FINDINGS OF FACT. The petitioner in Docket No. 71974, Bess Schoellkopf, is an individual residing at Dallas, Texas. The petitioners in Docket No. 71975, L. R. Munger and J. Fred Schoellkopf, are the duly appointed, qualified, and acting executors under the last will and testament of Laura D. Wilson, deceased. During the year 1930 the petitioner in Docket No. 71974 and the petitioners' decedent in Docket No. 71975 owned certain certificates of interest in trusts created by the Texas Bitulithic Co., the Fain-Townsend Co., and the Realty Trust Co., corporations, all of Dallas, Texas, pursuant to trust agreements executed under the dates of March 2, 1925, January 15, 1927, and May 1, 1925, respectively. The material provisions of the trust agreement executed by the Realty Trust Co. on May 1, 1925, which*1001 is essentially similar to the two other trust agreements, are as follows: WHEREAS, the Company is the Owner of or may hereafter acquire certain claims of special assessments against real estate and against the owners thereof, all evidenced by ordinances of assessment passed by the respective cities in which the said real estate is located, and also claims of special assessment further evidenced by certificates of special assessment or tax bills or warrants, and also municipal bonds and other direct obligations of cities and towns, such certificates and obligations being sometimes hereinafter referred to as "Securities"; and, WHEREAS, the said respective obligations hereinbefore mentioned are in sundry uneven amounts, and mature at various and sundry times and bear sundry rates of interest respectively, and it is impracticable to offer the same for sale separately, and the interest of the Company will be best conserved by selling and conveying the same to said Trustee absolutely, to be by said Trustee held and applied under the provisions of the Trust hereby created and by issuing in lieu thereof ownership certificates in the form hereinafter provided representing the beneficial*1002 interests; and, WHEREAS, the Company is further desirous of assuring to each and every beneficiary hereunder that the funds realized from the collection of the interest on such securities and from the collection or sale of such securities, shall be sufficient at all times for the payment therefrom of all the principal and interest in said respective ownership certificates expressed as and when the same is by said ownership certificates expressed to be due and payable, and for the better accomplishment of such purposes will deposit with and assign to the Trustee hereunder an additional amount of securities to a par amount equal to five per cent (5%) of the face value of all ownership certificates at any time outstanding hereunder; and, WHEREAS, the Company is further desirous of procuring the prompt collection of the principal and interest of the said securities as the same respectively mature and the distribution thereof to and among the respective beneficiaries hereunder, as in this agreement more particularly set forth; and WHEREAS, such ownership certificates and interest coupons to be attached thereto and the Trustee's certificate of authentication thereof it is agreed shall*1003 be in substantially the following form (the number, amount, series, date, date of interest, and date of maturity being properly inserted), to-wit: *90 (Form of Ownership Certificate) MUNICIPAL TRUST OWNERSHIP CERTIFICATE No. SERIES $ Realty Trust Company, a corporation, duly organized and existing under and by virtue of the Laws of the State of Texas, having its principal office in the City of Dallas, Texas, does hereby certify that the bearer hereof, or, if this ownership certificate be registered, the registered holder hereof, is entitled to participation in the proceeds and avails of certain special assessment certificates, bonds, and direct obligations issued by municipalities of the States of Texas and New Mexico, and heretofore assigned and delivered to City National Bank of Dallas, Texas, as Trustee under a certain agreement of trust, dated as of the first day of May, 1925, to the extent of the principal sum of Dollars ($ ) payable from such proceeds and avails on the first day of , 19 , with interest upon the said principal sum herein expressed from date hereof at the rate of per cent ( %) per annum, payable on the first day of and of in each year upon presentation*1004 and surrender of coupons hereto attached as they severally mature at the office of the said City National Bank of Dallas, Texas, all in the manner and upon the terms more particularly set forth in the agreement of trust between Realty Trust Company and City National Bank of Dallas, as Trustee, hereinbefore mentioned, to which agreement reference is hereby made for a full description of the rights of the holder or registered owner hereof and the terms, provisions, and conditions upon which this ownership certificate is issued and held. The Realty Trust Company, for better securing the distribution to the holder or the registered owner hereof from the proceeds and avails of the securities held by the said City National Bank of Dallas, as Trustee, under the agreement hereinbefore expressed, has agreed with said City National Bank of Dallas, as Trustee, that the par value of the said securities held by said Trustee under said agreement shall at all times be equal to One Hundred Five Per Cent (105%) of the aggregate principal amount expressed in all of the outstanding ownership certificates of the series of which this ownership certificate is one. The bearer or registered holder hereof*1005 by the acceptance of this ownership certificate consents to and is bound by all the terms, covenants, and agreements in the said agreement of trust hereinbefore referred to expressed, and particularly waives and releases all interest collected by the said Trustee upon the securities held by it under the provisions of the said agreement of trust in excess of interest at the rate herein specified. This ownership certificate shall pass by delivery, unless registered in the name of the owner on the books of the Trustee * * *. Such registration, however, shall not affect the negotiability of the coupons, which shall continue to be negotiable by delivery merely, notwithstanding registration hereof. * * * (Form of Interest Coupon) No. $ Due to bearer hereof on the first day of 19 , on surrender hereof at the office of City National Bank of Dallas, in the City of Dallas, Texas. Dollars, being the agreed semi-annual interest rate on Municipal Trust Ownership Certificate No. , Series , issued by Realty Trust Company. * * * SECTION *91 2. Whenever the Company shall desire to issue any series of ownership certificates pursuant to the provisions hereof, it shall deliver*1006 the same to the Trustee with the written order provided for in Section One of this Article, accompanied by special assessment certificates, or bonds or direct obligations, issued by municipalities either of the State of Texas or of the State of New Mexico, or of both of said States, then duly assigned to the Trustee in such manner as to vest title to the same in the said Trustee, to a par amount of One Hundred Five per cent (105%) of the par amount of the ownership certificates so to be authenticated. Every such order shall be further accompanied by the following: * * * Every security delivered and assigned to the Trustee under the pvosions [sic] of this Section shall have endorsed thereon by the Company its unconditional guarantee of the prompt payment of the principal and interest of such security as and when the same shall become due and payable, which guarantee shall be in form as shall be satisfactory to the Trustee. * * * SECTION 3. The owner or registered holder of each ownership certificate issued hereunder shall, subject to the terms hereof, be a beneficiary in the series of securities sold and assigned to the Trustee hereunder as the basis of the issuance*1007 of the ownership certificates of such series in the proportion that the par amount recited in such ownership certificate bears to the par amount of all the said ownership certificates of the said series issued and outstanding hereunder. * * * ARTICLE II. * * * SECTION 2. In the event the Trustee shall not have in its hands applicable to that purpose funds with which to meet the next accruing installment of principal and interest due to the holders of any series of ownership certificates issued hereunder at least five (5) days preceding the date upon which the said payments are respectively expressed to become due, then the Company upon notification by the Trustee of the deficiency of funds in its hands so to make the said payments shall at once and not less than five (5) days preceding the date on which the said respective payments are so expressed to become due, advance and pay to the Trustee, to be by it applied in the purchase of said ownership certificates or coupons as hereinafter provided, cash in an amount sufficient, with the funds then in the hands of the Trustee, to make said payments respectively in full. As to all advancements so made by the company from time*1008 to time, the Company shall be entitled to receive from the Trustee as and when the same shall be surrendered to the Trustee and duly purchased by it from said fund, ownership certificates and coupons issued hereunder to the face amount as near as may be to the advancements so made, and thereafter the Company shall be entitled as the owner and holder of such ownership certificates and coupons to all the rights and benefits of the former owner and holder thereof; subject, nevertheless, to the right of the owners and holders of all other ownership certificates of the said series to receive payment in full of all principal and interest expressed to be due upon such ownership certificates prior to any payment of principal or interest being made upon the ownership certificates or coupons so held by the Company; and the Trustee shall endorse upon the face of all ownership certificates and coupons so delivered to the Company that the same are subordinate *92 as to both principal and interest to the right of all other holders of ownership certificates of such series to receive payment in full of principal and interest of the ownership certificates so held by them respectively. SECTION*1009 3. All moneys so collected and received by the Trustee either as principal, interest, penalty, or otherwise, upon or in relation to that portion of the securities exceeding the expressed principal amount of the ownership certificates issued and outstanding hereunder and so assigned and delivered to the Trustee under the provisions of this instrument shall constitute a trust fund and shall be by the Trustee applied from time to time, first, to the payment of all expenses, costs and charges of the Trustee in and about the trust hereby created, including counsel and attorney's fees and costs incurred in the collection of any of the said securities assigned and delivered to the Trustee hereunder; second, to the payment, so far as the same will extend, of any interest becoming due upon any of the ownership certificates issued hereunder and outstanding, for the payment of which sufficient funds from other sources shall not be in the hands of the Trustee; third, to the payment of principal, so far as the same will extend, of ownership certificates becoming due and payable hereunder, and for the payment of which sufficient funds from other sources shall not be in the hands of the said Trustee. *1010 In the event of any Deficiency to pay in full the interest or the principal aforesaid, or either, distribution of such funds shall be made by the Trustee pro rata to and upon said interest coupons or ownership certificates, as the case may be. All interest coupons or ownership certificates paid with funds provided for in this section shall, when so paid and received by the Trustee, be by it delivered to the Company, and the Company shall thereupon become entitled to all the rights and benefits of the former holders of such ownership certificates and coupons, subject, nevertheless, to the payment in full of all other ownership certificates and interest coupons of the same series before any payment of principal or interest upon such ownership certificates or coupons so held by the Company, and the Trustee shall endorse upon the face of all ownership certificates and coupons so delivered to the Company that the same are subordinate as to both principal and interest to the right of all other holders of ownership certificates of such series to receive payment in full of principal and interest of the ownership certificates so held by them respectively. SECTION 4. In the event the Trustee*1011 shall not have in its hands applicable to that purpose funds with which to meet any installment of principal or interest as and when the same are expressed to be due and payable to the holders of the ownership certificates and interest coupons issued hereunder, and the Company shall fail to furnish funds to the Trustee, for the purchase as provided in Section 2 of this Article, of such ownership certificates and interest coupons to the extent of such deficiency, the Trustee may of its own motion and shall, upon the written request of the holders of at least one-fourth in amount of the ownership certificates of the said series then outstanding and upon indemnity and security satisfactory to the Trustee, as hereinafter provided, after giving fifteen (15) days' notice of the time and place by advertisement in any daily newspaper published in the City of Dallas, and State of Texas, proceed to sell for cash all of the said securities assigned and delivered to it hereunder as a basis for the issuance of such series of ownership certificates, including the 5% excess of the said securities constituting the additional security furnished by the Company to the holders of such ownership certificates*1012 and interest coupons, as well as the balance of such securities transferred and assigned to the Trustee in respect of said series; * * *. * * * SECTION *93 7. In the event there shall at any time be any default in the payment of either the principal or interest of any securities held by the Trustee hereunder, and such default shall continue for a period of twelve months, or in the event that any proceedings had with reference to the issuance of any of said securities shall have been adjudged irregular or invalid, or in the event any lot or lots against which any assessment has been levied constituting any part of the said securities hereunder shall be sold for taxes the Company agrees to substitute immediately upon demand of the Trustee, in lieu of such defaulted or invalid securities, other securities of a like nature, being certificates of special assessment issued by cities and towns of the States of Texas and New Mexico or direct obligations of said States or its municipal subdivisions, of an equal principal face amount exclusive of the face amount of any mechanic's lien or other supplemental security accompanying such security, which said substituted securities shall*1013 in each case be accompanied by all the statements, legal opinions, and documents provided in Article I of this agreement of trust to be filed with the Trustee in like manner and with like effect as when securities are deposited to secure an original issue of a series of ownership certificates hereunder. But the provisions of this section shall not in any-wise be deemed to impair or affect the right of the Trustee to enforce to the fullest extent the guarantee of the Company of the payment of principal and interest of said securities as herein provided. * * * ARTICLE III. * * * SECTION 2. Each holder or owner of any ownership certificate issued hereunder expressly waives all right to any interest which may be received by the Trustee upon or in relation to any of the securities of the series of which the said ownership certificate pertains in excess of the rate of interest expressly provided in the said ownership certificates and evidenced by the interest coupons thereto appertaining. SECTION 3. Neither the Company nor the holder or owner of any outstanding ownership certificate issued hereunder shall have any legal title to or interest in any securities assigned and*1014 delivered to the Trustee hereunder, but the right of the Company and of such holder or owner shall be the right to receive from and through the Trustee as herein provided the income, proceeds, and avails of such securities, and as to said Company the right to receive reassignment of portions of said securities, all in the manner in this agreement of trust provided, it being the intention hereof to vest the full legal title to said securities and all securities substituted therefor in said Trustee. The Trustee hereunder shall have the sole right to collect or receive any payment for principal, interest, penalty or otherwise on or in respect of the said securities, until the sale thereof as herein provided, including the right in the event of default in the payment of principal or interest upon the said securities to proceed against the Company upon its endorsed guaranty on such securities; but nothing herein contained shall require the said Trustee to proceed at any time upon such guaranty or to take any steps toward collection of the defaulted securities, unless it shall first have been indemnified to its satisfaction against all costs and expenses which it might thereby incur by*1015 the Company or by holder or holders of the ownership certificates, or some of them, outstanding hereunder of the series to which said defaulting securities appertain. * * * ARTICLE *94 VI. Whenever all of the ownership certificates of any series shall have been cancelled, or funds for the payment of the same and of all unpaid interest thereon, as therein expressed, and of all fees, expenses, and disbursements of the Trustee hereunder in respect of such series, shall have been deposited with, and paid to the Trustee hereunder, the Trustee shall convey, transfer, assign and set over to the Company all securities and cash in its hands appertaining to such series other than the cash so deposited for the payment of such ownership certificates, interest coupons and expenses. All cash so deposited hereunder shall be held by the Trustee as a trust fund for the benefit of such ownership certificates and interest coupons of such series, and shall be paid to the holders and owners thereof upon the production of the same to the Trustee for cancellation. The Company may, from time to time, when not in default in any of its covenants herein contained and when no default exists*1016 in the payment of the principal or interest of any particular series of ownership certificates at any time issued and outstanding hereunder withdraw from the Trustee so much of the securities or cash in the hands of the Trustee appertaining to any series as shall be in excess of one hundred five percent (105%) of the face value of all the ownership certificates of such series then outstanding, but the Company expressly covenants anything to the contrary hereinbefore or in this agreement contained notwithstanding that it will at all times maintain on deposit with said Trustee hereunder securities as aforesaid in equal par value to one hundred five per cent (105%) of the aggregate of all outstanding ownership certificates issued hereunder. The ownership certificates were issued and sold in the form prescribed by the trust agreement. Pursuant to the terms of the above trust agreements, the trustee, First National Bank in Dallas, held assets deposited with it and paid interest due on outstanding certificates of ownership issued pursuant to the terms of the trust agreements. The assets held by the trustee consisted of certificates of special assessment and other direct obligations*1017 of municipalities and counties of the State of Texas, together with cash paid to the trustee by the respective grantors named in the trust agreements when any such special assessment certificates or other direct obligations were withdrawn by the latter without depositing other certificates or obligations of like principal amount. Such assets or cash were held by the trustee, as required by the trust agreements, in an amount equal to 105 percent of the outstanding ownership certificates. Trust ownership certificates issued by the grantor corporations and the interest coupons attached thereto, when presented for payment, were paid out of the cash received and held by the trustee under the trust agreements. During the year 1930 the trustee collected interest in the total amount of $154,337.63 upon such securities deposited with it by the Texas Bitulithic Co. and $75,213.12 upon certificates so deposited by the Fain-Townsend Co., and paid out as interest on the outstanding trust ownership certificates total sums of $115,425 and $52,300, respectively, *95 the respective balances of $38,912.63 and $22,913.12, interest collected, being retained by the Texas Bitulithic Co. and*1018 the Fain-Townsend Co. During the same year the trustee collected interest upon the securities deposited with it by the Realty Trust Co. in excess of the interest on outstanding trust ownership certificates which it was required to any under the terms of the trust agreement of May 1, 1925, and the balance of such interest was retained by the Realty Trust Co. During 1930 the petitioner, Bess Schoellkopf, received from the First National Bank in Dallas, as trustee, totals of $2,200 and $1,200, respectively, as interest on the trust ownership certificates owned by her which had been issued by the Texas Bitulithic Co. and the Fain-Townsend Co., respectively, pursuant to the said trust agreements. During 1930, Laura D. Wilson received from the First National Bank in Dallas, as trustee, totals of $1,250, $1,690, and $1,292.50, respectively, as interest on the trust ownership certificates owned by her which had been issued by the Texas Bitulithic Co., the Fain-Townsend Co., and the Realty Trust Co., respectively, pursuant to the trust agreement above mentioned. The petitioner, bess Schoellkopf, was a beneficiary of the estate of J. B. Wilson (trust) being entitled to a one-fifth distributive*1019 share in the income of such estate. During the year 1930 the estate owned certain certificates of interest in the above described trusts created by Texas Bitulithic Co., Fain-Townsend Co., and Realty Trust Co. The estate received $4,714.72, $3,342.17, and $2,437.50, respectively, as interest on those certificates. The distributive share of the estate which was received by the petitioner, Bess Schoellkopf, for that year was one fifth, or $2,098.88, of the total interest of $10,494.39 received by such estate on the trust ownership certificates described above. The petitioner, Bess Schoellkopf, filed her income tax return for the year 1930 with the collector of internal revenue at Dallas, Texas. In her return she did not report as taxable income any part of the amounts of $2,200, $1,200, and $2,098.88 received by her, as set out above. In determining the deficiency against the petitioner the respondent has included such interest in taxable income. The petitioner, Laura D. Wilson, filed her income tax return for the year 1930 with the collector of internal revenue at Dallas, Texas. In her return she did not report as income any part of the interest payments of $1,250, $1,690, *1020 and $1,292.50 received by her as set out above. In determining the deficiency against the executors of the estate of Laura D. Wilson, deceased, the respondent has included in taxable income the amounts of interest so received. *96 OPINION. VAN FOSSAN: The petitioners' position is that the interest paid to them was interest upon the direct obligations of political subdivisions of the States of Texas and New Mexico and as such was exempt from Federal income tax on constitutional grounds and under the express terms of section 22(b)(4) of the Revenue Act of 1928. 1 They state, on brief, "if these petitioners are taxable on the amounts in controversy it is because under the particular facts of the cases the amounts in issue do not constitute interest upon such obligations." *1021 The respondent contends that the interest so paid was simply interest on the trust certificates which were the obligations of the grantors of the trusts or of the trusts themselves. The petitioners rely principally on the language of the trust instrument stating that "the owner or registered holder of each ownership certificate * * * shall * * * be a beneficiary in the series of securities sold and assigned to the trustee as the basis of the issuance of the ownership certificates * * *" and of the certificate itself reading "Realty Trust Company * * * does hereby certify that the bearer hereof is entitled to participation in the proceeds and avails of certain special assessment certificates, bonds and direct obligations issued by municipalities of the States of Texas and New Mexico." If the cases at bar were to rest on the quoted phrases alone, the petitioners' theory would be persuasive, but we must look to the entire situation with its varied rights and obligations to determine the true character and the correct legal status of the certificates of participation. The grantors in the several trusts were corporations. The corporation purchased the direct obligations of political*1022 subdivisions of states. It then transferred those securities to a trustee "absolutely", under an agreement which contained many features not usually found in a pure trust. The so-called beneficiaries of the trust, unknown *97 and unnamed in the trust instrument, purchased "Municipal Trust Ownership Certificates" transferable by delivery, unless registered. The certificate was signed by the grantor, provided for a fixed rate of interest, matured in five years, and had interest coupons attached, the same being negotiable by delivery. The certificate provided on its face that the bearer or registered holder, "particularly waives and releases all interest collected by the said Trustee upon the securities held by it under the said agreement of trust in excess of interest at the rate herein specified." Under the trust agreement no definite municipal or state securities were made the corpus of the trust. The fund of such securities was a flexible and mutable portfolio subject wholly to the control and designation of the company. Withdrawals, eliminations, and substitutions were made at its will. Section 3 of Article III of the trust agreement specifically provided that the*1023 certificate holders should have no legal title or interest in the municipal securities themselves, but only in the proceeds from their sale and in a certain portion of the interest therefrom. Though some provisions of the trust agreement and certificates, at casual reading, seem to indicate that the certificate owner was the direct recipient of interest from municipal and state securities, and though the cash payment of his semiannual coupons and, in part, the return of his capital in five years were presumed to arise from such a source, by the very terms of the plan in certain events those payments might be made from contributions made by the grantors or from previously received surplus interest. The certificate holder was concerned only with the regular payment of the interest due on the coupons and with the prompt payment of his capital upon maturity of the certificate. This payment bore no necessary relationship to the collection of the interest on any specific municipal securities. The company had guaranteed the payment of their principal and interest and had agreed to supply any amounts required by the trustee to pay such principal and interest when due. The phrase "the*1024 agreed semiannual interest rate" found in the interest coupons is significant. The company had agreed and guaranteed that the certificate owner should receive that to which his certificate showed he was entitled. By guaranteeing the payment of the interest on the municipal and their similar securities, which apparently bore a much higher rate than the certificate coupon, the grantors thus made certain that the coupon owner would receive his interest. By reason of those assurances and other conditions on the part of the company, we are of the opinion that a new security, the "Municipal Trust Ownership Certificate", was created, to which the petitioners looked and upon which security the interest *98 in question was paid. Attention is called to the fact there is nothing in the trust instrument and certificate, or in the record, to show that the certificate holder knew the kind, amount, interest rate, maturity, name of the obligor, or any other pertinent fact relating to the direct obligations of the state political subdivisions which issued the underlying trust fund securities. By reason of the guarantee of the company, his return was assured in the fixed amount. We conclude*1025 that the interest received by the petitioners was not interest upon the obligations of a state or political subdivision thereof and that, therefore, the income accruing by virtue of the ownership of the "Municipal Trust Ownership Certificates" was not tax-free under the law. In , we held that the taxing of profits of a dealer in tax-exempt securities was too remote to interfere with the governmental function of a state. . So in the cases at bar we can see no possible influence that the taxing of the interest received by the petitioners on the certificates of participation can have on the functioning of the unnamed political subdivisions whose securities were held by the trustee. The record discloses that in 1930 out of $154,337.63 collected by the trustee from the securities held under the trust agreements, the Texas Bitulithic Co. received and retained $38,912.63, while in the same yar the Fain-Townsend Co. retained the sum of $22,913.12 out of $75,213.12 collected by the trustee. These facts cast a revealing light on the inward character of the plan. *1026 The petitioners rely on (reversing ), a case which grew "out of the peculiar manner in which the Commonwealth of Virginia has borrowed money for the building of roads." In that case the court observed that "The Ridge Route Corporation was obviously formed and operated merely as an agency to facilitate the borrowing of money by the State." The court concluded: * * * that in reality the banks, and not the corporation, lent the money to the state, that the notes of the corporation were issued merely to indicate the extent of each bank's participation in the transaction, and that the banks, and not the corporation, were the owners of the state and city obligations when the interest was paid. The facts in these cases are so dissimilar that the cited case is no authority here. The petitioners also cite , the facts in which, at casual reading, are somewhat similar to those in the cases at bar. There are, however, vital differences which serve to distinguish the cases. *99 In the case cited the certificate*1027 provided that the corporation sells to the certificate purchaser "all of its right, title and interest in Municipal Improvement Bonds issued under the special assessment laws of the State of California" and that the certificate owner "is entitled at any time upon demand and surrender of this certificate * * * to receive bonds of unpaid face value equal to the principal sum * * *." The trust agreement provides for the payment of the principal sum as stated in the ownership certificate prior to maturity, upon demand, by delivery to the certificate holder of specific bonds, selected by the trustee, or at maturity by cash or unpaid bonds, at the holder's option. The agreement further provides: * * * It is the intention of the parties hereto that the delivery to the purchaser thereof of a certified certificate, vests in the holder of such certificate the ownership of an amount in unpaid face value bonds, equal to the par value of the certificate, subject to the implied agreement on the part of the purchaser of such certificate by the acceptance thereof, to allow the said bonds to remain in the hands of the Trustee for collection under the terms and conditions of this Trust, * * * *1028 None of the "interest income" in the Carson case flowed to the petitioners by reason of any of the warranties of the corporation or of bonds bearing an interest rate of less than 7 percent. In the cases before us the certificate states that the bearer (or registered holder) "is entitled to participate in the proceeds and avails of certain special assessment certificates * * * to the extent of the principal sum, payable from such proceeds and avails" on a day certain. The trust agreement makes no provision for payment of the certificate prior to maturity nor does it permit the certificate holder, upon maturity, to receive specific bonds in lieu of cash. On the contrary, it states definitely that: * * * Neither the Company nor the holder or owner of any outstanding ownership certificate issued hereunder shall have any legal title to or interest in any securities assigned and delivered to the Trustee hereunder, but the right of the Company and of such holder or owner shall be the right to receive from and through the Trustee as herein provided the income, proceeds, and avails of such securities, and as to said Company the right to receive reassignment of portions of said securities, *1029 all in the manner in this agreement of trust provided, it being the intention hereof to vest the full legal title to said securities and all securities substituted therefor in said Trustee. * * * Furthermore, after the ownership certificates of any series shall have been paid or provided for, all surplus of cash and securities shall belong to the grantors. The comparison of the provisions quoted from the respective trust instruments and certificates demonstrates clearly that in the Carson case the certificate holder was a beneficial owner os certain deposited bonds and could obtain a specific allocation of his share of those *100 bonds on demand before or upon maturity. The petitioners here had no such right. They were entitled to only a definite semiannual interest return on the principal sum, which sum was to be repaid in cash at the maturity date of the certificate. They looked to the grantor for assurance as to both the interest and the return of principal. Reviewed by the Board. Decision will be entered for the respondent.LEECHLEECH, dissenting: It seems to me that the result announced in the majority opinion is not supported therein*1030 by any sufficiently material distinction from the situation presented in Carson Estate Co.,31 B.T.A. 607">31 B.T.A. 607, in which we reached a different conclusion. Accordingly, I respectfully dissent. BLACK agrees with this dissent. Footnotes1. (b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: * * * (4) TAX-FREE INTEREST. - Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended; or (C) the obligations of the United States or its possessions. Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C) shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income taxes. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624364/

QUINTANA PETROLEUM COMPANY. 1QUINTANA PETROLEUM CO.Docket Nos. 100314-100321.United States Board of Tax Appeals44 B.T.A. 1318; 1941 BTA LEXIS 1299; June 5, 1941, Promulgated *1299 (EDITOR'S NOTE: No Majority Opinion Appears at this Cite.The Majority Opinion Appears at 44 B.T.A. 624.)DISNEY, dissenting: I cannot agree with the conclusion reached by the majority as expressed in the first paragraph of the headnote, holding that a portion of the net proceeds from the operation of an oil and gas lease paid in accordance with the terms of the assignment requiring the assignee to pay the assignor one-fourth of the proceeds from operation, constitutes a capital expenditure and not a legal deduction from gross income. In Galatoire Bros. v. Lines, 23 Fed.(2d) 676, it was held by the Circuit Court of Appeals for the Fifth Circuit that payments comprising 50 percent of the profits of a business, under the terms of a lease, were paid for the use of rented premises for the entire term of the lease and must be prorated throughout the entire term and allowed as deductible expenses in accordance with the proration. I cannot distinguish that case, in principle, from the present proceeding and in my opinion the payment of a portion of the net profits was properly considered and reported by the petitioner as payment of rentals, *1300 for which deduction should be allowed. Nor can I believe that section 114(b)(3) of the Revenue Act of 1936 and Regulations 94, article 23(m)-1(g) should be interpreted as the respondent has done. The statute, specifying the percentage of depletion to be allowed, refers to and bases same upon "the gross income from the property during the taxable year." [Italics supplied.] I think a fair interpretation fo the remainder of the sentence, as to exclusion from gross income fo rents or royalties paid or incurred, requires that the expression "during the taxable year" be inferred and understood to follow and modify "gross income" just as it does earlier in the sentence - in other words, that only rents and royalties paid or incurred (by the taxpayer in respect to the property) during the taxable year should be excluded from gross income in computing the 27 2/1 percent depletion. The history of this subject indicates to me that Congress intended to simplify a previously difficult matter by allowing computation to be made only upon what was done during the taxable year, and not to complicate it by requiring consideration of other matters such as bonus payments paid in acquiring*1301 a lease in an earlier year, necessitating allocation and apportionment as contended by the respondent. I think a more practicable working rule was intended and that the petitioner's view should be sustained. I therefore dissent. Footnotes1. Opinion. See P. 624. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624410/

WILLIAM A. MATNEY, Deceased, and ESTELLA MATNEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMatney v. CommissionerDocket No. 4475-69.United States Tax CourtT.C. Memo 1974-90; 1974 Tax Ct. Memo LEXIS 228; 33 T.C.M. (CCH) 455; T.C.M. (RIA) 74090; April 15, 1974, Filed. William A. Matney, pro se. Robert A. Roberts, for the respondent. QUEALYMEMORANDUM FINDINGS OF FACT AND OPINION QUEALY, Judge: Respondent has determined deficiencies in the petitioners' Federal income tax for the taxable years 1964 and 1966 in the amounts of $957.43 and $6,088.06, respectively. Respondent has also asserted additions to tax for the taxable year 1966 pursuant to section 6653(a) 1 in the amount of $304.40. Due to certain concessions by the parties, the only issues remaining for our decision relate to the following: (1) The fair market value of certain property received by the decedent in April 1966 as partial downpayment*229 on a contract for the sale of his farm and subsequently retained upon default of the purchaser. (2) The fair market value of certain stock received by the decedent in December 1966 in partial satisfaction of the purchase price upon a subsequent sale of the farm. FINDINGS OF FACT Some of the facts are stipulated. Such stipulations and the exhibits attached thereto are incorporated herein by reference. Petitioners, William A. Matney, deceased, and Estella Matney, were husband and wife at all times pertinent herein. On March 25, 1972, William A. Matney was killed attempting to resist a robbery to a used car lot which he operated. No executor or executrix for his estate has ever been appointed. At the time of the filing of the petition herein, petitioners' legal residence was Louisville, Kentucky. They filed joint Federal income tax returns for the taxable years 1964 and 1966 with the district director of internal revenue, Louisville, Kentucky. 2During the years in question, decedent was engaged in the operation of a dairy farm*230 located in Washington County, Indiana, as well as of a used car lot located in Louisville. On April 15, 1966, decedent entered into a contract with Hatzel McKim to sell his farm. As partial downpayment thereon, petitioner received title to a parcel of realty located at 2205 St. Louis Avenue, Louisville, Kentucky. Decedent retained title to this property upon McKim's subsequent default on the contract. Decedent leased out the property in both 1967 and 1968. In September 1967, Earl E. Brown, a Louisville realtor, was asked by decedent to appraise the property. He estimated its worth to be $4,500, describing the property as run down and in very poor condition. He also indicated that the property was located in an area subject to rapid deterioration due to widespread prevalence of vandalism. Decedent did not report the receipt of such property in income on his 1966 joint income tax return or in any subsequent return. On his income tax returns for 1967 and 1968, decedent claimed a depreciation allowance on such property predicated on an adjusted basis of $10,000. The necessity of including such property in decedent's gross income for 1966 is not in question. The sole dispute*231 concerns the fair market value at which such property should be includable. In his notice of deficiency, respondent asserted the property had a value of $11,000. Petitioners contend that the property should be valued at $4,500. In September of 1966, decedent entered into a second contract for the sale of his farm, this time with one Claude E. Knoy. In satisfaction of an agreed purchase price of $56,000, decedent received at the closing, held on or about December 10, 1966, $50,000 in cash and 2,000 shares of stock of American Business Corp. (hereinafter referred to as "American"), valued by the parties at $3 per share. The decedent paid the realtors who arranged the sale a sales commission of $1,000 cash and 600 shares of American stock, at an agreed value of $3 per share. At various times that December, decedent attempted to obtain loans based on the American stock but was unsuccessful. Decedent never received any dividends on the stock. A petition was filed in August of 1968 for the appointment of a receiver for American. In October of 1968, a receiver was duly appointed. On his 1966 return, decedent reported $56,000 as the gross sales price for the sale of his farm.*232 At the trial, he contended, however, that such amount should be reduced to $50,000, since the stock of American received pursuant to the sale was worthless at the time of receipt.OPINION The first issue for decision concerns the value at which the parcel of realty which decedent received in April 1966 from Hatzel McKim as partial downpayment on a contract for the sale of his farm and subsequently retained after McKim defaulted on the contract is includable in decedent's income for 1966. The necessity of including such property in income is not in question. Respondent has determined that the property is includable at a value of $11,000. Decedent, who at no point ever reported the receipt of such property in income, contended that the value of the property was not more than $4,500. The burden of proof is upon decedent to overcome the presumption of correctness attached to respondent's determination. . In attempting to meet this burden, decedent introduced the testimony of a realtor whom he had asked to inspect and appraise the property in the fall of 1967. The realtor appraised the property as having a value of $4,500, describing*233 the property as run down and in very poor condition. The Court finds no basis for questioning this appraisal. Since, however, the property was in an area subject to rapid deterioration, we must also make allowance for the lapse of time since decedent's acquisition of the property. In the light of such facts, we find that the property in question should be includable in the gross income of decedent at a value of $6,000. The remaining issue for determination concerns the fair market value of $2,000 shares of American stock which decedent received in December of 1966 from Claude E. Knoy in partial satisfaction of the agreed purchase price of $56,000 for the sale of his farm. Decedent also received $50,000 in cash on the sale. On his 1966 income tax return, decedent valued the stock at $3 per share for purposes of reporting the amount received on the sale. At the trial decedent contended the stock he received was actually worthless, thereby causing the gain reported on the transaction to be overstated by $6,000. The position of respondent is that the stock had a value of $3 per share as initially reported by decedent. The decedent had the burden of showing that the stock he*234 received in December of 1966 was in fact worthless. The question is necessarily one of fact. Decedent emphasized the fact that American went into receivership in the fall of 1968. This fact, however, has no bearing on the value of the stock some 20 months earlier. It is the value of the stock at the time of receipt about which we are concerned for purposes of determining the amount received under section 1001(b). One of decedent's witnesses testified that she received some American stock in August of 1966 on the sale of her farm but the next month found it to be worthless. She failed, however, to explain the basis upon which she reached such a conclusion. Accordingly, such testimony represents mere opinion only, totally unsubstantiated, which this Court is unwilling to accept. Decedent testified that he attempted to obtain loans on several occasions that December but was unsuccessful. Such fact of itself does not indicate that the stock was worthless. See , affd. (C.A. 9, 1930). While it may well reflect the fact that the stock might have had a value of*235 less than $3, it was incumbent upon decedent to show such lesser value and this he failed to do. Indeed, decedent has introduced no evidence as to the financial condition of American during the year in question. He did not even submit the corporation's financial statement for 1966 which would reflect its earnings or losses and from which at least the book value of the stock, if any, could be determined. It appears to us that the most telling piece of evidence as to the value of the stock is the value given it by the parties themselves in an arm's length transaction, that being $3 per share. This is more persuasive evidence of its value than decedent's hindsight judgment which must necessarily reflect the fact that the corporation subsequently failed. See . The same value of $3 was assigned to the stock when decedent used 600 shares thereof to satisfy part of the sales commission due the realtors on the sale. In accordance with the above, we find that decedent has failed to show that the American stock he received in December of 1966 was either worthless or had a fair market value of less than the $3 per share at which he*236 initially valued it and with which respondent now concurs. Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Estella Matney is a petitioner herein only by virtue of her having filed a joint return with her husband for the years in question. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4562838/

In the United States Court of Appeals For the Seventh Circuit ____________________ No. 20‐2175 ILLINOIS REPUBLICAN PARTY, et al., Plaintiffs‐Appellants, v. J. B. PRITZKER, Governor of Illinois, Defendant‐Appellee. ____________________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 20 C 3489 — Sara L. Ellis, Judge. ____________________ ARGUED AUGUST 11, 2020 — DECIDED SEPTEMBER 3, 2020 ____________________ Before WOOD, BARRETT, and ST. EVE, Circuit Judges. WOOD, Circuit Judge. As the coronavirus SARS‐CoV‐2 has raged across the United States, public officials everywhere have sought to implement measures to protect the public health and welfare. Illinois is no exception: Governor J. B. Pritzker has issued a series of executive orders designed to limit the virus’s opportunities to spread. In the absence of bet‐ ter options, these measures principally rely on preventing the 2 No. 20‐2175 transmission of viral particles (known as virions) from one person to the next. Governor Pritzker’s orders are similar to many others around the country. At one point or another, they have in‐ cluded stay‐at‐home directives; flat prohibitions of public gatherings; caps on the number of people who may congre‐ gate; masking requirements; and strict limitations on bars, restaurants, cultural venues, and the like. These orders, and comparable ones in other states, have been attacked on a va‐ riety of grounds. Our concern here is somewhat unusual. Governor Pritzker’s Executive Order 2020‐43 (EO43, issued June 26, 2020) exhibits special solitude for the free exercise of religion.1 It does so through the following exemption: a. Free exercise of religion. This Executive Order does not limit the free exercise of religion. To pro‐ tect the health and safety of faith leaders, staff, con‐ gregants and visitors, religious organizations and houses of worship are encouraged to consult and follow the recommended practices and guidelines from the Illinois Department of Public Health. As set forth in the IDPH guidelines, the safest practices for religious organizations at this time are to 1 EO43 was set to expire by its own terms on August 22, 2020, but the Governor issued EO52 on August 21, 2020. See https://www2.illinois.gov/ Pages/Executive‐Orders/ExecutiveOrder2020‐52.aspx. EO52 extends EO43 in its entirety through September 19, 2020. For convenience, we refer in this opinion to EO43. No. 20‐2175 3 provide services online, in a drive‐in format, or out‐ doors (and consistent with social distancing re‐ quirements and guidance regarding wearing face coverings), and to limit indoor services to 10 peo‐ ple. Religious organizations are encouraged to take steps to ensure social distancing, the use of face coverings, and implementation of other public health measures. See EO43, § 4(a), at https://www2.illinois.gov/Pages/Execu‐ tive‐Orders/ExecutiveOrder2020‐43.aspx. Emergency and governmental functions enjoy the same exemption. Other‐ wise, EO43 imposes a mandatory 50‐person cap on gather‐ ings. The Illinois Republican Party and some of its affiliates (“the Republicans”) believe that the accommodation for free exercise contained in the executive order violates the Free Speech Clause of the First Amendment. In this action, they seek a permanent injunction against EO43. In so doing, they assume that such an injunction would permit them, too, to congregate in groups larger than 50, rather than reinstate the stricter ban for religion that some of the Governor’s earlier ex‐ ecutive orders included, though that is far from assured. Re‐ lying principally on Jacobson v. Massachusetts, 197 U.S. 11 (1905), the district court denied the Republicans’ request for preliminary injunctive relief against EO43. See Illinois Repub‐ lican Party v. Pritzker, No. 20 C 3489, 2020 WL 3604106 (N.D. Ill. July 2, 2020). The Republicans promptly sought interim re‐ lief from that ruling, see 28 U.S.C. § 1292(a)(1), but we de‐ clined to disturb the district court’s order, Illinois Republican Party v. Pritzker, No. 20‐2175 (7th Cir. July 3, 2020), and Justice Kavanaugh in turn refused to intervene. Illinois Republican 4 No. 20‐2175 Party v. Pritzker, No. 19A1068 (Kavanaugh, J., in chambers July 4, 2020). We did, however, expedite the briefing and oral argument of the merits of the preliminary injunction, and we heard ar‐ gument on August 11, 2020. Guided primarily by the Supreme Court’s decision in Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008), we conclude that the district court did not abuse its discretion in denying the requested preliminary in‐ junction, and so we affirm its order. I Before we turn to the heart of our analysis, a word or two about the standard of review for preliminary injunctions is in order. The Supreme Court’s last discussion of the subject oc‐ curred in Winter, where the Court reviewed a preliminary in‐ junction against the U.S. Navy’s use of a sonar‐training pro‐ gram. Id. at 12. It expressed the standard succinctly: “A plain‐ tiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irrep‐ arable harm in the absence of preliminary relief, that the bal‐ ance of equities tips in his favor, and that an injunction is in the public interest.” Id. at 20. The question in Winter, however, just as in our case, is one of degree: how likely must success on the merits be in order to satisfy this standard? We infer from Winter that a mere possibility of success is not enough. Id. at 22. In the related context of a court’s power to stay its own judgment (or that of a lower tribunal), the Court returned to this subject in Nken v. Holder, 556 U.S. 418 (2009). There, while noting the “substantial overlap” between the analysis of stays and that of preliminary injunctions, id. at 434, the Court No. 20‐2175 5 stopped short of treating them identically. It pointed out that, unlike a preliminary injunction, which is an order directed at someone and that governs that party’s conduct, “a stay oper‐ ates upon the judicial proceeding itself.” Id. at 428. Before such an order should issue, the Court said, the applicant must make a strong showing that she is likely to succeed on the merits. Id. at 434. At the same time, following Winter, the Court said that a possibility of success is not enough. Neither is a “better than negligible” chance: the Court expressly dis‐ approved that formula, see id., which appears in many of our decisions, including one the Court singled out, Sofinet v. INS, 188 F.3d 703, 707 (7th Cir. 1999). See also, e.g., Whitaker by Whitaker v. Kenosha Unified Sch. Dist. No. 1 Bd. of Educ., 858 F.3d 1034, 1046 (7th Cir. 2017); Girl Scouts of Manitou Council, Inc. v. Girl Scouts of U.S. of Am., Inc., 549 F.3d 1079, 1096 (7th Cir. 2008); Int’l Kennel Club of Chi., Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1084 (7th Cir. 1988). We note this to remind both the dis‐ trict courts and ourselves that the “better than negligible” standard was retired by the Supreme Court. We understand from both Winter and Nken that an appli‐ cant for preliminary relief bears a significant burden, even though the Court recognizes that, at such a preliminary stage, the applicant need not show that it definitely will win the case. A “strong” showing thus does not mean proof by a pre‐ ponderance—once again, that would spill too far into the ul‐ timate merits for something designed to protect both the par‐ ties and the process while the case is pending. But it normally includes a demonstration of how the applicant proposes to prove the key elements of its case. And it is worth recalling that the likelihood of success factor plays only one part in the analysis. The applicant must also demonstrate that “irrepara‐ ble injury is likely in the absence of an injunction,” see Winter, 6 No. 20‐2175 555 U.S. at 22. In addition, the balance of equities must “tip[] in [the applicant’s] favor,” and the “injunction [must be] in the public interest.” Id. at 20. II With this standard in mind, we are ready to turn to the case at hand. We begin by confirming, as we did in Elim Ro‐ manian Pentecostal Church v. Pritzker, 962 F.3d 341 (7th Cir. 2020), that the possibility that EO43 may change in the coming days or weeks does not moot this case. The Governor has made clear that the virus is a moving target: if possible, he will open up the state (or certain regions of the state) further, but if the criteria to which the state is committed take a turn for the worse, he could reinstate more stringent measures. See id. at 344–45. Our mootness analysis in Elim thus applies with full force to this case. The next question relates to the overall validity of EO43 and orders like it, which have been issued in the midst of a general pandemic. As we noted in Elim, the Supreme Court addressed this type of measure more than a century ago, in Jacobson v. Massachusetts, 197 U.S. 11 (1905). The district court appropriately looked to Jacobson for guidance, and so do we. The question the Court faced there concerned vaccination re‐ quirements that the City of Cambridge had put in place in re‐ sponse to a smallpox epidemic. The law made an exception for children who had a physician’s certificate stating that they were “unfit subjects for vaccination,” id. at 12, but it was oth‐ erwise comprehensive. Faced with a lawsuit by a man who did not wish to be vaccinated, and who contended that the City’s requirement violated his Fourteenth Amendment right to liberty, the Court ruled for the City. In so doing, it held that it was appropriate to defer to the City’s assessment of the No. 20‐2175 7 value of vaccinations—an assessment, it noted, that was shared “by the mass of the people, as well as by most mem‐ bers of the medical profession … and in most civilized na‐ tions.” Id. at 34. It thus held that “[t]he safety and the health of the people of Massachusetts are, in the first instance, for that commonwealth to guard and protect,” and that it “[did] not perceive that this legislation has invaded any right se‐ cured by the Federal Constitution.” Id. at 38. At least at this stage of the pandemic, Jacobson takes off the table any general challenge to EO43 based on the Fourteenth Amendment’s protection of liberty. Like the order designed to combat the smallpox epidemic, EO43 is an order designed to address a serious public‐health crisis. At this stage in the present litigation, no one is alleging that the Governor lacks the power to issue such orders as a matter of state law. In‐ stead, our case presents a more granular challenge to the Gov‐ ernor’s action—one that focuses on his decision to subject the exercise of religion only to recommended measures, rather than mandatory ones. We must decide whether that distinc‐ tion is permissible. Normally, parties challenging a state measure that ap‐ pears to advantage religion invoke the Establishment Clause of the First Amendment (assuming for the sake of discussion that the challengers can establish standing to sue). That is em‐ phatically not the theory that the Republicans are pursuing. We eliminated any doubt on that score at oral argument, where counsel assured us that this was not their position. As we explain in more detail below, the Republicans argue in‐ stead that preferential treatment for religious exercise con‐ flicts with the interpretation in Reed v. Gilbert, 576 U.S. 155 (2015), of the Free Speech Clause of the same amendment. A 8 No. 20‐2175 group of 100 people may gather in a church, a mosque, or a synagogue to worship, but the same sized group may not gather to discuss the upcoming presidential election. The Re‐ publicans urge that only the content of the speech distin‐ guishes these two hypothetical groups, and as they see it, Reed prohibits such a line. Our response is to say, “not so fast.” A careful look at the Supreme Court’s Religion Clause cases, coupled with the fact that EO43 is designed to give greater leeway to the exercise of religion, convinces us that the speech that accompanies reli‐ gious exercise has a privileged position under the First Amendment, and that EO43 permissibly accommodates reli‐ gious activities. In explaining that conclusion, we begin with a look at the more conventional cases examining the interac‐ tion of the two Religion Clauses. We then take a close look at Reed, and we conclude by explaining that a comparison be‐ tween ordinary speech (including political speech, which all agree lies at the core of the First Amendment) and the speech aspect of religious activity reveals something more than an “apples to apples” matching. What we see instead is “speech” being compared to “speech plus,” where the “plus” is the pro‐ tection that the First Amendment guarantees to religious ex‐ ercise. Even though we held in Elim that the Governor was not compelled to make this accommodation to religion, nothing in Elim, and nothing in the Justices’ brief writings on the effect of coronavirus measures on religion, says that he was forbid‐ den to carve out some space for religious activities. See South Bay United Pentecostal Church v. Newsom, 140 S. Ct. 1613 (2020); Calvary Chapel Dayton Valley v. Sisolak, No. 19A1070, 2020 WL 4251360 (U.S. July 24, 2020). No. 20‐2175 9 A Although there is a long history and rich literature dealing with the two Religion Clauses, it is enough here for us to begin with the Supreme Court’s more recent decisions up‐ holding legislation that gives religion a preferred position. We start with Corporation of the Presiding Bishop of the Church of Je‐ sus Christ of Latter‐Day Saints v. Amos, 483 U.S. 327 (1987). In that case, several people who were fired from church‐owned corporations solely because they were not church members sued the church under Title VII of the Civil Rights Act of 1964; their theory was that the church had engaged in impermissi‐ ble discrimination on the basis of religion. The case would have had some legs if an ordinary employer had decided to sack all its Catholic, or Jewish, or Presbyterian employees. Af‐ ter all, section 703(a) of Title VII specifies that it is “an unlaw‐ ful employment practice for an employer—(1) to fail or refuse to hire or to discharge any individual, or otherwise to discrim‐ inate against any individual [in a variety of ways] because of such individual’s … religion … .” 42 U.S.C. § 2000e‐2(a). But that is not all the statute says. Section 702 states that the law does not apply to “a religious corporation, associa‐ tion, educational institution or society with respect to the em‐ ployment of individuals of a particular religion to perform [the institution’s work].” 42 U.S.C. § 2000e‐1(a); see also Civil Rights Act of 1964, Title VII, § 703(e), 42 U.S.C. § 2000e‐2(e). The plaintiffs in Amos contended that the exemption permit‐ ting religious employers to discriminate on religious grounds violates the Establishment Clause. The Supreme Court re‐ jected this theory and held that the Establishment Clause per‐ mits accommodations designed to allow free exercise of reli‐ gion. The Court’s opinion stresses that it is permissible for the 10 No. 20‐2175 government to grant a benefit to religion when the purpose of the benefit is simply to facilitate noninterference with free ex‐ ercise: This Court has long recognized that the govern‐ ment may (and sometimes must) accommodate reli‐ gious practices and that it may do so without violating the Establishment Clause. It is well established, too, that the limits of permissible state accommodation to religion are by no means co‐extensive with the nonin‐ terference mandated by the Free Exercise Clause. There is ample room under the Establishment Clause for benevolent neutrality which will permit religious exercise to exist without sponsorship and without in‐ terference. 483 U.S. at 334 (cleaned up). Lest there be any doubt, the Court repeated that it had “never indicated that statutes that give special consideration to religious groups are per se invalid.” Id. at 338. Using the ru‐ bric of Lemon v. Kurtzman, 403 U.S. 602 (1971), which was then widely accepted, the Court found that the legislature was en‐ titled to enact a measure designed to alleviate governmental interference with the internal affairs of religious institutions, and that such a law did not have a forbidden primary effect of advancing religion. Finally, and interestingly for our case, the Court rejected Amos’s assertion that the religious exemp‐ tion violated the Equal Protection Clause. A statute otherwise compatible with the Establishment Clause that “is neutral on its face and motivated by a permissible purpose of limiting governmental interference with the exercise of religion,” 483 U.S. at 339, had to satisfy only rational‐basis scrutiny for No. 20‐2175 11 Equal Protection purposes. Section 702, the Court held, easily passed that bar. Another case in which the Court addressed measures that give special solicitude to the free exercise of religion was Cut‐ ter v. Wilkinson, 544 U.S. 709 (2005). That case involved a clash between state prisoners who alleged infringements of their right to practice their religion—guaranteed by both the Free Exercise Clause and the Religious Land Use and Institution‐ alized Persons Act (RLUIPA), 42 U.S.C. § 2000cc‐1(a)(1)–(2)— and prison officials, who asserted that the accommodations required by RLUIPA violated the Establishment Clause. RLUIPA was passed in response to Employment Division, De‐ partment of Human Resources of Oregon v. Smith, 494 U.S. 872 (1990), which held that the Free Exercise Clause does not pro‐ hibit states from enforcing laws of general applicability that incidentally burden religion.2 Congress first struck back with the Religious Freedom Restoration Act (RFRA), Pub. L. No. 103‐141, 107 Stat. 1488 (codified at 42 U.S.C. §§ 2000bb– 2000bb‐4), in an effort to require a more robust justification for laws burdening religious exercise, but the Supreme Court held in City of Boerne v. Flores, 521 U.S. 507 (1997), that RFRA could not be applied to the states. Congress’s next answer was RLUIPA, which affects only land‐use and institutionalized persons, but because of the tie to federal funding, avoids the 2 We are aware that the Supreme Court has granted certiorari in Ful‐ ton v. City of Philadelphia, No. 19‐123, 140 S. Ct. 1104 (2020), and that one of the questions presented in that case is whether Smith should be reconsid‐ ered. We doubt that the outcome of Fulton will have any effect on this case, and in any event, we remain bound by Smith until the Supreme Court in‐ structs otherwise. 12 No. 20‐2175 constitutional flaws the Court found in RFRA as applied to state institutions. The Cutter plaintiffs were Ohio prisoners who adhered to a variety of nonmainstream religions, such as Satanism, Wicca, and Asatru. They complained that the prison was im‐ peding their religious practices in a number of ways, includ‐ ing by denying access to religious literature, restricting op‐ portunities for group worship, withholding the right to fol‐ low dress and appearance rules, and not engaging the ser‐ vices of a chaplain. The defendants did not deny these allega‐ tions; they argued instead that they were under no obligation to deviate from their general policies. RLUIPA, they said, im‐ properly advances religion to the extent that it required these types of affirmative measures. As in Amos, the Supreme Court held that the state “may … accommodate religious practices … without violating the Es‐ tablishment Clause.” Id. at 713 (alterations in original) (inter‐ nal quotation omitted). It reiterated its comment in Walz v. Tax Commission of City of New York, 397 U.S. 664, 669 (1970), that “there is room for play in the joints” between the Free Exercise and Establishment Clauses. 544 U.S. at 713, 719. RLUIPA, it then said, lies within the “space for legislative action neither compelled by the Free Exercise Clause nor prohibited by the Establishment Clause.” Id. at 719. It offered this explanation for its holding: Foremost, we find RLUIPA’s institutionalized‐per‐ sons provision compatible with the Establishment Clause because it alleviates exceptional government‐ created burdens on private religious exercise. See Board of Ed. of Kiryas Joel Vill. Sch. Dist. v. Gru‐ met, 512 U.S. 687, 705 (1994) (government need not “be No. 20‐2175 13 oblivious to impositions that legitimate exercises of state power may place on religious belief and prac‐ tice”) … . 544 U.S. at 720. It is noteworthy in this connection that the predicate for the religious accommodation is a legitimate exer‐ cise of state power, albeit one that burdens religion. Much the same can be said of the coronavirus measures now before us. The third case we find helpful is Hosanna‐Tabor Evangelical Lutheran Church & School v. Equal Employment Opportunity Commission, 565 U.S. 171 (2012). There the Court returned to the employment setting, this time examining an action brought by the EEOC against a church and its associated school. The EEOC asserted that the school had fired a teacher in retaliation for her threat to file a lawsuit under disability‐ discrimination laws; the school responded that its reason for firing her was that her threat to sue was a breach of the tenets of its faith. The central issue, however, involved the teacher’s status: if she was properly characterized as a “minister” of the faith, then the First Amendment barred the EEOC’s suit; if she was instead a lay employee, the parties assumed that the case could go forward. See also Our Lady of Guadalupe Sch. v. Mor‐ rissey‐Berru, 140 S. Ct. 2049 (2020) (extending Hosanna‐Tabor to teachers responsible for instruction in the faith, regardless of their specific title or training). In this instance, the Court found that the Free Exercise Clause and the Establishment Clause pointed in the same di‐ rection—both mandate noninterference “with the decision of a religious group to fire one of its ministers.” 565 U.S. at 181. It endorsed the idea of a “ministerial exception” to the other‐ wise applicable laws regulating employment relationships. Id. at 188. But, in responding to the EEOC’s argument that no 14 No. 20‐2175 ministerial exception is needed, because religious organiza‐ tions enjoy the right to freedom of association under the First Amendment, the Court offered guidance on the way the dif‐ ferent branches of the First Amendment interact: We find this position [i.e., that the general right to freedom of association takes care of everything] unten‐ able. The right to freedom of association is a right en‐ joyed by religious and secular groups alike. It follows under the EEOC’s and Perich’s view that the First Amendment analysis should be the same, whether the association in question is the Lutheran Church, a labor union, or a social club. … That result is hard to square with the text of the First Amendment itself, which gives special solicitude to the rights of religious organ‐ izations. We cannot accept the remarkable view that the Religion Clauses have nothing to say about a reli‐ gious organizationʹs freedom to select its own minis‐ ters. Id. at 189. In other words, the Religion Clauses are doing some work that the rest of the First Amendment does not. Whether that extra work pertains only to the implied right to freedom of association (not mentioned in so many words in the text of the amendment) or if it applies also to the right to freedom of speech, is the question before us. In order to answer it, we must examine the primary free‐speech case on which the Re‐ publicans rely, Reed v. Gilbert. B Reed involved the regulation of signs in the town of Gil‐ bert, Arizona. 576 U.S. at 159. Gilbert’s municipal code regu‐ lated signs based on the type of information they conveyed, No. 20‐2175 15 and this turned out to be its fatal flaw. Signs designated as “Temporary Directional Signs Relating to a Qualifying Event” were regulated more restrictively than signs conveying other messages, including signs that were deemed to be “Ideologi‐ cal Signs” or “Political Signs.” Id. at 159–60. The case arose when a small church and its pastor wanted to erect temporary signs around the town on Saturdays. Because the church had no permanent building, it needed a way to inform interested persons each week about where it would hold its Sunday ser‐ vices. Id. at 161. The problem was that the church’s signs did not comply with the Code, which dictated size, permissible placement spots, number per single property, and display duration. This prompted the Town’s Sign Czar to cite the church twice for Code violations. After efforts at a mutually satisfactory ap‐ proach failed, the church sued the Town, claiming that the Code abridged its right to free speech in violation of the First Amendment, made applicable to the states through the Four‐ teenth Amendment. Both the district court and the court of appeals (over the course of a couple of rounds) ruled in favor of the Town, because as they saw it, the Code “did not regu‐ late speech on the basis of content.” Id. at 162. The Supreme Court reversed. The Court recognized two types of content‐based regula‐ tions: first, regulation based on the content of the topic dis‐ cussed or the idea or message expressed, id. at 163; and sec‐ ond, regulation that is facially content neutral, but that “can‐ not be justified without reference to the content of the regu‐ lated speech,” id. at 164 (cleaned up). The Town’s Code, the Court held, fell in the first category because it treated signs differently depending on their communicative content: 16 No. 20‐2175 If a sign informs its reader of the time and place a book club will discuss John Locke’s Two Treatises of Government, that sign will be treated differently from a sign expressing the view that one should vote for one of Locke’s followers in an upcoming election, and both signs will be treated differently from a sign expressing an ideological view rooted in Locke’s theory of govern‐ ment. More to the point, the Church’s signs inviting people to attend its worship services are treated differ‐ ently from signs conveying other types of ideas. On its face, the Sign Code is a content‐based regulation of speech. Id. Entirely missing from Reed is any argument about, or dis‐ cussion of, the way in which these principles apply to Free Exercise cases. That is probably because if the Town was do‐ ing anything, it was disadvantaging the church’s effort to pro‐ vide useful information to its parishioners, not lifting a bur‐ den from religious practice. The only governmental interests the Town offered in support of its Code were “preserving the Town’s aesthetic appeal and traffic safety.” Id. at 171. The Court found those interests to be woefully lacking, falling far short of a compelling state interest and a narrowly tailored response. Id. at 172. In order to make Reed comparable to the case before us, we would need to postulate a Sign Code that restricted temporary directional signs for everyone except places of worship, and that left the latter free to use whatever signs they wanted. But that is not what Reed was about, and so we must break new ground here. No. 20‐2175 17 C We will assume for the sake of argument that free exercise of religion involves speech, at least most of the time. One can imagine religious practices that do not involve words, such as a silent prayer vigil, or a pilgrimage or hajj to a sacred shrine, or even the act of wearing religiously prescribed clothing. Per‐ haps in some instances those actions would qualify as sym‐ bolic speech, see, e.g., Texas v. Johnson, 491 U.S. 397, 404 (1989), but others would not. Nonetheless, we recognize the im‐ portance of words to most religious exercise, whether those words appear in a liturgy, or in the lyrics to sacred music, or in a homily or sermon. And we understand the point the Re‐ publicans are making: EO43 draws lines based on the purpose of the gathering, and the type of speech that is taking place sheds light on that purpose. Someone sitting in a place of wor‐ ship for weekly services is allowed to be part of a group larger than 50, but if the person in the front of the room is talking about a get‐out‐the‐vote effort or is giving a lecture on the Im‐ pressionists, no more than 50 attendees are permitted. (Some of the Republicans’ other hypotheticals are a little more strained: if the 23rd Psalm is the scriptural passage for the Sabbath or a Sunday service for one group, and another group wants to use the identical text for a discussion of ancient po‐ etry, is the different treatment based on content or something else?) But the Free Exercise Clause has always been about more than speech. Otherwise, why bother to include it at all—the First Amendment already protects freedom of speech, and we know that speech with a religious message is entitled to just as much protection as other speech. See Rosenberger v. Rector and Visitors of the Univ. of Va., 515 U.S. 819, 837 (1995). 18 No. 20‐2175 Moreover, the Rosenberger Court held, nondiscriminatory fi‐ nancial support for religious organizations would not run afoul of the Establishment Clause, because the program was neutral toward religion. Id. at 840. Indeed, the Court acknowl‐ edged, it was “something of an understatement to speak of religious thought and discussion as just a viewpoint, as dis‐ tinct from a comprehensive body of thought.” Id. at 831. However one wishes to characterize religion (including the decision to refrain from identifying with any religion), there can be no doubt that the First Amendment singles out the free exercise of religion for special treatment. Rather than being a mechanism for expressing views, as the speech, press, assembly, and petition guarantees are, the Free Exercise Clause is content based. The mixture of speech, music, ritual, readings, and dress that contribute to the exercise of religions the world over is greater than the sum of its parts. The Supreme Court made much the same point in Ho‐ sanna‐Tabor, as we noted earlier, when it responded to the ar‐ gument that the general right to freedom of association suf‐ ficed to protect religious groups, and thus there was no need for a ministerial exception to the employment discrimination rules. If that were true, the Court said, then there would be no difference between the associational rights of a social club and those of the Lutheran Church. 565 U.S. at 189. “That result,” the Court wrote, “is hard to square with the text of the First Amendment itself, which gives special solicitude to the rights of religious organizations.” Id. Just so here. The free exercise of religion covers more than the utterance of the words that are part of it. And, while in the face of a pandemic the Governor of Illinois was not compelled to make a special dispensation for religious activities, see No. 20‐2175 19 Elim, nothing in the Free Speech Clause of the First Amend‐ ment barred him from doing so. As in the cases reconciling the Free Exercise and Establishment Clauses, all that the Gov‐ ernor did was to limit to a certain degree the burden on reli‐ gious exercise that EO43 imposed. We stress that this does not mean that anything a church announces that it wants to do is necessarily protected. If the church wants to hold a Labor Day picnic, or a synagogue wants to sponsor a “Wednesday night at the movies” event, or a church decides to host a “battle of the bands,” the church or synagogue would be subject to the normal restrictions of 50 people or fewer. We have no occasion here to opine on where the line should be drawn between religious activities and more casual gatherings, but such a line surely exists. And it is important to recall that EO43 does not say that all activi‐ ties of religious organizations are exempt from its strictures. Only the “free exercise of religion” is covered, and those words, taken directly from the First Amendment, provide a limiting principle. Because the exercise of religion involves more than simple speech, the equivalency urged on us by the Republicans be‐ tween political speech and religious exercise is a false one. Reed therefore does not compel the Governor to treat all gath‐ erings alike, whether they be of Catholics, Lutherans, Ortho‐ dox Jews, Republicans, Democrats, University of Illinois alumni, Chicago Bears fans, or others. Free exercise of religion enjoys express constitutional protection, and the Governor was entitled to carve out some room for religion, even while he declined to do so for other activities. 20 No. 20‐2175 III Before concluding, we must also comment on the Repub‐ licans’ alternative argument: that the Governor is allowing Black Lives Matter protestors to gather in groups of far more than 50, but he is not allowing the Republicans to do so. They concede that their argument depends on practice, not the text of the executive order. The text contains no such exemption, whether for Black Lives Matter, Americans for Trump, Save the Planet, or anyone else. Should the Governor begin picking and choosing among those groups, then we would have little trouble saying that Reed would come into play, and he would either have to impose the 50‐person limit on all of them, or on none of them. The fact that the Governor expressed sympathy for the people who were protesting police violence after the deaths of George Floyd and others, and even participated in one pro‐ test, does not change the text of the order. Nonetheless, the Republicans counter, there are de facto changes, even if not de jure changes. Essentially, they charge that the state should not be leaving enforcement up to the local authorities, and that they are aggrieved by the lax or even discriminatory levels of enforcement that they see. Underenforcement claims are hard to win, however, as we know from cases such as DeShaney v. Winnebago County Department of Social Services, 489 U.S. 189 (1989). It is also difficult to prevail in a case accusing the police of racial profiling. See, e.g., Chavez v. Ill. State Police, 251 F.3d 612 (7th Cir. 2001). Although we do not rule out the possibility that someone might be able to prove this type of favoritism in the enforcement of an otherwise valid response to the COVID‐19 pandemic, the record in this case falls short. No. 20‐2175 21 Indeed, the problems of late have centered on ordinary crim‐ inal mobs looting stores, not on peaceful protestors. The Republicans’ brief offers only slim support for the proposition that the 50‐person ban on gatherings does not ap‐ ply to the Black Lives Matters speakers. It first points out that the Governor issued a press release expressing sympathy for the protests. But such a document, untethered to any legisla‐ tive or executive rule‐making process, cannot change the law. Cf. Medellin v. Texas, 552 U.S. 491, 523–32 (2008) (holding that President George W. Bush’s memorandum in response to an international court’s decision was “not a rule of domestic law binding in state and federal courts”). The Republicans also complain that the Chicago police stood by idly while the Black Lives Matters protests took place, but that they dispersed “Re‐ open Illinois” gatherings. Notably absent from these allega‐ tions, however, is any proposed proof that state actors, not municipal actors, were engaged in this de facto discrimination. Finally, the Republicans contend that the Governor prom‐ ised that the National Guard troops he deployed to Chicago would not “interfere with peaceful protesters’ first amend‐ ment rights.” Aside from the fact that this argument appears for the first time in their Reply Brief and is thus waived, it is unpersuasive. The Governor made clear that the National Guard was deployed to protect property against unrest, not to enforce the COVID‐19 order. He did not single out any cat‐ egory of protester by message. We conclude that the district court did not abuse its discretion when it found that none of these allegations sufficed to undermine the Governor’s likeli‐ hood of success on the merits, or for that matter to undercut his showing that the state would suffer irreparable harm if EO43 were set aside. 22 No. 20‐2175 IV We conclude with some final thoughts. The entire premise of the Republicans’ suit is that if the exemption from the 50‐ person cap on gatherings for free‐exercise activities were found to be unconstitutional (or if it were to be struck down based on the allegedly ideologically driven enforcement strat‐ egy), they would then be free to gather in whatever numbers they wished. But when disparate treatment of two groups oc‐ curs, the state is free to erase that discrepancy in any way that it wishes. See, e.g., Stanton v. Stanton, 429 U.S. 501, 504 n.4 (1977) (“[W]e emphasize that Utah is free to adopt either 18 or 21 as the age of majority for both males and females for child‐ support purposes. The only constraint on its power to choose is … that the two sexes must be treated equally.”). In other words, the state is free to “equalize up” or to “equalize down.” If there were a problem with the religious exercise carve‐out (and we emphasize that we find no such problem), the state would be entitled to return to a regime in which even religious gatherings are subject to the mandatory cap. See Elim, 962 F.3d 341. This would leave the Republicans no better off than they are today. We AFFIRM the district court’s order denying preliminary injunctive relief to the appellants.

01-04-2023

09-03-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624365/

ESTATE OF MAXINE ROBINSON DIXON, ROBIN DIXON, EXECUTOR, ANDREW H. CHANDLER, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Dixon v. CommissionerDocket No. 4743-88United States Tax CourtT.C. Memo 1990-17; 1990 Tax Ct. Memo LEXIS 17; 58 T.C.M. (CCH) 1165; T.C.M. (RIA) 90017; January 11, 1990; As Corrected January 11, 1990 Sol Spielberg, for the petitioner. Larry D. Anderson, for the respondent. GERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent, by means of a statutory notice of deficiency, determined a $ 55,497 Federal estate tax deficiency for the Estate of Maxine Robinson Dixon (estate). Due to various concessions and agreements of the parties, one issue remains for our consideration. Petitioner seeks to utilize the alternative*18 valuation date under section 2032. 1 Prerequisite to the estate's entitlement to use the alternative valuation date, is an election made in an estate tax return "filed within the time prescribed by law or before the expiration of any extension of time" to file. We must decide whether the estate met the filing requirement. FINDINGS OF FACT The parties entered into a stipulation of facts, along with attached exhibits, which is incorporated by this reference. The executors resided in Marietta, Georgia, at the time the petition was filed in this case. Maxine Robinson Dixon (decedent) died on December 17, 1983. The Federal estate tax return was due to be filed nine months later on September 17, 1984, a Monday. On September 14, 1984, the Friday before the estate tax return due date, Sol Spielberg (Spielberg), preparer of the estate's return and representative of petitioners herein, signed and submitted a Form 4768 (Application for Extension of Time to File U.S. Estate Tax Return and/or Pay Estate Tax) to respondent requesting an extension for filing*19 to November 17, 1984, a Saturday. A $ 105,000 estimated tax payment was submitted along with the request for an extension. The request was approved on behalf of respondent on October 22, 1984, by William B. Hartlege (Hartlege). On November 12, 1984, Spielberg signed and submitted two Forms 4768, which, on their face, again sought extension to file to November 17, 1984, and extension to pay to March 16, 1985. These two forms contain a number of inconsistencies. Both are signed by Spielberg on November 12, 1984, but one is approved for respondent by Sylvia W. Wren (Wren) on December 31, 1984, and the other is approved for respondent by Hartlege on December 31, 1984. Hartlege was the Director of respondent's Service Center and Wren was the Assistant Director of the same facility. The form approved by Hartlege had no conditions with respect to extension for filing or payment. The form approved by Wren had no condition with respect to the extension for filing, but set forth the requirement that the "return must be filed timely" as a condition to the extension for payment. Although both forms contained requests to extend the time for payment to March 16, 1985, neither form reflected*20 that there would be any shortage of payment and both estimated that the estate tax would be $ 105,000, the amount already paid with the first request for an extension dated September 14, 1984. Both November 12, 1984, requests seek to extend the return filing date to November 17, 1984, the date already approved by Hartlege on October 22, 1984. Both of the November 12, 1984, requests provide, as "Reason for request - Inability to secure all of the information needed by due date." On January 9, 1985, the Form 706 (United States Estate Tax Return) was executed by the executors and Spielberg, as preparer, and mailed to respondent. Respondent received the return on January 14, 1985. Forwarded with the estate tax return was a check for $ 35,013 "covering balance of Tax due" per Spielberg. OPINION We are concerned here with the question of whether the estate tax return in this case was either timely filed or filed within any granted extensions to file. If the return was not timely filed or filed within granted extension time, then the estate will not be entitled to elect the alternative valuation date under section 2032. *21 Section 2032(c) provides that the election to use the alternative valuation date "shall be exercised" on the estate tax return "filed within the time prescribed by law or before the expiration of any extension of time granted pursuant to law for the filing of the return." As an initial matter, petitioners have referred us to section 2032(d)(2) which provides that "No election may be made under [section 2032] if [the estate tax return] is filed more than 1 year after the time prescribed by law (including extensions) for filing such return." Section 2032(d)(2) was added by section 1024(a) of Public Law 98-369, July 18, 1984, and is effective (section 1024(b)(1) of Pub. L. 98-369, 98 Stat. 1030) for estates of decedents dying after July 18, 1984. Decedent in this case died on December 17, 1983, and accordingly, petitioner is not entitled to rely upon the provisions of section 2032(d)(2). The estate tax return in this case was not "filed within the time prescribed by law" and, accordingly, we must decide whether it was filed "before the expiration of any extension of time granted pursuant to law for the filing of the return." Petitioner advances two basic arguments in support of*22 its position that the return was filed at a time which would permit the election of the alternative valuation date. First, it argues that its representative intended to extend the filing time to March 16, 1985, which, although he signed requests which contained November 17, 1984, extension dates, could have been determined to be incorrect by respondent's comparison with the prior request for extension. Second, petitioner argues that respondent's approval of its November 12, 1984, requests for extension are, in essence, disapprovals which would place them within the special provision of respondent's Revenue Ruling 64-214, 2 C.B. 472">1964-2 C.B. 472. The entire direct testimony of petitioner's representative, Spielberg, was as follows: On November 12, 1984, my secretary, at my direction, prepared an additional extension of time for filing the estate tax return of Maxine Dixon. I instructed her that we wanted to get an additional extension of time until March 16, 1985, because we did not have all of the information available. Based on my verbal instructions, she prepared the [request for extension], and I signed it based on those facts. On cross-examination, Spielberg was*23 vague about his proofreading practices, but he admitted signing the second requests dated November 12, 1984. Spielberg was also vague about the existence of two different November 12, 1984, requests for extension. Although there were some inconsistencies between the two requests dated November 12, 1984, there was nothing patently inconsistent about the chronological sequence on each document. Each document was executed November 12, 1984, and requested extensions to file to November 17, 1984, and extensions to pay to March 16, 1985. Respondent's agents approved both of the requests on December 31, 1984. It appears that requests to extend the time within which to file estate tax returns or pay estate tax are not coordinated or compared by respondent with other requests by the same taxpayer concerning the same return to be filed. Petitioner argues that respondent would have known that the request for a November 17, 1984, extension was in error if respondent had compared the November 12, 1984, request with the September 14, 1984, request, which also sought extension to file to November 17, 1984. Respondent contends that petitioner's argument is ironic in that it was petitioner's*24 representative's inattention to detail and errors on the documents that caused the problem. The error here, if any, was made by Spielberg's inattention to detail and/or delegation of his responsibility to his secretary. The record is clear that the extensions to file the estate tax return were sought and approved only until November 17, 1984, and the return was not executed until January 9, 1985, or received by respondent until January 14, 1985. Nothing in the record causes us to conclude otherwise. Section 2032(c) requires a timely filed return or one within the time of a granted extension to file. The "timely filed" requirement has been strictly construed in connection with the election of the alternate valuation date and has been consistently applied over the years. See Estate of Ryan v. Commissioner, 62 T.C. 4">62 T.C. 4, 10 (1974); Estate of Downe v. Commissioner, 2 T.C. 967">2 T.C. 967, 970-971 (1943); Estate of Flinchbaugh v. Commissioner, 1 T.C. 653">1 T.C. 653, 655 (1943); Crissey v. United States, an unreported decision ( N.D. N.Y. 1980, 45 AFTR 2d 80-1754, 80-1 USTC par. 13,335).*25 2 Some of these cases held that the alternate valuation date election was not available even though the failure was due to mistake or even where there was reasonable cause for the late filing. The circumstances of this case are straightforward and do not present any reason for varying from long-established precedent. Petitioner's final argument concerns Revenue Ruling 64-214. That ruling provides, in certain situations, for a 10-day grace period within which to make a "timely" election in situations were a taxpayer has sought an extension to file and the request is denied. *26 Petitioner argues that it should have had 10 days from December 31, 1984. Petitioner makes this argument even though its requests for extension were granted, because, as petitioner contends, the circumstances here were, in essence, a denial of the extension it intended. Petitioner's argument is based upon the same type of nonsequitur as its first position because the extensions sought were granted. Any other interpretation would be fiction. We hold that the estate tax return for the Estate of Maxine Robinson Dixon was not timely filed or filed within the extension period concluding November 17, 1984, as required in section 2032(c). We accordingly hold that the estate is not entitled to elect the alternate valuation date under section 2032. To reflect the foregoing and concessions of the parties, Decision will be entered under Rule 155. Footnotes1. Section references are to the Internal Revenue Code, as amended and in effect for the period involved in this controversy.↩2. See also Estate of Archer v. Commissioner, T.C. Memo 1984-57">T.C. Memo. 1984-57; Estate of Carpousis v. Commissioner, T.C. Memo. 1974-258; Estate of Bradley v. Commissioner, T.C. Memo. 1974-17, affd. per order 511 F.2d 527">511 F.2d 527 (6th Cir. 1975); Estate of Fisk v. Commissioner, a Memorandum Opinion of this Court dated Jan. 28, 1952 (11 T.C.M. (CCH) 77">11 T.C.M. 77, 21 P-H Memo T.C. par. 52,018), revd. on other grounds 203 F.2d 358">203 F.2d 358↩ (6th Cir. 1953)

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624367/

ESTATE OF HENRY N. BRAWNER, JR., ROGER J. WHITEFORD AND EDGAR N. BRAWNER, EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brawner v. CommissionerDocket No. 82695.United States Board of Tax Appeals36 B.T.A. 884; 1937 BTA LEXIS 641; November 16, 1937, Promulgated *641 1. Over a period of years decedent, who had been in the milk and dairy business for 36 years, invested a large sum of money in improved and unimproved real estate. During the taxable year he paid $400 to an auditor for a report on the receipts and disbursements of an apartment house that he contemplated buying. Held, the $400 is not an ordinary and necessary expense, because the particular transaction is held to have been an investment and not a trade or business carried on during the taxable year; held further, the decedent is entitled to a deduction of $4,257.85 for attorney fees, since the fees were paid in connection with and as a result of his milk and dairy business. 2. The amount of depreciation to which decedent is entitled upon a building owned and operated by him determined. 3. Prior to the taxable year decedent loaned money on second trust notes. The debtors having defaulted on both first and second trust obligations, decedent bid in the property at the foreclosure sale. Held, the balance of capital account against the debtors is a bad debt properly charged off. Robert P. Smith, Esq., for the petitioners. C. A. Ray, Esq.,*642 for the respondent. KERN *885 This proceeding involves a deficiency of $11,509.52 in income taxes for 1932. Each issue involves the right of the original petitioner herein, Henry N. Brawner, Jr., to a deduction for: (a) $400 paid to Joseph Zucker for auditing services; (b) $4,257.85 paid to counsel for legal services and expenses; (c) $1,108.21 additional depreciation; and (d) $21,558.12 representing a loss on investment. As an alternative to (d), the petition alleges that the $21,558.12 is deductible as a bad debt. A suggestion of the death of the original petitioner herein, and motion for substitution of parties having been filed October 20, 1937, an order was entered substituting his executors, Roger J. Whiteford and Edgar N. Brawner, as petitioners herein. FINDINGS OF FACT. HenryN. Brawner, Jr., deceased, was a resident of Washington, D.C., and was engaged in the milk and dairy business for 36 years. During all of this period he was associated with the Chestnut Farms Dairy. From March 1921 until January 1924 he was the sole owner of the business. He incorporated the business in 1924, and thereafter owned all of the 10,000 shares of capital stock*643 except four shares. In 1928 he exchanged all of his stock in the Chestnut Farms Dairy for stock and securities in the National Dairy Products Corporation. Brawner continued as president of the Chestnut Farms Dairy after its acquisition by the National Dairy Products Corporation and became a director of the latter corporation. Prior to the taxable year decedent had become an extensive property holder in the District of Columbia, having acquired about 200 separate and distinct parcels of real estate. His holdings included improved and unimproved property, the improvements consisting of apartment *886 houses, stores, and store buildings, and an apartment house in Alexandria, Virginia. In addition to purchasing real property, decedent loaned money on first, second, and sometimes third trusts. During 1921, 1922, and 1923 decedent's dealings in real estate were confined to three or four transactions a year, but later, when he had more money, his real estate transactions were more numerous. The funds used in acquiring real property or lending money thereon came from decedent's milk and dairy business and from his investments. After the transfer of the Chestnut Farms Dairy*644 to the National Dairy Products Corporation in 1928, he had approximately $1,000,000 at his disposal. A resume of his real estate transactions from 1928 to 1932, inclusive, reveals the following purchases and loans and the amounts thereof: YearNumber of real-estate transactionsCost of properties purchasedLoans on real property1928165$275,000$184,00018295164,00069,000193060,00019314502,00032,000193245,000During these years decedent sold only one piece of real property, in 1928, and exchanged one piece without gain or loss in 1932. Petitioner received gross rentals in 1931 and 1932 of $15,642 and $21,786.46, respectively, on real properties that he owned and operated. The purchasing, or selling, of property, the lending of money on real estate, the renting, leasing, repairing, and upkeep of improved properties, and the collection of rents and interest were all handled directly under decedent's supervision. He devoted two or three hours each day to his real estate interests and was assisted therein by the secretary of the Chestnut Farms Dairy. No outside agents were employed to assist him in carrying on his real*645 estate transactions. He handled no real estate transactions for others, nor did he hold himself out as a real estate broker. His real estate activities were confined solely to managing his own properties and to the acquisition of additional properties as an investment. In his income tax returns for 1925, 1926, and 1928 decedent listed his "Occupation, Profession or Kind of Business" as "Dairy Products." In his tax returns for 1929, 1930, and 1931 he listed himself as "President, Dairy Products Business." On his return for the taxable year he reported that his business was "Capitalist: President Dairy Business"; and the income reported therein was from the sources and in the amounts following: ItemAmount1. Salaries, wages, commissions, etc., Chestnut Farms Dairy$28,500.00Directors' fees905.002. Income from business or profession3. Interest on bank deposits, notes, corporation bonds15,697.124. Interest on tax-free covenant bonds, etc4,287.507. Rents and royalties7,447.1610. Dividends on (a) stocks of domestic corporations27,815.45*887 Issue (a).During the taxable year decedent was contemplating the purchase*646 of an apartment house known as the Woodley Park Towers. In order to verify certain statements and to determine whether the property would be a good investment, he had an audit made of the receipts and expenditures of the apartment house. The audit cost decedent $400, but it convinced him that he did not want the property, and negotiations for its acquisition were discontinued. Issue (b).During 1932 decedent paid $4,257.85 to attorneys who represented him before the Bureau of Internal Revenue, the Board of Tax Appeals, and the Circuit Court in connection with his tax liabilities for the years 1921, 1922, and 1923, during which years decedent individually owned and operated the Chestnut Farms Dairy. Some of the items claimed by him as to these taxable years were allowed by the Bureau, while other items were litigated before the Board and the Circuit Court. The largest item involved a deduction claimed in 1921, 1922, and 1923 by decedent of approximately $114,000 paid to the widow of decedent's former partner in the dairy business. Issues (c) and (d).On or about May 2, 1928, decedent loaned $46,000 to McKeever & Goss. His loan was evidenced by five notes of $10,000*647 each, due on or before three years from May 2, 1928, bearing 6 percent interest and secured by a second trust on lot 8, square 217, known as 1414 K Street, N.W. As additional security Robert L. McKeever personally endorsed the notes. In 1928 a first trust had been placed on the property in the amount of $125,000, this trust being held by the Prudential Life Insurance Co. In 1930 interest payments on both trusts were suspended, and in 1931 decedent advanced an additional $4,103.33 to pay interest on and curtail the first trust. In July 1931 decedent bid in the property at a foreclosure sale for $32,500, the balance due on the first trust at that time being $115,625. Thereafter, he sued McKeever & Goss upon their notes and Robert L. *888 McKeever, individually, upon his endorsement thereof. The amount involved in the suit was $21,603.33, representing $50,000 in notes plus $4,103.33 advanced, less $32,500 paid to acquire the property. During the taxable year decedent obtained a deficiency judgment against the said parties in the sum of $26,780, which included interest. He was unable to satisfy his judgment, however, as McKeever & Goss went out of business in July 1932, *648 leaving no assets, and Robert L. McKeever was adjudged a bankrupt in the fall of 1932. Decedent filed a claim in the bankruptcy proceedings but was unable to collect anything thereon. Later, in November 1932, he attached and collected $1,250, representing a fee of Robert L. McKeever that was pending and paid after the bankruptcy proceedings. In 1934 decedent's counsel collected $1,500 as a result of a suit by McKeever & Goss for commissions, but counsel retained this collection to cover his fee and expenses in connection with the litigation. Decedent's books reflected his $46,000 loan by a debit entry, dated May 2, 1928, in an account entitled "McKeever & Goss" in the notes and accounts receivable part of his ledger. The entries on the debit and credit side of this ledger account through the taxable year were as follows: DebitsCredits19281931May 2Five notes, $10,000 each, etc$46,000.00Nov.30Charged interest pd$3,228.3319311932May 2Protest fees11.15Nov. 7Attachment1,250.00July 6H. L. Rust on 1st Trust4,103.33Oct. 30Curtail 1st Trust1,875.001932Apr. 4Thos. J. Owen Fees Sale92.65Apr. 30Curtail 1st Trust1,875.00Oct. 29Curtail 1st Trust1,875.00*649 In the latter part of 1932, after determining that McKeever & Goss had gone out of business without leaving assets and after Robert L. McKeever had been adjudged a bankrupt, decedent transferred the foregoing account from the notes and accounts receivable portion of his ledger to the real estate section thereof. At or about the time he transferred the account from notes and accounts receivable to real estate, he crossed out the title "McKeever & Goss" and entered in pencil the title "Real Estate 1415 K St., N.W."; and, at the same time, on the credit side of the account, in pencil, were written the separate notations "Building bought in for $32,500 July 1931" and "Judgment for difference against R. L. McKeever worthless bankrupt no assets 1932." At the bottom of the account on the credit side appears the following entry, headed "Memo": *889 First Trust Note $125,000 dated April 30, 1928, 10 years, 5-1/2% semi annual curtails $1,875.00 balance due on note 7/1/31 $115,625.00. Curtails H. N. B. Jr. 7/6/311,875.0010/30/311,875.004/30/321,875.0010/30/321,875.004/30/331,875.0010/30/331,875.00Upon acquisition of the premises at 1415*650 K St., N.W., decedent valued the building at $125,000 and estimated its remaining life as 50 years. This valuation was fixed after an inspection of the building in August 1931. The building was a four-story reenforced concrete and brick structure with a limestone front, 32 rooms, an elevator, a slag roof with a very expensive skylight, a basement the full length of the building, and a good heating plant. The building was constructed in 1923 and was in good condition in August 1931. In valuing the building, decedent considered, in addition to its physical condition, its potential rental value and the $125,000 first trust on the premises. In his return for the taxable year decedent claimed a deduction of $2,500 for depreciation of the building at 1415 K St., N.W., but the Commissioner reduced the amount of the deduction $1,108.21, his reasons therefor being stated in his deficiency letter as follows: In the return a deduction of $2,500.00 (2 per cent of $125,000.00), representing depreciation on a building at 1415 K Street, N.W., was claimed. It appears the property was assessed as follows: Land$81,000.00Improvements72,000.00Total$153,000.00The*651 cost of the property, $147,576.79, has been allocated to land and building on the basis of assessed values as follows: Land$78,128.89Improvements69,447.90Total$147,576.79The depreciation allowable is, therefore, a remaining balance of $68,197.90 ($69,447.90 less $1,250.00) prorated over a remaining life of 49 years of $1,391.79 instead of $2,500.00 as claimed on your return, and depreciation was overstated $1,108.21. As a result of this adjustment rental income has been increased by $1,108.21. Decedent made no claim on his 1932 return for a deduction representing a bad debt or a loss as a result of his loan on the property at 1415 K St., N.W., and the subsequent foreclosure and his acquisition of that property. *890 OPINION. KERN: Issue (a) involves the right of decedent to deduct $400 paid in connection with the proposed purchase of an apartment house. The right to the deduction is premised upon the contention that decedent was extensively engaged in buying and selling real estate and in making loans secured by real property. The petitioners rely upon section 23(a) of the Revenue Act of 1932, which provides for the deduction of all ordinary*652 and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. As was said in the case of , "The decided cases touching upon what constitutes the carrying on of a business do not announce any comprehensive rule that can be readily applied to the varying facts that are presented in this class of cases." It is generally recognized that "those who take the position of passive investors, doing only what is necessary from an investment point of view" are not carrying on a trade or business within the meaning of this section of the revenue Act. However, those who are actively engaged in the enterprises in which they are financially interested may be considered as carrying on a business. It is also true that a person actively and regularly engaged in buying and selling for profit, substantial quantities of securities, or considerable numbers of real estate tracts, will be considered as carrying on a business with regard to such trading. *653 ; . In some cases the result of the taxpayer having made investments is that the taxpayer thereafter is engaged in one business, or many businesses, depending upon the character of the investments made, all within the meaning of said section of the act. . In the instant case decedent had in the year 1928 the sum of $1,000,000 derived from the dairy and dairy products business available for investment, and from that date to and including the taxable year 1932 he invested approximately that amount in real estate and in real estate loans, having purchased during those years 174 pieces of real estate, but selling only one piece and exchanging one piece without gain or loss. In 1932 the gross rentals received by him amounted to $21,786.46. We must conclude from these facts that he was not engaged in the business of buying and selling real estate as a real estate broker, and, further, that he was engaged during these years in the business of managing rental property purchased by him as an investment. The deduction claimed*654 by him, however, and involved in this issue of the instant case, is not an item propertly connected with his business of managing rental properties owned by him, but is, on the *891 other hand, an item of expense incurred by him incident to a proposed investment; that is, a contemplated purchase by him of additional rental property. Therefore, we must conclude that it was not an ordinary and necessary expense paid or incurred during the taxable year in carrying on a trade or business, and as to this issue, we approve respondent's determination. Issue (b).The attorney fees which are claimed as a deduction grew out of the litigation of decedent's tax liability in 1921, 1922, and 1923. During these years he was engaged in operating the milk and dairy business as a sole proprietorship. There can be no doubt that decedent was engaged in that business, and we are satisfied that the sum of $4,257.85 was paid out as attorney fees by decedent during the taxable year. In our opinion, this expenditure grew out of and proximately resulted from the milk and dairy business carried on by decedent and is deductible as an ordinary and necessary expense of that business. *655 ; . Cf. , and cases cited. Issue (c).The amount of the depreciation deduction to which decedent is entitled depends upon the value of the improvements at 1415 K Street, N.W., since the life of the building is not in dispute. Decedent valued the building at $125,000; the respondent valued it at $69,447.90, thereby reducing decedent's deduction for depreciation $1,108.21, and increasing his rental income by the same amount. Respondent's determination being prima facie correct, decedent was under obligation to overcome this valuation by proving the value of the improvements in a different amount. His proof consisted of the testimony of his assistant, who described the building and the method used in valuing it. This witness testified that his allocation of cost to the improvements was based upon a personal inspection of the property in August 1931, upon consideration of the income-producing ability of the property, and upon the amount of the first trust. In order to support the opinion of*656 this witness counsel endeavored to qualify him as an expert in valuing properties. We are not persuaded that his experience would justify us in considering him to be an expert or in relying on his valuation. Upon this issue we, therefore, determine that decedent did not maintain the burden of proof, and respondent's valuation and computation of depreciation will be adopted. *892 Issue (d).Decedent has asserted his right to a further deduction as to 1932 income, either as a bad debt or as a loss. In the petition a slightly larger deduction is claimed as a loss, $21,558.12, or, in the alternative, that the amount is deductible as a bad debt. In his brief decedent reversed positions and contended that the deduction claimed, $21,530, is a bad debt, or, in the alternative, is a loss. A brief summary of the pertinent facts will tend to clarify this issue. Decedent loaned $46,000 to McKeever & Goss on second trust notes and later advanced to them the sum of $4,103.33. Upon default, the makers of the notes and their endorser, R. L. McKeever, were sued and judgment was obtained for $27,680, including interest. The judgment could not be executed because of the bankruptcy*657 of the individual and the failure of the firm without assets. Being unable to collect the judgment, decedent claimed that the difference between the judgment obtained and credits against it, of $4,000, which was not loaned, and of $1,250, an amount collected after judgment, represent a bad debt, or the loss sustained. With regard to decedent's contention that this proposed deduction should be allowed as representing a bad debt, respondent contends that there was no proper charge-off thereof made by decedent within the taxable year, as required by section 23(j) of the Revenue Act of 1932. When decedent crossed out the title "McKeever & Gross" on the account involved herein, and entered in pencil the title "Real Estate 1415 K Street, N.W.", transferred the account from the notes and accounts receivable portion of his ledger to the real estate section thereof, and made the notation "Building bought in for $32,500, July 1931" and "Judgment for difference against R. L. McKeever worthless, bankrupt, no assets 1932", it is our opinion that a proper charge-off of the account against McKeever & Goss, carried on decedent's books was accomplished, conforming to the rules laid down in the*658 following cases: ; ; ; ; ; . It would seem clear that decedent, by the actions and notations mentioned above, and more fully set out in the findings of fact herein, evidenced the ascertainment of worthlessness of this account substantially as of the date of such ascertainment and within the taxable year, and effectively eliminated his claim against McKeever & Goss as an asset. However, article 23(k)-3 of Regulations 94 provides as follows: *893 If mortgaged or pledged property is lawfully sold (whether to the creditor or another purchaser) for less than the amount of the debt, and the mortgagee or pledgee ascertains that the portion of the indebtedness remaining unsatisfied after such sale is wholly or partially uncollectible, and charges it off, he may deduct such amount (to the extent that it constitutes capital or represents an item the income from which has*659 been returned by him) as a bad debt for the taxable year in which it is ascertained to be wholly or partially worthless and charged off. * * * In view of this provision, it is therefore apparent that decedent could deduct as a bad debt only that portion of the worthless judgment against McKeever & Goss which constituted capital. Since there is no evidence in the record that any portion of the judgment representing interest has been reflected in decedent's income tax returns, the amount of his capital represented in the account against McKeever & Goss is the sum of $46,000, plus $11.15 protest fees, plus the advancement of $4,103.33. To be credited on this is the sum of $1,250 received by him on this account by means of an attachment, November 7, 1932, and also the sum of $32,500 which is the amount for which the mortgaged property was sold. It is, therefore, our conclusion on this issue that the claim of decedent for a deduction as a bad debt should be allowed in the sum of $16,364.48. Reviewed by the Board. Decision will be entered under Rule 50.LEECHLEECH, dissenting: I dissent on the first point. It seems to me this record establishes the fact*660 that the petitioner, during the taxable year, was in the business of owning and operating real estate; that as an ordinary and necessary expense of that business, he paid, during that year, the disputed $400, and, accordingly, is entitled to its deduction under the Revenue Act of 1932, section 23(a). STERNHAGEN and ARUNDELL agree with this dissent.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624368/

DON MEEKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMeeker v. CommissionerDocket No. 21751-90United States Tax CourtT.C. Memo 1994-290; 1994 Tax Ct. Memo LEXIS 291; 67 T.C.M. (CCH) 3128; June 23, 1994, Filed *291 For petitioner: Scott P. Hendricks. For respondent: Richard A. Stone. SWIFTSWIFTMEMORANDUM OPINION SWIFT, Judge: This case is before the Court on petitioner's motion under section 7430 for an award of administrative and litigation costs. All section references are to the Internal Revenue Code. At the time the petition was filed, petitioner resided in San Benito, Texas. In January of 1989, respondent began an audit of petitioner's Federal income tax returns for 1986, 1987, and 1988. Petitioner did not fully cooperate in providing respondent with requested documents. Petitioner was generally evasive when respondent's representatives attempted to arrange meetings and discuss adjustments, and petitioner refused to consent to an extension of the statute of limitations for 1986, 1987, and 1988. On August 28, 1990, respondent issued a notice of deficiency regarding petitioner's 1986, 1987, and 1988 Federal income taxes. On September 27, 1990, petitioner filed his petition for a redetermination of the deficiencies. In November of 1990, the case was assigned to respondent's Appeals Office for consideration. Between November of 1990 and January 28, 1992, respondent's Appeals*292 Office representatives continued to request information from petitioner relating to petitioner's tax liabilities. Several conferences were held between petitioner, his legal representatives, and respondent's Appeals Office representatives. During this time, petitioner submitted additional documentation, and petitioner and respondent reached agreement on some issues. On January 28, 1992, at a day-long settlement conference, petitioner's representatives submitted significant additional documentation. At the conclusion of this conference, a tentative Stipulation of Agreed Adjustments (Settlement) on all issues was entered into. Five days later, petitioner, his legal representatives, and respondent's attorneys met again, signed the Settlement, and filed the Settlement with the Court. On March 17, 1992, however, respondent filed a status report explaining that a dispute had arisen over some of the terms of the Settlement. The Court granted an extension of time to resolve the dispute, which proved unfruitful. On June 9, 1993, respondent filed a Motion for Summary Judgment. On October 18 and 20, 1993, an evidentiary hearing was held. Immediately thereafter, we rendered a bench *293 opinion effectively deciding the dispute over the terms of the Settlement in favor of respondent. On December 16, 1993, pursuant to our bench opinion, we ordered that respondent's Motion for Summary Judgment be recharacterized as a Motion for Entry of Decision and granted respondent's motion. In reliance upon the fact that, under the terms of the Settlement, petitioner's tax liabilities were substantially reduced from the tax liabilities as determined in the notice of deficiency, petitioner now moves for an award of administrative and litigation costs. Under section 7430(a), a "prevailing party" may be awarded reasonable administrative and litigation costs, including reasonable attorney's fees. , affg. in part, revg. in part, and remanding ; , affg. ; . To qualify as a prevailing party, the taxpayer must establish, among other things, that*294 the taxpayer either substantially prevailed with respect to the amount in controversy, or substantially prevailed with respect to the most significant issue or set of issues. Sec. 7430(c)(4)(A)(ii). The taxpayer must also establish that respondent's position was not substantially justified. Sec. 7430(c)(4)(A)(i); , affg. per curiam . Whether respondent's position was substantially justified depends upon whether respondent's position was unreasonable in light of all the facts and circumstances of the case and in light of legal precedents. ; Sher v. Commissioner, 89 T.C. at 84; . Generally, respondent's concession of all or part of a case is not by itself sufficient to establish that respondent's position was unreasonable. ;*295 ; . The taxpayer must also establish that the taxpayer exhausted the administrative remedies within the Internal Revenue Service, sec. 7430(b)(1); that the taxpayer did not unreasonably protract the court proceedings, sec. 7430(b)(4); that the fees and costs requested are reasonable, sec. 7430(c)(1)(B)(iii); and that, at the time the proceeding was commenced, the taxpayer's net worth did not exceed $ 2 million, sec. 7430(c)(4)(A)(iii). In the present case, respondent concedes that petitioner has exhausted the administrative remedies and that petitioner has substantially prevailed with regard to the amount in controversy. The table below compares respondent's determination, as set forth in the notice of deficiency, of petitioner's tax liabilities and his additions to tax for 1986, 1987, and 1988, with petitioner's tax liabilities and additions to tax for 1986, 1987, and 1988, as agreed to in the Settlement: 1986Per Statutory NoticePer SettlementIncrease in Tax$ 303,918$ 28,804Additions to Tax91,1761,440Total395,09430,2441987Per Statutory NoticePer SettlementIncrease in Tax$ 176,827$ 48,088Additions to Tax53,0482,404Total229,87550,4921988Per Statutory NoticePer SettlementIncrease in Tax$ 125,606$ 40,608Additions to Tax37,0742,030Total162,68042,638*296 Petitioner argues that respondent's litigation position was not substantially justified because respondent's representatives allegedly ignored documentation and other evidence presented by petitioner, refused to correct adjustments on an item-by-item basis at the time adequate evidence was presented (forcing petitioner to settle the adjustments as a "package deal"), and proposed adjustments without supporting evidence. Respondent relies on cases such as and , which hold that respondent is not unreasonable when her representatives refuse to concede adjustments until the taxpayer provides appropriate substantiation. See also ; , affd. without published opinion . In essence, the issues before us may be reduced to the following: whether respondent's representatives should have settled the adjustments sooner than January 28, 1992. *297 The evidence is clear that petitioner did not submit to respondent's representatives adequate documentation relating to many of his claims on a timely basis. The evidence is also clear that respondent's representatives did consider petitioner's documentation when received. On the record before us, we conclude that respondent's representatives did not ignore petitioner's evidence and that respondent's representatives were not unreasonable in failing to settle many of the adjustments sooner than January 28, 1992. Petitioner's argument that he was forced to settle the adjustments on a package basis also is without merit. There is no credible evidence that the settlement negotiations in this case were managed improperly by respondent's representatives. We conclude that petitioner does not qualify as a prevailing party as defined in section 7430(c)(4)(A). Accordingly, petitioner is not entitled to recover administrative and litigation costs. An apropriate order and decision will be entered.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624369/

HORACE E. BROWN AND ELAINE V. BROWN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrown v. CommissionerDocket No. 8436-84.United States Tax CourtT.C. Memo 1988-342; 1988 Tax Ct. Memo LEXIS 369; 55 T.C.M. (CCH) 1446; T.C.M. (RIA) 88342; August 1, 1988. James M. Secrest and Richard M. Hall, for the petitioners. Reid Huey, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: This case was assigned to Special Trial Judge Daniel J. Dinan pursuant to the provisions of section 7443A(b) and Rules 180, 181 and 182. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE DINAN, Special Trial Judge: On January 31, 1984, respondent determined deficiencies in petitioners' Federal Income taxes and additions to tax as follows: Additions to TaxYearDeficiencySection 6653(a)(1)Section 6653(a)(2)1980$ 2,606.00$ 130.30- 0 -19813,068.00  153.40  *19825,448.22  - 0 -- 0 -*371 Petitioners timely filed their petition with this Court on April 2, 1984. Respondent filed his answer on May 16, 1984. On August 21, 1985, respondent moved for leave of Court to file an amended answer. The motion was granted and the amended answer was filed on September 30, 1985. Respondent, in his amended answer, asserted that petitioners earned income in 1980, 1981, and 1982 which they did not report on their returns and, as a result, were liable for additional deficiencies and additions to tax in the following amounts: Additions to TaxYearDeficiencySection 6653(b)(1)Section 6653(b)(2)1980$ 9,736.40$ 6,171.20- 0 -19819,998.18  6,533.09  - 0 -198210,408.47 7,928.35  **Respondent contends that the increased deficiencies result from unreported income of $ 20,000 a year for the years 1980-1982, plus unreported gains of $ 2,310 and $ 520, realized in the years 1980 and 1982, respectively, from the sale of farm machinery. This case was called from the Motions Session*372 of the Court as Washington, D.C., on April 22, 1987, for hearing on the Court's Order to show cause why respondent's motions for sanctions, filed March 26, 1987, should not be granted. Counsel for the parties appeared and were heard. By Order dated April 22, 1987, the Court ruled: that the Court's order to show cause is made absolute and respondent's Motion to Impose Sanctions filed on March 26, 1987, is granted in that petitioners shall be prohibited from introducing into evidence at the trial of this case any matters which pertain to paragraphs 3, 4, 5 and 9 under the category "Issues for Trial" set forth in respondent's Trial Memorandum. All issues raised by petitioners in their petition have either been conceded by them or will be decided against them pursuant to the Court's Order of April 22, 1987, supra, imposing sanctions, except whether petitioners failed to report interest income in the amount of $ 636.00 on their return for the year 1980 and whether petitioners are liable for additions to tax under section 6653(a). The parties have stipulated that petitioners omitted from income $ 241.44 in interest on their 1980 return, rather than $ 636.00. The issues raised*373 by respondent in his amended answer filed September 30, 1985, remaining for decision are (1) whether petitioners received unreported income of $ 20,000 in each of the years 1980, 1981 and 1982, (2) whether petitioners are liable for self-employment tax under section 1401 on income received from Brown's Service in the years 1980-1982, (3) whether petitioners realized gain from the sale of farm machinery in the years 1980 and 1982, and (4) whether petitioners are liable for additions to tax under section 6653(b), as an alternative, to the issue of whether they are liable for additions to tax under section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners resided in Franklin, Indiana, at the time they filed their petition. Petitioners have three children: Steven Ray Brown, Jeffrey Lee Brown and Tamara Ann Brown. They filed joint Federal individual income tax returns for the years 1980, 1981 and 1982. Petitioner, Horace Brown (Mr. Brown), who was in his late forties at the time, retired from his civil service job in 1978 because of physical disabilities. He had been a mechanic and later a supervisor at his civil service job. After*374 his retirement, Mr. Brown received disability payments. His disabilities precluded him from engaging in strenuous physical activities. Petitioners' returns in 1980, 1981 and 1982 were prepared by a local tax preparer, Ralph Davis. petitioners had used Davis' service for many years prior to 1980. Davis' method of preparing petitioners' returns was to go down the line items on a blank tax form and ask petitioners for information relevant to each line on the form. After Davis had received all the information from petitioners, he would complete the returns. Davis had used this method of preparing petitioners' returns since 1963. Petitioners never informed Davis that they had received any income from a business known as Brown's Service when they met with him to prepare their tax returns. Petitioners used a trade name known as Brown's Service during the years 1980, 1981 and 1982. Brown's Service was not incorporated. Petitioners had used the name Brown's Service for 20 to 30 years to buy various machine parts wholesale and to publicize their family's jack-of-all trades business activities. These activities included snow removal, lawn care, storage, maintenance and repair work. *375 Receipts stamped with the name Brown's Service were given to customers who had work done by Mr. Brown or his sons. Many of these receipts were marked "paid" or "pd" and were often signed with either Mr. Brown's name or initials or Jeffrey Brown's name or initials. In addition, many of the checks which were made in payment for services rendered (mainly snow removal or lawncare) were made payable to Brown's Service. There is no doubt that substantial funds were paid to Brown's Service for snow removal and lawn care during the years in issue as shown by the receipts and cancelled checks introduced into evidence at trial. Brown's Service employed, in addition to petitioners' sons, numerous other persons who performed labor during the years in issue. 2Petitioners allowed their 15-acre farm to be used as a storage facility. People would pay either petitioners, Brown's Service or Jeffrey Brown rent to store property on the farm. Mr. Brown testified that he received approximately $ 600 in rent from people who stored property on his farm during 1982 and*376 1983. 3Mr. Brown kept a record book in 1981 of snow removal jobs performed by Brown's Service. The record book contains names of customers and has either an "H" for Horace, "J" for Jeffrey or a checkmark next to the customers' names. Mr. Brown owned a snow removal truck as did his son Jeffrey. However, petitioners' son Steven did not have a truck and so he would borrow Mr. Brown's truck whenever he removed snow. Jeffrey often had help from his friends when removing snow. His friends would also occasionally use Mr. Brown's truck when assisting Jeffrey. Mr. Brown was paid no rent for the use of his truck but was generally reimbursed for out-of-pocket expenses incurred when his truck was borrowed. Jeffrey had numerous snow removal and lawn care customers who had used his services for many years. Mr. Brown assisted Jeffrey in soliciting customers but Jeffrey also solicited many of his customers himself. Mr. Brown often helped Jeffrey by collecting payments*377 for jobs done. He even cashed some of Jeffrey's checks for him. These checks were made out to either Jeffrey, Mr. Brown or Brown's Service. Jeffrey did not have a checking account, but he did have a savings account and a cash equivalency fund account. During the years in question, Jeffrey held part-time jobs in addition to his work doing lawn maintenance and snow removal. He was also a student during this time. Because of his other commitments, he often did not have the time to collect payments for jobs himself. There is no evidence in this record which shows that any of these payments were for services performed by Mr. Brown, instead of Jeffrey. Furthermore, there is no evidence in the record that Mr. Brown performed any of the services associated with Brown's Service during the years in question. Jeffrey's tax returns for the years 1980, 1981 and 1982 did not report as income amounts he received from his work doing lawn maintenance and snow removal. However, in 1984 he submitted unsigned Forms 1040 marked "amended Federal income tax returns" (for the years 1980, 1981 and 1982, respectively) which included income from those sources. These Forms 1040 were submitted after*378 petitioners had been audited by respondent's agents. Mr. Brown, under the name of Brown's Service, was in the business of selling Swirlsoft water softeners. He sold the water softeners at wholesale cost to friends and to his church, but not to the general public. Mr. Brown was involved in three automobile accidents between 1980 and 1982. After his first accident he filed a claim with his own insurance company, Preferred Risk. A part of his claim was for lost wages. After initially resisting the insurance company's request for copies of his Federal income tax returns, Mr. Brown furnished copies of his income tax returns for the years 1978, 1979 and 1980 to the insurance company. He claimed that he had additional income from self-employment activities which he had not reported on his tax return. Petitioner settled his claim with Preferred Risk for $ 4,575. Mr. Brown was involved in a second automobile accident which occurred in June, 1981. he filed a third-party claim with the other driver's insurance company, Allstate Insurance. He claimed personal injuries and lost wages. The insurance company asked for copies of petitioners' income tax returns to verify lost wages claimed. *379 They refused. Mr. Brown again claimed he had self-employment income which he had not reported on his return. The insurance company settled with him for $ 27,000. In February of 1982, Mr. Brown was involved in a third automobile accident. Again he claimed lost wages including income he did not report on his tax return. The insurance company, Indiana Insurance, denied his claim. In 1984, Mr. Brown was indicted by the State of Indiana, County of Marion, on three counts relating to insurance fraud. The first count charged him with exerting unauthorized control over the property of Preferred Risk by falsely claiming the existence and extent of physical injuries, lost wages and income. The second count was similar to the first except that it concerned his claim against Allstate Insurance Company. The third and final count concerned the attempted theft of property from Indiana Insurance Company by submitting false income loss claims. Mr. Brown, in a plea arrangement, pled guilty to Count III. Counts I and II were dismissed accordingly. A judgment of guilty of attempted theft was entered against him for submitting false income claims to the Indiana Insurance Company. 4*380 Mr. Brown testified on the stand in this case that he had lied about lost income on his insurance claims. On February 2, 1980, Mr. Brown sold a wheat drill, cultivator, rotary hoe and posthole digger for $ 1,050. On February 5, 1980, he sold a disk and plow for $ 1,000. On August 7, 1980, he sold two wagons for $ 260. On April 27, 1982, he sold a grader blade for $ 520. Petitioners have conceded that they have no remaining basis in the two wagons which were sold on August 7, 1980. Petitioners' 1980 return contained a depreciation schedule which did list property which may have been the same as the other property sold. The property listed on the schedule did have basis remaining. Respondent offered no evidence as to the basis of the farm equipment sold. Petitioners' 1980, 1981 and 1982 tax returns were audited by respondent. Respondent's auditors held several meetings with petitioners during 1983. The auditors examined petitioners' items of income and asked if there were any additional unreported items of income. petitioners said that they reported all of their income. Respondent's auditors requested records of petitioners' activities. Petitioners produced all the*381 records requested of them except for their cancelled checks. The auditors requested the cancelled checks on July 21, 1983. However, petitioners' cancelled checks previously had been seized by the Marion County prosecutor's office for the insurance fraud investigation. The record discloses no other evidence of non-cooperation on the part of petitioners during the examination of their returns by respondent's auditors. OPINION As a preliminary matter, we would note that all issues raised by petitioners' in their petition except the additions to tax under section 6653(a) were resolved before trial. The other issues remaining for decision were first raised in respondent's amended answer. Under Rule 142(a), respondent has the burden of proof on all issues raised in the amended answer. See Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1173 (1981). Respondent first contends that petitioners actively carried on a business known as Brown's Service which generated substantial income not reported on their 1980, 1981 and 1982 returns. There is no doubt that substantial revenues were*382 generated by Brown's Service. This is evidenced by the fact that receipts stamped with the name Brown's Service were given to customers for services rendered and that customers often wrote checks out to Brown's Service to pay for services rendered. The existence of Brown's Service is also evidenced by the fact that Mr. Brown used that name to purchase Swirlsoft water softeners, wholesale. Further evidencing the existence of Brown's Service is the fact that various individuals submitted signed statements that they received funds from Brown's Service for services they performed for it as employees. Based on this evidence, we find that Brown's Service existed during the years in issue and was in the business of providing such services as lawn care, snow removal, general maintenance, etc. We are not, however, persuaded that Mr. Brown personally received any income from these activities of Brown's Service. Respondent has offered evidence which purports to show that Mr. Brown personally received income from Brown's Service during the years in issue. His evidence includes cancelled checks, signed receipts, log books and Mr. Brown's representations to certain insurance companies. Mr. *383 Brown countered that he did none of the work which produced the income attributable to Brown's Service and only collected money for his sons who did not have the time to collect the bills themselves. Indeed, he testified that because of his disabilities, he could not engage in physical labor. His testimony was corroborated by Jeffrey. Mr. Brown owned a snow plow but claimed that he did not use it because of his disabilities. He claims that when his truck was used, it was used by one of Jeffrey's friends. Respondent has offered no evidence to show that Mr. Brown actually removed snow and was paid for his services. A log book was received in evidence at trial which lists the amount charged for snow removal jobs in 1981 and which shows either Mr. Brown's initial or Jeffrey's initial or a checkmark beside it. Mr. Brown testified that the initial simply indicated whose truck was used. Respondent argues that the initial indicates who performed the services. We find that there is insufficient evidence in the record to prove that Mr. Brown did any of those jobs. We are unwilling to draw the inference, as suggested by respondent, that Mr. Brown's initial in the log book shows that*384 he personally performed the work charged for as shown in the log book. As for the signed receipts, again respondent argues that this demonstrates that Mr. Brown, not his son Jeffrey, performed those services. Mr. Brown testified that he was simply collecting the payments for his son who was busy at his other job or in school. Again, respondent's argument is unpersuasive. The mere collection of funds by Mr. Brown is insufficient to prove that he performed those services. Fink v. Commissioner,T.C. Memo 1984-505">T.C. Memo. 1984-505; Stoll v. Commissioner, a Memorandum Opinion of this Court dated Aug. 19, 1946. There was also introduced into evidence at trial a book which lists names of people who stored property on petitioners' 15-acre farm. This storage revenue is also evidenced by cancelled checks of the people who paid to have their property stored and the records kept by petitioners. Respondent argues that the amount evidenced by the receipts of these rental payments is income to petitioners. Jeffrey testified that he was the person who received most of the money, not petitioners. Petitioners further argue that their costs were not taken into account in determining*385 whether there was income attributable to petitioners. Nevertheless, the log book, cancelled checks and the admission by Mr. Brown that he received approximately $ 600 in rent from storages persuades us that he received this income in 1982. Therefore, respondent has met his burden of proof on this issue. Generally speaking, income from rental property is taxed to the owner of property even if someone else managed the property. Palmieri v. Commissioner,27 T.C. 720">27 T.C. 720, 721 (1957). Consequently, even though Jeffrey may have collected the money, it is still taxable to petitioners. Respondent places a great deal of weight on the fact that Mr. Brown represented to three insurance companies that he had self-employment income from Brown's Service which he did not report on his income tax returns. Respondent had representatives of the insurance companies involved testify at trial that he told them that he made money from various odd jobs which he did not report on his returns. We do not doubt that these conversations took place. We have no doubt, however, that Mr. Brown was completely*386 untruthful in his claims against the insurance companies for lost income. Clearly, he had ulterior motives in preparing his insurance claims; namely that his overstatements of income would result in a larger dollar settlement with the insurance companies. Indeed, his untruthful representations cost him dearly because he was convicted of submitting false income claims to the Indiana Insurance Company, a felony offense in Indiana. We attach little weight, therefore, to his representations of lost income to the insurance companies because we find his representations to have been deceitful. Respondent further asserts that Mr. Brown received unreported income from the sale of Swirlsoft water softeners. He admits that he sold water softeners to friends and to his church but not to the general public. 5 He claims to have bought the water softeners wholesale and to have resold them at the same price. In fact, he claims to have lost money on the sales when his costs are taken into account. Respondent offered no evidence to show otherwise. Accordingly, we find that respondent has failed to prove that Mr. Brown realized any gain from the sale of the Swirlsoft water softeners. *387 Initially, the revenues from Brown's Service were not reported as income by anyone. However, Jeffrey Brown, in 1984, filed for 1980, 1981 and 1982 Forms 1040 marked amended tax returns adding to gross income amounts he received from his snow removal and lawn care business. We find it curious that his amended unsigned returns had been prepared without his knowledge, shortly after his parents were audited by respondent's agents. Numerous inferences can be drawn from this; the most obvious is that since respondent's agents had discovered Brown's Service they would eventually trace income generated by it to Jeffrey Brown. But we could very well infer that petitioners were trying to hide unreported income by representing that their son earned the money and reported it as his income when, in fact, it was petitioners who earned the money. Nonetheless, there is insufficient evidence in the record to persuade us that Jeffrey Brown's unsigned Forms 1040 were used to cover up any unreported income of petitioners. Respondent further contends that petitioners' unreported income enhanced their lifestyle. The record discloses that petitioners received income from dividends and interest, capital*388 gains from the sale of their farm and income from retirement pay. The record fails to disclose evidence which would show that petitioners' standard of living was above one which could be supported by petitioners' reported income. Therefore, we are unpersuaded by respondent's enhanced lifestyle argument because it is reasonable to assume that petitioners' lifestyle could be supported without the income from Brown's Service. Respondent has offered into evidence voluminous records, testimony from witnesses and various financial statements of petitioners in an effort to prove that petitioners received unreported income from Brown's Service. As we have said, supra, we find that Brown's Service existed and that it generated revenues. Respondent, however, has failed to persuade us that petitioners earned the income generated by Brown's Service. Therefore, we find that respondent has failed to meet his burden of proof to show that petitioners received unreported income from Brown's Service other than the income from the storage of property on petitioners' property. Respondent has also raised the issue of whether petitioners received unreported income from the sale of farm machinery. *389 Petitioners concede that they failed to report taxable gain of $ 260 from the sale of two wagons having a basis of zero. Respondent contends that petitioners had unreported gains of $ 520 from the sale of a grader blade, $ 1,000 from the sale of a disk and plow and $ 1,050 from the sale of a wheat drill, cultivator, rotary hoe and posthole digger. Petitioners contend that the basis of the equipment exceeded its sale price so that no gain should be recognized. Respondent did not offer any evidence on the basis of the equipment but argues that the basis was zero. We have no proof in this record to persuade us that the basis in the equipment sold is zero or is less then the amount realized. This is especially true considering the fact that petitioners' depreciation schedules list property which may in fact have been the property sold which property showed unrecovered basis. Again the respondent has failed to persuade us that petitioners realized taxable income, other than from the sale of the two wagons. See Falck v. Commissioner,26 B.T.A. 1359">26 B.T.A. 1359, 1365 (1932), affd. sub nom. Houghton v. Commissioner,71 F.2d 656">71 F.2d 656 (2d Dir. 1934) (the Internal*390 Revenue Service had the burden of proof on the issue of basis because the Commissioner raised it in his amended answer; failure to prove basis caused the Board to conclude no gain was realized); James E. Caldwell Co. v. Commissioner,24 T.C. 597">24 T.C. 597, 622 (1955) (dissenting opinion), revd. 234 F.2d 660">234 F.2d 660 (6th Cir. 1956) (upheld dissenting opinion) (when basis not shown, one will not be presumed). We will not assume the basis of the property and since respondent has failed to introduce any evidence regarding basis we find that respondent has failed to prove that there was a taxable gain from the sale of the equipment, other than the $ 260 gain from the sale of the wagons. Respondent has alleged that petitioners are liable for the self-employment tax under section 1401 for income they received from Brown's Service. As we have previously found, respondent has only proved that petitioners failed to include in income gain from the sale of two wagons and rental income from storage on their 15-acre farm. This income is not subject to the self-employment tax. Section*391 1401 places an additional tax on self-employment income. Self-employment income is defined as net earnings from self-employment. Section 1402(b). Net earnings from self-employment do not include rentals from real estate, section 1402(a)(1), or gain or loss from the sale of property, section 1402(a)(3). Therefore, since the unreported income which we have found is not self-employment income, the tax on self-employment income under section 1401 is not applicable and may not be assessed. Respondent asks us to find that petitioners' underpayment was due to fraud under section 6653(b). We have already found that respondent has failed to meet his burden of proof with respect to the receipt of additional income by petitioner, except for the gain of $ 260 from the sale of two wagons and the receipt of $ 600 in rental income. Therefore, our fraud inquiry is restricted to those two items of unreported income. Respondent must prove that any portion of an underpayment in tax was due to fraud by clear and convincing evidence. Section 7454(a); Rule 142(b); Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 220 (1971).*392 This burden may be met by showing that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes, and that there is an underpayment of tax. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968), cert. denied 393 U.S. 1020">393 U.S. 1020 (1969); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983). Fraud will never be presumed. Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1005-1006 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984); Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 200 (1976), affd. without opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Spies v. United States,317 U.S. 492">317 U.S. 492 (1943); Gajewski v. Commissioner, supra at 200; Stone v. Commissioner, supra at 223-224. Circumstantial evidence of fraud may be shown by substantial underreporting*393 of taxable income, Alder v. Commissioner,422 F.2d 63">422 F.2d 63, 66 (6th Cir. 1970), affg. T.C. Memo. 1968-120; Vise v. Commissioner,31 T.C. 220">31 T.C. 220, 226-227 (1958), affd. 278 F.2d 642">278 F.2d 642 (6th Cir. 1960); dealing in cash, Spies v. United States,317 U.S. 492">317 U.S. 492 (1943), Bowlin v. Commissioner,31 T.C. 188">31 T.C. 188, 203 (1958), affd. per curiam 273 F.2d 610">273 F.2d 610 (6th Cir. 1960); and failing to maintain adequate books and records. Spies v. United States, supra;Bryan v. Commissioner,209 F.2d 822">209 F.2d 822, 827 (5th Cir. 1954), cert. denied 348 U.S. 912">348 U.S. 912 (1955), affg. T.C. Memo 1951-313">T.C. Memo. 1951-313; Romer v. Commissioner,28 T.C. 1228">28 T.C. 1228 (1957). The record in this case falls far short of proving by clear and convincing evidence that petitioners understated their taxable income with the intent to evade tax. Respondent argued that petitioners substantially underreported their income. If true, this would be evidence of fraud. However, such is not the case. Petitioners merely omitted from income the proceeds from the sale of two wagons and a small amount*394 of rental income. This amount is insignificant when compared to the income petitioners reported during the years in issue. Respondent also argues that petitioners dealt in cash to conceal income. The record does not support respondent's argument. Since we have determined that most of the income earned through Brown's Service is not attributable to petitioners, it follows that petitioners' receipts of cash were a very insignificant portion of their total income. Respondent also argues that petitioners were evasive during their audit. We disagree. Petitioners appear to have been forthright when being audited by respondent's agent. In fact, respondent's agent admitted that the only documents which petitioners did not turn over during the audit were the cancelled checks which were not in petitioners' possession. Admittedly, petitioners' business records were disorganized and incomplete. This fact is probative on the question of fraudulent intent. However, petitioners' failure to keep adequate business records is not so egregious as to rise to the level of fraudulent intent. Respondent has failed to produce clear and convincing evidence of fraudulent intent to evade taxes during*395 the years in issue. Accordingly, we hold that respondent is not entitled to additions to tax for fraud under section 6653(b). Respondent argues that if he has not established the addition to tax for fraud, that the underpayments in taxes for the years in issue were due to negligence or intentional disregard of the rules and regulations. Sections 6653(a)(1) and 6653(a)(2). A review of this record convinces us that petitioners failed to maintain adequate records to show their income tax liabilities for the years in issue. They are clearly liable for additions to tax for the years in issue pursuant to sections 6653(a)(1) for each of the years 1980 and 1981 on the amount of the deficiencies under our determination and the addition to tax under section 6653(a)(2) for the year 1981. Insofar as this record shows the entire underpayment for 1981 was due to negligence. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated. All Rule references are to the Tax Court Rules of practice and Procedure. ↩*. 50 percent of the interest due on the underpayment of $ 1,775.00. ↩**. 50 percent of the interest due on the underpayment of $ 15,856.69 ↩2. Persons who rendered services for Brown's Service were: Joe Fletcher, Mark Patterson, Jim Wells, and Gary Wayne Emberton. ↩3. Mr. Brown testified to this fact and there is also a record book in evidence which shows the names of the renters and the amounts paid. These amounts total approximately $ 600, which appear to have been paid in 1982. ↩4. Mr. Brown received a one year suspended sentence, was put on probation for six months, was required to serve 50 hours of community service, and was required to pay a $ 75 probation fee and a $ 15 a month supervision fee. ↩5. Mr. Brown stipulated to the fact that he was in the business of selling Swirlsoft water softeners. ↩

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LOUIS P. SANTI AND OPAL B. SANTI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSanti v. CommissionerDocket No. 8851-88United States Tax CourtT.C. Memo 1990-137; 1990 Tax Ct. Memo LEXIS 137; 59 T.C.M. (CCH) 110; T.C.M. (RIA) 90137; March 14, 1990*137 Held: A valid election under section 172(b)(3)(C) to forgo the carryback of a net operating loss was made. Roy Keathley and David T. Popwell, for the petitioners. Vallie C. Brooks, for the respondent. WHITAKER*247 MEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined a deficiency in the income tax liability of petitioners for the years and in the amounts as follows: Taxable Year EndedDeficiencyDecember 31, 1974$  14,197.00December 31, 19752,554.00December 31, 197620,307.00December 31, 1977752,121.13December 31, 197825,112.25*138 After concessions the only issue before the Court is whether petitioners are entitled to carry back the 1978 taxable loss in the agreed upon amount to the years 1975, 1976, and 1977. In the statutory notice, respondent determined that petitioners were not entitled to a net operating loss carryback because of an election to relinquish the carryback made on petitioners' 1978 Federal income tax return. FINDINGS OF FACT Some of the facts have been stipulated and they are so found. When the petition was filed, petitioners resided in Highland Beach, Florida. For each of the taxable years 1974 through 1978, petitioners filed joint Federal income tax returns. The returns for each of those years were prepared by Rhea & Ivy, certified public accountants. On page 2 of petitioners' 1978 Federal income tax return the following sentence was typed in the bottom margin below the signature of the tax return preparer: "Taxpayer elects to carry net operating loss over under IRC 172(b)(2)(c)." The return carries the date 9-9-79 next to the signature of Mr. Santi and the first page carries an Internal Revenue Service "received" date stamp of September 12, 1979. There*139 is also attached to the return in between Form 4625 (Computation of Minimum Tax -- Individuals) and Form 4952 (Investment Interest Expense Deduction) a handwritten schedule which contains at the top petitioners' names, Mr. Santi's social security number, and the date "12-31-78." Below the date there is the following descriptive legend: "Computation of 1978 N.O.L. and limitation of items of Tax Preference Items under Sec 58(h)." This schedule shows the computation of the "adjusted net operating loss" in the amount of $ 450,155 and then a description of "Items of Tax Preference under Tax Benefit Rule of IRC Sec 58(h)." The third such item reads in pertinent part as follows: C. Other items which would not be an item of tax preference under Sec 58(h) except that NOL will be carried over to future years. The items are included in the NOL. Consistent with petitioners' stated intent on this 1978 return, the 1979 and 1980 income tax returns took into account and fully absorbed the $ 450,155 net operating loss shown on the 1978 return. The issue which we must decide is whether or not the language on the return and in the schedule constitute an election*140 to forgo the carryback of the net operating loss. The case was submitted fully stipulated. OPINION Section 172(b)(3)(C)1 provides, insofar as pertinent, that Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that taxable year. The applicable regulations appear in section 7.0(d) of the Temporary Income Tax Regulations issued under the Tax Reform*141 Act of 1976 pertaining to elections. In pertinent part, this Temporary Regulation reads as follows: (d) Manner of making election. Unless otherwise provided in the return or in a form accompanying a return for the taxable year, the elections described in paragraphs (a) and (c) (except paragraphs (c)(1)(i), (c)(4) and (c)(5)) shall be made by a statement attached to the return (or amended return) for the taxable year. The statement required when making an election pursuant to this section shall indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer's *248 basis or entitlement for making the election. [42 Fed. Reg. 1469 (Jan. 7, 1977.] Petitioners' argument is simply that the 1978 income tax return language pertaining to the 1978 net operating loss did not comply literally or substantially with the temporary regulations. We are convinced, and petitioners do not contend to the contrary, that the tax return preparer in preparing the return and petitioners when they*142 signed it intended to relinquish the right to carry the loss back to prior years. On brief both parties discuss the case of Powers v. Commissioner, T.C. Memo. 1986-494, respondent relying on that case and petitioner seeking to distinguish it. The return of the taxpayer in Powers included on a separate sheet under the heading "ELECTION STATEMENTS" insofar as pertinent the following: (1.) Pursuant to Section 56(b)(3)(C), Taxpayer elects to carryforward to 1979 the net operating loss of 1978. We noted in our opinion that the only deficiency in the election statement attached to the return was the reference to section 56(b)(3)(C) instead of section 172(b)(3)(C). In fact there was no subsection (C) in section 56(b)(3). We concluded that the reference to the incorrect Code section number was immaterial since the tax return manifested an election to waive the carryback and the taxpayer in that case was bound by it. Petitioners are correct in noting that the election statement in Powers more closely complies with the temporary regulations than the election statement in this case. However, we believe that petitioners' 1978 Federal income tax return,*143 taken as a whole, reflects a clear election to relinquish the carryback of the 1978 net operating loss. The regulations direct that the section 172(b)(3)(C) election be made by a statement attached to the return, which statement shall indicate a section under which the election is being made and shall set forth information sufficient to identify the election, the period to which it applies, and the taxpayer's basis or entitlement for making the election. In our case there is a statement attached to the return although it recites merely that the net operating loss will be carried forward to future years without specifying the year or years. The language typed at the bottom of page 2 of the return refers to section 172(b)(2)(C) rather than section 172(b)(3)(C) which is the correct Code section but that statement was certainly sufficient to alert the Internal Revenue Service to petitioners' intention to carry the net operating loss forward rather than backward and to direct an auditing agent to the section which authorizes the election. We note in this case that there is no subsection (C) in 172(b)(2). This error is certainly less significant than the error in Powers since in*144 Powers the wrong Code section was referred to whereas here petitioners at least correctly referenced section 172(b). Taking the tax return as a whole, the language on the bottom of page 2 together with the language on the handwritten schedule sufficiently complies with the requirement that there be a separate statement and an indication of the Code section under which the election is being made, i.e., Code section 172(b). We are uncertain as to the intent of the language in the temporary regulation requiring the statement to indicate "the period for which it applies." If that refers to the year or years to which the loss will be carried forward, we deem the reference to "future years" to be sufficient. Until the future years' returns are prepared, or at least information is available from which they could be prepared, one cannot accurately determine the carryforward years. In this case, the 1978 return was filed during 1979 but the loss was also used for the 1980 return. The final requirement that the statement indicate the taxpayer's basis or entitlement for the election was sufficiently identified in that the tax return referred to section 172(b). The only provision in*145 section 172(b) which refers to elections appears in subsection (3), which refers to three elections. Two of those elections apply to foreign expropriation losses. Thus the only election which could have been intended by petitioners on their 1978 tax return was that described in section 172(b)(3)(C). No agent auditing this 1978 income tax return could possibly have been mislead as to petitioners' intention. The "essence" of this statute is that "a taxpayer unequivocally communicates his election." Young v. Commissioner, 783 F.2d 1201">783 F.2d 1201, 1206 (5th Cir. 1986), affg. 83 T.C. 831">83 T.C. 831 (1984). That was done in this case. Looking at the 1978 tax return as a whole, we think there is substantial compliance with the requirements of the temporary regulations. Thus, the election was a valid one and binding on petitioners. Decision will be entered under Rule 155. Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩

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COMMISSIONER OF INTERNAL REVENUE, RespondentTaylor v. CommissionerDocket No. 30397-86.United States Tax CourtT.C. Memo 1989-186; 1989 Tax Ct. Memo LEXIS 189; 57 T.C.M. (CCH) 230; T.C.M. (RIA) 89186; April 25, 1989. Richard F. Stein, for the respondent. RUWEMEMORANDUM OPINION RUWE, Judge: This case is before the Court on respondent's written motion to dismiss for lack of prosecution and on respondent's oral motion to hold petitioner in default for the additions to tax for fraud under section 6653(b). 1Respondent determined a deficiency in petitioner's Federal income tax and*190 additions to tax as follows: Additions to TaxYearDeficiencySec. 6653(b)(1)Sec. 6653(b)(2)Sec. 6654Sec. 66611985$ 39,213$ 19,60750 percent of$ 590$ 3,921interest due on$ 39,213Petitioner was incarcerated at State Farm, Virginia at the time he filed his petition. Pursuant to notice to the parties, this case was scheduled for trial during the Court's February 22, 1988 trial session in Richmond, Virginia. Petitioner failed to appear and the Court continued the case. This case was again set for trial during the Court's January 23, 1989 trial session in Richmond, Virginia. Petitioner made no appearance and respondent filed a motion to dismiss for lack of prosecution and orally moved the Court to enter a default judgment against petitioner regarding the additions to tax for fraud. We took these motions under advisement. Petitioner was given notice of the January 23, 1989 trial date in August 1988. At no time thereafter did he communicate with the Court. Aside from a phone call made to the Internal Revenue Service's Appeals Office in Richmond, Virginia, petitioner has failed to communicate with respondent*191 in any manner. Respondent has served trial memorandums on petitioner, written to him, and served a number of motions on him. These motions were served by mail and respondent never received any notice that the documents were undeliverable. Dismissal of a case is a sanction resting in the discretion of the trial court. . It is well settled that a taxpayer's failure to appear at trial can result in a dismissal of the action against a taxpayer for failure to prosecute properly in actions where a taxpayer seeks the redetermination of a deficiency. ; , affd. without opinion . Respondent's motion to dismiss for lack of prosecution as to the deficiency and the additions to tax under sections 6654 and 6661 will be granted. In regard to the additions to tax for fraud, respondent has orally moved the Court to hold petitioner in default. It is clear to us that petitioner "has failed to plead or otherwise proceed." Rule 123(a). Subsequent to the petition, *192 petitioner has failed to communicate with respondent or the Court. He failed to participate in the preparation of his case and did not appear at trial. Petitioner has in effect abandoned his case. Under such circumstances a default decision for fraud is appropriate if the pleadings set forth sufficient facts to support such a judgment. . "Entry of a default has the effect of admitting all well-pleaded facts in respondent's answer, and a default judgment must be supported by respondent's well-pleaded facts." . In , 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." After reviewing the pleadings, we conclude that respondent has set forth sufficient facts to support such a judgment. In his Answer, respondent denied all substantive allegations of fact and error and affirmatively alleged: 6. FURTHER ANSWERING*193 THE PETITION, and in support of the determination that the underpayment of tax required to be shown on petitioner's income tax return for the taxable year 1985 is due to fraud, the respondent alleges: a. During the taxable year 1985, petitioner was engaged in the business of selling illegal drugs. b. The petitioner failed to maintain adequate books and records of his income from the sale of illegal drugs. c. The petitioner established a business known as New World Investments, Inc., a Delaware corporation, with its principal place of business at 1 West Cary Street, Richmond, Virginia 23220. d. New World Investments, Inc., was established by the petitioner as a business front for his illegal drug trafficking activities. e. The petitioner dealt in large amounts of cash. f. The petitioner received taxable income for the taxable year 1985 in the amount of $ 95,231.00 from the sale of illegal drugs. g. The income tax due and payable by the petitioner for the taxable year 1985 is in the amount of $ 39,213.00. h. The petitioner failed to file an income tax return for the taxable year 1985 and failed to pay any portion of income tax liability due from him for said year. *194 i. Petitioner fraudulently, and with intent to evade tax for the taxable year 1985, handled his assets and income-producing activities in a manner, the likely effect of which was to mislead or conceal. j. The petitioner's failure to file an income tax return and to report his correct taxable income for 1985 was due to fraud with intent to evade tax. k. The petitioner's failure to pay his income tax liability for 1985 was due to fraud with intent to evade tax. l. A part of the underpayment of tax which petitioner was required to show on an income tax return for 1985 is due to fraud. To establish fraud, respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. ; . The existence of fraud is a question of fact to be resolved upon consideration of the entire record. ; , affd. without published opinion .*195 Fraud will never be presumed. . Respondent may, however, prove fraud through circumstantial evidence since direct evidence of the taxpayer's intent is rarely available. ; . The taxpayer's entire course of conduct may establish the requisite fraudulent intent. . Petitioner's conduct, as established through respondent's affirmative pleadings, leads us to conclude that respondent has proven fraud. Petitioner's failure to file an income tax return during the year in issue despite the receipt of substantial income, and his failure to maintain adequate books and records of his income producing activities are evidence of fraud. , affg. a Memorandum Opinion of this Court. The fact that petitioner engaged in illegal activities involving large amounts of cash also tends to circumstantially demonstrate fraudulent intent. .*196 Based on this record, we sustain respondent's determinations. An appropriate order and decision will be entered.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect during the years in issue, all Rule references are to the Tax Court Rules of Practice and Procedure.↩

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https://www.courtlistener.com/api/rest/v3/opinions/4624372/

ESTATE OF ROBERT W. QUICK, DECEASED, ESTHER P. QUICK PERSONAL REPRESENTATIVE, AND ESTHER P. QUICK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE OF ROBERT W. QUICK, DECEASED, ESTHER P. QUICK PERSONAL REPRESENTATIVE, AND ESTHER P. QUICK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent *ESTATE OF QUICK v. COMMISSIONERTax Ct. Dkt. No. 8588-97United States Tax Court110 T.C. 440; 1998 U.S. Tax Ct. LEXIS 34; 110 T.C. No. 32; June 29, 1998, Filed *34 An appropriate order denying petitioners' motion for reconsideration will be issued. Ps filed a Motion for Reconsideration of our Opinion reported as Estate of Quick v. Commissioner, 110 T.C. 172">110 T.C. 172 (1998). Among other things, Ps argue that our failure therein to order refunds for overpayments of tax for Ps' 1989 and 1990 tax years stemming from the "proper" computational adjustments which R should have made for those years, as well as refunds for overpayments for their 1987 and 1988 tax years attributable to NOL carrybacks from 1989 and 1990, was erroneous. HELD: Ps' Motion for Reconsideration is denied; this Court has jurisdiction to determine overpayments of tax, if any, attributable to affected items as part of a decision of this case ( sec. 6512(b)(1), I.R.C.; Woody v. Commissioner, 95 T.C. 193">95 T.C. 193, 206, 209 (1990), followed); this Court lacks jurisdiction to order credits or refunds of overpayments except with respect to overpayments determined by final decision as authorized by sec. 6512(b)(2), I.R.C.Gretchen A. Kindel, for respondent. Kevin M. Bagley and Mitchell B. Dubick, for petitioners. NIMS, JUDGE. NIMS*440 SUPPLEMENTAL OPINIONNIMS, JUDGE: In a timely filed Motion for Reconsideration (Motion) pursuant to Rule 161, petitioners request the Court to reconsider its Opinion reported as Estate of Quick v. Commissioner, 110 T.C. 172">110 T.C. 172 (1998). The Opinion is incorporated herein by this reference.Except where*38 otherwise noted, all Rule references are to the Tax Court Rules of Practice and Procedure. All section *441 references are to sections of the Internal Revenue Code in effect for the years in issue.In our Opinion, we held, among other things, that respondent's recharacterization of petitioners' distributive share of partnership losses for 1989 and 1990 as passive for purposes of section 469 (the section 469 issue) constituted an "affected item" within the meaning of section 6231(a)(5), and was thereby subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324, 648, codified at sections 6221 through 6233. Estate of Quick v. Commissioner, supra 110 T.C. at 187-189.In their Motion, petitioners allege that our conclusion that the section 469 issue is an affected item within the meaning of section 6231(a)(5) and accompanying regulations is incorrect as a matter of law. Petitioner's Motion further alleges that, even if the section 469 issue is an affected item, the Court nevertheless should have ordered respondent to refund overpayments of taxes paid for 1989 and 1990, as well as overpayments for 1987 and 1988, based *39 on the "proper" computational adjustments to petitioners' returns which respondent should have made after the conclusion of the partnership level proceeding. Lastly, petitioners' Motion alleges that we inconsistently decided that the section 469 issue constitutes an affected item for 1989 and 1990 but is not an affected item for 1987 and 1988. Respondent has filed an objection to petitioners' Motion, together with a supporting memorandum of law.Reconsideration under Rule 161 serves the limited purpose of correcting substantial errors of fact or law and allows the introduction of newly discovered evidence that the moving party could not have introduced, by the exercise of due diligence, in the prior proceeding. Westbrook v. Commissioner, 68 F.3d 868">68 F.3d 868, 879-880 (5th Cir. 1995), affg. per curiam T.C. Memo 1993-634">T.C. Memo 1993-634; see Lucky Stores, Inc. v. Commissioner, T.C. Memo 1997-70">T.C. Memo 1997-70, affd. without published opinion 116 F.3d 1476">116 F.3d 1476 (4th Cir. 1997); Estate of Scanlan v. Commissioner, T.C. Memo 1996-414">T.C. Memo 1996-414. The granting of a motion for reconsideration rests with the discretion*40 of the Court, and we usually do not exercise our discretion absent a showing of unusual circumstances or substantial error. CWT Farms, Inc. v. Commissioner, 79 T.C. 1054">79 T.C. 1054, 1057 (1982), affd. 755 F.2d 790">755 F.2d 790 (11th Cir. 1985). Reconsideration is not the appropriate *442 forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party. Stoody v. Commissioner, 67 T.C. 643">67 T.C. 643, 644 (1977); Estate of Scanlan v. Commissioner, supra.Petitioners' argument that the section 469 issue cannot be an affected item for purposes of the applicability of TEFRA's audit and litigation provisions was raised previously and received thorough consideration by this Court. Estate of Quick v. Commissioner, supra.Petitioners' Motion does not evince any unusual circumstances or substantial error with respect to this issue. We therefore decline to reconsider this issue or to elaborate on it any further. See Stoody v. Commissioner, supra at 644.Petitioners next contend that, even if the section*41 469 issue is an affected item requiring partner level factual determinations, the Court erred in failing to order refunds for overpayments of taxes paid for 1989 and 1990, as well as refunds for overpayments for 1987 and 1988 resulting from net operating loss carrybacks from 1989 and 1990. In petitioners' view, respondent simply should have increased the amount of petitioners' distributive share of partnership losses flowing from the favorable adjustments at the partnership level for 1989 and 1990. Instead, respondent recharacterized petitioners' distributive share of the adjusted partnership losses (as well as petitioners' share of partnership losses previously reported on their returns for those years) as passive in notices of computational adjustment issued for 1989 and 1990, resulting in deficiencies. However, as an affected item requiring partner level factual determinations, the recharacterization of such losses was not properly subject to computational adjustment. Sec. 6230(a)(2)(A)(i); see Estate of Quick v. Commissioner, supra.Respondent argues that this Court correctly declined to order refunds for overpayments of tax in our Opinion. We agree, *42 but for the sake of clarity, we deem it necessary to discuss our rationale in greater detail than we did previously.The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. See sec. 7442; Judge v. Commissioner, 88 T.C. 1175">88 T.C. 1175, 1180-1181 (1987); Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). We have jurisdiction to decide whether we have jurisdiction. Pyo v. Commissioner, 83 T.C. 626">83 T.C. 626, 632 (1984).*443 Our jurisdiction to determine overpayments of tax is provided by section 6512(b). Judge v. Commissioner, supra at 1182. Section 6512(b) provides: (b) Overpayment Determined by Tax Court. --(1) Jurisdiction to determine. -- Except as provided by paragraph (3) and by section 7463, if the Tax Court finds that there is no deficiency and further finds that the taxpayer has made an overpayment of income tax for the same taxable year * * * in respect of which the Secretary determined the deficiency, or finds that there is a deficiency but that the taxpayer has made an overpayment of such tax, the Tax Court shall have*43 jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Tax Court has become final, be credited or refunded to the taxpayer. Section 6512(b)(2) confers jurisdiction to order refunds of overpayments determined by this Court "after 120 days after a decision * * * has become final."Respondent, by virtue of having challenged petitioners' characterization of their distributive share of adjusted partnership losses for 1989 and 1990, has effectively transmuted what otherwise would have been unquestionably a partnership item, i.e., the amount of losses in petitioners' hands, into an affected item requiring partner level factual determinations. Sec. 6231(a)(3); sec. 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs. Having concluded that the section 469 issue is an affected item subject to deficiency proceedings under section 6230(a)(2)(A)(i), it follows that we have jurisdiction to determine any overpayments attributable thereto in this partner level proceeding. See, e.g., Woody v. Commissioner, 95 T.C. 193">95 T.C. 193, 206 (1990). However, the determination of any overpayments must be included as part of the decision in this*44 case after a trial on the merits. See sec. 6512(b)(3); Estate of Quick v. Commissioner, supra at 189. Pursuant to section 6512(b)(1), petitioners would be entitled to a credit or refund of any overpayment that we may determine only when the decision becomes final. Further, pursuant to section 6512(b)(2), we may order the refund of any overpayment included in a decision only if the refund remains unpaid for 120 days after the date the decision becomes final.In response to petitioners' argument, even if the adjustments to the amounts of their distributive share of partnership losses for 1989 and 1990 were somehow separable from respondent's challenge to the characterization of those losses *444 under section 469, and were therefore subject to computational adjustment, which they are not, we lack jurisdiction under section 6512(b) to determine any overpayments of tax attributable to computational items at any stage of this proceeding. Woody v. Commissioner, supra at 206. It follows that we also lack the authority to order the credit or refund of overpayments attributable to such computational items.Lastly, petitioners' argument that *45 the Court failed to treat the section 469 issue consistently for all years before the Court is unavailing. We did not conclude that the characterization of petitioners' share of losses is an affected item for 1989 and 1990, but is not an affected item for 1987 and 1988. Nor did we state that whether or not an item is an affected item depends solely on whether respondent "elects" to challenge it through an affected items deficiency proceeding. We simply held that "the characterization of losses as either passive or nonpassive in the hands of a partner is an affected item under section 469". Estate of Quick v. Commissioner, supra at 188.Respondent did not challenge petitioners' characterization of their proportionate share of partnership losses for 1987 and 1988, and thus the affected items deficiency procedures were not required to be followed for those years. Rather, adjustments to the amounts of petitioners' distributive share of partnership losses in those years were properly made by respondent pursuant to notices of computational adjustment upon the conclusion of the partnership level proceeding. Sec. 6230(a)(1). It is only because respondent challenged*46 the characterization of losses for 1989 and 1990, necessitating partner level factual determinations, that affected items deficiency procedures apply to those years. Sec. 6230(a)(2)(A)(i)In sum, respondent cannot, as petitioners contend, arbitrarily "elect" to make the section 469 issue an affected item for certain years but not for others. However, respondent is free to challenge a taxpayer's characterization of his share of partnership losses via the affected items deficiency proceedings in any year for which the period of limitations is open.We have considered each of the remaining arguments of the parties and to the extent that they are not discussed herein, find them to be either not germane or unconvincing.*445 For the above reasons,An appropriate order denying petitioners' motion for reconsideration will be issued. Footnotes*. This opinion supplements our previously filed Opinion in Estate of Quick v. Commissioner, 110 T.C. 172 (1998).↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624375/

Scruggs-Vandervoort-Barney, Inc., a Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentScruggs-Vandervoort-Barney, Inc. v. CommissionerDocket No. 7223United States Tax Court7 T.C. 779; 1946 U.S. Tax Ct. LEXIS 80; September 19, 1946, Promulgated *80 Decision will be entered under Rule 50. 1. Petitioner's predecessor operated a retail department store whose assets and liabilities petitioner acquired through a statutory reorganization in 1937. Petitioner's predecessor owned 97.25 per cent of the stock of a bank which was located in the department store. Most, if not all, of the depositors were customers of petitioner's predecessor and later of petitioner. The bank was closed on January 14, 1933, and the depositors received 80.5 per cent of their deposits upon its liquidation. Upon the payment of the final dividend by the receiver of the bank, petitioner, in order to protect and promote its own retail business, decided to reimburse the depositors for the 19.5 per cent loss in the amount of $ 240,888.31 by the issuance of merchandise purchase certificates redeemable at the petitioner's store for merchandise at retail prices, or for payment on accounts, and deducted this amount on its income tax return for the fiscal year 1941 as an ordinary and necessary expense. Held, that petitioner, in the issuance of these merchandise purchase certificates, incurred ordinary and necessary business expenses in the two fiscal years*81 in which such certificates were issued to depositors of the bank; held, further, that, inasmuch as such certificates were not obligations to pay money, but were payable in goods, petitioner's deductions, with respect to the amounts of certificates redeemed in goods, are limited to the cost of goods sold. These deductions are determined under the evidence. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, distinguished.2. The sales, in the payment of which the merchandise purchase certificates were accepted at their face value, were recorded in the usual manner at the full selling prices and sales made on merchandise purchase certificates were treated and reported by petitioner in its tax returns as sales made for cash. Held, that, inasmuch as petitioner received nothing in money value in making these particular sales, its gross income was overstated for each of the two taxable years. The amounts of adjustments to be made under issues 1 and 2 are determined. Gustavus A. Buder, Jr., Esq., for the petitioner.Felix Atwood, Esq., for the respondent. Black, Judge. BLACK*779 This proceeding involves deficiencies in petitioner's income tax for the fiscal year ended July 31, 1941, in the amount of $ 57,318.19 and in excess profits tax for the fiscal year ended July 31, 1942, in the amount of $ 71,242.18.The deficiency in income tax for the fiscal year 1941 results from respondent's disallowance as a deduction from petitioner's gross income for the taxable year 1941 of the amount of $ 240,888.31, the amount that petitioner decided to reimburse the depositors of the insolvent Scruggs, Vandervoort & Barney Bank and for which petitioner *780 was to issue merchandise purchase certificates. The deficiency in excess profits tax for the fiscal year 1942 results from two adjustments to excess profits net income, five adjustments to invested capital, and an adjustment to the excess profits credit carry-over.Petitioner, by appropriate assignments of error for the fiscal year*83 ended July 31, 1941, contests the above mentioned adjustment of $ 240,888.31 and alleges that the Commissioner erred in determining that the net income for the fiscal year July 31, 1941, should be adjusted in the amount of $ 240,888.31 without reducing this amount by the profit included in income when the purchase certificates were redeemed for merchandise at retail prices.Petitioner, in contesting the deficiency in excess profits tax for the fiscal year ended July 31, 1942, assigns as errors the following:(d) The commissioner erred in eliminating the amount of excess profits credit carry-over from the fiscal year ended July 31, 1941 to the fiscal year ended July 31, 1942 by the adjustments set forth in items (a), (b), and (c) and determining the tax for the fiscal year ended July 31, 1942 on the basis of the income without proper allowance of the said carry-over.(e) The commissioner erred in reducing equity invested capital for the fiscal year ended July 31, 1942 in the amount of the deficiency asserted for the fiscal year ended July 31, 1941.FINDINGS OF FACT.Most of the facts were stipulated. The stipulation is incorporated herein by reference and adopted as part of our findings*84 of fact.The petitioner is, and since February 1937 has been, a corporation duly organized under the laws of the State of Missouri, with its principal office located in St. Louis, Missouri. The returns for the periods here involved were filed with the collector for the first district of Missouri and were filed upon an accrual basis.The notice of deficiency was mailed by registered mail to the petitioner on December 2, 1944.Scruggs-Vandervoort-Barney Dry Goods Co., hereinafter called the predecessor corporation, was organized under the laws of the State of Missouri on January 15, 1906. Through a nontaxable statutory reorganization all of the assets of that corporation were transferred to petitioner on February 1, 1937, and petitioner assumed all the indebtedness and liabilities of the corporation. The reorganization and transfer caused no interruption in the operations of the retail department store and no changes in personnel or physical properties.Petitioner operates a retail department store in St. Louis, Missouri, selling men's, women's, and children's wearing apparel and *781 other items usually sold by large department stores. Its sales are made primarily to residents*85 of St. Louis and vicinity.In the year 1911 a bank known as Scruggs, Vandervoort & Barney Bank, hereinafter referred to as the bank, was incorporated under the laws of the State of Missouri, and petitioner's predecessor, the Scruggs-Vandervoort-Barney Dry Goods Co., owned 97.25 per cent of its shares of stock. This bank was located in the department store of petitioner's predecessor until it was closed on January 14, 1933. Most, if not all, of the depositors in the bank were customers of the petitioner's predecessor. Upon the bank's closing it was taken over by the state commissioner of finance, to be liquidated. At and prior to the bank's closing, five of its nine directors were also members of the board of directors of petitioner's predecessor. Upon the bank's closing, petitioner's predecessor received letters and other communications from dissatisfied customers who had money on deposit in the bank.The liquidation of the bank resulted in the payment of liquidating dividends aggregating 80.5 per cent of the amount of deposits, which were allowed as general claims. By reason of statutory requirements the bank was a separate corporate entity from petitioner's predecessor and*86 there was no legal liability on the part of the petitioner or its predecessor to the bank's creditors.Petitioner believed, however, that unfavorable reaction and lost patronage and diminished business would result from the final realization of loss by the depositors of the bank and thought it should in some way reimburse the bank's depositors for the deficiency resulting from its liquidation. Petitioner's executives, shortly after the definite extent of the loss to depositors of the bank became ascertainable, consulted with the officers of the three banks with which it did business in St. Louis relative to petitioner's situation and advisable courses to pursue. Petitioner's executives were advised by each of the three banks that, in their opinion, it should in some way reimburse the depositors of the Scruggs, Vandervoort & Barney Bank for the deficiency resulting from its liquidation, as it was their opinion that petitioner would otherwise suffer from lost patronage and diminished business, which they believed could be saved by assuming liability for the loss to the depositors of the bank.Petitioner's board of directors, therefore, decided to reimburse the bank's depositors in*87 the amount of the 19.5 per cent loss resulting from the liquidation. A notice to the bank's depositors advising them of such action was, at the request of the petitioner, enclosed and mailed on April 1, 1941, in the same envelope with the final liquidating dividend. The notice to the depositors stated in part as follows:*782 This is the voluntary action of Scruggs-Vandervoort-Barney, Inc. and this company is to be sole judge and arbiter of adjustment of any controversy arising in the operation of the proposed program.Merchandise purchase certificates were issued in the form of coupon books, which stated in part:This book contains coupons good for $ * * * in trade or payment on account and is the voluntary gift of Scruggs-Vandervoort-Barney, Inc., St. Louis, Missouri. * * *The receipt signed by the depositor stated:Date:Received of Scruggs-Vandervoort-Barney, Inc., their voluntary gift offer of     in Merchandise Purchase Certificates for the remaining balance of original claim filed against the liquidated Scruggs, Vandervoort & Barney Bank.Signed    These merchandise certificates would entitle the depositor to purchase merchandise therewith at retail prices*88 at petitioner's store or apply the same to the holder's charge account.Upon the mailing of the notice by the petitioner with the final liquidating dividend, and within the fiscal year ended July 31, 1941, the petitioner made a charge to profit and loss upon its books in the amount of $ 240,888.31 and credited this amount to an account designated "Provision for Scruggs, Vandervoort & Barney Bank claims." This amount represented the total amount of unsatisfied claims against the bank other than the claims of the petitioner or its subsidiary.The petitioner claimed this deduction on its income tax return for the fiscal year ended July 31, 1941, which the respondent disallowed. In disallowing this deduction, the Commissioner in his deficiency notice stated as follows:(a) It is held that payments made with merchandise purchase certificates to depositors of Scruggs, Vandervoort & Barney Bank were not ordinary and necessary business expenses and therefore are not allowable deductions.Thereafter petitioner issued and delivered to the bank's depositors its merchandise purchase certificates in the aggregate amount of $ 218,826.96. Of this amount $ 213,828.26 was issued and delivered to*89 the claimants of the bank within the fiscal year ended July 31, 1941, and $ 4,998.70 was issued and delivered within the fiscal year ended July 31, 1942. Petitioner received a favorable reaction from the customers and depositors of the bank, as well as favorable publicity from the newspapers in St. Louis, for this action. Of the total merchandise purchase certificates issued, namely, $ 218,826.96, the amount of $ 217,810.72 was redeemed through sales at retail prices of merchandise at petitioner's store, through application as credit to its accounts receivable, and through sales, also at retail prices, at the store of petitioner's wholly owned subsidiary, the Denver Dry Goods Co., as follows: *783 Fiscal years ended July 31 --19411942TotalRedeemed through sales$ 92,108.95$ 106,526.45 $ 198,635.40Applied as credits to:Accounts receivable17,483.70(26.91)17,456.79Employees accounts55.5855.58Redeemed through the Denver Dry Goods Co24.231,638.72 1,662.95Total109,672.46108,138.26 217,810.72The excess of the aggregate amount of merchandise purchase certificates issued and delivered to the bank's claimants ($ 218,826.96) *90 over the aggregate amount of the certificates redeemed ($ 217,810.72) namely, $ 1,016.24, was carried in the petitioner's accounts as a liability until the fiscal year ended July 31, 1943, at which time it was transferred to the credit of an account designated "Reserve for Bonuses and Commission" and the allowable deduction reduced by this amount.Of the total amount of $ 240,888.31 which represented the aggregate amount of merchandise purchase certificates which it was anticipated would be issued, the amount of $ 22,061.35 was not actually issued because of the failure of the bank's claimants to call for their certificates by June 1, 1942, the last date provided for issuance. On June 1, 1942, and within the fiscal year 1942 a credit of $ 22,061.35 was made to the surplus account and charged to "Provision for Scruggs, Vandervoort & Barney Bank claims." In petitioner's returns for the fiscal year 1942, it included and added to its taxable income the amount of $ 22,061.35. The respondent, however, adjusted petitioner's taxable income for the fiscal year 1942 in this amount, saying in the statement attached to the deficiency notice that "It has been held that the merchandise purchase*91 certificates when issued were not deductible. Therefore, the amount forfeited does not represent taxable income."The sales in payment of which the merchandise purchase certificates were accepted at their face value were not differentiated in any manner on petitioner's books from any other sale. They were recorded in the usual manner at the full selling prices and were treated and reported by petitioner in its tax returns for 1941 and 1942 the same as sales made for cash. As merchandise purchase certificates were accepted in payment of sales at retail prices the aggregate face amount of such certificates was debited to the liability account designated "Provision for Scruggs, Vandervoort & Barney Bank claims," and the offsetting credit was passed to merchandise sales account.The percentages of gross profit on sales realized by the petitioner for the fiscal years ended July 31, 1940, to July 31, 1942, inclusive, before cash discounts on purchases, were as follows:Year ended --PercentageJuly 31, 194032.76July 31, 194133.26July 31, 194234.56*784 The percentages of gross profit on sales realized by the petitioner for the fiscal years ended July 31, 1940, *92 to July 31, 1942, inclusive, after cash discounts on purchases, were as follows:Year ended --PercentageJuly 31, 194035.78July 31, 194136.32July 31, 194237.97The variation in petitioner's gross profit during the fiscal years 1941 and 1942 was from 28.9 per cent to 46.6 per cent of sales.In computing the amount of gross profits percentages above, petitioner had no way of ascertaining whether or not the certificates were redeemed in a department of the store that had a large or a small gross profit.The percentages of net profit on sales realized by the petitioner for the fiscal years ended July 31, 1940, to July 31, 1942, inclusive, are as follows:Year ended --PercentageJuly 31, 19401.90July 31, 19412.92July 31, 19424.67The issuance and redemption of the merchandise purchase certificates were performed by its regular employees and involved no expenses which would not otherwise have been incurred, except as to an amount of $ 1,601.82 representing wages of temporary special employees in connection with the issuance of the certificates and other expenses.In disallowing the $ 240,888.31 as a deduction from taxable income, the respondent*93 did not reduce the amount of this disallowance by any profit recorded on the books and included as taxable income on the tax return for the fiscal year ended July 31, 1941, resulting from treating the redemption of the merchandise purchase certificates as sales. The respondent, likewise, did not reduce the taxable income reported for the fiscal year ended July 31, 1942, by any profit recorded on the books and included as taxable income on the tax return for that year resulting from treating the redemption of the certificates as sales.OPINION.The issues presented in this proceeding are: (1) Whether or not the reimbursement to the depositors of the insolvent Scruggs, Vandervoort & Barney Bank under the circumstances detailed in our findings of fact represent ordinary and necessary business expenses within the meaning of section 23 of the Internal Revenue Code; (2) if the claimed deduction of $ 240,888.31 or any part thereof *785 is not allowable, whether or not the petitioner overstated its taxable income for the year 1941 by reason of the fictitious gross profits resulting from redemption of the certificates; (3) whether or not the respondent erred in eliminating the amount*94 of excess profits carry-over from the fiscal year ended July 31, 1941, to the fiscal year ended July 31, 1942, by the adjustments to its taxable income in 1941, and determining the tax for the fiscal year ended July 31, 1942, on the basis of the income without proper allowance for the said carry-over; and (4) whether or not the respondent erred in reducing equity invested capital for the fiscal year ended July 31, 1942, in the amount of the deficiency asserted for the fiscal year ended July 31, 1941.Issue No. 1. -- Petitioner contends that the cost of reimbursement to the depositors of the bank by the issuance of merchandise certificates represents ordinary and necessary business expense within the meaning of section 23 of the Internal Revenue Code1 and is deductible from income in the years of issuance of the certificates.*95 In support of its contention petitioner argues that originally its predecessor organized the bank, owned 97.25 per cent of the stock, and gave it a name almost identical to its own (Scruggs, Vandervoort & Barney Bank), and five of its nine directors were also members of a board of directors of petitioner's predecessor. It also argues that the bank was operated within the store, had no separate entrance, was accessible to the public only by the same elevators, escalators, and stairway as were used in patronizing the store; that it was open for business during the store hours and served as a convenience to the store's customers, as well as a means of attracting patronage to the store, and was a valuable adjunct to the store because depositors and borrowers, when transacting bank business, were attracted to the store's merchandise. Petitioner also maintains that the public viewed the bank as part of the store operation, for when the bank failed the petitioner's predecessor "received letters and other communications from dissatisfied customers who had money on deposit in the bank"; that the change in name from Scruggs-Vandervoort-Barney Dry Goods Co. to Scruggs-Vandervoort-Barney, Inc., *96 at the time of reorganization on February 1, 1937, did not give rise to another and new corporation in the eyes of the store's customers or the public; that, as the petitioner became the transferee of the assets of its predecessor, so it also inherited the expectancy on the part of the bank's depositors for it to make good any deficiency in their deposits. Petitioner further *786 maintains that, in its desire to avoid unfavorable reaction on the part of the bank's depositors, most, if not all, of whom were petitioner's customers, and to prevent lost patronage and diminished business, it decided to reimburse the depositors for the amount of the deficiency. Petitioner also stresses the fact that its own bankers advised that it make these reimbursements in order to preserve the good will of its own business.Respondent argues that the issuance of the merchandise purchase certificates under the circumstances herein constituted voluntary gifts and not ordinary and necessary business expenses incurred by petitioner in carrying on its trade or business. He maintains that neither petitioner nor its predecessor had any legal liability to the depositors of the bank; that while petitioner*97 believed, and its bankers agreed, that it would be advantageous for petitioner to make the reimbursements herein, the record does not show that they were necessary or ordinary in the carrying on of its business.What constitutes an ordinary and necessary expense has been passed upon in many cases. As was said by the Supreme Court in Welch v. Helvering, 290 U.S. 111">290 U.S. 111:Many cases in the federal courts deal with phases of the problem presented in the case at bar. To attempt to harmonize them would be a futile task. They involve the appreciation of particular situations, at times with border-line conclusions. * * *Among the cases cited by petitioner in support of its contention that the expenses in question are deductible are Edward J. Miller, 37 B. T. A. 830; Robert Gaylord, Inc., 41 B. T. A. 1119; and Dunn & McCarthy, Inc. v. Commissioner, 139 Fed. (2d) 242. In the Edward J. Miller case, Miller, an insurance agent representing several insurance companies, had placed insurance for his customers with an insurance company which later failed. As a protection*98 and defense against attack upon his business, Miller voluntarily paid to his customers matured claims against the insolvent insurance company and, at his own cost, voluntarily reinsured his customers in a solvent company. The Board reversed the Commissioner and allowed these expenditures as "ordinary and necessary business expenses" deductions. In discussing the general question involved, among other things, we said:What constitutes an allowable deduction for ordinary and necessary business expense often raises a difficult question under the facts, and quite as often requires a border-line decision. However, it is well settled that expenditures made to protect or to promote a taxpayer's business, and which do not result in the acquisition of a capital asset, are deductible. The difficulty sometimes lies in determining whether the acts done were motivated by a purpose to protect or to promote the business. For a comprehensive discussion of this point, and citation of authorities, see First National Bank of Skowhegan, Maine, 35 B. T. A. 876.*787 In the Miller case we distinguished Welch v. Helvering, supra,*99 in the following language:In Welch v. Helvering, * * * cited in respondent's brief, the taxpayer paid portions of the claims of former customers of a bankrupt corporation, of which he had been secretary, in order to strengthen his individual standing and credit, and to reestablish business relations with the corporation's former customers. The Court held that such expenditures were not deductible as ordinary and necessary business expenses. The present proceeding, in our opinion, does not come within the doctrine of the Welch case. There the expenditures were made to acquire, and not to retain or protect and promote the taxpayer's business. * * *For the same reasons we gave in distinguishing Welch v. Helvering in the Miller case we think the facts of the instant case distinguish it from the Welch case. We think that the facts in the instant case show that the expenditures in question were made to protect and promote petitioner's business and did not result in the acquisition of a capital asset.In Robert Gaylord, Inc., supra, the Board allowed voluntary payments as "ordinary and necessary expenses." In that case the *100 taxpayer was one of the contributors to a fund being raised in the city of St. Louis to save a large bank, the Franklin-American Trust Co., from complete failure and hasty liquidation. The taxpayer in that case was not engaged in the indemnity or guaranty business and had no direct financial stake in the insolvent bank. The contribution was made in an effort to avoid a general run on banks in the city of St. Louis and the resultant chaos, as well as to avoid the possible indirect detriment which could be suffered by the petitioner through failure to collect accounts from its customers in the event of a general run on city banks. We held that the contribution was a deductible expense.In Dunn & McCarthy, Inc., Docket No. 109554, memorandum opinion entered March 19, 1943, the material facts were that several salesmen of the petitioner had made personal loans to the sales manager, who later became the president of the company. The aggregate of such loans was a substantial amount. Petitioner's president thereafter died by his own hand without repaying the loans to the salesmen, and his estate was unable to respond because it was insolvent. A number of petitioner's customers knew*101 of the foregoing situation, and one of the creditor salesmen made inquiry what the company was going to do about it. Its board of directors, being of the opinion that its failure to recognize and discharge its moral responsibility in regard to the loans would impair the attitude of the salesmen toward the company, injure morale in the organization, and also damage good will by giving rise to an adverse attitude on the part of customers, authorized the payment of the loans to the salesmen, which *788 was done. Petitioner deducted the sum so paid from its gross income in the year of payment. The Commissioner disallowed the deduction and we affirmed the Commissioner. However, we were reversed in Dunn & McCarthy, Inc. v. Commissioner, supra (C. C. A., 2d Cir.). The court, in reversing us and holding that the claimed deduction should be allowed as an "ordinary and necessary business expense," distinguished Welch v. Helvering, supra, along lines similar to those which we used in distinguishing it in Edward J. Miller, supra.While it is, of course, true that the facts in the instant*102 case are not the same as the facts of either of the three cases cited above, nevertheless we think the facts of the instant case bring it within the ambit of the three cases above cited and on their authority we decide the main issue for petitioner.The Commissioner strongly relies upon Welch v. Helvering, supra, but for reasons which we have already mentioned we think the facts of the instant case are distinguishable. Another case which respondent urges in behalf of his determination is Mitten Management, Inc., 29 B. T. A. 569, in which we relied upon and followed the Supreme Court's decision in Welch v. Helvering, supra. In the Mitten Management, Inc., case, the taxpayer was engaged in the business of the management of corporations, firms, individuals, etc., with particular reference to the business of passenger transportation in municipalities and other kindred activities. The defunct bank in that case, Producers & Consumers Bank of Philadelphia, was an entirely independent enterprise, unconnected in any manner with the taxpayer, and its failure in 1925 cast no reflection *103 or discredit of any kind upon the taxpayer and did not in any manner increase its burdens or problems of operations. As stated in the findings:On February 1, 1926, an agreement was entered into between the receiver of the Producers & Consumers Bank and Thomas E. Mitten under which a new bank was to be formed by Mitten to take over the assets and assume a certain part of the deposit liabilities of the failed bank.It seems clear, therefore, that the payment by Mitten Management, Inc., of the amounts which the defunct bank owed its depositors in that case was an entirely new undertaking on the part of Mitten Management, Inc., for the obvious motive of trying to create new and therefore nonexistent good will among a particular element in the community. It was not undertaken in an effort to retain or protect preexisting good will. These facts we think distinguish the Mitten case from the instant case.Therefore, on the strength of the foregoing authorities we sustain petitioner in principle on issue 1. That does not mean, however, that we hold that petitioner is entitled to a deduction of the entire $ 240,888.31 which is claimed on its income tax return for the fiscal year 1941*104 *789 and which the Commissioner has disallowed. As we construe petitioner's brief, it no longer claims that it is entitled to that much deduction, and it is clear that it is not. The merchandise certificates which petitioner issued to the bank depositors were not unconditional obligations to pay in money, but were to be paid in merchandise. Petitioner would be entitled to deduct only the cost of such merchandise. That would be the extent of its payment to the former depositors of the bank. On this point petitioner states in its brief as follows:It is believed, therefore, that the mere decision within the fiscal year ended July 31, 1941 to issue the Merchandise Purchase Certificates was insufficiently certain, as relates to the amount involved, to give rise to the accrual as of the date of the decision. The subsequent actual delivery of the Merchandise Purchase Certificates presented, however, an event certain in nature and amount, and it is believed that the Court may find that the accrual should have been made as of July 31, 1941 and July 31, 1942 on the basis of the Merchandise Purchase Certificates issued within each of these years and on the basis of other facts then*105 known, such as the amount thereof applied as credits to accounts.Petitioner then gives the following statement in its brief of the amounts of the deductions for the two fiscal years involved which it thinks should be made under the facts as proved:Fiscal year ended July 31 --19411942Total Merchandise Purchase Certificatesdelivered$ 213,828.26$ 4,998.70Amount credited to accounts17,563.511,611.81Remaining amounts ($ 196,264.75 and $ 3,386.89,respectively) which could be expected only to beredeemed through delivery of merchandise at thecost of 63.68% and 62.03% of retail sellingprices, respectively124,981.392,100.89Amount of Merchandise Purchase Certificatesissued in 1941 redeemed in 1942, $ 104,155.80($ 196,264.75 redeemed through delivery ofmerchandise in 1941 and 1942, less amountredeemed through delivery of merchandise in1941, $ 92,108.95), at the gross profitdifferential 1.65% (37.97%-36.32%)1,718.57142,544.901,994.13Petitioner in its brief explains the foregoing deductions which it now claims as follows:As of July 31, 1941 Merchandise Purchase Certificates in the amount (at retail selling prices) of $ 213,828.26*106 had been issued. Of these, $ 92,108.95 had been redeemed through the delivery of merchandise and $ 17,563.51 had been credited to customers' accounts receivable and other accounts. As of the close of business July 31, 1941 it was, therefore, definitely known that, of the Merchandise Purchase Certificates issued within that year, the amount of $ 17,563.51 (the amount credited to customers' accounts receivable or other accounts) would constitute an expense in its entirety, while the remaining Merchandise Purchase Certificates issued in that year, namely $ 196,264.75, could only be assumed to be redeemed through the delivery of merchandise. The deduction with respect to the latter amount would, therefore, be limited to the known cost of such merchandise, namely 63.68% (see gross profit percentage, page 10 Stipulation) thereof, or $ 124,981.39, so that the total deduction for the year *790 ended July 31, 1941, if the Court should find that accrual should be made on the basis of facts known at that date, would amount to $ 142,544.90.As relates to the fiscal year ended July 31, 1942, an amount of Merchandise Purchase Certificates of $ 4,998.70 was issued to claimants of the subsidiary*107 Bank, while an amount of $ 106,526.45 was redeemed through delivery of merchandise at retail selling prices and a net amount of $ 1,611.81 was applied as credits to accounts. On the same basis, this latter amount would constitute, in total, an expense for the year 1942, while the remaining Merchandise Purchase Certificates issued within that year, namely $ 3,386.89, could be expected to be redeemed only through delivery of merchandise, and again the deduction, therefore, would necessarily be limited to cost relating to such merchandise during that year, namely 62.03% (see gross profit percentage, page 10 Stipulation) or $ 2,100.89.Because of the fact, however, that a substantial portion of the Merchandise Purchase Certificates actually delivered within the fiscal year 1941 were not redeemed until the fiscal year 1942, coupled with the slightly higher prevailing percentage of gross profit in the latter year, the deduction computed for the year 1941 proves excessive to the extent of $ 1,718.57, this being represented by the amount of Merchandise Purchase Certificates issued in 1941 but redeemed, through delivery of merchandise, in 1942, namely $ 104,155.80, at the gross profit differential*108 of 1.65%. On the basis of the known facts as of July 31, 1942, the net deduction for that year, if the Court should so find, would, therefore, become $ 1,994.13. * * *We think the accruals shown in the foregoing statements made by petitioner in its brief represent the accruals which should reasonably be made in the determination of issue 1. Absolute accuracy would, of course, be impossible on account of the various departments in petitioner's store and the varying degrees of gross profit at which different articles of merchandise were sold. As stated by the Supreme Court of the United States in Utah Power & Light Co. v. Pfost, 286 U.S. 165">286 U.S. 165:Undoubtedly the administration of an act like this one is attended with some difficulty. Measurements and calculations are more or less complicated. Absolute precision in either probably cannot be attained, but that is so to a greater or less degree in respect of most taxing laws. If, for example, absolute exactness of determination in respect of net income, deductions, valuation, losses, obsolescence, depreciation, etc., were required in cases arising under the federal income tax law, it is safe to say*109 that the revenue from that source would be much curtailed. The law, which is said not to require impossibilities, must be satisfied, in many of its applications with fair and reasonable approximations.Therefore, in the light of all the facts we think the accruals suggested by petitioner and as explained above represent fair and reasonable approximations.The Commissioner contends that we have no jurisdiction to determine the amount of petitioner's net income for the fiscal year 1942 because he has determined an overassessment in petitioner's income tax for the year 1942. Therefore, we should not render any decision as to proper accruals for that year. It is, of course, true *791 that, where the Commissioner has determined an overassessment in a taxpayer's income tax for a particular year, we have no jurisdiction to redetermine the overassessement for that year. But that is with reference to the income tax deficiency. Where in the same year the Commissioner has determined an excess profits tax deficiency against the same taxpayer, we do have jurisdiction to redetermine the excess profits tax deficiency. See Pioneer Parachute Co., 4 T. C. 27.*110 Therefore, in a redetermination of petitioner's excess profits tax liability for the fiscal year 1942, effect should be given in whatever way may be proper to the accrual of $ 1,994.13 above determined for the fiscal year 1942. We shall make no effort, however, to redetermine any overassessment of petitioner's income tax for that fiscal year because we have no jurisdiction, the Commissioner having determined an overassessment in petitioner's income tax for the fiscal year 1942.Issue No. 2. -- This issue is raised by the following assignment of error:(b) The commissioner erred in determining and asserting that the net income for the fiscal year ended July 31, 1941 should be adjusted in the amount of $ 240,888.31 in respect of such payments without reducing said amount of $ 240,888.31 by the profit included in income when the purchase certificates were redeemed by deliveries of merchandise at current selling prices.In support of this assignment of error petitioner in its brief submits the following proposition: "No profit or gain was realized through the free delivery of merchandise to depositors of Scruggs, Vandervoort & Barney Bank." Petitioner argues in support of the *111 foregoing proposition that, while the amounts of merchandise purchase certificates redeemed were reported on the books as sales at retail prices, this was done for accounting purposes, thereby increasing fictitiously gross profits for the fiscal years 1941 and 1942; that there was in fact no profit on redemption of the certificates; that book entries may not be used as a basis of taxing a profit which was never realized; and that the income determined by respondent should be reduced by the amounts of the fictitious gross profits of $ 33,453.97 and $ 40,448.09 for the fiscal years 1941 and 1942, respectively. The above gross profits were computed by taking the retail prices of goods redeemed under the certificates of $ 92,108.95 and $ 106,526.45 in 1941 and 1942 and the gross profits on sales for these years of 36.32 per cent and 37.97 per cent, respectively.Respondent, while still insisting that petitioner is not entitled to any deduction by reason of the issuance of the merchandise purchase certificates, says in his brief:* * * If it be assumed, however, for the purpose of arguing this point, that the petitioner would have been entitled to a deduction for the voluntary gifts *792 *112 it seems that the amount of the deduction which would be allowable would be the cost of the merchandise which was redeemed by the merchandise certificates plus the proportionate part of the expenses attributable to those goods. The proportionate part of the expenses, of course, has been deducted on petitioner's return as no segregation was made. * * *We think petitioner must be sustained on this point. It seems clear that although petitioner reported the sales of merchandise delivered upon the presentation of these merchandise certificates as cash sales and accounted for them upon its books and income tax returns in that manner, it in fact received no cash payment for these goods and had no gross profits upon such sales.The determination of the way these transactions should be handled, once the basic issue raised by issue No. 1 is decided, seems to be clearly a tax accounting problem. Cf. Dobson v. Commissioner, 320 U.S. 489">320 U.S. 489. Petitioner contends in effect that it is entitled to $ 142,544.90 plus $ 33,453.97, or a total of $ 175,998.87 deductions, plus exclusions, for the fiscal year 1941, and $ 1,994.13 plus $ 40,448.09, or a total of $ 42,442.22, *113 for the fiscal year 1942, or a grand total of deductions plus exclusions for both years of $ 218,441.09. This is $ 630.37 more than the total certificates that were redeemed, namely, $ 217,810.72. We think petitioner is entitled to deductions plus exclusions, spread over the two years as above indicated, limited, however, to a total of $ 217,810.72. This means that in a recomputation under Rule 50 petitioner is entitled to receive $ 175,998.87 as deductions, plus exclusions, for the fiscal year 1941 and $ 41,811.85 deductions, plus exclusions, for the fiscal year 1942.As pointed out under issue No. 1, we have no jurisdiction to redetermine the amount of the overassessment of petitioner's income tax for the fiscal year 1942 and we make no attempt to do so. It is in the redetermination of petitioner's excess profits tax for the fiscal year 1942 that the adjustment for 1942 herein directed should be used in a recomputation under Rule 50.Issues Nos. 3 and 4. -- The questions raised under issues Nos. 3 and 4 as to the excess profits credit carry-over from the fiscal year ended July 31, 1941, to the fiscal year ended July 31, 1942, and the reduction of equity invested capital*114 for the fiscal year ended July 31, 1942, are contingent upon our decision of issues Nos. 1 and 2. On this subject respondent says in his brief:* * * The statement of the petitioner alleging that the Commissioner erred in eliminating the amount of the excess-profit credit carry-over from the fiscal year ended July 31, 1941 to the fiscal year ended July 31, 1942, and in reducing equity invested capital for the fiscal year ended July 31, 1942 in the amount of the deficiency asserted for the fiscal year ended July 31, 1941, are contingent upon a reversal of the Commissioner's disallowance of the claimed deduction. Should this court change the disallowance of the deduction, it does not appear *793 that there will be any controversy relative to making the proper adjustments in petitioner's tax.Petitioner does not argue to the contrary in its brief. Therefore, it will be assumed that a proper adjustment of the matters raised by issues 3 and 4 will be taken care of in a recomputation under Rule 50.Decision will be entered under Rule 50. 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, * * *↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624377/

DAVID L. FISCUS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; SUZANNE MERRILEE ELLIS (BURGESS), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFiscus v. CommissionerDocket Nos. 21762-80, 21963-80.United States Tax CourtT.C. Memo 1982-465; 1982 Tax Ct. Memo LEXIS 278; 44 T.C.M. (CCH) 826; T.C.M. (RIA) 82465; August 10, 1982. David L. Fiscus, pro se. James A. Kutten, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined deficiencies of $4,617.62 and $1,234.12*279 in the 1977 Federal income taxes of petitioners David L. Fiscus and Suzanne Merrilee Ellis, respectively. 1 After concessions, the remaining issues are (1) whether additional compensation in the form of post differential paid to petitioner David L. Fiscus while stationed in Korea is exempt from tax, (2) the filing status of petitioner David L. Fiscus, and (3) whether petitioner Suzanne Merrilee Ellis filed a joint return with petitioner David L. Fiscus. These cases are consolidated for purposes of trial, briefing, and opinion. FINDINGS OF FACT Some of the facts are stipulated and found accordingly. Petitioner David L. Fiscus resided in St. Louis, Mo., when he filed his petition herein. Petitioner Suzanne Merrilee Ellis resided in Hurst, Tex., when she filed her petition herein. *280 During 1977, petitioner David L. Fiscus (hereafter also referred to as David or petitioner) was employed by the Department of Army as a civilian in Taegu, Korea. In 1977 David received wages of $27,784.92 which included $4,168.00 paid as a foreign post differential. In addition to those wages, David received a $4,400 living quarters allowance. Petitioners, David and Suzanne Merrilee Ellis (Suzanne), were married prior to and during 1977. In August 1977, they entered into a written separation agreement. The day after this agreement was signed, Suzanne returned to the United States from Korea to live with her parents. In April 1978, David and Suzanne were divorced by a decree of the Circuit Court, Twentieth Judicial Circuit, St. Clair County, Ill. Prior to that divorce decree, there was no decree of separate maintenance ordered by any court. David originally filed his 1977 Federal income tax return as a single individual. He did not report the $4,168 post differential as income. Suzanne did not file a 1977 Federal income tax return. David amended his 1977 return changing his filing status to a married individual filing jointly. A signature purporting to be that of Suzanne*281 M. Fiscus appears on the amended return. Suzanne, however, never signed and amended return and she never intended to file a joint return. Since what appeared to be a joint return was filed, respondent sent duplicate originals of the same notice of deficiency to both petitioners who, by this time, had separate mailing addresses. Respondent determined the post differential must be included in petitioners' gross income. In his answer in docket No. 21963-80, respondent further asserts that petitioner David L. Fiscus was not entitled to file either as a single individual or as a married individual filing jointly, but rather, he was required to file as a married individual filing separately. In the event we find a joint return was in fact filed, respondent asserts a deficiency against petitioner Suzanne Merrilee Ellis. OPINION The first issue is whether petitioner David L. Fiscus is allowed an exemption from Federal income tax for the amount of additional compensation received as a post differential while stationed in Korea. In 1960, Congress passed the Overseas Differentials and Allowances Act (hereafter the ODA), Pub. L. 86-707, 74 Stat. 792-802, 5 U.S.C. secs. 5921*282 -5926 which provides a means for compensating government employees for the extra cost and hardship incident to their overseas assignments. 2 Title II of the ODA provides for three types of compensation in addition to the basic pay for civilian employees: living quarters allowances, cost-of-living allowances, and post differentials. The post differential is granted on the basis of conditions of environment environment which differ substantially from conditions of environment in the continental United States and serve as a recruitment and retention incentive. Section 523 of the ODA amended section 912(1) of the Internal Revenue Code of 1954, 3 as amended, to read as follows: *283 SEC. 912. EXEMPTION FOR CERTAIN ALLOWANCES. The following items shall not be included in gross income, and shall be exempt from taxation under this subtitle: (1) Foreign Areas Allowances.--In the case of civilian officers and employees of the Government of the United States, amounts received as allowances or otherwise (but not amounts received as post differentials) under-- (C) title II of the Overseas Differentials and Allowances Act, * * * [Emphasis added.] Although post differentials are provided for by title II of the ODA, they are specifically excepted by the parenthetical language of section 912(1) from tax exempt status accorded other forms of allowances provided by the ODA. 4 Clearly, the statute does not exempt from taxation the post differential at issue herein. Accordingly, petitioner David L. Fiscus must include those amounts in his 1977 gross income. The second issue is the correct filing status of petitioner David L. Fiscus. Respondent contends petitioner's correct filing status is married filing separate. Petitioner contends*284 he is entitled to file as a single individual. We agree with respondent. Petitioner filed his original return as a single individual and, thereafter, filed an amended return claiming the status of married filing jointly. We have found as a fact that Suzanne Merrilee Fiscus, petitioner's wife at that time, did not sign the amended return and had no intention of filing a joint return. Thus, it is clear petitioner did not file a joint return. However, petitioner contends he is entitled to the filing status of a single individual. We disagree. Marital status for tax purposes is determined on the last day of the taxable year. Sec. 143(a)(1). If a taxpayer is legally separated under a decree of divorce or a decree of separate maintenance, then he shall not be considered married for tax purposes. Sec. 143(a)(2). However, if a married couple simply enter into a written separation agreement and are divorced sometime after the close of the taxable year, with certain exceptions not relevant herein, they are considered married for tax purposes. Sec. 1.143-1(a), Income Tax Regs.; Donigan v. Commissioner,68 T.C. 632">68 T.C. 632 (1977). Although petitioners were separated at the*285 end of 1977 pursuant to a written separation agreement entered into between themselves, they were not divorced until 1978. Since they were not separated in 1977 under a decree of divorce or a decree of separate maintenance, petitioner is considered married for tax purposes. 5 Accordingly, since no joint return properly was filed, petitioner's correct filing status is as a married individual filing separately. The final issue pertains to the deficiency asserted against petitioner Suzanne Merrilee Ellis. Respondent's position is that, in the event we find that a joint return was filed, then petitioner Suzanne Merrilee Ellis is liable for the asserted deficiency.*286 Our holding that petitioner's ex-wife did not sign and did not in fact intend to file a joint return is dispositive of this issue. See Estate of Campbell v. Commissioner,56 T.C. 1">56 T.C. 1 (1971); Federbush v. Commissioner,34 T.C. 740">34 T.C. 740 (1960), affd. per curiam 325 F.2d 1">325 F.2d 1 (2d Cir. 1963). Therefore, petitioner Suzanne Merrilee Ellis is not liable for the taxes owed by her former husband, David L. Fiscus. To reflect concessions and the foregoing, Decision will be entered under Rule 155 in docket No. 21762-80.Decision will be entered for petitioner in docket No. 21963-80.Footnotes1. Respondent sent a notice of deficiency of $1,234.12 to each of the petitioners herein. Each petitioner therein filed his and her separate petition giving rise to the two docketed cases. With respect to petitioner David L. Fiscus, respondent, in his answer, increased the deficiency to $4,617.62. With respect to petitioner Suzanne Merrilee Ellis, the asserted deficiency remains $1,234.12.↩2. Sec. 203 of the Overseas Differentials and Allowances Act, Pub. L. 86-707, 74 Stat. 792, 793, 5 U.S.C. sec. 5922(c) authorizes the President to issue regulations regarding the payment of allowances and differentials. Pursuant to Exec. Order No. 10903, 26 Fed. Reg. 217 (January 12, 1961), President Dwight D. Eisenhower delegated to the Secretary of State authority to issue regulations governing the payment of post differentials under title II of the Overseas Differentials and Allowances Act. Standardized Regulations of the State Department, issued pursuant to that authorityd delegated by the President, show that Taegu, Korea qualified for a 15 percent post differential for each month in 1977. Generally, regulations issued pursuant to the Overseas Differentials and Allowances Act control when payments are made to government employees notwithstanding rules and regulations issued pursuant to laws in effect prior to the passage of that Act. See sec. 522, Pub. L. 86-707, 74 Stat. 792, 802, Overseas Differentials and Allowances Act. ↩3. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in issue.↩4. Respondent correctly does not propose to tax the $4,400 living quarters allowance received by petitioner in 1977.↩5. Petitioner argues that since the separation agreement was notarized by the Judge Advocate General (JAG), the separation agreement should be given the same effect as if decreed by a court. Petitioner's argument must be rejected; the JAG does not function as a court. Petitioner also argues the 1977 Internal Revenue Service income tax instruction booklet supports his claim. Whatever that booklet says, it is simply not an authoritative source of law. Zimmerman v. Commissioner,71 T.C. 367">71 T.C. 367↩ (1978).

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624378/

KAHUKU PLANTATION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kahuku Plantation Co. v. CommissionerDocket No. 19156.United States Board of Tax Appeals12 B.T.A. 977; 1928 BTA LEXIS 3415; June 29, 1928, Promulgated *3415 1. Under the Revenue Act of 1918, held, a taxpayer is entitled to make its returns of income upon the basis on which its accounts are kept, if such accounts accurately reflect its income. 2. The petitioner was engaged in raising and marketing sugar cane. The planting, cultivation, and marketing of its crop extended over three taxable years. It kept its accounts on the "crop basis" of accounting. Held, that an amount received for losses to a crop, caused by a strike, is to be accounted for in the same manner as any other receipt from the crop. 3. "Crop basis" of accounting discussed. Arthur A. Ballantine, Esq., Bernhard Knollenberg, Esq., and S. Milton Simpson, Esq., for the petitioner. M. N. Fisher, Esq., and L. C. Mitchell, Esq., for the respondent. PHILLIPS *977 The Commissioner determined a deficiency in income and profits taxes for the calendar year 1920 in the amount of $91,556.41, of which $35,745.84 is here in controversy. Petitioner instituted this proceeding for a redetermination of its tax and alleges that the Commissioner committed error in including as taxable income for the year 1920 the amount of $77,708.34*3416 received by the petitioner on December 31, 1920, as indemnity for losses to its 1921 and 1922 sugar crops. *978 FINDINGS OF FACT. 1. Petitioner is a corporation organized under the laws of the Territory of Hawaii. It operates a sugar plantation on the Island of Oahu. 2. In the Hawaiian Islands a crop of sugar cane takes from 18 months of two years to mature. It is usually planted or ratooned in the summer, beginning in April or May, and is brought under cultivation by September. It is cultivated, fertilized and irrigated during the second year, and harvested and manufactured into raw or commercial sugar in the third year. During each calendar year work is being performed on three separate crops - the crop that is being harvested; the crop under cultivation, which was planted the prior year; and the crop that is being planted, which will be harvested two years thereafter. 3. The petitioner, with the approval of the Commissioner of Internal Revenue, has for many years (before, during, and after 1920) kept its accounts and made its Federal income-tax returns on the so-called "crop basis" as permitted by the Treasury regulations. The crop basis of accounting*3417 was very generally in use by sugar plantations throughout the Islands. It had been used by the petitioner since 1901. Under this system of accounts a crop was treated as a venture and an account kept for each crop. All expense incident to the crop, from the preparation of the soil to the harvest and manufacture of the cane into raw sugar, were charged to the crop account, and all receipts from the crop were credited to the crop account. When the crop was harvested and disposed of, the account was closed and it was determined whether there had been a profit realized or a loss sustained from the crop. 4. The Hawaiian Sugar Planters' Association, of which the petitioner was a member, is an unincorporated voluntary association, organized in the year 1895, whose membership (45 members) consists of substantially all of the sugar companies and individual planters in the Territory. The Association conducts an extensive experimental station for the improvement of sugar cane and elimination of cane pests, and in various other ways acts as the central organization of the Hawaiian sugar industry. It derives its income from regular and special assessments of its members based on the tonnage*3418 of sugar produced by the respective members. These assessments have been consistently allowed as a deductible business expense by the Commissioner of Internal Revenue. 5. In January, 1920, a strike of Japanese plantation laborers began on seven of the plantations, including Kahuku, situated on the Island of Oahu - one of the four sugar-producing islands in the Territory. The greater part of the labor on the Island was Japanese and the situation presented by the strike was considered very serious by the *979 Hawaiian sugar industry. The strike was financed by funds from the Japanese laborers on the other islands and it was believed that if it succeeded on Oahu, it would spread to these islands. The result was that concerted action to resist the strike was taken by all the Hawaiian sugar plantations through their organization, the Hawaiian Sugar Planters' Association. 6. It was apparent that the plantations resisting the strike would each sustain losses, either through direct property damage or on account of labor conditions incident to the strike, and the Association agreed to indemnify the plantations affected by the strike if they would take a stand against the*3419 strikers until the strike was broken. On January 29, 1920, the Trustees of the Association passed the following resolution: RESOLVED, that the Association agrees to bear all losses to property which may be occasioned by the resistance of strikes on any and all plantations arising out of controversies over wages; it being understood that the plantations will be guided by the policy laid down by the Association from time to time in dealing with strikes for higher wages. All losses to be adjusted by the Association, whose decisions shall be final The adoption hereof is subject to the approval of the respective boards of directors and plantation owners. On February 21, 1920, the Trustees of the Association passed the following resolution: A motion was also unanimously carried that the sense of the strike sharing resolution adopted by the Association on the 29th day of January, 1920, is that losses to net profits are to be borne rather than losses to property. In connection with the suggestion of the Committee that the Trustees decide at this time the scope of said strike sharing resolution, it was moved by Mr. Dowsett, seconded by Mr. Bottomley, and voted that the losses occasioned*3420 by strike resistance to be borne by the Association are only losses sustained by those plantations the laborers of which are out on a strike. 8. The strike was finally broken in July, 1920, but not until the seven Oahu plantations affected by it, including petitioner's plantation of Kahuku, had sustained damages to their growing crops of cane. During the period of the strike there was in the ground most of the 1920 crop, planted in 1918; all of the 1921 crop, planted in 1919; and all of the 1922 crop, planted in 1920. The strike caused a shortage of labor. The strike-breakers were inexperienced men and the hours worked were less than the regular plantation hours. As a consequence, labor performed on the three crops was less than that which would normally have been performed. As a result of this shortage in labor and other conditions brought about by the strike, the harvest, and consequently the manufacture and marketing of the 1920 crop, was delayed. During the period of delay the market price of sugar fell. The cultivation, irrigation and fertilization of the 1921 and 1922 crops were delayed and irregular. This stunted the growth of the cane and as a consequence the yield*3421 was less than it otherwise *980 would have been. The planting of the 1922 crop was delayed and the acreage planted was less that of the 1920 crop which it followed. When it became apparent that the strike was likely to continue for some time and that losses were being sustained against which there was no check, the Association decided that steps should be taken to have a record made of the conditions on each of the plantations so there might be some evidence of loss other than the statement of the respective managers. 9. On February 16, 1920, the Trustees of the Association authorized the President to appoint a committee to make a survey of the plantations under strike and to determine the conditions on the plantations and maintain a record from day to day of the effect of the strike on each of the plantations. The purpose was expressed in the minutes of the Trustee's meeting as follows: Mr. Tenney stated that the time has arrived for the Association to do something toward making a survey of the plantations under strike; that losses are being piled up against which there is no check and the liability therefor is running against the Association; that steps should be*3422 taken to have a record made of the conditions and situation on each of the plantations so that there will be some evidence other than the statements of the respective managers. That an independent committee, so far as possible to form one, should be put to work to make a survey and determine the conditions on the plantations and maintain a record from day to day so that the real facts may be known. On motion made by Mr. Wodehouse and seconded by Mr. Bishop, it was voted that the President appoint such a committee as suggested by Mr. Tenney. In general, the duties of said committee, as understood by the Trustees, appeared to be that it should have experts investigate the general conditions of the plantations and keep a check on such conditions from time to time; and to keep records as to the losses that are being sustained owing to the strike. This committee was appointed from among the agricultural experts at the experimental stations and sent out to the plantations affected by the strike, to observe and report the conditions of the fields and the effect of the strike upon the growing crops, particularly irregularities in irrigation, the application of fertilizer, or any*3423 other conditions that would tend to retard the growth and progress of the crops. These technical experts remained continuously at the plantations during the strike and made regular notes as to the conditions affecting the crops. 10. When the strike had been settled, the Hawaiian Sugar Planters' Association, through its strike claims committee, estimated the net losses sustained by the affected plantations. The estimated tonnage loss to petitioner's plantation was as follows: loss to 1920 crop, 445 tons; to 1921 crop. 129.52 tons; to 1922 crop, 744.22 tons. 11. On December 29, 1920, the Association empowered the Strike Claims Committee to make a final determination of the amount of strike loss indemnity to be allowed to the Oahu plantations. This Committee then took up in detail the matter of determining the *981 amount of the losses occurring on each plantation with respect to each crop affected. On November 17, 1920, it presented to the Trustees of the Association a detailed from to be employed by the plantations in submitting their claims for strike losses. It was the purpose of this form to measure losses by the decreased receipts from each crop, with adjustment*3424 for increased or decreased costs in the planting, cultivation and marketing of such crop. The computation of the amount so ascertained and paid to the petitioner was summarized on one of these forms as follows: LossesGains1920 crop:Exhibit 2(D) (operations)$57,842.97Exhibit 3 (D) (bonus)$57,165.13Exhibit 4(B) (receipts)344,775.48Exhibit 5(D)(E) (rents)13,791.02Exhibit 6(C) (miscellaneous)31,217.28Total, 1920 crop433,835.7360,956.15Subtract gains 1920 crop60,956.15Net loss, 1920 crop372,879.581921 crop:Exhibit 8(C) (operations)5,337.05Exhibit 9(M) (receipts)14,427.23Exhibit 10(D)(E) (rents)686.30Exhibit 11(D) (miscellaneous)1,664.54Total, 1921 crop19,764.282,350.84Subtract gains, 1921 crop2,350.84Net loss, 1921 crop17,413.441922 crop:Exhibit 13(c) (operations)23,213.58Exhibit 14(M) (receipts)82,989.67Exhibt 15(D)(E) (rents)3,943.47Exhibt 16(C) (miscellaneous)4,553.28Total, 1922 crop87,451.9527,157.05Subtract gains, 1922 crop27,157.05Net loss, 1922 crop60.294.9012. The plantations kept their cost accounts in an elaborate and detailed form, so that*3425 it was possible to determine the cost by units, either per acre or per ton of cane, for the various operations such as clearing, planting, hoeing, or weeding, irrigating, fertilizing, cutting, loading and transportation. In arriving at the amount of loss from operations on account of the strike, the Committee took the average cost of these various operations for the preceding years 1917, 1918, and 1919 as a basis for normal cost and compared these normal costs with the actual cost which had been or would be paid. 13. Under a contract between petitioner and its laborers, petitioner would have had to pay a bonus to its regular plantation laborers in 1920 had there been no strike. The strike breakers received a flat wage and were not entitled to a bonus. The difference between this flat wage and the amount of bonus the plantation would have paid such laborers had there been no strike was treated by the Committee*982 as a saving and deducted from the gross losses in arriving at the net losses sustained in that year. 14. Due to labor conditions there was a delay in harvesting and shipping the 1920 crops, during which the price of sugar fell. The loss from receipts was*3426 determined as the difference between the price actually received and the price which would have been received had the 1920 crop been harvested and marketed under normal conditions. The loss in receipts from the 1921 crop was determined by applying a price of 8 cents per pound to the estimated loss in tonnage by reason of inadequate care and cultivation during the strike. From this was deducted the decreased expense of cutting, milling and marketing the smaller crop. The loss in receipt from the 1922 crop was determined in the same manner. The principal cause of the reduced tonnage in the 1922 crop was the decrease in the amount of planting and the delay in starting the crop with a consequent stunting of the cane and a shortening of the growing period. 15. Rentals were paid by the plantations upon the basis of a percentage of the crop. The Committee treated as a gain the difference between the rents actually paid and those which would have been paid on a normal crop. 16. Extraordinary expenses, such as additional cost for fuel oil for the mill furnaces, extra police, cost of camps for strike breakers and similar items were grouped by the committee as miscellaneous losses. *3427 17. In estimating the loss sustained the Committee took into account any savings which would be effected on account of a normal expenditure which would not be necessary to make on account of changed conditions resulting from the strike. These items were deducted from the gross determination of loss in arriving at the net loss sustained. 18. The sum of $450,587.92, representing its estimated loss with respect to the three crops, was paid to petitioner by the Hawaiian Sugar Planters' Association in December, 1920. 19. Petitioner's balance sheet at December 31, 1920, was as follows: Assets:Permanent Improvements$1,315,590.08Growing Crop 1921340,600.84Growing Crop 192284,941.89Investments32,866.00Supplies and Sundries132,391.36Accounts Receivable75,587.08Cash637,540.46Total assets2,619,517.71Liabilities:December Pay roll22,112.55Personal Accounts payable35,772.67Strike Compensation 1921 and 1922 Crops$77,708.34Reserve for Taxes325,000.00Capital Stock1,158,924.15Surplus1,000,000.00Total liabilities and capital2,619,517.71*983 20. In its accounts and in its Federal income-tax returns petitioner*3428 treated the amount received as indemnity for the estimated losses to its 1920 crop as income for 1920. It treated the amounts received as indemnity for the losses to its 1921 and 1922 crops as income for the years 1921 and 1922, respectively, and not as income for 1920. 21. The respondent, in the determination of the deficiency, treated the amount of $17,413.44 received on account of the 1921 crop, and $60,294.90 received on account of the 1922 crop, as taxable income for 1920. 22. In petitioner's business of running a sugar plantation there are items of expense and income that can not be allocated to any particular crop and are properly applied to the year in which they are incurred or received. OPINION. PHILLIPS: During the years involved the petitioner was engaged in the operation of a sugar plantation on the island of Oahu, in the Territory of Hawaii. In the Hawaiian Islands a sugar crop matures in about two years. The cane is planted or ratooned during the spring and summer of the first year, cultivated during the second year and cut and ground in the third year. During each calendar year there are, therefore, three crops to be considered; the crop which is being*3429 harvested, the crop which is being started, and the intermediate crop, planted the previous year, which is under cultivation. Substantially all of the expenses incurred upon such a plantation are upon account of some one crop and may readily be charged against such crop. Expenditures made during the course of one year upon account of one crop differ from those made in the same year for the other crops and are of little or no benefit to such other crops. The acreage of crop planted varies from year to year, as does the cost of production and the price realized. Experience has shown that the only practicable method by which the results of operations may be gauged and profit or loss determined is to keep the accounts upon a basis by which the expenses of each crop are separately kept and are carried forward as a capital or asset item until the crop is harvested, when the entire expenditure is charged against the receipts from that crop. This system of accounting is known as the crop basis of accounting and during the taxable years was employed by the petitioner and by substantially all the plantations in the Hawaiian *984 Islands. It is expressly recognized in the regulations*3430 promulgated by the Commissioner, which read: If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized. As herein used the term "farm" embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit and truck farms, also plantations, ranches, and all land used for farming operations. (Article of Regulations 45, 62, 65 and 69.) This regulation was issued pursuant to sections 212(b) and 213(a) of the Revenue Act of 1918 which provided in part: SEC. 212. (b) 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 upon such basis*3431 and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * * SEC. 213. (a) * * * The amount of all such item [of income] shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * * The subsequent revenue acts have contained similar provisions and the regulation has remained unchanged since it was first promulgated under the 1918 Act. The crop basis of accounting is an adaptation of the voyage or venture methods of accounting. Such methods of accounting go back to the earliest known history of voyages and are among the earliest known forms of accounting. They continue to play an important part in accounting theory and practice, particularly in those cases where the transaction involved is an isolated one, or the business transacted is a series of ventures maturing at regular or frequent intervals and is of such a nature that the result of a comparison of current receipts with current expenditures bears no fixed relationship to the true earnings*3432 of the accounting period. This principle of accounting has been recognized by the Board as proper in the case of a round-trip voyage of a vessel, where receipts for passage and freight received in advance of the voyage are to be offset by the expenses of the voyage subsequently incurred. . There is no dispute between the parties that the crop basis of accounting is properly used in computing the income from sugar plantations in the Hawaiian Islands; the returns of petitioner were filed and audited and the deficiency computed upon the basis of such *985 method of accounting. The parties differ only as to its proper application to the facts in this case. In January, 1920, the Japanese laborers on the plantations on the Island of Oahu went on strike. The greater part of the labor on that island and on the three other sugar producing islands in Hawaii was Japanese. The sugar industry looked upon this strike as a matter of the gravest character. It was believed that if the strike succeeded on Oahu, it would spread to the other islands. This was based on information that the strikers were largely financed by funds from the*3433 Japanese laborers on these other islands. The result was that concerted action was taken by all the Hawaiian sugar plantations through their organization, the Hawaiian Sugar Planters' Association. It was seen that each plantation resisting the strike would sustain losses through it; possibly through direct property damage and certainly through inadequate labor supply, which would mean delay in harvesting the 1920 crop, poor cultivation of the 1921 crop, and a reduced area or defective planting and care of the crop to mature in 1922. The plantations as a group desired to make certain that the Oahu plantations would fight the strike to the end in spite of the damage and cost. With this in view, the Trustees of the Hawaiian Sugar Planters' Association, shortly after the outbreak of the strike, agreed on behalf of the Association to indemnify the plantations affected by the strike for losses sustained in resisting the strike, and these plantations agreed that they would be guided by the decisions of the Association in the handling of the strike resistance. It soon became apparent that the strike was likely to continue for a considerable period, and the Association desired to keep*3434 fully advised at all times during its progress as to the losses resulting therefrom. Consequently, on February 16, 1920, the Trustees of the Association authorized the President to appoint "an independent committee * * * to make a survey and determine the conditions on the plantations and maintain a record from day to day so that the real facts" (as to the strike losses) "may be known," which Committee was thereafter appointed. This Committee appointed experts from the technical staff of the Association, who remained continuously at the plantations affected by the strike and made regular notes as to the conditions of growth of the cane, the irrigation conditions and other matters bearing on the effect of the strike upon the growing crops. The resistance to the strike was successful, and by the end of July the strike was practically over and substantially all of the strikers remaining in the Islands had returned to work. The Strike Claims Committee then took up in detail the matter of determining the amount of the losses occurring on each plantation with respect to each crop affected. On November 17, 1920, the Committee*986 as a result of their work presented to the*3435 Trustees a detailed form to be employed by the plantations in submitting their claims for strike losses. The items going into the tabulation of net loss were intended to be such as to put these plantations upon the basis which would have existed had there been no strike. In the case of the petitioner the amount paid it was summarized upon one of these forms as set out in our findings. The largest item in the computation is the loss from receipts. In the case of the 1920 crop, this was due principally to the delay in harvesting the crop. Because of this the cane did not produce the quantity of sugar which would have been obtained had it been harvested at the proper time, and the sugar was marketed late. The probable loss in tonnage was determined by the experts from the staff of the Planters' Association. But the principal loss in receipts in 1920 was due to the collapse in the price of sugar during the latter part of 1920, the strike having delayed the plantations affected in getting their crop to market. The date when the raw sugar would have been ready for shipment was determined from date of previous years. The price which the normal corp shipped at the usual dates would*3436 have brought, after the payment of shipping costs, was computed and compared with the amount realized. The loss in receipts from the 1920 crop was determined to be $344,775.48. The loss in receipts from the 1921 crop was determined by applying to the tonnage of sugar that would be lost by reason of inadequate cultivation during the strike, a price of 8 cents per pound. This was considered to be a fair average of the prospective price for the 1921 crop. The probable loss in tonnage was determined by the experts on the staff of the Association on the basis of the survey by them of the growing crop, made at frequent intervals during the strike and subsequently during 1920. The estimate of the price of sugar in 1921 was fixed by the Trustees of the Association. The loss in receipts from the 1922 crop was determined in the same manner. The principal cause of the reduced tonnage in this crop was the decrease in the acreage planted and the delay in starting the crop with a consequent shortening of the growing period. The items of losses from operations represent the increased cost of field operations, such as clearing, planting, hoeing, irrigating, fertilizing, cutting, loading, *3437 transportation of cane from field to mill, and other increased labor costs. The computation of the increased cost was based on the average cost of the same operations for the three preceding years. The item of gain from bonus, which occurs only in 1920, represents the amount of bonus which would have been paid to laborers under normal operations but which was not paid because of the strike. Such bonus is based upon the price received from sugar. *987 The gains from rents represent the difference between the rentals which would have been paid on the receipts from a normal crop, as estimated, and those payable on the basis of the receipts from the reduced crop which would be harvested in each of the crop years. Rentals were payable upon the basis of a fixed percentage of the crop. The amounts included under miscellaneous losses consisted of such items as increased cost of fuel oil for the mill furnaces - due to the irregularity with which the crop was harvested, extra amounts paid for police, losses of amounts advanced to former employees who went on strike and left the plantations without paying such advances, and other items which were not considered ordinary agricultural*3438 expenses. In computing each item there was charged against it any saving which would be effected. For instance in the case of the 1922 crop, a gain from operations was computed. In this case the crop was late in planting and was smaller in amount and while it would yield less, it would also require smaller expenditures for irrigating, cultivating, fertilization and harvesting than would a normal crop. The amount saved in this manner over the amount which would have been expended on a normal crop was treated in the computation as a gain. That items of income need not necessarily be included in gross income of the year when received is recognized in section 213(a) of the Revenue Act of 1918, which, after stating what is to be included in gross income, provides: * * * The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * * When the method of accounting employed is the so-called crop method, the cost of planting, cultivating, and harvesting of*3439 the crop and all other expenses incidental to the production and marketing of the crop are charged to one account, usually denominated "crop account," and the receipts from the sale thereof are credited to the same account. The usual practice, which was followed in this case, is to carry a separate account for each crop. The balance in the crop account is carried upon the books and into the balance sheet as an asset or liability until the total receipts and expenditures can be ascertained, whereupon the balance, representing the profit or loss upon the crop, is carried into the profit and loss statement and the crop account closed. In such circumstances a proper balance sheet will show as an asset the amount invested in each crop which has not yet been harvested and the profit and loss statement will reflect the result of the crop harvested in the current year, without attempting to estimate in any way the profit or loss on crops in the ground. The situation is comparable with that of a manufacturer who inventories at cost those goods produced in his factory. The *988 principle of this method of accounting is to bring into the crop account all receipts from that crop and*3440 all expenses chargeable to that crop. If an item of income or expense relating to the crop is excluded from the crop account, this will necessarily disturb the accuracy of the accounting and will result in showing a net gain or loss from that crop different from the true net gain or loss. The same would be true of any accounting system based upon the principles of venture or voyage accounting. Under such a method of accounting, receipts are not to be treated as income or payments treated as expenses until the sale or other disposition of the crop is substantially completed and its outcome is known. Thus, receipts from a crop in a year prior to that in which that crop is completed are not accounted income until the year of sale or other disposition of the crop. Additional expenses will arise, in connection with the producing, harvesting and marketing of the crop, until the sale or other disposition is completed, or substantially so, all of which are incidental to the earning of the gross income represented by the receipts from the crop. The parties do not question that these are the proper principles to be applied in this case and these principles have, we believe, the unqualified*3441 support of standard works of accounting. The respondent, however, contends that the receipts in question are not, in fact, receipts from the crop but an award made by the Association for the privilege of conducting the strike in such a manner that the outcome would benefit all of its members. The amount of the award, says the respondent, was not income from the crops and had no connection with them save that they were employed as a means of measuring the amount to be paid under the agreement between the Association and the planters. Petitioner, on the other hand, contends that the payment was awarded for specific losses to each of the respective crops. That the payment may have been liquidated damages for the privilege of conducting the strike would not prevent it from going into the crop account if it was made in respect of the crop. Receipts from hail insurance for damages to crops, insurance for loss of receipts from freight, insurance from the partial destruction of goods involved in a venture, are all treated as receipts from the crop, voyage or venture. The question to be determined is whether the payment was in fact a receipt arising out of the crop. It can not be*3442 questioned that the strike did have its effect upon the crops in question. The tonnage of sugar produced was reduced, the cost of the necessary labor during the strike was increased, and the cost of cultivation in the period following the strike was increased, for the testimony is that a late or neglected crop requires greater attention than a normal crop. The expense already incurred was rendred of less value than would have been the case under *989 normal circumstances. We are thus presented with a situation where receipts are reduced and expenses increased. The award made by the Planters' Association represented a computation, based on the best available data, of the amount by which receipts and expenses were affected and a balancing thereof. A balance so arrived at is in no true sense net income, for it must be considered in connection with other expenditures made or to be made and other receipts to result from the crop before we may determine whether any part represents a gain. It may well be that under normal conditions a loss would have resulted from the crop, and the payment is no more than a reduction in the amount of such loss. So long as it relates to a crop*3443 planted it represents nothing but a computation of the net loss in receipts. To refuse to consider such an item in computing gain or loss from the crop is to distort the gain or loss from that crop. It is just this which the Revenue Act seeks to avoid. We have said that the parties, the Commissioner's regulations, and the accounting authorities are agreed that amounts received from hail insurance for damage to a crop are to be reported as a part of the crop income. The basis for the computation of the damage in such a case is precisely that followed in this case. The courts hold that the recovery under a policy insuring growing crops against damage is the market value of the crop destroyed, less the expense of preparing it for market. The loss in bushels, less the cost of maturing, harvesting, and marketing may be shown as indicating the amount of the loss. ; ; ; . This is the measure which was used in this case and we see no difference in principle between a payment for losses by hail and a payment for losses*3444 from a strike. It is true that in either case the amount received represents gross income, but it does not represent a profit; and until the crop for the year is completed it can not be known whether there has been a profit or a loss. Under the crop system of accounting, the receipt from this source must be considered with the other receipts from the crop, and compared with the expenses. It is claimed that the expenses of the crop have no connection with the amount awarded. This overlooks the fact that the starting point of the award was the amount to be received from the crop under normal conditions, and that such a crop can be produced only by reason of such expenditures. It is our opinion that to the extent that the award was for losses to the crop, it is to be considered as a receipt from that crop and accounted for as such. It appears that the amount awarded for 1921 was entirely on account of damage to the crop to mature in that year. We find, however, that in computing losses to be paid on the 1922 crop, consideration was given to the smaller acreage which was planted. Any amount which was included in the computation *990 for that reason does not represent*3445 a receipt from the 1922 crop, but rather a payment in the nature of a reimbursement for profits foregone. It is a payment of the estimated profits on acreage never planted and comprising no part of the crop. It represents income of the year when received and not income from a future crop for it can not be said to be in any true sense a payment arising from petitioner's crop for 1922. There is no basis on which we may determine how much of the payment made on account of 1922 represents reimbursement for the net loss of receipts from the crop of that year, and how much represents a computation of profits on the acreage which was not planted. The computation made by the Association is such as to lead to the belief that a substantial portion of the payment falls in the latter classification. We are of the opinion that the payment of $17,413.44 on account of the net losses to the 1921 crop is properly to be accounted for as a receipt on account of the crop of that year, to be used in determining the income come from that crop and that it was erroneously included by the Commissioner in computing the taxable income for 1920. The action of the respondent with respect to the payment for*3446 1922 losses is approved. Counsel for the respondent place reliance upon the decision of the Circuit Court of Appeals for the Ninth Circuit in . In that case the court had for decision the proper treatment under the Hawaiian income-tax law of these strike-loss payments. It decided that the entire payment was income for 1920. The difference in the situation, however, appears from the opinion where it is said: The inference is not deducible from the decisions of the Supreme Court of Hawaii that income actually received in one year is not taxable as income of that year but is to be carried into the income of another year. The statute which governs this case provides in express terms for precisely that which the court finds missing in the Hawaiian statute. The underlying principles of the two statutes are so divergent, so far as they affect the treatment of this payment, that the decision can not be considered as controlling here. The court also points out in that case that the amount paid was compensation or liquidated damages for losses sustained. Counsel for respondent argue from this that the amount was income. *3447 Unquestionably so, but this does not decide the question for it must still be determined whether this payment of compensation or liquidated damages for losses was for losses to the crop of a future year to the extent that it constitutes a payment received out of that crop. This we have done. Reviewed by the Board. Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624379/

Peabody Hotel Company, Petitioner, v. Commissioner of Internal Revenue, RespondentPeabody Hotel Co. v. CommissionerDocket No. 230United States Tax Court7 T.C. 600; 1946 U.S. Tax Ct. LEXIS 98; August 19, 1946, Promulgated *98 Decision will be entered under Rule 50. Pursuant to a plan of reorganization adopted under a section 77-B Bankruptcy Act proceeding, the insolvent debtor corporation's property was transferred to two new corporations. Approximately 13 per cent of such property (as it existed prior to such transfers) was transferred to one new corporation in recognition of the full priority rights of one class of bondholders secured by such property. The other new corporation, petitioner, acquired all of the insolvent debtor's property to which the latter's general creditors and the other classes of bondholders could look for payment of their claims; and, further, petitioner acquired such property subject to various liabilities assumed by petitioner, pursuant to the plan and court decrees and in exchange for 69 per cent of petitioner's voting common stock issued to the debtor's creditors. In addition, petitioner issued 31 per cent of its common stock for $ 49,861 new working capital. Held, that the transaction was a nontaxable reorganization under section 112 (b) (4) and (g) (1) (B) of the 1934 Act, as amended, and that petitioner is entitled to the same basis as its properties would*99 have in the hands of the transferor under section 113 (a) (7) of the 1934 Act. J. S. Allen, Esq., Allan Davis, Esq., and M. O. Carter, C. P. A., for the petitioner.Bernard D. Hathcock, Esq., for the respondent. Tyson, Judge. TYSON *600 The respondent determined deficiencies in income tax and excess profits tax for the years and in the amounts as follows:Year ended --Income taxExcess profitsdeficiencytax deficiencyAug. 31, 1935$ 3,406.07$ 854.73Aug. 31, 19366,634.75Aug. 31, 19374,958.04Total14,998.86854.73Petitioner seeks a redetermination that there are no deficiencies for the years ended August 31, 1935, and August 31, 1937, but, *100 instead, that there are overpayments in the amounts of $ 1,362.22 and $ 365.23 for those years, respectively, and that there is a deficiency not in excess of the amount of $ 1,700.75 for the fiscal year ended August 31, 1936.The issues are whether respondent erred in disallowing claimed deductions for each of the years involved (1) for depreciation and (2) for amortization of bond discount and expense. The primary question, answer to which is decisive of both issues, involves a determination of the petitioner's basis for the property acquired by it *601 upon its organization in 1934, that is to say, whether the basis in the hands of petitioner is (a) the cost to it of such property as determined by respondent, or (b) as contended for by petitioner, the same basis for such property in petitioner's hands as it would have in the hands of its transferor under section 113 (a) (7) or (a) (8) of the Revenue Act of 1934, because, as claimed, the property was acquired either pursuant to a nontaxable "reorganization" within the meaning of section 112 (b) (4) and (g) (1) (B) of the Revenue Act of 1934 as amended by section 213 (g) of the Revenue Act of 1939, or pursuant to a nontaxable*101 "exchange" within the meaning of section 112 (b) (5) of the Revenue Act of 1934.At the hearing the parties stipulated the amounts of the deductions for depreciation and for amortization of bond discount and expense allowable to petitioner for each of the years in controversy, if it is determined herein that petitioner acquired its assets pursuant to a nontaxable reorganization or exchange. The parties also stipulated the amounts and dates of payments made by petitioner for income taxes for each of the years in controversy. Effect to the stipulations will be given under Rule 50 in accordance with our opinion herein. The petition was amended to conform to such stipulated facts, which are included herein by reference.FINDINGS OF FACT.The petition herein was filed on November 23, 1942.The petitioner is a Tennessee corporation, with its principal office in Memphis, Tennessee. Its income tax returns for the years here involved were filed with the collector of internal revenue for the district of Tennessee at Nashville, Tennessee.The petitioner was organized on July 26, 1934, pursuant to a plan of reorganization of the Memphis Hotel Co., a Tennessee corporation, under section 77-B*102 of the Bankruptcy Act, as amended.In March 1933 the Memphis Hotel Co. had an authorized capital stock of 50,000 shares, par value $ 50 each, which were owned by persons in various states. At that time it owned and operated the Peabody Hotel and the Gayoso Hotel, both located in Memphis, Tennessee, and it also owned and operated a farm known as the Gayoso farm, located in DeSoto County, Mississippi. The Memphis Hotel Co. also owned 50 per cent of the capital stock of the Chickasaw Hotel Co., consisting of 1,000 shares of common and 684 shares of preferred, and under an agreement operated the latter's hotel property known as the Chisca Hotel located in Memphis, Tennessee. At that time the Memphis Hotel Co.'s liabilities included, inter alia, three separate bond issues as follows: One hereinafter referred to as the "Peabody firsts," which were secured by Southern Hotel first mortgage 6 per *602 cent gold bonds, dated July 1, 1923, constituting a first lien on all the Peabody Hotel real and personal property, which bonds had been assumed by the Memphis Hotel Co.; one hereinafter referred to as the "Gayoso firsts," which were secured by the Memphis Hotel Co.'s first mortgage*103 6 per cent gold bonds, dated March 1, 1924, constituting a first lien on all the Gayoso Hotel real and personal property; and one hereinafter referred to as the "Peabody seconds" which were secured by the Memphis Hotel Co.'s refunding mortgage and collateral trust 7 per cent gold bonds, dated November 2, 1925, constituting a second lien on the Peabody Hotel and Gayoso Hotel real and personal properties and further secured by a collateral trust agreement and pledge of 1,000 shares of the common stock of the Chickasaw Hotel Co.On March 8, 1933, E. G. Taylor, a resident of Mississippi, as a bondholder and on behalf of all creditors, both secured and unsecured, and on behalf of the stockholders of the Memphis Hotel Co., filed against that company a bill of complaint, Equity No. 1182, in the District Court of the United States for the Western Division of the Western District of Tennessee. The bill of complaint alleged, inter alia, that during 1932 and 1933 the defendant, Memphis Hotel Co., had failed to make certain interest and sinking fund payments on its bonds and had defaulted on the principal of certain of those bonds which had matured; that demand for foreclosure on the mortgages*104 would be made in the immediate future; that the filing of many suits would be precipitated; and that timely intervention of the court was necessary for the preservation of the assets and the going business of the defendant and for the avoidance of a multiplicity of suits. The bill of complaint prayed for an order appointing receivers with full power to take possession of all the defendant's properties and to operate its business in toto, and requiring all creditors to file claims in that proceeding. On March 8, 1933, and on consent of the defendant, the court entered its order appointing W. P. Armstrong and A. L. Parker as receivers for the defendant corporation, with powers and duties as prayed for. The bill of complaint did not allege insolvency of the defendant, but, on March 8, 1933, it was, in fact, insolvent.On March 10, 1933, the Bank of Commerce & Trust Co. of Memphis, Tennessee, filed an intervening bill in the above mentioned proceeding, as the indenture trustee under each of the three deeds of trust securing the bond issues above mentioned, and also as trustee under the collateral trust agreement and pledge of stock constituting liens against the Memphis Hotel Co.'s*105 Peabody Hotel, Gayoso Hotel, Gayoso Farms, and 1,000 shares of common stock of the Chickasaw Hotel Co. The intervening bill alleged, inter alia, defaults under each indenture, and asserted the respective lien rights of the interveners for foreclosure on those properties. The bill prayed that, pending foreclosure, the receivers theretofore appointed and then in possession of all the *603 defendant's properties be also constituted receivers for the benefit of the holders of the respective secured debts, with full authority and powers to continue the operation of the various properties in the manner theretofore conducted by them and that they be required to impound, segregate, and hold in separate accounts the net rents, issues, and profits from the several mortgaged properties for the benefit of the respective classes of bondholders. On March 10, 1933, the court entered its order appointing W. P. Armstrong and A. L. Parker as receivers, with the powers and duties as prayed for.Through the above mentioned proceedings in equity the creditors of the insolvent Memphis Hotel Co. took effective command and control over that company's properties, with the result that the equity*106 ownership of such properties had shifted from the stockholders to such creditors. Subsequent to March 10, 1933, and pursuant to the court order of that date, the receivers, in accordance with the directions of the decree, continued operation of the business and properties of the Memphis Hotel Co. and the proceeds from the various properties were impounded and segregated for the benefit of creditors through the application of proper accounting methods.At the time of the institution of the proceeding in Equity No. 1182, on March 8, 1933, the Memphis Hotel Co. was indebted to the Bank of Commerce & Trust Co. of Memphis on a collaterally secured loan and that bank immediately asserted its banker's lien against the Memphis Hotel Co.'s entire deposit in that bank. Later, by compromise agreement with the receivers and approval of the court, the bank applied a portion of the deposit in reduction of the debt and released the remaining portion of such deposit to the receivers. The Memphis Hotel Co. was thereafter indebted to the bank in the amount of $ 69,602.25, with interest, secured by the originally pledged securities. By proceedings had in both the District Court of the United States*107 for the Western Division of the Western District of Tennessee and in the District Court of the United States for the Northern District of Mississippi, in which latter district the Gayoso farm was located, that farm was sold for $ 70,000 cash, and the sale was confirmed by the courts. Pursuant to an order of the court for the Western District of Tennessee, the receivers applied the cash proceeds of the sale to pay in full the Memphis Hotel Co.'s debt to the bank, which thereupon released the pledged collateral consisting of $ 250,000 principal amount of Peabody seconds and 684 shares of preferred stock, par value $ 100 each, of the Chickasaw Hotel Co. The Peabody seconds, so released, were canceled, thus reducing the outstanding bonds of that issue to the principal amount of $ 841,000, and the preferred stock of the Chickasaw Hotel Co., so released, was charged with liens as per the court's allocation between creditors, viz, a first lien of $ 10,799.83 in favor of general unsecured creditors of the Memphis Hotel Co. and a junior lien of *604 $ 47,035.70 in favor of holders of Peabody seconds. The acts as recited in this paragraph were all done prior to March 1, 1934, the date*108 of the promulgation of the plan hereinafter mentioned.Due to the Memphis Hotel Co.'s defaults on its outstanding bond issues, the holders of each of the three respective bond issues executed protective agreements, of dates as follows: For Peabody seconds in November 1932, for Gayoso firsts in March 1933, and for Peabody firsts in June 1933; and pursuant to those agreements bondholders' protective committees were organized.A reorganization committee composed of the chairman of each of the three bondholders' protective committees promulgated, as of March 1, 1934, a plan and agreement of reorganization of the Memphis Hotel Co. That plan was approved and adopted by each bondholders' protective committee, and was submitted to the court in the pending proceeding in Equity No. 1182 by petition of the receivers and intervening petitions of the several bondholders' protective committees. The court, by its order entered on May 5, 1934, adjudged such plan to be fair, timely, and equitable with respect to the interests of all parties concerned, ordered the consummation of the plan under the supervision of the court, and ordered the cause set for further hearing on July 7, 1934.On June 25, *109 1934, the reorganization committee and the several bondholders' protective committees executed an amendment to the plan and agreement of reorganization of March 1, 1934, to make the same applicable and to enable its consummation through a corporate reorganization proceeding in bankruptcy under sections 77-A and 77-B of the Bankruptcy Act as amended on June 7, 1934. One of the primary purposes of the amended plan was to avoid foreclosure sales provided for in the original plan.On June 28, 1934, the Memphis Hotel Co. filed in the District Court of the United States for the Western Division of the Western District of Tennessee a "Debtor's Original Petition" "In Proceedings for a Corporate Reorganization No. 11663," alleging insolvency and invoking the jurisdiction of the court under sections 77-A and 77-B of the Bankruptcy Act, as amended, for consideration and approval of the original plan and agreement of reorganization dated March 1, 1934, as amended by the amendment of June 25, 1934. The petition alleged, inter alia, the pertinent facts as to the Memphis Hotel Co.'s assets and liabilities, capital stock, and financial condition, and further alleged that continued operation*110 of the business was impossible without effecting a plan of reorganization materially reducing the Memphis Hotel Co.'s capitalization and fixed charges and rearranging its indebtedness; that a bankruptcy reorganization could be consummated, without foreclosure, more expeditiously and at less expense than *605 through the pending proceeding in Equity No. 1182; that the proposed plan as amended had been accepted by more than two-thirds in amount of the holders of secured and unsecured claims; and that by corporate resolution the Memphis Hotel Co. had approved and accepted the plan as amended and authorized the filing of its "Debtor's Original Petition." By court order entered June 28, 1934, the foregoing petition was approved as properly filed under sections 77-A and 77-B of the Bankruptcy Act, as amended, and A. L. Parker was appointed temporary trustee of the estate of the debtor, Memphis Hotel Co.In the "Proceedings for a Corporate Reorganization No. 11663," upon notice to all creditors and stockholders and on hearing and consideration of certain premises, including the record in the prior receivership cause in Equity No. 1182, the court in entering its decree on August 1, 1934, *111 found that the debtor was insolvent; that the plan was "fair and equitable" as to all classes of creditors and the stockholders and was "feasible"; that the plan complied in all respects with the requisites of section 77-B of the Bankruptcy Act as amended; and that the plan had been accepted by a majority of the stockholders and by or on behalf of holders in excess of two-thirds in amount of each class of allowed claims, including the outstanding $ 1,777,000 principal amount of "Peabody firsts," the outstanding $ 660,000 principal amount of "Gayoso firsts," and the outstanding $ 840,000 principal amount of "Peabody seconds." The court in its decree approved and confirmed in all respects the plan of reorganization, as amended (hereinafter referred to as the plan); made the plan binding on all stockholders and creditors of the debtor, whether they had accepted it or not; and granted the debtor and the corporations to be organized under the plan full authority to consummate and ordered the consummation of the plan. The court further ordered that the time within which the stockholders of the debtor could comply with the plan requiring deposit of stock of the Memphis Hotel Co. and payment*112 of cash for stock in the Peabody Hotel Co. be extended to January 1, 1935. The decree made permanent the appointment of A. L. Parker as trustee of the estate of the debtor, and allowed established claims, both secured and unsecured.The decree of August 1, 1934, also ordered cancellation of $ 3,000 principal amount of Peabody firsts and $ 1,000 principal amount of Peabody seconds theretofore acquired by the debtor for retirement and not included in the above amounts of outstanding bonds. The decree reserved for further action of the court the allowance of compensation and expenses of various parties in connection with the proceedings and the plan, including the expenses in the cause Equity No. 1182, whether payable by the trustee or made a charge upon the assets of the debtor.*606 Pursuant to the plan the petitioner in the case at bar, the Peabody Hotel Co., was incorporated on July 26, 1934, under the laws of Tennessee, with an authorized capitalization of 25,000 shares of no par value voting common stock, to take over all the properties of the Memphis Hotel Co. except the Gayoso Hotel property. Also, pursuant to the plan and at or about the same time, the Gayoso Hotel Co. *113 was incorporated under the laws of Tennessee to take over the Gayoso Hotel property free of all liens except taxes, because the plan recognized the full priority rights of the holders of Gayoso firsts to that entire hotel property, including its impounded receipts from the receivership and trustee operations, and also because the plan recognized that such holders, to the extent of their deficits, had the status of general creditors of the Memphis Hotel Co.On August 31, 1934, pursuant to the plan and with court approval of the substance and form of the conveyance, the bankruptcy trustee, the Memphis Hotel Co. and the Bank of Commerce & Trust Co. as indenture trustee under the trust deed of March 1, 1924, securing Gayoso firsts, jointly executed a transfer and conveyance to the Gayoso Hotel Co. of all the real property known as the Gayoso Hotel, together with all machinery, equipment, personal property, etc., used in connection therewith; the good will and use of the name Gayoso; the supplies, etc., located in or held for use of the Gayoso Hotel; the bills, notes and accounts receivable, the executory contracts, and the cash in the hands of A. L. Parker, trustee, consisting of two *114 items of $ 1,154.53 and $ 10,462.25, arising from the receivership and trusteeship operation of the Gayoso Hotel; and also the sum of $ 10,799.83 in the hands of A. L. Parker, trustee, arising from the sale of the Gayoso farm and originally allocated for the benefit of general creditors of the Memphis Hotel Co. but subsequently directed by the court to be transferred to the Gayoso Hotel Co. in connection with Gayoso firsts becoming general creditors with respect to their deficits. The conveyance was in fee simple, free and clear of all claims of the Memphis Hotel Co. and its stockholders and creditors, except liens for taxes on the property transferred, which it was agreed would be paid out of the cash transferred to the Gayoso Hotel Co. For the transfer of such property and as required by the plan, the Gayoso Hotel Co. issued its entire capital stock, no par voting common, to Parker, trustee, who lodged the same with the transfer agent for distribution in exchange for Gayoso firsts. The August 31, 1934, book value of the properties so transferred amounted to $ 696,163.03, or approximately 13 per cent of the total properties of the Memphis Hotel Co. on that date and prior to the*115 transfer. The properties so conveyed were subject only to the priority lien rights of the holders of Gayoso firsts bonds, and neither the holders of Peabody firsts and Peabody seconds nor the general creditors of the Memphis Hotel Co. had any equitable interest therein.*607 On August 31, 1934, pursuant to the plan, the Peabody Hotel Co. voting trust agreement was executed to secure a union of all interests in order to concentrate the responsibility for proper management of the Peabody Hotel Co. properties. The agreement provided for the issuance of the common capital stock of the Peabody Hotel Co. requisite to be issued to carry out the plan up to the amount of 23,481 shares, to the voting trustees for them to hold the legal title thereto upon active trust for a period of 10 years, unless sooner terminated. The agreement also provided that the stock represented by the voting trust certificates should be voted by the trustees as directed by the owners of such certificates at any meeting of the stockholders at which it was proposed:(a) to amend its certificate of incorporation, (b) to reduce its capital, (c) to sell, lease or exchange all of its property and assets, including*116 its good will and its corporate franchises, or such part of its property and assets as would substantially limit the corporate business, (d) to consolidate with any other corporation or corporations, or (e) to surrender its charter and dissolve itself, * * *The agreement further provided for the voting trustees' issuance of voting certificates requisite under the plan and up to an amount representing the 23,481 shares of such stock, and for delivery of such voting certificates to the transfer agent of the trustee in bankruptcy for distribution to the stockholders in accordance with the plan. The agreement also provided for payment of all dividends on the stock of the Peabody Hotel Co. to the holders of the voting trust certificates.On August 31, 1934, pursuant to the plan and court decree and with court approval of the conveyance, the bankruptcy trustee, the Memphis Hotel Co., and the Bank of Commerce & Trust Co. as indenture trustee under the deed of trust and collateral trust agreement, both dated November 2, 1925, jointly executed a transfer and conveyance of title in fee simple to the Peabody Hotel Co. of all the remaining properties of every kind and description of the Memphis*117 Hotel Co. (the properties so conveyed being all its properties other than those properties transferred of even date to the Gayoso Hotel Co.) including all the real property, building and land, known as the Peabody Hotel, together with all machinery, fixtures, furniture, equipment, and personal property owned or used in connection with such property; the good will, business and name of Peabody; the merchandise, supplies, and personal property of every kind located in or held for use of the Peabody Hotel; the printing machinery, presses, equipment, and supplies comprising the print shop owned by the Memphis Hotel Co. and located in the Chisca Hotel; all the automobiles and trucks owned by the Memphis Hotel Co.; the 1,000 shares of common and 684 shares of preferred capital stock of the Chickasaw Hotel Co.; and all bills, notes, accounts receivable, intangibles, rights, and beneficial interests under *608 executory contracts, and cash on hand arising from the operation of the Peabody Hotel and comprising assets of the Memphis Hotel Co. and its receivers from March 8, 1933, to June 28, 1934, in the proceeding in Equity No. 1182, and of the trustee of the estate of the Memphis Hotel*118 Co. appointed on June 28, 1934, in the proceeding for corporate reorganization No. 11663. The conveyance was in fee simple and free and clear of all claims of the Memphis Hotel Co. and its stockholders and creditors, except that it was subject to the liens for taxes assessed against such property; the liens of the deeds of trust securing the Peabody firsts and the Peabody seconds bonds; the rights of lessees and licensees of space or privileges under certain specified existing executory leases and contracts; and also the court costs, expenses, and liabilities due to be paid by the bankruptcy trustee but not already paid by him on August 31, 1934. The August 31, 1934, book value of the properties so transferred amounted to $ 4,594,750.80, which (after eliminating the properties transferred to the Gayoso Hotel Co. in recognition of the full priority rights of the holders of Gayoso firsts) was 100 per cent of the Memphis Hotel Co.'s properties against which its general creditors and the holders of Peabody firsts and Peabody seconds had any equitable claim. On August 31, 1934, the Peabody Hotel Co. acquired substantially all of the properties of the Memphis Hotel Co.Pursuant to the*119 foregoing conveyance of August 31, 1934, the plan and court orders and decrees, and in consideration for such conveyance, the Peabody Hotel Co., petitioner, did the following:Assumed the obligation of the "Peabody firsts" outstanding in the principal amount of $ 1,777,000 and the coupons attached thereto, including $ 17,770 interest accrued to September 1, 1934, and the deed of trust securing the same, except that the sinking fund requirements of the deed of trust then in default and to become due during a period of three years beginning January 1, 1934, which were waived;Assumed the $ 840,000 principal amount of outstanding old "Peabody seconds" and unpaid coupons thereon, and issued to the bankruptcy trustee's transfer agent in exchange therefor an equal principal amount of new Peabody Hotel Co. second mortgage 10-year 5 per cent bonds, dated as of May 1, 1934, with accrued interest thereon amounting to $ 14,000 on September 1, 1934, secured by lien on the Peabody Hotel real and personal property junior to the lien of the Peabody firsts and further secured by collateral trust agreement and pledge of 1,000 shares of common stock of the Chickasaw Hotel Co.;Issued, immediately, *120 for the benefit of the holders of the old Peabody seconds a total of 10,080 shares of its stock to the voting trustees on the basis of 12 shares in exchange for each old Peabody seconds bond;Issued, immediately, for the benefit of holders of old Gayoso firsts, a total of 3,960 of its shares to the voting trustees on the basis of three shares for each $ 500 principal amount of Gayoso firsts representing their participation as general creditors of the Memphis Hotel Co.;Issued, immediately, for the benefit of general creditors of the Memphis Hotel Co., a total of 895 shares of its stock to the voting trustees on the basis of one *609 share for each $ 25 of claim; and, to eliminate claims under $ 25 and the excess of other claims over the highest multiple of $ 25, such creditors were paid $ 2,790.81 out of the cash assets received from the bankruptcy trustee subject to such liability;Issued, immediately, for the benefit of holders of lease claims against the Memphis Hotel Co. a total of 987 shares of its stock to the voting trustees on the basis of one share for each $ 25 of claim for rent reserved and unpaid since default to the end of 1934;Issued, immediately, for the benefit*121 of holders of commission claims against the Memphis Hotel Co. a total of 58 shares of its stock to the voting trustees on the basis of one share for each $ 25 of claim for claims for commissions unpaid and accrued to May 1, 1934;Issued, pursuant to the plan and court decrees, a total of 7,123 shares of its stock to the voting trustees for the benefit of participating stockholders of the Memphis Hotel Co. and certain other persons, at the times and in the amounts hereinafter fully set out.The petitioner, Peabody Hotel Co., also assumed the following liabilities to which the transferred property was subject: The accrued taxes amounting to $ 59,810.66 on August 31, 1934, on the property transferred to the Peabody Hotel Co.; the expenses and costs of the reorganization proceedings and of the receivership and bankruptcy proceedings; expenses and liabilities not already paid by the bankruptcy trustee at August 31, 1934, including three items totaling $ 13,136.41; an item of $ 904.96 to I. Samelson & Co. on its preferential right of reclamation claim for assets improperly taken over by the receivers from the Memphis Hotel Co. and subsequently adjudged to be a lien on the assets of the *122 Memphis Hotel Co.; three items totaling $ 22,423.61 to be paid over to the Gayoso Hotel Co. by petitioner out of the cash funds received from the bankruptcy trustee and pursuant to the plan in connection with the settlement of accounts in the trustee's operation of the business and the amount due on account of claims of the holders of old Gayoso firsts as general creditors of the Memphis Hotel Co. In addition, petitioner assumed and agreed to pay the expenses of the voting trustees under the Peabody Hotel Co. voting trust agreement executed as a part of the plan.On August 31, 1934, all of the properties of the Memphis Hotel Co. in the hands of the trustee in bankruptcy were delivered to the Gayoso Hotel Co. and the Peabody Hotel Co., respectively, pursuant to the above mentioned conveyances of even date, except for $ 2,500 retained by the trustee for payment of his fee and certain other expenses as ordered by the court. The court, by its order entered on September 29, 1934, approved and confirmed the transfers, conveyances, and other instruments and documents executed in carrying out the plan; approved appointment of the transfer agent of the trustee and the delivery to such agent*123 of the securities for exchange in carrying out the plan; approved the trustee's statement of accounts to September 29, 1934; and approved all acts done and steps taken toward *610 consummation of the plan. Also, the order approved the final allowance of compensation to the trustee in bankruptcy, but, after stating that all exchanges could not be completed for some time and certain adjustments could not be then finally determined, ordered that "the trusteeship of said Trustee is not at this time terminated, but said Trustee will continue to act until said Plan of Reorganization in all respects has been fully and finally consummated." The cause was retained by the court for further reports by the trustee and for such action on "other matters as may be appropriate or proper incident to, or in connection with this proceeding, to be finally and completely carried out and consummating said Plan of Reorganization or the orders of the Court relative thereto."Pursuant to the plan and court decrees, the Peabody Hotel Co. earmarked 7,123 shares of its stock as the maximum number available to the stockholders of the Memphis Hotel Co. if all of them participated under the plan by depositing*124 with the depositary one share of the latter company's stock accompanied by payment of $ 1, for which they were to receive one-seventh share of Peabody Hotel Co. stock, thereby providing a total of $ 49,861 cash to be paid in as new working capital. The August 1, 1934, court decree fixed January 1, 1935, as the time limit for making such exchange. Pursuant to the Peabody Hotel Co.'s intervening petition filed December 18, 1934, in proceedings for corporate reorganization No. 11663, for instructions and directions of the court on certain matters in connection with the consummation of the plan and the court's order entered on the same date, the Peabody Hotel Co. offered to participating stockholders of the Memphis Hotel Co. the right, expiring on January 1, 1935, to subscribe for sufficient fractional shares to complete whole shares on the basis of $ 7 per share; and further offered such stockholders the right, after January 1, 1935, to subscribe at $ 7 per share for an additional allotment out of the unutilized portion of the 7,123 shares of Peabody Hotel Co. stock set apart under the plan for the benefit of the participating Memphis Hotel Co. stockholders. Pursuant to the plan and*125 also the court authorization to issue additional fractional shares, the Peabody Hotel Co. issued up to January 1, 1935, a total of 3,010 of its shares to the voting trustees for the benefit of participating stockholders of the Memphis Hotel Co. The Peabody Hotel Co. further issued, on January 18, 1935, a total of 1,542 of its shares to the voting trustees for the benefit of participating Memphis Hotel Co. stockholders who subscribed for additional allotments at $ 7 per share under the court order and offer of December 18, 1934. Pursuant to corporate resolution adopted January 18, 1935, the Peabody Hotel Co. filed a petition on January 22, 1935, in the proceedings for a corporate reorganization No. 11663, for directions and instructions with reference to the unutilized portion of the above mentioned 7,123 shares of its stock and on January 22, 1935, the court *611 entered its order "That, pursuant to the Plan of Reorganization and in order to raise necessary working capital, Peabody Hotel Company be and it is hereby authorized and directed to offer the 2,571 shares of its stock unabsorbed by stockholders of Memphis Hotel Company" participating under the plan, to the voting trustees*126 at $ 7 per share, with the understanding that they in turn notify holders of voting trust certificates of their preemptory right to subscribe to such shares until February 18, 1935, and further that after that date the Peabody Hotel Co. was authorized to accept the offer of H. T. Bunn and R. B. Snowden to purchase the remainder thereof, at $ 7 per share. In accordance with the order, the Peabody Hotel Co. issued in February 1935 a total of 16 of its shares at $ 7 per share to the voting trustees for the benefit of those exercising such preemptory rights and also in February 1935 issued to the voting trustees a total of 2,555 shares at $ 7 per share as subscribed for H. T. Bunn and R. B. Snowden. Prior to February 1935 Bunn had been a stockholder of the Memphis Hotel Co., but not a participating stockholder under the plan, and he held no shares of Peabody Hotel Co. stock other than the 1,500 shares so purchased. Snowden, as a holder of old Peabody seconds bonds, had been issued Peabody Hotel Co. stock under the plan prior to his purchase of 1,055 shares in February 1935.In the matter of Memphis Hotel Co., "Debtor," "In Proceedings for a Corporate Reorganization No. 11663" (77-B*127 proceedings), the court, on March 2, 1935, entered its final order and decree, in which it was found that all acts ordered done in consummation of the plan had been performed and that all exchanges of securities had been consummated, either by delivery to the parties or to the transfer agent for delivery to them. The decree approved final report of the trustee in bankruptcy and discharged the trustee of all further duty. Also the decree provided that the debtor, Memphis Hotel Co., was discharged of all debts and liabilities, and the rights of creditors, stockholders, and other interested persons were terminated, except as to the claim of I. Samelson & Co. which was finally determined subsequent to that date. The plan was consummated on March 2, 1935.In consummation of the plan as above set out, the Peabody Hotel Co. issued a total of 23,103 shares of its voting no par common stock to the voting trustees, of which total 15,980 shares, or approximately 69 per cent, were, immediately after the transfer to it by the Memphis Hotel Co. of the properties in question, issued for the benefit of the secured and unsecured creditors of the debtor, Memphis Hotel Co., and 7,123 shares, or approximately*128 31 per cent of such total, were issued for the benefit of stockholders of the Memphis Hotel Co. participating under the plan and certain other persons as authorized by the court, upon payment therefor at $ 7 per share for a total of $ 49,861 cash paid in as new working capital.*612 The voting trust agreement was terminated on August 31, 1936, whereupon shares of stock of the Peabody Hotel Co. held in trust were exchanged for the voting trust certificates.In December 1937 the Peabody Hotel Co. sold 1,098 shares of its stock to its stockholders at $ 26 per share and in February 1938 it sold its remaining 799 shares (making a total of 25,000 authorized shares outstanding), but neither of those sales had any connection with the plan of reorganization.The properties of the Memphis Hotel Co. acquired by the Peabody Hotel Co. on August 31, 1934, pursuant to the plan of reorganization, had in the hands of the Memphis Hotel Co. on that date a depreciated cost and basis, as follows:Land$ 924,398.16Buildings2,532,870.67Equipment, machinery, etc823,307.431,000 shares common stock Chisca Hotel Co110,000.00684 shares preferred stock Chisca Hotel Co68,400.00Cash accounts, prepaid expense, inventories and notes receivable128,405.39Automobiles and trucks1,369.15Print shop equipment6,000.00Total4,594,750.80*129 The opening book entries of the Peabody Hotel Co. were based on the books and records of the Memphis Hotel Co. and reflected the above listed assets on the same basis, except that unamortized bond discount was not brought forward from the Memphis Hotel Co.'s books to the Peabody Hotel Co.'s books. Also, the Peabody Hotel Co.'s books set up liabilities totaling $ 2,747,836.45 assumed pursuant to the plan.OPINION.The question presented involves primarily a redetermination of the petitioner's basis of the property acquired by it upon its organization in 1934. More specifically stated, the question is whether the basis in the hands of petitioner is (a) the cost to it of the property as determined by respondent, or, as contended by petitioner, (b) the same basis for such property in petitioner's hands as it would have in the hands of the Memphis Hotel Co. because acquired pursuant to a nontaxable reorganization or exchange. By stipulation the parties have concluded the issues originally raised as to the amounts of the deductions allowable for each of the years for depreciation and for amortization of bond discount and expense, if petitioner's contention as to the basis is sustained. *130 The petitioner contends, first, that the transfer of the Memphis Hotel Co. property to it on August 31, 1934, pursuant to the plan of *613 reorganization, meets the requirements of a nontaxable reorganization under section 112 (b) (4) and the first clause of section 112 (g) (1) (B) of the Revenue Act of 1934, as amended by section 213 (g) of the Revenue Act of 1939, in that as a party to and in pursuance of a plan of reorganization, petitioner acquired substantially all of the properties of the Memphis Hotel Co. solely for petitioner's voting stock and its assumption of the transferor's liabilities; and/or, second, that the transfer meets the requirements of a nontaxable exchange under section 112 (b) (5) of the Revenue Act of 1934; and, third, that from either viewpoint petitioner's basis for the property so acquired is the same as it would be in the hands of the transferor, the Memphis Hotel Co., under either section 113 (a) (7) or section 113 (a) (8) of the 1934 Revenue Act, or both. The applicable sections of the revenue acts are set out in the margin. 1*131 *614 The respondent contends that petitioner did not acquire its properties either as the result of a reorganization of the Memphis Hotel Co. or as the result of any exchange, within the meaning of the applicable provisions of the revenue acts, and that therefore he has correctly used the petitioner's cost basis in determining its tax liability for the years in question.The answer to the question presented by petitioner's first contention of whether there is here a nontaxable reorganization depends, in part, upon answers to other subsidiary questions arising out of the definition of "reorganization" made in section 112 (g) (1) (B) as amended, supra, those subsidiary questions being as follows: (a) Whether the Peabody Hotel Co. acquired "substantially all the properties" of the Memphis Hotel Co.; and, if so, (b) whether those properties were acquired "solely for all or a part of its voting stock"; and, if (a) and (b) are answered in the affirmative, (c) whether there was preserved the continuity of interest requisite to a reorganization. We shall consider the subsidiary questions in the order as stated.Did the Peabody Hotel Co. acquire "substantially all the properties" *132 of the Memphis Hotel Co., the subsidiary question presented in (a) above? We think the question requires an affirmative answer.In , it was held that whether the assets acquired by the transferee constituted "substantially all the properties" of the transferor depends upon the facts and circumstances in each case rather than upon any particular percentage, and it is clear from that case and the authorities cited therein that the question must be resolved as an ultimate conclusion of fact. It is established that the receiver's sale of the Gayoso farm and the resulting elimination of certain liabilities of the Memphis Hotel Co. was prior to the promulgation of the plan of reorganization and formed no part thereof. The court, in approving the plan as being "fair and equitable" to all classes of creditors of the Memphis Hotel Co., determined, in accordance with the plan, that the holders of Gayoso firsts, outstanding in the principal amount of $ 660,000 as a liability of the Memphis Hotel Co., had full priority rights to the entire Gayoso properties, including the impounded receipts from the receivership and bankruptcy trustee*133 operations, and further recognized that such bondholders, to the extent of their resulting deficits, took the status of general creditors of the Memphis Hotel Co. It would therefore seem apparent that, at the time of its conveyances to the petitioner and the Gayoso Hotel Co., the Memphis Hotel Co. had no equity and consequently no real substantial property interest in the assets conveyed to the Gayoso Hotel Co., and this because the property so conveyed was of lesser value than the amount of the mortgage thereon evidenced by Gayoso firsts. That it was of lesser value is clearly shown by the fact that the holders of Gayoso firsts were issued, as general creditors, *615 3,960 shares of stock in petitioner to cover their deficits remaining after conveyance of the properties to the Gayoso Hotel Co., in which the holders of Gayoso firsts become sole stockholders. Furthermore, by its transfer of the Gayoso Hotel properties to the Gayoso Hotel Co., the Memphis Hotel Co. was relieved of all liability on the Gayoso firsts bonds, except for the above mentioned deficits. On August 31, 1934, pursuant to the plan, petitioner acquired all the properties of the insolvent Memphis Hotel Co. *134 to which the latter's general creditors and the holders of Peabody firsts and Peabody seconds could look for payment of their claims, and such creditors had become the equitable owners of such properties through the court proceedings initiated in March 1933. While, from the viewpoint of the total properties of the insolvent Memphis Hotel Co. as they existed at the time of the August 31, 1934, transfers, it may be said that 13 per cent thereof was transferred to the Gayoso Hotel Co. and 87 per cent was transferred to the petitioner, we think that such percentages are not determinative of this question. In its decree of August 1, 1934, the court, in approving the plan which recognized the full priority rights of the holders of Gayoso firsts, as above stated, thereby carved out the Gayoso Hotel properties for separate transfer in partial satisfaction of the Memphis Hotel Co.'s liability of $ 660,000 on Gayoso firsts bonds. The fact that the transfers to the Gayoso Hotel Co. and to petitioner occurred on the same date and pursuant to the same plan is immaterial. Under the factual circumstances here present we conclude, and have so found as a fact, that by the transfer of August 31, *135 1934, the petitioner acquired "substantially all the properties" of the Memphis Hotel Co. on that date. See also ; ; ; dismissed, ; and .Were the properties in question acquired by petitioner "solely for all or a part of its voting stock," the subsidiary question presented in (b) above? In the consideration of this question, the liabilities to which the property acquired was subject and the liabilities assumed by petitioner as set out in our findings are to be "disregarded" under section 112 (g) (1) (B) as amended, supra. Included in these assumed liabilities are the outstanding Peabody seconds, in lieu of which petitioner issued new bonds in the same principal amount. , and .*136 Also included in those assumed liabilities are the liabilities to which the property acquired was subject, such as the accrued real estate taxes; the various liabilities of the Memphis Hotel Co. and its bankruptcy trustee and the expenses and costs of the court proceedings not already paid by the trustee on August 31, 1934; and the I. Samelson *616 & Co. preferential right of reclamation claim for certain assets. After thus disregarding the assumed liabilities, the facts clearly establish that no consideration passed from petitioner for the properties acquired other than the issuance of its voting common stock to various classes of creditors of the insolvent Memphis Hotel Co. Briefly stated, petitioner acquired properties having a total book value of $ 4,594,750.80, subject to assumed liabilities totaling $ 2,747,836.45, and immediately after the transfer to it of such properties it issued a total of 15,980 shares of its voting common stock to the transferor's creditors in consideration therefor. Petitioner also issued 7,123 shares of its voting common stock at $ 7 per share for a total $ 49,861 new working capital. We conclude that petitioner acquired the properties in question*137 "solely" for "a part" of its "voting stock" within the meaning of section 112 (b) (4) and (g) (1) (B), supra. ;; and .Was the continuity of interest requisite to a reorganization preserved, the subsidiary question presented in (c) above? This question must also be answered in the affirmative, for, pursuant to the plan and court orders, the Memphis Hotel Co.'s stockholders were eliminated as the equitable owners of the properties of that insolvent company and its creditors, to whom the stock in the Peabody Hotel Co. was issued, became such equitable owners instead, thus satisfying the required continuity of interest. ; .Having concluded that petitioner acquired the properties in question pursuant to a "reorganization" as defined in section 112 (g) (1) (B) as amended, supra, and since it is clearly established that *138 such acquisition was "in pursuance of the plan of reorganization" as to which, each, the petitioner and the Memphis Hotel Co. was a "party," we further hold that the transaction was a nontaxable reorganization under section 112 (b) (4), supra.The next question presented is whether the transfer meets the requirements of section 113 (a) (7), supra, namely, that "immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them." The creditors of the insolvent Memphis Hotel Co. became the equitable owners of that company's assets from the time they invoked legal processes to enforce their full priority rights over the stockholders of that company. Pursuant to the plan of reorganization the bankruptcy trustee, the trustee under the indentures securing the bonds, and the debtor, the Memphis Hotel Co., joined in a transfer of substantially all of the latter's properties to petitioner, and immediately thereafter those former creditors were entitled to receive and were *617 issued, under the plan, 69 per cent of petitioner's voting common stock; that is, 15,980 shares out of the total of 23,103 shares *139 which were to be issued pursuant to the plan, the remaining 31 per cent, or 7,123, being issued for cash at various times prior to the consummation of the plan on March 2, 1935, as evidenced by the court's final decree entered on that date. Accordingly, immediately after the transfer, those creditors had an "interest or control in such property of 50 per centum or more," thus satisfying the required continuity of interest or control. ;; and The fact that petitioner's voting stock was issued to the voting trustees instead of directly to the creditors is immaterial, for the voting trustees held legal title to the stock with the consent and for the holders of the voting trust certificates, who were the equitable owners, respectively, of specific numbers of shares of the stock of petitioner and entitled to receive the dividends thereon. .*140 Accordingly, we hold that petitioner's basis for the property in question is the same as it would be in the hands of its transferor, Memphis Hotel Co., under section 113 (a) (7) of the Revenue Act of 1934. Since the parties have stipulated the amounts of the deductions to which petitioner is entitled for depreciation and for bond discount and expense, they are also necessarily in agreement as to the correct "basis" which the properties would have had in the hands of the Memphis Hotel Co., petitioner's transferor.In view of our conclusion as to the application of section 113 (a) (7), supra, it is unnecessary to consider or decide whether or not the transaction involved came within the provisions of section 112 (b) (5), supra.The respondent erred in his determination.Decision will be entered under Rule 50. Footnotes1. SEC. 112 [1934 ACT] RECOGNITION OF GAIN OR LOSS.(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.(b) Exchanges Solely in Kind. --* * * *(4) Same -- gain of corporation. -- No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.(5) Transfer to corporation controlled by transferor. -- No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.* * * *(g) Definition of Reorganization. [1934 Act as amended by section 213 (g) Revenue Act of 1939.](1) The term "reorganization" means * * * (B) the acquisition by one corporation, in exchange solely for all or part of its voting stock, of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded; * * *SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --* * * *(7) Transfers to corporation where control of property remains in same persons. -- If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * *(8) Property acquired by issuance of stock or as paid-in surplus. -- If the property was acquired after December 31, 1920, by a corporation -- (A) by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), or(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624381/

RICHARD POWERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Powers v. CommissionerDocket No. 20896.United States Board of Tax Appeals14 B.T.A. 701; 1928 BTA LEXIS 2931; December 13, 1928, Promulgated *2931 Respondent affirmed for lack of proof of error. W. L. Schuyler, C.P.A., for the petitioner. T. M. Mather, Esq., for the respondent. VAN FOSSAN *702 OPINION. VAN FOSSAN: Petitioner asks redetermination of a deficiency in income tax for the calendar year 1924 amounting to $1,076.29. The sole issue is the fair market value of a mortgage given on certain property located in Miami, Fla., during the taxable year, which respondent determined to have a fair market value equal to 40 per cent of its face and which petitioner contends had no fair market value at the time received. The evidence shows that this property was sold in 1924 for a price of $53,000 of which $20,000 was paid in cash and the balance covered by a mortgage due one-half on July 21, 1926, and the remainder in 1927. It appears that the property was purchased for speculative purposes and was not offered for sale in 1924 or 1925. It is of record that the property increased in value in 1924 and 1925. Petitioner's testimony is directed almost entirely to proving that in 1926, after the deflation of the Florida boom, it was impossible to sell the mortgage notes or refinance the*2932 mortgage for its face value or anything approximating the same. The record is almost devoid of any evidence bearing on the year 1924 other than that market values at that time were increasing. The testimony fails to prove that during the taxable year the mortgage was not fully worth the value determined. Subsequent developments in 1926 and other years do not demonstrate that at the time the mortgage was received in 1924 its fair market value was less than 40 per cent of its face. Petitioner has failed to sustain the burden of proving respondent's determination to be in error. . Judgment will be entered for the respondent.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624382/

William C. Stolk and Eve Stolk, Petitioners, v. Commissioner of Internal Revenue, RespondentStolk v. CommissionerDocket No. 86839United States Tax Court40 T.C. 345; 1963 U.S. Tax Ct. LEXIS 120; May 17, 1963, Filed *120 Decision will be entered under Rule 50. 1. Sec. 1034(a), 1954 Code -- Nonrecognition of Gain from Sale of Property Denied. -- Held, that the vacating of a residence with the intention of not returning and the holding of the same property for 2 years while looking for new property do not satisfy and are incompatible with the requirement that the property which is sold was used by the taxpayer as his principal residence. Held, further, that the occupancy of the new property only during weekends and holidays does not constitute using that property as the taxpayer's principal residence within a period of 1 year after the sale of the old property. Accordingly, the gain from the sale of the old property must be recognized. Ralph L. Trisko, 29 T.C. 515">29 T.C. 515, distinguished.2. Sec. 162(a) -- Expenses of Corporate Officer -- Reimbursed Expenses. -- Held: (a) Petitioner's expenditures for entertainment and gifts which were not reimbursed by corporation are not deductible because they were personal expenses, not ordinary and necessary business expenses. (b) Taxicab expenses for which corporation would have made reimbursement if claimed, were not*121 petitioner's business expenses but were corporation's business expenses, and are not deductible. Kenneth C. Quencer, for the petitioners.Joseph Wilkes, for the respondent. Harron, Judge. Fay, J., dissenting. Withey, Drennen, and Dawson, JJ., agree with this dissent. HARRON *345 The Commissioner determined an income tax deficiency of $ 9,183.26 for 1955. The *122 issues are (1) whether under section 1034(a), 1954 Code, gain from the sale of property is not to be recognized rather than recognized as long-term capital gain; (2) whether various expenses paid by petitioner, for which he did not claim reimbursement by the corporation of which he is an officer, are his ordinary and necessary business expenses under section 162(a).FINDINGS OF FACTSome facts have been stipulated; they are so found and incorporated herein by reference.The petitioner, William C. Stolk, filed a joint return with his wife with the district director of internal revenue for the district of Upper Manhattan, N.Y.*346 Petitioner is the chief executive officer and chairman of the board of directors of American Can Co. His office was and is in New York City.Petitioner was the general manager of sales in 1941; vice president in 1942; executive vice president in 1949; president in April 1951; chief executive officer in 1952. He will be eligible to retire and plans retiring in August 1965.Petitioner's family consisted of his wife and three daughters in 1953. By the early part of 1953, all of his daughters had married and had their own homes.On July 19, 1955, petitioner*123 and his then wife, Fern G. Stolk, entered into a separation agreement. Petitioner established a statutory residence in Reno, Nev., in order to obtain a divorce which was duly granted under a decree dated September 15, 1955. Thereafter, in 1955, petitioner and his present wife, Eve Stolk, were married.Issue 1. Real Estate TransactionsPetitioner owned residential property, a house and surrounding 5 acres of land, in Chappaqua, Westchester County, N.Y., near Mt. Kisco, a distant suburb of New York City. He bought the property in 1941 when the house was new. The cost of the entire property was $ 32,012. Petitioner added a screened porch which cost $ 250. The total cost basis of the property was $ 32,262. 1 From the time of purchase until the fall of 1950, this home was petitioner's only residence. He did not own any other residence until he purchased a substitute residence and a farm on September 1, 1955.*124 In the fall of 1950, petitioner leased a small apartment at 40 Park Avenue, New York City, so as to live closer to his office. His duties and work as a corporate executive had increased and he found it inconvenient to commute during the week to his suburban home. At that time, only one daughter was still living at home. During the week, petitioner and his family occupied the apartment. They spent weekends and holidays at Chappaqua. The apartment comprised two bedrooms, living-dining room, and kitchen; it was unfurnished; the rent was $ 300 a month. Petitioner carpeted and furnished the apartment. He did not take such furnishings out of the Chappaqua house. Petitioner occupied this apartment until the early part of 1953.In early 1953, a larger penthouse apartment at 40 Park Avenue was available, consisting of living room, dining room, two bedrooms, and kitchen. The monthly rent was $ 600. Petitioner and his wife moved into this apartment in March or April 1953, and lived there until October 1955. At this time, petitioner decided to look for other residential *347 property with a farm where he could carry on farming operations, to which he could retire in 1965.In April*125 or May 1953, while furniture was still in the house, petitioner listed the Chappaqua house for sale, but not for rent, with local real estate brokers. Within 2 days thereafter, he received a very attractive offer of purchase which he did not accept.In May or June 1953, petitioner moved out of the Chappaqua house all of the furnishings with the then definite intention of not living there again or making any further use of the property. He intended to sell the property and use the proceeds in the purchase of other property in the country. He moved all of the furniture to a warehouse in Mount Vernon, N.Y., except personal effects and furniture for one bedroom which were moved to the city apartment. Petitioner kept the house heated to preserve the walls and keep it in generally good condition, and paid taxes. After moving out, neither petitioner nor any member of his family made any use of any part of the property. It remained vacant until it was sold on July 29, 1955. The property was not offered for rent or rented at any time; it was not converted to any trade or business use, or held for the production of income.The furniture in the Chappaqua house was insured for $ 60,000. *126 Exclusive thereof, petitioner paid about $ 2,500 for the furnishings used in his rented apartment in the city.On July 29, 1955, petitioner sold the Chappaqua house and 1 1/2 acres for the net amount, after expenses, of $ 51,940. On September 30, 1955, he sold the remaining 3 1/2 acres for the net amount of $ 6,864. He received the total net amount of $ 58,804. Respondent agrees that the entire property constituted one unit of residential property and does not make any issue of the fact that the property was disposed of in two transactions.In October 1955, petitioner moved from 40 Park Avenue to 521 Park Avenue, New York City. In his return for 1955, he gave 521 Park Avenue as his home address. This apartment consisted of living room, one bedroom and dressing room, and kitchenette.In October 1961, petitioner moved to Manhattan House, 200 East 66th Street, New York City, where he and his wife have resided continuously since then. This apartment consists of a combination living room and dining room, one bedroom, and kitchen.During 2 years, in his spare time, from the spring of 1953 until the summer of 1955, petitioner looked at farm properties in New York, Pennsylvania, West*127 Virginia, Virginia, and other nearby States. He looked at 64 properties and bought the 64th.On September 1, 1955, petitioner purchased 446.25 acres of land with various improvements, called Hampstead Farm, located in Esmont, Va., 20 miles from Charlottesville. It is 427 miles from New York City, one way; 854 miles round trip. He renamed the property *348 Eden Farm. Of the entire property, 5 acres represent the residence area with a house having about eight rooms and two bathrooms, a two-room-and-bath guest cottage, a servant's cottage, garage, and old icehouse. One-half of a pumphouse and horse barn are allocated to the residence. The remaining 441.25 acres include 300 acres of open farmland and 141.25 acres of woodland. The farm area improvements include a tenant dwelling, silo, cow and hay barn, horse barn, pumphouse, tool repair building, machine shed, utility structures, water lines, boundary and cross fences, and interior roads. Prior to petitioner's purchase, the farm was a working farm where beef cattle, hay, and grain were raised.In October 1955, petitioner moved his principal furniture from the warehouse in New York and some furniture from his city apartment*128 to the Eden Farm residence, which was in habitable condition. However, he did some remodeling and improving of the main residence and guest cottage within 1 year after selling the Chappaqua property.Also, petitioner began farming operations in 1955 on 147 acres and purchased Black Angus cattle, horses, and farm equipment. He hired a tenant farmer and three field hands. He has continued his farming operations and now has about 250 head of cattle. Petitioner regards the farm operation as a business and reported it as such in his 1955 return.During the last 4 months of 1955, and thereafter, petitioner and his wife went from New York City to Eden farm during weekends and holidays. During these visits they occupied and lived in the main dwelling house. Petitioner's wife has not lived continuously at Eden Farm; she lives in the New York apartment during the week and makes the round trip to the farm with petitioner during weekends. During the last 4 months of 1955, petitioner and his wife spent about 13 weekends at Eden Farm. They usually left New York on Friday and returned on Sunday. On about three occasions they left New York on Wednesday or Thursday and returned on Monday *129 or Tuesday. In 1956, petitioner and his wife spent weekends and holidays at Eden Farm. Petitioner joined Farmington Country Club in Charlottesville.For 1955 and 1956, petitioner filed resident New York State income tax returns and nonresident Virginia State income tax returns. He maintains two checking accounts and a safe-deposit box in New York, and one checking account in Virginia.Petitioner voted in New York in 1960, as a resident of New York. He did not vote in any election anywhere in 1955; he did not vote in 1956 in the national election.Within 1 year after the purchase of Eden Farm, petitioner spent $ 12,493.90 in the course of remodeling the house and guest cottage. *349 Of this sum, $ 11,186.59 was spent for improvements of a capital nature which properly is to be added to cost basis.Petitioner purchased the entire Eden Farm property for $ 116,009.14. The parties have stipulated that of this amount, $ 46,009.14 is the portion allocable to the purchase of the residence and related 5 acres. The total cost of the new residence, including the cost of capital improvements, was $ 57,195.73. Since petitioner received from the sale of the Chappaqua property the net*130 amount of $ 58,804, and the total cost of the Eden Farm residence was $ 57,195.73, there was not reinvested in the new residence $ 1,608.27 of the proceeds from the sale of the old residence.The following are stipulated: (1) The allocable parts of the expense of acquiring Eden Farm are $ 259.14 for the residence, and $ 750 for the farm; total, $ 1,009.14. (2) The unadjusted cost basis of the various farm structures, water lines, fences, and roads is $ 41,000, which is to be depreciated over a useful life of 25 years; for 1955, depreciation on that basis is allowable for one-third of a year, or 4 months. (3) Repairs made by petitioner to the tenant farmer's cottage costing $ 2,744.18 are to be capitalized and depreciated over a useful life of 10 years; for 1955 the allowable depreciation on that basis is one-fourth of a year, or 3 months.When petitioner moved out of the Chappaqua house in the spring of 1953 with the intention of not returning and of not using the property again as a residence or for any other purpose, he then abandoned the property as his residence and it was not thereafter used as his principal residence. The Chappaqua house was not his principal residence at*131 the time it was sold in July 1955, or during the period following the date when he moved out in 1953.Petitioner's occupancy and use of the Eden Farm residence during weekends and holidays did not constitute using that residence as his principal residence within a period of 1 year after the sale of the Chappaqua property.Beginning in May or June 1953, petitioner's principal residence was the apartment which he occupied in New York City, and a New York apartment has continued to be used as his principal residence continuously thereafter up to the present time.Issue 2. ExpensesAmerican Can Co., at all times material, has followed the practice of receiving expense account statements and claims for reimbursement from its officers and other employees for allowable expenses incurred and paid by them in connection with the conduct of its business, and upon audit, it reimburses them for allowable business expenditures. During 1955, petitioner submitted to the company such regular expense account statements, the nature and amounts of which are *350 disclosed, under which he received reimbursement of business expenses.During 1955, petitioner voluntarily incurred and paid additional*132 expenses which it is claimed aggregated $ 1,789.33; $ 1,690.78 for entertainment and gifts, and $ 98.55 for taxicabs. It is claimed, also, that none of this expense was included in any expense account submitted to the company by petitioner and that no part was reimbursed. Some of the entertainment expenditures were for dinner parties and similar entertainment in Caracas, Nassau, and Puerto Rico while petitioner was otherwise on corporation business trips away from the United States and, also, in Los Angeles, San Francisco, Reno, and New York City. Nevertheless, they were not included in any of petitioner's expense account statements which were presented to the corporation, for which petitioner received reimbursement. The taxicab expenses were incurred in New York City in connection with the corporation's business, were its business expense, and would have been reimbursed if petitioner had submitted expense accounts for them or included them in expense accounts, which he failed to do.The corporation did not expect or require petitioner to incur and pay from his own funds any of the expenses in question or, in general, any expenses other than those for which it would ordinarily*133 reimburse him under regular expense account claims. None of the claimed expenses in the amount of $ 1,789.33 was ordinary and necessary business expense of petitioner in earning his salary and carrying on his executive duties; all were personal expenses.OPINIONIssue 1. Real Estate TransactionsThe issue is whether the gain from the sale of the Chappaqua property is not to be recognized in the year of the sale under section 1034(a), 1954 Code. 2 The dispute involves two aspects of the statute: First, whether the Chappaqua property was used by petitioner as his principal residence and, second, whether within 1 year after the date of the sale of the Chappaqua property, part of Eden Farm was used by petitioner as his principal residence.*134 With respect to each property, petitioner's use thereof is determinative. His use must be equated with the statutory requirement of "principal residence."*351 Respondent's primary contention is that petitioner abandoned the Chappaqua property as a residence at least 2 years before its sale, thereby disqualifying that property as one "used by the taxpayer as his principal residence," and that when he abandoned the property, an apartment in New York City became and continued to be petitioner's principal residence.The question whether or not a taxpayer has abandoned property as a residence prior to its sale is one of first impression under section 1034(a).The words of a statute are to be given their ordinary meaning. Old Colony R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552; Helvering v. San Joaquin Co., 297 U.S. 496">297 U.S. 496; Helvering v. Flaccus Leather Co., 313 U.S. 247">313 U.S. 247. The construction of a statute should be in harmony with the statute "as an organic whole." Lewyt Corp. v. Commissioner, 349 U.S. 237">349 U.S. 237. The context in which a word occurs and the*135 purpose of the statute in which it is employed indicate its meaning.The ordinary meaning of "use," principal," and "residence" is clear and well understood, but if dictionary definitions are helpful in recalling the common meanings (see Webster's Unabridged Third New International Dictionary), use (the verb) means a "putting to service of a thing"; principal means "chief or main"; and residence means "the place where one actually lives or has his home." The context in which "used" occurs, referring to the "old residence," connects "used" with the taxpayer's "principal residence," thereby making it clear that the property which is sold shall be utilized as the principal residence.Petitioner did not use the Chappaqua property for 2 years prior to its sale. The place where he actually lived and had his home was an apartment in New York City during the period in which the Chappaqua house was vacant, and from about May 1953 until July 29, 1955, at least, the apartment was his principal residence. Moreover, petitioner admits that he intended, when he moved everything out of the Chappaqua house into storage, never to return there to live and not to make any further use of that property. *136 Furthermore, shortly before moving all of his possessions out of the Chappaqua house, petitioner moved into a more attractive apartment at 40 Park Avenue for which the rent was $ 600 a month, twice the amount of the rent of the first apartment leased in the same building. Taken together, petitioner's actions at about the same time of moving into another apartment and moving out of the Chappaqua house with the intention of not returning to live there again constituted an abandonment of the Chappaqua house as petitioner's principal residence.Petitioner contends that for the purpose of section 1034(a), the Chappaqua house was his principal residence because it had been *352 so used beginning in 1941, and because he alleges that he regarded the city apartment as a temporary residence pending his acquisition of property to replace the Chappaqua property. His explanations for leaving the Chappaqua house vacant are that he found it more convenient to live in the city apartment while he looked for replacement property which would be suitable for both a residence and a farm, and that although he diligently searched for the new property, it required his leisure time during 2 years *137 to locate new property which satisfied his requirements, which he finally purchased. He also asserts that the Chappaqua property was continuously offered for sale during the 2 years when it was vacant.With respect to the latter assertion, the record is silent. Petitioner did not present evidence relating to what efforts were diligently made during 2 years to sell the property, if any were in fact made, other than that he received and rejected one good offer of purchase 2 days after the property was put on the market for sale in April or May 1953. Lacking some explanation of why the Chappaqua property was held as vacant property for 2 years, and taking into account the closeness in the timing of the sale of the old property, on July 29, 1955, and the purchase of the new property, on September 1, 1955, there is a strong implication under all of the circumstances that petitioner did not strenuously try to sell the Chappaqua property until he had located the Virginia property and had obtained a commitment of the seller to sell it to him. His arrangements may have been made with the provisions of section 1034(a) in mind, so as to be sure that the purchase of the Virginia property would*138 be completed within a period of 1 year after the date of the sale of the New York property. But however it may have been, petitioner's explanations about putting the New York property on the market for sale in 1953, and deciding to look for a piece of farming and residential property before he did so, and about the length of time spent in finding the new property do not serve to establish that the Chappaqua property was not abandoned as and remained his principal residence within the meaning of section 1034(a). The facts that petitioner wanted to sell the property and seriously searched for 2 years before he found suitable property in Virginia merely explain why the Chappaqua property was vacant for 2 years, but these explanations do not negate the fact that the Chappaqua property was not used and was abandoned as a residence 2 years before it was sold. The provisions of section 1034(a) do not provide and the legislative history thereof does not indicate that the stated relief will be allowable if there is a reasonable cause for not using the old property as a principal residence.Since the words of a statute are to be given their ordinary meaning, it is pertinent to consider the*139 relevant legal meaning of the term residence -- how it is acquired and how it is lost.*353 In Dwyer v. Matson, 163 F. 2d 299, 302 (C.A. 10), citing Shaeffer v. Gilbert, 73 Md. 66">73 Md. 66, 20 Atl. 434, 435, a well-accepted definition of residence as distinguished from domicile is as follows:It [residence] does not mean * * * one's permanent place of abode, where he intends to live all his days, or for an indefinite or unlimited time; nor does it mean one's residence for a temporary purpose, with the intention of returning to his former residence when that purpose has been accomplished, but means, * * * one's actual home, * * * whether he intends to reside there permanently, or for a definite or indefinite length of time.The elements of residence are the fact of abode and the intention of remaining, and the concept of residence is made up of a combination of acts and intention. Neither bodily presence alone nor intention alone will suffice to create a residence. 77 C.J.S. Residence, p. 295; Petition of McLauchlan, 1 F. 2d 5, 7 (C.A. 1). In the case of In Re Garneau, 127 F. 677">127 F. 677, 679,*140 the court said:Residence has been defined to be a place where a person's habitation is fixed, without any present intention of removing therefrom. It is lost by leaving the place where one has acquired a permanent home and removing to another place animo non revertendi, * * *Applying the above tests to the facts here, it follows that petitioner's moving out of the Chappaqua house with the intention at the time of moving of not again living there constituted abandonment of that property as a residence.Section 1034(a) provides that the old property must be used as the taxpayer's principal residence. In the absence of such use the statute does not apply and the nonrecognition-of-gain relief must be denied. Biltmore Homes, Inc. v. Commissioner, 288 F.2d 336">288 F. 2d 336, 342, affirming a Memorandum Opinion of this Court. Having moved into a leased apartment with the intention of living and making his home there for an indefinite length of time, the Chappaqua residence ceased to be petitioner's residence when he moved out.Relying upon Ralph L. Trisko, 29 T.C. 515">29 T.C. 515, petitioner contends that the relief afforded by section 1034(a)*141 may not be denied merely because the taxpayer is not living in the old residence at the time of its sale. The Trisko case is distinguishable. Also, this Court (p. 520) strictly limited the decision there to the facts of that case.In the Trisko case (p. 519), the Commissioner determined that the taxpayer held and used his residence as income-producing real estate; therefore, he was not entitled to the relief allowed by section 112(n) of the 1939 Code, the predecessor of section 1034(a). It is evident that the chief basis for the Commissioner's determination was the distinction made in the committee reports which accompanied the bill which became the Revenue Act of 1951 (section 318(a) of which added section 112(n), which states that "The term 'residence' is used in contradistinction to property used in a trade or business and property *354 held for the production of income"). The relevant part of the committee reports (which are reprinted in 2 C.B. 309">1951-2 C.B. 309, 436, and 483) is set forth below. 3 This Court concluded from the evidence that Trisko was not holding and using his residence for the production of income but had leased it during*142 a temporary absence while he was employed abroad in order to provide for its care and maintenance, and that under all of the facts and circumstances the property in question, which was sold, was used by Trisko as a residence in contradistinction to property held for the production of income. In so concluding, the Court indicated that the facts and circumstances in the Trisko case were for practical purposes within the provision in the Commissioner's regulations which states that "The mere fact that property is, or has been, rented is not determinative that such property is not used by the taxpayer as his principal residence." See sec. 1.1034-1(c)(3), Income Tax Regs.; and Rev. Rul. 59-72, 1 C.B. 203">1959-1 C.B. 203. The Court found, also (p. 516), that Trisko "intended at all times while away from his residence to return to it as soon as his employment made it possible," and that the residence was not on the market for sale.*143 The Trisko case involved the circumstance that the taxpayer was not occupying his old residence at the time of its sale, but neither the reasoning nor the holding there made stands for the broad construction which petitioner seeks, that a taxpayer is not required to physically occupy his old residence at the time of its sale. The seemingly broad statement in John F. Bayley, 35 T.C. 288">35 T.C. 288, 296, to that effect cannot properly be so understood in the light of the findings and reasoning of the Trisko case, and obviously such broad statement was made in the course of and for the purpose of pointing out the statutory requirement that "a new residence must be lived in or physically occupied, on or prior to the postsale deadline date" (p. 297). In the Bayley case (p. 296) it was said that in the Trisko case "this Court held that the taxpayer was not required to physically occupy his old residence at the time of the sale thereof." But, the Court specifically limited its statement to what the holding was in that case. The Trisko case did not present the precise question which is at issue here and it is distinguishable on its facts.*355 *144 In the committee reports relating to section 318(a) of the 1951 Act (sec. 112(n), 1939 Code), supra (which contain the main indication of the congressional intent), it is noted that the statute carries over the similar treatment which "is available under existing law under the involuntary-conversion provisions of section 112(f)," such as when a home is destroyed by fire or lost by the exercise of the powers of condemnation and the proceeds recovered by the taxpayer are invested in a replacement residence. See report of the Joint Committee Staff, 2 C.B. 309">1951-2 C.B. 309. In this and the other committee reports it is stated that "the mere fact that the taxpayer temporarily rents out either the old or the new residence may not, in the light of all of the facts and circumstances in the case, prevent the gain [from the sale of the old residence] from being not recognized." Report of the Ways and Means Committee, 2 C.B. 436">1951-2 C.B. 436. It is in connection with this circumstance of a temporary renting out of the old residence that there appears the further explanation that "The taxpayer is not required to have actually been occupying his old residence*145 on the date of its sale." Report of the Joint Committee Staff, 2 C.B. 309">1951-2 C.B. 309. The foregoing statement clearly was limited to the possible situation where the taxpayer temporarily rented out his old residence before its sale, having acquired and moved into his new residence within the statutory period of 1 year before the date of the sale of the old residence; or was limited to a similar situation. The facts and circumstances in the instant case, where the taxpayer moved out of his old residence 2 years before its sale and before the purchase of the new property, are substantially different from the examples given in the committee reports and do not come within the congressional intent indicated by those reports.The phrase "used by the taxpayer as his principal residence" means habitual use of the old residence as the principal residence. The antithesis is nonuse of property as the principal residence.It is held that the Chappaqua property was not used as petitioner's principal residence and that his city apartment was used as his principal residence at the time of the sale of the Chappaqua property and during a period of 2 years prior to the sale; *146 the Chappaqua property does not qualify under section 1034(a) and the gain from its sale must be recognized in the year of the sale.This holding is dispositive of the issue because in order to obtain the relief afforded by the statute, all of the prescribed conditions must be satisfied. Although it is unnecessary to decide the remaining questions, in this instance we do so.The statute requires that the new residence must be used as the taxpayer's principal residence within 1 year from the date of the sale of the old one. The question is which was used as petitioner's principal residence during the postsale period, the Eden Farm residence or the *356 New York apartment? In order to meet the prescribed requirement, the taxpayer must prove that the new property was his principal residence. It is not enough to establish that he occupied and used the new property as a residence. It is true that petitioner moved his chief household furnishings into the main dwelling house at Eden Farm within 3 months after it was purchased; that the main dwelling there was in condition to be lived in; and that petitioner and his wife lived there during weekends and holidays in 1955 and 1956, *147 within the 1-year postsale period. But such use and occupancy was not sufficient to constitute Eden Farm as petitioner's principal residence during the 1-year period involved. Petitioner and his wife made a round trip of 854 miles in order to make short visits to Eden Farm from New York City where petitioner's chief occupation required his presence during most of each week. The apartment in New York was where he lived and made his home in the ordinary and customary meaning of the term "principal residence." It was the home to which he returned from business and vacation trips, which was his address for voting purposes, and where he has intended to live for a period of several years until he is eligible to retire from his chief occupation in August 1965, which will be about 10 years after the time of the purchase of Eden Farm. That petitioner's chief household furnishings were moved to Eden Farm in 1955 and that he regularly spent weekends and holidays there do not establish that it was his principal residence within the statutory period. It is held that the city apartment was petitioner's principal residence in 1955 and 1956 during a period of 1 year, at least, after the sale*148 of the Chappaqua property.Evidence was introduced relating to the cost of the Chappaqua property, and petitioner's expenditures in purchasing and making improvements at Eden Farm. We find and conclude that the cost of the old property was $ 32,262; and that $ 11,186.59 was spent for improvements of a capital nature at Eden Farm out of the proceeds from the sale of the old property, which are properly added to basis.Issue 2. ExpensesPetitioner would have received reimbursement for taxicab charges of $ 98.55, incurred in New York City in connection with the company's business, if he had claimed it. It was not necessary for him to remain unreimbursed. These charges were business expenses of the company and petitioner cannot convert its business expenses into his own by failing to claim repayment, even though paid by him. Deduction is not allowable. Hal E. Roach, 20 B.T.A. 919">20 B.T.A. 919, 925; Horace E. Podems, 24 T.C. 21">24 T.C. 21, 23; Heidt v. Commissioner, 25">274 F. 2d 25 (C.A. 7), affirming a Memorandum Opinion of this Court; Burnet v. Clark, 287 U.S. 410">287 U.S. 410; Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 493-494.*149 *357 Petitioner was required to prove the nature and amount of each item of entertainment and gift expense totaling $ 1,690.78, and that each item was proximately related to his business of earning his income and was ordinary and necessary expense, was not personal, and was not reimbursed. He failed in his burden of proof. He did not produce original, detailed records made at the time of each expenditure. The diary in which he claims he made such record was not produced although it is existent. His testimony was vague, general, and replete with self-serving conclusions. It is not adequate to discharge his burden of proof. Neither was his general tabulation of overall totals for various classes of alleged expense. The record confirms petitioner's belief that none properly could be charged to the corporation as its ordinary and necessary business expense. "It is not enough that there may be some remote or incidental connection" with the conduct of a business. Ralph E. Larrabee, 33 T.C. 838">33 T.C. 838, 843; Richard A. Sutter, 21 T.C. 170">21 T.C. 170; Henry Cartan, 30 T.C. 308">30 T.C. 308; Eugene H. Walet, Jr., 31 T.C. 461">31 T.C. 461,*150 affd. 272 F. 2d 694 (C.A. 5); Reginald G. Hearn, 36 T.C. 672">36 T.C. 672, affd. 309 F. 2d 431 (C.A. 9).All of the expenses were of a social nature. Almost all those entertained and given gifts did not have any present or potential business relations with the corporation; no business of the company was discussed or promoted. Petitioner's claim for a deduction is based chiefly on his contention that he made the expenditures only because he was one of the chief company officers and believed they created goodwill. This case closely resembles Noland v. Commissioner, 269 F. 2d 108 (C.A. 8), affirming a Memorandum Opinion of this Court, certiorari denied 361 U.S. 885">361 U.S. 885. The reasoning there applies equally well here. Petitioner failed to prove that as part of his duties the corporation expected or required him to assume and pay from his own funds any of the disputed expenses, without repayment. The corporation followed a policy of reimbursing its officers for direct expenses in furthering its business. Since it did not reimburse petitioner, the expenses*151 were prima facie personal expenses either because they were voluntarily assumed or did not arise directly out of the exigencies of the corporation's business. Noland v. Commissioner, supra.Petitioner failed to overcome this prima facie nature of the expenses as well as the prima facie correctness of respondent's determination. Expenses of social obligations of a person holding a responsible executive position ordinarily are not his ordinary and necessary business expenses and petitioner has not proved the contrary. The deduction is not allowable. Welch v. Helvering, 290 U.S. 111">290 U.S. 111; Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465; Andrew Jergens, 17 T.C. 806">17 T.C. 806, 811; Jacob M. Kaplan, 21 T.C. 134">21 T.C. 134, 145.Recomputation of the deficiency is necessary chiefly because certain agreed adjustments are to be made which relate to other items.Decision will be entered under Rule 50. FAY*358 Fay, J., dissenting: I respectfully disagree with the majority opinion which holds that the petitioner is not entitled to avail himself of*152 the provisions of section 1034(a) of the Internal Revenue Code of 1954. My dissent is predicated on the belief that the majority has not only misinterpreted the language of section 1034(a) but has erred with regard to its ultimate findings of fact.The majority opinion is based on the erroneous premise that section 1034(a) is applicable only when the property sold is the principal residence of the taxpayer at the time of the sale. This premise, however, is not supported by the language of the statute, nor can it be explained by resorting to the legislative history of section 1034. The statute itself merely states, in effect, that --If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property * * * is purchased and used by the taxpayer as his principal residence, gain (if any) * * * 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.Section 1034 was intended by Congress to *153 be a relief measure, and as such I believe it is the obligation of the courts, in the absence of a congressional expression to the contrary, to construe such legislation with a view toward liberality. Since the statute itself imposes no restrictions on the word "used," I believe this Court, under the circumstances of this case, should likewise decline to do so.In the instant case, there is no dispute that the Chappaqua property was used at least until 1950 as petitioner's principal residence. Such being the case, there appears to be no reason why petitioner should be denied the benefits of section 1034.However, even if the majority is correct in its construction of the word "used" in the statute, I am of the opinion that the Chappaqua property was petitioner's principal residence at the time of the sale. The issue here centers on whether petitioner actually abandoned Chappaqua as his principal residence in 1953. The majority's finding that petitioner did abandon Chappaqua as his principal residence in 1953 stems by and large from the fact that petitioner at that time removed his furniture having an insured value of $ 60,000 from Chappaqua. The fact that petitioner removed his*154 furniture does not, under the circumstances of this case, constitute an act of abandonment of a residence. Since the furniture was extremely valuable and petitioner was now living full time in a rented apartment in New York City, it would not be unreasonable for petitioner to seek to protect the furnishings of his house against the risks of fire, theft, etc., which are more likely to occur when premises are unoccupied for periods of time. Furthermore, considering that petitioner refused to sell his Chappaqua property until he could find and purchase a suitable farm *359 and that he refused to integrate his Chappaqua furniture, except for one-bedroom suite, into the New York City apartment, it would seem that petitioner's contention that the New York apartment he rented was only a temporary residence and that Chappaqua was his principal residence is supported by the record. The fact that petitioner was not actually living in Chappaqua at the time of its sale does not bar the use of section 1034. See Ralph L. Trisko, 29 T.C. 515">29 T.C. 515, 519 (1957).The majority also concluded that the "new residence" was not used by petitioner as his principal residence. *155 Considering the petitioner's reasons for renting and maintaining the New York apartment, the nature of the apartment in view of petitioner's income and position, the circumstances surrounding the acquisition of the farm, the reasons for its acquisition, the furnishing of it with the Chappaqua furniture and the fact that petitioner and his wife traveled to the farm every weekend and holiday, it would appear that the finding of the majority is contrary to the facts revealed by the record. Footnotes1. The respondent determined that the cost basis was $ 32,012. Petitioner established that there was an additional capital cost of $ 250.↩2. SEC. 1034. SALE OR EXCHANGE OF RESIDENCE.(a) Nonrecognition of Gain. -- If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year 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 (as defined in subsection (b)) of the old residence exceeds the taxpayer's cost of purchasing the new residence.↩3. Whether or not property is used by the taxpayer as his residence, and whether or not property is used by the taxpayer as his principal residence (in the case of a taxpayer using more than one place of residence), depends upon all of the facts and circumstances in each individual case, including the bona fides of the taxpayer. The term "residence" is used in contradistinction to property used in trade or business and property held for the production of income. Nevertheless, the mere fact that the taxpayer temporarily rents out either the old or the new residence may not, in the light of all of the facts and circumstances in the case, prevent the gain from being not recognized. For example, if the taxpayer purchases his new residence before he sells his old residence, the fact that he rents out the new residence during the period before he vacates the old residence will not prevent the application of this subsection. [H. Rept. No. 586, 82d Cong., 1st Sess. p. 109, (1951); S. Rept. No. 781 (Supp.), 82d Cong., 1st Sess. p. 32, (1951).]↩

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SAMUEL R. ELLISON AND PATRICIA K. ELLISON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEllison v. CommissionerDocket No. 24315-91United States Tax CourtT.C. Memo 1994-437; 1994 Tax Ct. Memo LEXIS 439; 68 T.C.M. (CCH) 630; August 25, 1994, Filed *439 Decision will be entered under Rule 155. For petitioners: William J. Hagan. For respondent: Douglas A. Fendrick. PARRPARRMEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined deficiencies in petitioners' Federal income tax for 1988 of $ 10,407, and additions to petitioners' Federal income tax for 1988 of $ 520.35 under section 6653(a)(1)(A), 1 and $ 1,967.25 under section 6661. After concessions, the issues for decision are: (1) Whether petitioners are entitled to deduct job expenses and tax preparation fees claimed on Schedule A for 1988. We hold that they are not so entitled. (2) Whether petitioners are entitled to deduct expenses claimed on Schedule C for 1988. We hold that they are so entitled to the extent stated herein. (3) Whether petitioners are liable for an addition to tax*440 due to negligence pursuant to section 6653(a)(1)(A). We hold that they are. (4) Whether petitioners are liable for an addition to tax due to substantial understatement of income tax pursuant to section 6661. We hold that they are. FINDINGS OF FACT The parties submitted this case partially stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petition herein was filed, petitioners resided in Dresher, Pennsylvania. Petitioners are married and filed a joint Federal income tax return for 1988. Patricia K. Ellison (hereinafter petitioner wife) worked as a sales representative for International Business Machines (hereinafter IBM) during the taxable year at issue. Petitioner wife traveled extensively throughout Pennsylvania, Delaware, and New Jersey. Petitioner wife used her own automobile for these travels. Petitioners deducted expenses related to this vehicle for gasoline, oil, repairs, insurance, depreciation, and car rental. Petitioners also deducted expenses for lodging, meals, and entertainment incurred by petitioner wife while calling on clients, and travel expenses incurred by petitioner wife relating to*441 IBM sales meetings in Chicago and Atlanta. All of these expenses were deducted as unreimbursed employee expenses on Schedule A of petitioners' 1988 Federal income tax return. None of these expenses were substantiated by receipts or other documentation. Samuel R. Ellison (hereinafter petitioner husband) worked as an architecture consultant for Johnson Jones, Inc., during January and February of 1988. For the remainder of 1988, petitioner husband worked as a professional servicing consultant; he operated his consulting business as a sole proprietorship, and filed a Schedule C related to this operation with petitioners' 1988 Federal income tax return. On Schedule C, petitioners deducted expenses related to travel, meals and entertainment, rent, supplies, utilities and telephone, and vehicles. None of these expenses were substantiated by receipts or other documentation. Petitioners deducted $ 500 paid for preparation of their tax returns on Schedule A for 1988. This amount was not substantiated. On July 25, 1991, respondent issued a statutory notice of deficiency to petitioners. In the notice, respondent determined deficiencies in and additions to petitioners' 1988 Federal income*442 tax regarding unreported income, the disallowance of deductions, negligence, and substantial understatement of income tax. OPINION Issue 1. Schedule A DeductionsRespondent contends that all amounts deducted on Schedule A as unreimbursed employee expenses and tax preparation fees are nondeductible, because petitioners failed to substantiate these expenditures. Petitioners argue that their testimony at trial adequately substantiated these expenditures, and thus they are entitled to the claimed deductions. Deductions are a matter of legislative grace; a taxpayer seeking a deduction has the burden of proving his or her entitlement to such deduction. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934). Testimony that a tax return was correct as filed is insufficient to satisfy a taxpayer's burden of proof. Wilkinson v. Commissioner, 71 T.C. 633">71 T.C. 633, 639 (1979); Simmons v. Commissioner, T.C. Memo 1994-222">T.C. Memo. 1994-222. Taxpayers are required to maintain records that are sufficient to substantiate claimed deductions. Sec. 6001. Under certain circumstances, where a taxpayer*443 establishes his or her entitlement to a deduction, but does not establish the amount of that deduction, we are permitted to estimate the amount allowable. Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). However, there must be sufficient evidence in the record to permit us to conclude that deductible expenses were incurred in at least the amount allowed. Otherwise, "relief to the taxpayer would be unguided largesse." Williams v. United States, 245 F.2d 559">245 F.2d 559, 560 (5th Cir. 1957); see Luman v. Commissioner, 79 T.C. 846">79 T.C. 846, 859 (1982). In the case of transportation, travel, and entertainment expenses, section 274(d) overrides the so-called Cohan rule. See Sanford v. Commissioner, 50 T.C. 823">50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201">412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Under section 274, no deduction otherwise allowable is permitted for expenses incurred for transportation, travel, or entertainment on the basis of any approximation or unsupported*444 testimony of the taxpayer. Pursuant to the stringent substantiation requirements of section 274(d), no deduction for transportation, travel, or entertainment is allowed in the absence of adequate records or sufficient evidence corroborating the taxpayer's own statement. The heightened substantiation requirements of section 274(d) also apply with respect to any listed property, as defined in section 280F(d)(4). Section 280F(d)(4)(A)(i) includes as listed property any passenger automobile. Petitioners' Schedule A deduction of unreimbursed employee expenses comprises items that fall within the stringent substantiation requirements of section 274(d) and the accompanying regulations. Accordingly, petitioner wife's oral testimony, in the absence of corroborating documents, is insufficient to overcome respondent's determination that the deductions are improper. Thus, on the instant record, we hold that petitioners are not entitled to any deduction for unreimbursed employee expenses for 1988. Petitioners did not proffer any evidence or testimony regarding the claimed deduction of $ 500 for tax preparation costs. Hence, we sustain respondent's determination as to this item. Issue*445 2. Schedule C DeductionsThe dispute regarding Schedule C expenses again centers on substantiation. Respondent argues that petitioners have not adequately corroborated their expenses, while petitioners urge us to accept their oral testimony as substantiation. With respect to the Schedule C expenses for transportation, travel, and entertainment, we again look to the strict requirements of section 274(d). Because petitioners have presented only uncorroborated oral statements regarding these expenses, we hold that these expenses are not adequately substantiated, and, therefore, are nondeductible. With respect to the remainder of petitioners' Schedule C deductions, petitioners failed to present any details that would justify the amounts claimed. Petitioner husband's testimony at trial concerned estimates of his costs. Upon due consideration, and using our best judgment on the entire record, we conclude that petitioners are entitled to deduct the following amounts as Schedule C expenses relating to petitioner husband's consulting activities: ItemAmountRent on business property$ 1,600Supplies400Utilities and telephone500See generally Cohan v. Commissioner, supra.*446 Issue 3. NegligenceRespondent determined that petitioners are liable for an addition pursuant to section 6653(a)(1)(A) for negligence in failing to substantiate their deductions. Section 6653(a)(1)(A) provides that if any part of any understatement of tax required to be shown in a return is due to negligence or disregard of rules or regulations, an amount equal to 5 percent of the entire underpayment is to be added to the tax. Negligence, for the purpose of section 6653, is defined as "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), affg. in part and remanding in part 43 T.C. 168">43 T.C. 168 (1964)). The Commissioner's determination of negligence is presumed correct, and the taxpayer has the burden of proving that it is erroneous. Rule 142(a); Luman v. Commissioner, supra at 860-861. Petitioners in the instant case have not met this burden. Petitioners proffered no evidence*447 to indicate that their failure to substantiate the deductions claimed was not negligent. Moreover, we conclude that claiming these deductions without proper substantiation was conduct that failed to comport with the actions of a reasonable and ordinarily prudent person under similar circumstances. Thus, we hold that petitioners are liable for an addition to tax for negligence pursuant to section 6653(a)(1)(A). Issue 4. Substantial Understatement of TaxRespondent determined that petitioners are liable for additions to tax due to a substantial understatement of their tax liability pursuant to section 6661(a). Section 6661(a) imposes an addition to tax equal to 25 percent of any underpayment attributable to a substantial understatement of income tax. Generally, an understatement exists when the amount of tax shown on a taxpayer's return is less than the amount required to be shown on that return. Sec. 6661(b)(2)(A). For individuals, an understatement is substantial if it exceeds the greater of $ 5,000 or 10 percent of the amount required to be shown on the taxpayer's return. Sec. 6661(b)(1)(A). The amount of the understatement is reduced by items with respect to which*448 the taxpayer had substantial authority for his or her position, or for which relevant facts affecting tax treatment were adequately disclosed. Sec. 6661(b)(2)(B). Petitioners proffered no evidence showing that they had substantial authority for their position, and they did not adequately disclose their tax treatment of their unsubstantiated deductions. Accordingly, if, after the Rule 155 computation, there is a substantial understatement of petitioners' income tax within the meaning of section 6661(b)(1)(A), respondent's determination under section 6661(a) will be sustained. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩

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General Aggregates Corporation v. Commissioner.General Aggregates Corp. v. CommissionerDocket No. 80322.United States Tax CourtT.C. Memo 1962-27; 1962 Tax Ct. Memo LEXIS 282; 21 T.C.M. (CCH) 121; T.C.M. (RIA) 62027; February 9, 1962*282 Held, on the facts advancements by a corporation to petitioner, which was the principal stockholder of said corporation, were dividends rather than loans, consequently petitioner was liable for personal holding company surtax under section 500, I.R.C. of 1939. Bertram H. Loewenberg, Esq., 75 Federal St., Boston, Mass., for the petitioner. Raymond T. Mahon, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined deficiencies in petitioner's income tax and personal holding company surtax for the years 1951 and 1952 as follows: Income TaxTaxable YearDeficiency1951$ 3,814.7919521,620.14Personal Holding Company Surtax1951$71,747.43195229,025.42*283 The issue is whether petitioner received personal holding company income in the form of dividends in the years 1951 and 1952 in the amounts of $89,314.15 and $36,962.69, respectively. Findings of Fact Some of the facts have been stipulated and they are found accordingly. The petitioner, General Aggregates Corporation, is a Massachusetts corporation organized in 1944. It had 14,941 shares of Class A stock (entitled to 5 percent cumlative dividend) with a par value of $1 a share and 54,538 shares of Class B stock with a par value of $1 per share. Each share of Class A and Class B stock was entitled to one vote. George S. Wilbur owned 5,395 shares of Class A stock and 150 persons unrelated to Wilbur owned the balance of Class A stock, or 9,546 shares. Wilbur owned 14,293 shares of Class B stock, and his wife, son and daughter, owned a total of 40,000 shares of Class B stock. During the years in question more than 50 percent in value of the petitioner's outstanding stock was owned by four individuals, namely, George S. Wilbur, Martha Wilbur, his wife, George, Jr., and Helen Wilbur, children of George and Martha. Petitioner's income tax returns for the years 1951 and 1952 were*284 filed with the district director of internal revenue for the district of Massachusetts. Highland Sand & Gravel Company, Inc. (hereinafter sometimes called Highland) is a Massachusetts corporation organized in 1930. It was actively engaged in the sand and gravel business. It had 589 shares of no par value Class A stock (entitled to $8 per share cumulative dividend) and 10,000 shares of no par value Class B stock. Class A and Class B stockholders were both entitled to one vote per share. The Class A stock was owned: 138 shares by George S. Wilbur; 96 shares by Wilbur's wife; 115 shares by Wilbur's son; and 100 shares by Wilbur's daughter - making a total of 449 shares owned by the Wilbur family. The balance of Class A, or 140 shares, was owned by persons unrelated to the Wilburs. All 10,000 shares of Class B stock were owned by petitioner. Highland was at all times actively engaged in the sand and gravel business. At all times here in issue George S. Wilbur was, until his death on November 21, 1952, the president and principal executive officer of petitioner and Highland. Sometime in 1950, George S. Wilbur conceived the idea of establishing a high class dining and social center*285 in Beverly, Massachusetts. On or about September 26, 1950, George S. Wilbur leased from the owners for a period of 10 years certain real estate located in Beverly, Massachusetts. The lease covered part of a building known as Lodge Pole Ranch and approximately 7 acres of land. The lease recited that the premises were to be used by Wilbur "for carrying on a high-class business of serving food to the public." On or about May 18, 1951, George S. Wilbur caused to be organized Chateau Montserrat, Inc., (hereinafter sometimes called Chateau), a Massachusetts corporation formed for the purpose of conducting a restaurant business on the said Beverly real estate. The books of the petitioner and of Chateau Montserrat, Inc. show that one-half of the capital stock of Chateau was paid for by the petitioner and that petitioner paid $5,000 for said stock. The said books show that the petitioner also paid to Chateau as a payment for capital stock the amount of $3,500, which amount was charged by petitioner to the account of George S. Wilbur. On the books of Chateau, Lillian E. Aarons was credited with the said amount of $3,500 plus a later credit in the amount of $1,500 for out-of-pocket expenses*286 paid by her for the benefit of Chateau. On the books of Chateau, Lillian E. Aarons was shown as the owner of the other one-half of the capital stock of Chateau in the amount of $5,000. Lillian E. Aarons had been employed by George S. Wilbur for many years in a secretarial capacity. No stock certificates were ever issued by Chateau Montserrat, Inc. George S. Wilbur did not communicate his plans for establishing the restaurant or the organization of Chateau to the members of his family or the other officers of petitioner or Highland. He used a Beverly law firm, not the attorneys for petitioner or Highland, to organize Chateau. He became a director of Chateau immediately after it was organized, and he completely dominated the corporation. During the year 1951 the petitioner received $64,000 from Highland Sand & Gravel Co., Inc., by 7 checks as follows: June 11, 1951$25,000July 17, 19515,000August 27, 195110,000September 14, 19517,000October 17, 19516,000November 19, 19513,000December 14, 19518,000 On the books of Highland these payments were shown as a credit to cash and a debit to the account of the petitioner. On the books of the petitioner*287 these payments were shown as a debit to cash and a credit to Highland. On January 1, 1951, petitioner had on deposit with the First National Bank of Boston the sum of $60,516.94. This was petitioner's only bank account during the years in question. George S. Wilbur, as treasurer of the petitioner, had sole authority to draw checks on this account. Between January 1 and May 31, 1951, no deposits were made in this account and on May 31, 1951, the balance in the said account had been reduced to $516.34. Between June 1 and December 31, 1951, the only deposits to this account were the seven payments made by Highland to the petitioner aggregating $64,000 described above, plus $80.60 deposited in June 1951, and $1,200 deposited in October 1951. During the year 1951 the petitioner made payments from this account which were unrelated to the Chateau project aggregating $29,966.50. The balance of the moneys in said account was paid to or spent for the benefit of the said Chateau project in 1951, as set forth below. During the period from January 1, 1951 to June 10, 1951, the petitioner paid amounts aggregating $36,334.93 to various vendors in payment for materials or labor in connection with*288 the construction and fitting out of the so-called Chateau Montserrat Restaurant located on the real estate referred to above. These payments were shown on petitioner's books as a credit to cash and a debit to an account opened in the name of each vendor. During the remainder of 1951, beginning with a check dated June 11, 1951, the petitioner made similar payments to vendors supplying materials or labor for the Chateau Montserrat Restaurant in the amount of $27,247.92. These payments were also shown on petitioner's books as a credit to cash and a debit to an account in the name of the vendor. The petitioner's books reflect that as of December 31, 1951, the foregoing payments aggregating $63,582.85 were charged to the account of Highland and credited to the accounts of the said vendors. During the period January 1 through June 10, 1961, the petitioner, in addition, made payments to five vendors for services and equipment furnished by them to the Chateau Montserrat Restaurant aggregating $4,452.50. These five transactions were shown on petitioner's books as a credit to cash and a debit to the account of Chateau Montserrat. On August 15, 1951, petitioner also made a payment in the amount*289 of $283 to a vendor furnishing services to the Chateau Montserrat Restaurant. On petitioner's books this transaction was shown as a credit to cash and a debit to the account of Chateau. These transactions were all recorded on the Chateau books as a debit to the particular asset or expense account and a credit to the account of the petitioner. During the year 1951 petitioner also made 7 payments directly to Chateau on various dates beginning on May 24 and ending on December 17 in the aggregate amount of $27,000. On petitioner's books these transactions were shown as credits to cash and debits to the account of Chateau. The Chateau books in turn showed these payments as a debit to cash and a credit to the petitioner. On December 31, 1951, the books of Chateau show a debit to the petitioner's account in the amount of $18,447.82 and a corresponding credit to the following expense accounts: Labor$17,888.88Social Security Tax199.63Unemployment Tax359.31 On December 31, 1951, the books of the petitioner show a credit to the Chateau in the amount of $18,447.82 and a corresponding debit to the account of Highland in the amount of $18,447.82. This sum of $18,447.82*290 represents assets and expenses either paid for by the petitioner and charged to Chateau during the year or paid for by Chateau with moneys paid directly to it by the petitioner, as hereinbefore described. During 1951 Highland made payments aggregating $25,314.15 directly to George S. Wilbur, which he in turn paid either to Chateau or to vendors supplying materials or labor for the construction and fitting out of the restaurant. On the books of Highland these payments were shown as a credit to cash and a charge to the George S. Wilbur Special Account. By an entry dated December 31, 1951 on Highland's books, these amounts were charged to the petitioner's account and the George S. Wilbur account was credited in the like amount of $25,314.15. On the books of the petitioner no entries reflecting the receipt or disbursement of the $25,314.15 were shown in its cash receipts or cash disbursements accounts. By entries dated May 1, 1951 and December 31, 1951, the petitioner's journal shows that the said payments were reflected in the first instance as a credit to Highland and a debit to the account of Chateau or the various vendors in question, as the case may be. The final entries in petitioner's*291 journal show that the said accounts of Chateau and the vendors were credited by the same amounts with which they had been debited, and Highland's account was charged by the same amount with which it had been credited. The amounts referred to above that were paid to or for Chateau were used in connection with the installation and fitting out of the restaurant. The source of all these payments was the $64,000 which petitioner received from Highland, the $25,314.15 which George S. Wilbur received from Highland and the balance of the funds petitioner had on hand January 1, 1951. At the end of 1951 the books of Highland reflected the receipt of a statement prepared by George S. Wilbur on behalf of the petitioner showing the following disbursements: For machinery, equipment andinstallation$ 86,617.59For improvements to leasedproperty6,905.07For interest paid on equipmentnotes314.15For cash advanced to labor18,447.82$112,284.63 Entries were made on the books of Highland crediting petitioner's account in the amount of $112,284.63 and debiting the asset and expense accounts previously referred to. Included in the said statement aggregating $112,284.63*292 and recorded on the books of Highland, as aforesaid, were three payments made early in 1952 to vendors furnishing equipment to the said restaurant, as follows: Wm. H. Cann & Son, Inc.$2,549.51Thompson-Winchester Co.1,000.00Greenlaw Electric Co.2,320.89During the taxable year 1952 the petitioner received $34,500 from Highland, as follows: DateAmountJanuary 14, 1952$7,000February 20, 19522,500March 14, 19521,000March 21, 19522,000April 10, 19523,500April 30, 1952500May 23, 19523,000June 20, 1962$3,000July 23, 19523,000August 22, 19523,000September 23, 19523,000October 22, 19523,000 With the exception of a $1,700 deposit in July 1952, which is not material to the issue here involved, said amounts totaling $34,500 were deposited in petitioner's bank account and represent the only deposits made therein during 1952. On Highland's books these payments were shown as a credit to cash and a debit to the petitioner. On the petitioner's books these amounts were shown as a debit to cash and a credit to Highland. From said checking account $2,549.51 was paid to Wm. H. Cann & Son., Inc. and $1,000 was*293 paid to Thompson-Winchester Co. $31,000 was paid directly by petitioner to Chateau Montserrat; the said payments totaling $31,000 were shown on petitioner's books as a credit to cash and a debit to Chateau. On the books of Chateau the said payments were shown as a debit to cash and a credit to the account of the petitioner. The following checks on the dates and in the amounts indicated represent disbursements made by the petitioner from its bank account to or for the benefit of Chateau: DateAmountJanuary 14, 1952$ 300.00January 14, 19522,700.00January 16, 19522,549.51January 16, 19521,000.00January 30, 1952750.00February 20, 19522,000.00March 14, 19521,000.00March 21, 19522,000.00April 14, 19522,300.00April 30, 1952500.00May 23, 19522,800.00June 23, 19523,000.00July 8, 1952200.00July 23, 19523,000.00August 4, 1952300.00August 12, 1952500.00August 22, 19523,500.00August 28, 1952250.00September 23, 19523,000.00October 22, 19523,000.00During the year 1952 Highland paid directly to George S. Wilbur the sum of $2,320.89. This amount was shown on Highland's books as a credit to cash and a*294 debit to the petitioner's account. Wilbur paid this amount directly to Greenlaw Electric Company for work and materials furnished to Chateau. This sum was recorded on the books of Highland as of December 31, 1951 as a part of the $112,284.63 referred to above. No promissory notes were ever executed by the petitioner with respect to the payments made to it by Highland in the amounts of $64,000 and $34,500 nor did the petitioner ever furnish any security for the repayments of these moneys. Highland never charged any interest on these payments and petitioner never paid any interest to Highland with respect to these payments. The petitioner never repaid these amounts to Highland in cash, but charged them back to Highland in the manner and to the extent indicated above. No promissory notes were ever executed by the petitioner or by George S. Wilbur for the amounts of $25,314.15 and $2,320.89 which George S. Wilbur received from Highland. Neither the petitioner nor George S. Wilbur ever furnished any security for the repayment of these amounts. Highland never charged any interest on these amounts and neither the petitioner nor George S. Wilbur ever paid any interest to Highland on these*295 amounts. Neither the petitioner nor George S. Wilbur repaid these amounts to Highland in cash, but these amounts were charged back to Highland in the manner and to the extent indicated above. The earnings and profits of Highland were as follows for the years indicated: Earnings and ProfitsIncrease (or Decrease)Earnings and ProfitsYearat Beginning of YearDuring Yearat End of Year1945($ 4,106.60) deficit($ 2,234.43)($ 6,341.03) deficit1946( 6,341.03) deficit23,472.4617,131.43194717,131.4342,657.8959,789.32194859,789.3284,021.51143,810.831949143,810.8357,634.72201,445.551950201,445.5578,609.26280,054.811951280,054.8131,775.81311,830.621952311,830.62(17,952.49)293,878.13For the taxable years 1932 to 1952, inclusive, Highland paid no dividends to its stockholders and made no distributions with respect to any of its stock. The accumulated dividend arrearage with respect to the Class A stock of Highland was approximately $94,000 as of December 31, 1952. The books of Highland reflect no payments to petitioner debited to surplus in either 1951 or 1952. The books of petitioner reflect no*296 amounts received from Highland as credits to income during 1951 or 1952, except for certain amounts of rental income unrelated to the matter here at issue. During 1951 and 1952 the directors of both the petitioner and Highland Sand & Gravel Co., Inc. were George S. Wilbur, Robert Davison and George S. Wilbur, Jr. George S. Wilbur died on November 21, 1952. Robert Davison died on November 20, 1959. With the exception of the following statement contained in the annual stockholders' meetings: "VOTED: That all transactions, acts and doings of the stockholders and of the Board of Directors and officers of the corporation during the year just ended be and the same hereby are in all respects approved, ratified, confirmed and accepted." the minutes of the directors' meetings and the minutes of the stockholders' meetings of the petitioner and of Highland for the taxable years 1951 and 1952 contain no indication that the stockholders or directors of these corporations, other than George S. Wilbur, had any knowledge of the Chateau Montserrat project, or Mr. Wilbur's participation therein, or of the payments described above. Chateau opened its restaurant for business in 1951. The business*297 was unsuccessful and the restaurant was closed late in 1952, shortly after George S. Wilbur's death. Chateau was liquidated early in 1953. The fixtures and other personal property belonging to the corporation were sold on or about January 21, 1953. The net balance from the sale of the property in the amount of $1,400 was paid to the estate of George S. Wilbur. There are no entries on the books of the petitioner, of Chateau, or of Highland showing that Highland purchased any of the capital stock of Chateau. Respondent determined that the advancements in the amounts of $89,314.15 and $36,962.69 constituted dividend income to petitioner and that petitioner qualified as a personal holding company and was liable for surtax imposed on such companies. Opinion Section 501, Internal Revenue Code of 1939, 1 defines a personal holding company as a corporation where more than 50 percent in value of the stock is owned by not more than five individuals and 80 percent of the corporation's gross income during the taxable year is "personal holding company income as defined in section 502." The definition of "personal holding company income" in section 502 includes "dividends". It is admitted*298 the stock ownership requirement of section 501 is present here. Wilbur, his wife, son and daughter, owned more than 50 percent in value of General Aggregates Corporation stock. The only question is whether 80 percent of its gross income during 1951 and 1952 was dividends. Petitioner was the principal stockholder of Highland, holding 10,000 shares of Highland's 10,589 shares of stock and during said years it received substantial advancements from Highland. Also during 1951 and 1952 Highland's earnings and profits totaled $311,830.62 and $293,878.13, respectively. Petitioner owned one-half of Chateau's stock. It is stipulated that in 1951 and 1952 Highland paid over to petitioner the amounts of $64,000 and $34,500, respectively. It is also stipulated that during said years Highland paid either to Chateau's creditors or to Wilbur to be used for Chateau's restaurant project the sums of $25,314.15 in 1951 and $2,320.89 in 1952. If the advancements to petitioner and the advancements to Wilbur to be used for Chateau are dividends as respondent determined, then petitioner is liable*299 for dividend and personal holding company income. Petitioner's position is that all of the above payments were loans by Highland to petitioner. Whether the advancements by Highland to petitioner, its principal stockholder, were loans or dividends is a question of fact upon which petitioner had the burden of proof. W. T. Wilson, 10 T.C. 251">10 T.C. 251. The question is really one of intent. Did the parties really intend that Highland's disbursements to and for the benefit of petitioner in 1951 and 1952 were loans that were to be repaid? In the instant case the answer must be gleaned from circumstantial evidence. Both petitioner and Highland were completely dominated by Wilbur and he was the president and treasurer of Chateau. None of the other stockholders or officers of petitioner or Highland knew anything about the advancements at the time they were made or, indeed, about Chateau and petitioner's connection with that corporation until after Wilbur's death in November 1952. Consideration must be made of all of the facts and circumstances to see if the true purpose was to create loans at the time when the advancements were made. Advancements which were not intended to be loans when*300 made are dividends to the extent of earnings and profit. Section 115(a) and (b). And this is so even though they have no reference to the proportions in which the stock is held. Elliott J. Roschuni, 29 T.C. 1193">29 T.C. 1193, affirmed 271 F. 2d 267. Respondent on brief argues the following circumstances support his determination that the payments constitute dividend income to petitioner: (1) No promissory notes were ever executed by the petitioner with respect to the payments made by Highland during 1951 and 1952. (2) The petitioner did not furnish any security for the repayment of the amounts which it received from Highland. (3) The petitioner did not agree to pay any interest and it did not, in fact, pay any interest on the amounts which it received from Highland during 1951 and 1952. (4) The money which Highland paid out to or for the petitioner's benefit during 1951 and 1952 has never been repaid to Highland. (5) There was never any understanding or plan between the petitioner and Highland as to the time and manner in which the petitioner was to repay Highland. (6) Highland never instituted suit or took any other steps to collect the amounts which it*301 paid out to or for the petitioner during 1951 and 1952. (7) The petitioner had what was tantamount to absolute control of Highland so that it was within petitioner's discretion as to whether the withdrawals should be made in the form of dividends or otherwise. (8) Highland never declared any dividends or made any distributions with respect to its stock from 1932 to 1952, inclusive, in spite of the fact that its earnings and profits were increasing steadily and substantially. In our opinion the record shows the withdrawals by petitioner of Highland's funds constituted distributions of earnings by Highland or dividends, and did not represent loans. Probably the most conclusive factors against petitioner's contention is the failure to have any provision for repayment and the failure to make repayment. Elliott J. Roschuni, supra.Any argument that the advancements were loans is almost totally destroyed by the fact that many years after the advancements they have not been repaid. It will not do for petitioner to explain that it did not have the money to repay the so-called loans. It held 10,000 shares of Highland stock and it could cause Highland to declare a dividend*302 or it could cause Highland to redeem some of its outstanding stock that it held, as payment of the so-called loan. Petitioner was never engaged in a business that might in time produce income that could be used to repay the advancements. Its only asset, aside from Highland stock, was a parcel of realty rented to Highland for $1,200 a year. The only circumstances which petitioner seems to feel favors its loan theory are the book entries that recorded the transactions on the books of petitioner and Highland and the fact that in 1954 or 1955 petitioner transferred a parcel of realty to Highland allegedly in partial payment of its indebtedness. The manner in which the withdrawals are handled on the books is an important factor ( Victor Shaken, 21 T.C. 785">21 T.C. 785) but not controlling ( Irving T. Bush, 45 B.T.A. 609">45 B.T.A. 609). But here the book entries are not consistent with petitioner's theory that the withdrawals were loans. It is true that the initial entries with respect to the withdrawals were, with the exception of the $25,314.15 paid to Wilbur in 1951, all recorded in the books of both corporations as if they were loans from Highland to petitioner. Even the said payment*303 to Wilbur, which was used for petitioner's benefit, was first shown on Highland's books as a charge to Wilbur and later in 1951 changed to a charge to petitioner. However, the subsequent bookkeeping entries are not at all consistent with petitioner's position that Highland was loaning it money. Petitioner and Highland in effect treated petitioner's payments in 1951 to or for Chateau as repayment of the withdrawals. Highland had no connection with Chateau and owned no stock in Chateau. Petitioner was a 50 percent stockholder in Chateau and the sums it spent for Chateau could not be expenses of Highland. To a limited degree the same procedure was followed in 1952, however most of the money which Highland paid out in 1952 is still shown as an outstanding open account on the books of both corporations. The record shows that Wilbur completely dominated the entries that were made on the books of both corporations. These entries were made before his death on November 21, 1952. The most that can be said for the book entry evidence is that some of it would be consistent with petitioner's loan theory and some would not. As previously stated petitioner's only asset, aside from its 10,000*304 shares of Highland, was a parcel of realty with a building thereon which it rented to Highland for $1,200 a year. A witness who was a director of Highland in 1954 or 1955 testified that in one of those years this realty was transferred to Highland for a price "in the vicinity of $25,000." He said Highland did not pay $25,000 cash to petitioner but "[it] was deducted, as far as I know, from a bill that they [petitioner] owed to Highland Sand and Gravel." This evidence does not show that at the time of the advancements loan transactions were contemplated. It is not clear from this testimony that the realty transfer was in fact a partial payment of Highland's advancements. At any rate the transfer was made two or three years after Wilbur's death and it hardly supports an inference that the corporate intent in 1951 and 1952 was to make loans to petitioner. We hold for respondent on the issue presented. The advancements in the stipulated sums of $64,000 and $25,314.15 in 1951 and $34,500 and $2,320.89 in 1952, were dividends. Petitioner was a personal holding company during said years and is therefore liable for the surtax. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1939, as amended, unless otherwise noted.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624385/

Estate of Harriet Ankeny Watson, E. A. Mallaghan, Administrator and Trustee v. Commissioner. Estate of John D. Ankeny, Mary R. Ankeny and First National Bank of Walla Walla, Executors v. Commissioner.Estate of Watson v. CommissionerDocket Nos. 110399, 111288.United States Tax Court1944 Tax Ct. Memo LEXIS 357; 3 T.C.M. (CCH) 164; T.C.M. (RIA) 44052; February 25, 1944*357 John F. Watson, Esq., Thomas P. Gose, Esq., 218 First Nat. Bank Bldg., Walla Walla, Wash., and Henry F. Moore, C.P.A., for the petitioners. Arthur L. Murray, Esq., for the respondent. HARRON Supplemental Memorandum Findings of Fact and Opinion HARRON, Judge: Originally, a memorandum findings of fact and opinion was entered in this proceeding on January 4, 1944. As set forth in that opinion, the question presented was whether payments received by petitioners in the taxable year from the liquidation of a national bank were taxable income to them. The payments were refunds to each petitioner of 20 percent of the principal amount of a bank stock assessment which had been paid by petitioners in prior years. Petitioners in their income tax returns for those years had claimed and were allowed deductions for the full amount of the assessments paid by them. In our original opinion, it was stated, inter alia, that the question of whether the refunds represented taxable income to petitioners in the taxable year depended upon whether or not each petitioner had received a full tax benefit from the allowance of the assessment as a deduction. It was held in Estate of John D. Ankeny, *358 (Docket No. 111288) that payment of the refund was not taxable income since petitioner had not received a full tax benefit from the deductions of the assessment in the prior years. In Estate of Harriet Ankeny Watson (Docket No. 110399), it was held that the refund received in the taxable year was taxable income since petitioner had received a full tax benefit from the deductions of the assessment in the prior years. On January 31, 1944, petitioner, Estate of Harriet Ankeny Watson, moved for a rehearing or reconsideration of the proceeding, asking that a finding of fact be made that the stock of the First Inland National Bank of Pendleton, Oregon, was not worthless in any year prior to 1940. The motion further asks that the refund received in the taxable year be applied against the original cost of the stock as a recovery of capital. Respondent, in his notice of deficiency, determined that the stock was worthless in 1932 when the bank was closed. Petitioner in its pleadings alleged that respondent had erred in that determination, and evidence was adduced on the question at the hearing. In our original findings of fact and opinion, it was not thought necessary to the determination*359 of the issue to make the finding requested by petitioner, but in view of the pleadings and the evidence, we are making supplemental findings of fact although no change in our original decision is made. However, the arguments advanced by petitioner are considered further in our supplemental opinion. Supplemental Findings of Fact On October 17, 1932, the First Inland National Bank was closed by proclamation of the mayor of the city of Pendleton, and on March 22, 1933, the Comptroller of the Currency of the United States appointed a conservator to direct the affairs of the bank. As of October 17, 1932, the bank had total assets of $6,582,178.67 and total liabilities of $4,390,486.65. On February 1, 1934, Charles Reynolds was appointed receiver of the bank and he continued in that capacity until November 19, 1938, when Raymond Elliott was appointed receiver. Elliott continued as receiver until September 1940, at which time all depositors and creditors of the bank had been paid in full. These payments included 6 percent interest on the deposits and claims. In September 1940, after all expenses of the receivership had been paid, Elliott turned over all of the bank's remaining assets to*360 petitioner, Ankeny who had been elected by the bank's stockholders to act as their agent in liquidating the remaining assets. The receiver's first quarterly report to the Comptroller of the Currency for the period ended September 30, 1934, classified the bank's assets as follows: GoodDoubtfulWorthlessTotalTotal Assets at date of suspension,Oct. 17, 1932$2,363,542.06$2,505,247.35$1,713,389.26$6,582,178.67Total Assets as of Sept. 30, 19342,566,809.102,517,814.631,738,919.536,823,543.26The report also showed the following amounts had been collected by the receiver: From good assets$2,297,266.87From doubtful assets961,587.43From worthless assets85,334.71From assessment on stockholders154,281.06From other collections38,334.27Total$3,536,804.34In his final report for the quarter ended June 30, 1940, the receiver reported total assets of $7,461,352.06, total liabilities of $4,390,486.65 and total collections of $4,836,265.46 as follows: AmountsCollected byReceiverFrom good assets$2,529,845.72From doubtful assets1,490,923.00From worthless assets423,345.28From assessment on stockholders391,800.14From other collections351.32Total$4,836,265.46*361 The total assets turned over in September 1940 to petitioner Ankeny as agent for the bank's stockholders after the bank's depositors and creditors had been paid in full amounted to $1,738,326.06. At the date of the hearing, 70 percent of the stockholders' assessments had been repaid to them and there still remained for liquidation total assets in the sum of $1,420,905.95. During the taxable year, petitioner Ankeny was offered in cash the sum of $50 per share for his stock of the First Inland National Bank. The stock of the First Inland National Bank of Pendleton, Oregon, was not worthless during the years 1932 to 1940, inclusive. Supplemental Opinion We have found as a fact that the stock of the First Inland National Bank of Pendleton, Oregon, was not worthless in any of the years 1932 to 1940, inclusive. This determination is based primarily upon the records of the receiver of the bank, the testimony of Ankeny, now deceased, and the testimony of Elliott, a former receiver of the bank. Ankeny, who was a banker and the largest stockholder of the First Inland National Bank, testified that he never claimed a loss on the stock as the shares could not have been considered worthless*362 in any of the years since the bank closed. He further testified that during the taxable year he was offered $50 per share in cash for his stock. We think the record substantiates Ankeny's opinion that the stock could not have been considered worthless in 1932 or thereafter. Although the liquidation of the bank's assets has not yet been completed, the bank's depositors and creditors have been paid in full together with 6 percent interest on their deposits and claims. The costs and expenses of the receivership have also been fully paid. In addition, the stockholders have received payment of 70 percent of the assessment and there still remains over a million dollars of assets to be liquidated. Elliott, who had been assistant to the receiver in 1932 and receiver from 1938 until the receivership ended in 1940, testified that in view of the large margin of assets over liabilities in 1932 and in subsequent years, the stock could not have been considered worthless at any time. Respondent offered no evidence as to the worthlessness of the stock in 1932 other than the fact that the bank was closed in that year and a 100 percent stock assessment was subsequently levied upon the stockholders. *363 Under all the circumstances, it must be held that the stock was not worthless in 1932 or in the subsequent years. Petitioner contends that this finding disposes of the issue in that if the stock was not worthless prior to the taxable year, it had the right to credit the refund against the original cost of its stock rather than against the stock assessment. We think this contention must be rejected in this proceeding in view of the treatment on the income tax return of the deduction in the earlier year. In the final analysis, the question resolves itself to one of proper accounting by petitioners for a deduction taken and allowed in prior years. Cf. . Petitioner paid the assessment in 1935 and 1936 and deducted it on its returns for those years, receiving a full tax benefit from the deductions. In that respect, petitioner received a full return of the capital paid on the assessment since the deductions in the prior years had offset gross income for those years. Since the refund received in the taxable year was by its terms "20% of the principal amount of the assessment" and since that assessment no longer represented*364 capital, the refund constituted taxable income. The question in this proceeding would not have arisen if petitioner had not taken and been allowed deductions for the payment of the assessment in the prior years. We do not know upon what theory those deductions were taken but we assume they were allowed by respondent on the assumption that the bank stock was worthless in 1932. We think that the issue of the worthlessness of the stock is immaterial to the present proceeding. The issue here is whether there is a deficiency in income tax for the taxable year. Since the refund constituted taxable income for the reasons heretofore set forth, respondent is sustained on this issue. Accordingly, Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624387/

LEON F. AND PHYLLIS M. HODGE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentsHodge v. CommissionerDocket Nos. 1802-76, 3720-76.United States Tax CourtT.C. Memo 1980-155; 1980 Tax Ct. Memo LEXIS 425; 40 T.C.M. (CCH) 286; T.C.M. (RIA) 80155; May 5, 1980, Filed Robert M. Tyle, for the petitioners. William J. Neild, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These cases were assigned to and heard by Special Trial Judge Murray H. Falk pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGE FALK, Special Trial Judge: These cases were consolidated for trial, briefing, and opinion under Rule 141(a), Tax Court Rules of Practice and Procedure. Respondent*427 determined deficiencies of $68.02, $366, and $561.97, respectively, in petitioners' 1969, 1972, and 1973 federal income taxes. Concessions having been made, the sole issue remaining for decision is whether petitioners are entitled to a net operating loss carryover to 1969 and 1973 under section 172 and, if so, the amount thereof. Resolution of the issue depends upon the amount, if any, by which a casualty loss deduction to which petitioners are entitled under section 165(a) for 1971 exceeds that allowed by respondent. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. Petitioners filed their original and amended joint federal income tax returns for 1969 and 1971 and their joint federal income tax returns for 1972 and 1973 with the Internal Revenue Service Center at Andover, Massachusetts. At the time the petition herein was filed, they resided at Corning, New York. Petitioners purchased a two-story house in Corning, New York, in 1969 for $14,500. They paid an attorney's fee of $125 upon the closing of the purchase and made capital improvements to the property prior to June 23, 1972, which cost them approximately $7,945. In 1971 and*428 the first part of 1972, the second floor of the house was held as a rental flat. Petitioners used the first floor of the property as their residence. Their residence portion consisted of a living room, dining room, kitchen, one bedroom, a sewing room, and one bathroom. On or about June 23, 1972, petitioners suffered a casualty loss by flood to the property and its contents when water rose to a height of approximately 54 inches on the first floor. One of the two garages was damaged beyond repair. A portion of the fence around the property and the front steps were washed away. The furnace was ruined. The hardwood floors and lower kitchen cabinets on the first floor were destroyed. All interior walls in the cellar and first floor were damaged.Cracks appeared in the walls on the second floor. Supporting posts had to be installed in the basement. It took a year to repair the property sufficiently for petitioners to move back in, petitioner Leon F. Hodge doing much of the work himself. Petitioners spent approximately $13,269.24 for materials and contract labor, which did not restore the property to as good condition as before the flood. The parties agree that the loss to petitioners' *429 personal property was $12,941.99. Petitioners obtained a loan from the Small Business Administration (hereinafter referred to as the SBA), repayment of $5,000 of which was later forgiven. Petitioners now concede that the amount of their loss should be reduced by $5,000 on account of this loan forgiveness. They did not receive anything further for their loss by way of insurance or otherwise. Petitioners filed an amended joint federal income tax return for 1971 3 on which they claimed a casualty loss deduction under section 165(a) in the amount of $31,072.99; $18,231 attributable to the loss to realty. They applied $11,723.33 against their adjusted gross income for 1971 and carried back the remainder to 1968. The excess thereof over their income for 1968 was carried over to 1969, 1970, 1972, and 1973. Petitioners also claimed a loss due to the flood to the rental unti and its furnishings in the amount of $9,442.13 on their 1972 return; $7,234.72 attributable to the realty. In his notices of deficiency, respondent disallowed the loss claimed on petitioners' 1972 return and allowed $27,566.67 as a deduction with respect to the entire loss due to the flood in determining petitioners' *430 1971 tax and net operating loss carryback to 1968. The decrease in fair market value of the real property in issue caused by the flood was not more than $17,517.27, allowed by respondent. OPINION The issue here is purely factual. The parties agree as to the amount of the deduction to be allowed for personalty lost in the flood. Petitioners now concede that the amount of the loss should be reduced by the amount ($5,000) of the SBA loan forgiveness. The only dispute, then, is the amount of the loss to realty, respondent contending that petitioners have failed to show that the decrease in fair market value of the property exceeds the amount respondent allowed, while petitioners assert that they have met their burden of proof. We agree with respondent.Section 165(c)(3) permits individuals to deduct losses suffered on the damage to and destruction of property by reason of fire, storm, shipwreck, or other casualty to the extent that each such loss exceeds $100 and is not compensated for by insurance or otherwise. The measure of the loss is the different between the fair market value of the property immediately before the casualty and its fair market*431 value immediately thereafter, but not exceeding its adjusted basis. Helvering v. Owens, 305 U.S. 468 (1939); Lamphere v. Commissioner, 70 T.C. 391">70 T.C. 391 (1978); sec. 1.165-7(b)(1), Income Tax Regs. The burden of proof as to values rests with petitioners. Pfalzgraf v. Commissioner, 67 T.C. 784">67 T.C. 784, 787 (1977); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 256 (1971).To establish the amount of the loss, the relevant fair market values "shall generally be ascertained by competent appraisal." Sec. 1.165-7(a)(2)(i), Income Tax Regs. After the flood, petitioners obtained appraisals of the fair market value of the house before and after the flood from two local real estate agents. The testimony of neither is before the Court and their appraisal reports do not state on what method of methods they were based. The circumstances are such here that we draw no inference from the absence of their testimony that the testimony of these persons would be unfavorable to petitioners, 4 but neither can we give their appraisals any weight. *432 The opinion of a landowner as to the value of his or her property is admissible in evidence without further qualification because of the owner's special relationship to that property. District of Columbia Redevelopment Land Agency v. 13 Parcels of Land, 534 F.2d 337">534 F.2d 337, 339-340 (D.C. Cir. 1976); United States v. Sowards, 370 F.2d 87">370 F.2d 87, 92 (10th Cir. 1966); Kinter v. United States, 156 F.2d 5">156 F.2d 5 (3d Cir. 1946); Harmon v. Commissioner, 13 T.C. 373">13 T.C. 373 (1949); see also Fed. R. Evid. 701; 2 Jones, Evidence, sec. 14:6, p. 599 (6th ed. 1972); 3 Wigmore, Evidence, sec. 714, p. 50 (1970 rev.). But, we are not bound to accept that testimony at face value, even though it is uncontradicted, if it appears to be improbable, unreasonable, or offered solely to serve the self-interests of the taxpayer. See Fixel v. Commissioner, T.C. Memo. 1974-197, affd. without opinion 511 F.2d 1400">511 F.2d 1400 (5th Cir. 1975); cf. United States v. 3,698.63Acres of Land, Etc., 416 F.2d 65">416 F.2d 65 (8th Cir. 1969). While the owners of property are competent to testify as to its vlaue, the*433 weight to be given their testimony will depend upon their knowledge, experience, method of valuation, and other relevant considerations. Biddle v.United States, 175 F. Supp. 203">175 F. Supp. 203, 204 (E.D. Pa. 1959); see Jenny v.Commissioner, T.C. Memo 1977-142">T.C. Memo. 1977-142. The only evidence of the property's pre-casualty and postcasualty values was offered through the testimony of petitioner Phyllis M. Hodge. She testified that she believed the residence had a fair market value of approximately $23,000 immediately before the flood. She claims that her estimate is based upon what petitioners paid for the house and improvements and upon comparable sales. She also testified that the property was valueless after the flood. She was extremely vague on both points, however, and appears actually to have relied entirely upon the real estate agents' unsupported appraisals referred to above. Taking into account her self-interest and the weaknesses of her knowledge, experience, and methods of valuation, we are unable to find that petitioners have established the fair market value of the property either immediately before or immediately after the casualty. In proper circumstances, *434 the amount of expenditures actually made to repair the damaged property is acceptable as evidence of the loss of value. See sec. 1.165-7(a)(2)(ii), Income Tax Regs.; Lamphere v. Commissioner, supra; Pickering v. Commissioner, T.C. Memo. 1978-427, affd. by unpublished order     F.2d     (2d Cir. Sep. 6, 1979), cert. denied     U.S.     (Jan. 7, 1980). Here, however, those expenditures are considerably less than the amount respondent has allowed for the loss. On the whole, we believe that respondent's allowance of a loss in the amount of $17,517.27 to the realty is generous. In any event, petitioners have not adduced evidence on the basis of which we can say that they are entitled to a deduction in any greater amount than that set forth in the notices of deficiencies. Petitioners having failed to carry their burden of proof, see Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure, we sustain respondent's determinations. See Burlew v.Commissioner, T.C. Memo 1979-368">T.C. Memo. 1979-368. * * *In accordance with the foregoing, Decisions will be entered for*435 the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, Tax Court Rules of Practice and Procedure↩, the post-trial procedures set forth in that rule are not applicable to these cases.3. See sec. 165(h).↩4. Petitioners unsuccessfully attempted to obtain the testimony of both persons. Their failure to appear as witnesses, therefore, is not unexplained and the "absent witness" rule (see Kean v. Commissioner, 51 T.C. 337">51 T.C. 337, 343-344, affd. on this issue 469 F.2d 1183">469 F.2d 1183, 1187-1188↩ (9th Cir. 1972)) is not applicable here.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624388/

APPEAL OF SHOPE BRICK CO.Shope Brick Co. v. CommissionerDocket No. 6531.United States Board of Tax Appeals5 B.T.A. 1042; 1927 BTA LEXIS 3690; January 10, 1927, Promulgated *3690 1. The value of United States and Canadian patents paid in to a corporation for a consideration of $1 and $2, respectively, may not be included in invested capital under the Revenue Acts of 1918 and 1921 as a paid-in surplus. 2. March 1, 1913, value of patents determined. Frederick L. Pearce, C.P.A. and George M. Morris, Esq., for the petitioner. Thomas P. Dudley, Jr., Esq., for the Commissioner. MORRIS*1042 This is an appeal from the Commissioner's determination of a deficiency of $9,550.02 income and profits taxes for 1919, 1920 and 1921. The petitioner alleges that the Commissioner erred in refusing to allow a paid-in surplus for intangibles and in disallowing a deduction taken for exhaustion of patents, and that it is entitled to special assessment. FINDINGS OF FACT. The petitioner is an Oregon corporation, having incorporated on April 13, 1911, under the name of Shope National Concrete Machinery Co. The name was changed to Shope Brick Co. on March 9, 1917, without other amendment to the original charter. Prior to 1909, David F. Shope, residing in St. Paul, Minn., had been experimenting with a process for waterproofing*3691 brick and cement blocks. Having perfected his process and a machine to manufacture the new type of brick, he applied for letters patent. On July 19, 1910, he was issued United States Patent No. 965,027 for his machine, and on February 28, 1911, United States Patent No. 985,709 for his process. The cement brick machine puts into operation the method of waterproofing cement blocks covered by *1043 the basic process, and the former patent is controlled by the latter. Shope also applied for and was issued Canadian letters patent on December 29, 1911, for the machine and on November 19, 1912, for the process. The life of a Canadian patent is 6 years, with the privilege of renewal for a further term of 12 years, or a total life of 18 years. At incorporation, stock in the amount of $4,961 - 4,961 shares of $1 par value - was issued for the tangible assets of Shope's brick business in Portland, Oreg. Shope received 10 shares, his wife 4,950 shares, and Robert H. Downes one share. At the date of incorporation Shope assigned his two United States patents to the corporation for a cash consideration of $1, no stock being issued therefor. The assignments were recorded in the*3692 United States Patent Office on May 15, 1911. Thereafter Shope assigned his Canadian patent applications to the corporation for a cash consideration of $2. The assignment dates of the two applications for patent were July 21, 1911, for the machine, and February 1, 1912, for the process. Sales of territorial rights made in the years 1909 to 1913, inclusive, by either Shope or the petitioner under the Shope patents, are as follows: Date.United States Territory.Sales price.Jan. 16, 1909Milwaukee County, Wisconsin$2,250Oct. 12, 1909Spokane County, Washington1,500Nov. 8, 1909Pierce County, Washington3,750Sept. 27, 1913Wayne and Washtenaw Counties, Mich2,500Feb. 7, 1914San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa Counties, California. 8,500Total18,500Canadian Territory.March 20, 1913Vancouver, B. C1,321.55April 9, 1913Kamloops, B. C400.00May 5, 1913Parts of Saska tchewan and Alberta2,600.00May 20, 1913Prince Rupert, B. C800.00June 17, 1913(2) Electoral Dists. B. C3,600.00Total8,721.55Sales of territorial rights under the Shope patents during 1919, 1920 and 1921 were*3693 as follows: 1919$33,404.45192041,701.83192148,862.77The sales of territory were made by Shope, and, after incorporation, by the petitioner, upon a certain well defined basis. Shope could produce brick at a saving of $10 per thousand and it was sold at practically the same prices as brick of similar quality. He figured that a new Shope brick plant should do a minimum of 10 per cent of *1044 the normal business in the territory during its first year of operation. By multiplying 10 per cent of the face brick consumed within the territory for the preceding year by $10 a thousand, the saving by his process to the manufacturer, he arrived at the price at which he sold the territory. This method of arriving at a sales price has been consistently followed. The experience of the company has been that the actual sales of the licensees reach 10 per cent of the territory. The expenses and overhead in selling the territorial rights amounted to approximately 30 per cent of the sale price. The Shope machine was made by contract at a cost of $75. A certain number of machines were sold with each territory. Additional machines could be secured at prices*3694 of $175, $200 or $250 each, according to the contracts of sale of the various territories. The Shope machine had an annual capacity of 375,000 bricks, computed upon a basis of 1,500 bricks per day and 250 working days per year. The machine was simple to operate and the work could be done by common labor. The product was a high class face brick that would resist moisture and not absorb it. The bricks were made in 115 sizes and in various colors and shades. The value of the United States patents on April 13, 1911, was $5,250; on March 1, 1913, it was this value less depreciation for the period from April 13, 1911, to March 1, 1913. The value of the Canadian patents on March 1, 1913, was $6,105.08. The amount allowed by the Commissioner for paid-in surplus resulting from the donation to the petitioner of the two United States patents at the date of incorporation is $1,240. He allowed no amount for paid-in surplus for the two Canadian patents. A March 1, 1913, value was allowed for the United States patents and no value as of that date for the Canadian patents. No allowance for exhaustion of the United States patents was made in determining taxable net income for 1919, but*3695 a deduction of $83 was allowed in each of the years 1920 and 1921 for such exhaustion. No allowance for exhaustion of the Canadian patents was made for any of the years in question. OPINION. MORRIS: At the hearing petitioner withdrew its claim for special assessment, leaving two questions for our consideration, first, whether, under section 326 of the Revenue Acts of 1918 and 1921, petitioner is entitled to a paid-in surplus on the United States and Canadian patents in computing invested capital, and, if so, the amount thereof; and, second, the value, if any, on March 1, 1913, of those patents for exhaustion purposes. In connection with the first point, the Commissioner raised the question at the hearing whether it was proper for him to have included a paid-in surplus *1045 of $1,240, resulting from the turning in of the two United States patents to the petitioner at the date of incorporation. Under section 325 of the Revenue Acts of 1918 and 1921, patents are intangible property. We have previously considered the question whether, under the Revenue Acts of 1917 and 1918, intangibles acquired by way of gift may be included in invested capital as paid-in surplus in*3696 the . In that case we held: It seems clear to us, however, that in providing for the inclusion in invested capital of intangibles paid in for stock or shares, subject to very specific and arbitrary limitations, Congress intended to exclude intangibles paid in as a gift. It would be absurd construction indeed which would permit the inclusion in invested capital, under very arbitrary limitations, of intangibles paid in for a consideration, and at the same time permit the inclusion of intangibles paid in as a gift to the full extent of their actual cash value. As there is no difference between the Revenue Acts of 1921 and 1918 so far as the question under consideration is concerned, that decision is controlling here. The petitioner may not therefore include in invested capital as a paid-in surplus the value of the patents in question, and the Commissioner was in error in including the amount of $1,240 in invested capital as a paid-in surplus for the United States patents. The petitioner has submitted two methods of computation of the values of the patents at the date turned in and at March 1, 1913, which, being based*3697 on anticipated profits and other assumptions, are of little use. The mere stating of them seems to us to be sufficient to show how inherently fallacious the computations and resulting values are. In the first method, the petitioner took the population of the territories sold at the time the patents were paid in and found that it represented .6 of 1 per cent of the total population of continental United States. These territorial rights were sold for $7,500. By multiplying this amount by 100/.6 the petitioner found that the sale of rights in the balance of continental United States would bring $1,250,000, which was reduced by 30 per cent, representing selling cost and overhead, to $875,000. Discounting the latter amount for the life of the patents by Hoskold's formula, using 8 and 4 per cent, a net value on April 13, 1911, of $421,225 was arrived at. The March 1, 1913, value was computed by the same method and a net value of $265,734 was reached. The Canadian patents were computed for each of the dates as having a net value of $35,919. The second method consisted of taking the face brick production in the United States in 1911, assuming that the petitioner would produce one-tenth*3698 of the face brick produced therein, and multiplying that one-tenth by $7, the difference between the saving of $10 *1046 per thousand in the manufacture of its brick, and $3, which represented selling cost and overhead. Petitioner computed this to be $510,937 and, by using Hoskold's formula, as above, arrived at a net value on April 13, 1911, of $245,965. A like computation for value on March 1, 1913, of the United States patents gave a total of $279,214. In the computations, population and production estimates were secured from publications of the Census Bureau, United States Department of Commerce. What we said in , is particularly applicable: It appears from the evidence that the valuation * * * for the patents at the time paid in was predicated to a considerable extent upon future hopes and not altogether upon what the patents were actually worth in cash at that time. The experience of the men interested in the patents perhaps justified their belief that they would ultimately prove successful and result in large earnings, but the Revenue Act contemplates a cash value at the time the patents are paid*3699 in. If the patents are to be valued as of March 1, 1913, the Revenue Act contemplates a cash value at that time. Undoubtedly the patents were valuable. Any higher value, however, than that set forth in our findings of fact would be merely speculative and prospective. We have used the actual sales of territorial rights in arriving at our determination, which seems to us to be the only conclusion warranted by the record. Prior to April 13, 1911, the only sales made were the three in 1909, amounting to $7,500, which reduced by 30 per cent, representing selling expenses and overhead, gives an amount of $5,250 which we consider the only evidence of value attributable to the patents as of that date. As there were no sales from 1909 until the latter part of 1913, the value of the patents on April 13, 1911, depreciated to March 1, 1913, is taken as the value on the latter date. The March 1, 1913, value of the Canadian patents, which we find to be $6,105.08, represents the sales of Canadian territory less 30 per cent for selling expenses and overhead. In our opinion, the Canadian sales set forth in the findings of fact are close enough to March 1, 1913, to be indicative of value*3700 as of that date. The petitioner is entitled to exhaustion, therefore, for the taxable years in question on the March 1, 1913, value of the patents above set forth. The life of the patents should be computed from the date of the process patents for the reason that, although the machine patents would expire some months prior to the process patents, the machine by itself is of little value without the process. Judgment will be entered on 15 days' notice, under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624389/

M. Greenspun v. Commissioner. Rose Greenspun v. Commissioner. Parker-Browne Company v. Commissioner. M. Greenspun Trust No. 1 v. Commissioner. Evelyn D. Greenspun, Residuary Trust v. Commissioner. Iva Bell Greenspun, Residuary Trust v. Commissioner. M. Greenspun and Rose Greenspun, Husband and Wife, Transferees v. Commissioner. Parker-Browne Company, The Greenspun System, Transferee v. Commissioner.Greenspun v. CommissionerDocket Nos. 108233, 109441, 112644, 108229, 109438, 112645, 108234, 109440, 112646, 108231, 109439, 112649, 108232, 109437, 112647, 108230, 109436, 112648, 226, 225.United States Tax Court1948 Tax Ct. Memo LEXIS 134; 7 T.C.M. (CCH) 509; T.C.M. (RIA) 48135; July 22, 1948*134 Wm. A. Blakley, Esq., and Hoyet A. Armstrong, Esq., for petitioners. E. G. Sievers, Esq., for respondent. HILL Memorandum Findings of Fact and Opinion HILL, Judge: Our decisions in the above entitled consolidated cases were entered on the basis of our Memorandum Findings of Fact and Opinion entered April 12, 1944. Decisions in all dockets, except Docket Nos. 108231, 109439 and 112649, were entered under Rule 50. Decisions of no deficiency were entered in the above three dockets indicated by numbers. Such three dockets were the proceedings in M. Greenspun Trust No. 1 for the respective years 1938, 1939 and 1940. All of the decisions under Rule 50 were reviewed by the United States Circuit Court of Appeals for the Fifth Circuit. That Court handed down its opinion in its consolidated Docket No. 11322 on July 19, 1944, , reversing our decisions in the cases of Parker-Browne Company Docket Nos. 108234, 109440 and 112646, and the cases of M. Greenspun Docket Nos. 108223, 109441 and 112644. Because of the existence of the marital community of M. Greenspun and Rose Greenspun the Circuit Court's opinion re the M. Greenspun cases affected a*135 like disposition of the cases of Rose Greenspun Docket Nos. 108229, 109438 and 112645. The Circuit Court remanded the proceedings designated in its consolidated Docket No. 11322 to this Court with directions: (a) To treat as deductible by Parker-Browne Company as a business expense the rentals, up to one cent per pound, payable to Greenspun Trust No. 1 as owner of the cylinders, "except to the extent that on a rehearing they (rentals at one cent per pound) are shown to be excessive and unreasonable and therefore not necessary and proper business expenses"; (b) As to the deductions for bad debt claimed for the year 1940 by M. Greenspun in Docket No. 112644, and Rose Greenspun in Docket No. 112645, the Tax Court is directed by the Circuit Court to make "complete findings of fact as to (1) the existence of the debt, and (2) whether it became worthless within the taxable year 1940, and for its (Tax Court's) determination of the legal effect of the facts so found." The Circuit Court, on April 16, 1947, reversed our decisions and remanded to the Tax Court for further proceedings not inconsistent with its opinion of July 19, 1946 in the consolidated cases in its Docket No. 11322, the*136 cases of Rose Greenspun, our Docket Nos. 108229, 109438 and 112645, the case of Parker-Browne Company, the Greenspun System, Transferee, our Docket No. 225 and the case of M. Greenspun and Rose Greenspun, husband and wife, Transferees, our Docket No. 226. The Circuit Court, on April 16, 1947, reversed in part our decisions in the Iva Bell Greenspun Residuary Trust cases, our Docket Nos. 108230, 109436 and 112648, the Evelyn D. Greenspun Residuary Trust cases, our Docket Nos. 108232, 109437 and 112647, and remanded them to the Tax Court for recomputation under Rule 50 not inconsistent with its opinion of July 19, 1944 in its consolidated Docket No. 11322. The proceedings in Docket Nos. 225 and 226 involve the question of transferee liability for deficiencies in taxes determined by respondent against Parker-Browne Company for the tax years 1938, 1939 and 1940. The petitioners in these dockets admit liability as transferees for such deficiencies as may be held to be due. Consequently, our decisions in such proceedings will be determined by our decisions under mandate and opinion of the Circuit Court entered July 19, 1946 in the Parker-Browne Company cases and will be entered under*137 Rule 50. Our decisions in the Iva Bell Greenspun Residuary Trust cases, Docket Nos. 108230, 109436 and 112648, and in the Evelyn D. Greenspun Residuary Trust cases, Docket Nos. 108232, 109437 and 112647, will be entered under Rule 50 in compliance with the mandate and opinion of the Circuit Court therein entered April 16, 1947. In compliance with the opinion and mandate of the Circuit Court dated July 19, 1946, reversing our decisions in the Parker-Browne Company the M. Greenspun cases and remanding them for rehearing, findings of fact, conclusions of law and decisions on the questions (1) of reasonable cylinder rentals, not in excess of one cent per pound, in the Parker-Browne Company cases, and (2) for complete findings of fact, conclusions of law and decision on the bad debt issue in the M. Greenspun case, Docket No. 112644, and Rose Greenspun case, Docket No. 112645, a rehearing was had in Dallas, Texas, on January 16, 1948. Such rehearing was confined to the submission of evidence on the question of what amount of rentals, not exceeding one cent per pound, for use of the cylinders would be reasonable and hence deductible as an ordinary and necessary business expense. Evidence*138 was so submitted. In view of the opinion of the Circuit Court on the bad debt issue and of the status of the existing record of the evidence on that point, we deemed a further hearing on that question unnecessary and none was had. Under the mandates of the United States Circuit Court of Appeals for the Fifth Circuit, issued on its decisions in the above entitled proceedings in accordance with its opinion handed down July 19, 1946, in the Consolidated cases in its , there are presented for our consideration and decisions the following questions: 1. What amount, not exceeding one cent per pound of gas, constitutes a reasonable rental for use of the cylinders as containers for the distribution by Parker-Browne Company of carbonic acid gas? 2. If it should be held that such reasonable rental is an amount less than one cent per pound of gas, was payment of the difference between such determined reasonable amount of rental and one cent per pound of gas the distribution of an informal dividend to M. Greenspun? 3. Is Parker-Browne Company entitled to deduct for income tax purposes the amount of the market cost of replacement in the*139 respective tax years before us of the cylinders lost or misplaced in such respective years? 4. Are M. Greenspun and Rose Greenspun each entitled to deduct for income tax purposes one-half of community debts, totalling $41,644.41, which were ascertained by them to have become worthless in 1940 and were charged off in that year? Findings of Fact Cylinder rentals. Reference is made to the findings of fact in our original report herein entered April 12, 1944 in respect of the Parker-Browne Company cases, the M. Greenspun and Rose Greenspun cases, the M. Greenspun Trust No. 1 cases, the Evelyn D. Greenspun Residuary Trust case, and the Iva Bell Greenspun Residuary Trust case. Such findings of fact, in so far as they are pertinent to the question of the reasonableness of cylinder rentals now before us will, without repetition here, constitute a part of our findings of fact herein under the mandate of the Circuit Court of Appeals. The facts found and specifically set forth herein are repetitions of some of the findings of fact hereinabove referred to. Reference is here made to the following exhibits in the record of evidence herein, namely, Exhibit No. 26 (the rental contract), *140 Exhibit No. 4, Part 2, (indenture of Trust No. 1), Exhibit No. 4, Part 3 (indenture of Evelyn D. Greenspun Residuary Trust), and Exhibit No. 4, Part 4 (indenture of Iva Bell Greenspun Residuary Trust) and by such reference they are made a part of these findings of fact as if set forth in haec verba. The cylinders in question are made of pressed manganese steel billets and have an almost interminable useful life. Each cylinder is tested before sale and thereafter at five-year intervals by a hydrostatic testing machine that applies internal pressure of 3,000 pounds. A cylinder that meets such test, regardless of how long it may have been in use, is as good as a new cylinder. The pressure in a filled cylinder is about 1,000 pounds. Each cylinder is tested for leakage when filled. In Parker-Browne Company's operations a 50-pound cylinder of gas is sold, emptied and returned for refilling from four to six times a year. A 20-pound cylinder of gas is sold, emptied and returned for refilling from two to four times a year. From 1935 to 1940, inclusive, the price of cylinders, including valves and freight, ranged between $16 and $17.49 each for 50-pound cylinders and $9.61 and $10.89*141 each for 20-pound cylinders. The record is silent as to the price of cylinders prior to 1935. At December 31, 1938 there were in use 10,352 20-pound cylinders of the then replacement or market value of $133,437.58, and 8,274 50-pound cylinders of the then replacement or market value of $145,622.40, or a total value of $279,059.98. At December 31, 1939 the inventory and replacement or market value of the cylinders in use were the same as in 1938. At December 31, 1940 there were in use 10,602 20-pound cylinders of the then replacement or market value of $143,020.98, and 8,874 50-pound cylinders of the then replacement or market value of $141,984, or a total value of $285,004.98. The foregoing inventories are the cumulative inventories of all prior years back to 1919. The investment in the cylinders represented by the original cost thereof was in each of the years 1938 and 1939, $151,968.18, and in 1940, $164,067.17. Deductions for depreciation on the cylinders have been claimed and allowed from 1920 to 1940, inclusive. At the end of 1940 the accumulated depreciation and deductions allowed therefor, were $101,779.22. In the years 1938, 1939 and 1940 deductions for depreciation*142 on the cylinders were allowed in the respective amounts of $3,172.25, $3,392.12 and $2,953.78. The number of pounds of gas sold and distributed in the cylinders for the tax years here in question was as follows: Pounds19382,298,02019392,246,05019402,376,895A reasonable rental per annum for the cylinders was 11 per cent of the investment therein represented by the original cost of the cylinders as above found. Opinion The ony direct testimony on the reasonableness of the amount of rentals of cylinders for the shipment of carbonic acid gas is the testimony of witness Beach. His testimony was that such cylinders furnished on a rental basis should return the owner 10 to 12 per cent on his investment after payment of taxes. Other evidence submitted relative to the reasonable amount for such rentals is that a discount in the price of gas to a customer who furnished his own cylinders was one to three cents per pound on the gas so sold. In determining what is reasonable and therefore deductible as a business expense in respect of the cylinder rentals, due consideration should be given to the judgment of the contracting parties in that regard if and*143 in so far as such judgment is found to be expressed in the rental contract. The Circuit Court of Appeals has held in the instant case that Parker-Browne Company was under a legal obligation to pay rent for the use of the cylinders here involved in the amount of one cent per pound of gas shipped therein, but that, for income tax purposes, it was entitled to deduct as a necessary business expense only the amount of such rentals, not exceeding one cent per pound, as should be found to be reasonable. The duty is upon us to make such finding. In approaching a solution of this question we will first examine the rental contract, the relation of the parties thereto and to each other, and the method of its execution to ascertain whether the contract represents an agreement arrived at on the basis of negotiations on behalf of each of the contracting parties acting independently in his own interest. The ascertainment of such fact will serve to indicate whether the amount of rentals agreed upon shall weigh heavily or lightly in our consideration of what was a reasonable rental. The facts found show that Parker-Browne Company began the manufacture and sale of carbonic acid gas in 1911. The gas*144 was distributed to customers in cylinders owned and furnished to it by Morris Greenspun and two other persons at a rental of three cents per pound of gas. At that time Greenspun was a minority stockholder of Parker-Browne Company. His co-owners of the cylinders owned no stock in that corporation. By 1918 Greenspun had acquired full ownership of the cylinders and all of the stock of Parker-Browne Company. In 1918 Greenspun sold the cylinders to Parker-Browne Company for $56,968.18. At that time it appeared to him that Parker-Browne Company was doing "pretty well" financially in business. After the sale of the cylinders to the corporation Greenspun went away for about a year and did not personally manage the business. During that time the business of the corporation "was going pretty bad" and "running into the ground." When he came back he repurchased the cylinders at the price at which he sold them to the corporation. The reason Greenspun reacquired the cylinders is set forth in his testimony as follows: "The reason I acquired it was because as long as I was able to run the business, this was the main investment, every nickle I had was invested in the cylinders. The cylinder*145 is the most important part of the business, and it was my interest to get them back so in case the business was not so good I would have the cylinders. It was my interest to have them back." The resale of the cylinders to Greenspun was authorized by a resolution of the directors of Parker-Browne Company. Such resolution also authorized the corporation to enter into an agreement with Greenspun for the rental of such cylinders on a basis of three cents per pound on all gas sold and delivered therein. Such agreement was executed and carried out. The rental contract as reformed or revised in 1935 provided for a minimum of one cent and a maximum of three cents per pound as cylinder rental. M. Greenspun and his wife owned, in community, all of the stock of Parker-Browne Company when the rental contract was entered into in 1919 and such ownership continued through 1940. In each of the indentures of Trust No. 1, the Evelyn D. Greenspun Residuary Trust and the Iva Bell Greenspun Residuary Trust, M. Greenspun and his wife were the grantors and O. A. Brightwell, Jr., was the trustee. Brightwell was also the secretary and manager and M. Greenspun was the president of Parker-Browne Company. *146 Greenspun and his wife reserved the power in each of the trusts to remove Brightwell as trustee and appoint another as trustee. It is obvious that Greenspun had the power to control the board of directors of Parker-Browne Company and that he could, at his pleasure, also remove Brightwell from his employment and official position with Parker-Browne Company. The rental contract covers only the cylinders which Greenspun purchased from Parker-Browne Company in 1919 and additional cylinders thereafter purchased which he transferred to the Greenspun trusts in 1931, and makes no provision for other cylinders to be furnished for use of Parker-Browne Company on a rental basis. Parker-Browne Company is not obliged under the rental contract to use in its operations only such cylinders as are supplied to it on a rental basis. But when Parker-Browne decided that additional cylinders were required for the distribution of the gas which it manufactured and sold, it bought the required additional cylinders in its own name, with its own money, and reimbursed itself therefor by charging the amount of the purchase cost to moneys due from it as rentals. Neither Greenspun nor the trusts involved were*147 required to turn a hand in making such purchase. Obviously, they did not even determine whether they would or should make the investment. However, the rental contract was carried out as if Greenspun and/or the trusts had the irrevocable right to furnish for rental all of the cylinders required in the business of Parker-Browne Company. The rental contract provides that when a cylinder is bought and credited to Greenspun and/or the trusts Parker-Browne Company is responsible, at its own expense, not only for the testing, repair and upkeep of the cylinder, but also for the repairs or replacement of broken, worn out, lost or obsolete parts of the cylinder. Parker-Browne Company is obligated under the rental contract, upon demand of the owner, to replace a lost cylinder or pay therefor the then market value of a new cylinder. In other words, when once a cylinder was purchased it became an assured income-producing asset in the hands of Greenspun and/or the trusts, entailing no expense of upkeep or hazard of loss. By reason of the almost interminable useful life of the cylinders and the fact that Parker-Browne Company bore the full burden of expense and the risk of ownership of the cylinders, *148 it is apparent that the actual loss by depreciation to the owner thereof was negligible. Consequently the substantial deductions allowed for depreciation constitute in practical effect a gratuitous tax benefit. It would, indeed, be difficult to envisage a more profitable and economically secure investment arrangement from the standpoint of Greenspun and the trusts. It is as nearly proof against possible financial loss or the necessity for the exercise of business or financial responsibility on the part of the owner as the genius of the human mind could devise in respect of the subject matter. Yet, the record discloses that the owner of the cylinders claimed, and was allowed for tax purposes, deductions for depreciation thereof in substantial amounts. It cannot be deduced from the evidence that the sale of the cylinders to Greenspun and the rental thereof by Parker-Browne Company was of business or financial advantage to the latter. All of the advantage thereof was on the side of Greenspun. We think it apparent that Greenspun had the unfettered control of Parker-Browne Company and that he had the power to, and did, dictate the procedure of the sale of the cylinders to him and the*149 terms of the rental contract. The rental contract was in effect wholly unilateral in its execution and economic advantages and does not reflect an agreement between two parties exercising independent volition and judgment. We think it obvious from the facts and circumstances above detailed that Greenspun directed the transaction of the sale to him of the cylinders and the rental thereof to Parker-Browne Company on such terms as he deemed would best subserve his own personal interests, and that the financial interest of Parker-Browne Company was subordinated thereto. In this view we can give little weight to the terms of the rental contract in our consideration of what is a reasonable amount for such rentals or what basis should be used for the computation of a reasonable amount of rentals. Therefore, within the limits prescribed by the Circuit Court of Appeals, we have found what we believe is the basis for the computation of a reasonable rental for the cylinders. Witness Beach who had been engaged for many years in a business similar to that of Parker-Browne Company, namely, in the manufacture and sale of carbonic acid gas distributed in cylinders, testified that in his opinion*150 a return of 10 or 12 per cent on the investment after payment of taxes would be a reasonable rental for the cylinders here in question. The testimony showed that this was the only rental contract of its kind and that other manufacturers of carbonic acid gas distributed it in their own cylinders and occasionally in cylinders of the purchasers. We have found that 11 per cent of the original cost of the cylinders is a reasonable annual rental for the cylinders. Our determination that 11 per cent of the investment was a reasonable rental is made without consideration of the question of taxes on such income. We think the amount of rental which we have found to be reasonable is amply supported by the record herein. It will be observed from an examination of our findings of fact that the rental of one cent per pound of gas which Parker-Browne Company is obligated to pay for use of the cylinders under the rental contract exceeds in each of the taxable years before us the amount of such rentals which we have determined to be reasonable. Accordingly, Parker-Browne Company will be entitled to a deduction as an ordinary and necessary business expense for cylinder rental in each of such taxable*151 years only in the amount which we have determined to be reasonable as such rental. The second question for our decision is whether the excess of the cylinder rental computed at one cent per pound of gas over the amount of the rental which we have herein determined to be reasonable was an informal dividend to M. Greenspun. The law of the case is that the rental contract here involved was a valid and legally binding contract for the payment of a rental of one cent per pound. Hence, the full amount of such payment so made by Parker-Browne Company was the payment of rental. By the same token the payee thereof was entitled to, and did, receive the full amount of such payment as rental. We hold, therefore, that the excess of the payment so made over the amount which we have hereinabove determined to be reasonable as rental was not an informal dividend or a distribution of profits to M. Greenspun. The third question for our decision is whether Parker-Browne Company was entitled to deduct for income tax purposes the market cost of replacement in the respective tax years before us of the cylinders lost or misplaced in such respective years. Findings of Fact The rental contract here*152 involved provides in paragraph III thereof as follows: "In further consideration of such lease, second party expressly agrees to continue to replace all steel gas drums which may be lost or misplaced by second party, and/or to pay the market value for all steel gas drums which may be lost or misplaced by second party. In this connection it is understood and agreed that as to whether or not said drums so lost or misplaced shall be replaced or paid for by second party, the option of first party shall govern, and he may, at his option, demand either replacement or payment of the market value, as he may determine, and may likewise demand full or partial replacement or payment at any time. After any such demand by first party, second party shall have a reasonable time only in which to replace or pay for such drums * * * In determining the amount to be paid for lost drums, it is agreed that such amount shall be based on the market cost of replacement prevailing on dates such drums are considered lost or misplaced by second party, irrespective of depreciation or book values on said drums." Cylinders were lost in the years of an average total replacement or market value as follows: 1938$3,197.2519391,827.1619401,637.60*153 Parker-Browne Company accrued a liability on its books and deducted as an ordinary and necessary business expense in each of the above designated years the respective amounts of the above indicated cost of such lost cylinders. Respondent disallowed such deductions. Opinion Parker-Browne Company was on the accrual basis of accounting. Under the law of the case the rental contract here involved is valid and binding on the parties thereto. Under the terms of such contract the liability of Parker-Browne Company to replace or pay the then market value of lost cylinders accrued in the year of such loss. It appears from the findings of fact herein that the owner of the cylinders had the option to require either replacement of the cylinders or payment therefor. It appears to us that, measured in dollars, the cost of replacement and the payment of the market value of such lost cylinders would be the same. Since under the rental contract the obligation to replace or pay for the lost cylinders was a necessary expense imposed on Parker-Browne Company in the rental contract, such obligation in the respective amounts for the taxable years before us was properly accrued. Accordingly, *154 we hold that such accruals are deductible by Parker-Browne Company as an ordinary and necessary business expense. The fourth question for our decision is whether M. Greenspun and Rose Greenspun, his wife, in our Docket Nos. 112644 and 112645, are each entitled to deduct for income tax purposes one-half of community debts which were ascertained by them to have become worthless in 1940 and were charged off in that year. Findings of Fact In 1940 Morris Greenspun and Rose Greenspun, his wife, were the owners in community of a valid and existing indebtedness in the amount of $24,738.08 due from Calusa Oil Corporation and of indebtedness in the sum of $16,906.33 due from Greenspun System, Inc., and each such indebtedness was by them ascertained to be worthless and was charged off in that year. Each such indebtedness became worthless in 1940. Opinion The record discloses that subsequent to the time our original Memorandum Findings of Fact and Opinion was entered herein the respondent agreed in writing that the indebtedness set out in our findings of fact above was a valid and existing indebtedness. By virtue of such agreement the existence of the indebtedness in question was established*155 and we have so found. The Circuit Court of Appeals in reversing us on this issue held that we were in error in holding there was no evidence that the debt became worthless in 1940. On that point the Circuit Court, in its opinion as originally handed down on July 19, 1946, said: "* * * it is quite apparent that, under the impression that the amendment of 1942 was applicable, its findings as to the worthlessness in 1940 of the debt are not responsive to the legal issue tendered under the statute as it existed in 1940. This issue was whether the debts were ascertained to be worthless and charged off in the taxable year. If the rule followed in the Second Circuit is to be applied, that ascertainment was conclusive in favor of the taxpayer. If the rule laid down in the Fifth Circuit is to be applied, that ascertainment was prima facie evidence of worthlessness and controlling unless the evidence also showed that the taxpayer really ascertained their worthlessness in earlier years. The Tax Court, treating the matter as though the taxpayer's actions were without bearing on the determination of the issue, deliberately denied them any weight." The Circuit Court on August 22, 1946 revised*156 its opinion by striking therefrom the language above quoted and substituted therefor the following language: "* * * Its conclusion that such evidence is wholly lacking as to No. 1 is contrary to the agreement of the parties that there was a valid existing indebtedness in the amount claimed. Its conclusion that such evidence is wholly lacking as to No. 2 ignores undisputed testimony." The evidence establishes that petitioners made an ascertainment that the indebtedness became worthless in 1940 and charged it off in that year. There was no evidence to controvert the correctness of such ascertainment or that the indebtedness was charged off in 1940. We hold for the petitioners on this issue and that each of them is entitled to deduct one-half of the amounts thereof in their income tax returns for the year 1940. Decision will be entered under Rule 50 in each docket under remand.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624390/

ALLEN J. and DENISE S. WORKMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWorkman v. CommissionerDocket No. 4245-71.United States Tax CourtT.C. Memo 1974-5; 1974 Tax Ct. Memo LEXIS 314; 33 T.C.M. (CCH) 16; T.C.M. (RIA) 74005; January 14, 1974, Filed. Allen J. Workman and Denise S. Workman, pro se.Richard R. Harrington, for the respondent. GOFFEMEMORANDUM FINDINGS OF FACT AND OPINIONGOFFE, Judge: Respondent determined a deficiency of $1,018.00 in petitioners' Federal income tax for the year 1969. The only issue for decision is whether payments received by Denise S. Workman for services as a teaching assistant in the French Department at the University of California at Los Angeles are excludable as a 2 fellowship or scholarship grant under the provisions of section 117, Internal Revenue Code of 1954. 1FINDINGS OF FACTSome facts have been stipulated*315 by the parties and are so found.Allen J. and Denise S. Workman are husband and wife whose legal residence was Los Angeles, California, when they filed their petition in this proceeding. Their joint Federal income tax return for the year 1969 was filed by them with the Ogden Service Center of the Internal Revenue Service at Ogden, Utah.In 1965 Denise S. Workman (herein called petitioner) enrolled at the University of California at Los Angeles (U.C.L.A.) to pursue a masters degree in French. She was a teaching assistant for each of the years 1965 through 1969 in the U.C.L.A. French Department. During 1969 petitioner was a teaching assistant supervisor as well as a Ph. D. candidate in French. Her responsibilities as a teaching assistant included teaching undergraduate French courses; keeping office hours; preparing, administering and correcting examinations; and attending classes of other newer assistants and commenting on their teaching skills. She worked 20 hours per week. She was not covered by the university retirement or health plan, and no deductions for these purposes were made from the amounts she received from U.C.L.A. As a matriculated student, however, she was entitled*316 to free medical and hospitalization services through 3 the university student health service. No social security taxes were withheld from her salary because part-time students working for a university are not covered by social security if they are attending classes.Teaching assistants at U.C.L.A. act as assistants to full-time faculty members. They are selected on their academic performance and prior teaching experience, but financial need is not considered in their selection. As their teaching assistant experience at U.C.L.A. advances, their salary is increased. They are paid out of a university fund from which all faculty salaries are drawn. They are regarded by the university as part-time employees who free the time of its regular faculty to perform research.U.C.L.A. teaching assistants are responsible for elementary instruction in their respective departments and they individually control the progress of the classes they instruct. If there were no such assistants, the university would have to increase the number of its full-time faculty members to instruct the student body.In addition to teaching assistantships, U.C.L.A. also provides awards and grants to students*317 based solely on their scholastic excellence. An outright grant for academic merit to an undergraduate is termed a scholarship, whereas the same outright grant to a graduate student is considered a fellowship. The assistantship is 4 unlike either a scholarship or a fellowship in that some sort of activity, contribution or service is expected in return. If a teaching assistant fails to carry out enumerated responsibilities, then his or her salary would be terminated by the university.In the U.C.L.A. French Department not all candidates for a Ph. D. degree are required to become teaching assistants or to have reasonably equivalent teaching experience to obtain their degree.Petitioner received $4,004.72 from U.C.L.A. in 1969 while serving as a teaching assistant. She excluded this amount from the gross income reported on her Federal income tax return for 1969.Respondent determined that no portion of the $4,004.72 received by petitioner from U.C.L.A. in 1969 is excludable from her gross income under section 117.OPINIONSection 117(a) excludes from gross income any amount received by an individual as a scholarship or fellowship grant. Section 1.117-4(c), Income Tax Regs.*318 , provides that payments made as "compensation for past, present, or future employment services" and payments made to "an individual to enable him to pursue studies or research primarily for the benefit of the grantor" are not excludable as scholarship or fellowship grants. In Bingler v. 5 Johnson, 394 U.S. 741 (1969), the Supreme Court upheld the validity of these regulations. The Supreme Court also noted in Bingler that the regulations under section 117 comported with the ordinary understanding of the terms scholarship and fellowship as meaning "relatively disinterested "no-strings' educational grants, with no requirement of any substantial quid pro quo from the recipients." Bingler v. Johnson, supra at 751.Respondent contends that all the payments received by petitioner in 1969 as a teaching assistant were compensation for services and that the amounts were paid primarily as compensation. Hence he argues that the amounts paid for her services as a teaching assistant do not qualify as either a scholarship or a fellowship grant within the ambit of section 117(a) and must be included in her gross income.The essence of petitioner's argument is that the function*319 of teaching assistants is scholarly and, by its very nature, a grant, which should be excludable. She contends that the menial condition of teaching assistants should be changed and improved to create an aesthetic ideal in both the university and the state. Petitioner points out that prior to 1969 a teaching assistant's stipend at U.C.L.A. had always been considered excludable, and that she received a tax certificate from the French Department indicating her stipend for 1969 was excludable from her income for that year. She states that many other teaching assistants filed such certificates 6 with their 1969 returns and have never been audited by the Internal Revenue Service. Thus, if the stipend is excludable for some, then it should be excludable for all recipients. She also points out that she never received social security, health, unemployment or tenure benefits from the university such as the regular full-time faculty received. She argues that if she must pay taxes for such social benefits, then she should also receive them. And, finally, she stresses that she was closely supervised and that her teaching was necessary to her own education.In Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407 (1966),*320 affirmed per curiam 373 F.2d 742">373 F.2d 742 (C.A. 4, 1967), we held that an exclusion based on section 117 must be tested by whether or not payments were made primarily for the purpose of furthering the education and training of an individual or to compensate a person for services which benefited the grantor. Such determination of primary purpose of such payments in each case must necessarily turn upon its own particular facts and circumstances. Stephen L. Zolnay, 49 T.C. 389">49 T.C. 389, 395 (1968).In Edward A. Jamieson, 51 T.C. 635">51 T.C. 635 (1969), under facts quite similar to those of the instant case, we concluded that payments to a teaching assistant in French at the University of Texas did not constitute a scholarship or fellowship grant within the meaning of section 117(a). Instead, we held that they were taxable as 7 compensation for services rendered. We reach the same conclusion on the facts of this case.As in Jamieson, the payments to petitioner as a teaching assistant were not based upon her financial need, but were made only for services actually rendered and were paid to her in her capacity as a part-time employee of U.C.L.A. Teaching assistantships*321 at U.C.L.A. were not awarded upon the basis of the number of qualified graduate students in need of financial assistance. Petitioner's salary was drawn from university funds earmarked and used to pay the salaries of its regular full-time faculty.While payments for teaching and close supervision might enable petitioner to further her own education and training, it is equally clear that the primary purpose of any payments to her by the university was to compensate for her teaching services rendered. Petitioner fully understood that she was being paid for teaching, and she was certainly aware that the predominant relationship she had with the university while teaching undergraduate French courses was that of an employee. If she ceased carrying out her teaching responsibilities, her salary from the university would have been terminated. On the other hand, no such services were expected from recipients at U.C.L.A. of either a scholarship or a fellowship grant, which were outright and with "no strings" attached. As in Jamieson, this difference in treatment accorded 8 by the university to teaching assistants and the holder of scholarships and fellowships in its administration carries*322 some weight in our determination here. Similarly, differences in the privileges accorded regular staff faculty and not generally accorded teaching assistants - including unemployment insurance, social security and tenure benefits - in no way preclude our finding of an employer-employee relationship. U.C.L.A. was and is free to categorize its various employees and give each classification different privileges. We have found that under pertinent regulations the petitioner was precluded from receiving social security benefits so long as she was attending classes. Furthermore, as a student she was entitled to complete medical care as needed through the existing student health service. Tenure and unemployment compensation could not be granted to a student working only part-time who was not expected to remain beyond her study for a doctorate degree.While we recognize petitioner's sincere desire to create an "aesthetic ideal" within both the university and the State beginning with the improved treatment of its teaching assistants, she has not shown that the payments she received in 1969 for teaching services were anything other than compensation for work performed and thus includable*323 in her gross income. The certificate she received from the French Department for 1969 indicating that her payments for 9 teaching were nontaxable does not control the taxable character of such payments, which must be tested according to the intent and scope of section 117(a).Accordingly, we hold that the amounts received by petitioner from U.C.L.A. do not qualify as excludable scholarship or fellowship grants under section 117, but are taxable as compensation for services rendered as a teaching assistant.Decision will be enteredfor the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as amended, unless otherwise indicated.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624391/

EUGENE A. and MARY K. HAHN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHahn v. CommissionerDocket No. 9768-78.United States Tax CourtT.C. Memo 1979-429; 1979 Tax Ct. Memo LEXIS 99; 39 T.C.M. (CCH) 372; T.C.M. (RIA) 79429; October 15, 1979, Filed Eugene A. Hahn, pro se. William E. Bonano, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Fred S. Gilbert, Jr., pursuant to the provisions of section 7456(c) of the Internal Revenue Code1 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GILBERT, Special Trial Judge: Respondent determined a deficiency in petitioners' Federal income tax for the year 1975 in the amount of $501. As set forth below, the statutory notice of deficiency made adjustments to several of the deductions claimed by petitioners on their tax return: Amount onAmountItem AdjustedReturnAllowedSeminar Expense$4,300$2,823Legal and Professional Expenses$6,695$3,811Posse Expenses$3,887 $ 732Alimony$7,700$6,578Insurance$2,435$3,456Medical Expense$1,898 $ 777*101 Except for the amount claimed as posse expense, petitioners have made concessions as to all of the adjustments listed above. Respondent has allowed $732 of the posse expense as a charitable contribution, under section 170. The issues remaining for decision are: (1) Whether the amount claimed as posse expense constitutes an ordinary and necessary business expense, under section 162, and, if so, whether deduction is, nevertheless, barred by section 274; and (2) whether the petitioners are entitled, under section 170, to a deduction for the posse expense in any amount exceeding the $732 already allowed by respondent. FINDINGS OF FACT Some of the facts in this case were stipulated. The facts so stipulated, and the exhibits attached thereto, are incorporated herein by this reference, except as otherwise indicated. The petitioners filed a joint Federal income tax return for the year 1975. At the time the petition herein was filed, they resided at 2317 Swathmore Drive, Sacramento, California. Petitioner Eugene A. Hahn (hereinafter referred to as petitioner) is a physician. He has been engaged in the general practice of medicine in the Sacramento area for 20 years, with some*102 specialization in the treatment of allergies. After his graduation from medical school in 1945, petitioner was on active duty in the Navy. While stationed at a hospital in Alaska for a period of three years, he occasionally participated in weekned bear hunts. To participate, it was necessary that one be able to ride a horse. Thus, petitioner was introduced to horseback riding. Petitioner was discharged from the Navy in 1950 and moved to Oregon, where he set up a medical practice and purchased a small beef ranch. While living on the Oregon ranch, petitioner found it necessary to purchase a horse with which to herd cattle. In 1953, he sold the ranch and the horse and moved to Sacramento, California. In making the move to Sacramento, petitioner was faced with the problem of beginning a new medical practice in an area where there were already a number of physicians with established practices. At that time, physicians were not allowed to advertise, and, thus, it was necessary for one starting a new practice to find alternative methods of making himself known in the community. In 1955, petitioner became acquainted with a member of the Sacramento County Sheriff's Mounted Posse*103 (hereinafter sometimes referred to as the posse). Upon the invitation of his new acquaintance, petitioner joined the posse and, for this purpose, bought a horse from him. One of the reasons that petitioner joined the posse was that he thought that it would help to promote his medical practice. He also liked horses and enjoyed riding them. The Sacramento County Sheriff's Mounted Posse was organized in May, 1946. It is a civilian reserve unit of the Sacramento County Sheriff's Office, and members of the posse are deputy sheriffs on an auxiliary basis. They are issued badges and guns, and can be called to active duty in emergencies. The posse has been called out to aid the sheriff in police activities (e.g., searches for missing children) taking place in areas primarily accessible by horseback. 3 In addition, the posse rides as an equestrian drill team and performs at fairs, rodeos, parades, and other exhibitions and competes against other drill teams. Each rider owns and maintains his own hourse and equipment. During the year in question, petitioner owned and maintained*104 two hourses for use in connection with posse activities. For purposes of uniformity, drill team members are required to ride only palomino horses, but they are not required to maintain two of them. Petitioner did so in order to be able to participate in posse events, even though one of his horses was sick or injured. The posse is the champion drill team of the State of California, and has served as honor guard for several governors of the state. Each year the group travels throughout a number of counties within the state and, in addition, makes one or two trips to cities outside the state. In doing so, it contributes to the success of state and county fairs and spreads goodwill in the name of the sheriff's office. Every Wednesday night in 1975, for approximately nine months of the year, petitioner rode in a three-hour drill team practice session. He also exercised his horses once or twice a week on his own, in order to keep them in the proper physical condition for hourses used in a drill team. When petitioner was unable to exercise the horses, his wife did it for him. She, however, had a horse of her own which she used for recreational purposes and, therefore, rode the*105 petitioner's posse horses only to exercise them when he could not. Petitioner rode his horses only during posse events, practice sessions, and weekly exercise sessions, and not for general recreation. The evidence indicates he had very little time for horseback riding and did none other than that connected with his participation in the posse. In addition to serving as a riding member of the posse drill team, petitioner was available to perform medical services in the event that any member of the team was injured. Apparently, petitioner's medical practice has been promoted to some extent by his membership in the posse and his participation in its activities. Over the years, a number of posse members and their families have become his patients. On their 1975 Federal income tax return, petitioners claimed a deduction, in the amount of $3,887, for "Sheriff Posse Exp." This represented costs incurred by petitioner in maintaining his posse horses and equipment and in traveling with the drill team to posse exhibitions. 4 Respondent, in the statutory notice of deficiency, allowed $732 of that expense as a charitable contribution, and disallowed the balance of $3,155. 5 The explanation*106 attached to the statutory notice stated that petitioner was being allowed a deduction for his out-of-pocket expenses for the posse, but gave no indication as to why the amount of the deduction was limited to $732.OPINION*107 Petitioner contends primarily that the expenses incurred in connection with his posse activities are deductible, under section 162, as ordinary and necessary business expenses. The basis for this contention is that his association with the posse afforded him an opportunity to meet people and promote his medical practice. Respondent's position is that the amount claimed as posse expense is not deductible because the expenditures were motivated by personal, rather than business, considerations. Furthermore, respondent contends that, even if the expenses at issue are considered to have been motivated by business concerns, they constitute entertainment expenses that are barred from deduction by section 274, because they were not directly related to the active conduct of petitioner's medical practice.Petitioner has the burden of proving that the expenses at issue were ordinary and necessary within the meaning of section 162. See Rule 142(a), Tax Court Rules of Practice and Procedure. This is essentially a question of fact, and to meet this burden, petitioner must show that the expenditures*108 were made primarily for business purposes. Also, it must be shown that there is a proximate rather than a remote or incidental relationship between the expenditures and the business concerned. Henry v. Commissioner,36 T.C. 879">36 T.C. 879 (1961).Petitioner argues that, in order to survive, a physician must find some method of promoting his practice other than direct advertising, and, thus, that the expenses of doing so are both ordinary and necessary. He states that the primary reason he joined the posse in 1955 was to promote his medical practice and that the reason he has continued as a posse member, for some 24 years, is that it has been lucrative for him to do so. On brief, he indicates that, at any given time, his medical practice averages approximately 300 active patients and that 189 or more patients have been gained, over the years, as a result of posse membership. He then argues that it would be economically unsound for him to forsake that membership. Accepting all of this as true, we think that the arguments put forth by petitioner were laid to rest in the case of Henry v. Commissioner,supra. In that case, the petitioner was a tax attorney*109 and accountant who sought to deduct, as an ordinary and necessary business expense, the cost of operating and maintaining a yacht. Since the ethics of his profession prohibited advertising, he contended that the operation of his yacht constituted one of the feasible methods of promoting his business. In holding that such expenses were not deductible, this Court stated that: We recognize, as petitioner urges, that the business success of a lawyer or an accountant rests upon the clients who may seek his professional services. We recognize moreover that these clients often come from the contacts -- business, social, personal, or political -- which a professional person, for whatever purpose and by whatever means, may develop or cultivate. Petitioner further requests that we recognize the fact, which we do, that generally a professional person should broaden his contacts in the interests of his practice, although the efforts may be long in producing tangible results. But were we to recognize that expenditures for normally personal pursuits become deductible business expenses simply because they afford contacts with possible future clients without showing a more direct relationship*110 to the production of business income, it is evident that most all club dues and similar expenditures, for example, as well as the expense of appearing at the right place at the right time with the right people, could be claimed as ordinary and necessary business expense. * * * [Henry v. Commissioner,supra at 885-886.] Petitioner, however, asserts that his case is a unique one. He argues that he receives no social or personal benefit from his posse membership. Apparently, petitioner feels that his testimony concerning the number of patients he has gained from posse activities shows such a direct relationship between business and expenditure that this case should be distinguished from previous ones. However, the mere fact that petitioner was successful in gaining patients as the result of posse activities does not, in itself, alter the essential nature of those activities. See Henry v. Commissioner,supra;Larrabee v. Commissioner,33 T.C. 838">33 T.C. 838 (1960). After considering the record in its entirety, we are not convinced that petitioner undertook the expenditures at issue for primarily business reasons, or that there*111 was a proximate, rather than a merely incidental, relationship between the expenditures and petitioner's medical practice. Vis-a-vis his business, petitioner has failed to show how the expenses at issue differ in nature from similar expenditures which might be undertaken by any horse enthusiast. On the basis of this record, we are unable to find that the expense incurred by petitioner in connection with his posse activities is an ordinary and necessary expense of his medical practice. Accordingly, no part of that expense is deductible under section 162. Having reached this conclusion, we need not consider the applicability of section 274 to this case. This leaves only the question of whether any part of the posse expense in excess of the $732 already allowed by the respondent is deductible as a charitable contribution, under section 170. 6*112 Petitioner did not expressly raise the charitable contribution issue in either his petition or at trial. He argues the point for the first time on brief. Even so, we hold that the issue is properly before us. 7 Any argument by respondent that he is surprised or put at a disadvantage by petitioner's "raising" this issue would clarly be without merit. The issue, whether respondent erred in limiting to $732 the deduction for petitioner's out-of-pocket expenses for the posse, was framed by respondent's own notice of deficiency. At trial, the evidence indicated that petitioner was entitled to a greater deduction. Respondent, however, was*113 unable to explain why the deduction had been limited to $732.On his own initiative, respondent argued the charitable contribution issue in his brief. Petitioner's arguements on the issue were made in a brief submitted in reply to the arguments made by respondent. On the basis of this record, it is our conclusion that both parties have impliedly consented to a determination of the issue. See Rule 41(b), Tax Court Rules of Practice and Procedure. Compare, Markwardt v. Commissioner,64 T.C. 989">64 T.C. 989 (1975). The respondent's initial determination was that the petitioner incurred out-of-pocket expenses for the posse which are deductible as a charitable contribution. See sec. 1.170A-1(g), Income Tax Regs.That determination is presumptively correct. E.g.,Cohen v. Commissioner,266 F.2d 5">266 F.2d 5 (9th Cir. 1959). Implicit in it is the further determination that the posse is a qualified charitable donee and that the contribution was made for qualified purposes. Given such a determination, and considering the evidence presented at trial, *114 we can see no rational basis for limiting petitioner's deduction to $732. Undoubtedly, respondent recognized this and, in order to justify his position, asserts on brief that the posse is not a qualified charitable donee and that petitioner's contribution was not for qualified purposes. 8 Since this is inconsistent with the initial determination made in respondent's notice of deficiency, he may not so argue without affirmative pleadings on his part, Campbell v. Commissioner,11 T.C. 510">11 T.C. 510 (1948), unless the record indicates that the issues he raises were tried by consent of the parties. See Rule 41(b), Tax Court Rules of Practice and Procedure. We need not make such a determination, however. *115 Even if the issues raised in respondent's brief had been tried by the consent of the parties, it is clear that the burden of proof on those issues would be on respondent and not, as respondent argues, on the petitioner. Rule 142(a), Tax Court Rules of Practice and Procedure; Bank of London & South America, Ltd. v. Commissioner,17 B.T.A. 1263">17 B.T.A. 1263 (1929). Respondent, however, put forth no evidence to support the contentions he makes in his brief. On the other hand, the evidence gives an affirmative indication that petitioner's contribution does qualify under section 170(c)(1). The posse is under the direction of the Sacramento County Sheriff's Office, a political subdivision of the State of California. Furthermore, petitioner's expenditures appear to have been made for exclusively public purposes.At least there was no evidence to the contrary. Absent such evidence, we will not overturn respondent's initial determination that petitioner made a qualified charitable contribution. Bank of London & South America, Ltd. v. Commissioner,supra.See %byrum v. Commissioner,58 T.C. 731">58 T.C. 731, 735 (1972). On the basis of the record herein, *116 we hold that petitioner is entitled to a charitable deduction in an amount greater than $732. However, we do not agree with his assertion that he is entitled to a deduction for the full amount claimed as posse expense. Section 1.170A-1(g), Income Tax Regs., provides that "unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution." For reasons of his own, petitioner maintained two posse horses. However, the evidence indicates that he was required to maintain only one. Indeed, in actually rendering services to the posse, petitioner used only one horse. Therefore, we hold that those expenditures which are attributable to the maintenance of a second horse by him are not deductible, as they were not made directly incident to the rendition of services to the posse. Accordingly, petitioner is entitled to a deduction for only one-half the cost of shoeing and stabling. The other posse expenses, which he apparently would have incurred regardless of the number*117 of horses kept, are deductible in full. * * *In accordance with the foregoing, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. Pursuant to the order of assignment, on the authority of the "otherwise provided" language of Rule 182, Tax Court Rules of Practice and Procedure↩, the post-trial procedures set forth in that rule are not applicable to this case.3. Petitioner could not recall whether the posse had been called out for this purpose in 1975.↩4. Itemized, the expense breaks down as follows: Shoeing $ 200Stabling2,520Cleaning144Trailer275Tack448Meals & Lodging300Total$3,887The stabling expense includes the cost of hay, grain, and veterinary services. There is no question of substantiation in this case. The respondent concedes that these expenses were incurred and paid for by petitioner. ↩5. The stipulation of facts stated that the total deduction claimed by petitioners was $3,887, and that $3,155 of this amount was in dispute. It also stated that $702 had been allowed by the respondent as a charitable contribution. However, the $702 is not in mathematical accord with the other figures given in the stipulation, while $732 is. In addition, $732 is the amount which appears in the itemization of adjustments made in the statutory notice. Accordingly, for purposes of this opinion, we find that the respondent allowed $732 as a charitable contribution.↩6. Section 170 provides in pertinent part as follows: (c) Charitable Contribution Defined.--For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of -- (1) A State, a possession of the United States, or any political subdivision of any of the foregoing * * *, but only if the contribution is made for exclusively public purposes. (2) A corporation * * * organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *↩7. See Seufert Bros. Co. v. Lucas,44 F.2d 528">44 F.2d 528 (9th Cir. 1930), revg. 14 B.T.A. 1023">14 B.T.A. 1023↩ (1929), holding that where the evidence will support a deduction under one section of the taxing statute, a taxpayer ought not be denied relief simply because he initially relied on a different section. See generally, 9 Mertens, Law of Federal Income Taxation, sec. 50.63, p. 181 (1977 rev.), discussing situations where the Commissioner's determination may be sustained on grounds different from those initially relied on.8. Respondent purports to limit this new argument to the $3,155 of posse expense which was disallowed. It is his position that none of the posse expense should have been allowed, but he did not wish to "amend the pleadings in this case and assume the burden of proof" with respect to the $732. As noted infra,↩ however, respondent is mistaken in assuming that the burden of proof is on petitioner with respect to the new matter raised by respondent's argument on brief.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624392/

O.B.M., Inc., Gerard M. McAllister, Trustee in Liquidation, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentO. B. M., Inc. v. CommissionerDocket Nos. 4485-65 -- 4491-65United States Tax Court52 T.C. 619; 1969 U.S. Tax Ct. LEXIS 95; July 7, 1969, Filed *95 Decisions will be entered for the respondent. O.B.M. adopted a plan of complete liquidation on June 23, 1961. On June 23, 1962, O.B.M. retained assets in excess of those needed to meet its claims. Held:1. The petitioners have failed to prove that O.B.M. made a diligent attempt to determine what assets needed to be retained to meet claims and to distribute the rest of its assets, and accordingly, sec. 337, I.R.C. 1954, does not apply to the liquidation.2. The individual stockholders are liable as transferees for the deficiency found against O.B.M. Bernard J. Long and Bernard J. Long, Jr., for the petitioners.Leon M. Kerry and Jay S. Hamelburg, for the respondent. Simpson, Judge. SIMPSON*619 The respondent determined deficiencies in the income tax of the corporate petitioner, O.B.M., Inc., as follows:T.Y.E.Dec. 31 --Deficiency1961$ 37,679.73196218,815.0019637,100.00Total63,594.73The respondent further determined that each of the individual petitioners is liable, as a transferee of O.B.M., Inc., for the total amount of the deficiencies asserted against O.B.M., Inc., $ 63,594.73, plus interest. The principal issue presented is whether all the assets of O.B.M., Inc., except for assets *96 retained to meet claims, were distributed within 12 months of its adoption of a plan of complete liquidation, so that, under section 337 of the Internal Revenue Code of 1954, 2 it is not taxable on the gain from the redemption of certain stock owned by it. The answer depends upon the interpretation of the phrase in that section, "less assets retained to meet claims," and the application of that phrase to the facts of this case.FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found. O.B.M., Inc. (O.B.M.), was organized under the laws of the State *620 of New York in 1906. Although the company was known by different names during its existence, we shall refer to it consistently as O.B.M. Its corporate income tax returns for the taxable years 1961, 1962, 1963, and 1964 were filed with the district director of internal revenue, Manhattan, New York. Its principal office was in New York City, N.Y., at the time its petition was filed in this case.Each of the individual petitioners had his legal residence within the State of New York at the time his petition was filed *97 in this case. At all times relevant to the issues herein, the individual petitioners owned stock in O.B.M. as follows:ShareholdingsDocket No.Namepercent4486-65Burton O'Brien50    4487-65Gerard M. McAllister12 1/24488-65Anthony J. McAllister12 1/24489-65James P. McAllister12 1/24490-65Roderick H. McAllister6 1/44491-65Charles D. McAllister6 1/4Prior to 1958, O.B.M.'s principal business was contract dredging of boat slips in New York Harbor and towing of scows and equipment. On or about June 19, 1958, O.B.M. ceased all dredging operations and sold all of its operating equipment and properties, except for the tug DuBois II, to Tidewater Dredging Corp. (Tidewater). In return, O.B.M. received 50 percent, or 4,180 shares, of Tidewater's preferred stock and 50 percent, or 1,420 shares, of its common stock. The Tidewater stock constituted O.B.M.'s principal asset after June 19, 1958.O.B.M. chartered the tug, DuBois II, to Tidewater from June 19, 1958, to March 31, 1960. From April 1, 1960, to approximately June 10, 1960, the tug was chartered to McAllister Bros., Inc.McAllister Bros., Inc., paid O.B.M. commissions in the amounts of $ 6,926.97 between June 1, 1960, and December 31, 1960, *98 and $ 5,250 between January 1, 1961, and June 30, 1961. The U.S. Coast Guard certificate of inspection of DuBois II expired on June 12, 1960. The Coast Guard made a biennial inspection of the tug and on June 20, 1960, sent O.B.M. a letter detailing needed repairs. O.B.M. estimated that the repairs would cost $ 25,000 and decided not to make them. The DuBois II was not operated after June 1960.On June 23, 1961, at a special joint meeting of stockholders and directors, a plan of complete liquidation of O.B.M. was adopted. Under the plan, O.B.M. was to sell all of its salable assets and distribute to its stockholders, within a 12-month period from the date of the plan, the sale proceeds and its other assets, "less such assets, if any, as may be necessary to meet * * * [O.B.M.'s] claims." On June 26, 1961, O.B.M.'s board of directors met and resolved that the *621 corporation be dissolved under section 337 and appointed Gerard M. McAllister, a stockholder, director, and officer (and one of the petitioners herein), as the trustee in liquidation. Louis J. Riso, the treasurer of O.B.M., handled the details of the liquidation under Mr. McAllister's general supervision.On June 23, 1961, the *99 balance sheet of O.B.M. reflected the following assets and liabilities:TABLE IAssetsCash in bank$ 29,359.69Accounts receivable8,087.89Claims receivable12,507.39Investment in U.S. Treasury bills198,810.00Accrued interest receivable, U.S. Treasury bills400.98Investment in preferred stock, Tidewater Dredging Corp418,000.00Investent in common stock, Tidewater Dredging Corp189,637.46Investment in stock, Mersick Industries (16,236 shares)50,000.00Investment in O'Brien-Quist, joint venture39,937.90Floating equipment tug, DuBois II$ 229,720.43Less reserve for depreciation210,104.9119,615.52Total966,356.83LiabilitiesAccounts payable875.00Miscellaneous taxes payable545.09Liability for damage claims1,750.00Total3,170.09Between June 23, 1961, and June 22, 1962, O.B.M. made cash distributions to its stockholders totaling $ 1,127,000. 3 In addition, on June 19, 1962, O.B.M. caused its 16,236 shares of stock in Mersick Industries, Inc., valued at $ 2.50 per share for Federal tax stamp purposes, to be transferred to its stockholders in proportion to their O.B.M. stockholdings.On June 23, 1962, O.B.M. had assets, ascertained in existence and value, totaling $ 5,099, consisting *100 of $ 3,913 in cash and $ 1,186 in insurance claims. It had liabilities ascertained as to existence and amount totaling $ 2,250, consisting of accounts payable of $ 1,000 and provision for damage claims in excess of insurance coverage of $ 1,250. In addition, as a result of its participation in a joint venture, described more fully later, O.B.M. was liable for a judgment which New York City had obtained against the joint venture for unpaid general business tax. This judgment was for $ 4,416.61 plus interest from the date of *622 the judgment, which amounted to approximately $ 1,300 on June 23, 1962.Also on that date, O.B.M. owned the tugboat DuBois II with a book value of $ 14,553, an investment in the joint venture whose book value was $ 39,938, and its stock in Tidewater. On that date, certain of O.B.M.'s Federal, State, and local tax returns remained unaudited. These items are discussed later.Tug DuBois II. -- The tug DuBois II was not operated after June 12, 1960. From that time until August 31, 1967, O.B.M. and Mr. McAllister as trustee in liquidation for O.B.M. maintained and paid for insurance on the tug and continued to offer it for sale for commercial purposes or for scrap. *101 The tug had a scrap value, as of June 23, 1962, of between $ 3,000 and $ 5,000. In 1966, William B. McConnell made an offer of $ 12,000 for the tug, intending to use it as a shrimp boat. Mr. McConnell placed a $ 2,000 deposit on the boat, but after a thorough inspection, he decided not to purchase it and forfeited his deposit. In 1967, the tug was sold for scrap for $ 4,000.Joint Venture. -- Prior to 1953, O.B.M. was engaged in a joint venture with Quist Construction Co., Inc., to perform a contract with New York City for the demolition of a pier. In 1953, the joint venture instituted a suit against New York City seeking damages in the amount of $ 250,000 on account of an alleged misrepresentation by the City in the demolition contract. On June 23, 1962, this lawsuit was still pending and was the joint venture's sole remaining asset. In 1958, O.B.M. acquired the right to any proceeds of this lawsuit, with limitations not here relevant. In 1954, two law firms declined to handle the suit and advised O.B.M. that it was worthless, but Albert Foreman, an attorney, agreed to represent the joint venture in the suit for a contingent fee of 33 1/3 percent, later reduced to 25 percent. *102 Mr. Foreman engaged in various conferences with representatives of the City and, between the time he took the case and October 1962, stood ready to settle the case for no less than $ 70,000. In 1958, the City's legal representative proposed to recommend to the City comptroller that the case be compromised for $ 15,000; this proposal amounted to an offer of settlement. This offer was rejected at that time by Mr. Foreman but was never withdrawn prior to October 1962.In October 1962, at a pretrial conference, Mr. Foreman offered to settle the case for $ 40,000, and the City refused. The judge thereupon strongly urged the attorneys for O.B.M. and the City to obtain authorization from their respective principals to settle the case for $ 25,000. Thereafter sometime prior to December 1963, the parties finally agreed to settle the case for $ 25,000. On account of this settlement, O.B.M., on May 20, 1964, received the net amount of $ 12,859.83. This amount *623 took into consideration a compromise of the City's judgment for business taxes and interest against O.B.M. This amount was computed as follows:TABLE IITotal settlement$ 25,000.00Less:  Amount payable to New York City for business taxjudgment plus interest$ 4,751.67Attorneys' fees (25% of recovery)6,250.00Attorneys' expenses88.50Due Messrs. Quist and Ferrugio (5% ofrecovery)$ 1,250Less amount previously paid2001,050.0012,140.17Balance12,859.83The *103 Tidewater Stock. -- On or about June 19, 1961, Tidewater's stockholders voted to sell all of its physical assets to the Great Lakes Dredge & Dock Co. (Great Lakes) for $ 2,150,000. Great Lakes is a publicly owned company, with its principal office at Chicago, Ill., whose business is marine contracting and dredging. None of the stockholders of O.B.M. are or were stockholders of Great Lakes. On June 23, 1961, the stockholders voted that, following consummation of the sale, Tidewater should pay all of its debts and obligations and distribute to its stockholders, within 12 months of the adoption of the plan of liquidation, "all of the remaining assets of Tidewater less such assets, if any, as may be necessary to meet Tidewater's claims," and thereby observe the requirements of section 337. Mr. McAllister, who was a stockholder and officer of Tidewater, was designated trustee in liquidation, but Mr. Riso, who was Tidewater's financial vice president, handled the details of the liquidation. At the June 23, 1961, stockholders' meeting, Tidewater's name was changed to United Maritime Associates, Inc. 4*104 On June 30, 1961, Tidewater received from Great Lakes $ 2,136,000 on account of the sale of its assets. 5 Thereafter, O.B.M. received from Tidewater, prior to June 23, 1962, distributions totaling $ 834,060 on account of Tidewater's liquidation, the last distribution in that period being received on February 28, 1962. 6 None of the Tidewater shares *624 held by O.B.M. or any other of Tidewater's stockholders were ever surrendered as a result of the Tidewater liquidation.As of February 28, 1962, after the liquidating distributions of that date, Tidewater's books reflected the following assets, liabilities, and stockholders' equity:TABLE IIIAssetsCash in Grace National Bank$ 3,440Accounts receivable90,909Federal income tax refund receivable14,342Insurance claims receivable12,338Deposit (collected Mar. 20, 1962)6,000Insurance premium refunds (collected Apr. 18, 1962)82Other receivables:Burton E. O'Brien$ 936Robert M. Catherine, Jr6061,542Total128,653Liabilities and stockholders' equityAccounts payable:Johnson & Higgins394Henry Brout & Co2,500$ 2,894Taxes payable:Income tax withheld from employee3,063New York City excise tax on gross receipts2,180State franchise taxes (estimated)1,0006,243Accrued expenses:Workmen's compensation insurance in connection withVerrazano Bridge contract1,936Various in connection with Judi Bob claim1,2643,200Estimated liability for damage claim (in excess of insurance coverage)500Total liabilities12,837Stockholders' equity115,816Total128,653*105 Tidewater's annual report for the fiscal year ending February 28, 1962, stated that this balance sheet, which shows stockholders' equity in the amount of $ 115,816, did not reflect certain contingent liabilities, viz, additional retroactive workman's compensation premiums of approximately $ 51,000; liability to the owner of the vessel Judi Bob for damages estimated at $ 20,000 over and above the amount shown *625 on the books; and liability for additional Federal, State, and local taxes which might be asserted with respect to unaudited tax returns.Subsequent to February 28, 1962, the Federal taxing authorities denied certain deductions claimed on Tidewater's 1962 income tax return and asserted a deficiency of approximately $ 30,000 plus interest. The Federal tax claims against Tidewater were settled sometime during 1963. Also in 1963, the workmen's compensation liability was settled for an amount less than the anticipated $ 51,000. On February 28, 1963, Tidewater made a distribution to its stockholders of which O.B.M. received $ 28,400. In 1964, Tidewater satisfied its liability arising out of the damage to the Judi Bob for $ 4,900. On December 9, 1964, Tidewater made a distribution *106 to its stockholders, of which Mr. McAllister, as trustee in liquidation for O.B.M., received $ 7,500. On September 6, 1966, Tidewater completely wound up its affairs and made a final liquidating distribution to its stockholders of $ 1,107.32, of which Mr. McAllister, as trustee in liquidation for O.B.M., received $ 553.66.Contingent Federal, State, and Local Tax Liabilities. -- As of June 23, 1962, certain of O.B.M.'s State and City tax returns were still subject to audit. Federal tax returns for the taxable years after 1957 were subject to audit; however, the 3-year statute of limitations had run with respect to the taxable year 1958. As of June 23, 1962, Mr. Riso and Gerard McAllister did not anticipate any specific tax liability for any particular year and set no assets aside specifically to meet anticipated tax liabilities.On March 1, 1963, O.B.M., following the receipt of the $ 28,400 distribution from Tidewater, distributed $ 28,000 to its stockholders. On July 10, 1964, O.B.M. filed a certificate of dissolution with the secretary of state of New York, distributed its remaining assets to Mr. McAllister as trustee in liquidation for O.B.M., and went out of existence.Between *107 July 16, 1964, and September 7, 1966, the following deposits were made in a checking account in the name of Gerard M. McAllister, as trustee in liquidation for O.B.M.:TABLE IVDateItemAmount7/16/64Recovery on claim for joint venture$ 12,859.83O'Brien Bros. -- Quist bank account 1463.25O.B.M. account2,575.4110/26/64Refund New Jersey franchise tax50.0012/10/64Tidewater distribution7,500.002/3/66Wm. B. McConnell -- deposit on sale of DuBois II2,000.009/7/66Final Tidewater distribution553.66Total26,002.15*626 On July 20, 1964, Mr. McAllister, as trustee in liquidation for O.B.M., distributed $ 15,000 to O.B.M.'s stockholders, which amount consists, in part, of the proceeds of the settlement of the joint venture claim against New York City. On September 14, 1965, he distributed, as trustee, $ 4,000 to O.B.M.'s stockholders, so that they could pay attorneys' fees arising out of the present proceeding. As of the date of the trial in this case, the checking account in the name of Mr. McAllister, as trustee in liquidation for O.B.M., showed a balance of $ 8,339, which amount was retained in that account to pay the costs of the present proceeding, including possible appeals.The *108 following table summarizes the distributions received by O.B.M. from Tidewater and the cash distributions it made to its stockholders:TABLE VDistributionsCash distributionsDateby Tidewaterbyto O.B.M.O.B.M. toits stockholdersDuring 12-month period:July 13, 1961$ 418,000July 14, 1961$ 500,000July 31, 1961241,400240,000Aug. 25, 1961200,000Sept. 5, 196199,400Sept. 21, 1961100,000Feb. 28, 196275,260Mar. 1, 196275,000June 19, 196212,000Total during 12-month period834,0601,127,000After 12-month period:Feb. 28, 196328,400Mar. 1, 196328,000July 20, 1964 12 15,000Dec. 9, 19647,500Sept. 14, 19654,000Sept. 6, 1966554Total after 12-month period36,45447,000Grand total870,5141,174,000 From 1961 through 1965, the individual petitioners received the following cash amounts in liquidation of their stockholdings in O.B.M.:TABLE VIBurton O'Brien$ 587,000James P. McAllister146,750Gerard M. McAllister146,750Anthony J. McAllister146,750Roderick H. McAllister73,375Charles D. McAllister73,375Total1,174,000OPINIONWhile *109 O.B.M. was in the process of liquidation, it received liquidating distributions from Tidewater in excess of its basis in the Tidewater*627 stock. The question presented is whether O.B.M. has met the requirements of section 337(a) so that it is not required to recognize the gain it realized on the Tidewater liquidation. Section 337(a) provides:SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.(a) General Rule. -- If -- (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.The answer depends on whether O.B.M. distributed within the 12-month period all of its assets "less those retained to meet claims." 7*110 It is undisputed that O.B.M. did not distribute all of its assets within 12 months of the adoption of the plan of complete liquidation. On June 23, 1962, it still had assets consisting of cash and insurance claims totaling $ 5,100, the tug DuBois II with a minimum value of $ 3,000, its claim against the City arising out of the O'Brien-Quist joint venture, and the Tidewater stock. On that date, it had liabilities, which were ascertained as to existence and amount, consisting of accounts payable, a liability for an insured damage claim, and the judgment of New York City against the O'Brien-Quist joint venture on account of unpaid general business tax. These liabilities totaled $ 7,950, and it had assets the value of which were ascertained to be worth at least $ 8,100 -- clearly an amount sufficient to cover its liabilities.The question, then, is why the claim against New York City arising out of the joint venture and the Tidewater stock were not distributed. The petitioners argue that O.B.M., when it adopted its plan of liquidation, directed Mr. McAllister and Mr. Riso to distribute all its assets within 12 months except *111 for those retained to meet claims; that these gentlemen did undertake to distribute all the corporate assets and did in fact distribute substantially all of them within the 12-month period; that in good faith they believed the claim and the stock to be worthless on June 22, 1962, and did not distribute them for that reason; and that section 337 requires no more than such a good-faith attempt to comply with its terms.The petitioners' contention that the claim against the City was worthless rests on the testimony of Mr. McAllister that he considered *628 it worthless in 1962. However, in 1958, the City offered to settle the suit for $ 15,000. O.B.M.'s attorney, who was asking $ 70,000 in settlement, refused this offer, but the City did not withdraw it. At all times until October 1962, the City's offer remained open, and the case could have been settled for that amount. O.B.M. continued to ask for $ 70,000 until October 1962 when it made a settlement offer of $ 40,000. At a pretrial conference in October 1962, the judge urged the parties to settle the case for $ 25,000 and set in motion the machinery which led to actual settlement for that amount in 1963. On the basis of these facts, *112 the conclusion is inescapable that as of June 23, 1962, the case had a minimum settlement value of no less than $ 15,000. Taking into account witness and attorney fees and expenses to be deducted from any settlement, the lawsuit had a minimum cash value of at least $ 10,500.The petitioners argue that whatever the lawsuit's actual value, Mr. McAllister held a good-faith belief that it was without value and that this good-faith belief is sufficient justification under section 337*113 for the failure to distribute or otherwise dispose of the claim. Mr. McAllister testified that his belief that the suit was worthless was based upon the legal advice which had been received in 1953 and 1954 and the unavailability of certain key witnesses. However, he was unaware of the offer of the City to settle the claim for $ 15,000. The true state of affairs could and should have been learned in the process of liquidating the corporation in the 12-month period, yet the record discloses no effort on the part of those in charge of the liquidation to learn the correct facts. Mr. McAllister did not consult the counsel handling the litigation as to the chances of recovery or as to the value of the claim.On the basis of the record before us, we believe that the petitioners have failed to prove that a good-faith attempt was made to comply with the requirements of section 337. We do not fault O.B.M. for lacking perfect vision as to the future course of events. They failed to meet the requirements of the statute, not because they did not correctly anticipate the value of the claim, but because they did not make a serious effort to determine its value as of June 23, 1962. To determine *114 what liability should be anticipated and what assets should be retained to satisfy them calls for the exercise of some judgment on the part of corporate officials arranging for the liquidation of a corporation. Had these corporate officials made a serious effort to determine the value of the claim, we would have a different case, irrespective of whether their forecast turned out to be accurate or inaccurate. However, they have failed to prove that they made such an attempt. They argue that their general purpose was to comply with section 337, that there was no purpose of tax avoidance, and that they were not deliberately *629 attempting to time the tax consequences for stockholders. Nevertheless, this evidence, even if it is true, fails to demonstrate that they inquired into the value of the claim against the City. In our opinion, a taxpayer who is seeking to qualify for the tax benefit of section 337 must establish more diligence in attempting to meet the requirements of the section. The statute requires that all assets be distributed, except for those retained to meet claims, and we think that as a minimum the taxpayer must diligently attempt to determine what assets the corporation *115 has and attempt to distribute them in accordance with this requirement of the statute.The Tidewater stock presents a slightly different situation. The petitioners contend that this asset also was worthless on June 22, 1962, inasmuch as Tidewater itself had just completed a 12-month liquidation pursuant to section 337 and had retained only such assets as were necessary to meet claims. On brief, both the petitioners and the respondent invite us, in effect, to consider whether Tidewater itself satisfied the requirements of section 337. We decline to do so.Even if it is assumed that by June 23, 1962, Tidewater had distributed all of its assets except those retained to meet claims, within the requirements of section 337 (and we expressly do not so decide), it does not follow that its stock was worthless. The fact that Tidewater may have acted reasonably in anticipating and providing for its contingent liabilities did not preclude the possibility, which became an actuality, that such claims would not materialize or would be settled for an amount less than anticipated. We think that the fact that after the close of the 12-month period Tidewater became able to make additional distributions *116 to its stockholders is not merely accidental but illustrates the potential value of the stock of a liquidating corporation which retains assets to meet claims. Indeed, although O.B.M.'s officers professed to believe that the Tidewater stock was without value on June 22, 1962, we doubt that they would have been willing to abandon it altogether, thereby giving up any right to possible future distributions from Tidewater. If these officials had exercised due diligence in attempting to comply with the requirements of section 337, they would have recognized the potential value of the Tidewater stock and would have distributed it to the O.B.M. stockholders. 8In the alternative, the petitioners attempt to justify the retention of the claim against the City and the Tidewater stock on the basis that they were needed to meet contingent claims against O.B.M. However, this position is inconsistent with the testimony of Mr. McAllister and Mr. *117 Riso that they considered the claim and the stock to be worthless -- *630 if they were worthless, then there was no reason to retain them to meet claims. In addition, the petitioners have failed to prove the amounts of the contingent claims or that they made any reasonable effort to ascertain such amounts. At trial and on brief, the petitioners contend that O.B.M. had contingent claims outstanding against it consisting of liquidating expenses, insurance on the tug Dubois II, continuing interest on the general business tax judgment, and liability for increased taxes asserted with respect to unaudited tax returns. Yet, the record contains little or no evidence with respect to the likely amount of these claims as of June 23, 1962. Inasmuch as we are not given any indication of the magnitude of these claims, we could not determine what amount of assets might reasonably have been retained to meet them. What is more, it does not appear that Mr. McAllister and Mr. Riso made any serious effort to anticipate the amounts of such claims with any degree of specificity whatsoever. Those who seek to comply with section 337 must make a diligent effort to ascertain as well as possible both the existence *118 and the amounts of claims remaining at the end of the 12-month period, in order to make reasonable provision therefor. There is no evidence that such effort was made with respect to the contingent claims.The petitioners contend that the respondent is attempting to penalize O.B.M. and its stockholders for the fact that Mr. McAllister and Mr. Riso exercised "conservative" judgment in valuing its assets and determining the amount necessary to meet claims; that is not the ground of our holding. We are not concerned with the business philosophy underlying the business judgment; the question is whether any serious judgment, based on facts ascertained as well as possible, was made at all with respect to the retention of assets to meet claims; and our holding is based upon the petitioners' failure to prove that any such judgment was exercised.In conclusion, we hold that O.B.M. has not met the requirements of section 337 and that it is therefore taxable on the gain it realized as a result of the liquidation of Tidewater.The respondent has asserted transferee liability under section 6901 on the part of the individual petitioners for the deficiency asserted against O.B.M. Section 6901 provides *119 a procedure whereby the respondent may collect unpaid taxes from a transferee; the substantive liability of a transferee is a matter of State law. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39 (1958). The burden of proof is on the respondent to establish that the individual petitioners are liable as transferees for the deficiencies which we have found to have been properly asserted against O.B.M. for its taxable years 1961, 1962, and 1963. Sec. 6902(a).The amounts paid to the individual petitioners as liquidating distributions were without full and adequate consideration; each distribution *631 was one of a series of distributions in complete liquidation which left O.B.M. insolvent. See Drew v. United States, 367 F. 2d 828 (Ct. Cl. 1966); J. Warren Leach, 21 T.C. 70">21 T.C. 70 (1953). The income tax liability of O.B.M. was accruing from the time of the first distributions in complete liquidation of O.B.M. Under such circumstances, sections 273 and 278 of the New York Debtor and Creditor Law impose liability on the stockholders, in the amount each received as a liquidating distribution, for the claims of O.B.M.'s creditors. The facts therefore fully support the respondent's claim of transferee liability *120 and the record discloses no grounds for our holding to the contrary. See Archie A. Swinks, 51 T.C. 13">51 T.C. 13 (1968). The petitioners make no argument and adduced no proof with respect to this issue; their sole stated ground for resisting transferee liability is that O.B.M. was not liable for the claimed deficiencies, a position we have rejected. Since each of the individual petitioners received amounts in excess of the amount of O.B.M.'s deficiencies, we hold that they are each liable as transferees for O.B.M.'s deficiencies in income tax, as here found, plus interest as provided by law.Decisions will be entered for the respondent. Footnotes1. Cases of the following petitioners are consolidated herewith: Burton O'Brien, docket No. 4486-65; Gerard M. McAllister, docket No. 4487-65; Anthony J. McAllister, docket No. 4488-65; James P. McAllister, docket No. 4489-65; Roderick H. McAllister, docket No. 4490-65; and Charles D. McAllister, docket No. 4491-65.↩2. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩3. See Table V, infra↩, p. 626.4. "Tidewater" as used herein refers to "Tidewater Dredging Corp." or "United Maritime Associates, Inc.," as the case may be.5. The record does not disclose how, when, or whether Tidewater received the other $ 14,000 from Great Lakes.↩6. See Table V, infra↩, p. 626.1. Uncashed checks.↩1. O.B.M. formally dissolved July 10, 1964. Thereafter, receipts and disbursements were managed by Mr. McAllister as trustee in liquidation for O.B.M.↩2. On May 20, 1964, O.B.M. received $ 12,859.83 in settlement of the joint venture's lawsuit against New York City.↩7. The parties agree that O.B.M.'s gain on the Tidewater liquidation is the sort of gain which may go unrecognized under sec. 337. See Rev. Rul. 57-243, 1 C.B. 116">1957-1 C.B. 116; Bittker & Eustice, Federal Income Taxation of Corporations & Shareholders 401 (2d ed. 1966).8. Because of our conclusion that sec. 337↩ does not apply in this case, we do not have to face the question concerning the effect of that section on the portion of the gain from the Tidewater stock realized by O.B.M. after the close of the 12-month period.

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https://www.courtlistener.com/api/rest/v3/opinions/4624393/

Appeal of CONSOLIDATED INVESTMENT CO.Consolidated Inv. Co. v. CommissionerDocket No. 392.United States Board of Tax Appeals1 B.T.A. 272; 1925 BTA LEXIS 2977; January 8, 1925, decided Submitted December 15, 1924. *2977 Evidence held insufficient to establish invested capital based upon the alleged value of a leasehold in 1906, or deduction for exhaustion based upon either the alleged value of the leasehold in 1906 when acquired by the taxpayer or upon the alleged value as of March 1, 1913. H. A. Mihills, C.P.A., for the taxpayer. Arthur H. Fast, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. JAMES*272 Before JAMES, STERNHAGEN, and TRUSSELL. This is an appeal from a deficiency letter dated August 18, 1924, in which the Commissioner asserted additional income and excess profits tax due for the year 1918 in the sum of $3,104.46, and for the year 1920 in the sum of $6,429.98, a total of $9,534.44. Oral hearing was had on December 15, 1924, at which hearing Lester L. Shumacker testified under oath and certain exhibits were offered on behalf of the taxpayer. FINDINGS OF FACT. The taxpayer on or about June 15, 1906, entered into a certain agreement with the Syndicate Trust Co., a corporation organized under the laws of the State of Missouri, under which agreement the trust company agreed to convey to the taxpayer all of*2978 a certain unexpired part of a leasehold estate in certain property in the city of St. Louis, Mo., theretofore acquired by the trust company. The trust company also agreed to cause the Hanover Investment Co., a *273 corporation of the State of Missouri, to enter into a lease with the taxpayer for 90 years from the first day of April, 1906, at a certain stated rental; to cause to be erected upon the property in question a 16-story building; and to cause certain other person to become lessees under the taxpayer in the premises in question. In consideration of the foregoing agrhements on the part of the trust company, the taxpayer agreed to make certain subleases negotiated for it by the trust company, as above mentioned, and to pay to the trust company in consideration of the foregoing $2,500,000 in a manner not specified, and in addition to deliver to the trust company $2,500,000 of thirty-year 5 per cent gold bonds, secured by a deed of trust or mortgage on all the property so to be acquired. The taxpayer also caused to be read into the record the original book entries of the taxpayer under which it appeared that there was set up as of June 30, 1906, as assets, $5,000,000*2979 as the cost of the property, and credited to the Syndicate Trust Co. $5,000,000. In the same entry the Syndicate Trust Co. was charged with $5,000,000, and there was credited to subscriptions to capital stock $2,500,000, and to first mortgage 5 per cent bonds, $2,500,000, with the notation "Consideration for the property purchased from and to be delivered by the trust company, the entire capital stock and bonds of the investment company." DECISION. The determination of the Commissioner is approved and the Board finds a deficiency in income and excess profits tax for the year 1918 in the sum of $3,104.46, and for the year 1920 in the sum of $6,429.98. OPINION. JAMES: The taxpayer appeals from the action of the Commissioner in rejecting as a part of claimed invested capital the sum of $1,250,000 representing the common stock of the taxpayer issued as a part of the $2,500,000 of capital stock, as above set forth in the findings of fact, and from the determination of the Commissioner rejecting as deductions from income for the years 1918 and 1919 the sums of $24,960.73 in each of the said years, and $23,882.29 in the year 1920. The taxpayer has introduced the record of the*2980 original transaction between itself and the Syndicate Trust Co., apparently relying upon that record alone as establishing, first, its right to include in invested capital the sum of $1,250,000, and, second, its right to the deductions from income above mentioned. The record so introduced shows that the capital stock of the taxpayer was issued to the owner of the property transferred in the sums mentioned. No testimony was introduced to show the value of that property at the time it was transferred to the taxpayer and none was introduced to show the value of the property on March 1, 1913. Section 326 of the Revenue Act of 1918 provides as to invested capital that there is included among other things "actual cash value of tangible property other than cash bona fide paid in for stock or shares at the time of such payment" and "intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount *274 not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding*2981 on March 3, 1917, whichever is lowest." It does not clearly appear from the record whether the $1,250,000 of stock in question was issued in payment or part payment for the leasehold or for the tangible property thereon. It does not appear from the evidence introduced what was the actual cash value of the property paid in, whether leasehold or building, and it does not appear from the evidence what was the total outstanding capital stock of the taxpayer on March 3, 1917. On this branch of the case it is obvious that there is no evidence before the Board having any material bearing upon the issue between the taxpayer and the Commissioner. With respect to the deductions claimed on account of exhaustion of the leasehold, it has been held in the , and , that the deduction from gross income of "a reasonable allowance for the exhaustion, wear, and tear of property used in the trade or business" is applicable to leaseholds but must be based upon its cost or its value on March 1, 1913. The taxpayer having introduced no testimony as to the value on either the date*2982 it acquired the property, or March 1, 1913, there is nothing in the record before us upon which we could find that the Commissioner has erred in his determination with respect to the deduction claimed or with respect to the resultant deficiencies in tax. For these reasons the determination as asserted by the Commissioner must be affirmed.

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11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624394/

Hollie M. Conaway v. Commissioner.Conaway v. CommissionerDocket No. 4746-66.United States Tax CourtT.C. Memo 1971-151; 1971 Tax Ct. Memo LEXIS 179; 30 T.C.M. (CCH) 657; T.C.M. (RIA) 71151; June 24, 1971, Filed Lawrence A. Runnels, for the petitioner. Tom G. Parrott, for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The Commissioner determined a deficiency in the amount of $197.44 in petitioner's income tax for the taxable year 1964. Certain issues having been conceded, the only question for our decision is whether petitioner is entitled to a dependency exemption deduction in 1964 for his daughter, Judith M. Conaway. Findings of Fact Hollie M. Conaway (hereinafter petitioner), who was residing in St. Louis, Mo., at the time the petition herein was filed, timely filed an income tax return for 1964 with the district director of internal revenue, St. Louis, Mo. Petitioner was married to Bernice Conaway until October 1, 1964, the date that the Circuit Court of Crawford*180 County, Mo., granted her a final decree of divorce. Petitioner and Bernice had six children. Petitioner claimed in his petition that he is entitled to a dependency exemption deduction for his daughter, Judith M. Conaway (hereinafter Judy). 1From January 1, 1964, until sometime in June of that year, Judy, who was seventeen years old then, lived with her mother and her brother, Cleo, in a house owned by Bernice's brother and located in Cherryville, Mo. The house, which had a fair rental value of approximately five to ten dollars a month, was provided rent-free although petitioner and his brother-in-law had an understanding whereby petitioner would make repairs to the house when necessary. Bernice's brother paid the property taxes thereon. Judy graduated from Cherryville High School sometime in May 1964 and, within one or two weeks thereafter, she moved to St. Louis where she resided with her sister, Janice Major (hereinafter Janice), throughout the remainder of that year. The living quarters which Judy shared with Janice, her husband, and their two children consisted of a three-room flat*181 at which they rented for approximately $45 to $48 per month. The gas and electric bills on this flat approximated $20 to $30 per month. Janice spent about $30 a week for food during the period that Judy lived with her. Commencing sometime in June or July 1964, Judy was employed by a White Castle restaurant in St. Louis. She filed an individual income tax return for that year on which she reported gross income of $1,598.85. Her Federal income tax, as computed therein, was $111. She also paid state and city income taxes and social security taxes in 1964 totaling $83.85. Although petitioner maintained a residence in St. Louis where he was employed during the year at issue, he sometimes visited Bernice and the two children in Cherryville. During the first five months of 1964, the only source of funds available to Bernice, Judy, and Cleo was cash which petitioner provided. He gave them approximately $30 to $40 each week from which they purchased groceries and other household items. The telephone bill averaged $5 per month, and the electricity charges ranged from $7 to $10 a month. Although Judy moved in with Janice sometime in early June 1964, she did not pay her anything for board*182 and lodging until August 1, 1964, at which time she began paying her $10 per week. By the end of 1964, Judy had paid a total of $220 to Janice for room and board. While in the employ of the White Castle in 1964, Judy received meals worth $46.55 in return for services rendered by her. Judy expended the following amounts on herself during 1964: 658 ItemAmountLife Insurance$ 8.68Radio12.50Cigarettes96.42Dishes40.00Shoes, Stockings25.00Cosmetics60.00Clothing150.00Transportation 171.30Total$563.90In addition to the food, utilities, and household expenses incurred in Cherryville which petitioner paid for, he also provided Judy with the following: ItemAmountClothing$ 10Education219Cosmetics30Spending Money60The following table summarizes the amounts and categories of expenditures made during 1964 toward the support of Judy: ItemAmountFood and Lodging$ 655.00Clothing160.00Dry Cleaning and Laundry130.00Transportation171.30Personal Care, (Cosmetics, Hair- cuts, etc.)170.00Education219.00Miscellaneous (Gifts, Entertain- ment, etc.) 280.00Total Support$1,785.30*183 Opinion In order to be entitled to claim Judy as a dependent, petitioner must prove that he provided over one-half of her total support in 1964. Sections 151 and 152 of the Internal Revenue Code of 1954. This burden necessarily entails that petitioner establish Judy's total support in that year. Robert I. Brown, 48 T.C. 42">48 T.C. 42 (1967); Aaron F. Vance, 36 T.C. 547">36 T.C. 547 (1961); and Bernard C. Rivers, 33 T.C. 935">33 T.C. 935 (1960). We have found as a fact that Judy's total support in 1964 was $1,785.30. Therefore, petitioner must establish that he provided at least $892.66 toward her support. This he has failed to do. While we were left with the distinct impression at trial that petitioner was a sincere and candid witness, the record herein simply does not support his claim. Bernice, petitioner's former wife, and Judy and Janice, his daughters, all testified in this case. We found their testimony ofttimes evasive and vague, and we are of the opinion that they were not as cooperative in establishing petitioner's case as one might desire. Nevertheless, based on petitioner's own testimony as well as the stipulations of the parties, we can only find that petitioner*184 provided $612 toward Judy's support. While we are sympathetic to petitioner's plight in that he is illiterate and cannot maintain adequate records, we have given him the benefit of the doubt wherever we could and are still constrained to hold that he has not established that he provided over one-half of Judy's support in 1964. Accordingly, he is not entitled to a dependency exemption deduction for her. To reflect the concessions of the parties, Decision will be entered under Rule 50. Footnotes1. Petitioner did not claim Judy as a dependent on his income tax return for 1964.↩

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https://www.courtlistener.com/api/rest/v3/opinions/4624395/

BELLAGIE I. NEWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Newman v. CommissionerDocket No. 78580.United States Board of Tax Appeals37 B.T.A. 72; 1938 BTA LEXIS 1088; January 14, 1938, Promulgated *1088 Where a testamentary executrix of an estate, who was also a legatee under her deceased husband's will, received certain income from community property which was owned one-half by the deceased husband and one-half by her in her individual capacity, held, that under the laws of Louisiana only the one-half of the community property owned by the deceased husband was transmitted to the testamentary executrix; held, further, that only the income from the one-half of the community property owned by the wife in her individual capacity is taxable to her. J. V. Wolff, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent. TYSON *72 OPINION. TYSON: This proceeding is for the redetermination of a deficiency in income tax for the year 1932 in the amount of $320.06. It is claimed by the petitioner that not only is there no deficiency, but that she has made an overpayment of income tax for 1932 in the sum of $284.37, exclusive of interest. *73 The only question in controversy is whether the agreed amount of $4,096.20, being the income from November 30, 1932, to and including December 31, 1932, derived from personal property*1089 formerly owned by the petitioner and decedent in community, or any part thereof, constitutes taxable income to the petitioner. The facts were stipulated and in brief are as follows: The petitioner is the widow of Harold W. Newman, late of New Orleans, Louisiana, who died testate November 30, 1932, leaving him surviving the petitioner and three sons, Harold W. Newman, Jr., Robert J. Newman, and Morris W. Newman. The will of the decedent appointed the petitioner executrix, "with full seizin and without bond", and provided further, in so far as pertinent here, as follows: I bequeathe to my beloved wife, Bellagie I. Newman, in addition to her one-half interest in our community of acquets and gains, the entire disposable portion of my estate, in full ownership, with the exception of Twenty-five Thousand Dollars which I bequeathe to my son, Morris W. Newman, as an extra portion. I bequeathe to my wife the unlimited and undivided usufruct of my entire estate and also on the above stipulated legacy to my son Morris W. Newman, during her entire life-time. The will of the decedent was probated and his estate administered in probate proceedings in the Civil District Court for the*1090 Parish of Orleans, State of Louisiana, in a proceeding entitled "Succession of Harold W. Newman." The only steps taken in such proceedings between the date of the death of the decedent and January 1, 1933, are as follows: Petition for the probate of decedent's will, for the qualification of petitioner as executrix, and the appointment of a notary to take an inventory, Probate of the will, The appointment of such notary, The commencing of the taking of the inventory, The qualification of the executrix, and The obtaining of an order to withdraw from the bank box of the decedent various interest coupons which belonged to decedent's mother, and in which the estate of the decedent had no interest but which were in his possession as his mother's agent. A petition was filed in the above probate proceedings on September 8, 1933, by the petitioner and the three sons, wherein they accepted, simply and unconditionally, the succession of the decedent, and prayed that they be put and sent into possession of all the property left by decedent; that the petitioner be recognized as the surviving spouse in community with decedent, entitled, as such, to the ownership of an undivided one-half*1091 of all the community property; that she be further recognized as the legatee of the disposable portion under the last will of decedent and entitled, as such, to the ownership of an undivided one-third of one-half of all the property left by the decedent, less $25,000 cash bequeathed to Morris W. Newman, and *74 to the usufruct on such $25,000 and on the other undivided two-thirds of one-half, or two-sixths of such property; and that the three sons be recognized as the sole and only heirs of decedent, and entitled, as such, to the ownership of an undivided two-thirds of one-half, or one-ninth each, of all of the property left by the decedent, subject to the usufruct in favor of their mother, the petitioner herein. The gross taxable income, for the period from November 30, 1932, the date of death of the decedent, to and including December 31, 1932, from the property formerly owned by the decedent and the petitioner in community is $4,096.20, and consists of the following items: Interest on a promissory note paid December 28, 1932$585.00Dividend by DeSoto Building, Ltd., paid December 31, 1932321.00Various interest coupons on bonds maturing December 1, 19323,190.20Total4,096.20*1092 In addition to this taxable income, the property produced exempt income during such period represented by interest coupons due December 15, 1932, on state bonds. None of the above bond interest coupons were cashed by the executrix in 1932. The only case which came into her possession in 1932 consisted of the above interest and dividend items of $585 and $321, respectively, together with the sum of $3,330.73, representing the decedent's cash in bank at the date of his death, which was transferred to the executrix on December 30. These three cash items were deposited in the Hibernia Bank & Trust Co. of New Orleans in an account entitled "Bellagie I. Newman, Testamentary Executrix." The petitioner did not withdraw any funds for any purpose from this account in 1932. The respondent determined that the net income of the petitioner for the calendar year 1932 was $20,100.56, composed of the following items: Net taxable income admitted by the petitioner$15,701.36Loss on account of stock in Edgewater Gulf Co. becoming worthless303.00All of the net income from the property formerly owned by the decedent and the petitioner in community from November 30, 1932, the date of the death of decedent, to and including December 31, 19324,096.20Total20,100.56*1093 The petitioner included one-half of the above income of $4,096.20 or $2,048.10, in her original 1932 income tax return, but now claims that such amount does not constitute income to her. The petitioner paid on August 3, 1934, as income tax for the calendar year 1932, the sum of $822.32, plus $66.46 as interest thereon, which payment was made within two years of the filing of the petition herein on February 20, 1935. *75 Nothing was paid or credited during the taxable period by the executrix to petitioner as a legatee of decedent or as usufructuary under the will. The petitioner sustained a loss of $303 in the year 1932 on account of the stock of the Edgewater Gulf Co. becoming worthless. The petitioner, under the will of her husband, was bequeathed in "full ownership" the entire disposable portion of his estate, less $25,000 bequeathed to one of their sons, and the unlimited and undivided usufruct of his entire estate, including the $25,000 bequest to the son, during her life. A "usufruct" is defined in article 533 of Dart's Civil Code of Louisiana, 1932, as "The right of enjoying a thing, the property of which is vested in another, and to draw from the same all*1094 the profit, utility and advantages which it may produce, provided it be without altering the substance of the thing." Under this definition, the usufruct in the personal property, the income from which is here involved, was, in effect, the equivalent of a life estate as known at common law. There are two questions presented, the first of which is, Did the seizin and right of possession of decedent's community interest in such personal property, the usufruct therein bequeathed to petitioner by the will of decedent, and the income therefrom received during the first month of the administration of the succession, or estate, pass to and vest in the petitioner individually, as respondent claims it did, or did the seizin and right of possession of such property and usufruct and such income therefrom vest in her as the executrix named in the will, and qualified as such by the proceedings in the probate court, as is claimed by petitioner? This question is presented by the issue of whether or not the respondent erred in his determination of a deficiency based upon his finding that the tax due on such income, in the amount of $2,048.10, was due from petitioner individually. The petitioner*1095 contends that section 162(c) of the Revenue Act of 1932 1 is applicable here, and that, since no part of such income was either "properly paid or credited" during the taxable period by herself as executrix to herself as an individual and legatee, such income is not taxable to her individually. The respondent, however, contends that such section is not applicable here as the income *76 involved does not represent "income received by estates of deceased persons during the period of administration or settlement of the estate" (sec. 161(a)(3), Revenue Act of 1932 2); that none of the interest of decedent in the community property passed to the executrix, but that such interest and the right to the income therefrom passed, under the laws of Louisiana and the provisions of the will, immediately upon the death of the husband, to the petitioner as the survivor of the community and as usufructuary; that, whether or not the income was received and held by her as executrix, it belonged absolutely to her individually as soon as it was produced, and therefore is taxable her. *1096 The contention of respondent, that the property bequeathed petitioner vested in her immediately upon the death of her husband and that the income therefrom belonged to her individually as soon as it was produced rather than to her as executrix, is based upon the propositions, first, that articles 940, 941, and 942 of the Civil Code of Louisiana, in effect, so provide, and, second, that the administration of the estate was unnecessary, and consequently inoperative, because, he asserts, no debts against the estate are shown to have existed. Both propositions are settled adversely to respondent's contention and favorably to that of petitioner, by the opinion in the case of , in which the widow, and an heir named as a beneficiary in the will of decedent, opposed the application of the testamentary executor to be confirmed as such on the grounds, inter alia, that the heir was entitled to enter into immediate possession of the property bequeathed her in the will, without the intervention of an administration, and, further, that an administration was unnecessary because there were no debts of the succession, or estate. The Supreme*1097 Court of Louisiana held that the heir opposing the confirmation of the testamentary executor was not entitled to receive direct, or to be put into possession of, the property bequeathed her in the will, and that the testamentary executor was entitled to be confirmed regardless of whether or not there were debts of the estate. The court, after citing and discussing various articles of the Civil Code and Code of Practice of Louisiana, as well as prior decisions of that court relating to executors and their status with regard to successions or estates, stated, inter alia, as follows: The office and seizin of the executor enable him therefore to dispose of the title and to control the possession of all the property of the succession and *77 the title and seizin of the heirs are among the rights that may be thus disposed of and controlled. Those rights must yield to the paramount authority and rights of an executor; and the only way in which the heir can resist the executor is, not by relying on his own title and seizin, but by taking away from the executor the seizin which the testator and the law have conferred upon him, a privilege which the heir may exercise on complying*1098 with conditions imposed by Articles 1671 and 1012 of the Civil Code. * * * We conclude, therefore, that the dictum in the opinion in Succession of Dupuy, to the effect that "the seizin of the executor is a fiction of law which does not interfere with the legal possession of the heir," is misleading and that the law is correctly interpreted in the opinion of Bird v. Succession of Jones in the statement that: "The actual seizin of an executor is something distinct from and paramount to the fictitious seizin which, it is said, is vested in the heir immediately upon the death of the ancestor." Articles 1671 and 1012 referred to in the above excerpt from the Serres opinion are set out by footnote. 3*1099 With special reference to the question of the necessity of the existence of debts against the estate in order to justify the confirmation of a testamentary executor, the court discussed various probable reasons why a testator should desire to have an executor of his estate even though he owed no debts, nor would owe any at the time of his death, and concluded that the question of the necessity or propriety of appointing an executor was one to be decided solely by the testator as a right conferred upon him by law, stating, inter alia, as follows: It is not true that the sole duty of an executor to whom the seizing of an estate has been given, is to pay the debts and deliver the legacies; but on the other hand those duties, so far as values are concerned, may be, and often are, of less importance than the duty of delivering the balance or universality of the estate to the heirs. * * * Whether or not, therefore, the debts of this succession were of such a character as to have required the appointment of an administrator, if there had been no will, we are of the opinion that the executor appointed by the testator was entitled to be confirmed by the court. *1100 Cf. ,, and authorities cited therein; ; . The case of , is a decision of the Supreme Court of Louisiana, chiefly relied on by respondent as supporting his contention that such property of decedent *78 as was disposed of by his will and the income therefrom passed directly to petitioner in her individual capacity, and not to her in her capacity as executrix. In that case suit was instituted against his succession, or estate, to revive a judgment obtained against deceased in his lifetime and against his widow, individually, as survivor in community, and his children, individually, as his heirs, for the debt represented by the judgment. The petition instituting the suit failed to allege that the individual defendants had respectively accepted the community and the succession, as provided by statute law of Louisiana. Because of this failure to allege such acceptance an exception, or demurrer, *1101 to the petition was sustained by the lower court, and on appeal to the Supreme Court of Louisiana this action of the lower court was sustained in so far as it held that the petition disclosed no cause of action for a personal judgment against the widow and heirs of the deceased judgment debtor, but in so far as it held that the petition disclosed no cause of action against the "succession", the holding of the lower court was reversed. The Supreme Court of Louisiana, in reaching this conclusion after consideration of the identical articles of the Civil Code of Louisiana relied on by respondent, said, inter alia (p. 155): Articles 940, 941, 942 and 1014 of the Civil Code declaring, substantially, that an heir, being invested with seizin or the right of possession of the estate by the mere operation of law immediately at the death of the ancestor, is considered the heir so long as he has not renounced the succession, must be read in connection with Article 946, declaring that, although the succession is acquired by the heir at the moment of the death of his ancestor, the heir's rights nevertheless remain in suspense until he decides whether he would accept or renounce the succession. *1102 The articles referred to in this quotation from the opinion of the court are as set out by footnote. 4*1103 *79 It is obvious that the Schreiber case not only affords no support for the respondent's contention that the property and income here involved was that of the petitioner, individually, and passed to her directly in her individual capacity rather than in her capacity as executrix, but, on the contrary, constitutes a strong authority against such contention. The other Louisiana decisions cited by respondent in support of his contention are not in point. The foregoing authorities establish the principle that a decedent's one-half interest in personal property owned by the community, from which character of property the income here involved is derived, passes to and is held by the executor, as such, and not to the heirs or legatees directly, and such principle also obviously applies to the usufruct in such property. ; . Cf. . From these authorities it clearly appears that the interest of petitioner as an individual and legatee, in contra-distinction to her interest as executrix, in that part of the disposable*1104 property owned by decedent at the time of his death which was bequeathed to her absolutely, as well as in that other part of decedent's property in which she was bequeathed the usufruct, passed to her as executrix and was held by her in that capacity at the time she, as such executrix, received therefrom the income which is here involved. It necessarily follows that the income from such property during the taxable period was also received and held by her in her capacity as executrix and not in her individual capacity as legatee and usufructuary. We have found as a fact that nothing was paid or credited, during the taxable period, by petitioner as executrix to herself as legatee or usufructuary under the will of decedent, and, furthermore, it may be noted that such payment or credit could not have been legally made under article 977 of Merrick's Revised Civil Code of Louisiana, 5 since the acceptance provided for in that article was not made by petitioner as legatee and usufructuary until September 28, 1933, several months after the end of the taxable period. *1105 The respondent erred in his determination of a deficiency against the petitioner, such determination being based upon the income from that one-half of the community property owned by decedent at the time of his death. *80 Having disposed of the first question, there remains the second one to be answered, i.e., Did that one-half of the community property belonging to the surviving wife at the time of decedent's death and the income therefrom during the one month of administration, as well as that one-half of the community property belonging to the deceased husband at the time of his death, pass to the executrix as contended by petitioner? This question is presented by the contention of petitioner to the effect that the one-half interest in the community property owned by her at the time of decedent's death, as well as that one-half interest owned by decedent, passed into the administration of the estate and was held by her as executrix and not by her individually; that the income therefrom is, therefore, taxable to her as executrix and not to herself individually; and that in returning and paying tax as an individual on such one-half interest she made an overpayment in*1106 the amount of the tax so paid. The case of , was one in which the children and heirs of A. J. Festivan and his first wife, who predeceased him, sought to enjoin the sale of the whole of a certain tract of land which the executor of Festivan's estate was advertising for sale under an order of the probate court for the purpose of paying Festivan's debts. The petition alleged, inter alia, that the land had been owned in community by Festivan and his deceased wife, mother of plaintiffs; that plaintiffs as heirs of their deceased mother inherited a one-half interest in the land; and that the whole of the property could not be sold until their interest was ascertained by judicial investigation followed by partition. The defendants interposed several exceptions to the petition, among them one of "no cause of action." The Supreme Court of Louisiana reversed the lower court by ordering that the exception of "no cause of action", which was the only one considered in the opinion, be overruled and remanded the cause to the lower court for decision on the merits. The court said, inter alia:According to the allegations of the petition, *1107 the plaintiffs and the succession of Festivan are the joint owners of the tract of land in controversy. The plaintiffs, as joint owners, are entitled to partition in kind of the property, if practicable, and if not, to a partition by licitation, in which they would be entitled to one-half the net proceeds of the sale. All of these rights would be defeated by the proposed probate sale of the tract of land as the property of the succession. * * * It is not disclosed by the petition that the first community owed debts either to the surviving husband, or to third persons. Hence, the petition discloses a perfect legal title in the plaintiffs to an undivided half interest in and to the tract of land in question. * * * Plaintiff's father became their coproprietor with power to sell only his undivided half interest in the community property. * * * When the father died years later his half interest and no more passed into his succession. The other half interest belonged to the plaintiffs and the *81 Probate Court had no jurisdiction to order its sale to pay the debts of the deceased. * * * The petition alleges that the probate sale was ordered "for the purpose of paying*1108 off the debts of the deceased, A. J. Festivan." As the first community was dissolved in 1874, its debts, if any, have long since been prescribed. There is no presumption that the first community owed debts. Hence, the cases holding that community property may be administered in the succession of the husband for the purpose of paying community debts have no application to the facts of the case before us. As the suit was dismissed on the exception of no cause of action it is necessary to remand the case to the Court of Appeals for decision on the merits. * * * It is now ordered that the exception of no cause of action be overruled and the cause be remanded. See also ; . These authorities clearly establish the principle that, except in cases where there are community debts, the interest in the community property of the surviving member does not pass to or under the control of the executor of the deceased member's estate. This record is entirely devoid of any showing that there were any debts of the community, and, applying the principle established by these authorities, we conclude*1109 that the one-half interest in the community property owned by the petitioner as the survivor in community was not transmitted to or held by her in her capacity as executrix of the estate of her deceased husband, that consequently the income therefrom was properly taxable to her in her individual capacity, and that in paying same she made no overpayment. The petitioner cites only one case in support of her contention that the one-half interest in the community property owned by her as the surviving wife and member in community passed to and was held by her as executrix of her husband's estate, that case being , which announced the principle that "the administration of the succession of the deceased husband involves with it the administration of the community and the executor or administrator may rightfully cause the community property to be sold to pay the debts of the succession." It is apparent that the pronouncement of the court in this case does not support this contention of petitioner for the reason that the principle announced by it is identical with that of which it is said in the much later Festivan case, supra,*1110 that "the cases holding that community property may be administered in the succession of the husband for the purpose of paying community debts have no application to the facts before us," which facts, as in the instant case, failed to show the existence of community debts. It was stipulated by the parties that the petitioner sustained a deductible loss in the amount of $303 in the year 1932. Effect will be given to this stipulation upon recomputation under Rule 50. Decision will be entered under Rule 50.Footnotes1. The 'net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩2. (a) APPLICATION OF TAX. - The taxes imposed the this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including - * * * (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * * ↩3. ART. 1671 - The heirs can, at any time, take the seizin from the testamentary executor, on offering him a sum sufficient to pay the movable legacies and on complying with the requirements of Article 1012. ART. 1012 - In obtaining possession of the effects of a succession, the heirs shall not be permitted, under any pretense whatsoever, to have an actual delivery of any property of such succession which may be in suit or to receive any money of such succession when there shall be claims thereon pending in court, unless they previously give bond with good and sufficient security, if the plaintiffs in such suits require it; which security shall be one-fourth over and above the amount of the claims for money thus claimed, or of the appraised value of the property in suit, which estimation shall be made by two appraisers appointed by the judge. ↩4. ART. 940 - A succession is acquired by the legal heir, who is called by law to the inheritance, immediately after the death of the deceased person to whom he succeeds. This rule applies also to testamentary heirs, to instituted heirs and universal legatees, but not to particular legatees. ART. 941 - The right mentioned in the preceding article is acquired by the heir by the operation of the law alone, before he has taken any step to put himself in possession, or has expressed any will to accept it. Thus children, idiots, those who are ignorant of the death of the deceased, are not the less considered as being seized of the succession, though they be merely seized of right and not in fact. ART. 942 - The heir being considered seized of the succession from the moment of its being opened, the right of possession, which the deceased had, continues in the person of the heir, as if there had been no interruption, and independent of the fact of possession. ART. 1014 - He who is called to the succession, being seized thereof in right, is considered the heir, as long as he does not manifest the will to divest himself of that right by renouncing the succession. ART. 946 - Though the succession be acquired by the heir from the moment of the death of the deceased, his right is in suspense, until he decide whether he accepts or rejects it. If the heir accept, he is considered as having succeeded to the deceased from the moment of his death; if he rejects it, he is considered as never having received it. ↩5. ART. 977 - No one can be compelled to accept a succession, in whatever manner it may have fallen to him, whether by testament or the operation of law. He may therefore accept or renounce it. It shall not be necessary for minor heirs to make any formal acceptance of a succession that may fall to them, but such acceptance shall be considered as made for them with benefit of inventory by operation of law, and shall in all respects have the force and effect of a formal acceptance. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624396/

Mabel F. Grasselli, Petitioner, v. Commissioner of Internal Revenue, RespondentGrasselli v. CommissionerDocket No. 7391United States Tax Court7 T.C. 255; 1946 U.S. Tax Ct. LEXIS 133; June 28, 1946, Promulgated *133 Decision of no deficiency will be entered. Petitioner was donee of a power of appointment under a trust created in 1932, of which she was not a trustee. Her children were cobeneficiaries. She was empowered to alter, amend, or terminate the trust and to cause distribution of corpus to herself or her appointees. The trustee paid income to the other beneficiaries from 1936 to 1940, inclusive. On July 30, 1941, petitioner in writing amended the trust by dividing the corpus into three parts, one of which was to go to each of the two children, she relinquishing all power over it and retaining power over the third fund, which power she further exercised in 1942. Held, the amendments of section 1000, Internal Revenue Code, by section 452 (a) and (b), Revenue Act of 1942, do not apply prior to January 1, 1943, to cause such exercise of power of appointment to be deemed transfers of property, and the petitioner was not subject to gift tax either upon income paid to the other beneficiaries by the trustee in 1936-1940 or upon the division of the trust corpus on July 30, 1941. Mark A. Loofbourrow, Esq., for the petitioner.W. W. Kerr, Esq., for the respondent. Disney, Judge. DISNEY*255 OPINION.The Commissioner*135 determined deficiencies in gift tax for the years and in amounts as follows:1936$ 925.1419372,246.541938852.221939$ 3,298.1219404,121.611941218,887.55Two questions are presented: (a) Whether, prior to July 30, 1941 (and after January 1, 1936), the petitioner was subject to gift tax upon amounts paid to beneficiaries, other than herself, by the trustee under a trust under which she had power of appointment; and (b) whether she is subject to gift tax because of action taken by her under such power, on July 30, 1941. All facts were stipulated and we adopt the stipulation by reference and find the facts therein set forth. Only such parts thereof as considered pertinent to examination of the issues will be set forth herein. As the petitioner takes no issue with the *256 amounts of the deficiencies or the values used by the respondent, and no evidence is offered to deny their accuracy, though the respondent specifically relies thereon, we consider that there is no issue as to figures, but only as to the law applicable thereto.The material facts may be very briefly stated: In 1932 petitioner's husband created a trust, irrevocable by him, and of which the*136 petitioner was not trustee, providing for payment by the trustee of the trust income during the joint lives of himself and petitioner, as follows: 50 per cent to petitioner, 30 per cent to his son, and 20 per cent to his daughter; and, after settlor's death, 50 per cent to petitioner and 25 per cent each to the daughter and son. In addition, the trust instrument provided as follows:The Settlor's said wife shall have the right, at any time and from time to time, during her life, by an instrument in writing delivered to the Trustee to alter, amend or terminate the Trust Agreement in whole or in part, and in the event of any such termination the Trustee shall transfer, pay over and distribute such part or the whole of said principal, as the case may be, to the Settlor's said wife or to such person or persons, except the Settlor, and in such proportions as the Settlor's said wife shall direct by such instrument in writing, provided that the agreement shall not be amended so as to direct the payment, at any time, of income or principal to the Settlor.The settlor, and after his death the petitioner, could give directions to the trustee, in writing, duly delivered. In excess of certain*137 specific annuities provided by the trust instrument, the trust income, from January 1, 1936, to July 30, 1941, was paid one-half to petitioner and 25 per cent each to the daughter and son.The petitioner, from 1932 to 1941, inclusive, pursuant to the power vested in her, modified the trust and withdrew substantial amounts from the trust fund.By an instrument executed July 30, 1941, the petitioner, pursuant to the power vested in her, provided that the trust fund should be divided into three funds, designated "A," "B," and "C," that the income of funds A and B should be paid to the two children respectively, and that the income from fund C to be paid to petitioner for life, thereafter to be added (except as to certain bequests) to funds A and B; also that such trust principal as necessary for her care, comfort, and support, in accordance with her customary living standards, be paid to her from fund C.The instrument also provided:Mabel F. Grasselli shall have the right, at any time and from time to time during her life, by an instrument in writing delivered to the Trustee, to change the beneficiaries of Trust Fund C, except that she shall not in any way increase her beneficial interest*138 in said Trust Fund nor confer upon herself any power not herein reserved to her, or otherwise amend the provisions of this agreement as to Trust Fund C. Said Mabel F. Grasselli shall have no power in any way to *257 alter, change or amend the provisions of this agreement with respect to Trust Funds A and B.On March 3, 1942, petitioner by written instrument made a change in beneficiaries of fund C.The deficiencies determined represent gift tax, first, upon the trust income paid from January 1, 1936, to July 30, 1941, to persons other than the petitioner; and, second, upon the trust assets placed in funds A and B, and remainder value of those placed in fund C (after subtraction of certain gifts and the value of petitioner's life estate). The deficiency notice based taxation as to the years 1936 to 1940, inclusive, upon petitioner's control over the income and its apportionment, stating that this made the recipients subject to petitioner's bounty, so that the amounts paid constituted gifts taxable to her under section 501 of the Revenue Act of 1932 and section 1000 of the Internal Revenue Code. With reference to the year 1941, the deficiency notice based gift tax upon certain*139 distributions of trust income in 1941 to the son and daughter, and upon the value of trust property placed in funds A and B, and in C (less certain gifts and petitioner's life estate therein) by the instrument of July 30, 1941, upon the ground that therein the petitioner provided that thereafter she should have no power to alter, change, or amend as to A and B, and, since under the trust instrument she had full power to revoke, terminate or amend, therefore was vested with complete enjoyment, control, and disposition of the property and her exercise of such right constituted taxable gifts, within the meaning of section 1000 of the Internal Revenue Code.After claim by the Commissioner against the petitioner for income tax upon all of the trust income from 1936 to 1940, both inclusive, the matter was settled by the payment by petitioner of all of such income tax, except amounts thereof paid by the trustee and two beneficiaries.Under the facts outlined above, the petitioner's argument is, in brief, that the gift tax was laid on transfer of property, that a power is not property, and that under Sanford's Estate v. Commissioner, 308 U.S. 39">308 U.S. 39, there*140 is no completed gift so long as the power is in existence, as was the case here, before and after the instrument of July 30, 1941, petitioner having therein expressly reserved rights given her by the trust instrument, which rights she exercised on March 3, 1942; also that the income paid to the children prior to July 30, 1941, came to them under the terms of the trust. Reliance is placed also upon Edith Evelyn Clark, 47 B. T. A. 865, to the effect that relinquishment of a power by a donee thereof entailed no gift tax, no "property" being transferred. The petitioner also argues that the amendments to gift tax law by section 452 of the Revenue Act of 1942 can not be retroactively applied to the taxable years here involved, though it is *258 admitted that, if they are so retroactive, petitioner is subject to gift tax.The respondent, however, takes the view, in substance, that the broad powers conferred upon the petitioner were exercised by her on July 30, 1941, and, therefore, taxation resulted; that these were transfers of property not falling within the exclusions applicable to powers outlined in section 452 of the Revenue Act of 1942 -- in*141 short, that the amendments are retroactive; that section 452 (a) provides that exercise or release of a power of appointment shall be deemed a transfer of property, and a power of appointment is described there as any power to appoint "exercisable by an individual"; and that "exercise" as contrasted with "release" of powers of appointment (before July 1, 1946) is not exempted by statute from taxation. It is pointed out that the Edith Evelyn Clark case was one of relinquishment, not exercise, of the power. It is likewise argued that the petitioner's complete power of revocation and appointment is tantamount to complete ownership, casting gift tax on petitioner when by payment of income to the beneficiaries prior to July 1941, and by the action taken on July 30, 1941, such dominion was relinquished; and that by paying income tax on the trust income for 1936 to 1940 petitioner so admitted. It is also stated that relinquishment by the donor completes the gift, under the Sanford case, and Burnet v. Guggenheim, 288 U.S. 280">288 U.S. 280, as did the petitioner on July 30, 1941, by creation of funds A, B, and C. As to funds A and B, it is contended, she*142 made completed irrevocable transfer, while, as to fund C, it was complete, except as to her life estate (and certain contingent gifts).Since petitioner, as above seen, specifically admits the propriety of the Commissioner's action, if the provisions of section 452 of the Revenue Act of 1942 can be retroactively applied, we should first decide that question. Section 452 (a) amended section 1000 of the Internal Revenue Code by adding a new subsection, (c), which provides:Powers of Appointment. -- An exercise or release of a power of appointment shall be deemed a transfer of property by the individual possessing such power. * * *The respondent admits this subsection to be effective only as of January 1, 1943, except as provided by section 452 (b) of the same act, but in effect says such section applies the above language of section 452 (a) whenever the power is exercisable in favor of a donee, as here. Section 452 (b) provides:(b) Powers With Respect to Which Amendments Not Applicable. --(1) The amendments made by this section shall not apply with respect to a power to appoint, created on or before the date of enactment of this Act, which is other than a power exercisable in*143 favor of the donee of the power, his estate, *259 his creditors, or the creditors of his estate, unless such power is exercised after the date of enactment of this Act.(2) The amendments made by this section shall not become applicable with respect to a power to appoint created on or before the date of enactment of this Act, which is exercisable in favor of the donee of the power, his estate, his creditors, or the creditors of his estate, if at such date the donee of such power is under a legal disability to release such power, until six months after the termination of such legal disability. For the purposes of the preceding sentence, an individual in the military or naval forces of the United States shall, until the termination of the present war, be considered under a legal disability to release a power to appoint.Regulations 108, section 86.2 (b), on this subject, reads:Transfers under power of appointment. -- The exercise of a power of appointment after June 6, 1932, and before January 1, 1943, constitutes a gift by the individual possessing the power if the power is exercisable in favor of any person or persons in the discretion of such individual, or, however limited*144 as to the persons or objects in whose favor the appointment may be made, if it is exercisable in favor of the individual possessing the power, his estate, his creditors, or the creditors of his estate. The release before July 1, 1946, of a power to appoint created on or before October 21, 1942, the date of enactment of the Revenue Act of 1942, is excepted from the application of the tax by reason of the express provisions of section 452 (c) of the Revenue Act of 1942, as amended by Public Law 95 (79th Congress), approved June 29, 1945. * * *Section 452 (c) referred to in Regulations 108, section 86.2 (b), above (as amended by the Joint Resolution of December 17, 1942, by section 10 of the Current Tax Payment Act of 1943, by section 505 of the Revenue Act of 1943, by Public Law 511, 78th Congress, approved December 20, 1944, and by the Joint Resolution of June 29, 1945), provides:(c) Release Before July 1, 1946. --(1) A release of a power to appoint before July 1, 1946, shall not be deemed a transfer of property by the individual possessing such power.(2) This subsection shall apply to all calendar years prior to 1946 and to that part of the calendar year 1946 prior to July 1, *145 1946.In our opinion, the amendments enacted by section 452 are not effective retroactively. See Henry F. du Pont, 2 T.C. 246">2 T. C. 246, where we pointed out that "The evident purpose [of section 452 of the Revenue Act of 1942] was merely to add to the category of taxable gifts the exercise or release of a power of appointment received by the holder of the power from another." Section 451 of the Revenue Act of 1942 (in the same "Part" as section 452) provides:SEC. 452. GIFTS TO WHICH AMENDMENTS APPLICABLE.Except as otherwise expressly provided, the amendments made by this Part shall be applicable only with respect to gifts made in the calendar year 1943, and succeeding calendar years.*260 We can find nothing in section 452 "expressly" providing that the amendments there added are applicable to an exercise or release of a power of appointment executed in 1941.It is clear, we think, that nowhere in section 452 (b) (1) and (2) is there any express provision that exercise of a power of appointment prior to January 1, 1943, is, as respondent contends, subject to the amendments, and without an express provision to that effect, the exercise of power*146 by the petitioner on July 30, 1941, may not be subjected to the language of section 452 (a) that "An exercise or release of a power of appointment shall be deemed a transfer of property by the individual possessing such power."If the language of Regulations 108, section 86.2 (b) is intended to provide for gift taxation on exercises of powers prior to 1943, under the amendments provided in section 452, we think it is not within that statute and that it is invalid as applied here.Subsection (b) (1) of section 452 does not affirmatively state that the amendments shall apply to any exercise, prior to the amendments, if, as here, the power is exercisable by the donee in his own favor. It merely requires, with respect to a power other than one so exercisable, that there be exercise thereafter for the amendments to apply.Though the respondent invokes section 1000 (e), Internal Revenue Code (as added by section 502 (a), Revenue Act of 1943), and the language of the Senate Committee report thereon, we find nothing in either to support his theory. Not only do the text of the act and the committee report cover only cases of powers exercisable by the grantor, with no language as *147 to donee of power, but the closing lines of the committee report specifically state: "This section does not affect the present law governing the taxability of powers of appointment received from another person."Since we consider the 1942 amendments inapplicable, it only remains to inquire whether prior thereto the exercise of the power of appointment caused gift taxation. But exercise of a power, even by the donor himself, does not, prior to relinquishment thereof, cause incidence of gift tax. Sanford's Estate v. Commissioner, supra. We can not conceive why such exercise by a donee of such a power would be of greater effect. In Edith Evelyn Clark, supra, we held that there was no taxable transfer of property in 1932 upon the relinquishment of such a power, even though the relinquishment there was effected by an amendment of the deed of trust, under the power to amend therein contained, and thus an exercise of the power.So far as funds A and B are concerned, the petitioner on July 30, 1941, in fact relinquished or released, rather than exercised, her powers, which she could do, under the amendatory legislation, *148 section 452 (c) (1), as amended by H. J. Res. 353, approved May 29, 1946, until July 1, 1947, without incurring gift tax. The respondent, on *261 brief, states that, "With respect to Trust funds A and B, the petitioner unquestionably made a completed irrevocable transfer," and urges that "a gift is complete when the donor relinquishes dominion and control over the subject matter of a gift, as did the petitioner in the instant case on July 30, 1941, by creation of Trust funds A, B and C," and he computes the amount of gift by value of all, less petitioner's life estate (and certain contingent gifts not here involved), thus seeming to recognize release pro tanto of petitioner's powers. We hold that the petitioner did not incur gift taxation by the instrument of July 30, 1941.This leaves for consideration only the question whether the petitioner is liable for gift tax on the income paid to others prior to July 30, 1941. To hold that the payment of such income causes incidence of gift tax on the donee would be inconsistent with our view in Edith Evelyn Clark, supra. There the power was held by a donee, and she exercised it by amending the deed*149 of trust to strike out the paragraph giving her power to revoke, terminate, or amend. The trust instrument otherwise provided for income to her for life, thereafter corpus and income equally to three children, or their issue. The Commissioner determined that she had been "vested with complete control and disposition of the property and your relinquishing such right on June 22, 1932, constituted a gift * * *." We pointed out that the effect was the same whether there was appointment to the successor beneficiaries, or relinquishment of power to appoint; also that the beneficiaries could, despite exercise of the power by appointing them, take under the original trust; and we held that the relinquishment was not a taxable transfer. The same is true here, that is, the beneficiaries who received the income distributed would get it as effectively without appointment as with it, and by virtue of the trust instrument. The petitioner did nothing except to refrain from exercising her power to take or dispose other than to the beneficiaries who received the income. This is in the nature of relinquishment and within the ambit of the Edith Evelyn Clark case. If thereunder, where power*150 over the trust was essentially the same as here, written relinquishment does not constitute a gift, inaction by the present petitioner, permitting the trust instrument to be followed as made, seems to be even less of the nature of gift. Cf. Camelia I. H. Cerf, 1 T.C. 1087">1 T. C. 1087. Respondent refers to a committee report on section 502 of the Revenue Act of 1943, adding section 501 (c) of the 1932 Act, but therein we find reference only to payments of income where the grantor of the trust retains power over future income, the emphasized language in fact being "the interim payment of income to any beneficiary or other surrender by the grantor of control over such income prior to such termination is nevertheless a taxable gift and to be treated accordingly." *262 Regulations 108, section 86.3, also relied on by the respondent, clearly is intended to apply, as does the example given therein, to cases of rights reserved by the donor of the trust, nothing indicating applicability to a case of donated powers of appointment. It should not be applied here. Nor is the fact that the petitioner settled a contention with the Commissioner as to whether*151 she was owner of the trust income, by paying what tax the trustee and others had not paid, to be considered here. Such compromise does not necessarily demonstrate accuracy of view nor govern here. Commissioner v. Warner, 127 Fed. (2d) 913, and Leonard A. Yerkes, 47 B. T. A. 431, cited by the respondent, involved powers reserved by the grantor. Richardson v. Commissioner, 151 Fed. (2d) 102, also cited by the respondent, involved the donee of a power to appoint, as here, but the donee, who was also the trustee of the trusts which he had power to cancel for his own benefit, did not merely permit income to be paid or accumulated for others, but himself received the income as trustee, and within his discretion, as provided in the trust instrument, either set it aside as accumulations for the beneficiaries or paid it to them, whereby as the Circuit Court, affirming the Tax Court, held, he made completed gifts. Here the petitioner was not trustee, and took no such affirmative action as did the petitioner in the Richardson case. She did nothing, and the payment of income to the beneficiaries*152 was not her act, but that of the trustee. She could, under the terms of the trust, accomplish nothing by inaction for she could direct the trustee and alter, amend, or terminate the trust only by an instrument in writing delivered to the trustee. Under these facts we think the Richardson case does not apply. Here, as in Camelia I. H. Cerf, supra, we said of the Edith Evelyn Clark case, the petitioner merely had a power of defeasance over the interests of the other beneficiaries, which interests were already contingently theirs, under the trust instrument. Relinquishment merely removed the power of defeasance. Unlike the Cerf case, where the petitioner was sole income beneficiary and we held she had a vested equitable interest, here, as in the Clark case, the petitioner (aside from her own 50 per cent interest in the income trust here involved) had nothing except a power to defeat the interests contingently belonging to the others, the children. Failure to exercise that power did not in our opinion effect a gift. If the petitioner in the Clark case could not effect gift by relinquishment, the petitioner here could not do so *153 by doing nothing but let the trust provisions take their course and the income take its course to other beneficiaries. We conclude that petitioner did not make gifts of the income paid to the other beneficiaries prior to July 30, 1941.Decision of no deficiency will be entered.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624397/

SCOTT P. THURNER AND YVONNE E. THURNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentThurner v. CommissionerDocket No. 8407-87United States Tax CourtT.C. Memo 1990-529; 1990 Tax Ct. Memo LEXIS 583; 60 T.C.M. (CCH) 961; T.C.M. (RIA) 90529; October 9, 1990, Filed *583 Decision will be entered under Rule 155. Gaar W. Steiner and Cameron D. Sewell, for the petitioners. William P. Hardeman and Henry C. Griego, for the respondent. COLVIN, Judge. COLVINMEMORANDUM FINDINGS OF FACT AND OPINION By notice of deficiency sent to petitioners on December 29, 1986, respondent determined deficiencies, additions to tax, and increased interest as follows: Sec. 6653(a) 1 orYearDeficiencySec. 6653(a)(1)Sec. 6621(c)1980$ 351,855$ 17,593To be determined1981512,05225,603To be determined For 1981, respondent also determined an addition to tax under section 6653(a)(2) equal to 50 percent of the interest due on $ 512,052. Petitioners claimed substantial losses in 1980 and 1981 from gold and platinum spread 2 transactions arranged through L.M.E. Investments, Ltd., and L.M.E. Commodities, Ltd. (both referred to here as LME). LME was found to have inspired, designed, and executed certain transactions with United States investors which were factual shams in Forseth v. Commissioner, 85 T.C. 127 (1985), affd. 845 F.2d 746">845 F.2d 746 (7th Cir. 1988), affd. per curiam sub nom. Enrici v. Commissioner, 813 F.2d 293 (9th Cir. 1987), affd. without opinion sub nom. Bramblett v. Commissioner, 810 F.2d 197">810 F.2d 197 (5th Cir. 1987), affd. without opinion sub nom. Woolridge v. Commissioner, 800 F.2d 266">800 F.2d 266 (11th Cir. 1986). Also Mahoney v. Commissioner, 808 F.2d 1219 (6th Cir. 1987). On their Federal income tax returns, petitioners deducted losses from the claimed cancellation of the gold and platinum spread transactions. Respondent disallowed the deductions. The primary issues for decision are: *584 1. Whether petitioners may deduct amounts attributable to cancellation of gold and platinum spread transaction contracts in 1980 and 1981. We find that the gold and platinum spreads at issue were factual shams. We also find that they were not entered into primarily for profit. We hold that petitioners may not deduct losses resulting from the claimed cancellation of the loss legs of the gold and platinum forward future contracts. 2. Whether petitioners are at risk for more than $ 108,000 in losses in 1980. We hold they are not. Laureys v. Commissioner, 92 T.C. 101 (1989) is distinguished. 3. Whether petitioners are liable for additions to tax for negligence under section 6653(a) for 1980 and section 6653(a)(1) and (a)(2) for 1981. We hold that they*585 are. 4. Whether petitioners are liable for increased interest attributable to a tax-motivated transaction under section 6621(c). We hold that they are. 5. Whether petitioners are liable for damages under section 6673. We hold that they are not. 6. We also address the following preliminary issues: a. Whether price lists from the American Board of Trade (ABT) are admissible. We do not use ABT data in our analysis and so we do not reach this issue. b. Whether the "leads doctrine" places the burden of proof on respondent. We hold it does not. c. Whether documents from Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985), are admissible in this case. We do not use the documents from Forseth v. Commissioner, supra, in our analysis and so we do not reach this issue. FINDINGS OF FACT Some of the facts are stipulated and are so found. We note that respondent asserts that the gold and platinum spreads at issue are factual shams. Our use of terms such as loss, gain, position, straddle, option, and transaction, is not necessarily to be construed as a finding that the transactions are not factual shams. 1. PetitionersPetitioners*586 are husband and wife who resided in Milwaukee, Wisconsin, when the petition was filed. References to petitioner in the singular are to Scott P. Thurner. Petitioners are cash basis, calendar year taxpayers. Petitioner runs a family business in Milwaukee, Wisconsin, and has managed and controlled his own and his family's investments for many years predating 1980. He had been active in high risk investments including oil and gas exploration in the United States and South America and commodities. Petitioner was Chairman of the Board of Trans Delta, a successful venture oil company. In 1980 he and his family realized about a $ 20,000,000 profit from the sale of Trans Delta. On his 1980 return, he reported $ 4,793,361 of capital gains income from the sale, and, after the 60 percent exclusion for long-term capital gains, he included $ 1,941,738 in income. In 1981 petitioner formed T Investment Group, in which he owned about a 20-percent interest at that time. He was the group's managing partner. It was formed to pool family investment resources. Petitioner has invested in commodities since 1972. By 1980 petitioner had invested extensively in many commodities, such as silver,*587 gold, platinum, and other strategic and precious metals. He studied investment advice and market data from various brokers, publications, and seminars. He studied commodities prices and trends by monitoring and charting various commodities daily. Charting was initially done manually and later by computer. He had employees to record, monitor, and chart commodities prices daily. Petitioner made his own investment decisions. Others had input but not discretion to act without his approval. Petitioner employed an accounting and administrative manager, John E. Mackowski. Mr. Mackowski was responsible for financial relationships with brokers, including transfers of more than $ 20,000,000 during each of the years at issue. Mr. Mackowski was also responsible for dealing with different brokerage houses over the years, including LME. Before 1980, petitioner invested in commodity straddles through the United States brokerage firm of E. F. Hutton. Petitioner was at least generally familiar with the tax consequences of his investments during the years at issue. He knew about short and long-term gains and the advantages of taking a loss this year and deferring gain from this year to*588 the next. Petitioner knew that there was a special tax reason for holding an investment six months and one day before selling. He also was aware that a commodity transaction he conducted in May 1981, was done two days before the effective date of a commodities tax reform enacted that year. Generally, petitioner held commodity straddle positions for no longer than nine months. An examination of petitioner's trades during the years at issue shows no canceling of loss legs of straddles except for the gold and platinum transactions at issue. In 1981, petitioners had pensions and annuities income of $ 1,538,133 and interest income of $ 622,796. In apparent anticipation of their tax liability for the year, petitioners prepaid $ 225,417 in estimated tax for taxable year 1981. 2. L.M.E. Investments, Ltd. and L.M.E. Commodities, Ltd.Petitioner dealt in commodities in silver and other metals through brokers in the United States, as well as LME and J. Sinclair & Company of London. Petitioner gave several reasons for going to London, including, the 24 hour trading there, the more international outlook of London brokers than of brokers in the United States, and his belief*589 that trading was "too regulated in America." The transactions at issue here were conducted by petitioner with LME in 1980 and 1981. LME was found to have inspired, designed and executed certain transactions which were factual shams in Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985). LME was a broker in the London market. LME did not take contracts for its own account as a dealer. Instead, it laid off contracts as a broker in the unregulated principal to principal market. Petitioner was introduced to LME by C. L. (Bud) Caveness, a nonpracticing lawyer, friend, and business associate of petitioner for over 15 years. Mr. Caveness had been an LME client since 1974 and had invested in gold, silver, spreads, and straddles over the years. Petitioner did not talk to anyone in the United States about LME other than Mr. Caveness. Petitioner and Mr. Caveness went to London in October 1980 to interview the principal people from LME and other London brokerage firms, including the London branch of a United States firm. He met with them extensively to discuss the entire range of commodities markets, investment opportunities, and strategies in connection with strategic and*590 precious metals, futures contracts, forward contracts, spreads and straddles. LME recommended, in addition to the purchase of various strategic metals and silver contracts, which were petitioner's primary initial interest, that petitioner consider investing in a gold/platinum spread. LME representatives told petitioner that LME had American clients, but none were ever named. We note that all taxpayers in Forseth , except Mr. Bramblett ( Forseth v. Commissioner, supra at 133), were introduced to LME through a United States company called InterAct. In contrast, other than in connection with this case, petitioner had not heard of InterAct or any taxpayer in Forseth v. Commissioner, supra.When petitioner checked on LME at the London branch of his bank, First Wisconsin Bank, he found that the bank did not have a file on LME. He did not try to determine if LME was listed in any publication as a reputable and substantial broker in the commodities market. James Gourlay was the owner and chairman of L.M.E. Investments, Ltd. and L.M.E. Commodities Ltd. James Gourlay was the manager for Competex who developed the commodities transactions*591 for 265 taxpayers in Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087, 1108 (1986), affd. sub nom. Herrington v. Commissioner, 854 F.2d. 755 (5th Cir. 1988), cert. denied 109 S. Ct. 2062">109 S.Ct. 2062, 104 L. Ed. 2d 628">104 L. Ed.2d 628 (1989), affd. sub nom. Yosha v. Commissioner, 861 F.2d 494">861 F.2d 494 (7th Cir. 1988), affd. sub nom. Ratliff v. Commissioner, 865 F.2d 97">865 F.2d 97 (6th Cir. 1989), affd. sub nom. Kirchman v. Commissioner, 862 F.2d 1486">862 F.2d 1486 (11th Cir. 1989), affd. sub nom. Keane v. Commissioner, 865 F.2d 1088">865 F.2d 1088 (9th Cir. 1989), affd. sub nom. Killingsworth v Commissioner, 864 F.2d 1214 (5th Cir. 1989), affd. sub nom. Friedman v. Commissioner, 869 F.2d 785 (4th Cir. 1989), affd. sub nom. Dewees v Commissioner, 870 F.2d 21">870 F.2d 21 (1st Cir. 1989), affd. sub nom. Kielmar v Commissioner, 884 F.2d 959 (7th Cir. 1989), Kielmar v Commissioner (7th Cir. 1990), 1990 US App LEXIS 427, and affd. sub nom. Lee v Commissioner, 897 F.2d 915">897 F.2d 915 (8th Cir. 1989). Competex later changed its name to L.M.E. James Gourlay also had a relationship*592 with the entity, J. Sinclair & Company, which petitioner equated with LME and with which petitioner did business. Paul Gleeson was associated with James Gourlay at LME. Mr. Gleeson became the director of LME during the years at issue. In November 1980, petitioner sent an initial margin deposit of $ 60,000 to LME for the spread at issue here. Petitioner testified that he did not execute a power of attorney. In 1980 and 1981, petitioner established several accounts for himself and T Investments. These included two dollar accounts for the trades at issue here, #09284 and #89005, two sterling accounts bearing the same numbers (#09284 and #89005), and a J. Sinclair dollar and sterling account (#2248). In 1981 T Investments established additional accounts. Petitioner ceased being a customer of LME in 1987 because of a dispute about a commodity purchase unrelated to the transactions at issue here. In 1986 petitioner asked LME to purchase cadmium for him. LME sent petitioner a confirmation of the purchase. Later it was shown LME made no such purchase. The dispute resulted in litigation. Substantially all money owed to petitioner was recovered from LME. 3. Comparison*593 of American and London Commodities MarketsThe London commodities market in gold and platinum during the relevant period was a "principal to principal" market. That is, trades occurred off the exchange by means of direct person-to-person contact and price negotiation. Some trading occurs on the floor of the London Metals Exchange, but the majority of trading is done off the exchange in pre-market or after hours trading. London commodities trading can occur 24 hours a day worldwide. All trading both on and off the London exchange floor is done orally at negotiated prices. American and London commodity prices generally track each other. There is a general correlation. However, there can be price differences for brief periods of time when one market is closed and the other is open. Other differences that can affect price differences between London and other markets, include storage costs, interest rates, transportation costs, insurance costs and the like. London has no regulations governing limitations on daily price changes, unlike markets in the United States which can result in short-term price differences between the American and other world markets. 4. The Spreads*594 a. General DescriptionAs we have found in Glass v. Commissioner, supra at 1101-1104, and in Etshokin v. Commissioner, T.C. Memo. 1990-271, slip op. at 1-4, a commodity futures contract or forward contract is a commitment to deliver or to receive a specified quantity of a commodity at a specified date and price in the future. A futures contract may be offset by taking the opposite position in the same commodity for the same date at the current market price. A person who sells a commodity futures contract is obligated to deliver the commodity on the specified delivery date; this is referred to as taking a short position. A person who buys a commodity futures contract is obligated to accept delivery of the commodity in the specified delivery month; this is referred to as taking a long position. An investor holding only a long or short contract in a commodity has a naked position. An investor holding a long and short contract has a hedged position. The hedge is virtually total if the short and long contracts have the same terms, e.g., the same delivery month. The hedge is not total if the contracts have different delivery months. *595 A commodity futures straddle involves simultaneously holding a long and short position in one commodity. A spread is the same, except it involves two different commodities. The long position and the short position are commonly referred to as the "legs" of the straddle or spread. Petitioner claimed losses from the closing of certain commodity futures contracts by cancellation in 1980 and 1981. When a position was closed by cancellation, LME represented that it would extinguish the responsibilities of the investor thereunder, debiting his or her account for a cancellation fee equal to the amount of loss inherent in the position. In such instances, petitioner did not know how the amount of the loss was determined. When a position was closed by offset, LME would enter into an opposite contract for the purchase or sale of the same quantity and delivery date of that commodity. The transactions at issue here are listed below at paragraph 4d. Generally, the transactions at issue here started as spreads, comprised of long and short forward contracts in equal quantities of gold, on the one side, and platinum, on the other. Losses at issue were claimed based on LME's representation*596 that it closed forward contracts by cancellation. b. The 1980 TransactionsPetitioner analyzed trends in the gold and platinum market over several years and especially from about March to November 1980, when he entered the first gold/platinum spread transaction. Petitioner's decision to enter into a gold and platinum spread was the result of his evaluation and the recommendations of James Gourlay, and Paul Gleeson, both of LME. In 1980, petitioner purchased contracts, setting up spreads that were long in platinum and short in gold. The parties stipulated that petitioner received a letter from James Gourlay, Director and President of LME, dated November 19, 1980, in which Mr. Gourlay thanked petitioner for placing funds for a margin account with LME on the day before. In the letter Mr. Gourlay confirmed that any losses in the dealings in gold and platinum would be restricted to a maximum of $ 108,000. In the letter, Mr. Gourlay, said, "we confirm that any losses in these dealings will be restricted to a maximum loss of 6 percent of this figure ($ 1,800,000), namely, U.S. $ 108,000 (One hundred and eight thousand dollars.)" Petitioner interpreted the letter to mean that*597 LME would try to contain his maximum loss to $ 108,000 for $ 1,800,000 of gold and platinum contracts. Petitioner made purchases on November 21, 24, 25, 28 and December 1, 1980, in account no. 09824. On December 10, 1980, nine days after entering the last spread transaction, petitioner began canceling the loss legs of those spread transactions. The loss legs were long platinum contracts. Paul Gleeson, an agent of LME, told petitioner that there could be a big American tax advantage to selling off half of the spread and going directly into a straddle. Petitioner may have been aware of such a tax advantage at the time. He canceled the long platinum legs of the forward contracts primarily for tax reasons, and possibly to a small degree to avoid further losses. He considered that he was getting about a one-half million dollar loss for 1980 in canceling the forward contracts at issue. He considered the tax consequences of these transactions. On the same days as the 1980 cancellations, petitioner purchased long contracts in gold and held these until they closed both legs on April 2, 1982. When petitioner canceled his 1980 long platinum contracts in 1980 the loss was $ 498,450. *598 When he closed their 1980 spread/straddles in 1982, he had a net loss of $ 19,980. c. The 1981 TransactionsA review of the activity in account no. 89005 shows that, in 1981, petitioner purchased contracts, setting up spreads whereby he was long in gold and short in platinum. These transactions are listed below at paragraph 4d. Forward contracts in gold were purchased on April 8, 9, 10, and 22, 1981, and were canceled on April 29, 30, and May 5, 1981. As in the case of the long platinum loss legs in 1980, petitioner canceled the long gold legs of the forward contracts primarily for tax reasons. He considered that he was getting about a one million dollar loss for 1981 in canceling the forward contracts at issue. He considered the tax consequences of these transactions. On the same day as the 1981 cancellations, petitioner purchased long contracts in platinum. He held these straddle contracts until he closed both legs in January 1983. When petitioner canceled his long platinum contracts in 1981 the loss was $ 1,001,670. When the 1981 transactions were closed in 1983 petitioner had a net loss of $ 40,470. Petitioner did not defer or extend the preset delivery or*599 close out date of any of the transactions. Petitioner reported a short-term capital gain and long-term capital loss on close out of the transactions. There was no conversion of ordinary income into long-term capital gain. d. Summary of the 1980-1983 Transactions At IssuePetitioner's 1980-1982 trades at issue are summarized in the charts below: THE 1980/1982 TRANSACTIONS     Gold and Platinum trade with LME (Acct. No. 09824, dollar     account) for 1980 spread. P = platinum and G = gold. The     parenthetical number cross-references the line describing the     contract which was canceled or offset. Contract orDeliveryTroyPriceGain orDateTradeDebit No.DateOz./TroyLoss1.11/21/80Long P115354 (12)2/22/82800$ 762.502.11/21/80Short G115373 (21)4/22/82800767.003.11/24/80Long P115441 (14)2/24/821,200753.004.11/24/80Short G115497 (22)4/23/821,200751.505.11/25/80Long P115501 (16)2/25/821,200734.506.11/25/80Short G115593 (23)4/26/821,200748.007.11/28/80Long P115711 (18)2/26/82700732.508.11/28/80Short G115698 (24)4/28/82700744.509.12/1/80Long P116047 (20)3/1/821,000742.5010.12/1/80Short G116114 (25)6/1/821,000772.0011.12/10/80Long G117041 (26)7/9/82800685.0012.12/10/80CANCEL P707232 (1)2/22/82800663.00($ 79,600)13.12/11/80Long G117320 (28)7/16/821,200661.0014.12/11/80CANCEL P707233 (3)2/24/821,200640.00(135,600)15.12/11/80Long G117321 (28)7/16/821,200660.0016.12/11/80CANCEL P707234 (5)2/25/821,200639.00(114,600)17.12/11/80Long G117322 (27)7/16/82700659.0018.12/11/80CANCEL P707235 (7)2/26/82700638.00(66,150)19.12/12/80Long G117511 (27)7/16/821,000664.0020.12/12/80CANCEL P707236 (9)3/1/821,000640.00(102,500)       1980 Total Loss(498,450)1981 No Activity21.4/2/82Long G409942 (2)4/22/82800$ 329.00$ 350,400 22.4/2/82Long G409943 (4)4/23/821,200329.00507,000 23.4/2/82Long G409944 (6)4/26/821,200330.00501,600 24.4/2/82Long G409945 (8)4/28/82700331.00289,450 25.4/2/82Long G409946 (10)6/1/821,000335.20436,800 26.4/2/82Short G409947 (11)7/9/82800336.80(278,560)27.4/2/82Short G409948 (17,19)7/16/821,700337.2028.4/2/82Short G409948 (13,15)7/16/822,400337.10(1,328,220)      1982 Total Gain478,470       Net Loss(19,980)*600 THE 1981/1983 TRANSACTIONS     Gold and Platinum trade w/ LME (Acct. No. 89005, dollar account)     for 1981 spread.Contract orDeliveryTroyPriceGain orDateTradeDebit No.DateOz./TroyLoss1.4/8/81Long G100015 (20)4/8/833,000$ 668.202.4/8/81Short P100027 (29)1/7/833,000623.803.4/8/81Long G100016 (24)5/9/833,000674.204.4/8/81Short P100028 (37)2/8/833,000629.805.4/9/81Long G100053 (18)4/8/832,400667.006.4/9/81Short P100075 (35)1/10/832,400623.807.4/9/81Long G100054 (28)5/9/833,000673.308.4/9/81Short P100076 (38)2/9/833,000629.509.4/10/81Long G100056 (16)3/10/832,000637.0010.4/10/81Short P100084 (36)1/10/832,000600.0011.4/22/81 Long G100157 (22)4/22/834,000650.0012.4/22/81Short P100147 (39)2/22/834,000612.0013.4/22/81Long G100158 (26)5/23/833,000656.2514.4/22/81Short P100148 (32)1/21/833,000606.0015.4/29/81Long P100248 (34)5/30/832,000593.5016.4/29/81CANCEL G700006 (9)3/10/832,000605.40($ 63,200)17.4/29/81Long P100249 (31)6/29/832,400600.5018.4/29/81CANCEL G700007 (5)4/8/832,400610.70(135,120)19.4/30/81Long P100257 (30)6/30/833,000603.2020.4/30/81CANCEL G700008 (1)4/8/833,000613.20(165,000)21.4/30/81Long P100258 (41)5/30/834,000596.5022.4/30/81CANCEL G700009 (11)4/22/834,000613.30(146,800)23.5/5/81Long P100385 (40)6/6/833,000599.5024.5/5/81CANCEL G700033 (3)5/9/833,000615.00(177,600)25.5/5/81Long P100386 (33)4/5/833,000587.8026.5/5/81CANCEL G700034 (13)5/23/833,000615.40(122,550)27.5/5/81Long P100387 (42)5/5/833,000593.5028.5/5/81CANCEL G700035 (7)5/9/833,000609.50(191,400)    1982 Total Loss(1,001,670)1982 No Activity29.1/25/83Long P404186 (2)1/7/833,000$ 423.90599,700 30.1/25/83Short P404192 (19)6/30/833,000448.00(465,600)31.1/25/83Short P404191 (17)6/29/832,400465.20(324,720)32.1/25/83Long P404188 (14)1/21/833,000466.00420,000 33.1/25/83Short P404189 (25)4/5/833,000484.20(310,800)34.1/25/83Short P404190 (15)5/30/832,000463.80(259,400)35.1/25/83Long P404187 (6)1/10/832,400442.0036.1/25/83Long P404187 (10)1/10/832,000441.90752,520 37.1/31/83Long P04832 (4)2/8/833,000492.10413,100 38.1/31/83Long P04333 (8)2/9/833,000492.40411,300 39.1/31/83Long P04334 (12)2/22/834,000494.50470,000 40.1/31/83Short P04337 (23)6/6/833,000523.30(228,600)41.1/31/83Short P04336 (21)5/30/834,000522.70(295,200)42.1/31/83Short P04335 (27)5/5/833,000519.80(221,100)   1982 Total Gain961,200    Net Loss(40,470)*601 Cancellation prices were not directly provided by LME. However, when a contract was canceled, a debit note was issued identified by a debit note number and a liquidated damages dollar amount. The debit note dollar amount divided by the number of contract ounces yields a price per ounce. That price per ounce subtracted from the original contract price yields an effective cancellation price which is indicated on the charts. Commissions are not taken into account for these charts because none are separately stated by LME for these accounts. BALANCED POSITIONSAs indicated by the chart below, at the end of each day petitioner was in a balanced position by quantity of gold and platinum. Balanced Position of 1980 SpreadGoldPlatinum DateLong ShortLong ShortBalance11/21/80800800- 0 -11/24/801,2001,200- 0 -11/25/801,2001,200- 0 -11/28/80700700- 0 -12/1/801,0001,000- 0 -12/10/80800800- 0 -12/11/803,1003,100- 0 -12/12/801,0001,000- 0 -4,9004,9004,9004,9004/2/824,9004,900Petitioner's open position on December 31, 1980, was*602 that he was long on gold 4,900 ounces, short on gold 4,900 ounces. Balanced Position of 1981 SpreadGoldPlatinumDateLong ShortLong Short Balance4/8/816,0006,000 - 0 -4/9/815,4005,400 - 0 -4/10/812,0002,000 - 0 -4/22/817,0007,000 - 0 -4/29/814,4004,400 - 0 -4/30/817,0007,000 - 0 -5/5/819,0009,000 - 0 -20,40020,40020,40020,4001/25/8310,40010,400 - 0 -1/31/8310,00010,000 - 0 -20,40020,400Petitioner's open position on December 31, 1981, was that he was long on platinum 20,400 ounces, and short on platinum 20,400 ounces. e. Additional Findings Relating to the 1980 and 1981 Gold and Platinum Transactions(1) Initial Trading Date. LME received the first margin money from petitioner on or about November 19, 1980, and trading activity commenced on or about November 19, 1980. LME documentation shows that cash was received in the account on November 10, 1980, and that trading activity in a strategic metal was initiated on November 10, 1980. (2) Commissions. LME had a normal business*603 practice of charging commissions on commodity trades. Commissions charged by LME are separately stated on documents entitled "Difference Account." For example, this was done for a July 1984 gold transaction. However, there are no separately stated commissions on petitioners' exhibits for the gold and platinum trades in 1980 and 1981. Petitioner's accounting and administrative manager, John Mackowski, never asked LME what, if any, the commissions were for the trades at issue. In contrast, petitioner had made inquiries about commissions in connection with his other dealings with LME. For example, on May 6, 1981, petitioner inquired about the commission for forward contracts of silver, and on April 9, 1984, petitioner made another inquiry about commissions on forward contracts. (3) Confirmations. LME had a normal business practice of generating a document entitled "Confirmation of Contract" to confirm its commodity trades. Confirmations for other transactions were maintained by petitioner and are in the record. However, the record includes no confirmations of the 1980 or 1981 gold or platinum transactions. (4) Inquiries. Petitioner made numerous Telex inquiries to*604 LME about commodities prices. The record includes copies of 78 such inquiries and replies. None are for gold or platinum prices for the contracts at issue here. Petitioner's accounting and administrative manager acknowledged that inquiries into gold or platinum prices were never made. 5. WOCOM and TIFA Transactions With LMEWOCOM Commodities Limited (WOCOM) was organized in 1975 and was a founding member of the Hong Kong Futures Exchange Limited. It is the exclusive Hong Kong agent for Rudolph Wolf & Co., one of the largest metals dealers in the world with many international clients, including LME. TIFA is a Liechtenstein corporation incorporated in 1927 that has engaged in a wide range of investment activities including commodities since that date. David Mitchell has been a director of TIFA since 1964, when he acquired the company for his family. He has full authority to operate on behalf of the company and enter into transactions. TIFA has no ownership interest in or control over LME. Before the trial of this case, counsel for both parties were present in London for the deposition of Paul Gleeson by written questions. David Mitchell was deposed in Brussels*605 by written questions. The record includes LME confirmations to TIFA and WOCOM for gold and platinum trades during 1980 and 1981. The TIFA and WOCOM transactions tended to mirror those of petitioner. For example, around the time petitioner bought long platinum, TIFA or WOCOM bought short platinum in similar quantities. 6. Petitioner's LME Margin ActivitiesOn November 19, 1980, petitioner made an initial margin deposit of $ 60,000 in connection with the 1980 gold/platinum spread. The 1980 transactions were closed in 1982 at a loss of $ 19,980. That amount was subtracted from petitioner's margin accounts. Thus the net fee charged by LME was $ 19,980 for the 1980 transactions. The amount of 1980 losses generated from these transactions was $ 498,450. This is a tax deduction to cost ratio of 24.95 to 1. On April 16, 1981, petitioner made an additional margin deposit of $ 60,000 in connection with the 1981 platinum/gold spread. The 1981 transactions were closed in 1983 at a loss of $ 40,000. Thus, the net fee charged by LME for the 1981 transactions was $ 40,470. The amount of 1981 losses from these transactions was $ 1,001,670. This is a tax deduction to cost ratio of 24.75 to 1. Petitioner made certain other margin deposits for his dealings with LME which are not at issue here. Petitioner ordinarily made margin deposits in advance of any margin call in order to maintain a positive equity balance in the Thurner accounts for trading flexibility. On the few occasions that market conditions required a margin call, funds were deposited immediately. For example, on February 28, 1983, LME made a margin call for $ 4,000,000, which was deposited in cash by wire transfer within 24 hours. At no time during the period from November 1980 to December 1982 were the aggregate of petitioner's personal accounts in a deficit equity position, except to the possible extent of outstanding margin calls which were timely met by petitioner.7. Tax Treatment of Spreads/StraddlesPetitioner relied primarily on Mr. Mackowski for tax advice. Petitioners' 1980 and 1981 tax returns were prepared by John Foley. Petitioner relied on John Foley in connection with tax return preparation. John Foley is an independent CPA who worked primarily through Mr. Mackowski with respect to petitioners' returns. Petitioner personally met Mr. Foley once or twice. The*606 record does not show what information was provided to the tax preparer. When a tax question arose, Mr. Mackowski would check with Mr. Foley, and, on occasion, a tax attorney. Petitioners timely filed joint Federal income tax returns for taxable years 1980 and 1981. On their 1980 return, petitioners claimed an ordinary loss of $ 498,450 for "liquidated damages for contract cancellation." This reduced their 1980 adjusted gross income as shown on their 1980 return from $ 2,380,020, to $ 1,881,570. On their 1981 return, petitioners claimed an ordinary loss of $ 1,001,670 for "liquidation damages contract." This reduced their 1981 adjusted gross income as shown on their 1981 return, from $ 1,407,363 to $ 405,693. Their total tax liability as shown on their 1981 tax return was $ 51,138. Without the loss from the 1981 transaction at issue, petitioners' tax liability would have been $ 563,190. Respondent sent a notice of deficiency to petitioners on December 29, 1986, in which the ordinary losses for their damages were disallowed for both years. OPINION 1. Preliminary Issuesa. Price Lists from American Board of TradeAt trial certain American Board of Trade*607 (ABT) price lists that had been published in the Wall Street Journal were admitted into evidence. Petitioner objected on grounds that the information is irrelevant and inadmissible hearsay evidence. Respondent argued that it is relevant. Respondent relies upon the market quotations exception to the hearsay rule which provides that "market quotations, tabulations, lists, directories, or other published compilations, generally used and relied upon by the public or persons in particular occupations" are an exception to the hearsay rule. Fed. R. Evid. 803(17). Both parties renewed their positions in their briefs. The ABT data was noted in Forseth v. Commissioner, supra at 157. See also Wolcher v. United States, 200 F.2d 493">200 F.2d 493, 498-499 (9th Cir. 1952). However, we do not use the data to reach our result here, so we do not reach this issue. b. Leads Doctrine and Burden of ProofAt trial petitioners raised the so-called "leads doctrine," citing Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954), and Lenske v. United States, 383 F.2d 20">383 F.2d 20 (9th Cir. 1967). The thrust of petitioners' argument is that respondent's*608 agent had not followed all leads, and thus has performed his duties improperly. Because of this, petitioner argues that the burden of proof should be placed on respondent. The leads doctrine was designed to ensure that a person is not convicted of a crime where the method used to prove income is indirect and reasonable leads are not investigated. Holland v. United States, supra. It places a duty on the government in criminal cases to follow up reasonable leads furnished by the taxpayer. Holland v. United States, supra at 135; United States v. Marabelles, 724 F.2d 1374">724 F.2d 1374, 1379 (9th Cir. 1984); United States v. Normile, 587 F.2d 784">587 F.2d 784 (5th Cir. 1979); United States v. Boulet, 577 F.2d 1165">577 F.2d 1165 (5th Cir. 1978), cert. denied 439 U.S. 1114">439 U.S. 1114 (1979); United States v. Lawhon, 499 F.2d 352">499 F.2d 352, 356-357 (5th Cir. 1974), cert. denied 419 U.S. 1121">419 U.S. 1121 (1975); United States v. Slutsky, 487 F.2d 832 (2d Cir. 1973), cert. denied 416 U.S. 937">416 U.S. 937 (1974); United States v. Suskin; 450 F.2d 596">450 F.2d 596, 598 (2d Cir. 1971); United States v. Shavin, 320 F.2d 308">320 F.2d 308, 311 (7th Cir. 1963),*609 cert. denied 375 U.S. 944">375 U.S. 944 (1963); United States v. Nemetz, 309 F. Supp. 1336">309 F. Supp. 1336, 1339 (W.D. Pa. 1970), affd. 450 F.2d 924">450 F.2d 924 (3d Cir. 1971), cert. denied 405 U.S. 988">405 U.S. 988 (1972); Swallow v. United States, 307 F.2d 81">307 F.2d 81, 84 (10th Cir. 1962), cert. denied 371 U.S. 950">371 U.S. 950 (1963). The leads doctrine is not applicable here because an indirect method of proving income is not at issue. Thus, we hold that the burden of proof remains with petitioners in this civil case where specific deductions are identified. c. Evidence from Forseth v. Commissioner, supraRespondent argues that certain evidence admitted at the trial of Forseth v. Commissioner, supra, should be admitted in this case. These documents were marked for identification at trial and authenticated by respondent's witness, but not admitted. This issue was briefed by the parties. Petitioners object on relevance grounds. Respondent argues that the documents are relevant to show that LME does not engage in solely legitimate transactions and to provide examples of transactions found to be factual shams. We do*610 not consider the documents at issue to decide this case. Thus, we do not need to reach this issue. We may, however, take judicial notice of our published opinion in that case. Fed. R. Evid. 201(c); see Funk v. Commissioner, 163 F.2d 796 (3d Cir. 1947); Sydnes v. Commissioner, 74 T.C. 864">74 T.C. 864, 868 n.5 (1980), affd. 457 F.2d 369">457 F.2d 369 (9th Cir. 1972); Kasey v. Commissioner, 54 T.C. 1642 (1970); Ambassador Hotel Co. of Los Angeles v. Commissioner, 32 T.C. 208">32 T.C. 208, 216 (1959), affd. 280 F.2d 303">280 F.2d 303 (9th Cir. 1960); Cumberland Portland Cement Co. v. Commissioner, 29 T.C. 1185">29 T.C. 1185 (1958); see also Levy v. Commissioner, T.C. Memo. 1987-609 affd. without published opinion 884 F.2d 574">884 F.2d 574 (5th Cir. 1989). 2. Authenticity of the TransactionsThe next issue for decision is whether the transactions here were factual shams. Deductions are strictly a matter of legislative grace and petitioners bear the burden of proving that they are entitled to any deductions claimed on their return. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 440 (1934);*611 Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Rule 142(a). Both parties agree that LME has engaged in legitimate commodities transactions on behalf of customers, and both agree that LME has been a party to factual shams patterned after legitimate transactions, such as those described in Forseth v. Commissioner, supra. LME inspired, designed, and executed gold and platinum straddles that we previously found to be factual shams. Forseth v. Commissioner, supra . Respondent contends, and petitioners deny, that these transactions are factual shams. Numerous significant circumstantial facts support respondent's view. LME had a business practice of generating a document called "Confirmation of Contract" to confirm commodity trades. The record includes numerous such confirmations, but none for the transactions at issue. LME's lack of confirmation copies, unlike copious documentation provided for other trades for petitioner, suggests these trades did not occur. LME charged commissions documented in a "Difference Account" statement. The record does not include any separately stated commissions for the transactions at issue. *612 None of petitioners' witnesses, including petitioner, knew how much in commissions was paid for the subject transactions. One of petitioners' witnesses calculated what he believed the commissions should have been, but acknowledged that commissions for the gold and platinum trades at issue were not separately stated. The lack of documentation stating commissions for these transactions, unlike for their other trading, suggests they were not actual transactions. The record includes numerous Telex messages between petitioner and LME concerning prices and movement of commodities, such as strategic metals and silver, but does not include gold or platinum. Mr. Mackowski testified that he could not recall whether he obtained from LME gold or platinum prices on the exchange for market value purposes. Petitioner's lack of inquiries to LME about gold and platinum prices, in marked contrast to petitioner's frequent inquiries about other investments with LME, suggests there was something fundamentally different about them. We note that petitioner's accounting and administrative manager said they could obtain these prices elsewhere, but that doesn't adequately explain why they refrained from*613 making inquiry to LME about these transactions. There are other irregularities in LME paperwork. One example is that LME records state the account for the 1980 transactions was opened on November 10, 1980, while it was actually opened on November 19, 1980. Also, in 1986 petitioner purchased cadmium. LME sent petitioner a confirmation of the purchase. Later it was shown LME made no such purchase. Another circumstantial fact that casts doubt on the transactions is that there is a striking pattern between petitioner's cost for the transactions and the first year losses provided. For 1980 the ratio between first-year loss and petitioner's cost is 24.75 to 1; for 1981 the ratio is 24.95 to 1. In Forseth v. Commissioner, supra, the Court noted a "remarkable correlation between the tax needs of each petitioner * * * and the nature and amount of tax losses delivered by LMEI/LMEC and InterAct." 85 T.C. at 152. Their losses as a percentage of adjusted gross income ranged from 55 percent to 94 percent. Here it was 20.94 percent for 1980 and 71.17 percent for 1981. We note that here petitioner did not deal with InterAct, the United States based firm*614 that brought the Forseth taxpayers (except Mr. Bramblett) to LME. However, we believe LME is perfectly able to conduct factual shams without InterAct. In Forseth, we held a factual sham for Mr. Bramblett who did not utilize InterAct. As that opinion stated, the real role of LMEI/LMEC was to contrive and/or manipulate an unregulated and unpublished market in gold and platinum forward contracts so that it could deliver to its investors the losses promised by its fee-splitting American liaison, InterAct. After a careful review of the facts, we must conclude that the transactions before us were factual shams, inspired, designed, and executed by LMEI/LMEC, with the participation of InterAct, for the sole purpose of achieving for its investors capital and ordinary losses to offset their unrelated income in 1980 and 1981. * * * (85 T.C. at 165.) Petitioners argue that here, unlike in Forseth, they did not give a power of attorney to LME. We do not believe the presence or absence of a power of attorney controls the issue as to whether the transactions were factual shams. Petitioners also argue that the record here includes evidence of the opposite*615 sides for their trades. Petitioners argue that proof of the reality of their gold and platinum trades for 1980 and 1981 is shown by the evidence that WOCOM and TIFA acquired positions which generally mirrored petitioner's trades. We do not believe these records make petitioners' point. These records show positions held by TIFA and WOCOM; they do not necessarily establish any connection to positions held by petitioner. Paul Gleeson said that TIFA and WOCOM purchased the offset positions from those purchased by petitioner. Gleeson said that when petitioner wanted to open a position, he went to TIFA or WOCOM to negotiate the purchase of the opposite position. He also said that whenever petitioner wanted to close out a position, he went back to TIFA or WOCOM to negotiate a price for "canceling" the transaction. Mr. Mitchell did not say that TIFA negotiated a cancellation or the previous contracts in the manner described by Gleeson. He was not asked to do so in the written interrogatories propounded by petitioners' counsel. Mitchell's deposition does not establish that TIFA held the opposite side of petitioner's (as opposed to someone else's) trades. Absent corroboration by*616 the records themselves or Mitchell, the Gleeson deposition does not convince us that TIFA or WOCOM specifically held the opposite sides of petitioner's trades. Respondent's agent testified that it would be impossible for a broker to look back in the business books at the transactions and determine who had the opposite side of one's transactions and petitioner did not convince us otherwise. 3. Profit Motive and Section 108 of the Deficit Reduction Act of 1984 as AmendedPetitioners argue that the deductions from these transactions are allowed under section 108(a) of the Deficit Reduction Act of 1984, as amended by section 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-154, 100 Stat. 2817. Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 884-885 (1987), affd. 904 F.2d 1011">904 F.2d 1011 (5th Cir. 1990); Glass v. Commissioner, supra at 1167; Smith v. Commissioner, 78 T.C. 350">78 T.C. 350, 394 (1982), affd. without published opinion 820 F.2d 1220">820 F.2d 1220 (4th Cir. 1987); and Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001, 1021 (1984). Petitioners argue that the gold and platinum transactions were entered into primarily for profit. *617 They also argue that we should allow the losses because the transactions had a reasonable potential for making a profit. Respondent contends that the transactions were not entered into primarily for profit. Respondent opposes the profit potential standard sought by petitioners, but argues that even if it is applied, petitioners did not meet it. Section 108 of the Deficit Reduction Act of 1984 (section 108), as amended by section 1808(d) of the Tax Reform Act of 1986, provides in pertinent part: Sec. 108. TREATMENT OF CERTAIN LOSSES ON STRADDLES ENTERED INTO BEFORE EFFECTIVE DATE OF ECONOMIC RECOVERY TAX ACT OF 1981. (a) General Rule. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions --(1) which were entered into before 1982 and form part of a straddle, and (2) to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply, any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business. *618 (b) Loss Incurred in a Trade or Business. -- For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business. * * * (e) Straddle. -- For purposes of this section, the term "straddle" has the meaning given to such term by section 1092(c) of the Internal Revenue Code of 1954 as in effect on the day after the date of the enactment of the Economic Recovery Tax Act of 1981, and shall include a straddle all the positions of which are regulated futures contracts. (f) Commodities dealer. -- For purposes of this section, the term "commodities dealer" means any taxpayer who --(1) at any time before January 1, 1982, was an individual described in section 1402(i)(2)(B) of the Internal Revenue Code of 1954 (as added by this subtitle), or * * * (g) Regulated Futures contracts. -- For purposes of this section, the term "regulated futures contracts" has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1954 (as in effect before the date of enactment of this Act). (h) *619 Syndicates. -- For purposes of this section, any loss incurred by a person (other than a commodities dealer) with respect to an interest in a syndicate (within the meaning of section 1256(e)(3)(B) of the Internal Revenue Code of 1954) shall not be considered to be a loss incurred in a trade or business. a. Primarily for Profit Standard AppliesCommodities spread or straddle transactions must be entered into primarily for profit for losses to be deductible under section 108(a) of the Deficit Reduction Act of 1984, as amended by section 1808(d) of the Tax Reform Act of 1986. Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 417 (1988); Boswell v. Commissioner, 91 T.C. 151">91 T.C. 151, 159 (1988); Glass v. Commissioner, supra; Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001 (1984); Smith v. Commissioner, supra.A straddle transaction is "entered into for profit" within the meaning of section 108(a) if it meets the "primarily for profit" standard applicable to losses under section 165(c)(2). Ewing v. Commissioner, supra at 416; Boswell v. Commissioner, 91 T.C. at 158-159.*620 In Ewing v. Commissioner, supra at 417-418, a case involving an investor in a gold straddle in a highly regulated market, we said: In determining whether a straddle transaction is entered into primarily for profit, Fox provides the following additional guidelines: (1) The ultimate issue is profit motive and not profit potential. However, profit potential is a relevant factor to be considered in determining profit motive. 82 T.C. at 1021. (2) Profit motive refers to economic profit independent of tax savings. 82 T.C. at 1022. (3) The determination of profit motive must be made with reference to the spread positions of the straddle and not merely to the losing legs, since it is the overall scheme which determines the deductibility or nondeductibility of the loss. 82 T.C. at 1018, citing Smith v. Commissioner , 78 T.C. at 390-391. (4) If there are two or more motives, it must be determined which is primary, or of first importance. The determination is essentially factual, and greater weight is to be given to objective facts than to self-serving statements characterizing intent. 82 T.C. at 1022.*621 (5) Because the statute speaks of motive in "entering" a transaction, the main focus must be at the time the transactions were initiated. However, all circumstances surrounding the transactions are material to the question of intent. 82 T.C. at 1022. In Yosha v. Commissioner, 861 F.2d 494">861 F.2d 494, 499 (7th Cir. 1988), affg. 87 T.C. 1087">87 T.C. 1087 (1986), the Seventh Circuit Court of Appeals, the Circuit to which this case is appealable, described the "for profit" requirement as follows: *622 [Options straddles] enable investors to speculate in this riskiest of markets without assuming the full market risk. The investor can hedge as much as he likes. The more he hedges, the smaller his risk either of gain or of loss. Although such transactions have economic substance even when the investor would not have engaged in them but for the tax advantages they offer, losses incurred in them are deductible from ordinary income only if they also satisfy the express statutory test applicable to loss deductions from ordinary income. The transactions must have been entered into "for profit," a term that has been interpreted to require that the "nontax profit*623 motive predominates." Miller v. Commissioner, 836 F.2d 1274">836 F.2d 1274, 1279 (10th Cir. 1988). Yosha v. Commissioner, supra at 499. b. Profit Potential StandardPetitioners suggest, however, that whether the transaction was entered into for profit should be measured by profit potential rather than profit motive. We note that the two tests are not mutually exclusive. The amount of profit potential is considered in deciding profit motive. Fox v. Commissioner, 82 T.C. at 1021. In determining whether a straddle or spread transaction is entered into primarily for profit, the ultimate issue is profit motive and not profit potential. Ewing v. Commissioner, supra at 417-418; Fox v. Commissioner, supra at 1021. The Seventh Circuit has recently applied the primarily for profit motive test in Yosha v. Commissioner, supra, affirming Forseth v. Commissioner, but noting that: Despite this growing phalanx of authority, the objective test, strongly urged by the taxpayers in this case, has much to recommend it. Judges can't peer into people's minds or "weigh" *624 motives * * * 861 F.2d at 501. In Boswell v. Commissioner, supra, we held that losses from commodity straddle transactions entered into before June 23, 1981, are deductible if the taxpayer's primary motive for entering into the transactions was to realize an economic profit under section 108(a) of the Deficit Reduction Act of 1984, as amended by section 1808(d) of the Tax Reform Act of 1986. In Friedman v. Commissioner, 869 F.2d 785 (4th Cir. 1989), affg. 87 T.C. 1087">87 T.C. 1087 (1986), the Fourth Circuit held that section 108(a) of the Deficit Reduction Act of 1984 incorporated the "primarily for profit" test. See also Miller v. Commissioner, 836 F.2d 1274">836 F.2d 1274 (10th Cir. 1988), revg. 84 T.C. 827">84 T.C. 827 (1985); Landreth v. Commissioner, 859 F.2d 643">859 F.2d 643 (9th Cir. 1988), affg. in part and revg. in part and remanding T.C. Memo 1985-413">T.C. Memo. 1985-413. Petitioners urge us to reject Boswell v. Commissioner, supra, and the line of cases that followed it, and to adopt an objective test or profit potential test. Specifically, petitioners suggest that where the transaction*625 is authentic and there is profit potential, the taxpayer should be deemed to satisfy the entered into for profit test under section 108(a). We decline to do so. Accordingly, we must decide whether these transactions were entered into primarily for profit, or whether they were primarily tax motivated. c. Application of Primarily for Profit StandardAs discussed below, we are not convinced that petitioners entered into the transactions at issue here primarily for profit. Petitioners argue that they entered into these transactions primarily for profit, but they do not deny considering the tax aspects of the transactions. Their evidence consists primarily of a large volume of other transactions not challenged by respondent and petitioner's testimony that the transactions at issue were entered into primarily for profit. At trial petitioner testified: What I do is, I look at a deal and analyze the deal, and if the deal looks good, whatever tax consequences come, that's just a dividend to you. It makes the deal better. and If it doesn't make economic sense you just don't go into it -- forget about taxes. Petitioner denied knowing that there was any special*626 tax reason for holding an investment six months and one day before selling, and he denied awareness that a commodity transaction he conducted in May 1981, was done two days before an effective date of a commodities tax reform. He denied that he considered that he would get a one-half million dollar tax loss for 1980 or a one million dollar tax loss for 1981 when he canceled the loss legs. Based on his detailed, hands-on, approach to operating his varied business and investment activities, we think he understated his awareness and consideration of tax factors. Greater weight should be given to the objective facts than to petitioner's self-serving testimony regarding intent. Fox v. Commissioner, supra at 1022; Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 699 (1982); 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); Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 666 (1979). Petitioner's objective conduct shows that he wanted to obtain tax losses for 1980 and 1981 in transactions designed to be virtually devoid of risk. We believe that is why he sold his long*627 platinum and gold positions each of those years shortly after buying them, and then replaced them with long gold and platinum positions. The objective facts in this record show petitioners' primary motive in these transactions was to obtain tax losses, and do not show petitioners' primary motive to be profit. Petitioner has entered into many other transactions primarily for profit over a period of many years, including the years at issue here. However, it does not necessarily follow that the trades at issue were entered into for primarily profit. We treat these transactions differently from petitioner's other trades in part because petitioner himself treated them differently. For example, he made frequent inquiries about his other trades, but not these. He received written confirmations of his other trades. In his other trades we have no reason to believe that he canceled a forward contract or sold a loss leg almost immediately after buying it to "cut his losses," replaced it immediately with a substitute position, and then held the hedged position into the second succeeding tax year, as he did here. After selling the loss legs, petitioner held the new balanced positions*628 in the 1980 gold straddle and 1981 platinum straddle for about 14 months, and about 20 months, respectively. Nowhere else in the record is it shown that petitioner held a commodity straddle or spread position for so long. Generally, they were held by petitioner for no longer than nine months. Petitioner anticipated large gross income in 1980 and 1981. He reported a $ 5 million profit from the sale in 1980 of an oil company of which he was chairman of the board. Petitioner entered into the gold and platinum transactions from November 21, 1980, to December 1, 1980. He canceled the loss legs from December 10, 1980, to December 12, 1980. The profit from the sale of the oil company and the timing of the transactions are strong evidence of petitioner's interest in obtaining approximately a half-million dollar ordinary loss write off. In 1981, petitioners had $ 1,538 in income from pensions, $ 1,538,133 from annuities, and $ 622,796 from interest. The $ 225,417 petitioners prepaid in estimated tax for taxable year 1981, shows they believed they would be liable for substantial tax. The ordinary loss of $ 1,001,670 for the contracts reduced petitioners' total tax liability to $ 51,138*629 as shown on their 1981 return from $ 563,190. The timing of the transactions, the manner in which they were conducted, petitioner's use of an unregulated foreign market, and the tax loss to cost ratios indicate tax motivation was in reality the primary motive. Petitioners argue that the instant case is identical to Laureys v. Commissioner, 92 T.C. 101">92 T.C. 101 (1989). We disagree. Laureys is distinguishable on several grounds. First, in Laureys, respondent conceded that the transactions, conducted on the highly regulated Chicago Board of Options Exchange, were not factual shams. Second, the taxpayer in Laureys was a full-time dealer and member of both the Chicago Board of Options Exchange and the Chicago Board of Trade. Here, petitioner was an investor. In that regard this case is more like Boswell v. Commissioner, supra, where the taxpayer was an investor, not a dealer, who entered into commodity straddles and claimed ordinary losses. There, we held that the taxpayer entered into T-bill straddles that had the potential to realize a modicum of economic profit, but the transactions were not entered into with the primary motive to derive*630 an economic profit. Boswell v. Commissioner, 91 T.C. at 153. Third, we did not deal with balancing dual motives in Laureys. We concluded that the taxpayer there had a primary purpose to make a profit. Laureys v. Commissioner, supra at 133-134. Here, we conclude that petitioner had no such primary purpose. Thus, even if there was any profit motive here, we must deal with balancing dual motives. In Fox v. Commissioner, supra, we examined dual motives and stated: The language of section 165(c)(2) does not specify the degree of profit motive necessary to support a section 165(c)(2) loss deduction. An incidental profit motive is insufficient. Ewing v. Commissioner, 20 T.C. 216">20 T.C. 216, 233 (1953), affd. 213 F.2d 438">213 F.2d 438 (2d Cir. 1954). At the other extreme, it requires no citation of authority to state as well that profit need not be the sole motive. When a taxpayer enters a particular transaction with the mixed motives of obtaining a profit and obtaining tax benefits, the question exists whether profit motive must be the primary motive to satisfy section 165(c)(2), or whether the profit motive*631 may be merely significant or substantial. For the purposes of this case, we proceed on the supposition, without deciding, that petitioner had some profit motive. The "primary" standard first appeared as a judicial gloss on the statutory language of section 165(c)(2) in Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282 (1938). The case was unrelated to section 165(c)(2) and the reference to section 23(e) (predecessor to section 165(c)(2)) was made in order to support the proposition that "The instances are many in which purpose or state of mind determines the incidence of an income tax." 304 U.S. at 289. In a footnote, the Court cited examples and included the following sentence: "Similarly, the deductibility of losses under section 23(e) * * * may depend upon whether the taxpayer's motive in entering into the transaction was primarily profit." (304 U.S. at 289 n. 5.) Despite its rather casual genesis, the "primary" standard was echoed by a number of courts subsequently faced with cases under section 165(c)(2). In Austin v. Commissioner, 298 F.2d 583 (2d Cir. 1962), affg. 35 T.C. 221">35 T.C. 221 (1960), the Second Circuit*632 reiterated the standard as follows: Petitioners contend that, since the word " primarily" does not appear in the statute, and since the Tax Court found that the transaction was entered into for profit, the deduction must be allowed. * * * But the position for which petitioners contend would not provide a workable interpretation of sec. 165. * * * In Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282, 289 note 5, 58 S. Ct. 932">58 S. Ct. 932, 936, 82 L.Ed. 1346 (1938), the Supreme Court said: "[T]he deductibility of losses under [sec 165(c)] may depend upon whether the taxpayers' motive in entering the transaction was primarily profit." This court has repeatedly held that, in determining the deductibility of a loss, the primary motive must be ascertained and given effect. * * * [298 F.2d at 584; fn. refs. omitted; emphasis added.] Fox v. Commissioner, 82 T.C. at 1019-1020. Petitioner argues that respondent's proof is circumstantial and entitled to no weight. We again note that the burden of proof is on petitioner. We have relied on circumstantial evidence to determine profit motive. National Water Well Association, Inc. v. Commissioner, 92 T.C. 75">92 T.C. 75, 88 (1989).*633 We have also relied upon circumstantial evidence to determine tax avoidance as a principal purpose for certain conduct. Your Host, Inc. v. Commissioner, 58 T.C. 10 (1972). Even in fraud cases reasonable inferences may be drawn from the facts because direct proof of the taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492 (1943); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). Petitioners' complaint is without merit. Petitioners have not argued that petitioner was a commodities dealer. Thus, the exception for commodities dealers under section 108(b) of the Deficit Reduction Act of 1984 as amended does not apply in this case. d. ConclusionOn balance, after review of the entire record, we find that petitioner had no more than an incidental interest in potential economic gain, and that his primary motive for entering into the transactions at issue was tax avoidance. Therefore, pursuant to our holdings in Smith, Fox, Glass, and Freytag, we find that petitioners have not shown the requisite profit motive. Accordingly, section 108(a) does not allow the deductions at issue. In*634 light of the foregoing, we hold that petitioners are not entitled to deduct amounts for liquidated damages due to cancellation of the loss legs of the gold/platinum spreads at issue. We sustain respondent's determination as to this issue. 4. At RiskPetitioners argue that the at risk limits of section 465(b)(4) do not apply here. Section 465(b) limits a taxpayer's deduction of losses from an activity to the extent that he or she is at risk for the investment. Sec. 465(b)(1). A taxpayer is considered at risk for the amount borrowed for which he or she is personally liable. Sec. 465(b)(1) and (2). Amounts borrowed do not include amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. Sec. 465(b)(4). Petitioners correctly point out that we have held that offsetting positions in options do not constitute "a similar arrangement" under section 465(b)(4). Laureys v. Commissioner, 92 T.C. 101">92 T.C. 101, 131-132 (1989). However, there is a significant difference between the instant case and Laureys. Here, there was a stop-loss agreement of $ 108,000 for $ 1.8 million of gold and platinum*635 trading, evidenced by the November 19, 1980 letter to petitioner from James Gourlay of LME. In the absence of any explanation to the contrary, we take it to apply to all of the 1980 gold and platinum positions at issue here. There was no stop loss agreement in Lauryes. We hold that the stop loss agreement limits petitioners' 1980 losses from these transactions to $ 108,000 for 1980. Respondent also argues that if the transactions are found not to be factual shams and to have been engaged in primarily for profit, that the resulting losses are capital losses, not ordinary losses. In light of our holding on the other issues here, we need not reach this issue. 5. Additions to Tax and Increases to Interesta. NegligenceRespondent determined that petitioners are liable for the additions to tax for negligence under section 6653(a) for 1980. Section 6653(a) imposes an addition to tax equal to five percent of the underpayment if any part of any underpayment is due to negligence or intentional disregard of rules and regulations. Respondent also determined that petitioners are liable for the additions to tax for negligence under sections 6653(a)(1) and (2) for*636 1981. Section 6653(a)(1) imposes an addition to tax equal to five percent of the underpayment if any part of the underpayment is due to negligence or intentional disregard of rules and regulations. Section 6653(a)(2)(2) imposes an additional liability of 50 percent of the interest due on the underpayment of tax attributable to negligence or intentional disregard of rules and regulations. Petitioners bear the burden of proving that respondent's determination that they were negligent or intentionally disregarded the rules and regulations for each of the years in issue was erroneous. Warrensburg Board & Paper Corp. v. Commissioner, 77 T.C. 1107">77 T.C. 1107, 1112 (1981); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). For purposes of these sections, "Negligence is 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), citing Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967), affg. in part and remanding in part 43 T.C. 168">43 T.C. 168 (1964) and T.C. Memo. 1964-299. Petitioners argue that they*637 were not negligent because: (1) petitioners have not disregarded the "at risk" rules; (2) petitioners have substantial authority that their losses were ordinary rather than capital; (3) petitioners satisfy the subjective and objective "for profit" tests; (4) respondent had conceded two issues; and (5) under Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127 (1985), and other analysis petitioners were not negligent. We disagree that petitioners have substantial authority for their position. In fact, the case law is overwhelmingly against their position. As discussed above, we find that petitioners fail to satisfy the "for profit" requirement. Respondent's concessions are irrelevant to this issue because the test is whether or not any part of the underpayment is due to negligence. Petitioners' attempts to contrast the facts of Forseth v. Commissioner, supra, with the instant case are not compelling. It does not logically follow that facts different from a case where negligence is found necessarily result in the absence of negligence in the instant case. Petitioners also contend that they were not negligent because they relied upon the opinions of two*638 professional advisers. Good faith reliance on the advice of counsel or a qualified accountant can be, under certain circumstances, a defense to the addition to tax for negligence. See, e.g., Ewing v. Commissioner, 91 T.C. at 423-424; Jackson v. Commissioner, 86 T.C. 492">86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521">864 F.2d 1521 (10th Cir. 1989); Pessin v. Commissioner, 59 T.C. 473">59 T.C. 473, 489 (1972); Conlorez Corp. v. Commissioner, 51 T.C. 467">51 T.C. 467, 475 (1968); see also United States v. Boyle, 469 U.S. 241">469 U.S. 241, 250-251 (1985). We rejected the taxpayers' reliance defense to negligence in Forseth v. Commissioner, supra at 167. We have also held taxpayers liable for additions to tax for negligence when they argued as a defense reliance on an attorney, accountant, tax adviser, or tax return preparer where there was no showing of the information that the taxpayer gave to the adviser. Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781, 803 (1972); Pessin v. Commissioner, supra; Lester Lumber Co. Inc. v. Commissioner, 14 T.C. 255">14 T.C. 255, 263 (1950). Generally, the duty to file*639 an accurate return cannot be avoided by placing responsibility on an agent. Enoch v. Commissioner, supra at 802. In this case petitioners argue that they relied upon the professional advice of their employee, John Mackowski, petitioners' accounting and administrative manager, and John Foley, an independent certified public accountant who worked under John Mackowski and who prepared the tax returns. Petitioners did not provide any evidence as to the information that they gave to their return preparer. 3 We can only surmise as to the information petitioners may have provided to their accountants and lawyers. Instead, petitioners make general allegations supported by self-serving testimony. Accordingly, we do not know what information and documents petitioners' accountants were given to prepare these returns. Without evidence of the information provided to their return preparer, we are unable to evaluate petitioners' reliance. *640 Petitioners rely on Ewing v. Commissioner, supra, and Jackson v. Commissioner, supra, in support of their reliance claim. However, those cases are distinguishable. In Ewing, the taxpayers read and in good faith relied upon a tax opinion provided by an attorney whom the taxpayer knew and successfully relied on for 10 years. Ewing v. Commissioner, supra at 423. Likewise, in Jackson, the taxpayers relied upon the legal opinion of competent tax counsel. Here, petitioners contend they relied upon their employee, John Mackowski, and their tax preparer, John Foley. Under the circumstances of this case, we believe petitioners' reliance on these persons was unreasonable. We believe that subject to concessions, that the entire underpayment is due to negligence or intentional disregard of rules and regulations. We therefore sustain respondent's determination as to this issue and hold that petitioners are liable for additions to tax for negligence. b. Increased InterestRespondent determined that petitioners are liable for additional interest on an underpayment attributable to a tax-motivated transaction as defined in*641 section 6621(c). 4*642 Petitioners argue that this increased interest rate should not apply because the subject transactions were not factual shams, had economic substance, and were entered into for profit. Section 6621(c) (formerly section 6621(d)) provides for an increase in the interest rate where there is a "substantial underpayment" (an underpayment of at least $ 1,000) in any taxable year "attributable to 1 or more tax motivated transactions." Section 6621(c)(3) defines tax-motivated transactions to include "any straddle (as defined in section 1092(c) without regard to subsections (d) and (e) of section 1092)," sec. 6621(c)(3)(A)(iii), and "any use of an accounting method specified in regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period." Sec. 6621(c)(3)(A)(iv). The increased interest rate is effective as to interest accruing after December 31, 1984 (the date of enactment of the original section 6621(d)), even though the tax-motivated transaction was entered into prior to that date and "regardless of the date the return was filed." H. Rept. 98-861 (Conf.), 1984-3 C.B. (Vol. 2) 239; Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552, 556 (1985),*643 affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). Respondent conceded the 1980 adjustment for origination fees in the amount of $ 4,190, and contends that the remaining deficiency is tax motivated as a distorting accounting method or a straddle. Section 6621(c)(3)(B) provides that the Secretary may add, by regulation, certain transactions that will be treated as tax-motivated transactions. In a case involving section 6621(d) (the predecessor to section 6621(c)), respondent's regulations thereto, and transactions not entered into for profit, we said: respondent's temporary regulations treat as a tax-motivated transaction "any deduction disallowed for any period under section 165(c)(2) relating to any transaction not entered into for profit." Sec. 301.6621-2T, Q-4 and A-4, Proced. & Admin. Regs. (Temporary), T.D. 7998, 1 C.B. 368">1985-1 C.B. 368, 49 Fed. Reg. 59394 (Dec. 28, 1984). [Fn. ref. omitted.] As part of our holding that the transactions lack economic substance, we have explicitly found that the disputed transactions were not entered into for profit. The losses from such transactions are thus not allowable under section 165(c)(2). Accordingly, *644 we also find that pursuant to respondent's temporary regulations, the interest rate under section 6621(d) [now section 6621(c)] is applicable to the underpayments attributable to such disallowed losses. * * * Patin v. Commissioner, 88 T.C. 1086">88 T.C. 1086, 1129 (1987), affd. without opinion Hatheway v. Commissioner, 856 F.2d 186">856 F.2d 186 (4th Cir. 1988) affd. Skeen v. Commissioner, 864 F.2d 93">864 F.2d 93 (9th Cir. 1989), (disagreed with by Heasley v. Commissioner, 902 F.2d 380">902 F.2d 380 (5th Cir. 1990), affd. Gomberg v. Commissioner, 865">868 F.2d 865 (6th Cir. 1989). As discussed above, we have found that the transactions at issue here were primarily tax-motivated transactions and not entered into for profit. Accordingly, we sustain respondent's determination as to this issue and hold that the increased interest under section 6621(c) applies. c. Frivolous Suit Instituted Primarily For DelayFor positions taken after December 31, 1989, in proceedings which are pending on, or commenced after such date, the Court may award a penalty (formerly damages) not in excess of $ 25,000 (formerly $ 5,000) when proceedings have been instituted*645 or maintained primarily for delay, where the taxpayer's position is frivolous or groundless, or where the taxpayer unreasonably fails to pursue available remedies. Section 6673(a)(1). Prior law is applicable to this case. Based on the entire record, we hold that petitioners are not liable for damages under section 6673. To reflect concessions, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. We use the term "gold and platinum spread" to refer to the purchase of forward contracts or futures in two different commodities, i.e., gold and platinum, in a hedged position comprised of two substantially offsetting positions.↩3. See Samp v. Commissioner, T.C. Memo. 1981-706↩.4. Section 6621(c) provides in pertinent part: (c) INTEREST ON SUBSTANTIAL UNDERPAYMENTS ATTRIBUTABLE TO TAX MOTIVATED TRANSACTIONS. -- (1) In General. -- In the case of interest payable under section 6601 with respect to any substantial underpayment attributable to tax motivated transactions, the annual rate of interest established under this section shall be 120 percent of the underpayment rate established under this subsection. (2) Substantial Underpayment Attributable to Tax Motivated Transactions. -- For purposes of this subsection, the term "substantial underpayment attributable to tax motivated transactions" means any underpayment of taxes imposed by subtitle A for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year so attributable exceeds $ 1,000. (3) Tax Motivated Transactions. -- (A) In General. -- For purposes of this subsection, the term "tax motivated transaction" means - * * * (iii) any straddle (as defined in section 1092(c) without regard to subsections (d) and (e) of section 1092), (iv) any use of an accounting method specified in regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period, * * *↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624400/

CAPENTO SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. RAYTHEON PRODUCTION CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Capento Sec. Corp. v. CommissionerDocket Nos. 105246, 108295.United States Board of Tax Appeals47 B.T.A. 691; 1942 BTA LEXIS 653; September 22, 1942, Promulgated *653 1. Corporation C owned all :$500,000) the bonds of corporation P, at a cost of $15,160. In pursuance of a plan of recapitalization of P, 5,000 shares of new preferred stock were in 1936 issued to C in exchange for the bonds, and the bonds were canceled. The value of the preferred shares was $50,000. Held, no gain to C may be recognized. 2. The exchange by P of preferred shares, having a value of $50,000, for its outstanding bonds, having a face value of $500,000, was in pursuance of a plan of recapitalization. Held, no gain to P may be recognized. 3. At the time of the exchange of preferred shares for outstanding bonds, accumulated unpaid interest of $33,750 was canceled. The cancellation was not shown to be in pursuance of the plan of recapitalization. Held, the cancellation of the interest is taxable gain to P. 4. Returns were due on the fifteenth of the month and were not filed until the seventeenth. Reasonable cause being shown for the untimely filing, held, the 5 percent addition to the tax should not be added. Edward C. Thayer, Esq., and Loring P. Jordan, Jr., Esq., for the petitioners. J. T. Haslam, Esq., for the respondent. *654 KERN *691 In Docket No. 105246, the Commissioner determined deficiencies for the fiscal year ended May 31, 1936, of $4,790.50 in income tax and $242 in excess profits tax. He held that the Capento Securities Corporation's exchange of Raytheon Production Corporation's bonds, which had cost Capento $15,160, for the Production Corporation's preferred shares, which had a value of $50,000, within the exemption provisions of section 112 of the Revenue Act of 1934, but consisted of a closed transaction for gain or loss purposes,@ and determined a taxable gain of $34,840. *692 In Docket No. 108295, the Commissioner determined deficiencies for the same fiscal year of $53,987.25 income tax and $18,180.06 excess profits tax. He held that in the same exchange the Raytheon Production Corporation's retirement of bonds for less than the issuing price resulted in a taxable gain of $450,000, the difference between the issuing price of the bonds and the fair market value of the preferred shares. He also held that the $33,750 unpaid interest, which had been accrued and deducted and was canceled in the exchange, was income in the taxable year. In each proceeding the*655 respondent claims a 5 percent penalty for failure to file the return on time. FINDINGS OF FACT. The Capento Securities Corporation, petitioner in Docket No. 105246, and the Raytheon Production Corporation, petitioner in Docket No. 108295, are Delaware corporations with principal office at Newton, Massachusetts. Their income tax returns were filed at Boston. All the stock of each is owned by the Raytheon Manufacturing Co., a Delaware copporation. Capento's stock was represented by ten $100 per value common shares and Production's by one thousand $100 par value common shares. Capento was organized in 1933. At a cost of $15,160 it acquired $500,000 face value bonds issued by Production in 1929. These bonds were its only asset. In 1934 Production borrowed $200,000 from the First National Bank of Boston, and, as a condition of the loan, Capento agreed not to demand or accept any payment on account of the Production bonds while the loan should remain unpaid. In April 1935 Production required $100,000 for the purchase of new equipment, and applied to the bank for an additional loan. The bank replied: * * * it will be necessary to extend the subordination £of the bonds] *656 to cover additional credit granted. It has occurred to us that it would be far simpler and more desirable from the standpoint of the holder of the company's notes that these bonds be replaced by an additional stock interest which would be clearly subordinate to our position. The Federal Reserve Bank of Boston, which was asked to participate in the loan, expressed no objection to the suggested replacement of bonds by stock, but wished a consolidation of the Manufacturing Co. and the subsidiaries. This condition was not pressed, and both banks finally consented to make the loan with equal participation on the understanding that the Production bonds would be replaced by stock. Pursuant to this understanding, the Manufacturing Co., Production, and capento approved and carried out a plan of reorganization whereby Production, after an appropriate charter amendment, issued 5,000 $100 par value shares of 6 percent noncumulative preferred *693 stock to Capento in exchange for the $500,000 face value bonds. The bonds were canceled. The stock had a value of $50,000. On October 25, 1935, the two banks each agreed to lend $50,000 to Production, and Production agreed not to dispose*657 of or encumber its property, incur indebtedness to any other bank, or pay dividends without the creditors' consent, and it was also agreed that the Manufacturing Co. would endorse and guarantee Production's notes and maintain current assets of a value to exceed current liabilities by an amount equal to the unpaid balance of the notes. The Manufacturing Co. gave the required endorsement and guaranty; Production gave to each bank its note for $50,000, dated October 26, 1935, payable in installments ending September 27, 1939; and the loans were made to Production, and were paid at maturity. When the Production bonds were exchanged by Capento for preferred shares, unpaid accrued interest of $33,750 on them was canceled. This interest had been deducted by Production on its income tax returns for the fiscal years ending May 31, 1935 and 1936. The income and excess profits tax returns of Capento and Production for the fiscal year ended May 31, 1936, were subscribed and sworn to by the president and the treasurer of each company before Hubert H. Lewis on Friday, August 14, 1936. Lewis at that time was secretary of both petitioners. He died in 1941. He had charge of filing the tax*658 returns and was known to be careful and meticulos in the performance of his duties. He knew that the returns were due to be filed with the collector at Boston not later than August 15, 1936, which was Saturday. The offices of the petitioners are at Newton, Massachusetts. The return bears the stamp of the collector's office notice to produce at the hearing the envelopes in which the returns in question were transmitted to the collector of internal revenue. Respondent failed to produce these envelopes at the hearing. OPINION. KERN: (1) Capento had acquired the entire issue of Production bonds for $15,160. 1 It was not a shareholder of Production, all of the shares being held by the Manufacturing Co. Capento's only asset was the Production bonds. In the taxable year, pursuant to a plan, Production issued and Capento received 5,000 new preferred shares, worth $50,000, in exchange for the outstanding bonds. The Commissioner determined that by this exchange Capento realized gain of $34,840 which must be recognized. Capento contends that the substitution by Production of preferred shares for bonds was a recapitalization, which, under the Revenue Act of 1934, section 112(g)(1)(D), *659 was a reorganization, and that, since the bonds were exchanged *694 by it solely for stock, no gain may be recognized, citing section 112:b):3) or :4). We see no escape from Capento's position. The substitution of shares for bonds and the cancellation of the latter was a recapitalization, Burnham v. Commissioner, 86 Fed.:2d) 776; certiorari denied, ; U.S. 683; (on review C.C.A., 2d Cir.); , and Capento's exchange of its entire property, consisting of the bonds, was an exchange by it of property or securities solely for stock in a corporation party to the reorganization pursuant to the plan of reorganization. Respondent's argument to the contrary is based largely upon the general premise that such a reorganization is a tax-avoiding device and therefore suspect. But we are unable to find that the procedure adopted was without justifiable business foundation, cf. *660 . The bonds had, so far as the record shows, been issued bona fide, in 1929; Capento had held them during the two years of its existence. Capento is still in existence as Production's preferred shareholder. It is, of course, true that the two corporations are closely related, directly and through the Manufacturing Co., which owns the shares of each; but that does not necessarily color their transactions and prevent normal tax consideration. Capento invested $15,160 in Production Corporation's bonds, and by a change in the form of its investment it now holds Production's preferred shares instead of the bonds. As a shareholder, it has subjected its investment to the risks of the business instead of having, as a bondholder, a fixed obligation; and this was for the purpose, in the interest of the Production Corporation, of further subordinating its own position to that of other lenders. It is hard to see an actual realization of gain which is escaping tax by a factitious device, like that attempted in the Gregory case. There was no doubt an effort to avoid a course which would invite a tax, but this alone is no occasion*661 for disregarding the clear terms of the statute. If the exchange had been a conversion by the Production Corporation into preferred shares pursuant to a provision of the bonds, no gain would have resulted to Capento, the bondholder, who perforce would have made the substitution, par for par, of shares of greater value than the cost to it of the bonds. In Docket No. 105246, the determination is reversed. (2) The Production Corporation in 1929 issued $500,000 of bonds :the consideration does not appear in evidence, so it may be assumed that they were issued for cash at par). In 1933 Capento bought these bonds from the holder at a cost of $15,160, and retained them as its only asset. Before the taxable year, Production needed working capital, and borrowed $200,000 from a bank upon Capento's agreement that the obligation of the bonds was subordinated to the new loan. In the taxable year Production needed more working capital and *695 sought to borrow $100,000. It was suggested that Production and Manufacturing, its sole shareholder, consolidate. This suggestion, however, was not adopted, and, instead of expressly subordinating the bonds to the new borrow, the same result*662 as that of subordination was accomplished by substituting preferred shares for the bonds and canceling the bonds. In July 1935 the new preferred was issued in its entirety of $500,000 par value to Capento and the entire issue of bonds was surrendered by Capento and canceled. The preferred shares were worth $50,000. The new borrow was procured in October. The petitioners argue that under the reorganization sections no gain or loss is realized, and also that no gain or loss is realized by a corporation in the receipt of the subscription price for the original issuance of its shares, citing Regulations 86, article 22:a)-16. The Commissioner argues that Production realized gain of $450,000 in discharging its bonded indebtedness of $500,000 for its shares worth only $50,000, since under the circumstances the reorganization sections are not permitted to apply. As we have said, there is no showing in this evidence of circumstances precluding the application of the reorganization sections. Production issued its preferred shares solely in exchange for its bonds, and section 112(b)(3) describes this situation and provides that no gain or loss shall be recognized. But, leaving aside*663 for the moment the statutory provision, it is hard to see that gain was in fact realized. The corporation had a liability of $500,000 on the bonds, having presumably borrowed that amount. While it discharged that liability, it created a new stock interest which became a balance sheet liability called capital stock. This is plainly different from the discharge of its indebtedness by the payment of money in a less amount than the indebtedness, as in , and the cases which have followed it. To substitute a capital stock liability for a bonded indebtedness may have its advantages, as this case illustrates, but it can not be called a present realization of gain. The assets are not thereby freed from obligation. They become the subscription price contributed by the shareholder. Even though the shares issued are, for a reason not explained by the evidence, worth only $50,000, the amount wherby the par value exceeds the present value is not a gain, for it is the par value which measures the capital stock liability. Gain is not realized by a corporation in the receipt of the subscription price of its shares, Regulations*664 86, article 22:a)-16, and this would seem to be no less true when the subscription price, instead of being newly paid, is the amount which has already been paid in as the principal of a bond loan. While the bond loan has been terminated, the amount borrowed is now committed to capital stock liability instead of to the liability of a fixed indebtedness. *696 The determination that the Production Corporation realized gain of $450,000 is reversed. 3. When the preferred was issued for the outstanding bonds, unpaid interest on the bonds had accumulated to the amount of $33,750. This had been deducted by Production when it accrued. It was not paid, and in petitioners' brief it is said the bondholder's accrued interest disappeared. deficiency, said amount in Production Corporation's income, citing Regulations 86, article 22:a)-149. Petitioners argue that the cancelation of the right to interest was a consideration for the preferred shares and not a forgiveness of indebtedness; and that, if it was a forgiveness, it was a gift. We see nothing in the evidence to support the petitioners' conception, either as consideration for the preferred shares or as a gift. The shares*665 were issued as the consideration for the retirement of the bonds in the same amount, and nothing was said about the interest. The unpaid interest was not an item of the recapitalization plan, cf. Skenandoa Rayon Corporation v. Commissioner, 122 Fed.:2d) 268; certiorari denied, ; . The cancelation of the interest is not explained in the evidence. The fact of cancelation is all that appears. By the cancelation assets were freed of the burden of the interest debt, and there was no corresponding obligation in the preferred shares, for they were issued at a par value only equal to the principal of the bonds. Nor is there evidence tending to show that the cancelation was gratuitous or intended as a gift. The determination that the $33,750 was Production Corporation's income is sustained. 4. Respondent, by amended answer filed many months after the issuance of the deficiency notices and about the time notices of hearing were mailed, asserts penalties under section 291 of the Revenue Act of 1934, as amended by section 406 of the Revenue Act of 1935, on account of the alleged failure of*666 petitioners to file returns within the time prescribed by law. The returns were due on August 15, 1936, which was a Saturday. They were prepared and ready for filing on August 14. They were mailed to the collector of internal revenue at Boston. Petitioners' offices were in Newton which is within the area commonly known as file stamp of the collector with the date of August 17, 1936. This may be considered as some evidence that they were filed on that date. However, if petitioners' failure to file the returns within the time prescribed by law was due to reasonable cause and not to willful *697 neglect, the penalty will not be imposed. Whether the failure in this case to file timely returns was due to reasonable cause is therefore the issue here to be decided. Respondent's regulation :Regulations 86, art. 53-4) provides that if a return is made and placed in the mails, properly addressed and postage paid, in ample time to reach the office of the collector in due course on or before the due date, no penalty will attach even though the return is not actually received by the collector until after the due date. It further provides that, if there is any question as to*667 whether a return was posted in ample time to reach the collector's office by the due date, "the envelope in which the return was transmitted will be preserved by the collector and forwarded to the Commissioner with the return. This regulation assumes, and in our opinion rightfully so, that if taxpayers mail returns to the collector, paid, to the period usually required for the transmission and delivery of mail, then the failure of the returns to arrive at the collector's office within the time allowed by law is not due to the willful neglect of the taxpayers, but, so far as they are concerned, is due to reasonable cause. The regulation also correctly assumes that, if there is any question concerning the time at which the returns were mailed, then the envelopes in which they were mailed would constitute the best evidence. In order to show in the instant case that the failure to file timely returns was due to reasonable cause, petitioners could offer proof that the returns had been timely and postage paid, corporate officer charged with the filing of the returns or through the documentary evidence of the envelopes in which they were mailed. The corporate officer in charge of their*668 filing died before the date of hearing :and before the filing of respondent's amended answer). Petitioners were therefore confined in their proof on this issue to the envelopes which would have definitely proved the time when the returns were mailed to the collector and which, in all cases involving a question of whether a return was posted in ample time to reach the collector's office by the due date, should have been by the collector and forwarded to the Commissioner with the return. Three days before the hearing herein petitioner's counsel served on respondent's counsel a notice to produce these envelopes. This notice was in writing and was in confirmation of an oral request to the same effect made several weeks before. At the hearing respondent's counsel was asked whether he had the envelopes specified in the notice to *698 produce. He answered, them. had no doubt about the situation and there was no necessity for keeping the records. When a party fails to produce documentary evidence pursuant to a notice to produce and no satisfactory explanation for such failure is given, an inference may properly be recognized that the evidence would be unfavorable to the party*669 failing to produce it. Jones on Evidence, 3d Ed. §§ 19, 20 and cases cited. We can think of no situation which more clearly demands the application of this rule than that presented in the instant case, where the respondent has raised an issue involving the imposition of a penalty at a time in the proceeding when he has had in his possession the only evidence which can give a definite answer to the issue which he has raised, which by his own regulation he should have preserved in the event of any such question, and which he failed to produce pursuant to proper notice. From the facts shown, the explanation given by respondent's counsel for his failure to produce the envelopes at the hearing, and the failure to impose the penalties in question at the time the deficiencies were determined, we can draw the logical inference that at the time when the returns were received for filing and at the later time when the deficiencies were determined, the collector and the Commissioner were satisfied that no penalty would attach because of the late filing of the return, and we may ascribe this satisfaction on their part to the fact that the returns were mailed at a time which brought the matter*670 within the purview of respondent's own regulation which we have quoted. This is the logical explanation for the inability of respondent's counsel to produce the envelopes, for if the collector and the Commissioner were satisfied that no penalty should attach, there would be no reason for the preservation of the envelopes. We feel confident that if the envelopes had been preserved they would have been produced at the hearing. We conclude that they were not preserved and from that fact we draw the foregoing inference. Having considered all of the evidence on this issue, and the inferences above referred to, we conclude that the failure of petitioners to file the returns in question within the time prescribed by law was due to reasonable cause and not due to willful neglect, and that no penalty should be imposed against petitioners pursuant to the statute. We have considered this issue without deciding whether, in cases in which respondent alleges in an affirmative answer the failure of petitioner to file a timely return and therefore asks the imposition of a penalty, the burden is on respondent to prove that the failure to file such a timely return is due to willful neglect*671 and not to reasonable *699 cause. If the respondent has such a burden of proof, then the result which we have already reached by another line of reasoning would be a fortiori.Reviewed by the Board. Decision will be entered under Rule 50.STERNHAGEN :Dissenting in part) STERNHAGEN, dissenting in part: I am in agreement with the decision as to each of the first three points upon the merits. But I can not find that the failure to file the returns on the fifteenth, as the statute required, was due to reasonable cause and not due to willful neglect. The statute expressly requires that the penalty shall be added except when it is shown that the failure to file was due to reasonable cause. The evidence shows that the return was not filed within the time required by law, but does not show the cause of the failure. I therefore see no escape from the 5 per centum addition to the tax. MELLOTT and DISNEY agree with this dessent. Footnotes1. The evidence does not show from whom the bonds were purchased. ↩

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11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624401/

UNITED LIBERTARIAN FELLOWSHIP, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentUnited Libertarian Fellowship, Inc. v. CommissionerDocket No. 12306-89XUnited States Tax CourtT.C. Memo 1993-116; 1993 Tax Ct. Memo LEXIS 114; 65 T.C.M. (CCH) 2178; March 29, 1993, Filed *114 For petitioner: David H. Wolen (an officer). For respondent: Ann M. Murphy and Elaine L. Sierra. RUWERUWEMEMORANDUM OPINION RUWE, Judge: Respondent determined that petitioner does not qualify for exemption from Federal income tax under section 501(a) as an organization described in section 501(c)(3). 1 Petitioner challenges respondent's determination by bringing this action for declaratory judgment pursuant to section 7428. The sole issue for decision is whether petitioner satisfies the organizational and operational requirements for exemption pursuant to section 501(c)(3). The parties have submitted a stipulated administrative record. For purposes of this proceeding, we accept the facts contained in the administrative record as true and incorporate them herein by this reference. Rule 217(b)(1). Background*115 United Libertarian Fellowship, Inc., (petitioner) was incorporated in 1975 by William C. White, Kathleen J. White, and C. Douglas Hoiles under the General Nonprofit Corporation Law of the State of California. The articles of incorporation state that petitioner was formed for the following purposes: (a) The specific and primary purpose is to maintain and operate a religious society for religious purposes. (b) The general purposes and powers are to have and exercise all rights and powers conferred on nonprofit corporations under the laws of California, including the power to contract, rent, buy or sell personal or real property, provided, however, that this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in the furtherance of the primary purpose of this corporation. (c) No substantial part of the activities of this corporation shall consist of attempting to influence legislation, and the corporation shall not participate or intervene in any political campaign on behalf of any candidate for public office.The articles of incorporation also provide that the management and control of the corporation's*116 affairs were to be conducted by a board of directors, which was to be initially composed of William C. White, Kathleen J. White, and C. Douglas Hoiles. The directors were to serve as such until selection of their successors. Petitioner's bylaws designate the governing body of petitioner as the board of elders, consisting of three elders who serve until resignation or termination of membership. The board of elders had the following rights and powers: (1) The right to designate successors; (2) the control and management of all the affairs of petitioner; and (3) the power to appoint the officers of petitioner, consisting of a president, a secretary/treasurer, and bishops. In February 1976, respondent determined that petitioner was tax exempt under section 501(c)(3) and recognized it as a "church" under section 170(b)(1)(A)(i). On June 29, 1977, respondent ruled that petitioner was not a "religious order" for Federal employment tax purposes. In 1981, some of petitioner's members came under criminal investigation by the Internal Revenue Service. On February 2, 1981, Special Agent Toral L. Solberg interviewed Mr. White, one of the elders, regarding another ULF member who was a bishop*117 in the organization. In the course of the interview, Special Agent Solberg learned that some bishops and some ordinary members of petitioner take a vow of poverty pursuant to which they contribute their income and assets to the church. One of the functions of a bishop is to determine how to use the assets which that bishop contributed. According to Mr. White, a bishop is responsible for submitting an annual report of the property he administers. Mr. White declined to show copies of these reports to Special Agent Solberg. According to Mr. White, the bishop whom Special Agent Solberg was investigating had contributed his personal residence to petitioner and used it as a parsonage. Special Agent Solberg also learned that the proceeds from the sale of the bishop's former residence subsequently were applied to a new residence when the bishop moved to the East Coast. On July 30, 1981, respondent, by written request, sought information from petitioner for the purpose of determining whether an examination of petitioner was necessary to resolve questions regarding its tax-exempt status. Respondent requested, among other things, information as to petitioner's specific method of record*118 keeping, as well as where the organization kept its books and records and where it maintained its bank accounts. In a statement dated September 1981, petitioner replied that it maintained no financial records, and that as an organization described in sections 6033(a)(2)(A)(i) and 501(c)(3), no record keeping guidelines were prescribed. In response to respondent's inquiry as to whether petitioner makes grants or loans, to whom, and in what amount, petitioner replied that it made loans when consistent with promoting the practice of its beliefs and that it currently had loans outstanding of $ 28,300. Respondent also asked whether petitioner had sold any property, and if so, to list the properties sold, date of sale, purchaser, and selling price. Petitioner's entire response to this question was "The Fellowship has sold three properties totalling 240,500." In response to respondent's request for petitioner's budget, including schedules of receipts, expenditures, assets, and liabilities for the current and following fiscal years, petitioner offered the following: receipts (yearly)gifts, grants, donations, etc.275,000interest, dividends, etc.5,000280,000expenditures (monthly)12 Missions20,000contingency3,33323,333(per month)x    12280,000*119 In response to respondent's request that petitioner describe in detail all properties owned by the organization, how such properties were used, whether they generated income or were used by anyone other than the church, petitioner replied: "The Fellowship owns the following properties: Church headquarters and mission in California, retreat in Idaho, and mission in Florida. The properties are used solely by the Church to conduct its daily activities." On November 26, 1981, respondent sent a second request for information from petitioner. Respondent again asked for petitioner's specific method of record keeping, a list of specific records, and their locations. This time, petitioner replied that: "The Fellowship maintains bank accounts for receipts and disbursements, with the records of such accounts maintained at Church headquarters." Petitioner did provide, as requested, the names and addresses of the board of elders as follows: Will Barkley, 1220 Larnel Place, Los Altos, CA 94022 David H. Wolen, 1220 Larnel Place, Los Altos, CA 94022 William C. White, 1220 Larnel Place, Los Altos, CA 94022 In response to respondent's request for the addresses and descriptions of petitioner's*120 church headquarters and mission in California, retreat in Idaho, and mission in Florida, petitioner replied: a. ULF headquarters: a wood frame building used for worship, meetings, meditation, study, and administration. b. ULFIdaho retreat: a log cabin in a rural setting used for retreat, worship, study, meditation, and administration. c. ULF West coast mission: a wood frame building used for meetings, worship, meditation, study, and administration.With the exception of the above information, petitioner refused to answer respondent's requests for information regarding the recipients of outstanding loans, names of ministers and amounts of parsonage they were paid, schedules of assets and liabilities, and the addresses of the properties listed as owned by petitioner in its previous response. On June 15, 1982, respondent sent petitioner notice that, based on the insufficiency of petitioner's responses, respondent determined it necessary to examine petitioner's books and religious activities. Beginning in April 1984, respondent's exempt organizations specialist made several attempts to schedule appointments to examine petitioner's books and activities. After rescheduling*121 five times in attempts to accommodate petitioner, respondent's agent met with petitioner's representative on September 17, 1984. Petitioner's representative did not produce any of petitioner's books or records for examination. On January 18, 1985, respondent issued a 30-day letter to petitioner notifying it of respondent's intention to revoke petitioner's exempt status and of petitioner's right to protest the proposed revocation. In May 1985, an appeals officer scheduled a hearing for June 11, 1985, as requested by petitioner's representative. Petitioner did not provide any further records or information to respondent or Appeals. On March 6, 1989, respondent issued a final adverse determination as to petitioner's exempt status under section 501(c)(3). Respondent's notice provides that the adverse determination is based upon petitioner's failure to establish that: (1) It operated exclusively for religious, charitable, or other exempt purposes; (2) it operated as a church as described in section 170(b)(1)(A)(i); and (3) that no part of its net earnings inured to the benefit of a private shareholder or individual. DiscussionSection 501 provides: (a) Exemption From Taxation. *122 -- An organization described in subsection (c) * * * shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503. * * * (c) List of Exempt Organizations. -- The following organizations are referred to in subsection (a): * * * (3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, * * * and which does not participate in, or intervene in * * * any political campaign on behalf of (or in opposition to) any candidate for public office.An organization is therefore entitled to exempt status if it is both organized and operated exclusively for religious or charitable purposes. The regulations under section 501(c)(3) provide both an organizational and operational test for ex emption. Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs. Failure to meet either the organizational*123 or the operational test negates exempt status. Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs.Respondent, in the notice of final adverse determination and on brief, focused entirely on petitioner's failure to satisfy its burden with respect to the operational test. We therefore direct our inquiry accordingly. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Sec. 1.501(c)(3)-1(c)(2), Income Tax Regs. The concept of private inurement is to ensure that the organization serves public rather than private interests. Church of Scientology of California v. Commissioner, 83 T.C. 381">83 T.C. 381, 491 (1984), affd. 823 F.2d 1310">823 F.2d 1310 (9th Cir. 1987). In a proceeding under section 7428, petitioner bears the burden of proof to establish that respondent's determination was in error. Rule 217(c)(2); Church of Scientology of California v. Commissioner, supra; Basic Bible Church v. Commissioner, 74 T.C. 846">74 T.C. 846, 856 (1980), affd. sub nom. Granzow v. Commissioner, 739 F.2d 265">739 F.2d 265 (7th Cir. 1984).*124 For an organization claiming the benefits of section 501(c)(3) as a religious organization, "tax exemption is a privilege, a matter of grace rather than right". Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849">470 F.2d 849, 857 (10th Cir. 1972). Under section 1.6033-2(h)(2), Income Tax Regs., an organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status. This Court has previously held that where the creators control the affairs of the organization, there is an obvious opportunity for abuse, which necessitates an open and candid disclosure of all facts bearing upon the organization, operations, and finances so that the Court can be assured that by granting the claimed exemption it is not sanctioning an abuse of the revenue laws. Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531">74 T.C. 531, 535 (1980), affd. 670 F.2d 104">670 F.2d 104 (9th Cir. 1981); see General Conference of the Free Church v. Commissioner, 71 T.C. 920">71 T.C. 920 (1979);*125 Levy Family Tribe Foundation, Inc. v. Commissioner, 69 T.C. 615 (1978). Where such disclosure is not made, the logical inference is that the facts, if disclosed, would show that the taxpayer fails to meet the requirements of section 501(c)(3). Bubbling Well Church of Universal Love, Inc. v. Commissioner, supra.Petitioner leaves us no choice but to draw such an inference in the present case. The record is devoid of documentation or other substantive information regarding petitioner's operations. No financial records and no minutes of meetings held or attended by the board of elders or petitioner's bishops were ever produced. What little information petitioner did provide, pursuant to respondent's written requests, was extremely vague and, in our view, simply an attempt by petitioner to avoid disclosing the requested information. Petitioner has completely failed to establish its entitlement to retain its tax-exempt status. 2*126 Petitioner has also failed to properly prosecute its case. Petitioner failed to file a brief, as ordered by the Court and required by Rule 151, or explain its failure to do so. We have previously treated such inaction by a party as an abandonment of those issues not addressed. See Calcutt v. Commissioner, 84 T.C. 716">84 T.C. 716, 721 (1985); Klein v. Commissioner, 6 B.T.A. 617">6 B.T.A. 617, 623 (1927); Hawkins v. Commissioner, T.C. Memo. 1990-341; Nosek v. Commissioner, T.C. Memo 1989-622">T.C. Memo. 1989-622; Bender v. Commissioner, T.C. Memo 1985-375">T.C. Memo. 1985-375. We have also held that failure to file a brief may justify the dismissal of all issues as to which the taxpayers have the burden of proof. Stringer v. Commissioner, 84 T.C. 693">84 T.C. 693, 708 (1985), affd. without opinion 789 F.2d 917">789 F.2d 917 (4th Cir. 1986). We sustain respondent's revocation of petitioner's exempt status. Decision will be entered for respondent. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Respondent offered, as evidence of petitioner's activities, the 1990 convictions of two of petitioner's elders, Mr. Barkley and Mr. White, for conspiracy to obstruct the Internal Revenue Service in its computation, assessment, and collection of Mr. Barkley's Federal income taxes and of four counts of tax evasion in connection with their ULF activities. Each count of the indictment charging Mr. Barkley and Mr. White with tax evasion alleged that they attempted to evade tax by "failing to pay to the Internal Revenue Service said income tax, by assigning his income to the United Libertarian Fellowship, Inc., and by filing * * * false * * * Returns." Kathleen White, one of petitioner's original incorporators, was also convicted on May 8, 1991, of two counts of making a false return of income in violation of sec. 7206(1). Petitioner stipulated to the authenticity of the indictments and verdicts, but nevertheless, objected to their admission. Our disposition of this action based on petitioner's failure to establish its entitlement to tax-exempt status, makes it unnecessary to rely on or make any specific findings with respect to the indictments and convictions.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624402/

Charles J. Kohl v. Commissioner.Kohl v. CommissionerDocket No. 6672-66.United States Tax CourtT.C. Memo 1968-233; 1968 Tax Ct. Memo LEXIS 67; 27 T.C.M. (CCH) 1155; T.C.M. (RIA) 68233; October 8, 1968. Filed *67 Loss deduction: Reconveyance of residence: Requirement of profit-inspired use. - The petitioner claimed that his residence was converted into an investment after he moved to another residence. After remaining vacant for three years, the residence was reconveyed to the original owner, whereby the petitioner claimed a long-term capital loss of $3,934. However, the right to a loss deduction must be supported by more than a taxpayer's subjective attitude toward his property. Charles J. Kohl, pro se, 1594 Vernal Ave., Fremont, Calif. Joel A. Sharon, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: Respondent determined deficiencies in petitioner's income tax for the years and in the amounts as follows: YearDeficiency1962$218.971963221.601964186.78The sole issue presented is whether petitioner was entitled to a loss deduction under section 165 of the Internal Revenue Code of 19541 on the reconveyance of his residence to the original seller. Findings of Fact All of the facts have been stipulated and are found accordingly. 1156 Petitioner and his wife filed a joint individual income tax return for each of the calendar years 1962, 1963, and 1964 with the district director at San Francisco, California. During the year 1948, petitioner moved to Ismay, Montana, with his wife and family. On October 29, 1952, petitioner and his wife entered into an agreement entitled "Contract for Deed" (hereinafter sometimes referred to as the contract), with*69 Leonard and Leone Leland (hereinafter referred to as the Lelands) to purchase from the Lelands land and a building located in Ismay, Montana, at a cost of $3,500. The contract provided that petitioner and his wife were to pay a purchase price of $3,500, together with interest thereon at the rate of 6 percent per annum, as follows: $10 by the execution of the contract; $30 plus interest on the unpaid balance by December 1, 1952; and $30 plus such interest by the first day of each and every month thereafter until the purchase price was paid in full. Under the contract, if petitioner and his wife failed to perform any of the covenants, including the monthly payment of $30, the Lelands reserved the right to demand immediate payment of the remaining balance and to have the contract forfeited. The contract was placed in escrow in the First National Bank of Miles City, Montana, together with the deed conveying the property to petitioner and his wife as well as instructions to the escrow agent to deliver the deed to petitioner and his wife when final payment was made. Petitioner used the land and building in Ismay as a personal residence for himself and his family from October 29, 1952, to*70 June 1959. In June 1959 petitioner and his family moved to Newark, California. On August 29, 1961, petitioner and his wife entered into a second agreement with the Lelands pursuant to which the Contract for Deed was canceled and the property was reconveyed to the Lelands. From June 1959, when petitioner moved to California, to August 29, 1961, when the property was reconveyed to the Lelands, petitioner made no attempt to rent the property at Ismay and it remained vacant during that entire period. On petitioner's income tax return for 1961, he reported the transaction involving the purchase and reconveyance of the Ismay property as a long-term capital loss in the amount of $3,934 of which $1,000 was deducted in petitioner's return for each of the years 1961, 1962, 1963, and $934 was deducted in his return for 1964. Respondent has disallowed the entire claimed deduction for each of the years in question. Opinion Section 165(a) of the Code allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise" and section 165(c) further provides, in pertinent part, that * * * In the case of an individual, the deduction under subsection*71 (a) shall be limited to - (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business * * * In Gerald Melone, 45 T.C. 501">45 T.C. 501, 505 (1966), a case factually similar to the case at bar, we recited the pertinent rule as follows: As regards a loss incurred on the sale of residential property, it has long been a settled principle that a loss incurred by a taxpayer from sale of his or her personal residence is not deductible; except where prior to the sale the taxpayer has abandoned the use of the property as his or her personal residence, and has converted the same to a profit-inspired use, so as to qualify the loss for deduction under the above-quoted provisions of sections 165 (a) and 165 (c)(1) and (2). Sec. 1.165-9 (a) and (b), Income Tax Regs.; and Warren Leslie, Sr. 6 T.C. 488">6 T.C. 488. * * * While petitioner contends that the Ismay property was converted to an investment after he moved to California in 1959, his argument finds no support in the record. To the contrary, the only relevant evidence presented consists of petitioner's testimony and a stipulation to the*72 effect that neither petitioner nor anyone in his behalf ever rented or attempted to rent the Ismay property. The fact that he may have considered the property to have become an investment once he moved away in 1959 cannot sustain his burden of proof. The right to a loss deduction under section 165 must be supported by more than a taxpayer's subjective attitude regarding his property. In light of the facts presented, we must hold that respondent correctly disallowed the loss deduction claimed by petitioner in each of the years in question. Decision will be entered for the respondent. 1157 Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/6113494/

IN THE SUPREME COURT OF THE STATE OF NEVADA YEONHEE LEE, No. 82831 Petitioner, vs. THE EIGHTH JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA, IN AND FOR THE COUNTY OF FILED CLARK; AND THE HONORABLE JAN 2 7 2022 DAVID M. JONES, DISTRICT JUDGE, ELIZABETH A. BROWN Respondents, CLERT TREmE CouRT and BY DEPUTTV ALBERTO EDUARDO CARIO, Real Party in Interest. ORDER GRANTING PETITION FOR WRIT OF MANDAMUS This is an original petition for a writ of mandamus challenging a district court order adopting a discovery commissioner's recommendation that the medical examination of real party in interest's physical condition proceed under NRS 52.380. Petitioner, Yeonhee Lee, alleges the district court manifestly abused its discretion by adopting a discovery commissioner's recommendation that NRS 52.380 supersedes NRCP 35. We elect to entertain this petition because "judicial economy and sound judicial administration militate in favor of writ review." Scarbo v. Eighth Judicial Dist. Court, 125 Nev. 118, 121, 206 P.3d 975, 977 (2009). In Lyft, Inc. v. Eighth Judicial District Court, we held NRS 52.380 unconstitutional because it violated the separation of powers SUPREME COURT OF NEVADA (0) I947A 431§P*4 4' :La • 4 , . .• .;kz doctrine. 137 Nev., Adv. Op. 86, P.3d _ (2021). Specifically, NRS 52.380 violated separation of powers because it is a procedural statute that conflicts with NRCP 35—a preexisting court rule. See State v. Connery, 99 Nev. 342, 345, 661 P.2d 1298, 1300 (1983) C[T]he [L]egislature may not enact a procedural statute that conflicts with a pre-existing procedural rule, without violating the doctrine of separation of powers, and . . . such a statute is of no effect."). Given our holding in Lyft, writ relief is appropriate in this case because the district court's adoption of the discovery commissioner's recommendation that NRS 52.380 supersedes NRCP 35, and its resulting denial of Lee's motion, constituted a manifest abuse of discretion. Cf. Round Hill Gen. Improvement Dist. v. Newman, 97 Nev. 601, 603-04, 637 P.2d 534, 536 (1981). Further, issuance of the writ is appropriate because the parties are still in the early stages of litigation and issuing the writ serves the interests of judicial administration. Int? Game Tech., Inc. v. Second Judicial Dist. Court, 124 Nev. 193, 198, 179 P.3d 556, 559 (2008). Accordingly, we ORDER the petition GRANTED AND DIRECT THE CLERK OF THIS COURT TO ISSUE A WRIT OF MANDAMUS instructing the district court to vacate its order adopting the discovery commissioner's 2 :••.:41....• .„ • report and instruct the district court to analyze the parties positions consistent with NRCP 35.' Parraguirre J. .414G. , J. Hardesty Stiglich , J. Cadish Silver Pickering Herndon cc: Hon. David M. Jones, District Judge Hon. Linda M. Bell, Chief Judge Duane Morris LLP/New York Duane Morris LLP/Las Vegas Maier Gutierrez & Associates Eighth District Court Clerk 'Real party in interest, Alberto Eduardo Cario, requested that we not consider Lee's petition because she did not comply with NRS 30.130 prior to filing this petition. NRS 30.130 only applies to declaratory judgment actions. State, Office of the Att:y Gen. v. Justice Court of Las Vegas Twp. (Escalante), 133 Nev. 78, 82, 392 P.3d 170, 173 (2017). This is not a declaratory judgment action. Therefore, we reject Cario's request. 3 ' !.. . . wi•

01-04-2023

01-28-2022

https://www.courtlistener.com/api/rest/v3/opinions/4624405/

JACQUELINE, INC., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Jacqueline, Inc. v. CommissionerDocket Nos. 2982-65, 4708-65, 5701-65, 1560-66, 3731-66, 4596-66, 512-67, 2201-70, 2304-70, 2305-70, 2306-70, 5231-70.United States Tax CourtT.C. Memo 1977-340; 1977 Tax Ct. Memo LEXIS 107; 36 T.C.M. (CCH) 1363; T.C.M. (RIA) 770340; September 27, 1977, Filed Louis D. Curet, for the petitioners. Bruce A. McArdle and E. M. Quijano, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These consolidated cases were assigned to and heard by former Special Trial Judge Joseph N. Ingolia pursuant to Rules 180 through 182, Tax Court Rules of Practice and Procedure. His report was filed on April 14, 1977, and subsequently the parties filed certain exceptions to it. The exceptions have been considered and, for the most part, are rejected. Some modifications*110 have been made in the report of the former Special Trial Judge. In almost every material respect his findings of fact are adopted. The Court also agrees with and adopts his views and conclusions on the legal issues except for the depreciation deduction claimed by Southland which is discussed in the Opinion as Issue 3--Constructive Ownership. Respondent determined deficiencies in the Federal income taxes and additions to tax with respect to the petitioners, as follows: JACQUELINE, INC.Additions to the TaxDocketTaxable YearInt. Rev. Code of 1954 2NumberEndedDeficiencySec. 6651(a)Sec. 6653(a)2982-6510-31-59$12,985.36$ 715.27$ 715.2710-31-6010,218.70567.55567.5510-31-618,573.82-428.691560-6610-31-628,577.73-428.89512-6710-31-636,226.59311.33400.652306-704-30-649,643.682,410.92482.18THE LeBARON CORPORATION4708-6510-31-60$37,253.06$9,313.26-4596-6610-31-6117,526.784,381.70$ 876.3410-31-6237,994.989,498.751,899.752305-7010-31-6327,075.806,768.951,353.794-30-6415,084.143,771.04754.21MOTOR HOTELS OF LOUISIANA, INC.5701-654-30-59$ 8,530.52-$ 426.534-30-6022,619.28-1,130.964-30-616,406.65-320.334-30-623,234.57$ 161.73161.733731-664-30-6321,397.91-1,069.902304-704-30-6432,244.328,061.081,612.224-30-652,085.61521.40104.284-30-6622,882.075,720.521,144.10*111 SOUTHLAND INNS, INC. DeficiencyDocketTaxablePer Stat.IncreasedNumberYr. EndedNoticeDeficiencyTotal2201-704-30-65$ 84,429.31$49,918.49$134,347.804-30-6645,074.6043,487.7288,562.325231-7 04-30-6799,647.7442,461.88142,109.624-30-68116,793.92-116,793.92Additions to the TaxInt. Rev. Code 1954, Sec. 6651(a)DocketPer Stat.IncreasedNumberNoticeDeficiencyTotal2201-70$21,107.33$12,479.62$33,586.9511,268.6510,871.9322,140.585231-7 024,911.9410,615.4735,527.4129,198.48-29,198.48Various concessions have been made by the parties both before and after trial, and will be given effect in the Rule 155 computations. The issues remaining for decision are as follows: 1. Whether LeBaron Corporation is entitled to a net operating loss deduction for the taxable year ended October 31, 1960, following its Chapter X (Bankruptcy Act) reorganization when the losses were incurred prior*112 to the reorganization; and, if so, the amount of the net operating loss. 2. The depreciable useful lives of two motels owned by Jacqueline, Inc. and LeBaron Corporation and the basis for depreciation of the LeBaron Corporation property. 3. Whether Southland Inns, Inc. is entitled to deductions for depreciation, taxes, and interest incurred on or with respect to certain real estate and improvements thereon, legal title to which was held by Jacqueline, Inc. and LeBaron Corporation; and, if so, whether it may use a stepped-up basis for depreciation purposes. 4. Whether Southland Inns, Inc. is entitled to file consolidated returns with Motor Hotels of Louisiana, Inc. and Motels, Inc. in the fiscal years ended April 30, 1967 and 1968, and is entitled to a full surtax exemption of $25,000. 5. Whether the failure of LeBaron Corporation, Jacqueline, Inc., and Motor Hotels of Louisiana, Inc. to file timely corporate income tax returns was due to willful neglect under section 6651(a). 6. Whether any part of the underpayment of tax of LeBaron Corporation, Jacqueline, Inc., and Motor Hotels of Louisiana, Inc. was due to negligence or intentional disregard for rules and regulations*113 under section 6653(a). FINDINGS OF FACT The stipulated facts are so found and, together with the exhibits attached thereto, are incorporated herein by this reference. Net Operating Loss DeductionPetitioner LeBaron Corporation (hereinafter called LeBaron) is a corporation organized under the laws of Louisiana since November 27, 1957. LeBaron's principal offices were located in New Orleans, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, LeBaron filed its U.S. Corporation Income Tax Return (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana.During the periods here involved, LeBaron operated on a fiscal year basis ending October 31st of each year, except for the fiscal year ended April 30, 1964. The capitalization of LeBaron from November 27, 1957, until confirmation of a plan of reorganization under Chapter X of the Bankruptcy Act, consisted of 100 shares of capital stock of a value of $100 per share, or a total of $10,000. The stock ownership of LeBaron from November 27, 1957, until confirmation of a plan of reorganization under Chapter X was as follows: Lionel S. Boulmay, Jr., president and*114 organizer of the corporation-- 98 shares; Elva P. Boulmay, wife of Lionel--l share; and Segrid L. Boulmay--l share. LeBaron constructed the LeBaron Motel located in New Orleans, Louisiana. The motel began operation under the management of Lionel S. Boulmay, Jr., on May 17, 1958. On October 10, 1958, LeBaron filed a petition with the United States District Court for the Eastern District of Louisiana, for corporate reorganization under Chapter X of the Bankruptcy Act. On July 31, 1959, Roy Occhipinti and Frank Occhipinti (hereinafter referred to as the "Occhipinti group") submitted a plan of reorganization to the Bankruptcy Court for approval. An amendment to the plan was filed by the Occhipinti group on August 31, 1959. The plan, as amended, was approved on September 4, 1959, and confirmed on October 7, 1959. From October 10, 1958 until October 7, 1959, the LeBaron Motel was operated by the trustee in bankruptcy. According to the plan of reorganization, the Occhipinti group received all the stock and assets of LeBaron in exchange for $690,000 in cash. The book value of the assets as of October 31, 1959, was $796,965.05. All levies, mortgages, and other encumbrances on the*115 real and movable property of LeBaron were canceled. The issued and outstanding stock certificates of LeBaron were declared canceled and void as of the date of transfer to the Occhipinti group. New certificates were ordered for the authorized and outstanding shares in the manner directed by the Occhipinti group. However, LeBaron was not liquidated after the reorganization. The Occhipinti group continued the operations of LeBaron while seeking a Holiday Inn franchise. On November 12, 1959, the Occhipinti group entered into a licensing agreement with Holiday Inns of America, Inc. The agreement provided that the existing LeBaron Motel was to be converted into a Holiday Inn. A completion date of April 15, 1960, was contemplated with operation under the Holiday Inn system to begin on that date. In order to comply with the conversion specifications, the swimming pool, kitchen, lounge, and restaurant of the old LeBaron Motel were demolished sometime during the 1960 fiscal year. While in reorganization, LeBaron reported net operating loss deductions of $80,896.01 and $23,853.50 for the fiscal years 1958 and 1959, respectively. For the fiscal year 1960, LeBaron claimed a net operating*116 loss deduction of $104,749.51. Respondent disallowed the claimed deduction and determined that $60,660 of the net operating loss deduction for fiscal years 1958 and 1959 was for capital expenditures. These disallowed expenditures were for: Salary$32,500Financial Services23,500Appraisals1,000Finders' Fee2,640Inspection Fee1,320Useful Lives of MotelsPetitioner Jacqueline, Inc. (hereinafter called Jacqueline) is a corporation organized under the laws of Louisiana since October 28, 1958. Jacqueline's principal offices were located in Metairie, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, Jacqueline filed its U.S. Corporation Income Tax Return (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana. Petitioner Southland Inns, Inc. (hereinafter called Southland) is a corporation organized under the laws of Louisiana since May 14, 1964. Southland's principal offices were located in Orleans Parish, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, Southland filed its U.S. Corporation Income Tax Return (Form 1120) with the District*117 Director of Internal Revenue, New Orleans, Louisiana. A corporation known as Carbone-West No. 1 Hotel Builders, Inc. (hereinafter referred to as Carbone-West) obtained a franchise from Holiday Inns of America, Inc., pursuant to which it built a motel at 5733 Airline Highway, Jefferson Parish, Louisiana (U.S. Highway 61). This motel, known as Holiday Inn West, was constructed in accordance with the specifications and requirements of the Holiday Inn franchise. It was completed and open for business on April 1, 1958. Jacqueline purchased the land and improvements of Holiday Inn West on or about October 30, 1958. Jacqueline was the owner of Holiday Inn West during the taxable years 1959 through April 30, 1964. On or about November 12, 1959, LeBaron, under the control of the Occhipinti group, obtained a Holiday Inn franchise for its motel located at 4861 Chef Menteur Highway, New Orleans, Louisiana (U.S. Highway 90). Because the LeBaron motel had not been built according to Holiday Inn specifications, some modification was required. This motel was known as Holiday Inn East.Leon S. Porier, Frank Olah, and Douglas Black (hereinafter referred to as the "Poirier group"), principal*118 stockholders of Southland, purchased the stock of both Jacqueline and LeBaron from the Occhipinti group on or about April 7, 1964.The Holiday Inn franchise of both motels was assigned to the Poirier group for the remainder of the franchise's original 20-year term.No extension could be obtained. On February 28, 1969, the Poirier group sold both Holiday Inn West and Holiday Inn East to Inn Operations, Inc., a subsidiary of Holiday Inns of America, Inc. The sale was made in settlement of a lawsuit brought by the Poirier group to enjoin Holiday Inns from canceling their franchise. Holiday Inns of America subsequently received title to both Holiday Inn West and Holiday Inn East. It leased the land and buildings of the motels to Topeka Inn Management, Inc. for a 22-year period with seven 10-year renewal options. Topeka Inn Management was also given a year-to-year management contract. As of June 1974, both motels were operated as part of the Holiday Inn chain. Membership in the Holiday Inn chain provides certain advantages which facilitate the operation of a motel. One such advantage is the right to participate in "Holi-Dex," a nationwide referral and advance reservation system. *119 On an average a Holiday Inn receives 30 percent of its business through referrals. Holiday Inn East and Holiday Inn West relied even more heavily on the system, and more than 70 percent of their business is attributable to Holi-Dex reservations. Normally a motel may qualify for membership in the Holiday Inn chain only if it meets certain minimum standards as to unit size, structural soundness, design, and location.The location must appear conducive to profitable operation, i.e., the economic climate of the surrounding area must be healthy and the nearby highways must carry a substantial amount of traffic. In order to keep its franchise for the normal 20-year term, a Holiday Inn must comply with certain operational standards and must also remain profitable. Operational standards are enforced by quarterly inspections of the motel, the restaurant, and the overall facilities. Occupancy rates and economic yield figures are reviewed by an official of Holiday Inns of America, who must recommend whether to continue or terminate a franchise. Most motels which lose their franchises survive as independently run operations. However, factors which reduce a motel's occupancy rate and profitability*120 to the Holiday Inn Corporation also affect its profitability as an independently run operation. Such factors include a decrease in the traffic flow bringing travelers past the motel, an adverse change in the commercial environment, physical deterioration of the motel over a period of time, and competition from motels of more modern design. Although the average occupancy rate at which Holiday Inns are profitable is somewhat higher, the Holiday Inn Corporation estimated a 60 percent break-even rate for Holiday Inn East and for Holiday Inn West. The occupancy rates required to make earlier investment profitable were in excess of 80 percent. Between 1964 and 1969, the occupancy rates had been in the range of 90 to 95 percent. After 1969, the rates declined, and in 1973 and early 1974, they were about 60 percent.Holiday Inn East had rates of 51.2 and 50.1 percent in 1970 and 1971, then made a recovery to about 61 percent. Holiday Inn West had rates of 51.2 percent, 65.7 percent, 54.9 percent, 65.5 percent, and 59.0 percent in the fiscal years ended 1970, 1971, 1972, 1973, and the short year ended May 24, 1974, respectively.Holiday Inn West is a complex consisting of seven separate*121 one or two story buildings. Four two story buildings house the motel units and are built of steel frames and steel bar joists which support a poured concrete deck, concrete slab balconies, and a concrete roof. Two of the buildings consist of back-to-back units separated by a chase or passageway. The other two buildings consist of single units, not back-to-back units. The buildings which do not house motel units are also of steel and concrete structure. There was physical deterioration of the buildings. Metal flashings on five of the buildings showed signs of leaking. On four of the buildings this allowed water to drip onto the balconies. The air conditioning system leaked, and drip pans installed in each room frequently overflowed, causing damage to guests' clothing. The masonry walls of one building exhibited diagonal cracks. On four buildings, the caulking around the windows and doors had dried and cracked, and several of the doors were warped. The bases of the back walls of four buildings had deteriorated. Dry rot and termite damage was present, particularly in the passageway or chase between the rooms which were built back to back. It was impossible to establish the*122 precise time period during which these defects developed. Despite some excessive wear and tear, no major structural problems exist. Holiday Inn East is a complex consisting of six separate one and two story buildings. Five of the six buildings were constructed in 1957. Three of these house motel units. The sixth building, containing 62 units, was constructed in 1966. All six buildings are built on concrete slab foundations. The three buildings built in 1957 which house motel units are two story wood framed structures. One of the buildings houses back-to-back units.The exterior walls at the entrances are brick veneer at the lower units and plywood siding at the upper units. The rear walls of two of these buildings are cement stucco. Each building has a wood framed balcony which runs the full length of the units to afford access to the second floor. Directly above each balcony, the roof extends out to provide cover. The facia boards at the roof overhang. The balconies consist of approximately two inches of light weight concrete on a plywood deck which is supported by wood joists cantilevering out from the floor system. The handrails along the balcony are pipe supported*123 by vertical wooden members and wood framing. Metal stairs to each balcony are vertically supported by pipe columns and are laterally supported by bolting the landings to the facia along the edge of the balconies. These three buildings have the greatest amount of deterioration. Dry rot or another form of deterioration has affected 40 to 50 percent of the facia material. The wood member connecting the wood joists was similarly affected, as were the ends of the joists at the facia, and the facia itself where the stairways were attached. The plywood decks on the balconies were deteriorated, as was the soffit. There were numerous cracks in the stucco causing water leakage into the buildings. Termite damage was present, especially in the bathrooms. Bathroom tiles and metal fixtures were damaged. Two of the buildings had settled to some degree, and walls of two buildings had separated from the wood framing. Leaks in the flashing and window caulking appeared in various locations. In 1960 or 1961, within three to four years after construction, new roofs were installed on all the original buildings. From 1966 to 1969 maintenance problems caused some rooms to be closed. Improper*124 drainage caused the flooding of a small number of rooms. About 80 to 90 tubs had to be replaced at one point. The roof leaked in two buildings. Sliding windows and screens had to be installed in one building to make the rooms more weatherproof. Some dry rot and termite damage was present. As of 1972, extensive repairs were necessary to prevent major structural damage in two to five years. However, it was impossible to establish the exact time period during which the pre-1972 deterioration took place.Except for one part of each of three buildings, all the necessary repairs at Holiday Inn East were minor. The newest building of the Holiday Inn East complex, the 62 units constructed in 1966, is a two story structure. Although the building showed some signs of excessive wear and tear, no structural distress was present. The design and materials of the original buildings at Holiday Inn East and Holiday Inn West were average to good. The design and materials of the new 62-unit building at Holiday Inn East were comparable to those used in modern motel construction. The repair and maintenance program at both Holiday Inn East and West was normal. After the Poirier group*125 acquired Holiday Inn East in 1964, extensive repairs were made. Almost all of the defects of both motels could be corrected by normal maintenance. Although Holiday Inn East failed to meet the inspection standards of a Holiday Inn franchise on two occasions, the necessary repairs were made in order to meet such minimum requirements. Holiday Inn East is located on U.S. Highway 90, which was the only traffic artery servicing New Orleans from the east. Holiday Inn West is located on U.S. Highway 61 and formerly was the most convenient motel to the airport. On February 11, 1958, a public hearing was held to announce the proposed route of a new interstate highway, Interstate 10. This proposed highway rerouted traffic from U.S. Highways 90 and 61, bypassing Holiday Inns East and West. The interstate was completed in stages. The portion ending in the nearest intersection to Holiday Inn East was completed on December 16, 1965. The portion ending in the nearest intersection to Holiday Inn West was completed on January 17, 1968. The annual average daily traffic count before and after Interstate 10 was completed shows a decline in the volume of traffic on Chef Menteur and Airline*126 Highways. The location of an interstate highway is crucial to the economic viability of a highway motel. The mortgage officer who made an economic appraisal of Holiday Inns East and West was of the opinion that the motels had a useful life of twelve years from 1964.This estimate was based on the age of the motels and the expected decline in occupancy as a result of the new interstate. Mr. Poirier, president of Southland, was aware of the interstate problem when making depreciation estimates in 1959; as accountant for LeBaron and Jacqueline; and in 1964 as owner of Holiday Inns East and West. It was the intention of the Poirier group to demolish Holiday Inn East in fifteen years and Holiday Inn West in twenty years. The Poirier group intended to build more modern motel facilities to compete with the new Holiday Inns being built in the New Orleans area. Construction of one such Holiday Inn, a high rise located near Holiday Inn East, was begun in 1966 and was completed and opened in 1968. The older design of Holiday Inns East and West, especially East, accounted to some degree for a decline in business. Both Holiday Inns East and West were originally located in economically balanced*127 neighborhoods. After 1969, the economic climate of these areas was in a decline. The amount of economic deterioration that occurred prior to this time was not known, although the areas began deteriorating well before 1969. Petitioners claimed a useful life of eighteen years from 1958 for all the buildings at Holiday Inn East and twenty years from 1958 for Holiday Inn West. Respondent made the following determinations: (1) twenty-nine years for the original buildings of Holiday Inn East from October 1959; (2) thirty years for the restaurant constructed at Holiday Inn East in 1961; (3) thirty years for the additional 62 units constructed at Holiday Inn East in 1966; and (4) thirty years for all the buildings at West from November of 1958. As to the 62 additional units, new motel units built shortly after the original units are usually depreciated over the remaining useful life of all the units. This is contrary to the method used by respondent. The useful lives determined by respondent are shorter than those suggested by industry standards. The useful lives determined by petitioners are less than the rates used by Holiday Inns of America. Holiday Inns would depreciate*128 the two story brick veneer buildings of East and West over a thirty-year period. These rates, however, are the result of a compromise between respondent and Holiday Inns of America. Constructive OwnershipPetitioner Motor Hotels of Louisiana, Inc. (hereinafter referred to as Motor Hotels) is a corporation organized under the laws of Louisiana on October 28, 1958.The principal offices of Motor Hotels were in Metairie, Louisiana, when the petitions were filed herein. For the fiscal years 1959 through 1966, Motor Hotels filed its United States Corporation Income Tax Returns (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana. The Poirier group acquired the stock of Jacqueline and LeBaron in April of 1964 in exchange for cash, notes, and assumed liabilities. In May 1964, Southland was incorporated. For all the taxable years in issue, legal title to Holiday Inns East and West was held by LeBaron and Jacqueline, respectively. The legal title to the land purchased in 1964 adjacent to Holiday Inn East and the 62 units constructed on it was held by Southland. A sale of the assets of LeBaron and Jacqueline to Southland, followed by a liquidation*129 of both corporations, was contemplated by the Poirier group. Documents of sale were drafted in February of 1965 to be executed after a permanent financing arrangement was obtained by Southland. The mortgage obtained from National Life Insurance Company of Vermont was originally intended to be undertaken by Southland alone. A document to this effect was drafted but not executed. Instead, the mortgage was executed by LeBaron, Jacqueline, and Southland on February 12, 1965. The original plan to transfer title to Southland before executing the mortgage was not implemented because of unsettled claims against Jacqueline and LeBaron. Both corporations had creditors' claims outstanding and LeBaron also had a personal injury claim against it. It was thought by the attorney for the Poirier group that a transfer of assets while these matters were pending would cause further legal problems. In March 1965, a plan of liquidation for Jacqueline and LeBaron was adopted by the Poirier group and filed with respondent. The plan was not implemented because of the pending lawsuits, franchise negotiations between the Poirier group and Holiday Inns of America, and construction difficulties*130 with the additional 62 units. In 1966, the Poirier group, Southland, Jacqueline, LeBaron, Motels, Inc., 3 and Motor Hotels all were parties to a lawsuit against Holiday Inns of America. The suit sought an injunction against Holiday Inns from canceling the Holiday Inn West franchise and $225 million in damages. A transfer of assets was not possible while this suit was pending. All franchise, mortgage, tax, and insurance payments were made by Southland. The checks were drawn on Southland's checking account. This was the only bank account maintained by the corporations. The daily receipts of Holiday Inns East and West were deposited in Southland's checking account. Separate expense accounts were maintained for Motels, Inc., Motor Hotels, and Southland. Although all disbursements were made from Southland's bank account, the expenses for each of these corporations were separately entered on each account. Southland reported the income from Holiday Inns East and West on its tax returns. Jacqueline and LeBaron filed their final income tax returns on April 30, 1964. The parties*131 agree that Southland does not have legal title to the land and improvements of Jacqueline and LeBaron. Respondent disallowed Southland's interest, tax, and depreciation deductions based on the properties to which Jacqueline and LeBaron hold legal title. Respondent allowed Southland to deduct the portion of the interest deduction for mortgage payments attributable to the 62 additional units and any additional interest and taxes paid on these units. Respondent also allowed Southland to deduct the remainder of the interest and taxes claimed as a rental expense deduction. Although Southland intended to take a stepped-up basis for the purchase price of LeBaron, Motor Hotels, and Jacqueline, it failed to do so. Instead, a carryover basis for depreciation was used for the taxable years in issue. Consolidated Returns and Surtax ExemptionSouthland's Federal income tax returns for the fiscal years 1967 and 1968 included the income and deductions of Motels, Inc. and Motor Hotels. These returns were untimely filed without an extension from the district director. A consent form (Form 1122) was not filed by either Motels, Inc. or Motor Hotels. Neither Motels, Inc. nor Motor Hotels*132 filed separate returns for the fiscal years 1967 and 1968. Affiliations Schedules (Form 851) were not attached to Southland's returns. The Poirier group owned 97 percent of the stock of Southland, Motels, Inc., and Motor Hotels. There is no evidence in the record showing that Southland owned the stock of Motels, Inc. and Motor Hotels. Respondent disallowed Southland's consolidated return and the full surtax exemption claimed for the fiscal years 1967 and 1968. Delinquency and Negligence PenaltiesWith one exception, petitioners were not granted extensions of time in which to file their income tax returns. LeBaron received such an extension for the 1960 taxable year from the District Director of Internal Revenue, New Orleans, Louisiana. LeBaron's returns for the taxable years 1960 through 1964 showed no taxes due. The consolidated returns of Southland, Motels, Inc., and Motor Hotels for the 1967 and 1968 taxable years were received by respondent on May 6, 1969. The reason given for this delay was Southland's involvement in litigation and other business matters. The Southland returns also indicated that no income taxes were due. Motor Hotels' return for the 1962*133 taxable year was received by the New Orleans district director 10 days after it was due. This return, as well as those for 1964 through 1966, showed no taxes due. Southland's returns for 1965 and 1966 showed no taxes due. Other than the explanation previously mentioned for the late filing of the 1967 and 1968 consolidated returns, petitioners gave no reasons for filing late returns for the years in issue. OPINION Issue 1. Net Operating Loss DeductionWhile in Chapter X reorganization, LeBaron claimed net operating losses of $80,896.01 and $23,853.50 for its fiscal years ended October 31, 1958 and 1959, respectively. After the acquisition by the Occhipinti group in October of 1959, LeBaron claimed a net operating loss carryover deduction for its fiscal year 1960.Respondent disallowed this deduction. Respondent's position is based upon the rationale of Willingham v. United States,289 F. 2d 283 (5th Cir. 1961), cert. denied 368 U.S. 828">368 U.S. 828 (1961); and Libson Shops,Inc. v. Koehler,353 U.S. 382">353 U.S. 382 (1957). LeBaron argues that the test of section 382(a) controls and, consequently, the Willingham and Libson Shops*134 holdings are inapplicable because they were decided under the Internal Revenue Code of 1939 which did not contain the provisions of section 382. This Court stated in Clarksdale Rubber Co. v. Commissioner,45 T.C. 2234">45 T.C. 2234, 42 (1965), that the "continuity of business enterprise" rule of Libson Shops applies to situations where two or more businesses combine and pre-merger losses are used to reduce post-merger income. We held that where the facts of a case are within the ambit of section 382, i.e., the change in ownership conditions of section 382(a)(1)(A) and (B) are met, then section 382(a)(1)(C) prevails over the Libson Shops test on the issue of whether "the same business" is thereafter carried on. Other courts have refused to apply the Libson Shops doctrine in cases governed by the 1954 Code. See Coast Quality Construction Corp. v. United States,463 F. 2d 503, 511 (5th Cir. 1972); United States v. Adkins-Phelps, Incorporated,400 F. 2d 737, 742 (8th Cir. 1968); Maxwell Hardware Company v. Commissioner,343 F.2d 713">343 F. 2d 713, 716 (9th Cir. 1965). Respondent primarily relies on Willingham to support his*135 position. In Willingham, a net operating loss incurred prior to a Bankruptcy Act reorganization was not allowed to be carried over and offset post-bankruptcy income. The Court of Appeals denied the deduction because, except for the uninterrupted existence of the state charter, the post-bankruptcy corporation was a new business enterprise. As a result of the bankruptcy reorganization, the corporation's stock ownership and structure was changed and its debts were canceled. Willingham v. United States,supra at 286 and 287. The facts here are similar to those of Willingham. After its Chapter X reorganization, LeBaron was owned by new stockholders, new management acquired control of its operations and the outstanding debts of priority, secured and unsecured creditors were reduced and satisfied. However, as previously indicated, Willingham was decided under the 1939 Code. As in Clarksdale Rubber Co.,supra, the objective tests of section 382 clearly reach the facts of this case. Nevertheless, the respondent argues that section 382(a) does not apply because it merely disallows net operating loss deductions in special circumstances; it does*136 not grant a deduction. Furthermore, respondent contends that section 382(a) only applies to those reorganizations covered by section 381. Neither party contends that the reorganization involved in this case is within the terms of section 381. Respondent cites, as further support for his position, the earnings deficit cases 4 which involved railroad bankruptcies. These cases basically support the Willingham rationale, i.e., a formal Bankruptcy Act proceeding obliterates any net operating losses or earnings deficits because all debts are canceled. Once again, however, we emphasize that the enactment of section 382 requires special treatment of net operating losses as opposed to other tax attributes. 5*137 The cases cited by LeBaron in support of its reliance on section 382 do not involve insolvency reorganizations. 6 However, in Utah Bit & Steel, Inc. v. Commissioner,T.C. Memo. 1970-50, we tested a Bankruptcy Act reorganization under section 269 and then under section 382 rather than under the Libson Shops doctrine. In our opinion LeBaron, after the Chapter X reorganization, was the same entity as before the reorganization. Although a different stock ownership and management group controlled the corporation after the reorganization and it obtained a national franchise, the same business enterprise continued. We perceive no sound reason to treat a formal restructuring of debt through bankruptcy any differently than a contractual arrangement with creditors for the reduction of debts. 7 Any benefits from the resulting cancellation of debts can be mitigated by the application of section 1016. Section 1.1016-7, Income*138 Tax Regs.Accordingly, we hold that the question of whether the pre-bankruptcy net operating losses of LeBaron may be carried forward is governed by the provisions of section 382; and we further hold that LeBaron meets the requirements of that section. First, the Occhipinti group's ownership of LeBaron's outstanding stock was at least 50 percent greater in taxable year 1960 than in the previous taxable year.Sec. 382(a)(1)(A). Second, the business conducted by LeBaron after the bankruptcy reorganization was substantially the same as that conducted before the reorganization. Sec. 382(a)(1)(C). LeBaron's acquisition of a national franchise and change of management are within the guidelines of H. F. Ramsey Co. v. Commissioner,43 T.C. 500">43 T.C. 500 (1965), and Goodwyn Crockery Co. v. Commissioner,37 T.C. 355">37 T.C. 355 (1961), affd. 315 F. 2d 110 (6th Cir. 1963). LeBaron continued to serve the same type of customers in the same location, with about the same number of employees and the same buildings. *139 Pursuant to section 172 we hold that LeBaron is entitled to carry over its fiscal years 1958 and 1959 net operating losses to the fiscal year 1960. Respondent disallowed $60,660 of the $104,749.51 claimed by LeBaron as a net operating loss deduction for the fiscal year 1960. He claims that such amount represents capital expenditures rather than current business expenses. The following items are involved: Salary$32,500Financial Services23,200Appraisal Fees1,000Finders' Fees2,640Inspection Fee1,320Respondent argues that these costs are capital expenditures because they were incurred in the construction rather than the operation of LeBaron. To the contrary, LeBaron contends that these amounts were expended after the motel opened for business on May 17, 1958. We agree with respondent that LeBaron has failed to meet its burden of proof on this issue. The only witness called by LeBaron to establish the nature of these expenditures was unable to recall either their exact amount or the time period when they were incurred. As to salaries, the respondent allowed LeBaron a deduction totaling $12,676.50 for the period from July 15 to October 31, 1958. *140 This amount should be adjusted to include another two months because LeBaron began operations on May 17, 1958. Respondent's July 15th opening date is based on the date used in LeBaron's depreciation schedule. However, the report of the bankruptcy trustee indicates that LeBaron Motel opened for business on May 17, 1958. It logically follows from our holding on the net operating loss issue that LeBaron is the same taxpayer before and after the Chapter X reorganization. Therefore, by agreement of the parties, LeBaron is entitled to a deduction for the demolition of the swimming pool, kitchen, restaurant, and lounge of the motel in 1960. Further, the journal entries in LeBaron's accounting books indicate that this loss occurred in the fiscal year 1960, and not in the fiscal year 1961 as claimed by LeBaron. Finally, we agree with respondent that an adjustment in LeBaron's basis (not below fair market value) must be made to reflect the cancellation of indebtedness as a result of its discharge from bankruptcy. Section 1.1016-7(a), Income Tax Regs. However, the purchase price paid by the Occhipinti group is not fair market value. Section 1.1016-7(c), Income Tax Regs. Rather, a reasonable*141 estimate of LeBaron's fair market value as of the date of the confirmation of the plan of reorganization is $759,500. This sum represents a cash payment of $690,000 by the Occhipinti group to the trustee in bankruptcy plus $61,000 in the hands of the trustee and a pro rata amount of ad valorem taxes, deposits, prepaid insurance and accounts receivable for the unexpired part of 1959. The indebtedness of LeBaron was canceled in 1959. LeBaron contends that the fair market value of the property involved would be equal to, if not in excess of, the book value of the assets prior to the reorganization proceeding. In support of this contention, LeBaron refers to two appraisals--one in September 1963 and another in December 1964. LeBaron's assertion that the burden of proof regarding this issue is on respondent is erroneous. This issue was clearly raised in the notice of deficiency sent to petitioner wherein respondent adjusted the basis of the property involved. Therefore, the burden of proof is on LeBaron. Rule 142(a), Tax Court Rules of Practice and Procedure.Having the burden of proof on this issue, LeBaron was required to introduce evidence to establish the fair market*142 value of the property involved at the date of entry of the order confirming the reorganization plan under which the indebtedness was canceled.It failed to do so. Its reliance on the two appraisals referred to in its exception to determine fair market value in 1959 is unfounded. LeBaron has not clearly shown how these appraisals, which were made several years after the reorganization, are valid indicia of the fair market value of the property involved in 1959. Absent such evidence, LeBaron has failed to carry its burden of proving that the fair market value of the property involved is other than that which we have determined. Issue 2. Useful Lives of MotelsSection 167 allows the taxpayer a deduction for the exhaustion, wear and tear of property used in the trade or business. Section 1.167(a)-1(b), Income Tax Regs., provides four factors to be considered in making this determination: (1) wear and tear or decline from natural causes; (2) normal progress of economic changes and current developments in the trade or business; (3) local conditions peculiar to the trade or business; and (4) repair, renewal, and replacement policies. The reasonableness of the taxpayer's claim*143 for depreciation is determined upon the basis of conditions known at the end of each taxable year. The taxpayer must establish the reasonableness of the claim which can only be changed by clear and convincing evidence. Section 1.167(b)-0(a), Income Tax Regs. In proving the reasonableness of the depreciation deduction, the taxpayer cannot rely on facts unknown at the time the return is filed or on "hindsight evidence." Commissioner v. Mutual Fertilizer Co.,159 F. 2d 470 (5th Cir. 1947); Western Terminal Co. v. United States,412 F. 2d 826 (9th Cir. 1969); Johnson v. Commissioner,302 F. 2d 86 (4th Cir. 1962). However, the taxpayer may present evidence of post-return developments to show the importance of a particular factor in determining the useful life of an asset. Bradford, Inc. v. United States, an unreported case (D.C.Del. 1972), 30 AFTR2d 72-5504, 72-2 USTC par. 9671 (post-return evidence used to show the importance of interstate highways to a roadside motel). These are the guiding principles to be applied to the factual situation involved with respect to any depreciation deduction. The resolution of*144 the depreciation issue is factual, based on the evidence presented. Here the determination is particularly difficult. On the one hand, the record contains evidence which indicates that both motels initially were constructed of materials which were of average to good quality. They both were well situated and, although a new interstate highway was being proposed as early as 1958, there was no showing the proposal would materialize in the near future so as to render the motels economically obsolete.Further, the motels maintained a high occupancy rate for some time and the repairs and maintenance programs were adequate, although difficult in the New Orleans climate. As to the life expectancy of the motels in comparison to other motels in the Holiday Inn "chain" and throughout the industry, the useful lives determined by the respondent are less than those normally used. These facts, of course, support the position taken by the respondent.On the other hand, other facts in the record establish that at some point of time, Holiday Inn East began deteriorating more rapidly than anticipated. Indeed, Mr. Carney, a vice president of Holiday Inns, Inc., testified that it had failed to meet*145 minimum requirements on at least two occasions and had simply "worn out." In addition, the evidence shows that changing economic factors would materially shorten the useful lives of the motels, especially Holiday Inn West. The projected construction of the new interstate highway became more definite and traffic lessened. Occupancy rates declined materially. The franchise period of Holiday Inns was limited to twenty years; and the availability of mortgage money was limited to fifteen years. On the basis of the entire record, we think the respondent's determination of the useful lives of the buildings at Holiday Inns East and West for the years prior to the acquisition by the Poirier group in 1964 is correct. All the economic factors were not then well defined and most of the testimony regarding the deteriorating physical condition of the buildings concerns events which took place after the taxable years in controversy. However, the evidence shows that by 1964 the economic conditions had changed. The bypassing of the motels by the new interstate highway was imminent; and it was reasonable to conclude that this would adversely affect the economic useful lives of the buildings. *146 In addition, by 1964 it was known that Holiday Inn East was depreciating more rapidly than originally anticipated. Therefore, we hold that for the years 1964 and subsequent thereto, the useful lives for Holiday Inns East and West claimed by petitioners are reasonable. Zimmerman v. Commissioner,67 T.C. 94">67 T.C. 94 (1976). Next, we must determine the useful life of the additional 62 units at Holiday Inn East which were opened in 1966. A vice president of Holiday Inns of America, Inc., called by the petitioners as an expert, testified that new motel units constructed shortly after the original buildings of a motel complex are depreciated over the remaining useful life of the original buildings.Respondent's policy is to depreciate such additional units according to their own useful life. In this instance, we think the respondent's approach is the better one since Holiday Inn East was not as badly situated as Holiday Inn West; and it is likely that the old units would be renovated. Consequently, we find a useful life of 18 years for the 62 new units at Holiday Inn East. Issue 3. Constructive OwnershipRespondent disallowed Southland's deductions for taxes, *147 interest, and depreciation attributable to the operation of Holiday Inns East and West. LeBaron and Jacqueline retained legal ownership of Holiday Inns East and West, respectively. Respondent allowed Southland rental expense deductions equivalent to the amounts claimed for taxes and interest with respect to the Jacqueline and LeBaron motel properties. The law is clear with respect to deductions for taxes and interest. Legal ownership of real property is a prerequisite to the deduction for taxes paid thereof. Evans v. Commissioner,42 B.T.A. 246">42 B.T.A. 246, 255 (1940). Similarly, with regard to interest, a taxpayer is only entitled to deduct the interest incurred on his own obligations, not those of another. Koppers Co. v. Commissioner,8 T.C. 886">8 T.C. 886, 889 (1947); Sheppard v. Commissioner,37 B.T.A. 279">37 B.T.A. 279, 281 (1938). Therefore, we agree with respondent's allocation of these deductions among LeBaron, Jacqueline, and Southland. The resolution of the depreciation deduction is more difficult. The facts are undisputed. LeBaron is a corporation organized under the laws of Louisiana since November 27, 1957. LeBaron constructed the LeBaron Motel*148 which began operation in New Orleans on May 17, 1958. LeBaron was subsequently reorganized under Chapter X of the Bankruptcy Act. The Occhipinti group purchased the stock and assets of LeBaron through the reorganization and subsequently converted the LeBaron Motel into Holiday Inn East. Carbone-West No. 1 Hotel Builders, Inc. constructed a motel known as Holiday Inn West. Jacqueline subsequently purchased the land and improvements of Holiday Inn West. The Occhipinti group also owned the stock of Jacqueline. The Poirier group acquired the stock of Jacqueline and LeBaron from the Occhipinti group in April 1964 in exchange for cash, notes and assumed liabilities. In May 1964, Southland was incorporated. For all taxable years relating to this issue, legal title to Holiday Inns East and West was held by LeBaron and Jacqueline, respectively. The Poirier group were the principal stockholders of Southland. The parties agree that Southland did not have legal title to the land and improvements of Jacqueline and LeBaron. The allowance for depreciation is designed to permit a taxpayer who invests in a wasting asset a means of recouping, tax free, his investment in that property. *149 Currier v. Commissioner,51 T.C. 488">51 T.C. 488, 492 (1968). To be entitled to depreciation under section 167, the taxpayer must have an investment in the property sought to be depreciated and the investment must be of such character as to give the taxpayer a depreciable interest in the property. Hunter v. Commissioner,46 T.C. 477">46 T.C. 477, 489-490 (1966). Although ownership of the property is usually required, the existence of bare legal title in another does not always deprive the taxpayer of a depreciation deduction if it is shown that the taxpayer, in fact, is the one who suffers the economic loss of his investment by virtue of the wear and tear or exhaustion of the property. Currier v. Commissioner,51 T.C. at 490. Capital investment rather than legal title is the determining factor as to whether a taxpayer is entitled to depreciation. This view is consistent with Helvering v. Lazarus & Co.,308 U.S. 252">308 U.S. 252 (1939), where the Supreme Court said at page 254: While it may more often be that he who is both owner and user bears the burden of wear and exhaustion of business property in the nature of capital, one who is not the owner*150 may nevertheless bear the burden of exhaustion of capital investment. Where it has been shown that a lessee using property in a trade or business must incur the loss resulting from depreciation of capital he has invested, the lessee has been held entitled to the statutory deduction. [Emphasis supplied.] Respondent established that Southland did not make any capital investment in the property legally owned by LeBaron and Jacqueline. Since Southland made no capital investment in such property, it follows that it had no basis for depreciation in such property. Consequently, in determining its basis for depreciation of property legally owned by LeBaron and Jacqueline, Southland is not entitled to carryover the aggregate adjusted basis for depreciation of such property on the books of LeBaron and Jacqueline. Southland contends that, although it did not claim a step-up in basis on the acquisition of LeBaron and Jacqueline, a stepped-up basis should be allowed to it because the Poirier group purchased the stock in order to obtain the assets. Kimbell-Diamond Milling Co. v. Commissioner,14 T.C. 74">14 T.C. 74 (1950), affd. 187 F. 2d 718 (5th Cir. 1951),*151 cert. denied 342 U.S. 827">342 U.S. 827 (1951). Respondent argues that the Kimbell-Diamond doctrine requires a liquidation after the purchase of the stock, a distribution of the assets to the shareholders, and a contribution of the assets to another corporation. Although the Poirier group drafted a plan of liquidation of LeBaron and Jacqueline, the plan was not carried out. However, petitioners claim that a defacto liquidation occurred. We disagree with petitioners. After the acquisition by the Poirier group, LeBaron and Jacqueline conducted sufficient activities to remain active business entities. First, LeBaron and Jacqueline undertook mortgagor liabilities on the mortgage loan to refinance the motel properties. Second, both corporations reserved the motel properties as assets in order to pay contingent liabilities. Third, both corporations joined in the lawsuit against Holiday Inns of America to enjoin the cancellation of the Holiday Inn West franchise. These activities are sufficient to negative the defacto liquidation argument. Rev. Rul. 74-462, 2 C.B. 82">1974-2 C.B. 82, 83. For these reasons, we conclude that Southland is not entitled to a stepped-up*152 basis for the depreciation of Holiday Inns East and West. Issue 4. Consolidated ReturnsRespondent disallowed Southland, Motels, Inc., and Motor Hotels' consolidated returns for the fiscal years 1967 and 1968 because of their failure to follow the technical requirements of section 1.1502, Income Tax Regs. Respondent argues that Motor Hotels has failed to prove that it is a member of an affiliated group according to section 1504.Petitioners contend that despite their failure to follow the technical requirements of the regulations, the consent of Motels, Inc. and Motor Hotels to the filing of a consolidated return with Southland is clear from the facts. We find it unnecessary to resolve this issue on the basis of compliance with technical requirements because we agree with respondent that petitioners have not proved that they are affiliated corporations. 8 Section 1501 allows an affiliated group of corporations to file a consolidated return. Section 1.1502-1(a), Income Tax Regs., defines a "group" as one qualifying under the provisions of section 1504. Section 1504 defines an "affiliated group" as a chain of corporations connected through stock ownership with a common*153 parent if: (1) Stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and (2) The common parent corporation owns directly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations. According to petitioners' brief, and the record is unclear on this point, the Poirier group owns the stock of all three corporations. Common ownership is not sufficient to meet the statutory test. Petitioners' theory of constructive ownership cannot be accepted in light of this clear statutory language.Petitioners have*154 cited no authority for this position. The facts here are not the same as in Rev. Rul. 69-591, 2 C.B. 171">1969-2 C.B. 171, because there the parent corporation owned and incorporated the subsidiaries and simply failed to issue stock certificates. Here, by contrast, there is only common stock ownership of the three corporations. Consequently, we sustain respondent on this issue. Respondent also disallowed Southland's claim of a full surtax exemption for the 1967 and 1968 fiscal years. He claims that Southland is a member of a controlled group within the meaning of section 1563(a)(2) and, therefore, is ineligible for the full surtax exemption. Section 1561(a). We disagree with respondent. While his determination is correct under section 1563(a)(2) as it now stands, the law was different in 1967 and 1968. In 1969, Congress changed the definition of a brother-sister controlled group from 80 percent stock ownership by one person to 80 percent stock ownership by five or fewer persons. As no one member of the Poirier group owned 80 percent or more of the stock of Southland, Motels, Inc., and Motor Hotels in 1967 and 1968, we hold that Southland is entitled to a full surtax*155 exemption for those years. Issue 5. Delinquency and Negligence PenaltiesRespondent determined additions to tax under section 6651(a) against LeBaron for the years 1960 through 1964, against Jacqueline for the years 1959, 1960, 1963, and 1964, against Southland for the years 1965 through 1968, and against Motor Hotels for the years 1962, 1964, 1965, and 1966, because of their failure to file timely income tax returns. Respondent asserts that petitioners' failure to file was due to willful neglect and was without reasonable cause. Petitioners have the burden of proving that there was reasonable cause for their failure to file timely returns. Bebb v. Commissioner,36 T.C. 170">36 T.C. 170, 173 (1961).Except for Southland's consolidated returns for 1967 and 1968, petitioners offered no reasonable cause for the delay. The fact that no income tax liability was reported does not prevent respondent's penalty determinations. Section 6651(a)(1) provides for a delinquency penalty on the "amount required to be shown as tax." Therefore, respondent's determinations are correct with respect to those items decided in his favor. If no tax is due for a particular taxable year,*156 then no delinquency penalty can be imposed. Harris v. Commissioner,51 T.C. 980">51 T.C. 980, 987 (1969). Southland's explanation for the untimely filing of its 1967 and 1968 consolidated returns cannot be accepted as reasonable cause. The fact that its president was busy with other corporate matters is not sufficient cause for the long delay involved here. Dustin v. Commissioner,53 T.C. 491">53 T.C. 491, 501 (1969), affd. 467 F. 2d 47 (9th Cir. 1972). Petitioners also have the burden of proving that respondent's determination of section 6653(a) negligence penalties against LeBaron (1961 through 1964), Jacqueline (1959 through 1964), and Motor Hotels (1959 through 1966) were incorrect. Reily v. Commissioner,53 T.C. 8">53 T.C. 8 (1969). Since Motor Hotels introduced no evidence on this issue, respondent's determination of additions to tax under section 6653(a) is sustained. However, with respect to LeBaron and Jacqueline, the record shows that the deductions were taken in good faith and raise substantial issues of law and fact. Scott v. Commissioner,61 T.C. 654">61 T.C. 654 (1974). Therefore, respondent's determinations of negligence penalties*157 against LeBaron and Jacqueline are not sustained. * * *To reflect the concessions of the parties and our conclusions on the disputed issues, Decisions will be entered under Rule 155. Footnotes1. The LeBaron Corporation, docket No. 4708-65; Motor Hotels of Louisiana, Inc., docket No. 5701-65; Jacqueline, Inc., docket No. 1560-66; Motor Hotels of Louisiana, Inc., docket No. 3731-66; The LeBaron Corporation, docket No. 4596-66; Jacqueline, Inc., docket No. 512-67; Southland Inns, Inc., docket No. 2201-70; Motor Hotels of Louisiana, Inc., docket No. 2304-70; The LeBaron Corporation, docket No. 2305-70; Jacqueline, Inc., docket No. 2306-70; and Southland Inns, Inc., docket No. 5231-70 have been consolidated for purposes of trial, briefs, and opinion.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue, unless otherwise indicated.↩3. Motels, Inc. is a corporation owned by the Poirier group. It operated Holiday Inn East.↩4. Dunning v. United States,353 F. 2d 940 (8th Cir. 1965), cert. denied 384 U.S. 986">384 U.S. 986 (1966); United States v. Kavanagh,308 F. 2d 824 (8th Cir. 1962); McCullough v. United States,344 F. 2d 383 (Ct. Cl. 1965), cert. denied 382 U.S. 901">382 U.S. 901 (1965); Banister v. United States,236 F. Supp. 972">236 F. Supp. 972↩ (E.D. Mo. 1964). 5. Respondent acknowledges that Willingham involved years (1952 and 1953) prior to the enactment of the 1954 Code, but points out that it was decided in 1961, some 7 years after the adoption of section 382. He also points out that the Court of Appeals for the Fifth Circuit made no comment regarding the effect section 382 may have had on the decision rendered in that case. Hence, respondent asserts that since an appeal in this case will be in the Fifth Circuit, the Tax Court is bound to follow the law of that circuit. See Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F. 2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1971). We disagree with respondent as to application of Golsen because of the change in law and because we do not regard Willingham↩ as being "squarely in point."6. Maxwell Hardware Company v. Commissioner,343 F. 2d 713 (9th Cir. 1965); Clarksdale Rubber Co. v. Commissioner,45 T.C. 234">45 T.C. 234 (1965); H. F. Ramsey Co. v. Commissioner,43 T.C. 500">43 T.C. 500↩ (1965).7. Tillinghast & Gardner, Acquisitive Reorganizations and Chapters X and XI of the Bankruptcy Act,26 Tax L. Rev. 663">26 Tax L. Rev. 663, 718↩ (1971).8. Petitioners' assertion that the burden of proof with respect to this issue is on the respondent is incorrect. The notice of deficiency dated June 5, 1970, notified Southland that it was not entitled to file a consolidated return with Motor Hotels. Thus, petitioners have the burden of proof on this issue.↩

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11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4476629/

OPINION. Naum, Judge: The petitioner contends that the installation of the sprinkler system was a repair which was made for the purpose of keeping the hotel property in ordinarily efficient operating condition and which did not add to the value of the property or prolong its life; and that the expenditure made therefor is an ordinary and necessary business expense deductible in the year ended June 30, 1950. We do not agree that the installation of the sprinkler system constituted a repair made “for the purpose of keeping the property in an ordinarily efficient operating condition.” Cf. Illinois Merchants Trust Co., 4 B. T. A. 103, 106, cited by petitioner. It was a permanent addition to the property ordered by the city of New York to give the property additional protection from the hazard of fire. It was an improvement or betterment having a life extending beyond the year in which it was made and which depreciates over a period of years. While it may not have increased the value of the hotel property or prolonged its useful life, the property became more valuable for use in the petitioner’s business by reason of compliance with the city’s order. The respondent did not err in determining that the cost of this improvement or betterment should be added to petitioner’s capital investment in the building, and recovered through depreciation deductions in the years of its useful life. International Building Co., 21 B. T. A. 617, 621, and cases cited therein; Difco Laboratories, Inc., 10 T. C. 660, 669. The petitioner contends,, in the alternative, that $3,938.46 of the $6,400 which it paid for the installation of the sprinkler system constituted an extraordinary expense and is deductible as an ordinary and necessary business expense in any event. Its position in the main is based upon the fact that the cost of the sprinkler system was considerably in excess of what it would have been had it been installed during the construction of a new building. However, that fact cannot convert a capital item or any portion of it into a current expense. In the course of events there may be many circumstances that require an increased capital outlay. In the construction of a building, for example, a variety of factors may increase the-normal expected cost, such as changes in plans, workmen’s mistakes, errors in design or plan, overtime pay in order to meet a deadline, and the like. Cf. Driscoll v. Commissioner, 147 F. 2d 493 (C. A. 5). Yet all such increases, whatever be the reason, are in general merely increases in the cost of the capital asset, and enter into the total cost which is to be depreciated over the life of the asset; they are not in the nature of current expenses. This case is unlike Rankin v. Commissioner, 60 F. 2d 76 (C. A. 6), and Frank & Seder Co. v. Commissioner, 44 F. 2d 147 (C. A. 3), relied upon by petitioner. The Rankin case involved a unique .situation in which the taxpayer paid a disproportionate amount of wages to a mechanic as “idle” time while waiting for parts to install a printing press. It is unlike the ordinary case of overtime pay incurred in acquiring a capital asset, and, regardless of the soundness of the Rankin decision, it is in any event inapplicable here. Although there was some general testimony by petitioner’s president as to overtime, there was no proof of any particular amount of overtime, and there is no indication of any charges for overtime in the contractor’s bills, which are in evidence. In the Frank <& Seder Co. case amounts were paid for expediting completion of a building, and since the completion of the building was necessary in order to carry on business during that very year it was held that such amounts were a direct charge against income earned during that year. But cf. W. P. Brown & Sons Lumber Co., 26 B. T. A. 1192, appeal dismissed, 68 F. 2d 1022 (C. A. 6). No such circumstances are presented here. Whatever additional costs may have been incurred here were not a charge against current earnings. Such costs are allocable to the life of the capital asset, and are recoverable through depreciation. The evidence introduced at the trial, that the cost of installing the sprinkler system in petitioner’s old building substantially exceeded the cost of a similar installation in a new building under construction, does not prove that any part of the cost of installation in the old building was an expense rather than a capital outlay. It represented the amount which petitioner might reasonably have expected to pay for such an installation under normal conditions for a building such as it owned. Petitioner has not established that any part of the $6,400 payment is deductible as an ordinary and necessary business expense in the year ended June 30, 1950. Decision will he entered for the respondent.

01-04-2023

01-16-2020

https://www.courtlistener.com/api/rest/v3/opinions/4476627/

OPINION. Johnson, Judge: Concessions made by the petitioner leave at issue the single question involving the prepaid subscriptions, the amount of which is not in controversy. The difference between the parties is whether it is taxable in the year of receipt, as determined by the respondent, or whether the amount should be deferred for taxation in the unexpired periods of the subscriptions. Respondent’s theory is that the so-called “claim of right” doctrine applies, whereas petitioner says that under the accrual method of accounting maintained by it, the amount does not constitute taxable income until earned in subsequent years. Thus the real controversy is the period of taxation of the income. Section 42 of the Code provides that gross income shall be reported in the year of receipt, “unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.” Section 41 provides, in part: The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but, * * * 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. * * * 'Until 1943 petitioner, as a part of its system of accounting and filing returns on an accrual basis, treated prepaid subscriptions as taxable income in the year of receipt of the payments. Respondent’s action conforms with that consistent method. Petitioner says that deferment of the amount applicable to unexpired subscriptions is consistent with an accrual method of accounting and clearly reflects income. It argues that the action of respondent, if approved, would compel it to keep its books of account and report income on a hybrid basis, thereby distorting income. The effect of the action of respondent in including the subscriptions in income of the year of their receipt, in accordance with petitioner’s consistent practice for many years prior to 1943, was that the changed method put into effect by the petitioner in that year without his consent did not clearly reflect income. Respondent’s determination has a presumption of correctness and petitioner had the burden of prpving error, i. e., that respondent’s method does not “clearly reflect income.” Schram v. United States, 118 F. 2d 541; Murtha & Schmohl Co., 17 B. T. A. 442; Leo M. Klein, 20 B. T. A. 1057; Permanent Homes Land Co., 27 B. T. A. 142. Consistency is required regardless of the system of accounting adopted to account for income. United States v. Mitchell, 271 U. S. 9; Cecil v. Commissioner, 100 F. 2d 896. The change made in the treatment of prepaid subscriptions for taxation was a change in petitioner’s method of accounting. Sec. 29.41-2, Regs. 111. The respondent may-reject a proposed change, as here, without prior approval and provision for adjustments. The Clendening Co., 1 B. T. A. 622; Claude Patterson Noble, 7 T. C. 960; Elmwood Corporation v. United States, 107 F. 2d 111; United States Industrial Alcohol Co. v. Helvering, 137 F. 2d 511; Brown v. Helvering, 291 U. S. 193, in which the Court said: In assessing the deficiencies, the Commissioner required in effect that the taxpayer continue to follow the method of accounting which had been in use prior to the change made in 1923. To so require was within his administrative discretion. * * * The Commissioner was of opinion that the method of accounting consistently applied prior to 1923 accurately reflected the income. He was vested with a wide discretion in deciding whether to permit or to forbid a change. Compare Bent v. Com’r. Int. Rev. (C. C. A.) 56 P. (2d) 99. It is not the province of the court to weigh and determine the relative merits of systems of accounting. Lucas v. American Code Co., 280 U. S. 445, 449, 50 S. Ct. 202, 74 L. Ed. 538. In Schram v. United States, supra, the court said that the administrative power to determine whether the system employed clearly reflects income should not be disturbed “unless the evidence shows that he has abused his discretion.” There was no abuse of discretion under the facts here. One of the basic principles of Federal income taxation is that there must be an annual accounting of income. It was held in North American Oil Consolidated v. Burnet, 286 U. S. 417, 424, that: If a taxpayer received earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * * The doctrine there announced “is now deeply rooted in the federal tax system.” United States v. Lewis, 340 U. S. 590. Healy v. Commissioner, 345 U. S. 278. Concerning cases cited by respondent in which the theory was applied, petitioner says that they relate to advance rentals and service contracts and are not controlling in a proceeding involving production of goods. The doctrine was applied in Booth Newspapers, Inc., 17 T. C. 294, affd. 201 F. 2d 55, in holding that it required the taxpayer therein, which accounted for income by the cash method, to include prepaid subscriptions for a daily newspaper published by it in income in the year of receipt without deferring, as is being sought here, any part thereof to future years. The same conclusion was reached in G. C. M. 20021, 1938-1 C. B. 157, involving prepaid subscriptions of a newspaper keeping its books on an accrual basis. A later ruling, I. T. 3369,1940-1 C. B. 46, recognizes either method, if it has been followed consistently in prior years, but if the deferred method has been used, expenses applicable to obtaining the subscriptions or to the subscriptions themselves must be allocated over the subscription periods. No proof was made here of such expenses. If it could be said that the issue, as framed by the pleadings and presented at the hearing, involved sales of a commodity, rather than proper accounting practice for income tax purposes, the record made contains no evidence to grant the relief claimed by petitioner. Grain or loss recognized in a sale is, in general, the difference between the amount realized and the adjusted basis for the property. Secs. Ill, 112, 113, I. R. C. No effort was made to establish an adjusted basis for the subscriptions and, absent proof of some offsetting figures, we would be compelled to treat the full amount realized as taxable income. It is evident that petitioner has never treated the subscription payments as amounts realized from.sales of a commodity. Testimony of accountants was offered by petitioner to establish that under the accrual system the prepaid subscriptions should be deferred as income until earned by delivery of the newspapers. Such an accounting procedure might be regarded by a business establishment as desirable to reflect earnings for a particular purpose, or be in accord with theories of accountants to reflect earnings, but the test of such methods is whether they clearly reflect income for purposes of taxation. Weiss v. Wiener, 279 U. S. 333; Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; Spring City Foundry Co. v. Commissioner, 292 U. S. 182. In South Dade Farms, Inc. v. Commissioner, 138 F. 2d 818, prepaid rentals were received for a crop year after the tax period. The amount was deferred on the books, kept on an accrual basis, until a lease was signed in the succeeding year, when the amount was credited to rental income for reflection in income for that year. Refunds were made if no lease was executed. Expenses for operation of the drainage and irrigation system on the land were allocated to the crop year in which the benefits of the expenditures were realized, regardless of the tax period in which they were made. As to the contention of the lessor that its method of accounting reflected its actual earnings more clearly than would any other method, the court said: The difficulty of this position is that Section 41, supra, required that the method of accounting should clearly reflect income, not net earnings. In Brown v. Helvering [291 U. S. 193], where the taxpayer was on the accrual basis, it was held that money received without restriction upon its use and disposition by the recipient was income in the year received, even though it was received before it was earned and some portion of it might have to be refunded in the future. The charges involved in Capital Warehouse Co., 9 T. C. 966, affd. 171 F. 2d 395, were not net figures because of expenses to be incurred in the subsequent years, yet the “claim of right” doctrine was applied to tax the receipts on an accrual basis of accounting. The membership dues collected in Automobile Club of Michigan,, 20 T. C. 1033, were included in income of an accrual taxpayer even though they had not been earned. Here, the subscriptions were actually received in cash, without any restrictions as to their use or disposition, and only business policy of petitioner required a refund upon application of a subscriber, a practice short of a legal obligation to do so. To conclude, we find no error in the determination made by the respondent. Accordingly, Decision will be entered for the respondent.

01-04-2023

01-16-2020

https://www.courtlistener.com/api/rest/v3/opinions/4476628/

OPINION. LeMike, Judge: The question presented is the proper computation of petitioner’s subchapter A personal holding company surtax liability, having regard to the provisions of section 117 (c) (l)1 of the Code, as applied to a personal holding company reporting certain income from excess long-term capital gains. The petitioner’s primary contention is that it is not liable for any subchapter A personal holding company surtax. On its income tax return (Form 1120), the petitioner returned as its tax liability the amount of $4,794.75, which is 25 per cent of its excess long-term capital gains of $19,179, whereas its normal tax and surtax liability, computed on Form 1120, was only $3,779.22. The respondent determined that since the petitioner’s ordinary and surtax liability was less than the amount of $4,794.75 reported, the lesser amount was petitioner’s income tax and surtax liability, and determined an overassessment of $1,015.53. While the income tax liability of petitioner is not directly involved, it is here material because, in determining the petitioner’s undistributed subchapter A personal holding company net income, the amount of the income taxes paid or accrued constitutes a deduction under the provisions of section 505 (a) (1) of the Code.2 If the petitioner is entitled to deduct as its income tax liability the amount of $4,794.75, there is no doubt that its undistributed subchapter A personal holding company net income is zero, there being a credit for capital gain in computing personal holding company net income under the alternative method of computing that tax under section 117 (c) (1). If, on the other hand, the lesser sum of $3,779.22 is the proper deduction under section 505 (a) (1), then it is conceded that petitioner’s undistributed subchapter A personal holding company net income under the alternative method of computing its personal holding company surtax is the amount of $332.72. Section 117 (c) (1) provides an alternative method of tax computation to a corporation whose income includes a net long-term capital gain or a net long-term capital gain in excess of a net short-term capital loss, as in the instant case. The purpose of the alternative method is to prevent a tax of more than 25 per cent in the taxable year in question on such long-term capital gain or the long-term capital gain in excess of the net short-term capital loss, as the case may be. The statute is not ambiguous. If the normal tax rate is less than' 25 per cent, as in the instant case, the alternative tax results in no benefit. The petitioner argues that as applied to a personal holding company the alternative method is available if its total income tax and its subchapter A personal holding company surtax liability is greater than the total tax computed as provided in section 117 (c) (1). To so construe the statute would give to a personal holding company a greater benefit than the act gives to an ordinary corporation and thus thwart its very purpose of limiting the tax on a net long-term capital gain or the net long-term capital gain in excess of the net short-term capital loss. The surtax on personal holding companies, imposed by section 500 of the Code, is an additional tax separate and distinct from the income tax. A personal holding company is required to file two separate returns, i. e., an income tax return (Form 1120) and a personal holding company return (Form 1120H). Begs. Ill, sec. 29.508-1. Since the income tax paid or accrued constitutes a deduction in computing the personal holding company subchapter A net income, the income tax liability must first be computed on Form 1120, because this is stated by section 505 (a) (1) to be a deduction from personal holding company net income. Where the income reported includes a net long-term capital gain or a net long-term capital gain in excess of a net short-term capital loss, the alternative method provided in section 117 (c) (1) is available if and only if it produces less tax than the normal tax and surtax computed as provided in the appropriate sections of chapter 1 of the Code.3 As heretofore observed, the normal tax and surtax computed on the normal income, including the excess net long-term capital gain, is less than the alternative tax computed as provided in section 117 (c) (1). Therefore, the amount properly deductible under section 505 (a) (1) for income tax paid or accrued is the amount of $3,779.22, as determined by the respondent. The deduction of the amount of $4,794.75, claimed by the petitioner in computing its undistributed subchapter A net income, results from its misinterpretation of the provisions of section 117 (c) (1). Therefore, the petitioner’s primary contention that it is not liable for any personal holding company surtax is without merit. In the alternative, the petitioner contends that its personal holding company surtax liability is either the amount of $1,566.39, or the amount of $1,316.85. The latter amount is arrived at by using as a deduction for income tax paid or accrued the amount of $4,794.75, which we have hereinabove determined is improper. The amount of $1,566.39 is arrived at by the use of the proper deduction of $3,779.22. Therefore, we think it necessary to discuss the petitioner’s alternative contention that its personal holding company surtax is the larger amount of $1,566.39. The petitioner concedes that if it is not entitled to the deduction in the amount of $4,794.75, then its undistributed subchapter A personal holding company net income is the amount of $332.72, as determined by the respondent. It also concedes that the partial tax on $332.72, at the rate of 75 per cent as provided in section 500 (1), results in a partial tax of $249.54. The partial tax, plus the 25 per cent of the excess net long-term capital gain of $19,179, or $4,794.75, results in a total alternative tax of $5,044.29, as computed under the provisions of section 117 (c) (1), as determined by the respondent. From this point the respective computations of the parties differ. The difference is in the amount which is to be offset from the total tax of $5,044.29 as the portion of the income tax under chapter 1 attributable to the excess net long-term capital gain. The respective computations are as follows: [[Image here]] In computing item 18, the petitioner computes the amount to be $3,477.90 in the following manner: Normal tax and surtax, including excess net long-term capital gain__ $8,779.22 Less: Income tax liability, excluding excess long-term capital gain, as follows: Net income_$28, 744. 94 Less: Excess net long-term capital gain_ 19,179. 00 9, 565.94 Less: Dividends received credit (85% of $9,565.94)_ 8,131.04 Normal tax and surtax net income_ $1,434.90 Income tax liability, excluding excess long-term capital gain, $1,434.90X15%, plus $1,434.90X6%_ 301.32 Income tax attributable to excess net long-term capital gain_$3,477.90 The respondent computed item 18, applying the percentage obtained, by dividing the excess net long-term capital gain of $19,179 by the net income of $28,744.94, or 66.7213 per cent, to the total income tax and surtax of $3,779.22, which producés a figure of $2,521.55. For the purposes of Form 1120, the petitioner’s normal tax and surtax net income, including the amount of excess net long-term capital gain, is the amount of $28,744.94. Since this amount is greater than the excess net long-term capital gain of $19,179, the amount attributable to such capital gain as a credit is the portion of chapter 1 income tax liability computed as if section 117 (c) (1) had not been enacted. The net long-term capital gain of $19,179 is 66.7213 per cent of the normal tax and surtax net income of $28,744.94. Therefore, the amount attributable to the net long-term capital gain would be 66.7213 per cent of the total chapter 1 tax liability of $3,779.22, or $2,521.55, as computed by the respondent. The respondent’s computation is correct and is approved. We, therefore, hold that there is a deficiency in the petitioner’s personal holding company surtax for the taxable year 1948 in the amount of $2,522.74. Decision will be entered for the respondent. SEC. 117. CAPITAL GAINS AND LOSSES. (e) Alternative Taxes.— (1) Corporations. — If for any taxable year the net long-term capital gain of any corporation exceeds the net short-term capital loss, there shall be levied, collected, and paid, in lieu of the tax imposed by sections 13, 14, 15, 204, 207 (a) (1) or (3), 421, and 500, a tax determined as follows, if and only if such tax is less than the tax imposed by such sections: A partial tax shall first be computed upon the net income reduced by the amount of such excess, at the rates and in the manner as if this subsection had not been enacted, and the total tax shall be the partial tax plus 25 per centum of such excess. SEC. 505. SUBCHAPTER A NET INCOME. For the purposes of this subchapter the term, “Subchapter A Net Income” means the net income with the following adjustments : (a) Additional Deductions. — There shall be allowed as deductions— (1) Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction under section 23; but not including the tax imposed by section 102, section 500, or a section of a prior income-tax law corresponding to either of such sections. Or, if not availed of in computing the chapter 1 iucome tax, tlien in computing the personal holding company surtax.

01-04-2023

01-16-2020

https://www.courtlistener.com/api/rest/v3/opinions/4653927/

IN THE SUPREME COURT OF PENNSYLVANIA EASTERN DISTRICT COMMONWEALTH OF PENNSYLVANIA, : No. 260 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : FRANKLIN BENNETT, III, : : Petitioner : ORDER PER CURIAM AND NOW, this 20th day of January, 2021, the Petition for Allowance of Appeal is DENIED.

01-04-2023

01-22-2021

https://www.courtlistener.com/api/rest/v3/opinions/4624407/

THE PACIFIC NATIONAL BANK OF SEATTLE, AS EXECUTOR OF THE LAST WILL OF FRANK V. MORGAN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Pacific Nat'l Bank v. CommissionerDocket No. 91048.United States Board of Tax Appeals40 B.T.A. 128; 1939 BTA LEXIS 893; June 22, 1939, Promulgated *893 1. Where the wife of a decedent in a community property state (Washington) waives all her interest in the marital community and acquiesces in the creation by her husband of a testamentary trust disposing of all his property (with unimportant exceptions), including all community property, held, that there is no present transfer to the husband by reason of the waiver which will justify the inclusion of the wife's share of the community property in the decedent's gross estate. 2. Where the decedent by a trust indenture has subjected the proceeds, not otherwise includable in his gross estate, of policies of insurance on his life to the payment of the expenses of his last illness and burial, such proceeds are to that extent includable in his gross estate; following Marmaduke B. Morton, Administrator,23 B.T.A. 236">23 B.T.A. 236. 3. Since only one-half of the community estate passed at decedent's death, only one-half of the decedent's last illness and burial expenses are deductible, following Lang's Estate v. Commissioner, 97 Fed.(2d) 867. W. H. Thompson, Esq., and Harold L. Scott, C.P.A., for the petitioner. B. H. Neblett, Esq.,*894 for the respondent. KERN *128 This case involves a deficiency in Federal estate tax of $2,036.85. As decedent died in 1934, the Revenue Act of 1926 as amended in 1932 and 1934, is applicable. Three questions are raised - (1) whether in the circumstances the entire property of the marital community was includable in the gross estate of the deceased husband; (2) whether the sum of $2,085.50, representing proceeds of policies of insurance on decedent's life, were includable; and (3) whether the funeral and administration expenses allowed by the respondent were in excess of the proper deduction. FINDINGS OF FACT. Petitioner is executor of the will of Frank V. Morgan, who died domiciled at Seattle, Washington, on November 17, 1934. On November 17, 1935, petitioner, as executor, filed a Federal estate tax return in which one-half of the property of the marital community was returned as the decedent's estate, the other half being treated as the property of the decedent's widow, Gertrude Grace. The Commissioner determined that the whole marital estate was taxable. The decedent and Gertrude Grace Morgan were married on November 10, 1895. *129 On*895 March 18, 1931, the decedent executed his last will, the pertinent parts of which are as follows: FIRST: I direct that all my just debts and funeral expenses be paid as soon after my decease as conveniently may be. SECOND: I declare that I have one, and child, namely, my son Percy Avery Morgan. THIRD: I give, devise and bequeath unto my beloved wife Gertrude Grace Morgan, of Seattle, Washington, my residence property at No. 2114 Queen Anne Avenue, Seattle, Washington, more particularly described as Lot Thirteen (13) of Block Eight (8) of Cove Addition to the City of Seattle, King County, Washington; and in the event that said residence property shall have been sold or disposed of prior to my death, in that event I give, devise and bequeath unto my said wife such other property, including the land and buildings and improvements thereon situate, as may be used and occupied by myself and my said wife as our home at the time of my death. I further give and devise unto my said wife that certain real estate situate in the county of King, State of Washington, described as follows: the East forty-eight feet of the South twenty feet of Lot Five, and the East forty-eight feet of the*896 South twenty feet of Lot Six, Block Eighteen, in Comstock's Addition to the City of Seattle, Washington. I further give and bequeath unto my said wife all my household goods, furniture and furnishings and my automobile. FOURTH: All the rest, residue and remainder of my property and estate, whether real or personal and of every description whatsoever and wheresoever situate, of which I may die seized and possessed or may be entitled to, I give, devise and bequeath unto the THE PACIFIC NATIONAL BANK OF SEATTLE, Washington, a corporation as Trustee, and upon the trusts and for the uses and purposes and with the powers specified and set forth in that certain Trust Agreement, bearing date March 18th, 1931, executed by and between myself as Trustor and the said PACIFIC NATIONAL BANK OF SEATTLE as Trustee. FIFTH: I hereby declare that in making this, my Last Will and Testament, I am disposing of, devising and bequeathing not only any separate estate I may have at the time of my death but also all the community property and estate of myself and my said wife, including the community interest and share of my wife therein, to all of which my said wife has consented and has elected to*897 take under this will by written instrument executed by her and bearing date the 18th day of March, 1931. SIXTH: After the admission of this my last will and testament to probate, I direct that no letters testamentary issue, and that my executor hereinafter named manage and settle my estate without the intervention of any court, and my said executor shall have, and is hereby given, full power and authority to sell, convey, mortgage or otherwise dispose of or encumber my property and estate, or any part thereof, without the order, intervention or confirmation of any court; it being my intention to make this what is commonly known as a nonintervention will. LASTLY: I nominate and appoint THE PACIFIC NATIONAL BANK OF SEATTLE, Washington, the executor of this my last will and testament, and direct that no bond be required of such executor; hereby revoking all former wills by me made. The waiver of all community and separate property rights made by decedent's wife referred to in his will, which was executed on the same day as the will, was drawn upon a printed blank form furnished *130 by the Pacific National Bank of Seattle and acknowledged before a notary public, and is*898 as follows: WAIVER OF WIFE TO COMMUNITY AND SEPARATE PROPERTY RIGHTS, AND ELECTION TO TAKE UNDER WILL I, Gertrude Grace Morgan, the wife of said Frank B. Morgan, the maker of the foregoing WILL, having read it in its entirety, and clearly understanding that my said husband by his said WILL disposes not only of all of his separate estate, but also all of our community property, in case there is any such, including the share thereof which I am entitled to take and receive by law upon his death, as well as his own share or interest therein, being fully convinced in my own mind of the reasonableness and equity of said WILL and the wisdom of its provisions and in consideration of the provisions made for me therein, I hereby elect to and do accept, acquiesce in and agree to said WILL and all of its provisions, including disposition at the death of my said husband of all our community property thereunder, and hereby waive all claims to my share of any community property, and any and all other claims, rights, interests and estates which I may have at the time of the demise of my said husband, upon or in all of his separate property and all of our community property, including all of his*899 property exempt from execution, but not including, however, and expressly excepting therefrom, my right to a probate homestead, and to a family allowance out of the estate of my said husband during the probate administration thereon, and I hereby accept such of the said provisions of said WILL as apply to or concern me, except as above expressly excepted. IN WITNESS WHEREOF, I have hereunto set my hand and seal this day of March 18th, 1931, at the City of Seattle, County of King, State of Washington. [Signed] GERTRUDE GRACE MORGAN. On the same day as the execution of his will, March 18, 1931, the decedent made a gift in trust to petitioner as trustee, the trust agreement's first eight articles being a regular printed form used by the bank, and the other articles added to meet the specific requirements of the settlor. The agreement, so far as relevant, was as follows: ARTICLE I. - Property Covered by Agreement. This agreement shall cover: (a) The money that may accrue or become payable at the Trustor's death upon the policies described in Schedule "A" attached hereto, including additional policies subsequently made subject hereto after deduction of any then outstanding*900 loans or advances now or hereafter made by the respective insurance companies on account of any such policies. (b) Any other property, real or personal, devised, bequeathed, assigned, granted or conveyed to the Trustee by the Trustor or by any other person for the purpose of the trust hereby created, such property to be held by the Trustee subject to the terms of this indenture in the same manner as if it had been included in the description of the property hereby transferred to the Trustee. * * * ARTICLE IX. - DISTRIBUTION OF TRUST PROPERTY. (a) From the funds received hereunder the Trustee shall pay the expenses of the last illness and burial of the Trustor. *131 (b) The balance of the fund subject hereto shall be invested as provided herein and the Trustee shall pay the net income therefrom in approximately equal monthly installments to GERTRUDE GRACE MORGAN, wife of the Trustor, and hereinafter called the "beneficiary", as long as she shall live, provided, however, that if said net income does not equal Three Hundred ( $300) Dollars per month, the Trustee shall pay said beneficiary from both principal and income a minimum amount of Three Hundred ( $300) Dollars*901 each month; and provided further that the Trustee may in its discretion make additional payments to the beneficiary in excess of Three Hundred ( $300) Dollars per month or in excess of the net income of the trust property if such additional payments in the discretion of the Trustee are necessary or advisable to provide for the care and comfort of the beneficiary. (c) At the death of the survivor of the Trustor and the beneficiary the balance of the trust estate shall be distributed to PERCY AVERY MORGAN, son of the Trustor and the beneficiary. If said son is not then living said balance shall be held in trust by the Trustee upon the following terms and conditions: If Emma Morgan, wife of said son, shall survive him and if she shall then be unmarried and if at the time of the death of said son he and Emma Morgan were living together as husband and wife, the Trustee shall pay the net income from said trust property to Emma Morgan as long as she shall live, provided, however, that the Trustee may in its discretion pay her portions of the principal from time to time if such payments are necessary or advisable in the opinion of the Trustee to provide for her maintenance or for the*902 care, support and education of any child of Emma Morgan and said Percy Avery Morgan. Any balance remaining at the death of said Emma Morgan or if said Emma Morgan shall not survive the Trustor, the beneficiary and said Percy Avery Morgan, or if she shall at that time have remarried, or if at the time of the death of Percy Avery Morgan he and said Emma Morgan were not living together as husband and wife, then at the death of the survivor of the Trustor and the beneficiary, said Percy Avery Morgan not then being living, the balance of the trust estate shall be held in trust for Uldene Morgan, granddaughter of the Trustor, upon the following terms and conditions: The Trustee shall use the income and/or principal of said balance for the care, support and education of said granddaughter, with authority to the Trustee during her minority to make payments direct to her or to those supplying her with services or materials and without the necessity of accounting to a legally appointed guardian. It is the desire of the Trustor that the Trustee shall provide said granddaughter with funds in a reasonable amount to cover the expenses of her care and support and education, including college*903 or university training. When said granddaughter shall have completed her school education, or when she shall have married, whichever event shall first occur, she shall thereafter receive in approximately equal installments the net income of the property subject hereto, except that the Trustee may in its discretion at any time pay her portions of the principal if in the opinion of the Trustee such payments are necessary or advisable for her maintenance. Any balance remaining at the death of said granddaughter shall be distributed as provided in her Last Will and Testament, and should she leave no Will distributing said balance it shall be paid by the Trustee to her issue in equal shares, and should she leave no issue it shall pass to her husband if a husband survive her, otherwise to her legal heirs as provided by the laws of the State of Washington for the distribution of the estates of intestate persons. *132 (d) In the event said Percy Avery Morgan shall leave surviving him either child or children in addition to said Uldene Morgan above mentioned, such afterborn child or children shall share equally in the trust herein created upon the same terms and conditions and*904 in the same manner as above provided in the case of said Uldene Morgan. (e) If any stock in the Ice Delivery Company, a corporation which may be owned and held by the Trustor at the time of his death shall become and be subject to and covered by this trust agreement, then the Trustee shall pay to Percy Avery Morgan, son of the Trustor, one half of all dividends which may accrue and be paid on said stock; and in case said stock, or any part thereof, shall be sold by the Trustee, the Trustee shall pay to said Percy Avery Morgan one half of the proceeds of any such sale or sales of stock; the remaining one half of all such dividends and the remaining one half of the proceeds of any sales of such stock shall be subject to and distributed under the preceding provisions of this trust agreement. All the property held by decedent at the time of his death and involved in this case had been acquired during coverture and none had been received by way of gift or inheritance; and in this property the decedent and his wife held equal shares under the law of the domiciliary state. From November 17, 1934, the day of the decedent's death, the petitioner as trustee has administered the whole*905 of the decedent's estate except his dwelling house, a certain lot in Seattle, and the house furnishings, all of which were devised or bequeathed by the decedent to his widow, pursuant to the terms of the decedent's will. The probate court has made no order requiring the decedent's widow to elect whether she will take under the will. The decedent's wife, Grace, executed a will on April 17, 1914, leaving $1 to her son, and all the residue to her husband. The decedent was named her executor. A week after the death of the decedent in 1934, his widow on November 24, 1934, executed a second will, at the suggestion of the trust officer of the petitioner bank, in which she bequeathed her whole estate, after the payment of debts, to her son. The decedent had insured his life under two policies, one for $1,500 and the other for $2,000, upon which he paid the premiums during his life. The proceeds of these policies at his death were paid over to petitioner as the decedent's trustee. The total amount of the expenses of the last illness and burial of the decedent was $2,085.53, which under order of the Superior Court of King County, Washington, in probate, was not paid, as the trust*906 indenture provided by its article IX(a), by the trustee out of the trust assets, but as the decedent's will, by its first article provided, out of his general estate before the residue was transferred to the trustee. OPINION. KERN: 1. Respondent's inclusion in the decedent's gross estate, under section 302, Revenue Act of 1926, with such additional tax as *133 may be required under section 401, Revenue Act of 1932, and section 405, Revenue Act of 1934, of the community interest of decedent's surviving widow rests wholly on the waiver which she executed on March 18, 1931, simultaneously with the execution by the decedent of his will and of the testamentary trust transfer; the respondent contending that this act transferred the wife's community property to the decedent during his lifetime and that consequently the entire estate held by the marital community passed at the decedent's death. Since the petitioner admits that the decedent's own one-half of the community property passed at his death and is taxable, no question arises on that. More elaborately stated, respondent's argument is that to treat the wife's community interest otherwise will enable her to transfer her*907 estate at death free of estate taxes; that this object to avoid taxes is implicit in the whole scheme; that the scheme itself is one which has generally been recommended by trust companies in community property states, as is evidenced by the general printed form of the trust instrument employed by the trust company here, and therefore contemplates tax avoidance on a large scale; and he draws the conclusion, it would seem, that the intention to avoid taxes vitiates the transfer. We believe that we fully appreciate the force of this argument, but it is one which should properly be addressed to Congress. This Board, in so far as it performs a judicial function, may construe the statute so as to accomplish the ends which the statute itself makes plain; cf. Lucas v. Earl,281 U.S. 111">281 U.S. 111, and the other cases cited by Cardozo, J., in Burnet v. Wells,289 U.S. 670">289 U.S. 670, at 677; but there are necessary limits to judicial discretion, and when those limits are reached, administrative officers must find the stopgap in legislative action. Disregarding the motives, therefore, with which the transfer may have been made, we look to what was actually done and*908 the legal effect of those acts. All the property in question here was acquired after the marital community had been established and, no part of it having been acquired by the husband by gift, bequest, devise, or descent (§ 6890, Remington's Compiled Statutes of Washington) nor any part so acquired by the wife (§ 6891, ibid. ); it was all community property (§ 6892, ibid. ). The husband is given the management and control of community real property but he may not sell, convey, or encumber it "unless the wife join with him in executing the deed", which he and she must both acknowledge. § 6893, ibid. The provision on descent of community property is as follows (Remington's Compiled Statutes of Washington § 1342): § 1342. Descent of Community Property. Upon the death of either husband or wife, one-half of the community property shall go to the survivor, subject to the community debts, and the other half shall be subject to the testamentary *134 disposition of the deceased husband or wife, subject also to the community debts. In case no testamentary disposition shall have been made by the deceased husband or wife of his or her half of the community property, *909 it shall descend equally to the legitimate issue of his, her, or their bodies. If there be no issue of said deceased living, or none of their representatives living, then the said community property shall all pass to the survivors to the exclusion of collateral heirs, subject to the community debts, the family allowance, and the charges and expenses of administration. [Cf. L. '75, p. 55, § 2; Cd. '81, §§ 3303, 2411, 2412; 1 H.C., § 1481.] Dower and curtesy are abolished, § 1343, ibid.; and likewise survivorship between joint tenants, § 1344. The community interest in realty may be transferred by either spouse to the other, as § 10572, ibid., provides: § 10572. [8766] Conveyances Between Husband and Wife. A husband may give, grant, sell, or convey directly to his wife, and a wife may give, grant, sell, or convey directly to her husband his or her community right, title, interest, or estate in all or any portion of their community real property. And every deed made from husband to wife, or from wife to husband, shall operate to divest the real estate therein recited from any or every claim or demand as community property, and shall vest the same in the grantee*910 as separate property. The grantor in all such deeds, or the party releasing such community interest or estate, shall sign, seal, execute and acknowledge the deed as a single person, without the joinder therein of the married party therein named as grantee: Provided, however, that the conveyances or transfers hereby authorized shall not affect any existing equity in favor of creditors of the grantor at the time of such transfer, gift, or conveyance: And provided further, that any deeds of gift conveyances or releases of community estate by or between husband and wife heretofore made, but in which the husband and wife have not joined as grantors, said deeds, where made in good faith and without intent to hinder, delay, or defraud creditors, shall be and the same are hereby fully legalized as valid and binding. [L. '88, p. 52, § 1; 1 H.C., § 1443.] Section 6894 provides specifically for the mode of transfer of any community property by one spouse to the other, as follows: § 6894. [5919] Agreements as to Status of. Nothing contained in any of the provisions of this chapter, or in any law of this state, shall prevent the husband and wife from jointly entering into any agreement*911 concerning the status of disposition of the whole or any portion of the community property, then owned by them or afterward to be acquired, to take effect upon the death of either. But such agreement may be made at any time by the husband and wife by the execution of an instrument in writing under their hands and seals, and to be witnessed, acknowledged, and certified in the same manner as deeds to real estate are required to be, under the laws of the state, and the same may at any time thereafter be altered or amended in the same manner: Provided, however, that such agreement shall not derogate from the rights of creditors, nor be construed to curtail the powers of the superior court to set aside or cancel such agreement for fraud, or under some other recognized head of equity jurisdiction, at the suit of either party. [Cd. '81, § 2416; 1 H.C., § 1401.] The decedent in his will declared (art. 5th) that he was disposing of "not only any separate estate I may have at the time of my death but also all the community property and estate of myself and my said *135 wife, including the community interest and share of my wife therein, to all of which my said wife has consented*912 and has elected to take under this will by written instrument executed by her and bearing date the 18th day of March, 1931." The decedent's wife in her waiver executed on the same day declared this likewise to be her intention, electing to take under the will, and waiving all claims to her share of the community property. This waiver she on the same day duly acknowledged before a notary public. Petitioner urges that section 6894 has provided an exclusive method of transfer of community property between spouses and that its requirements have not been complied with, citing Bloor v. Bloor,105 Wash. 110">105 Wash. 110; 177 Pac. 722. Respondent relies on Sponogle v. Sponogle,86 Wash. 649">86 Wash. 649; 151 Pac. 43; Shea v. Commissioner, 81 Fed.(2d) 937, and other cases to support an opposite conclusion. We do not think it necessary, however, to discuss or decide the question whether an effective transfer under local law could have been made by decedent's wife to him during his lifetime by the means she employed. The wife's transfer to the trustee has been treated as effective, it may be noted, by all parties concerned, *913 and we may assume in respondent's favor that a transfer to the husband by the same means would have been effective. We can not on that account, however, conclude the case for the respondent, for we must look to what the waiver sought to accomplish and, on our assumption that the proper statutory forms were employed, did accomplish. The wife's transfer of her interest in the marital community to her husband was not a present outright transfer to him, such as respondent attempts to spell out, but a transfer in trust to named trustees, under the fourth article of the will by which decedent disposed of the residue of his estate bty a transfer in trust, the wife's transfer in trust being limited by the condition precedent that her husband predecease her. The husband created a testamentary trust, the wife made a gift in trust inter vivos on the condition named. A recent writer on the subject, cited by petitioner's counsel, has concisely stated the conclusion to be drawn in respect of the analogous state inheritance law when he says: * * * For it is manifest that at the time of the death of the husband, under a will such as we are here discussing, the state is in no position to*914 levy any tax whatever upon the wife's half of the community property. Before the state can plausibly make such an attempt, a further voluntary and affirmative action on the part of the wife is required. In other words, she must agree and consent, either by a formal written acceptance of the will and relinquishment of her interest in the community property, or by virtue of an estoppel, that her half of the community property shall, along with the husband's half, be turned into the trust. But this amounts to nothing more than a conveyance by the wife to the trustee, after the death of the husband, of her interest in the community property. The fact that the entire community *136 property finds its way into the trust does not mean that the trustee of the beneficiaries under the trust receive the property by will or inheritance; it simply means that one-half of the community property goes to the trustee for the benefit of the named beneficiaries by virtue of the will of the husband, and the other half of the community property goes into the trust because of the voluntary and, what clearly seems to be, the legally affirmative act of the wife. [Judson F. Falknor, *915 5 Wash. Law Review 55, at 63 (1930).] Our decision in Coffman-Dobson Bank & Trust Co., Executors,20 B.T.A. 890">20 B.T.A. 890, supports the same conclusion and involves facts very similar to those here. There: The last will of the decedent disposed of his own estate, which, under the laws of the State of Washington, is 1/2 of the aggregate property, and further provided that if the widow would permit her property to be placed in trust and be disposed of ultimately, as directed by the decedent, she would receive the income from the whole estate. The widow elected to take under the will. As thus submitted we have for determination a single issue of law, viz., Does the act of a widow in placing her part of community property in a trust created by the will of her deceased husband, in consideration of a condition in said will giving her the income from the trust, which also included the interest of the decedent, vest, ad interim, her part of such property in the decedent's estate, so as to subject it to the Federal estate tax? After briefly reviewing the necessary procedure under Washington law to effect a transfer from wife to husband of community property, *916 we concluded at page 891: There is no claim here that the decedent required, or that the widow attempted to accomplish, a transfer of her interest in the community property to the former's estate if, by such informal procedure as indicated, it could have been done. The only condition specified by the will was that the widow permit her property to be placed in trust, and it was this condition to so permit it to be placed that she accepted in the election made. Without passing upon any hypothesis not before us as to what might have been done had the parties so intended, it is clear, under the facts here shown, that the interests of the widow in the property put in trust passed direct from her to said trust, and that it at no time was a part of the taxable estate of the decedent. The respondent seeks to distinguish this case, but we find nothing different in substance from the instant case. We are unable to accept his suggestion that the arrangement there was "an ordinary election" by the widow between her right to take by descent or under the will. Such an election is ordinarily made after the testator's death and while the will is in probate, not by an agreement inter*917 vivos between the testator and his wife. There is nothing in the Coffman-Dobson case to indicate that the wife's consent or waiver was not absolute, as respondent contends, but even if it were so in that case and not so here, we still think that in the instant case the wife's waiver created no present property interest in her husband and did no more than create a trust effective only on the condition precedent that her husband predecease her. *137 On the first point, therefore, we hold for petitioner. 2. The respondent contends that the proceeds of decedent's life insurance to the amount of $2,085.50, which was the sum of the expenses of the decedent's last illness and burial, should be included in the gross estate. There is no dispute over the amount. Respondent insists that since these proceeds were subject, under article 9(a) of the trust agreement, to "the expenses of the last illness and burial of the Trustor", an equivalent amount should be added to the gross estate. It is contended that the policy proceeds, although not expressly includable as such under section 302(g), Revenue Act of 1926, since they are payable to beneficiaries other than the executors*918 and are not in excess of $40,000, are includable as part of the estate as being subject to charges against the estate, expenses of administration, or to distribution; includable, that is, to the extent used for these purposes. The insurance proceeds, it is said, were used to the extent mentioned for the benefit of the estate, and as such are subject to the estate tax. Marmaduke B. Morton, Administrator,23 B.T.A. 236">23 B.T.A. 236, is relied on. Petitioner contends that the decedent's funeral expenses and expenses of his last illness had in that order priority under Washington law (§ 1541, Remington's Statutes) over all other expenses; and that they were in fact paid out of the general and not the trust estate. Petitioner also relies on the direction in decedent's will that "I direct that all my just debts and funeral expenses be paid as soon after my decease as conveniently may be." It is obvious that this direction is insufficient to alter the prior express direction in the trust deed, and, since the insurance proceeds were in law subjected to the charge in question, it is immaterial that they were in fact paid otherwise. We think it is clear on the authority of that case*919 that, notwithstanding the fact that the proceeds here were not payable to the bank as executor but as trustee, they were subjected by the trust agreement to the charges in question and to that extent and on that account are properly includable in the gross estate. It does not appear from the record of this case when the insurance policies were issued nor whether the premiums were paid from community funds. Therefore no question is presented similar to those involved in Lang v. Commissioner,304 U.S. 264">304 U.S. 264, and Elizabeth C. McCoy, Administratrix,39 B.T.A. 822">39 B.T.A. 822. 3. A further question is raised by the respondent in respect of the deduction properly allowable for the decedent's last illness and burial. It is said that if we hold that only the decedent's half of the marital estate passed at his death, only one-half of the sum claimed for such expenses, $2,085.50, is allowable as a deduction. The additional deficiency thus claimed has been properly pleaded in the respondent's *138 amended answer; and since its correctness is admitted by the petitioner in its reply brief, we sustain the respondent on this point. Cf. *920 Lang's Estate v. Commissioner, 97 Fed.(2d) 867. Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624408/

HARRY S. AND PATRICIA A. VAN SCOYOC, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentVan Scoyoc v. CommissionerDocket No. 11271-86.United States Tax CourtT.C. Memo 1988-520; 1988 Tax Ct. Memo LEXIS 552; 56 T.C.M. (CCH) 588; T.C.M. (RIA) 88520; November 8, 1988. Thomas J. O'Rourke and John J. Mullenholz, for the petitioners. Alan C. Levine, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: In a timely statutory notice of deficiency, respondent determined deficiencies in Federal income tax and additions to tax as follows: Additions to TaxTaxableSectionSectionSectionYearDeficiency6653(a)(1) 16653(a)(2)66611982$ 17,743$ 887.1550 percent$ 1,774.30of intereston $ 17,743198312,365618.2550 percent1,236.50of intereston $ 12,365*555 After concessions, 2 the issues which we must resolve are: 1. Whether petitioners' yacht chartering activities constituted an "activity not engaged in for profit" within the meaning of section 183(a). 2. Whether the yacht purchased by petitioners and used in their charter activity qualifies for the investment tax credit in 1982. 3. Whether petitioners are liable for the addition to tax for negligence or intentional disregard of rules or regulations pursuant to sections 6653(a)(1) and 6653(a)(2). Whether petitioners are liable for additions to tax for substantial understatements of tax liability as provided by section 6661. 3*556 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners are cash basis, calendar year taxpayers. They are also husband and wife and resided at McLean, Virginia, at the time their petition herein was filed. Petitioner Harry S. Van Scoyoc is an attorney who specializes in the field of taxation. During the taxable years at issue, he was employed as an associate with Charles Walker and Associates. His duties primarily involved the representation of clients before the United States Congress with respect to Federal tax matters. During the fall of 1981, petitioner 4 became interested in acquiring a sailboat for placement in a charter fleet. Petitioner had only very limited experience with sailing and sailboats in general, and no experience in the business of sailboat chartering. Petitioner was in part motivated by a desire to take advantage of the investment incentives contained in the recently enacted Economic Recovery Tax Act of 1981. Petitioner was also motivated by a belief that sailboats would continue to appreciate, or at least hold their*557 value, as they had throughout the 1970's. Petitioner placed particular reliance on a January 26, 1981 Wall Street Journal article which stated that sailboat prices had been appreciating for several years at a rate averaging 10 to 15 percent per year. Those in the boating industry attributed the appreciation in yachts to several factors. First, the energy crises of the early and mid 1970's had caused dramatic increases in the price of fuel and other petroleum based products. The increased fuel costs greatly increased the costs of operating motor powered vessels. As a result, many boating enthusiasts began to move away from powerboats into the more economical sailboats. The resulting increase in demand for sailboats drove up the prices of both new and used sailing vessels. The energy crises also contributed to the increased cost of fiberglass, a petroleum based product and the main raw material used in sailboat construction. The increased raw material costs caused increases in the prices of new sailboats, which also had the effect of increasing the value of used boats. A final factor contributing*558 to sailboat appreciation during the late 1970's was the relative weakness of the U.S. dollar vis-a-vis other currencies. This increased the cost of importing vessels constructed in foreign boatyards and in many cases made the cost of imports prohibitive. This limit on the supply of boats available, when coupled with increased demand, contributed to the appreciation in value of sailboats available on the domestic market. After talking with several boat brokers, and comparing the proposals offered by several charter operators, petitioner decided to purchase a new 36-foot Cape Dory sailing sloop from Nautilus Yacht Sales (hereinafter referred to, collectively with its affiliates, as "Nautilus"). 5 The purchase of the boat was for a price of $ 101,780 and was consummated on December 24, 1981. Petitioners christened their boat "La Cygnette." Petitioners also purchased a slip at the West River Yacht Harbor as part of the same transaction. The purchase price of the slip was $ 22,500. This transaction was consummated on February 16, 1982. *559 Immediately upon purchase, La Cygnette was leased back to Nautilus for the three-year period ending December 24, 1984. 6 The total rental payment of $ 20,356 was due under the lease agreement was payable on January 15, 1982. Under the terms of the lease, Nautilus was responsible for all routine maintenance of the boat during the lease term. Owners who placed their vessels into the lease program were entitled to use of the West River Yacht Harbor marina facilities. They also became entitled to use of their boat (or a similar boat if theirs was chartered) for a minimum of twenty-one days per year. Additional personal usage was possible only if their boat was available. 7*560 Petitioner also leased the slip back to Nautilus for the period beginning February 16, 1982 (the closing date) and ending December 30, 1984. The entire $ 4,500 lease payment due under this agreement was due on February 16, 1982. The Nautilus leaseback program enabled purchaser/lessors to own a yacht and a slip in which to moor it with little or no initial cash outlay. 8 Petitioners in this case made an initial cash deposit of $ 1,000 on La Cygnette and the slip. 9 Petitioners financed their downpayment on the boat by executing a $ 20,356 note payable to Nautilus. The note was due January 15, 1982, and was presumably to be paid with the lease payment of the same amount which was due petitioners on that date. The remaining $ 81,424 of the yacht's purchase price was financed with the proceeds of an $ 81,424 recourse loan obtained from the Capital City Federal Savings and Loan Association. The loan bore interest at 17 percent and was self-amortizing over a fifteen-year period. The loan called for a $ 1,253.122 monthly payment of principal and interest. *561 Similarly, the $ 4,500 downpayment on the slip was satisfied with the rental payment of the same amount which was due at closing. The remaining $ 18,000 of the slip's $ 22,500 purchase price was financed with an $ 18,000 recourse loan from the Bank of Maryland. This loan bore interest at the rate of 18 percent per annum and was self-amortizing over a ten-year period. The monthly payment of principal and interest required on this loan was $ 324.33. The Nautilus leaseback program was advertised as a good investment, as well as an economical way to own and enjoy a yacht. Nautilus promotional material also emphasized the tax benefits allegedly available through participation in the program. During 1982, petitioners reported no gross income from their yacht chartering activity other than the $ 20,356 advance lease payment on La Cygnette, and the $ 4,500 in advance rent on the slip at West River Yacht Harbor. During 1983, petitioners reported only $ 1,200 of gross receipts from yacht chartering. On their Schedule Cs attached to their 1982 and 1983 returns, petitioners showed net income of $ 2,517 and a net loss of $ 28,092, respectively, from their yacht chartering activities. *562 10 Petitioners also reported payments of interest of $ 17,388 and $ 14,200 on the loans secured to purchase the boat and slip as itemized deductions on Schedule A of their 1982 and 1983 tax returns, respectively. At trial, petitioners conceded that these interest deductions were attributable to the yacht chartering activity and should have been reported on Schedule C. Had these interest payments been treated properly, petitioner would have shown losses of $ 14,871 and $ 42,292 in 1982 and 1983, respectively, from their chartering activities. Petitioners showed total income from sources other than their charter activities of $ 143,389 and $ 119,549 on their returns for 1982 and 1983, respectively. Petitioner was initially satisfied with Nautilus' performance of its obligations under the lease agreements However, the quality of the maintenance provided by Nautilus soon began to deteriorate, in part due to financial difficulties which would eventually result in its bankruptcy. Petitioners*563 had been unaware of any problems with Nautilus' finances when they first entered their relationship with it. Petitioner became so concerned with Nautilus' failure to perform its maintenance obligations, and with rumors circulating that Nautilus' bankruptcy was imminent, that he retook possession of his vessel and terminated his association with Nautilus two months prior to the scheduled termination of the boat lease agreement. Petitioner then contracted with Strandquist Yacht Charters to act as his agent in chartering La Cygnette. This relationship proved to be no more satisfactory than had the Nautilus arrangement, and was terminated by petitioner at the end of the 1985 sailing season. During the 1986 and 1987 sailing seasons, petitioner chartered the boat on his own without the assistance of a charter agent. During all of the years of his charter activity, petitioners have maintained a separate checking account for exclusive use in their charter activity. They have also maintained books and records of their charter activities. Respondent mailed a statutory notice of deficiency to petitioners on April 16, 1986. In the notice, respondent determined, inter alia, that*564 petitioners' yacht chartering activity was an activity not engaged in for profit. He therefore increased petitioners' taxable income by $ 14,871 and $ 29,292 for taxable years 1982 and 1983, respectively. Additionally, respondent determined that petitioners were not entitled to the $ 10,178 of investment tax credit claimed with respect to their yacht in 1982. Finally, respondent concluded that petitioners' entire understatement of tax was due to negligence and was substantial, and determined additions to tax pursuant to sections 6653(a)(1) and (2), and 6661. OPINION 1. Section 183 IssueRespondent does not contest the amount of the deductions claimed by petitioners in the years at issue or that they were in fact incurred with respect to petitioners' chartering activities. Rather, he asserts that petitioners' chartering activity was an activity not engaged in for profit. 11 An "activity not engaged in for profit" is defined in section 183(c) as an activity other than one with respect to which deductions are allowable under section 162 or under paragraphs (1) or (2) of section 212. *565 If an activity is not engaged in for profit, section 183(b)(1) allows only those deductions which are not dependent on a profit motive. Section 183(b)(2) allows all other deductions which would be allowable if the activity was engaged in for profit, but only to the extent that gross income from the activity exceeds the deductions allowable under section 183(b)(1). Deductions are allowable under section 162 for expenses of carrying on an activity which constitutes the taxpayer's trade or business if those expenses are ordinary and necessary to the conduct of the trade or business. Section 212 allows the taxpayer to deduct expenses incurred in connection with an activity engaged in for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. In order to deduct expenses of an activity, the taxpayer must show that he engaged in the activity with an actual and honest objective of making a profit. Sec. 1.183-2(a), Income Tax Regs.; Beck v. Commissioner,85 T.C. 557">85 T.C. 557, 569 (1985); Flowers v. Commissioner,80 T.C. 914">80 T.C. 914, 931 (1983); Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 644-645 (1982),*566 affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Golanty v. Commissioner,72 T.C. 411">72 T.C. 411, 425-426 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). In this context, "profit" means economic profit, independent of tax savings. Landry v. Commissioner,86 T.C. 1284">86 T.C. 1284, 1303 (1986), on appeal (5th Cir., Jan. 12, 1987); Herrick v. Commissioner,85 T.C. 237">85 T.C. 237, 255 (1985); Beck v. Commissioner, supra at 570; Estate of Baron v. Commissioner,83 T.C. 542">83 T.C. 542, 557-559 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986); Surloff v. Commissioner,81 T.C. 210">81 T.C. 210, 233 (1983). While the expectation of economic profit need not be reasonable, the fact and circumstances must indicate that the taxpayer entered into the activity, or continued it, with the objective of making a profit. Beck v. Commissioner, supra;Fox v. Commissioner,80 T.C. 972">80 T.C. 972, 1006 (1983); Dreicer v. Commissioner, supra.The burden of proof is on petitioners to show that they engaged in their boat chartering activity with the objective of realizing*567 an economic profit. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111, 115 (1933). In making this determination, all relevant facts and circumstances are to be taken into account.12Finoli v. Commissioner,86 T.C. 697">86 T.C. 697, 722 (1986); Golanty v. Commissioner, supra;Jasionowski v. Commissioner,66 T.C. 312">66 T.C. 312, 321 (1976). Greater weight must be given to objective facts than to petitioners' mere statements of intent. Sec. 1.183-2(a), Income Tax Regs.; Beck v. Commissioner, supra;Flowers v. Commissioner, supra;Siegel v. Commissioner,78 T.C. 659">78 T.C. 659, 699 (1982); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 666 (1979). After carefully reviewing the entire record before us, we conclude that petitioners have failed to carry their burden of proving that they engaged in the activity with an actual and honest profit objective. *568 The "facts" which petitioners rely on in support of their position are based almost entirely on Mr. Van Scoyoc's own self-serving testimony. Mr. Van Scoyoc claimed that he fully expected to realize net negative cash flows during the early years of the charter activity, but that he looked at the boat and slip as a 15 to 20-year investment. Over that period he expected his cash flow to gradually increase through pay down of his loan balances and increased charter fees. Petitioner thus claims that he believed he would eventually reach a positive cash flow position. The only evidence presented that petitioners looked at the investment with a 15 to 20-year time frame is Mr. Van Scoyoc's own self-serving testimony. We find the cash flow projections provided by Nautilus, on which petitioner acknowledges he relied, more persuasive. These projections go out only to the year 1985. They do not show a positive before tax cash flow in any year for either the boat or the slip. 13 Mr. Van Scoyoc testified that he felt it was unrealistic to expect to earn consistently as much as $ 12,000 from charter operations. Even had petitioners managed to achieve this level of revenue, they still would*569 not have been able to cover even the loan payments on the boat. 14Petitioners also contend that they hoped the proceeds from the eventual disposition of the boat and slip would offset the losses incurred in their charter activity. 15 Mr. Van Scoyoc testified that he expected the boat*570 to depreciate in value during the first three years of ownership. He anticipated that it would then begin appreciating in value until by the fifth year it was again worth its original purchase price. Mr. Van Scoyoc's testimony in this regard is corroborated by the analysis provided to him by Nautilus. The Nautilus analysis also shows the slip would appreciate in value to $ 29,948 after three years of ownership and to $ 36,236 after five years. Again, we discount Mr. Van Scoyoc's testimony that he viewed his investment's profit potential over a 15 to 20-year period. The only documentary evidence presented, the Nautilus analysis, points to a 3 to 5-year investment horizon. At the end of 5 years, the analysis indicates that petitioners would realize $ 44,830 from the sale of the boat ($ 101,780 sales price less $ 56,941 remaining balance on the boat loan). This would not cover the $ 75,485 of negative cash flow before*571 taxes which the analysis indicates would be incurred during the years of boat ownership. 16The sale of the slip at the end of five years for $ 36,236 would generate $ 23,464 of cash flow after payment of the remaining balance of $ 12,772 on the slip loan. This would only offset the negative cash flow before taxes of $ 16,245 incurred during the years the slip was owned by $ 7,219. 17 Thus, the Nautilus analysis, the only documentary evidence presented by petitioners as*572 supportive of their general conclusions regarding the profit potential of their chartering activities, showed an overall negative cash flow of $ 23,427 before taxes from their investment in the boat and slip over the 5-year period. This is contrasted with the net tax savings of $ 30,298 which the Nautilus analysis indicates would be realized through participation in its sale/leaseback program. Giving greater weight to objective facts than to petitioner's mere statements of intent, we conclude that petitioners did not engage in the yacht chartering activity in the years at issue with the objective of deriving an economic profit therefrom. Rather, it seems more likely that petitioner's motivation was to garner the significant tax benefits they hoped to enjoy through participation in the program, and thereby shelter a portion of their substantial income from other sources. Although petitioners certainly would have liked to show a profit before taxes, their failure to draw up any kind of realistic analysis to determine the feasibility of such an outcome indicates to us that this objective was of only secondary importance to them. Petitioners may therefore deduct the expenses incurred*573 in their charter activity only as provided by section 183. 18*574 2. Investment Tax Credit IssueSection 38 provides that a credit against income tax is allowed to a taxpayer for qualified investment in certain property. The credit is allowable for property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and which has a useful life of 3 years or more. 19 Sec. 48(a)(1). Depreciation is allowable on property used in a trade or business or held for the production of income. Sec. 167(a). Our determination that petitioner's yacht chartering activity was not engaged in with the objective of making a profit is thus dispositive of this issue. See Finoli v. Commissioner,86 T.C. at 744; Pike v. Commissioner,78 T.C. 822">78 T.C. 822, 841-842 (1982), affd. in an unpublished opinion 732 F.2d 164">732 F.2d 164 (9th Cir. 1984). *575 3. NegligenceRespondent determined that the entire underpayment of tax by petitioners are attributable to negligence and imposed the additions to tax provided for by section 6653(a)(1) and (2). Section 6653(a)(1) imposes an addition to tax equal to five percent of the underpayment when any portion of the underpayment is due to negligence or intentional disregard of rules and regulations (but without intent to defraud). Section 6653(a)(2) imposes an addition to tax equal to 50 percent of the interest due on the portion of the underpayment which is attributable to negligence. Negligence is defined as a failure to exercise the due care that a reasonable and ordinarily prudent person would under the circumstances. Marcello v. Commissioner,380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967). Petitioner bears the burden of proving that his underpayment of tax was not attributable to negligence. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972); Rule 142(a). We find imposition of the addition to tax for negligence upon petitioners with respect to their charter activities to be inappropriate. It seems likely that both profit potential and tax shelter benefits*576 were factors in petitioners' decision to enter the yacht chartering activity. Petitioners were unable to prove that profit potential was the objective for their entrance into yacht chartering. However, the fact that petitioners' proof was inadequate on this issue does not require us to find that the underpayment with respect to the charter activity was due to negligence. Under the circumstances of the instant record, we find that petitioners' claim of losses with respect to their charter activity was not due to negligence. Respondent stipulated that the addition to tax for negligence was only appropriate if the section 183 issue was resolved in his favor. We take this as a concession by respondent of the negligence addition as it relates to the adjustments for $ 565 of dividend income and $ 11 of interest in 1982 which have been conceded. 4. Substantial UnderstatementRespondent determined that the understatement of tax by petitioners were substantial and imposed an addition to tax equal to 10 percent of the underpayment attributable to such understatements pursuant to section 6661. 20 That section defines a "substantial understatement" as one which exceeds the greater*577 of 10 percent of the tax required to be shown on the return of $ 5,000. Sec. 6661(b)(1)(A). The amount of the understatement is reduced for section 6661 purposes by the portion of the understatement which is attributable to petitioners' treatment of an item if there is substantial authority for such treatment, or if relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return. Sec. 6661(b)(2)(B). In evaluating whether the taxpayer's position regarding treatment of a particular item is supported by substantial authority, the weight of authorities in support of the taxpayer's position must be substantial in relation to the weight of authorities supporting contrary positions. 21Sec. 1.661-3(b)(1), Income Tax Regs. The substantial authority standard is less stringent than a "more likely than not standard," but stricter than a reasonable basis standard. Sec. 1.6661-3(a)(2). *578 The weight of the authorities for the tax treatment of an item is determined by the same analysis that a court would be expected to follow in evaluating the treatment of the item. Thus, an authority is of little relevance if it is materially distinguishable on its facts from the facts of the case at issue. Sec. 1.6661-3(b)(3), Income Tax Regs.Petitioners have not argued that adequate disclosure for purposes of section 6661 was made on their return. Consequently, we do not address that issue. Nor do petitioners argue that there was substantial authority for the 1982 omissions from taxable income which they have conceded. Petitioners do, however, argue that their position with regard to deductions taken with respect to their yacht chartering activities were supported by substantial authority. Specifically, petitioners point to several cases involving yacht chartering activities in which taxpayers succeeded in proving that their objective was the making of profit. Cases cited by petitioners include Slawek v. Commissioner,T.C. Memo 1987-438">T.C. Memo. 1987-438; Zwicky v. Commissioner,T.C. Memo. 1984-471; Dickson v. Commissioner,T.C. Memo. 1983-723;*579 McLarney v. Commissioner,T.C. Memo. 1982-461. In Antonides v. Commissioner, 91 T.C.   (September 27, 1988), the taxpayers relied on these same cases as establishing substantial authority for their position with respect to deductions claimed as a result of their involvement in the Nautilus sale/leaseback program. We concluded that the cited cases were materially distinguishable on their facts from the facts in Antonides and thus did not constitute substantial authority for the taxpayers' position. We can discern no material distinction between the facts herein and those in Antonides, which would impact on our determination as regards section 6661. We therefore conclude that the cited cases do not constitute substantial authority for petitioners' position with respect to their yacht chartering activities for the same reasons expressed in Antonides.To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. Petitioners have conceded adjustments in the statutory notice of deficiency which increase their taxable income in 1982 by $ 565 of dividend income and $ 11 of interest income.↩3. In his trial memorandum and opening statement, respondent for the first time argued that petitioner's use of $ 20,356 of advance lease payments as downpayment on their yacht purchase was a sham which should be given no effect for tax purposes. We do not believe that petitioners received fair notice of this issue and will not consider it. Seligman v. Commissioner,84 T.C. 191">84 T.C. 191, 197-199 (1985), affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986); Estate of Horvath v. Commissioner,59 T.C. 551">59 T.C. 551, 554-557↩ (1973).4. References to petitioner in the singular are references to Harry A. Van Scoyoc.↩5. There were three entities involved in the Nautilus operation. Nautilus Yacht Sales was a sales entity which offered a sale/leaseback program under which a purchaser was offered an opportunity to purchase a boat from Nautilus Yacht Sales and lease it back to Nautilus Boat Club. Nautilus Boat Club offered memberships to persons who were interested in sailing but did not wish to buy a boat. For an annual membership fee, club members were entitled to use of a sailboat from the Nautilus Boat Club fleet for a prescribed number of days. West River Yacht Harbor was a condominium association which owned slips and other facilities at the site of the Nautilus Boat Club.↩6. Although the lease agreement states that the lease commenced on December 24, 1981, petitioner did not take delivery of his boat until April 1982. The parties have thus stipulated that the yacht was not placed in service until 1982. ↩7. The only "personal" uses of the boat petitioner acknowledges are the several occasions on which he donated the use of the yacht to one of several charities with which he was involved for fund raising purposes. Petitioner claims to have attempted to maximize revenues by using his personal days to entertain clients on behalf of his employer. Petitioner was reimbursed $ 990 in 1984 and $ 3,135 in 1985 by his employer for use of the boat. Petitioners' returns for the years at issue however, do not indicate any amounts as having been received from his employer as charter fees. As reflected on their tax returns, petitioners generated the following total revenues from slip rentals and charter activities: ↩1982$ 24,85619831,20019842,19019854,93519868,920$ 42,1018. Nautilus promotional material for its sale/leaseback program indicates that purchase of both a slip and a boat were necessary to participate in the program. ↩9. The $ 1,000 deposit, along with an additional check for $ 645.18, was applied toward the closing costs associated with purchase of the boat slip.↩10. ↩1982 1983 Gross Income$ 24,856 $  1,200 Depreciation(17,742)(24,642)Other Expenses(4,597)(4,650)Net Income$  2,517 ($ 28,092)11. Neither respondent nor petitioners have argued that petitioners' activities with regard to the boat and the slip should be regarded as separate activities for purposes of sec. 183. See sec. 1.183-1(d)(3), Income Tax Regs.↩ The fact that both assets were purchased as part of the same transaction from the same seller supports our conclusion that only one activity was involved. The fact that petitioners kept only one set of books and records and reported the results of operation of both assets on a single Schedule C indicates that petitioners also considered themselves engaged in a single activity. Reference to petitioners' activities as regards both the boat and the slip are referred to as their "charter activity."12. Sec. 1.183-2(b), Income Tax Regs., provides a nonexclusive list of factors which should normally be considered in determining whether an activity is engaged in with the requisite profit objective. The nine factors are: (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, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. No single factor, nor the existence of even a majority of the factors, is controlling, but rather it is an evaluation of all the facts and circumstances in the case, taken as a whole, which is determinative. Sec. 1.183-2(b), Income Tax Regs.; Abramson v. Commissioner,86 T.C. 360">86 T.C. 360, 371 (1986); Golanty v. Commissioner,72 T.C. 411">72 T.C. 411, 425-426 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); Benz v. Commissioner,63 T.C. 375">63 T.C. 375, 382↩ (1974).13. The projection for the boat does show a small net positive cash flow of $ 374.44 in 1982. However this is only achieved by including the $ 20,356 advance lease payment as "cash in" without a corresponding "cash out" for satisfaction of the note given as downpayment on the boat. Had this payment been properly reflected, the projection would have shown a negative cash flow of $ 19,981.56 in 1982. ↩14. Mr. Van Scoyoc testified that he eventually paid off his loans and argues that this indicates an effort to contain costs and therefore make a profit on the charter activities. However, there is no evidence that Mr. Van Scoyoc anticipated paying off these loans when he first entered the charter activity. As only the taxable years 1982 and 1983 are at issue, we express no opinion as to whether petitioner possessed the requisite profit objective once the loan obligations had been extinguished.↩15. We consider the use of the boat and slip for charter activities and the holding of these assets for appreciation to be a single "activity" within the meaning of sec. 183. See fn. 11. See also Dickson v. Commissioner,T.C. Memo. 1983-723↩.16. The actual negative cash flow for 1981 thru 1985 as shown on the Nautilus projections on the boat was $ 55,129. However, as stated in footnote 12, the projection failed to show the $ 20,356 downpayment as cash outflow. Even a cursory inspection of the Nautilus projections by petitioner would have revealed this discrepancy. Also the Nautilus summary of the investment program indicates that it is a summary of results after five years of ownership. However, although it uses the results of operations for four years. Petitioners' failure to give effect to these obvious errors in the Nautilus projections is further evidence that economic profit was not their objective in pursuing the charter operations.↩17. The Nautilus projections show a negative cash flow of $ 11,745 related to slip ownership through 1985. However, the analysis fails to take into consideration the $ 4,500 downpayment on the slip as a cash outflow. See footnotes 12 and 15. ↩18. Although without effect to our resolution of the issues herein, we note several errors made by respondent in his application of sec. 183 in his notice of deficiency. First, the notice incorrectly states that deductions allowable under sec. 183(b)(1) are allowable only to the extent of gross income derived from the activity. Sec. 183(b)(1) deductions are allowable regardless of whether an activity generates any gross income. Thus the interest expenses incurred in their charter activity of $ 17,388 and $ 14,200 in 1982 and 1983, respectively, are deductible by petitioners in full. Furthermore, since this interest is incurred in an activity not engaged in for profit, it is properly deducted as an itemized deduction on Schedule A. All expenses other than those allowable under sec. 183(b)(1) are allowable under sec. 183(b)(2) only to the extent gross income from the activity exceeds the deductions allowable under sec. 183(b)(1). Thus, petitioners are entitled to no further deductions in 1983 with respect to their charter activity. The regulations state that all sec. 183(b)(2) deductions other than those which give rise to a basis adjustment are deducted first. Sec. 1.183-1(b)(1)(ii), Income Tax Regs. Thus, petitioners are entitled to an additional deduction of $ 4,597 in 1982 under sec. 183(b)(2). Finally, petitioners are allowed an additional deduction for those deductions which involve basis adjustment (i.e., depreciation) to the extent gross income from the activity exceeds the sec. 183(b)(1) deductions and those previously allowed under sec. 183(b)(2). Sec. 1.183-1(b)(1)(iii), Income Tax Regs.↩ Thus, petitioners are entitled to a depreciation deduction of $ 2,871 in 1982 with a corresponding adjustment to their basis in the boat and slip.19. We have determined that petitioners are entitled to a depreciation deduction on their boat in 1982 pursuant to sec. 183(b)(2). This would appear to bring the boat within the literal definition of "Section 38 property" as contained in Sec. 48(a)(1). However, sec. 1.48-1(b), Income Tax Regs., expands upon the Code definition as follows: Property (with the exception of property described in section 48(a)(1)(F) and paragraph (p) of this section) is not section 38 property unless a deduction for depreciation (or amortization in lieu of depreciation) with respect to such property is allowable to the taxpayer for the taxable year. A deduction for depreciation is allowable if the property is of a character subject to the allowance for depreciation under section 167 * * * [Emphasis added.] Therefore, the determination as to whether property meets the definition of section 38 property (i.e., is depreciable) and is thus eligible for the investment tax credit must be made by reference to sec. 167 only, without regard to the provisions of sec. 183. See Finoli v. Commissioner,86 T.C. 697">86 T.C. 697, 744-745↩ (1986).20. The Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002(a), 100 Stat. 1874, 1951, increased the sec. 6661(a) addition to tax to 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after October 21, 1986. See Pallottini v. Commissioner,90 T.C. 498">90 T.C. 498 (1988). Respondent has not amended his answer to seek an increase to the sec. 6661(a) addition to tax over the amount determined in the notice of deficiency. Accordingly, we merely sustain respondent's determination of sec. 6661(a) additions to tax equal to 10 percent of the underpayment attributable to the substantial understatements. We also note that in the Rule 155 computation the "understatement" must be reduced by any withholding credits in determining the "underpayment" to which the sec. 6661 addition to tax applies. See Woods v. Commissioner,91 T.C. 88">91 T.C. 88↩ (1988). 21. In determining whether there is substantial authority, only the following will be considered authority: applicable provisions of the Internal Revenue Code and other statutory provisions; temporary and final regulations construing such statutes; court cases; administrative pronouncements (including revenue rulings and revenue procedures); tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; and Congressional intent as reflected in Conference Committee reports, and floor statements made prior to enactment by one of the bill's managers. Sec. 1.6661-3(b)(2), Income Tax Regs.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624409/

SHERMAN S. WILCOX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilcox v. CommissionerDocket Nos. 15228-82, 19852-82.United States Tax CourtT.C. Memo 1985-243; 1985 Tax Ct. Memo LEXIS 384; 49 T.C.M. (CCH) 1525; T.C.M. (RIA) 85243; May 23, 1985. Sherman S. Wilcox, pro se. Pamela R. Piland, for the respondent. GERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined the following deficiencies and additions to the tax for petitioner in these consolidated cases involving the taxable years 1978, 1979 and 1980: Additions to the TaxTaxableYearDeficiencySec. 6653(b) 1Sec. 6653(a)Sec. 6651(a)Sec. 6654(a)1978$12,809.00$6,404.0019797,346.25367.311,836.56308.5419803,483.00174.15870.75222.91The primary issue presented in these consolidated cases is petitioner's claim that he is relieved from income tax liability for the years in issue because*386 of his association or contributions to his "Life Science Church" (hereinafter "church"). The following specific issues are presented for our consideration: (1) Whether petitioner is entitled to any charitable deductions for his 1978 taxable year; (2) Whether petitioner failed to report $214 of interest income for his 1978 taxable year; (3) Whether petitioner is liable for the section 6653(b) (fraud) addition to tax for his 1978 taxable year; (4) Whether petitioner received and failed to report income from wages in the amounts of $29,575 and $18,946 for the taxable years 1979 and 1980, respectively; (5) Whether petitioner is liable for the section 6653(a) (negligence) addition to tax for the taxable years 1979 and 1980; (6) Whether petitioner is liable for the section 6653(a) (failure to file) addition to tax for the taxable years 1979 and 1980; (7) Whether petitioner is liable for the section 6654(a) (failure to pay estimated tax) addition to tax for the taxable years 1979 and 1980; (8) Whether damages should be awarded to the United States for petitioner instituting or maintaining these proceedings primarily for delay or for frivolous or groundless positions; (9) *387 Whether this Court has jurisdiction over petitioner, which petitioner has raised by his "Motion to dismiss for want of Equity and Jurisdiction." Some of the facts have been stipulated by the parties and, for convenience, the Findings of Fact and Opinion are combined. Petitioner resided in San Bernardino, California, at the time he filed his petitions. The facts in this case and the positions and arguments offered by petitioner are strikingly similar to those in numerous other cases that have been heard by this Court. Much of petitioner's presentation appears derivative of "patented" material that has been developed by protester and tax avoidance groups. Petitioner's "Motion to dismiss for want of Equity and Jurisdiction"The first example of petitioner's use of "patented" anti-tax material is to be found in his jurisdictional motion. A few weeks prior to the trial, petitioner filed a "Motion to dismiss for want of Equity and Jurisdiction." Petitioner alleged that jurisdiction over him had been acquired through "fraud*388 and deception" because, as further alleged by petitioner, respondent did not comply with the Privacy Act (5 U.S.C. sec. 552a (e)(3)(A)), Treasury Reg. 31 C.F.R. 1.35(b)(2), and the Paperwork Reduction Act of 1980. More specifically, petitioner has alleged that respondent failed to include section 6012 in the Federal Register notice concerning the Privacy Act and in procedures concerning the Paperwork Reduction Act. Petitioner further alleged that the Internal Revenue Service Form 1040 and W-4 certificate are not in compliance with the "FEDERAL REGISTER ACT, 44 USC CHAPTER 15 § 1505," the Freedom of Information Act, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980. Petitioner's allegations are substantially identical to those made in the case of Billman v. Commissioner,83 T.C. 534">83 T.C. 534 (1984). As in Billman, petitioner herein has attempted to avoid tax by means of his relationship with a "church." Petitioner's claims and contentions concerning our jurisdiction are, for the most part, frivolous. Our holding in Billman more than adequately deals with petitioner's contentions that this Court lacks jurisdiction*389 and, accordingly, petitioner's motion to dismiss is denied. Effect of Petitioner's "Church" and Vow of Poverty on his 1978, 1979, and 1980 Tax LiabilitiesPetitioner filed his 1978 Federal income tax return reflecting $40,134 in income from wages and claiming a $78,078 charitable contribution, thereby reflecting no taxable income. The alleged $78,078 contribution was reported on line 21a of Schedule A of petitioner's 1978 Federal income tax return, which is specifically designated for "Cash contributions for which you have receipts, cancelled checks or other written evidence." Petitioner attached an "Affidavit of Poverty" to his 1978 return reciting that all of his possessions were gifted to the "Church or Order" and he also submitted as evidence in this case copies of two real property deeds reflecting transfers over to the "church." The deeds and affidavit were all executed in 1977 and petitioner presented no evidence of any contributions during his 1978 taxable year. Petitioner has not filed Federal income tax returns for the taxable years 1979 and 1980. The facts concerning petitioner's "church" are, again, strikingly similar to other cases decided by this Court. *390 In particular, see Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). Petitioner had been an electrician for nearly 40 years and was a member of Local 477 of the International Brotherhood of Electrical Workers during the taxable years 1978, 1979, and 1980. Although requested to do so by the Court, petitioner provided virtually no testimony or other evidence about the operation of his "church." The little testimony provided was nebulous and inconsequential. Petitioner testified that he was working construction in Alaska in 1976 and 1977 and before that "[he] had never been around dope, been around drinking * * *." Petitioner further testified that he could speak construction worker's language and "I know nobody likes to hear hellfire and brimstone, but when you get one on one and try to straighten a guy out or two, is the reason I started the Church in the first place." Concerning the organization of petitioner's "church," the evidence merely consisted of pro forma documents. Petitioner, on November 1, 1977, executed a preprinted Life Science Church form charter, which had been executed on October 18, 1977, by*391 William Drexler as Bishop and Dean of Life Science College. Petitioner's son, Michael S. Wilcox, and his housekeeper, Jewell Wellard, signed the Charter as trustees. Petitioner signed his name as follows: "Rev. Sherman S. Wilcox D.D." On November 5, 1977, petitioner signed a preprinted form "Affidavit [vow] of Poverty," which was recorded on November 29, 1977, with the San Bernardino County Clerk's office. The "Affidavit [vow] of Proverty," in essence, states that all of petitioner's possessions and income are "gifted" or otherwise became the property of the "church" regardless of whether they continued to appear in petitioner's name and that "Outside employment renumberation [sic] (when directed by the church or order) is not personal income, but rather income/gift to the church/order * * *." Petitioner attached a copy of this "Affidavit [vow] of Poverty" to his 1977 and 1978 Federal income tax returns. On December 2, 1977, petitioner executed and caused to be recorded two Grant Deeds (one for his residence and another for some vacant land) reflecting a transfer of real property from petitioner as a "widower" to petitioner, as a "minister" and his "church." Petitioner, *392 during 1977 and the years in issue, worked as an electrician for several contractors and was paid wages by cash or check as follows: Name of Payor1977197819791980Fluor Alaska, Inc.$25,910.06Rogers Electric Divi-sion of NewberryConstructors Inc.30,869.44Johnson-Peltier, Inc.$17,768.00Whittaker Electric Co.4,249.30$6,034.60Gregg Electric, Inc.2,200.00Paige Electric Co.11,192.80L.K. Comstock & Co.,Inc.$39,404.012,480.42Rini Electric, Inc.206.40Jackson Electric Co.,Inc.524.00Total Wages$56,779.502 $40,134.41$26,697.72$17,227.40When paid by check, checks were made payable to petitioner. All employment records were in the name of petitioner. On November 18, 1978, petitioner submitted a Form W-4 to an employer claiming one exemption for purposes of withholding taxes. On all other Forms W-4 that petitioner submitted to the employers shown above (during the years in issue), petitioner claimed to be exempt from withholding*393 and no taxes were withheld from his wages. During 1977, petitioner sought exemption from self-employment taxes from the then-named Department of Health, Education, and Welfare and from the Internal Revenue Service on the basis that his religious beliefs caused him to be conscientiously opposed to public insurance. Petitioner's requests for "resignation" or exemption from self-employment and/or social security tax were denied by both agencies. For 1977, petitioner signed and filed a Form 1040 and attached Forms W-2 which reflected $56,779.50 in wages. Petitioner sought a refund of all withheld tax due to his claimed exemption from tax based upon his "vow of poverty." No amounts were filled in on the various lines of the 1977 return, except for the various withholding tax payments and the claimed refund of same. For 1978, petitioner signed and filed a Form 1040 and attached Forms W-2 which reflected $40,134 in wages. Petitioner's 1978 return reflected the $40,134 as gross income from wages and also included a $78,078 claimed contribution deduction. As with the 1977 return, 3 a "vow of poverty" form was attached to the 1978 return. No other income or deductions were reflected on*394 petitioner's 1978 return. Petitioner did not file Federal income tax returns for the taxable years 1979 and 1980. Up until sometime late in 1977, petitioner maintained a personal checking account, with his son as a second signatory, at the Highland-Arrowhead branch of the Bank of America. That account was used to pay petitioner's personal day-to-day expenses. In 1977 petitioner opened a savings account in the "church's" name with the same bank. During late 1977 or early 1978, petitioner closed his personal checking account and opened a checking account in the "church's" name at the same bank. Petitioner's payroll checks were the primary source of funds deposited into the checking account during 1977. For 1978, 1979, and 1980, petitioner's personal living expenses were paid out of the "church's" bank account. Petitioner has not shown a new or different source*395 of deposits into the "church's" accounts other than the wages he received as an electrician. In essence, nothing changed in the handling of petitioner's personal finances other than the change of the name in which the bank accounts were maintained during the year in question. Other than petitioner's pro forma filling-in of a "church" charter and deed blanks and his renaming bank accounts, nothing changed in petitioner's modus operandi during the years 1977 through 1980. Throughout 1978, 1979 and 1980, with one exception, petitioner submitted Forms W-4 to various employers claiming that petitioner was exempt from the withholding of tax from his wages. In this manner petitioner changed his approach from claiming "charitable deductions" in excess of his reported wages in 1978 to using an "exempt" withholding status to avoid filing a return to claim a refund of his prepayment credits. Even though petitioner has offered forms claiming to be exempt from tax and/or attempting to establish a connection with a Life Science Church, in one of his pleadings he alleges, concerning his failure to file a return: (1) That there was no Internal Revenue Code section requiring him to pay tax; (2) *396 that he received nothing of tangible value that qualified as income; (3) that he did not volunteer to self-assess himself; (4) that he was not in receipt of gain or profit; and (5) that he enjoyed no grant of privilege or franchise. Petitioner's motivation to avoid or evade tax has led him to the dogmatic and legally unsuccessful postulates of tax protest. On these facts, we must first consider whether amounts paid to petitioner for work as an electrician were paid to him as an agent of his "church." Concerning the taxable years 1979 and 1980, petitioner's personal use of all property and funds transferred to his "church" coupled with the lack of any sacerdotal or charitable activity clearly establishes that the "church" was not a separate and distinct principal. McGahen v. Commissioner,76 T.C. 468">76 T.C. 468, 479 (1981), affd. without published opinion 720 F.2d 664">720 F.2d 664 (3rd Cir. 1983); Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir., 1984). Although the "church" charter recites that "church" receipts should not issue to the benefit of private individuals, petitioner testified that nothing changed in the*397 manner that he paid his personal expenses other than the account name upon which the checks were drawn. Checks were drawn and expenses were paid for such items as food, transportation, clothing, insurance premiums, automobile expenses and union dues to the electrical workers union. In sum and substance, petitioner deposited part or all of his wages into the "church's" account and paid his personal living expenses from the same account. The record is void of any evidence that the "church" had a congregation, members other than petitioner, worship services, liturgy or that petitioner who was its self-designated trustee and minister ever performed any sacramental services. The only testimony provided related to petitioner's belief that he could communicate with construction workers, but no charitable activity was described for the years before the Court. We find petitioner's evidence to be unconvincing. As in McGahen v. Commissioner,supra at 480, and repeated in Stephenson v. Commissioner,supra at 1001, the "church," by its very nature, merges the secular with the sacerdotal and must be seen as an impermissible attempt "to transmute*398 the commercial into the ecclesiastical and thus avoid the congressional separation of taxable individual income and tax-exempt religious order income." Accordingly, the wages earned by petitioner as an electrician were income to him and reportable. On his 1978 tax return, petitioner reported $40,134 in taxable wages and claimed a charitable contribution deduction of $78,078. Section 170 allows deductions for charitable contributions where taxpayers can prove that the contributions were made to a qualified tax-exempt organization and that no part of the net earnings of the qualified tax-exempt organization inured to the taxpayers' personal benefit. Davis v. Commissioner,81 T.C. 806">81 T.C. 806 (1983), appeal filed (9th Cir., June 25, 1984); Miedaner v. Commissioner,81 T.C. 272">81 T.C. 272 (1983); McGahen v. Commissioner,supra.Petitioner contends that he made contributions to his "church," which he considers to be a tax-exempt organization. Respondent's position is that petitioner has not proven the amount of the contribution and that petitioner received the personal use of the funds allegedly contributed. Petitioner has not presented any evidence*399 of the value or the amounts or type of property contributed, other than the two deeds to realty and the vow of poverty documents reciting the transfer of property. Further, the deeds and vow of poverty show the transfer in 1977, a taxable year not currently before this Court. Petitioner has not provided evidence showing that his "church" was a qualified tax-exempt organization. Other than the "charter" granted to petitioner by William Drexler as Bishop and Dean of Life Science College, there is nothing in the record to show that the "church" was organized or operated so as to qualify as a religious or charitable institution within the meaning of section 170(c)(2). Petitioner has not provided information on the size, frequency of meeting or existence of a congregation. Finally, the record reflects that all of petitioner's personal expenses were paid out of the "church's" bank account. Accordingly, we hold that petitioner is not entitled to any charitable deduction for the taxable year 1978. Omission of Interest Income in 1978Petitioner did not offer an explanation concerning or any evidence pertaining to respondent's determination that he failed to report $214 of interest*400 income for 1978. Accordingly, we hold that petitioner failed to report $214 of interest income during 1978. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142. 4Additions to the TaxRespondent determined, for the taxable year 1978, that all or part of petitioner's underpayment of tax was due to fraud within the meaning of section 6653(b). We have found that petitioner is not entitled to the claimed contributions and that he failed to report $214 in interest income. Respondent bears the burden of proving fraud. Sec. 7454(a); Rule 142(b). It must be shown that petitioner had an intent to evade a tax he believed to be owing. Webb v. Commissioner,394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court. The existence of fraud is a question of fact to be considered in light of the entire record, Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978), and may be inferred from circumstantial evidence. Powell v. Granquist,252 F.2d 56">252 F.2d 56, 61 (9th Cir. 1958);*401 Gajewski v. Commissioner,supra.The gist of petitioner's position on brief concerning the fraud issue is that "there can be no penalty imposed on one because of his exercise of constitutional rights," citing Sherar v. Cullen481 F.2d 945">481 F.2d 945 (9th Cir. 1973). Sherar presents a situation where an Internal Revenue agent was discharged from his Government position for refusing to submit records in connection with the audit of the employee-agent's taxes. Comparing Mr. Sherar's situation with a taxpayer who had been served a summons under section 7402, the Circuit Court found that Mr. Sherar's discharge was unwarranted. Sherar v. Cullen,supra at 948. It is unnecessary to express our agreement with the principle expressed in Sherar because we are unable to apply similar principles to petitioner's baseless claims that the taxing statutes are unconstitutional or that the participation in the tax system is wholly voluntary. In addition to petitioner's protester-type argument, he asserts, and has reported to the Internal Revenue Service for 1978, that he was either exempt from tax because of his relationship with his "church"*402 or that his claimed contribution to his "church" reduces to zero any income he may have earned. Respondent argues that petitioner's "vow of poverty" and establishment of his "church" were merely to evade the payment of tax. As stated in Stephenson v. Commissioner,supra,79 T.C. at 1008 (1982): "It is hard to believe any individual * * * could honestly believe that he could escape liability for income taxation and still enjoy unfettered use of all the income he received by so simple a step as the creation of the 'church.'" Prior to 1977, petitioner, an electrician for about 35 years, filed proper income tax returns. Included in the record of this case is a copy of petitioner's 1976 Federal income tax return. In that return petitioner reported $59,163 in wages and $1,037 in interest and dividend income. Amongst other deductions, petitioner claimed as deductions for contributions $38 for "Misc. Organized Charities" and $100 for "House of Worship." Late into 1977, petitioner executed a preprinted "church kit" consisting of a vow of poverty and charter. The documents are printed forms ostensibly received from the Life Science Church requiring petitioner to merely*403 fill in his name and the date. Additionally, on December 2, 1977, petitioner executed and recorded two deeds to real property to the "Life Science Church of Blake St., Sherman S. Wilcox, Minister." The deeds concerned petitioner's residence and some vacant land. For 1977, petitioner submitted a basically blank return advising of and attaching a vow of poverty and claiming a refund of all withheld taxes. Two Forms W-2 reflecting $56,779.50 in wages and $18,426.79 in withheld Federal income tax were attached. The Internal Revenue Service issued the refund to petitioner, who listed himself as "Reverend Sherman S. Wilcox" on the return. For 1978, petitioner changed his modus operandi. He reported $40,134 in wages and claimed a $78,078 deduction for contributions. A copy of the same vow of poverty was attached to the 1978 return. The amount of Federal income tax withheld for 1978 was drastically reduced to $3,021, for which petitioner requested a refund. The reduction of withheld tax is attributable to the filing of Forms W-4 with employers in which petitioner claimed exemptions from tax. For 1979 and 1980, petitioner did not file a return because he was successful in causing*404 all withholding to cease by the filing of exempt Forms W-4 with employers. The filing of false W-4 forms to stop withholding of Federal tax has been found as indicative of an attempt to evade the payment of income tax. Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983); Habersham-Bey v. Commissioner,78 T.C. 304">78 T.C. 304, 313-314 (1982). Petitioner's pattern of conduct reflects his intent to evade the payment of tax. Spies v. United States,317 U.S. 492">317 U.S. 492 (1943). Petitioner has decided not to pay any more tax following the filing of his 1976 return. By means of a "church kit" he created the subterfuge of exemption from tax which he stated in a return to his government and in Forms W-4 submitted to his employers. With nothing more than subscribing to a couple of pro forma documents, he purported to be a minister of a church. Petitioner, although offered the opportunity and requested to do so, presented no evidence of a congregation, sacerdotal activity or other operational aspects of a religious organization. Moreover, there were no real changes in petitioner's financial situation in connection with the creation of his "church" other than*405 a change in the name of the bank account to the "church's" name. Otherwise, as petitioner testified, nothing changed--all of his personal expenses, including housing, food, clothing, insurance, auto expenses, union dues, etc., were paid from the "church" account. He maintained full dominion and control over the account and the funds inured to petitioner's sole benefit. There is no evidence of any charitable activity during 1978. Although relatively small in amount, petitioner failed to report $214 of interest income for 1978. When considered within the entire pattern, this unexplained omission has probative significance. Petitioner, on brief, comments little about his "church" and instead puts forth the baseless and overused arguments that many tax protesters have unsuccessfully advanced before this and other courts. Petitioner poses a riddle centered about the voluntary nature of the tax system. The conclusion he reaches is that one may not be forced to self-assess since the system is voluntary. Petitioner has revealed his true intent to evade tax by these baseless claims. His choice to hide behind the facade of a religious organization to accomplish the evasion is, coupled*406 with the other facts in this record, fraudulent. Petitioner's actions are most disruptive of the system that guarantees constitutional freedom of religion. Petitioner's attempts to use this constitutional guarantee as a sword to evade payment of tax, rather than a shield permitting the free exercise of his religion. Respondent determine additions to tax for 1979 and 1980 pursuant to sections 6653(a) (negligence), 6651(a) (failure to file) and 6654(a) (failure to pay estimated tax). The burden of proof with respect to these additions to the tax is upon petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142. Petitioner has not presented any evidence to carry his burden of showing that the additions are not applicable. As previously discussed, the wages earned by petitioner were reportable by him and his failure to do so for 1979 and 1980 would, at very least, support the addition to tax for negligence and failure to file. Damages Under Section 6673Petitioner's consolidated cases present different aspects of the same issue concerning petitioner's relationship to his "church." The only major difference is that petitioner filed a return in docket*407 No. 15228-82 while petitioner did not file returns in docket No. 19852-82. These two cases, representing three taxable years, are the second and third cases brought before this Court by petitioner. He first filed a petition in docket No. 8649-81, concerning an income tax deficiency and addition to tax under section 6653(b) for his 1977 taxable year. That case was dismissed by an order of this Court, dated July 2, 1984, as a sanction for failing to comply with an order of this Court concerning discovery and case preparation. Respondent seeks $5,000 damages with respect to docket No. 19852-82 involving petitioner's 1979 and 1980 tax years. The record reflects the inherent inadequacy of petitioner's proof and the baseless and frivolous nature of his position. Section 6673 provides for damages to be awarded to the United States in an amount not in excess of $5,000 whenever it appears that a taxpayer has filed or maintained the petition primarily for delay or where the taxpayer's position is frivolous or groundless. As we have recently stated, this Court has been faced with numerous cases, such as this one, concerning attempts by taxpayers to use the "pretext of a church to avoid*408 paying their fair share of taxes * * * [and to] resort to the courts in a shameless attempt to vindicate themselves." Miedaner v. Commissioner,81 T.C. 272">81 T.C. 272, 282 (1983). Petitioner has abused the process of this Court and wasted its resources and those of respondent. The record in these cases causes us to find $5,000 in damages in docket No. 19852-82. Moreover, we can find no difference in the situation presented by docket No. 15228-82 and, accordingly, we find $5,000 in damages, sua sponte, in docket No. 15228-82. Decisions will be entered for the respondent.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and appropriate to the years in question.↩2. Petitioner rounded to nearest dollar on his 1978 income tax return to $40,134 and respondent used the rounded amount in the statutory notice.↩3. It is noted that petitioner also filed a petition with this Court concerning his 1977 taxable year (docket No. 8649-81). That case was dismissed and a decision was entered finding the full income tax portion of the deficiency against petitioner as a sanction for his failure to comply with an order of this Court.↩4. All rule references are to the Tax Court Rules of Practice and Procedure.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624414/

GORDON B. LEITCH, JR. AND MARY C. LEITCH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLeitch v. CommissionerDocket No. 7771-81.United States Tax CourtT.C. Memo 1981-504; 1981 Tax Ct. Memo LEXIS 239; 42 T.C.M. (CCH) 1058; T.C.M. (RIA) 81504; September 14, 1981Thomas Meyerer, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: This case was assigned to Special Trial Judge Marvin F. Peterson for hearing on August 5, 1981, at Washington, D.C., on respondent's motion for summary judgment. After a review of the record, we agree with and adopt the Special Trial Judge's opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE PETERSON, Special Trial Judge: This case is before the Court for hearing on respondent's motion for summary judgment. Respondent determined deficiencies of $ 9,684 and $ 8,989 in petitioners' 1977 and 1978 Federal income tax. Petitioners were residents of Portland, Oregon, when they filed their 1977 and 1978 Federal income tax returns with the Western Region Internal Revenue Service Center*240 in Ogden, Utah, and when they filed their petition in this case. In his notice of deficiency respondent determined that petitioners understated their adjusted gross income, itemized deductions, and personal exemptions for each of the years 1977 and 1978, as follows: 19771978Adjusted Gross Income$ 54,038$ 55,829Itemized Deductions13,25715,784Personal Exemptions4,5934,687Petitioners do not dispute respondent's adjustments to income, except that they maintain respondent erred by failing to compute their income for 1977 and 1978 in terms of a "specie" dollar which is calculated by discounting the face value of Federal reserve notes to reflect the amount of gold reserves backing such notes. Petitioners contend that under the Constitution of the United States gold and silver are the only measures of money. This identical issue was litigated and decided adversely to petitioners Gordon B. Leitch, Jr. and Mary C. Leitch in Leitch v. Commissioner, T.C. Memo. 1979-75, affd. in an unpublished opinion 652 F.2d 63">652 F.2d 63 (9th Cir. 1981), certiorari applied for July 23, 1981, which reads as follows: The Tax Court's grant*241 of summary judgment to the Commissioner is affirmed. Taxpayers' contention that income received in federal reserve notes (paper currency) is taxable only at a discounted "specie" dollar value (reflecting the extent to which the notes are backed by gold reserves), rather than at face value, is frivolous. United States v. Wangrud, 533 F.2d 495">533 F.2d 495 (9th Cir. 1976), cert. denied, 429 U.S. 818">429 U.S. 818 (1976). Accordingly, we conclude that respondent correctly determined petitioners' income and deductions in the dollar amounts as set forth in the notice of deficiency. Therefore, on the basis of the record in this case, there is no genuine issue of material fact regarding the issues and respondent is entitled to prevail as a matter of law. Respondent's motion for summary judgment will be granted. Respondent has also requested that the Court award damages pursuant to section 6673, Internal Revenue Code. In cases like this, where petitioners have previously submitted frivolous and meritless claims, 1 the Court will award such damages. See Sydnes v. Commissioner, 74 T.C. 864">74 T.C. 864, 870-872 (1980), affd. 81-1 USTC Par. 9393, 47 AFTR2d 81-1417*242 (8th Cir., April 29, 1981). See also McCoy v. Commissioner, 76 T.C. 1027">76 T.C. 1027 (1981), where we stated (p. 1029): It may be appropriate to note further that this Court has been flooded with a large number of so-called tax protester cases in which thoroughly meritless issues have been raised in, at best, misguided reliance upon lofty principles. Such cases tend to disrupt the orderly conduct of serious litigation in this Court, and the issues raised therein are of the type that have been consistently decided against such protesters and their contentions often characterized as frivolous. The time has arrived when the Court should deal summarily and*243 decisively with such cases without engaging in scholarly discussion of the issues or attempting to soothe the feelings of the petitioners by referring to the supposed "sincerity" of their wildly espoused positions. Therefore, in these circumstances the maximum damages authorized by law ($ 500) are appropriate and will be awarded under section 6673. An appropriate order and decision will be entered. Footnotes1. Arguments similar to those made by petitioners in their prior case, and again in the present case, have been uniformly rejected and variously characterized by the Courts of Appeals as "frivolous" in United States v. Daly, 481 F.2d 28">481 F.2d 28, 30 (8th Cir. 1973), cert. denied 414 U.S. 1064">414 U.S. 1064 (1973); as "without merit" in United States v. Schmitz, 542 F.2d 782">542 F.2d 782, 785 (9th Cir. 1976); and as "groundless" in United States v. Anderson, 584 F.2d 369">584 F.2d 369, 374↩ (10th Cir. 1978).

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624415/

CAROLINE J. SHAW, EXECUTRIX, ESTATE OF R. S. SHAW, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. R. H. BARR, PETITITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Shaw v. CommissionerDocket Nos. 26804, 26868.United States Board of Tax Appeals21 B.T.A. 400; 1930 BTA LEXIS 1852; November 21, 1930, Promulgated *1852 The liability for taxes asserted against the petitioners as transferees is barred by the statute of limitations. William H. Trindle, Esq., for the petitioners. R. W. Wilson, Esq., for the respondent. ARUNDELL*400 The petitioners seek a redetermination of their liability under section 280 of the Revenue Act of 1926 as transferees for unpaid income and excess-profits taxes of the Castle Rock Logging Co. for the years 1918 and 1920 in the respective amounts of $3,240.09 and $754.49. The single issue is whether the taxes for 1918 are barred by the statute of limitations, the respondent having conceded at the hearing that there is no deficiency for the year 1920. The death of R. S. Shaw having occurred in May, 1930, the executrix of his estate was substituted for the decedent as the petitioner in Docket No. 26804. FINDINGS OF FACT. The Castle Rock Logging Co., a dissolved Oregon corporation, filed its income and excess-profits tax return for 1918 on June 11, 1919, disclosing a tax liability of $395.28, which was duly assessed and paid. In November, 1921, the respondent made an additional assessment against the taxpayer in the amount of*1853 $3,825.57, on account of which the latter on December 12, 1921, filed a claim in abatement. Thereafter, in December, 1924, a certificate of overassessment in the amount of $585.48 was issued, leaving an unpaid assessment of $3,240.09. No waivers or agreements were ever executed by the taxpayer to extend the period for assessment and collection of taxes due from it for the year 1918. The notices of liability from which these appeals were taken were mailed to the petitioners on February 25, 1927. Upon the dissolution of the taxpayer on April 2, 1925, there was distributed to each of the petitioners cash or other property of a value in excess of $3,994.58. OPINION. ARUNDELL: This proceeding was brought under section 280 of the Revenue Act of 1926, which provides, in so far as material here, as follows: *401 SEC. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in tax imposed by this title * * * * * * (b) The period of limitation for assessment of any such liability of a transferee*1854 * * * shall be as follows: (1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or (2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, - then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act. The facts set forth in the findings bring the case squarely within the language of subdivision (b)(2) quoted above, and at first glance the quoted provision would seem to remove the case from the operation of the statute of limitation. In our opinion, however, no part of section 280 can be read alone, but each part must be read and construed along with other provisions of the Act. Section 280, in subdivision (a), provided a new method of proceeding against a transferee. Theretofore it had been entirely by suit; now it is to be largely, if not entirely, by executive action. Subdivision (b) provided different periods of limitation for assessment against the transferee from those for assessment against persons primarily*1855 liable for taxes. The Board has held that, where the period of limitation for assessment against the taxpayer expired after the enactment of the Revenue Act of 1926, the Commissioner had the additional period for assessing the transferee given by subdivision (b)(1), thus, in effect, holding that the law provided for two periods, one for the taxpayer, and a longer one within which to proceed against the transferre. ; ; . That Congress may provide different limitation periods, we have no doubt. The added difficulty in pursuing transferred assets in the hands of transferees would, in our opinion, be ample warrant for granting to the Commissioner the additional time. Subdivision (b)(2), within which the present case falls, provides that where the period for assessment against the transferor expired before the new method of procedure became effective, but assessment had been timely made, then the Commissioner could assess against the transferee up to a time not later than one year after the procedure established by section 280 could*1856 be brought into use. A brief review of the events leading to some of this legislation will, we believe, be helpful. The Bureau of Internal Revenue had always *402 accepted the view that if an assessment was made by the Commissioner within the period provided by law, then collection might be made at any time and the provision found in section 250 of the Revenue Act of 1921 that "no suit or proceeding for the collection of any such taxes due under this Act or any prior income, excess-profits or war-profits tax Acts * * * shall be begun after the expiration of five years after the date when such return was filed" had no application to proceedings by distraint. With the Supreme Court's decision in , there was a rude awakening on the part of the Government for it was there held that the word "proceeding" appearing in the quoted provision applied as well to distraint proceedings as to suits. That there was doubt as to the correctness of the respondent's interpretation long before the Lighterage decision is shown by reports of the House Ways and Means Committee and Senate Finance Committee when the*1857 bill that became the Revenue Act of 1924 was under consideration. See p. 26, Rept. No. 179, and p. 32, Rept. No. 398, 68th Cong., 1st sess. Whatever may have been the intention of Congress in enacting section 278 of the Revenue Act of 1924, the Supreme Court decided in the case of , that the additional six years for collection did not apply to assessments made before the passage of the 1924 Act. The Russell case was not decided until January, 1929, but the construction finally sustained by the Supreme Court had already been urged and when the 1926 Act was enacted that view "had apparently been already divined as a possibility." . Such was the situation when the 1926 Act was under consideration. Section 278(d) of that act was a substantial reenactment of the same subdivision of section 278 of the 1924 Act with this exception, it provided that "Where the assessment * * * has been made (whether before or after the enactment of this Act) within the statutory period of limitations properly applicable thereto such tax may be collected by distraint * * * if begun (1) *1858 within six years after the assessment of the tax * * *." The proposed action of the Ways and Means Committee which was finally embodied in the law in subdivision (d) of section 278 was bitterly opposed by many taxpayers and it was finally decided that the proposed legislation should not affect existing rights, and by section 278(e) Congress provided that "this section shall not * * * authorize the assessment of a tax or the collection thereof by distraint or a proceeding in court, if at the time of the enactment of this Act such assessment, distraint, or proceeding was barred by the statutory period of limitation properly applicable thereto * * *." At *403 the outset of this opinion we have quoted from section 280, subdivision (a) of which provides substantially that the liabilities of a transferee shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency "except as hereinafter in this section provided." But for the exceptions provided it would seem clear that the limitation period for transferees would be the same as for taxpayers and as section 278(e) made it clear that the section was not*1859 to revive rights that had been definitely lost by the Government, there could be no difficulty in reaching the conclusion contended for by the petitioners herein. As already pointed out we have taken the view that where the period for assessment against the taxpayer had not expired before the passage of the 1926 Act, subdivision (b)(1) gives the Commissioner an extra period of one year within which to proceed against the transferee, and we have indicated the reasons which we believe actuated Congress in providing this longer period. We have held, however, on the other hand that subdivision (b)(1) has no application in cases where the statutory period for assessing had finally and definitely expired before the passage of the 1926 Act. This subdivision is not in terms retroactive and an intention to revive a remedy for enforcing a liability theretofore barred is not to be lightly imputed to Congress unless there is a clear indication that such was the intent. . We do not believe it was the intention of Congress to reopen cases definitely closed, and this may be explained as the thought underlying our decisions on this point, though*1860 there may have been in some of the decisions other and different reasons for the conclusions reached. Subdivision (b)(2), however, by its very terms applies to cases where the period of limitation for assessment against the taxpayer expired before the enactment of this act, but assessment against the taxpayer was made within such period. If this provision may be given effect without construing it so as to revive a remedy for enforcing a liability that was unenforceable before its passage and without reopening cases closed out and dead, we think such a construction is to be preferred. By so doing we harmonize section 280(b)(2) with section 278(e) and avoid the incongruous result of supposing that Congress intended to leave the taxpayer as he was before the passage of the 1926 Act, and at the same time to revive a remedy for enforcing a liability which had likewise become unenforceable against the transferee. This we believe may be accomplished by reading section 280(b)(2) so as to apply to assessments made before the passage of the 1926 Act, which did in fact at the time they were made serve to extend the period for collection, which would include all valid assessments made after*1861 *404 the passage of the 1924 Act, but would not include assessments made before June 2, 1924, which it has now been definitely held in the Russell case were not included in the provisions extending the period for collection. We thus lay our decision on what we believe to be a correct interpretation of the Act in the light of the history of the legislation and the situation confronting Congress at the time. This view is in harmony with the additional legislation appearing in the 1928 Act. Section 506 of that act, among other things, provides that where the period for assessment and collection has expired, nevertheless, if after the passage of that act and before January 1, 1929, the taxpayer and the Commissioner consent in writing to a later assessment, such may be made though the effect of the agreement substantially confers on the Government a right which it had lost by the passage of time. Congress did not here arbitrarily extend the period but only gave the Government additional time in cases where, after the passage of the act, the taxpayer by his own affirmative action saw fit to grant it. The assessment in this case having been made against the transferor*1862 prior to June 2, 1924, it is our opinion that assessment and collection against petitioners, as transferees, are barred. Reviewed by the Board. Decision will be entered for the petitioner.MURDOCK MURDOCK, concurring: I agree with the decision of this case but desire to set forth my reason for so doing. The Revenue Act of 1926 was not intended to and did not authorize the assessment or collection of any tax which at the time of its enactment could not be assessed or collected because of the bar of the statutory period of limitation properly applicable thereto. See section 278(e). Section 278(d) of that act provides that a tax may be collected within six years after a timely assessment. Section 280(b) provides a period of limitation for assessment of transferee liability, but collection of taxes from transferees must be made in the same manner and subject to the same provisions and limitations as in the case of a deficiency in tax imposed by Title II of the Revenue Act of 1926. See section 280(a). Bearing in mind this provision of section 280(a), and reading section 280(b) in the light of section 278(d) and (e), I am convinced that the Revenue Act of*1863 1926, and particularly section 280 thereof, was not intended to and did not revive remedies for the enforcement of tax liabilities, where, prior to the enactment of the Act, the statutory period of limitations had already barred assessment or collection. *405 Section 280(b) of the Revenue Act of 1926 provided an entirely new procedure for the enforcement of a liability of a transferee, and at the same time, in subdivision (b), it provided a period of limitation for the assessment of any such liability. Prior to the enactment of that act, no such method of enforcement was available to the Commissioner, and there was no provision for the assessment of the liability of the transferee in respect to the tax imposed upon the transferor. It does not follow, however, that the Government could assert a claim against and collect a tax from a transferee under these prior acts after the statute of limitations had run against the original taxpayer. Suit or proceeding for collection from a transferee could not have been begun after the time had expired within which a suit or proceeding for collection from the taxpayer transferor had expired. *1864 ; ; . In one class of cases section 280(b)(1) gave the Government an additional year in which to proceed against the transferee after it could no longer proceed against the transferor. This class of cases is where both the period for assessment and collection against the taxpayer transferor were permitted to expire after the enactment of the Revenue Act of 1926, and before notice to or assessment against the transferee. I know of no reason why Congress did not have the power to fix the statutory periods of limitation which it did fix in section 280(b). Therefore, I see no difficulty in applying the plain words of section 280(b) where the facts in any given case bring it within either one of its provisions, but do not show that assessment or collection was barred before the enactment of the Revenue Act of 1926. Sections 1106(a) and 280(b) both appear for the first time in the Revenue Act of 1926, and there is no reason to believe that the general provisions of section 1106(a) supersede*1865 the specific provisions of section 280(b). Therefore, in all transferee cases it is important to see whether or not the Commissioner has moved against the transferee within the time given him by section 280(b). If he has, and if collection from the transferee was not barred before the enactment of the Revenue Act of 1926, then it matters not what the Commissioner's rights are against the transferor, for in such cases the bar of the statute has not run as to the liability of the transferee in respect of the tax imposed upon his transferor, and section 1106(a) does not have any effect. The cases all fall within two general classes depending upon the condition of the Commissioner's remedy at the time of the enactment of the Revenue Act of 1926. In all of those cases of transferee *406 liability where prior to the enactment of the Revenue Act of 1926 the statute had run against assessment or collection from the taxpayer transferor and likewise, therefore, against collection from the transferee, section 280(b) has no effect. It does not revive a remedy once dead, and the transferee has a complete independent defense. If section 1106(a) extinguishes the liability, the fact*1866 is of no particular importance in the decision of such cases. In all cases of transferee liability, where the Commissioner's remedy against the taxpayer and likewise against the transferee was still alive on the date of the enactment of the Revenue Act of 1926, the question of the continuation of that remedy against the transferee depends upon whether or not the Commissioner has proceeded against the transferee timely under section 280(b). If he has, section 1106(a) does not effect an extinguishment of the liability. If he has not, then that fact is a complete defense to the transferee and it is not important in the decision of such cases that section 1106(a) extinguishes the liability. There are a number of decisions of this Board on this subject in which different reasoning has been employed, but, so far as I have been able to determine, the result reached in each of those cases has been the result which would have been reached had the principles herein expressed been applied.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624416/

Rufus F. Turner and Marguerite H. Turner v. Commissioner.Turner v. CommissionerDocket No. 82122.United States Tax CourtT.C. Memo 1961-101; 1961 Tax Ct. Memo LEXIS 256; 20 T.C.M. (CCH) 468; T.C.M. (RIA) 61101; March 31, 1961Fortescue W. Hopkins, Esq., and William N. Pierce, Esq., Mountain Trust Bank Bldg., Roanoke, Va., for the petitioners. Richard C. Forman, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined a deficiency in petitioners' income tax for 1957 in the amount of $11,670.36. The issues presented are (1) whether there was a recognized gain upon the incorporation of a sole proprietorship; and (2) whether a bonus received in 1957 was properly reported in that year for income tax purposes. Findings of Fact Some of the facts have been stipulated and are incorporated herein by reference. Petitioners are husband and wife and reside in Martinsville, Virginia. For the calendar year 1957 they filed a joint income tax return with the director of internal revenue for the district of Virginia. Rufus F. Turner, hereinafter referred to as petitioner, as a sole proprietor, had engaged in the operation of a fresh produce wholesale grocery business for 36 years in Martinsville under the name of Cash Produce Company. Also associated with the business were petitioner's wife, Marguerite H. Turner, who had been employed*258 for 26 years as a bookkeeper, and James R. Ingram, petitioner's son-in-law, who had been employed for 7 years and was petitioner's principal assistant. On November 14, 1956, petitioner incorporated the sole proprietorship under the name of Cash Produce Company, Inc., hereinafter referred to as Cash Produce. The corporation transacted no business until January 1, 1957. A stock statement was filed with the Virginia State Corporation Commission on December 6, 1956, advising it of a plan to issue 135 shares of common stock for $6,750 in cash. Also in December 1956, petitioner conferred with his attorney and his certified public accountant with respect to the manner in which to accomplish the proposed transfer of the proprietorship assets to the new corporation. At that time the accountant made the following computation of the proprietorship goodwill Net earnings (before income taxes) -1952$ 29,887.34195318,468.80195419,536.61195524,830.86195621,535.87Total$114,259.48Less income taxes - 25%average28,564.87Total net earnings$ 85,694.615 year average$ 17,138.92Net earnings capitalized at 10%$171,389.20Less net invested capital at 12-31-56excluding goodwill (75,534.48 +21,535.87)97,070.35Goodwill at date of incorporation$ 74,318.85Rounding off$ 74,300.00*259 On January 1, 1957, with the exception of real estate and certain other fixed assets, all of the assets of the sole proprietorship together with certain liabilities were transferred to Cash Produce in exchange for 1,365 shares of common stock. These assets had a cost basis of $49,593.46. A summary of the balance sheet of the proprietorship as of December 31, 1956 was as follows: Current Assets$ 47,077.44Fixed Assets$ 91,455.07Less Depreciation36,490.0954,964.98Other Asset230.10TOTAL ASSETS$102,272.52Current Liabilities$ 5,202.17R. F. Turner, Capital: Balance 1-1-56$116,013.78Earnings for year195621,535.87$137,549.65Drawings for 195640,479.3097,070.35TOTAL LIABILITIES$102,272.52The following is the opening journal entry as of January 1, 1957 on the books of Cash Produce prepared by its attorney: DebitCash$ 9,092.61Accounts receivable12,339.46Inventory25,645.37Store fixtures996.30Cars and trucks20,273.91Office equipment3,111.87Frigidaire air conditioners620.21Incorporation expense230.10Goodwill74,300.00CreditReserve for depreciation -Store fixtures$ 481.53Cars and trucks15,449.23Office equipment1,433.56Air conditioners149.88Accounts payable - trade2,312.01Reserve for withholding tax625.02Accrued salaries2,024.58Accrued social security taxes240.56Note payable - R. F. Turner48,893.46Capital stock subscribed68,250.00Capital stock issued6,750.00*260 To record acquisition of business assets from R. F. Turner in exchange for capital stock of the corporation and account due R. F. Turner. A financial statement for Cash Produce as of January 1, 1957 was prepared by the accountant on January 19, 1957, and transmitted to the Produce Reporter Company, Wheaton, Illinois which publishes a credit rating reference book of produce firms. The following is the balance sheet from that financial statement: CURRENT ASSETSCash$ 9,092.61Accounts receivable - customers12,339.46Merchandise inventory - at the lower of cost (determined by thefirst-in-first-out method) or market25,645.37$ 47,077.44FIXED ASSETSStore fixtures, furniture, equipment and vehicles - at cost$25,002.29Less accumulated depreciation17,514.207,488.09INTANGIBLE ASSETSGood Will$74,300.00Incorporation expense230.1074,530.10TOTAL ASSETS$129,095.63CURRENT LIABILITIESAccounts payable: Trade$2,312.01Other625.02$ 2,937.03Accrued liabilities: Salaries and wages$2,024.58Taxes (other than taxes on income)240.562,265.14$ 5,202.17NONCURRENT LIABILITYNote payable to officer - unsecured and without interest$ 48,893.46CAPITALCommon stock - authorized, 3,000 shares of $50 par value; issuedand outstanding, 135 shares$ 6,750.00Subscriptions to common stock, 1,365 shares68,250.0075,000.00TOTAL LIABILITIES$129,095.63*261 Thereafter petitioner received the following reply from the Produce Reporter Company in regard to the financial statement submitted: The statement of Cash Produce Company, Inc., does present several problems from a rating standpoint. The item of "good will" is very correctly listed as a "intangible asset", it is the type asset which is eliminated from credit consideration in arriving at Blue Book financial ratings. When your good will and incorporation expenses of $74,530.10 are eliminated from your statement, that January 1, 1957 Corporation financial statement then shows a net worth of less than $500. We believe we have a feel of what your accountant and tax attornies [attorney] have attempted to accomplish in handling your incorporation on a basis which provides for a corporation note payable "to officer" of $48,893.46. Such an arrangement does, however, deplete completely the corporation's financial responsibility for credit rating purposes. Your accountant can, of course, advise you on the advisability of issuing corporate stock for that indebtedness to officers. Frankly, Mr. Turner, we hesitate very much to recommend a subordination agreement covering the notes*262 payable to officers and do so only as a last resort. In the event your accountants or attornies would want to prepare a subordination agreement which would clearly set forth that no payments are to be made on indebtedness to officers as long as there are any trade obligations and indicate clearly that you will notify Produce Reporter Company prior to the time any payment is made on that indebtedness, then such a subordination agreement could be accepted. It is the type exception, however, which is "loaded" with possibilities of misunderstanding for the future. * * *In response to this letter petitioner wrote the following: As principal stockholder, president and manager of Cash Produce Co., Inc. the undersigned will continue to honor credit extension with the same integrity and ability as in the past, and to personally guarantee payment of the corporations debts in the same manner as prior to incorporation. Though you suggest in your letter that a subordination agreement as to the corporations debt to me is "loaded" with possibilities of misunderstanding, you may accept this letter over my signature below as such an agreement, to the effect that any trade obligations*263 will most certainly be paid before any liquidation of this debt. Any drawings I made from the corporation above the minimal salary allowance provided for me will be charged against my annual profit-sharing. Furthermore, your letter ignored the fact that the note payable to officer of $48,893.46 was created by the charge for goodwill, and that the goodwill was a capitalization at 10% of the average net profits of the past five years. * * * Nevertheless, to eliminate goodwill from credit consideration as you state, should also require elimination of the debt which it created,leaving a remaining net worth of $49,363.36. To the latter should be added, if not more, by the subordination described above, the value of the business real estate which I retained in my own right in the amount of $47,476.89, giving a total net worth for credit purposes (Excluding other personal assets) in the amount of $96,840.25, exclusive of goodwill. * * *As evidence of the $48,893.46 designated on the balance sheet submitted to the Produce Reporter Company as "NONCURRENT LIABILITY, Note Payable to officer - unsecured and without interest", the accountant prepared the following instrument which was*264 executed sometime between January and November 1957: Notice of Indebtedness January 1, 1957 For value received, We, Cash Produce Co., Inc., do hereby promise to pay to Mr. Rufus F. Turner, his heirs or assigns, the amount of Forty-eight thousand, eight hundred, ninety-three dollars and forty-six cents, ($48,893.46) without interest, payable at the office of the corporation on or after February 1, 1958; also the corporation is not to furnish security of any type for this indebtedness. It is also agreed that the payee may draw funds from the corporation at any time upon the pledge of this note as security, said drawings to be deducted from the amount of this liability prior to settlement. Accepted and agreed to the above this date January 1, 1957. (S) Rufus F. Turner / Payee Cash Produce Co., Inc. (S) Rufus F. Turner / Registered Agent President This instrument was not adopted or ratified by any formal resolution of the stockholders or the board of directors of Cash Produce. A meeting of the board of directors of Cash Produce was held on February 25, 1957. Relevant parts of the minutes of that meeting are as follows: WHEREAS, Rufus F. Turner, sole proprietor and owner, *265 trading and doing business previously as the Cash Produce Company, Martinsville, Virginia, has the below mentioned personal property assets of $129,095.63, and said Rufus F. Turner, owner and sole proprietor, being subject to liabilities of $54,095.63, he having previously purchased for cash 135 shares at $50.00 per share for $6750.00 cash; therefore, total liabilities outstanding by purchase of said stock being the sum of $60,845.63, and the difference between said assets and liabilities being net assets and net worth of $68,250.00, and he has offered to sell the personal assets of said Cash Product [Produce] Company for the below sum, subject to said liabilities, with the remaining value in net assets and worth of $68,250.00 to the Cash Produce Company, Incorporated payable in common stock of the corporation, representing the difference between the assets subject to said liabilities. WHEREAS the said Rufus F. Turner, owner, has offered to transfer the said current, fixed and intangible personal property assets of said Cash Produce Company with the assumption of said liabilities to the Cash Produce Company, Incorporated, in exchange for $68,250.00 to be paid in 1365 shares of*266 the capital stock of the corporation of the par value of $50.00 each, and it is necessary for this Board of Directors to determine the value of such property in current money of the United States of America, as well as to accept or reject the said offer: NOW THEREFORE, BE IT RESOLVED: First, that this Board, in the exercise of its best skill and judgment, fixes and determines the value of the said property in current money of the United States in accordance with the Financial Statement of Cash Produce Company, Incorporated of January 1, 1957, as successor to Cash Produce Company (Rufus F. Turner, sole proprietor) on January 1, 1957, prepared by Alexander Grant & Company, certified public accountants of Roanoke, Virginia on January 19, 1957 and said Statement of the valuation of the assets and liabilities as set forth in said Statement, a copy of which is hereby attached and incorporated in the within resolutions and said balance sheet of said assets and liabilities of said Statement is hereby adopted as follows: [This balance sheet is identical with the one submitted to Produce Reporter Company, set out above.] Second, that the said offer of the said Rufus F. Turner, owner, *267 trading as the Cash Produce Company, Martinsville, Virginia, be and the same hereby is, accepted, in the sale of the above valued assets of $129,095.63, subject to the liabilities of $54,095.63, to the Cash Produce Company, Incorporated, and that 1365 shares of the common stock of the par value of $50.00 each in the total sum of $68,250.00 of said Corporation be issued, (in addition the amount $6750.00 has previously been issued to him by said Corporation for cash) and the remaining amount of $68,250.00 now be issued to Rufus F. Turner by said Corporation, to cover the actual net worth and net assets as shown in the First Resolution above. A fiscal year ending July 31 was adopted by Cash Produce. Petitioner's wife, as bookkeeper, incorrectly credited the $48,893.46 to "Accounts Payable" and subsequently certain drawings of petitioner were debited to this account with the result that the financial statement of Cash Produce for its fiscal year disclosed notes payable as $42,090.29. This error was corrected in January 1958 when the accountant audited petitioner's drawing account in preparation of the joint income tax return. On November 15, 1957, the accountant left the firm by which*268 he had been employed and shortly thereafter opened his own office in Martinsville. On January 1, 1958, petitioner and Cash Produce became the accountant's clients. On or about January 8, 1958, the accountant's immediate supervisor of his former firm telephoned him and also advised petitioner by letter that the incorporation of Cash Produce was, in the supervisor's opinion, taxable rather than tax free. On January 14, 1958, a debenture bond in the amount of $48,893.46 issued by Cash Produce to petitioner was filed with the Virginia State Corporation Commission. Although this debenture bond was dated January 1, 1957, it was prepared by Cash Produce's attorney from a form supplied by the accountant a few days prior to the filing. Pertinent provisions of this debenture bond are as follows: Cash Produce Company, Incorporated, a Corporation organized and existing under the laws of the State of Virginia, (hereinafter called the "Corporation"), for value received, hereby promises to pay to Rufus F. Turner, or order, his heirs or assigns, the total sum of $48,893.46, bearing interest at three per cent (3%) per annum, and being payable as follows: $5,000.00 on January 1, 1962, and $5,000.00*269 on the first day of each year thereafter until the total sum of $48,893.46 herein owed is paid unto the said Rufus F. Turner, or order, his heirs or assigns, together with 3% interest per annum and with the first payment of interest being due and payable on said sum on January 1, 1958 and on the first day of each year thereafter. The issue of the within corporate debenture is made and executed pursuant to the articles of incorporation of the said Corporation and in pursuance of a resolution of said Corporation passed on the 1st day of January, 1957 and said debenture herein being debenture No. 1. * * *This debenture is of an authorized issue debenture due as hereinabove set forth of the Corporation (hereinafter called debenture) of the aggregate principal amount of Forty-Eight Thousand Eight Hundred Ninety-Three Dollars and Forty-Six Cents ($48,893.46), duly authorized by resolution of the Board of Directors of the Corporation adopted January 1, 1957. The liability reflected in the debenture bond was recorded on the books of Cash Produce by the accountant as a "Long-Term Liability" with the explanation "Indenture due Rufus F. Turner from transfer of assets at date of incorporation. *270 " Although entered on the books in January 1958 it was dated January 1, 1957. One of the closing journal entries of Cash Produce for the fiscal year ended July 31, 1957 was as follows: Officers' salaries$12,000.00Payroll taxes55.12Social security tax payable$ 110.25Withholding taxes1,919.88R. F. Turner - accounts payable24.99Capital stock10,000.00To record additional salary paid toR. F. Turner in corporate commonstock.A "Stock Statement" dated January 10, 1958 was filed with the State Corporation Commission. It recited that "200 shares common stock at $50.00 per share in one issue [were] to be issued for * * * $10,000 in cash." The Commissioner explained in the statement accompanying the statutory notice of deficiency: It is held that you realized a gain of $74,300.00, recognized as a long-term capital gain to the extent of $48,893.46 (taxable at 50%), which represents the fair market value of non-interest bearing note received as part payment in the transfer of your net equity in assets to the Cash Produce Company, Incorporated. Therefore, taxable income has been increased in the amount of $24,446.73. In an amended*271 petition petitioners allege that they erroneously reported as income in 1957 stock or a bonus in the amount of $10,000. Opinion The tax incidents of a transfer of property to a new corporation are ascertained by reference to section 351, 1 Internal Revenue Code of 1954, which is a substantial re-enactment of section 112(b)(5) of the 1939 Code. Under section 351 the recognition of gain or loss at the time of incorporation is postponed if the transfer complies with the requisites of the statute which were framed in light of the underlying philosophy of the section, that an incorporation is a mere change in the form of doing business. Section 351 provides, in effect, that "no gain or loss shall be recognized" on the transfer of property to a corporation if (1) the transfer is "solely in exchange for stock or securities in such corporation" and (2) the transferor has an 80 per cent control of such corporation "immediately after the exchange." Section 351(b) contains a caveat that if property other than stock or securities permitted to be received without the recognition of gain or loss is obtained in the exchange, any gain on the transfer shall be recognized, *272 but "not in excess of" the fair market value of such "other property" or if money, the amount of money received. No loss shall be recognized. *273 In the instant case, the Commissioner determined that petitioner received in the incorporation of Cash Produce not only "nonrecognition" property, but also "other property" in the form of a non-interest bearing note in the amount of $48,893.46. He determined further that the petitioner had realized a gain of $74,300 on the transfer and consequently there was a recognized gain taxable as a long-term capital gain to the full extent of the face value of the note. In contesting the Commissioner's determination the petitioner argues (1) that the incorporation was entirely tax free as the "Notice of Indebtedness" was not a legal instrument, but only a memorandum prepared for petitioner's personal satisfaction until a debenture bond was issued and that the petitioner's receipt of such debenture bond on January 14, 1958 was an integral and concluding step in the plan of incorporation; (2) that the notice of indebtedness does not constitute "other property" within the concept of section 351; (3) that even if the notice of indebtedness is "other property" it had no fair market value; (4) that if it is "other property" and in addition had a fair market value, nevertheless no gain was realized*274 upon the receipt of the stock and "other property" because the value of the property received was not in excess of the net adjusted cost basis of the tangible assets transferred; and (5) that the notice of indebtedness represented an equity interest equivalent to stock. The petitioner's initial proposition is that the transactions were merely steps in a "single scheme" of incorporation. The question of whether a transaction is a part of a preconceived plan of incorporation is primarily factual. In Manhattan Building Co., 27 T.C. 1032">27 T.C. 1032 (1957) we said, at page 1042: "The test is, were the steps taken so interdependent that the legal relations created by one transaction would have been frutless without a completion of the series." See also ACF-Brill Motors Co., 14 T.C. 263">14 T.C. 263 (1950), affd. 189 F. 2d 704, certiorari denied 342 U.S. 886">342 U.S. 886 (1951). In the instant case the resolution of this question turns upon the legal effect of the notice of indebtedness. Petitioner claims it had no legal significance, but was merely a memorandum prepared for*275 his personal satisfaction until the issuance of the debenture bond. The Commissioner, on the other hand, says it was a note issued in conjunction with the incorporation and had no relation to the subsequent issuance of the debenture bond. Although labeled a "Notice of Indebtedness", the instrument provided that For value received, We, Cash Produce Co., Inc., do hereby promise to pay to Mr. Rufus F. Turner, his heirs or assigns, the amount of Forty-eight thousand, eight hundred, ninety-three dollars and forty-six cents, ($48,893.46) without interest, payable at the office of the corporation on or after February 1, 1958; also the corporation is not to furnish security of any type for this indebtedness. It is also agreed that the payee may draw funds from the corporation at any time upon the pledge of this note as security, said drawings to be deducted from the amount of this liability prior to settlement. Accepted and agreed to the above this date January 1, 1957. (S) Rufus F. Turner / Payee Cash Produce Co., Inc. (S) Rufus F. Turner / Registered Agent President As can be seen, no reference to an execution of a debt obligation in the future was embodied in the so-called*276 "Notice of Indebtedness", and though there may be some doubt as to its negotiability, the instrument on its face appears to be more than a memorandum as it contains all the indicia of an enforceable obligation to pay money. Virginia Code § 8-509. 2 There also seems to be an inconsistency between the label of the instrument and its designation as a "note" in the body of the writing. Inasmuch as such a construction is contrary to the intent of petitioner as testified to at the trial, it is necessary to examine the surrounding facts and circumstances to ascertain if they substantiate petitioner's contention. Under the terms of the notice of indebtedness petitioner could "draw funds from the corporation at any time upon the pledge of [the] note as security, said drawings to be deducted from the amount of [the] liability prior to settlement". This is in essence a drawing account*277 of $48,893.46 as petitioner could draw funds up to that aggregate amount from the corporation. Petitioner disaffirms any intention of withdrawing such amounts; however, an examination of the balance sheet of the sole proprietorship in 1956 discloses that petitioner's drawing in that year exceeded $40,000. The fact that no withdrawals were made in 1957 can be explained by the subordination agreement petitioner entered into with Produce Reporter Company. Petitioner was quite concerned about maintaining a high credit rating which, from the testimony, was deemed to be a necessity in the produce business. The correspondence between petitioner and Produce Reporter Company in the findings of fact clearly illustrates that petitioner could make no withdrawals without seriously impairing the corporation's credit standing. Petitioner's reply to Produce Reporter Company which contained the informal subordination agreement made no mention of an intended debenture bond, but he did make it clear that "any trade obligations" would be paid "before liquidation" of the debt and that "any drawings" would be charged against his "annual profit sharing". The argument by petitioner that a proforma balance*278 sheet prepared by the accountant in 1956 to reflect the proposed incorporation referred to a "Note payable - long term" has little significance as the time for payment set out in the notice of indebtedness was not for at least 13 months and under good accounting principles should have been so categorized for balance sheet purposes. Accountants' Handbook (4th Ed.) sec. 20.2. A more controlling factor we think is that the debt obligation contained in both the balance sheet incorporated into the minutes of the board of directors' meeting and the balance sheet submitted to Produce Reporter Company was designared as a "NONCURRENT LIABILITY - Note payable to officer - unsecured and without interest". This description very adequately describes the notice of indebtedness as it contained all the requisites of a note, was specifically stated to be unsecured and did not bear interest. It would also be properly characterized as a "noncurrent liability" as it was not payable during the corporate year ending July 31, 1957. Conversely, the debenture bond was, as its name indicates, a bond extending over a relatively long period of time which provided for the payment of interest. Petitioner submits*279 that a further impediment in construing the notice of indebtedness as a note is the lack of authorization by the board of directors. The minutes of the board of directors' meeting on February 25, 1957, show: NOW, THEREFORE, BE IT RESOLVED: First, that this Board, in the exercise of its best skill and judgment, fixes and determines the value of the said property in current money of the United States in accordance with the Financial Statement of Cash Produce Company, Incorporated of January 1, 1957, * * * said Statement of the valuation of the assets and liabilities as set forth in said Statement, a copy of which is hereby attached and incorporated in the within resolutions and said balance sheet of said assets and liabilities of said Statement is hereby adopted as follows: * * *NONCURRENT LIABILITY Note payable to officer - unsecured and without interest $48,893.46 * * *If the notice of indebtedness and the "noncurrent liability" contained in the balance sheet incorporated into the minutes of the board of directors' meeting are one and the same, as we think they are, such incorporation is sufficient authorization. It should be noted while commenting on the topic*280 of authorization that there is a recitation in the debenture bond that it was "executed pursuant to the articles of incorporation of the said Corporation and in pursuance of a resolution of said Corporation passed on the 1st day of January, 1957". The petitioner produced neither the articles of incorporation nor the resolution which supposedly authorized the issuance of the debenture bond. From the afore-going enumerated factors it can be seen that not only the instrument, but also the peripheral facts and circumstances contravene the petitioner's contention that the notice of indebtedness was merely intended to be a memorandum. To base our decision solely upon the declared intention of the petitioner unsupported by the evidence would be to disregard completely the realities of the situation. As we view the evidence we do not find such an "interdependent" relationship so as to justify a conclusion that a "single scheme" of incorporation existed of which the issuance of the debenture was the final step. Our view of the evidence is that the transaction was cast as depicted by the Commissioner, with the petitioner receiving in return for the assets transferred, stock and a note which*281 entitled him to draw funds from the corporation at will. This plan, however, was inadvertently thwarted when petitioner discovered that such withdrawals would affect the credit rating of the corporation. And later, in January 1958, when it was discovered that the incorporation might not be entirely tax-free, an antedated debenture bond which related back to the time of the incorporation was prepared by the attorney to shore up the transfer and render the entire exchange tax-free and the accountant at that time entered a new account on the books of the corporation entitled "Long - Term Liability" with the explanation "Indenture due Rufus F. Turner from transfer of assets at date of incorporation" which was dated January 1, 1957 to conform to the issuance date of the debenture bond. The next approach taken by petitioner is that the notice of indebtedness does not constitute "other property" within the meaning of section 351(b). This contention is not predicated upon an agreement that the notice of indebtedness was a security under section 351(a), but rather that the notice of indebtedness was received by petitioner only as evidence of an existing obligation and not in payment of an*282 obligation. We agree with petitioner that the notice of indebtedness is written evidence of an existing enforceable obligation. However, we do not agree that this is not "other property" within the purview of section 351(b). Petitioner cites Jay A. Williams, 28 T.C. 1000">28 T.C. 1000 (1957) and extracts from context our statement that "A note received only as security, or as an evidence of indebtedness, and not as payment, may not be regarded as income". In Williams we dealt with the question of whether a note received in payment of services was income to the recipient. We held the note was not income as it was established to our satisfaction that the note was not received in payment of the outstanding debt due the taxpayer for the performance of services and that "a simple change in the form of indebtedness from an account payable to a note payable is insufficient to cause the realization of income by the creditor". It is obvious that petitioner by this contention has completely misconceived the import of the note in this case. The question presented here is not whether the receipt of the note resulted in ordinary income under section 61(a), Schlemmer v. United States, 94 F. 2d 77*283 (C.A. 2, 1938); Robert J. Dial, 24 T.C. 117">24 T.C. 117 (1955); Jay A. Williams, supra, but whether gain was recognizable on the incorporation as a result of the receipt of the note under section 351. Our afore-going conclusion was that the notice of indebtedness was an enforceable note and the cases have uniformly held that a note of such duration does not comply with the statutory concept of a security. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462">287 U.S. 462 (1933); Cortland Specialty Company v. Commissioner, 60 F. 2d 937 (C.A. 2, 1932), certiorari denied 288 U.S. 599">288 U.S. 599 (1933); Lloyd-Smith v. Commissioner, 116 F. 2d 642 (C.A. 2, 1941); Neville Coke & Chemical Co., 3 T.C. 113">3 T.C. 113 (1944), affd. 148 F. 2d 599 (C.A. 3, 1945), certiorari denied 326 U.S. 726">326 U.S. 726 (1945); Camp Wolters Enterprises, Inc., 22 T.C. 737">22 T.C. 737 (1954), affd. 230 F. 2d 555 (C.A. 5, 1956), certiorari denied 352 U.S. 826">352 U.S. 826 (1956). Inasmuch as it does not qualify as a security under*284 section 351(a), it is "other property" under section 351(b). Rev. Rul. 56-303, 2 C.B. 193">1956-2 C.B. 193. Petitioner continues, that even if the notice of indebtedness is "other property" it had no fair market value. He says that it is apparent from the financial condition of the corporation and the testimony of the parties concerned that there was no immediate intention or ability to pay the obligation. The evidence does not disclose an inability on the part of the corporation to pay the note. Although there was evidence regarding the value of the note it was focused primarily on the aspect of its value as collateral security for a loan. There is a question as to whether it could be discounted; however, it should be kept in mind that, as previously indicated, this note was not an ordinary note whose value would increase as the maturity date approached, but was sui generis, as its provision that "the [petitioner] may draw funds from the corporation at any time upon the pledge of [the] note as security, said drawings to be deducted from the amount of [the] liability prior to settlement" made it in effect a drawing account. As we see it, the fair market value of the note was*285 at all times its stated value as petitioner at any time could have withdrawn such amounts, the only barrier to such withdrawals being the voluntary, self-imposed subordination agreement which could have been rescinded at any time by petitioner. We do not think that the evidence introduced establishes that the amount determined by Commissioner to be the fair market value is arbitrary or unreasonable. Petitioner in another phase of his assault upon Commissioner's determination argues that if we should find that the note has a fair market value nevertheless petitioner realized no gain on the transfer for the reason that the value of the stock and "other property" received was not in excess of the net adjusted cost basis of the tangible assets transferred. Simply stated, petitioner contends that the $74,300 which was ascribed to goodwill at the time of the incorporation was incorrect and that no goodwill existed or was transferred, or, if any was transferred, its value was negligible. The Commissioner says that the sole proprietorship possessed transferable goodwill with a value of $74,300. This presents a paradox as petitioner now attempts to retreat from his original position by relying*286 on Willoughby J. Rothrock, 7 T.C. 848">7 T.C. 848 (1946) and a ruling, Rev. Rul. 60-301, 1960-2 CB 15, in which the Commissioner challenged the transfer of goodwill. Conversely, the Commissioner here does not challenge, but acquiesces in the original amount designated by petitioner as goodwill. In addition to the aforementioned case and ruling, petitioner also calls attention to the testimony of a representative of Produce Reporter Company who stated that goodwill had no value in arriving at a rating for a produce business. A query from the Court revealed that this rating was from the standpoint of a creditor rather than a possible purchaser and that all assets were viewed in regard to their basis at liquidation in order to ascertain their worth to creditors in the event of such liquidation. This sheds little light upon the problem. We are convinced that the corporation acquired something more in value at the incorporation of the sole proprietorship than the tangible assets transferred, which was goodwill, and petitioner has not shown the Commissioner's determination of the amount of this goodwill to be erroneous. See John W. Harrison, 24 T.C. 46">24 T.C. 46 (1955),*287 affd. 235 F. 2d 587 (C.A. 8, 1956), certiorari denied 352 U.S. 952">352 U.S. 952. It follows that the Commissioner's determination must be sustained. It is unnecessary to discuss petitioner's final contention, that the notice of indebtedness represented an equity interest equivalent to stock, in view of our holding that the notice of indebtedness is a note. The second issue presented is whether petitioner improperly reported the receipt of a $10,000 bonus on his joint return for the year 1957. Petitioner claims: (1) that the bonus was not formally authorized by the corporation until January 7, 1958; (2) that the stock issued was not authorized by the State Corporation Commission to be issued until after January 7, 1958; and (3) that even if the stock was constructively received by petitioner on July 31, 1957, it had no substantial value at that time. As shown in the findings of fact, one of the closing entries of the corporation on July 31, 1957, credited "Capital stock" with $10,000, "To record additional salary paid to R. F. Turner in corporate common stock". A reference to this transaction was embraced in the minutes of the board of directors' meeting on January 7, 1958. It*288 stated that Having been previously approved by the board of directors the board voted unanimously to approve the payment of a bonus of $12,000.00 for the year ending July 31, 1957 to R. F. Turner, the president. Mr. R. F. Turner advised that after various withholdings that he had used the remainder of the sum of $10,000.00 in the purchase of 200 shares of the common stock at $50.00 per share to be issued and dated July 31, 1957. As we interpret the statement from the minutes of the board of directors' meeting, the bonus was a cash bonus of $12,000 which had "been previously approved by the board of directors". Petitioner then used "the sum of $10,000.00 in the purchase of 200 shares of the common stock [of the corporation] at $50.00 per share". Such an interpretation is in accord with a "Stock Statement" filed with the State Corporation Commission on January 10, 1958, which contained the recitation that "200 shares [of] common stock at $50.00 per share in one issue [were] to be issued for $10,000 in cash". It should be noted that at the bottom of the "Stock Statement" it states that "Rufus F. Turner, being first duly sworn, deposes and says * * *. The facts set forth in*289 the statement are true" followed by the signature of petitioner. The utilization of a part of the proceeds of the cash bonus to purchase corporate stock which was not authorized and issued until 1958 has no impact upon the proper reporting of the cash bonus for income tax purposes. We are convinced that petitioner's attempted repudiation of the transaction now, by claiming it was not a cash but rather a stock bonus is not supported by the facts and we disregard as irrelevant the arguments advanced by petitioner concerning the authorization, issuance and valuation of the corporate stock. The Commissioner must be sustained on this issue also. Decision will be entered for the respondent. Footnotes1. SEC. 351. [1954 Code] (a) General Rule. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property. (b) Receipt of Property. - If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock or securities permitted to be received under subsection (a), other property or money, then - (1) gain (if any) to such recipient shall be recognized, but not in excess of - (A) the amount of money received, plus (B) the fair market value of such other property received; and (2) no loss to such recipient shall be recognized. (c) Special Rule. - In determining control, for purposes of this section, the fact that any corporate transferor distributes part or all of the stock which it receives in exchange to its shareholders shall not be taken into account.↩2. Code of Virginia - § 8-509. Civil action on note or writing promising to pay money. A civil action may be maintained upon any note or writing by which there is a promise, undertaking, or obligation to pay money, if the same be signed by the party who is to be charged thereby, or his agent. * * *↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624417/

FREDERICK L. WATSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ELBRIDGE WATSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ARTHUR WATSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Watson v. CommissionerDocket Nos. 28475, 28476, 28477.United States Board of Tax Appeals25 B.T.A. 971; 1932 BTA LEXIS 1446; March 23, 1932, Promulgated *1446 1. Assessment and collection from petitioners, as transferees of corporate assets, of liabilities representing unpaid taxes of such corporation for the calendar year 1920, held, not barred by the statute of limitations. 2. Petitioners are held to have received, as stockholders of the taxpayer corporation, liquidating distributions representing all of its assets and, in consequence, to be each liable for unpaid taxes of such corporation to the extent of the value of the corporate assets received by each in such distribution. 3. Substantial minority interests in the stock of the Renim Specialty Company and the Mica Condenser Company are shown by the record to have been held during the year 1920 by individuals owning no stock in the taxpayer corporation, and the control by stockholders of the taxpayer corporation of the voting rights of such minority interests not having been shown, such corporation is held not to have been affiliated with the two mentioned corporations for that year under section 240(b)(2) of the Revenue Act of 1918. 4. The action of respondent in disallowing a deduction by the taxpayer corporation of $120,000 of a total of $180,000 paid by*1447 it as representing executive salaries for the taxable year is sustained, it being held that petitioners have failed to show that the payments made represented reasonable and necessary salaries. 5. The valuation of cost, less 25 per cent, placed upon the mica inventory of the taxpayer corporation as of December 31, 1920, by its officers, as representing market value on that date, held to be correct. Arthur W. Blakemore, Esq., for the petitioners. H. B. Hunt, Esq., for the respondent. SMITH *971 These proceedings, consolidated for hearing, are appeals from liabilities determined by respondent under section 280 of the Revenue Act of 1926, against petitioners as transferees of assets of Watson Brothers, Inc., as follows: PetitionerDocket No.Frederick L. Watson28475Elbridge Watson28476Arthur Watson28477For unpaid income and profits tax assessed against Watson Brothers, Inc., in the amount of $95,131.11 for the calendar year 1920. *972 Petitioners contend (a) that the assessment against or collection of any liabilities from them as transferees is barred by the statute of limitations, (b) that*1448 they are not liable as transferees of the taxpayer corporation, and (c) that there is no liability on the part of the corporation for unpaid taxes for the calendar year 1920, respondent having erred in determining a deficiency in respect of that corporation in that he (1) failed to allow the corporate claim of affiliation for that year with two other corporations; (2) disallowed a deduction of $52,843.96 by the corporation in its return as representing a bad debt; (3) disallowed as a deduction certain salary payments made in that year to officers of the corporation. FINDINGS OF FACT. Petitioners are residents of Boston, Massachusetts, and for many years have been engaged in the business of buying mica in bulk, fabricating it into the sizes required by industry and selling it in various lines of manufacture. For many years prior to this time petitioners' father had carried on this business and had trained them as mica experts. The business is a highly specialized one, requiring expert knowledge gained only through long experience. The buying of the mica is in bulk, either at the mines in India, Africa and Brazil, or upon the auction floors in London, and to buy advantageously*1449 requires a technical knowledge of grades and ability to determine from inspection of the bulk mica the grades and sizes of sheets into which it may be separated. Prior to 1916 petitioners carried on business as a partnership, under the firm name of Watson Brothers. In that year petitioner Frederick L. Watson had become involved in certain personal litigation, as the result of which the partnership business was being harassed by attachments filed against its property, and to meet this situation petitioners, by advice of counsel, formed a corporation, under the name of Watson Brothers, Inc., to which the petitioners conveyed all of the partnership assets, each receiving in return one-third of the issued corporate stock. Following this, the business was operated as a corporation until the close of the calendar year 1920. Late in that year, the personal litigation of Frederick L. Watson having been settled, it was decided to liquidate the corporation and carry on the business, as in the past, through a partnership. The reason for this was that the operation of the business required the absence of one or more of petitioners for long periods of time in foreign countries, necessitating*1450 the giving of powers of attorney by them to the remaining petitioner to act for them, and making it difficult for them to participate in corporate action requiring from time to time their actual presence in Boston. *973 Accordingly, on December 15, 1920, formal notice was given of a special meeting of the stockholders to be held on December 31, 1920, for the purpose of dissolving the corporation. The minutes of such meeting read as follows: The clerk submitted an offer from Frederick L. Watson, Arthur Watson and Elbridge Watson under date of December 27, 1920, a copy whereof is as follows: BOSTON, MASS., Dec. 27, 1920.WATSON BROTHERS, INC.We hereby offer to purchase all the assets of every name and nature of Watson Bros. Inc., including its merchandise in stock and in process of manufacture, tools, machinery, accounts and bills receivable, cash, securities, contracts, trade marks, patent rights and good will, and to pay for the same the sum of $60,000, and as part of the consideration and purchase price, assume all outstanding debts and obligations and liabilities of the Corporation as they shall appear upon the books of the Corporation as of December 31, 1920. *1451 The said sum of $60,000 to be paid by three negotiable promissory notes of $20,000 each, signed by us, dated December 31, 1920, and payable six months after date with interest at the rate of 6% per annum. FREDERICK L. WATSON. ARTHUR WATSON. ELBRIDGE WATSON. On motion duly made and seconded it was unanimously voted, all the Capital Stock of the Company outstanding voting in favor, that this Company accept the offer of Frederick L. Watson, Arthur Watson and Elbridge Watson addressed to it under date of December 27, 1920, and that a bill of sale in conformity with the terms of said offer be made, executed and delivered in the name and behalf of the Company by the Treasurer, and that this Company receive in full payment therefor said promissory notes. On motion duly made and seconded it was unanimously voted that the promissory notes received from Frederick L. Watson, Arthur Watson and Elbridge Watson in payment of the purchase price of the assets of this Corporation, be distributed pro rata among the stock holders in proportion to their holdings of Capital Stock, and that this Company cease to do or transact business as of December 31, 1920. On December 31, 1920, each*1452 petitioner was solvent and possessed a personal estate of approximately $200,000 and the notes had a fair market value equal to their face value. On December 31, 1920, the books of the corporation showed assets and liabilities as follows: LiabilitiesCash$12,332.43Renim Specialty Co4,659.52Accounts receivable6,769.32Inventory - mica106,765.24Mica advances7,634.32Machinery971.19Furniture and fixtures500.00Good will150,000.00A. Watson19,976.26Total309,608.28Accounts payable$486.00Federal tax, 1918 additional22,523.51Lease80.00J. B. Moors & Co2,000.00Discount reserve67.69E. L. Watson22,695.51E. Watson10,660.72C. E. Watson14,027.25Capital stock60,000.00Surplus177,067.60Total309,608.28*974 The item of "good will" in the amount of $150,000 appearing in the above statement had been carried forward each year from 1917, it having been set up on the books in that amount at that time by the examining accountant. No item of good will appeared among the assets taken over by the corporation and when set up in 1917 it was merely by a credit to surplus without debit to any account*1453 of expenditure. The item of mica inventory in the sum of $106,765.24 appearing in this statement represented cost of this material less 25 per cent, deducted in adjustment of such cost to market. This valuation represents actual market value of the inventory on that date. Beginning January 1, 1921, the business was carried on as a partnership, under the firm name of Watson Brothers. The petitioners, with partnership funds, satisfied all of the corporate liabilities appearing on the books of the corporation at December 31, 1920, and in addition paid Federal and State taxes and $15,826.85 interest later assessed against the corporation. The corporation was regularly dissolved under chapter 180 of the Acts of Massachusetts, effective March 31, 1922. No receiver was appointed for the corporation at any time. The three notes for $20,000 each mentioned above were held in the treasury of the corporation. No collection of principal or interest was made and in 1923 these notes were returned to the three petitioners and destroyed. For the year 1917 salaries of $30,000 each were regularly authorized to be paid petitioners by corporate resolution of January 5 of that year. For*1454 the year 1918 salaries of $45,000 each to petitioners were authorized and these amounts were duly paid to Arthur and Elbridge Watson, payment being made to Frederick L. Watson for 10 months of service at this rate. For the year 1919 salaries of $45,000 per year were authorized and paid to petitioners Arthur and Elbridge Watson, and for 1920 salaries in this same amount were authorized and paid all three of the petitioners and also to C. E. Watson, a brother, who owned no stock in the corporation, but had for many years been associated with petitioners in the business as its technical expert on the working of mica in bulk, being in charge of the plant. This individual had had many years of experience in this work and had devised methods for splitting and working mica and had obtained certain patents on his inventions. The net sales of the corporation and salaries paid by it were as follows: YearNet salesSalaries1917$430,788.26$90,0001918802,778.04127,5001919425,336.2390,0001920898,255.71180,000*975 Shortly prior to 1920 petitioners organized two corporations, the Renim Specialty Company and the Mica Condenser Company. The*1455 first was organized to market a device, the patent upon which had been acquired by Watson Brothers. The second was to manufacture condensers, the main component of which was mica. These corporations had each 500 shares of issued stock. During the calendar year 1920 the stockholdings in these companies and Watson Brothers, Inc., were as follows: Watson Bros., Inc.StockholderBeginning of yearEnd of yearSharesPer centSharesPer centArthur Watson20033 1/320033 1/3Elbridge Watson20033 1/320033 1/3F. L. Watson20033 1/3Subtotal40066 2/3600100Treasury20033 1/3C. E. WatsonF. G. CrowleyW. J. BarkeleyA. R. GoodwinTotal600100600100Renim Specialty Co.StockholderBeginning of yearEnd of yearSharesPer centSharesPer centArthur Watson2004020040Elbridge Watson2004020040F. L. WatsonSubtotal4008040080TreasuryC. E. WatsonF. G. Crowley50105010W. J. Barkeley50105010A. R. GoodwinTotal500100500100Mica Condenser Co.StockholderBeginning of yearEnd of yearSharesPer centSharesPer centArthur Watson18837.611022Elbridge Watson18737.417034F. L. Watson11022Subtotal3757539078TreasuryC. E. Watson651311022F. G. CrowleyW. J. Barkeley306A. R. Goodwin306Total500100500100*1456 Watson Brothers, Inc., advanced money to the Mica Condenser Company. That company was also largely indebted to it for mica furnished for its work. This company proved to be a complete failure before the close of the calendar year 1920, and on December 31 of that year a balance due from it to Watson Brothers, Inc., representing unpaid advances of cash and material in the sum of $52,843.96, was charged off by the latter company to profit and loss. The account was worthless and known to be worthless in 1920. Watson Brothers, Inc., filed on March 15, 1921, a Form 1120 for the calendar year 1920, on the basis of affiliation with the Renim Specialty Company and the Mica Condenser Company. This form was neither signed nor sworn to. On December 31, 1924, respondent assessed against Watson Brothers, Inc., additional taxes for the calendar year 1920 in the sum of $95,161.11. In determining this deficiency respondent disallowed a bad debt deduction of $52,843.96 taken by the corporation, as representing the Mica Condenser Company account charged off; allowed $60,000 in place of $180,000 deducted as executive salaries; disallowed the claim of affiliation, and computed income of the*1457 corporation upon a separate basis. OPINION. SMITH: Petitioners' contention, that the statute of limitations bars assessment of this deficiency against them as transferees, requires little discussion. The corporate return for 1920, filed March *976 15, 1921, was neither signed nor sworn to and was accordingly insufficient to start the running of the statute. . It is indicated that an amended consolidated return was filed on April 21, 1924, and, assuming that such return was properly executed, the five-year period for assessment and collection from the taxpayer would not expire until April 21, 1929, or subsequent to the enactment of the Revenue Act of 1926. The applicable provision of that act is accordingly section 280(b)(1), and the period of limitation in respect to assessment and collection against a transferee would not expire until long after the determination of the liabilities here in question and the appeals therefrom. Respondent contends that petitioners are liable as transferees of assets of Watson Brothers, Inc. It is his contention that the acquisition of the assets by petitioners, its stockholders, *1458 on December 31, 1920, was for an inadequate consideration, leaving the corporation with insufficient assets to pay its debts, and that the transfer of these assets to petitioners was accordingly, to the extent of such excess value, a distribution of corporate property to them, as stockholders, in fraud of creditors. In the alternative, he charges that, if it be found that the acquisition of these assets was for a sufficient consideration, these petitioners are liable as transferees, by reason of the distribution to them, as stockholders, in 1923, of all of the assets of the corporation upon its liquidation, these assets consisting of three notes for $20,000 each. Section 280 of the Revenue Act of 1926 provides, so far as material, as follows: (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title * * *: (1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the*1459 tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act. The facts of record show that it was the intention of the stockholders on December 31, 1920, to dissolve the corporation, to take over its assets, and, from January 1, 1921, to carry on the business as partners. The petitioners offered to buy the assets of the corporation "and to pay for the same the sum of $60,000, and as part of the consideration and purchase price, assume all outstanding debts and obligations and liabilities of the corporation as they shall appear upon the books of the corporation as at December 31, 1920." The sum of $60,000 was to be paid by three negotiable promissory notes of $20,000 each, dated December 31, 1920, and payable six months after date, with interest at the rate of 6 per cent per annum. *977 The resolution of acceptance of the offer provided that the notes should be distributed pro rata among the stockholders in proportion to their holdings of capital stock. It thus appears that each petitioner had a right, from the date of the acceptance of the offer to purchase, to demand from the corporation the return of his*1460 note. In this situation it must be held that the giving of the notes was an act devoid of substance. The fact is that all the assets of the corporation were turned over to the petitioners as of December 31, 1920, and the petitioners paid not only the liabilities of the corporation, as shown by its books of account, but other liabilities as well. The petitioners must be held to be transferees of the assets of the corporation and, as such, liable for its debts to the extent of the value of the assets received, plus interest on the value of such assets at 6 per cent per annum, the legal rate in Massachusetts, from December 31, 1920, the date of distribution. The next question is the value of the assets distributed to each of the petitioners. The balance sheet of the corporation at December 31, 1920, shows assets in excess of liabilities, other than capital liabilities, of $237,067.60. The petitioners contend, however, that the inventory of mica on hand of $106,165.24 was in excess of the fair market value of the inventory at that date and that the actual market value of the mica was much below that figure. This issue is disposed of by the finding that the valuation used represents*1461 actual market value on that date. The figure represents the opinion of the petitioners as at the close of the calendar year 1920, which was cost less 25 per cent. Petitioners' opinion, formed more than 10 years after that date, that the market value was at that time 50 per cent below cost, and the present opinion to the same effect of a witness introduced by them, can not be given the weight of their opinion in the determination of value made at the close of 1920 with knowledge of existing facts. This is especially true when it is taken into consideration that petitioners were mica experts, with exceptional knowledge and judgment as to market conditions. The petitioners further contend that the good will of the corporation was without value. It is shown in the balance sheet as having a value of $150,000. It was arbitrarily set up on the books of the corporation in 1917. From a consideration of the entire record we are of the opinion that the good will of the corporation had no cash value and we agree with counsel for the petitioners that it should be eliminated for the purpose of determining the net value of the assets over the liabilities. Eliminating the book value of the*1462 good will from the assets, it is found that the assets had a value in excess of liabilities of $87,067.60. Subsequent to January 1, 1921, the petitioners liquidated certain liabilities of the corporation which were not shown upon its books of *978 account at December 31, 1920. Taxes had accrued against the corporation in the amount of $15,826.85, which the petitioners paid. The deduction of this amount from the $87,067.60, above referred to, leaves the net value of the assets received by the petitioners as $71,240.75. The petitioners claim that following the acquisition of the assets they paid additional debts, totaling approximately $15,000, which represented liabilities of the corporation. But we are unable under the proof to verify such liabilities. It is true that the petitioners paid amounts for auditing the books of account either of the corporation or of the partnership, but we can not determine that these constituted any liabilities of the corporation on December 31, 1920. Upon the record it must be held that the petitioners received net assets of the corporation of $71,240.75 and that these assets belonged to the petitioners in equal shares. We are therefore*1463 of the opinion that each petitioner is liable as a transferee of the assets of the corporation to the amount of $23,746.92, plus interest at 6 per cent per annum, the legal rate in Massachusetts, from December 31, 1920, the date of distribution. In respect to respondent's denial of the corporation's claim of affiliation, petitioners contend that substantially all of the stock of the Renim Specialty Company and the Mica Condenser Company was owned or controlled by the same interests during the taxable year. We have set out in the findings of fact the ownership of this stock during that period as shown by petitioners' proof. From this it will be seen that all of the stock of Watson Brothers, Inc., was owned equally by the three petitioners, that 80 per cent of the stock of the Renim Specialty Company was owned by two of the petitioners, the remaining 20 per cent standing in the names of F. G. Crowley and W. J. Barkeley, and 78 per cent of the stock of the Mica Condenser Company was owned by petitioners, the remaining 22 per cent standing in the names of C. E. Watson, F. G. Crowley, W. J. Barkeley and A. R. Goodwin, none of whom owned stock in Watson Brothers, Inc. No facts are*1464 proven showing control of the voting rights of the minority stock by petitioners. Proof that these minority stockholders were employees of Watson Brothers, Inc., does not establish such fact. The petition alleges that the stock issued these employees was bought and paid for by petitioners and issued to them merely as a method of guaranteeing a percentage of the profits, but with the understanding that the actual ownership and voting rights of the stock were to remain in petitioners, but this allegation was denied by the answer and the record contains no proof of such facts. The facts proven fail to show affiliation under section 240(b) of the Revenue Act of 1918 of the taxpayer corporation with *979 the Renim Specialty Company and the Mica Condenser Company. ; ; ; ; . In determining the deficiency for the year 1920 against the corporation, respondent disallowed a deduction*1465 of $52,843.96 taken by it as a debt ascertained to be worthless and charged off in that taxable year. We have found that this amount was owing to the taxpayer from the Mica Condenser Company, that the debtor corporation was a total failure in that year, and that this indebtedness was charged off by the taxpayer at the close of the year to profit and loss. The taxpayer's claim to affiliation has been denied, and no question can be raised as to this indebtedness being one arising from an intercompany transaction. We accordingly hold that respondent was in error in his disallowance of this item. The remaining issue is upon respondent's action in disallowing $120,000 of a total deduction taken by Watson Brothers, Inc., in the sum of $180,000 as representing salaries of $45,000 each, paid to petitioners and a brother employed by the taxpayer. Respondent has allowed a salary of $15,000 to each of these individuals as representing reasonable compensation for services rendered. The burden is accordingly upon petitioners to show that the amount disallowed in fact represented reasonable compensation to be paid for the services performed. Upon this question petitioners have introduced*1466 no proof of what would be a reasonable salary for such services. It is merely shown that these sums were voted by the corporation as salaries in January, 1920, and represented approximately 19 per cent of the net sales of the corporation for that year, and that payments in past years of executive salaries had averaged approximately this percentage. We do not think that this proof establishes the fact that the salaries paid were wholly for the services performed or represented only reasonable compensation for such services. The fact that petitioners were owners of all the stock of the corporation and the close relationship to them of C. E. Watson calls for a closer scrutiny of these payments than of salaries voted by corporate directors having no interest other than that of the corporation itself. In , we said: * * * For the purpose of determining taxable net income, the deduction [for salaries] is limited to amounts which are reasonably commensurate with the personal services actually rendered and thus are no more than ordinary and necessary expenses of carrying on the business. Hence the directors' duty to the corporation is no*1467 criterion of the Commissioner's duty to limit the *980 tax deduction within the statutory bounds, and the two are not in conflict. When the Commissioner has made a determination, the taxpayer who attacks it must prove by evidence of the services rendered and their value that a correct determination would exceed that of the Commissioner. Where the payments are to kinsfolk or to shareholders, the proof must also show that they were not influenced by family considerations and were not disguised distributions of profits. See ; ; ; ; ; ; ; . The evidence in the proceedings at bar is in our opinion insufficient to establish the fact that the payments to the four Watson brothers in the amount of $180,000 represented expenses*1468 reasonable and necessary in the carrying on of the business and the allowance of $15,000 in the case of each petitioner and of a like amount to the fourth brother, as made by the respondent, is approved. The deficiency as determined against Watson Brothers, Inc., by respondent should be redetermined in accordance with this opinion. Reviewed by the Board. Judgment will be entered under Rule 50.MATTHEWS concurs in the result. GOODRICH dissents. MURDOCK MURDOCK, dissenting: In my opinion, these petitioners are liable for the full amount of any deficiency which may be due in this case.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624418/

VICTOR S. SCHAUER and VIOLET B. SCHAUER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSchauer v. CommissionerDocket No. 30203-83.United States Tax CourtT.C. Memo 1987-237; 1987 Tax Ct. Memo LEXIS 237; 53 T.C.M. (CCH) 793; T.C.M. (RIA) 87237; May 7, 1987. Victor S. Schauer, pro se. James E. Kagy, for the respondent. GALLOWAYMEMORANDUM FINDINGS OF FACT AND OPINION GALLOWAY, Special Trial Judge: This case was heard pursuant to the provisions of section 7456(d)(3) of the Internal Revenue Code of 1954 (redesignated section 7443A(b)(3) by section 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rule 180 et seq. of the Tax Court Rules of Practice and Procedure.1Respondent determined deficiencies in petitioners' income taxes and additions to tax as follows: Deficiency inTaxable YearIncome Tax andAdditions To TaxEndedSelf-Employment TaxSec. 6653(a)12/31/79$3,638.43 $181.92 12/31/802,924.22146.21*239 For each of the years, the issues for our decision are: (1) whether the income from an insurance business is taxable to petitioners or to the V. Family Schauer Trust; (2) if the income from the business is taxable to petitioners, whether respondent correctly determined income and expenses of the insurance business and other income and deductions reportable by and allowable to petitioners; (3) whether petitioners are liable for additions to tax under section 6653; and (4) whether damages should be awarded to the United States under section 6673. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners were residents of 448 N. Delaware Street, Mt. Gilead, Ohio, at the time their petition was filed. In April of 1980 and 1981, petitioners filed Forms 1041 (U.S. Fiduciary Income Tax Return) for the years 1979 and 1980 for organizations designated as "The V. Schauer Family Trust" in 1979 and "North Delaware Trust" in 1980 (the Trust). 2 The 1979 Form 1041 was signed by Victor S. Schauer as "Trustee." The 1980 Form 1041 was signed by Violet B. Schauer as "Agent." The Forms 1041 reported the following income and deductions: 19791980Net business Schedule C incomefrom insurance sales$13,185.39 $15,924.19 Charitable deduction(2,928.00)(3,626.38)Other deductions(4,792.85)(2,544.75)3 Income distribution deduction (5,464.54)(9,753.06)Taxable IncomeTax Liability*240 On their 1979 and 1980 tax returns, petitioners reported in gross income distributions from the Trust in the respective amounts of $3,278.75 and $5,911.84. Petitioners also reported small amounts of interest, dividend and rental income and zero tax liability for each year. When petitioners' tax returns were examined, petitioners refused to provide respondent's agents with a copy of the trust instrument. Respondent disregarded the Trust for tax purposes. He reduced petitioners' taxable income by the amounts reported as income distributions from the Trust. Respondent further adjusted petitioners' taxable income by: (1) including in*241 gross income insurance sales (as reported on Schedule C of the 1979 and 1980 Trust returns) in the respective amounts of $22,921.96 and $22,351.75; (2) allowing as insurance business expenses, $4,307.64 of $9,736.37 deductions claimed on Schedule C of the 1979 Trust return and $4,762.56 of $6,427.56 deductions claimed on Schedule C of the 1980 Trust return; (3) reducing petitioners' 1979 reported rental income from the Trust by the amount of $2,540.44; and (4) allowing petitioners itemized deductions verified in excess of the $3,400 zero bracket amount. Respondent also calculated self-employment taxes on Victor Schauer's net profit from insurance sales, determined additions to tax under section 6653(a), and determined petitioners' investment credit and political contributions credit. OPINION The first issue to be decided is whether income and expenses from the insurance business of Victor S. Schauer (petitioner) is reportable on his individual tax returns. Respondent has determined that the Trust should be disregarded for tax purposes. He has included in petitioner's gross income all income from insurance sales reported by petitioner on the Trust returns and has allowed as deductions*242 all insurance business expenses verified. Petitioner filed his petition with this Court on October 24, 1983, in which he alleges in part: 4. The determination of tax set forth in the said notice of deficiency is based upon the following errors: A. The Commissioner obtained figures for taxable gross income from a Form 1041, filed under the name of the V. Schauer Family Trust, #31-6201515. The Commissioner made an assignment of income from the trust to the petitioners. B. The Commissioner accepted income figures reported on Form 1041 and accepted part of the offsetting expenses and deductions to arrive at a taxable income. C. The Commissioner used the same erroneous income figure to compute self employment tax. D. Assuming in the alternative that the assignment of income by the Commissioner was proper; however the proper deductive offsetting expenses were not allowed. 5. The facts upon which the Petitioners rely, as the basis of their case, are as follows: A. The Commissioner made an arbitrary assignment of income without substantiation or investigation. The facts, in the eyes of the Petitioners, prove that the Commissioner was totally in error in the assumptions*243 made to authorize an assignment of income. The Commissioner has violated his own regulations by assigning income from the entity responsible for the earning of said income to a different entity. B. The Commissioner has made an arbitrary and improper determination that the V. Schauer Family Trust is a Grantor type Trust under Section 671 of the IRC. The Petitioners allege that this Trust is not a Grantor Type Trust, that all items reported under this Trust are correct and properly reported thereon and that, therefore, this disallowance of distribution of Beneficial Interest is improper. C. The Commissioner has made no investigation to ascertain that this creation of a family estate trust, the assignment of all income thereto and deduction of itemized items by said trust constitute a sham transaction, not recognized for tax purposes. The Commissioner has used a procedure which would definitely be improper and illegal for any taxpayer to use and is in violation of all rules for conducting an audit and presenting the results of such audit when he made unsubstantiated assumptions as far as the specific details of the Trust and when he used erroneous figures*244 for computation of taxes. D. In the alternative position taken, the commissioner did not proper [sic] allow itemized deductions for medical, auto, and office expense. Wherefore, the petitioners prays [sic] that this court may try the case and ascertains [sic] the validity of the V. Schauer Family Trust and its proper creation for tax purposes or in the alternative make reasonable allowances for itemized deductions which were only partially or not allowed at all. Respondent's answer was signed on December 2, 1983, by his Acting Assistant District Counsel in Cincinnati, Ohio, and filed with the Court on December 5, 1983. The case was set for trial on January 13, 1986, at Columbus, Ohio. Petitioner filed a Motion For Continuance based on his notarized affidavit dated January 3, 1986. Petitioner's motion for continuance was granted by the Court on January 14, 1986. When this case was called for trial on December 8, 1986, petitioner orally moved that the case be continued on the ground that respondent was improperly represented by an attorney who did not sign respondent's answer.4 Petitioner's motion was denied. Petitioner persisted in arguing his motion despite the*245 Court's ruling even though he was advised more than once to proceed with presenting his case; that the burden of proving he had created a valid trust for tax purposes and that the Commissioner had failed to allow the correct amount of business and itemized deductions was on him, not respondent. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Nevertheless, petitioner declined the opportunity to present evidence in support of the allegations set forth in his petition, except to state that he had been engaged in the insurance business for approximately 15 years and that prior to 1979, he reported insurance income and expenses on his individual tax returns. Consequently, the evidence in the record consists of a stipulation of facts which specifies petitioner's name, residence and filing status and contains copies of the notice of deficiency and individual and fiduciary tax returns. This stipulation of facts was reluctantly agreed to by petitioner only after respondent made three requests for petitioner to stipulate pursuant to Rule 91(a). However, petitioner refused to produce and stipulate a copy of the Trust instrument. 5*246 Petitioner's reasons for his refusal to stipulate the Trust instrument as part of the record and his failure to bring a copy of that document to trial have no merit. Nevertheless, rather than dismiss this case under Rule 123(b) 6 for failure to properly prosecute, we kept the record open so that petitioner could submit a copy of the Trust to the Court in accordance with his vague assertion that the Trust instrument would somehow show insurance commissions were payable to and taxable to the Trust rather than petitioner. Petitioner requested and was granted 60 days to furnish the promised document. In order to provide for written briefs in accordance with Rule 151, the Court, on December 10, 1986, ordered respondent to file a brief after receipt of his copy of the Trust instrument followed by petitioner's brief in reply to respondent's arguments and respondent's motion for damages under section 6673. Rather than comply with the Court's order, petitioner filed a "supplemental memorandum" 7 in furtherance of his previously rejected oral motion made at trial to continue the case. Petitioner's memorandum was filed as petitioner's information report. On February 25, 1986, we modified*247 our previous order. The record was closed without the Trust instrument or briefs of the parties and the case was deemed fully submitted for decision. It is clear from this record that this case is similar to many family trust cases that this and other Courts have decided adversely to taxpayers in recent years. See Whitesel v. Commissioner,T.C. Memo. 1983-9, affd. without published opinion 745 F.2d 59">745 F.2d 59 (6th Cir. 1984); Vercio v. Commissioner,73 T.C. 1246">73 T.C. 1246 (1980);*248 Markosian v. Commissioner,73 T.C. 1235">73 T.C. 1235 (1980); and innumerable memorandum opinions of this Court. 8 In Vercio, we held that the purported conveyance of the taxpayer's income to trusts was merely an assignment of income ineffective to shift the incidence of taxation to the trusts on amounts paid to the taxpayer as compensation for services. We also held that the taxpayer husband and wife were to be treated as owners of the entire trust under sections 671 and 677. Respondent has requested that we sustain his similar determination in this case. It is well established that when a party fails to produce evidence in his possession which, if persuasive from a taxation standpoint, would be favorable to him, his failure to present such evidence creates the presumption that the evidence if produced would be harmful to his cause. See Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158">6 T.C. 1158, 1165 (1946),*249 affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947). It is also well settled that deductions are matters of legislative grace. Deputy v. duPont,308 U.S. 488">308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 440 (1934); Rickard v. Commissioner,88 T.C. 188">88 T.C. 188, 196 (1987). Petitioner has failed to furnish any authority in the Code or Court decisions authorizing the deductions claimed by him on the Trust returns in calculating his individual taxable income for the years in issue. See Welch v. Helvering,supra.Respondent is sustained on this issue. As previously stated, respondent calculated petitioner's business insurance profit by including in income receipts disclosed on Schedule Cs attached to the Trust returns and allowing as deductions expenses on those forms, to the extent verified from petitioner's records. Respondent's examining agent also allowed itemized deductions verified in excess of the $3,400 zero bracket amount, determined self-employment tax liability, reduced rental income and adjusted claimed credits. Petitioner has alleged in his petition that he is entitled to nonbusiness deductions*250 and credits in excess of those allowed by respondent, but has failed to present any evidence of deductions allowable in excess of those calculated by respondent. Accordingly, respondent's determination of allowable business and nonbusiness deductions, income tax liability and self-employment tax liability is sustained. Petitioner has the burden of proving that respondent improperly determined an addition to tax under section 6653 for negligence or intentional disregard of rules and regulations. Petitioner has failed to present any evidence that respondent's determination is erroneous. Accordingly, respondent is sustained on this issue. See Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 792 (1972). Finally, we consider respondent's motion for an order awarding damages under section 6673 on the ground that petitioner instituted and has maintained this proceeding primarily for delay and that petitioner continues to maintain a position in this case which is frivolous and groundless. Section 6673 provides: Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position*251 in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as part of the tax. We have awarded damages to the United States on our own motion in appropriate cases where we are convinced that a taxpayer's position in the proceeding is frivolous and groundless and the proceeding was instituted for delay. See Coulter v. Commissioner,82 T.C. 580">82 T.C. 580 (1984); Abrams v. Commissioner,82 T.C. 403">82 T.C. 403 (1984). In many later cases, we have awarded damages to the United States in response to respondent's motion for damages in an appropriate amount. Our research has not revealed a case where we have awarded damages in cases holding that family trusts are devices for tax avoidance. However, we have declined awarding damages under section 6673 in several family trust cases only because of factors separate and apart from the family trust transactions. 9*252 In this case, respondent filed his answer on December 5, 1983, and the case was at issue. See Rule 638. On November 13, 1985, almost two years later, the Court served petitioner with a notice setting the case for trial at Columbus on January 13, 1986. Petitioner's motion for continuance filed with the Court at Columbus on January 13, 1986, was granted on January 14, 1986, for medical reasons alleged in petitioner's affidavit. However, petitioner's primary ground for the continuance was his contention that he was not given "sufficient notice" of the trial date, i.e., he should have been given 90 days rather than 60 days under Rule 132(a). 10 Petitioner also claimed in his affidavit attached to the petition that he had "not had sufficient time to draw up * * * stipulations or respond to the respondent's stipulations," and that he had "not asked for a prior continuance and this requested continuance is not an action of being dilatory." On October 15, 1986, counsel for respondent again corresponded with petitioner concerning a proposed stipulation of facts with respect to the trial scheduled on December 8, 1986. He received no reply. Respondent wrote again to petitioner on November 20, 1986, and*253 requested that the proposed stipulation of facts be executed. Respondent also mailed petitioner copies of our Markosian and Vercio cases. Petitioner was advised that his "family estate" claim was similar to those decided adversely to taxpayers in Markosian and Vercio and that if he pursued this claim, respondent would file a motion for damages under section 6673. Respondent also enclosed a copy of our decision in Sauers v. Commissioner,T.C. Memo 1984-367">T.C. Memo. 1984-367, to illustrate the conduct of taxpayers justifying an award of damages.Petitioner has found it appropriate to misread or misinterpret our Rules 24(b) and 132(a) to his advantage in attempting to secure continuances. However, he finds no fault in ignoring other rules of this Court when it suits his convenience. Petitioner has refused to stipulate "documents and papers * * * which fairly should not be in dispute" (Rule 91(a)); he has filed an untimely motion for continuance on the trial date (Rule 134); and during and after*254 trial he has steadfastly refused to heed the urging of the Court that he shoulder the burden of proving his case as required by Rule 142(a). Moreover, petitioner reneged on his assertion that he would provide the court with a copy of the Trust document and instead renewed in writing his previously rejected oral motion to continue the trial of the case. Since petitioner has abused the process of this Court primarily (if not entirely) for reasons of delaying and thus avoiding a determination of his tax liability rather than trying this case, we award the United States damages in the amount of $2,000. An appropriate order and decision will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated, and any "Rules" reference shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩2. The 1980 form disclosed that the North Delaware Trust was formerly referred to as the V. Schauer Family Trust. The employer identification number on each form is 31-6201515. The forms indicated that the Trust was created on September 28, 1978. ↩3. Forms K-1 attached to Forms 1041 reveal that income of the purported trust was to be distributed as follows: Victor S. Schauer, 40%; Violet B. Schauer, 20%; Barbara J. Kruger of Union Lake, MI, 25%; Jill M. Kruger, Katherine J. Kruger, and Christopher J. Kruger, all of Union Lake, MI, 5% each.↩4. Petitioner argued that his motion should be granted under our Rule 24(c), which states: "Counsel of record desiring to withdraw his appearance * * * must file a motion with the Court requesting leave therefor." (Emphasis added.) According to petitioner, trial of this case could not continue until respondent's Acting Assistant District Counsel who signed the answer files a motion to withdraw as counsel of record. Petitioner is mistaken. Section 7452 (Representation Of Parties) provides in part that: "The Secretary shall be represented by the Chief Counsel for the Internal Revenue Service or his delegate↩ in the same manner before the Tax Court as he has heretofore been represented in proceedings before such Court." (Emphasis added.) Since counsel of record for the Commissioner before this Court is always Chief Counsel of the Internal Revenue Service, who by law cannot withdraw his appearance, Rule 24(c) does not and is not intended to apply to any attorney delegated by Chief Counsel to represent the Commissioner in a particular case. 5. Respondent's counsel stated that petitioner had refused to furnish respondent's employees a copy of the Trust document since "day one."↩6. Rule 123(b) provides in part: "For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, the Court may dismiss at any time and enter a decision against the petitioner." Cf. Miller v. Commissioner,654 F.2d 519">654 F.2d 519, 521 (8th Cir. 1981), affg. per curiam an unpublished order of this Court for failure to stipulate. See also Bressler v. Commissioner,T.C. Memo. 1986-4↩, and Rule 149(b). 7. Petitioner refused to submit a copy of the Trust, advising the Court that submission of the Trust document "would be an act of futility and economic waste."↩8. E.g., Miller v. Commissioner,T.C. Memo. 1986-278; Sampson v. Commissioner,T.C. Memo. 1986-231; duBois v. Commissioner,T.C. Memo. 1986-160; Pfluger v. Commissioner,T.C. Memo. 1986-78↩.9. See Miller v. Commissioner,T.C. Memo. 1986-278 (other deductions conceded by respondent); Sampson v. Commissioner,T.C. Memo. 1986-231 (jurisdictional issue involved for two of the five years under consideration); duBois v. Commissioner,T.C. Memo. 1986-160↩ (issue other than the family trust issue presented).10. Rule 132(a) provides in part that notice of the trial date "ordinarily↩ will be given not less than 90 days in advance of the trial calendar." (Emphasis added.)

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624419/

CENTRAL DE GAS DE CHIHUAHUA, S.A., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCentral De Gas De Chihuahua, S.A. v. CommissionerDocket No. 18370-91United States Tax Court102 T.C. 515; 1994 U.S. Tax Ct. LEXIS 21; 102 T.C. No. 19; April 4, 1994, Filed *21 P rented equipment to X which did not pay rent. P and X were under common control of Y, and respondent, acting under the authority of sec. 482, I.R.C., allocated to P the fair rental value of the equipment. Held, since sec. 881, I.R.C., does not require an actual payment, such fair rental value is income under that section. George W. Connelly, Jr. and Linda S. Paine, for petitioner. T. Richard Sealy, III, for respondent. TANNENWALDTANNENWALDOPINION TANNENWALD, Judge: After making a jeopardy assessment, respondent determined a deficiency of $ 696,240 in petitioner's Federal income tax for its 1990 taxable year under section 881. 1 The case comes before us on cross-motions for summary judgment on the issue of whether the 30-percent tax imposed by section 881 applies in the absence of an actual payment of the income item, in this case rent. *22 As will subsequently appear, issues remain to be decided after we have disposed of the contentions of the parties herein, see infra p. 3, so that the cross-motions are more properly characterized as motions for partial summary judgment. However, the facts upon which the cross-motions are based are not in dispute so that the necessary conditions for partial summary judgment have been met. Rule 121(b); Blanton v. Commissioner, 94 T.C. 491">94 T.C. 491, 494 (1990). During 1990, petitioner (a Mexican corporation) rented a fleet of tractors and trailers to another Mexican corporation, Hidro Gas de Juarez, S.A. (hereinafter Hidro). Hidro did not pay rent for the equipment. Petitioner and Hidro were under common control within the meaning of section 482. The rented equipment was used to transport liquified petroleum gas from points within the United States to the Mexican border area where it was sold to Pemex, the Mexican Government-operated oil company, for distribution in Mexico. Petitioner did not file a Federal income tax return for 1990. Respondent, acting under section 482, allocated to petitioner the amount of $ 2,320,800 as the fair rental value of *23 the equipment for 1990 (which the parties now agree should be $ 1,125,000) and determined that petitioner was liable for the 30-percent tax imposed by section 881 on that amount, which is the primary position respondent asserts herein. Respondent also asserted in the deficiency notice and asserts herein, as an alternative position in the event that we should grant petitioner's motion, i.e., hold that the section 881 tax does not apply, that petitioner is liable for tax under section 882 on income effectively connected with the conduct of trade or business within the United States. Similarly, petitioner has reserved the right, in the event that we grant respondent's motion, i.e., hold that the section 881 tax does apply, to contend that only a portion of the agreed rental value should be allocated to the use of the equipment within the United States and other matters relating to the nature of the relationship between petitioner and Hidro. The parties are in agreement that our disposition of the motions herein will facilitate resolution of the matters reserved. The pertinent provisions of the Code upon which the positions of the parties are based are section 881(a) and section 1442(a), *24 the latter section incorporating a portion of section 1441(a). Section 881(a) imposes a tax "of 30 percent of the amount received from sources within the United States by a foreign corporation as * * * rents". 2Section 1442(a) provides, in pertinent part, that "In the case of foreign corporations subject to taxation under this subtitle, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 a tax equal to 30 percent thereof." Section 1441(a) provides, in pertinent part, that "all persons * * * having the control, receipt, custody, disposal or payment of any of the items of income specified in subsection (b) [which includes "rent"] (to the extent that any of such items constitutes gross income from sources within the United States) of any nonresident alien individual or of *25 any foreign partnership shall * * * deduct and withhold from such items a tax equal to 30 percent thereof". Petitioner argues that, in order for section 881(a) to apply, there must be an actual payment of the income item and that the allocation of rent to petitioner from Hidro under section 482 does not satisfy that requirement. Respondent counters with the assertion that there is no requirement of actual payment under section 882 and that the allocation of rent to petitioner under section 482 provides a sufficient basis for imposing the 30-percent tax under that section. For the reasons hereinafter set forth, we agree with the respondent. In marshalling support for their positions, the parties have viewed section 881, on one hand, and sections 1441 and 1442, on the other, as being mirror images of each other. In this context and in the absence of authority dealing with the issue whether actual payment is required for section 881 to apply, they have pointed to cases dealing with such requirement under sections 1441 and 1442 and comparable provisions of the Internal Revenue Code of 1939. Petitioner relies on L.D. Caulk Co. v. United States, 116 F. Supp. 835 (D. Del. 1953).*26 In that case, the issue was the obligation of the plaintiff to withhold tax, under section 143 of the Internal Revenue Code of 1939 (the predecessor of sections 1441 and 1442) on royalties payable to nonresident aliens at a time when payment of such royalties was blocked under U.S. law. The District Court articulated a thorough analysis of the obligation to withhold under such circumstances and concluded that, at least where the item of income could not have been legally paid, no such obligation existed. We think Caulk is clearly distinguishable from the situation herein where there was no legal impediment to the payment of rent by Hidro to petitioner. The same caveat was expressed in Southern Pacific Co. v. Commissioner, 21 B.T.A. 990">21 B.T.A. 990, 994 (1930), also relied upon by petitioner, which likewise involved the obligation to withhold in respect of blocked income and is therefore distinguishable. In a similar vein, we find petitioner's reliance on several of respondent's revenue rulings beside the point. The rulings involve clearly distinguishable circumstances, for the most part the measure of excise taxes on discounted payments, and in any event*27 are not binding upon us. Vulcan Materials Co. v. Commissioner, 96 T.C. 410">96 T.C. 410, 418 (1991), affd. without published opinion 959 F.2d 973">959 F.2d 973 (11th Cir. 1992). Since Air Tour Acquisition Corp. v. United States, 781 F. Supp. 669 (D. Haw. 1991), also relied upon by petitioner, involves excise tax on air transportation, it is also distinguishable. Respondent relies on Casa de la Jolla Park v. Commissioner, 94 T.C. 384">94 T.C. 384 (1990). That case also involved the obligation to withhold under section 1441(a) in a situation where interest was owed by petitioner therein to a nonresident alien who in turn owed money to a Canadian bank. Petitioner caused the amount of the interest it owed to be remitted to the Canadian bank to be applied against the sums due the bank from the nonresident alien. We held that petitioner in that case had an obligation to withhold. In so doing, we interpreted section 1441(a) as not necessarily requiring payment. We think Casa de la Jolla Park does not furnish respondent the degree of support which she attaches to it. In the first place, there was *28 payment although it was indirect. In the second place, the case dealt with the obligation to withhold and not with the issue of liability for the tax as such, which is the situation we have before us. Under these circumstances, we see no reason for us to pursue that question of how far the obligation to withhold attaches to an item of income allocated by respondent under section 482. See R. T. French Co. v. Commissioner, 60 T.C. 836">60 T.C. 836, 856 (1973), where we did not reach the question whether the obligation to withhold attached to a constructive dividend, a question we described as "tantalizing". We think that the parties' use of the mirror image concept is misguided. Section 881 imposes a liability for tax, and sections 1441 and 1442 provide a method for collecting that tax. See Newman & Co. v. United States, 423 F.2d 49">423 F.2d 49, 51-52 (2d Cir. 1970); see also Coastal Chemical Corp. v. United States, 546 F.2d 110">546 F.2d 110, 118 (5th Cir. 1977); Casanova Co. v. Commissioner, 87 T.C. 214">87 T.C. 214, 217-218 (1986). Thus, the former section and the latter two sections serve distinctly separate*29 purposes. Consequently, we are not persuaded that, even if actual payment is required for withholding under sections 1441 and 1442 (an issue we expressly do not decide herein), it necessarily follows that the same requirement should apply in determining the import of the word "received" in section 881. Indeed, the District Court, in L.D. Caulk Co. v. United States, 116 F. Supp. at 840 n.9, upon which petitioner heavily relies, indicated a similar view. Petitioner does not question the broad authority of respondent to allocate income under section 482. Moreover, petitioner does not question the authority of respondent to "create" income by an allocation between related entities -- a question which was the subject of conflicting views until resolved in respondent's favor. See Latham Park Manor, Inc. v. Commissioner, 69 T.C. 199 (1977) and cases discussed therein, affd. without published opinion 618 F.2d 100">618 F.2d 100 (4th Cir. 1980). To be sure, the existence of such authority was articulated in the context of provisions in the section 482 regulations for a correlative adjustment to the income of the*30 entity from which the income is allocated. See sec. 1.482-1(d) (4), Income Tax Regs.3 The fact that such an adjustment may not have any effect on Hidro for the taxable year before us since Hidro is a foreign corporation which does not appear to be subject to U.S. tax for such year is irrelevant; the adjustment is deemed made and conceivably could affect Hidro's U.S. tax liability in a subsequent year. Id.*31 Petitioner asserts that section 482 does not confer upon respondent the authority to "create" a payment. We think this position begs the question to be resolved. There can be no doubt that the authority of respondent to allocate income encompasses the conclusion that such allocation "creates" a deemed payment. Any other view would render such an allocation nugatory in a host of situations implicating the application of section 482 even where only domestic corporations are involved. Indeed, petitioner carefully refrains from pushing its rationale that far, seeking only to apply the requirement of actual payment to the language of section 881. In this context, the question is whether a deemed payment constitutes "an amount received" under section 881. We think it does. A holding that actual payment is required could significantly undermine the effectiveness of section 482 where foreign corporations are involved. Such a view would permit such corporations to utilize property in the United States without payment for such use and thereby avoid any liability under section 881. We are not impressed with petitioner's argument that equating a deemed payment under section 482 with*32 "an amount received" under section 881 would constitute a license to respondent to run wild in the arena of allocations under section 482 between foreign corporations under common control. Although respondent's authority under section 482 is extremely broad, it is not open ended and a taxpayer will always be able to challenge an allocation as not permitted by law and/or not correct in amount. Similarly, we are not impressed with petitioner's attempt to characterize the allocated fair rental value of the equipment as a constructive dividend to the parent of Hidro and petitioner and a nontaxable contribution of capital to petitioner. Petitioner's reliance on Rev. Rul. 78-83, 1 C.B. 79">1978-1 C.B. 79, is misplaced. Aside from the fact that the ruling is not binding upon us, see supra p. 6, it simply does not apply to the instant situation. The facts of that ruling were that sums due one subsidiary were actually paid to another subsidiary. Thus, there was an actual transfer of property which is the hallmark of cases involving both the allocation of intercorporate payments, and the consequent presence of a constructive dividend. See Sammons v. Commissioner, 472 F.2d 449">472 F.2d 449, 452-453 (5th Cir. 1972),*33 affg. in part, revg. in part, and remanding T.C. Memo 1971-145">T.C. Memo. 1971-145; White Tool and Machine Co. v. Commissioner, T.C. Memo 1980-443">T.C. Memo. 1980-443, affd. 677 F.2d 528">677 F.2d 528 (6th Cir. 1982). The long and the short of the matter is that we hold that the word "received" in section 881 includes the fair rental value of the equipment even though the amount thereof was not actually received by petitioner from Hidro. We are reinforced in this holding by the fact that Congress has clearly indicated when it wished to refer to actual receipts. See the pre-1993 versions of sections 453 and 453A ("installment payments actually received"); pre-1990 version of section 1402 (income of a corporate director derived in the taxable year when the services were rendered "regardless of when the income is actually paid or received"); section 9701 dealing with coal industry health benefits and defining a "1988 agreement operator" to include "an employer from which contributions were actually received". We reject petitioner's attempt to derive sustenance from the fact that, under sections 881(c) and 871(a)(1)(C), original issue discount element*34 of portfolio interest is generally not subject to the tax until paid or the obligation is sold or exchanged. If anything, the fact that Congress found it necessary to include a payment requirement for original issue discount indicates that such a requirement was not intended to apply to the phrase "amount received" in section 881(a). Petitioner's motion will be denied and respondent's motion will be granted. An appropriate order will be issued. Footnotes1. All statutory 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. A different rate of tax is imposed in respect of such income "effectively connected with the conduct of a trade or business within the United States." Sec. 882↩.3. Sec. 1.482-1(d)(4), Income Tax Regs., provides in pertinent part: (4) If the members of a group of controlled taxpayers engage in transactions with one another, the district director may distribute, apportion, or allocate income, deductions, credits, or allowances to reflect the true taxable income of the individual members under the standards set forth in this section and in § 1.482-2 notwithstanding the fact that the ultimate income anticipated from a series of transactions may not be realized or is realized during a later period. * * * The provisions of this subparagraph apply even if the gross income contemplated from a series of transactions is never, in fact, realized by the other members.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624420/

The Columbus Die, Tool and Machine Company v. Commissioner.Columbus Die, Tool & Mach. Co. v. CommissionerDocket No. 21518.United States Tax Court1952 Tax Ct. Memo LEXIS 52; 11 T.C.M. (CCH) 1053; T.C.M. (RIA) 52312; October 28, 1952John M. Hudson, Esq., for the petitioner. Lester M. Ponder, Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion This proceeding was brought for redetermination of deficiencies in Federal taxes as follows: Taxable Year EndedAprilAprilApril30, 194230, 194330, 1944Income tax$42,956.87$ 9,794.28$27,433.52Declared valueexcess profitstax548.01Excess profitstax3,447.5011,935.8425,150.73The issues presented are as follows: 1. Whether petitioner was availed of for the purpose of preventing the imposition of surtax on its stockholders by permitting the profits*53 to accumulate beyond the reasonable needs of its business during the taxable years ended April 30, 1942, 1943 and 1944, within the meaning of section 102, Internal Revenue Code. 2. Whether petitioner realized recognizable long-term capital gain on the disposition of certain unimproved land to the United States Government during the taxable year 1944, the proceeds from such sale having been expended within three months of receipt for the purchase of another tract of unimproved land. 3. If the gain on the last above-mentioned land is not recognizable under section 112 (f), Internal Revenue Code, whether petitioner is entitled to the deduction of legal and professional expenses incurred in the disposition of the property as a business expense for the taxable year 1944. Findings of Fact The stipulated facts are hereby found accordingly. Petitioner, an Ohio corporation, organized in May 1906 has its office and place of business at 955 Cleveland Avenue, Columbus, Ohio. Petitioner was incorporated with authorized capital stock (all common) of 100 shares, par value $100 each, and at the time of incorporation 26 shares, par value $2,600, *54 were issued. At the time of its organization petitioner had 5 stockholders. Between 1914 and 1916 Harry H. Price, Sr., acquired a majority and controlling intered in the stock of petitioner's company. Beginning in 1912 the authorized, issued and outstanding capital stock was increased on several occasions by means of stock dividends totaling $397,400 by the year ended April 30, 1932. Petitioner declared and distributed a further stock dividend of $400,000 in December 1944. During the taxable years there were issued and outstanding 4,000 shares of stock, par value of $400,000, all of which, except for one share, was held and owned by Price, members of his family, and a trust created by him for the benefit of his wife and children. Price owned 2,075 shares and his wife owned 1,200 shares or a total of 3,275 out of the 4,000 shares outstanding during the taxable period. The capital stock of petitioner has been of only one class, namely common stock; no bonds have been issued by petitioner at any time, and none of its stock has been purchased, redeemed, or retired by petitioner at any time. During the taxable years Price, members of his family and Chester C. Moelchert, who is not related*55 to them, were the Board of Directors and officers of petitioner. Price has been President and Chief Executive Officer of petitioner since its organization. Moelcheart has been in petitioner's employ since 1913, and has been its Secretary since 1915 or 1916. Petitioner's plant is located in the northcast section of Columbus, Ohio, about two miles from the center of the city. The tract of land upon which the plant is located when originally acquired by petitioner in 1913-1914 consisted of 15.524 acres. The tract is bounded on the east by Cleveland Avenue (a main highway through the city sometimes called 3-C Highway), on the north by the Timken Roller Bearing Co. plant, on the west by the Pennsylvania and New York Central Railways, and on the south by a warehouse and interestate hauling company. Prior to 1914 petitioner rented factory space for the conduct of its business. The Cleveland Avenue property of 15.524 acres was vacant land when acquired by petitioner and was acquired by petitioner specifically for the purpose of building a factory. The parcel was rectangular in shape and its dimensions were about 600 feet or 554 feet frontage on Cleveland Avenue or the east boundary, by about*56 1,250 feet in a westerly direction along the north or Timken Co. plant boundary to the railroad main line tracks on the west boundary, by about 600 feet or 554 feet in a southerly direction along the west or railroad boundary to a point and thence about 1,250 feet along the south boundary in an easterly direction to Cleveland Avenue or the east boundary. The Cleveland Avenue property was well suited and adaptable to the business of petitioner. The ground is level for the most part, it is on grade level with Cleveland Avenue at the front of the property and about 2 1/2 or 3 feet above grade level with the railroad tracks at the rear of the property. There are, and were, no deep ditches or ravines and no impingements on the property. It was zoned for industrial use. The typical utilities are available to the property. Good public transportation was available by streetcar, which was the principal means of local transportation in those days (1914). The main line tracks of two principal railroads aboutted the property on the west and a spur track from the main lines was run into the property. It was located fairly close to the railroad freight houses, facilitating the hauling back and*57 forth of incoming and outgoing freight, shipments of which in those days were by railroad. It is on a main highway and directly across the street from the property is an older residential district occupied mainly by a working class of people. The plant or factory of petitioner consists of three buildings or structures erected at different times but joined together or integrated into one building. The first or No. 1 building was constructed in 1914 on the Cleveland Avenue front of the property, the cast end of the tract, and along the south boundary line, which abuts the property of the warehouse and interestate hauling company. This structure is set back about 25 feet from Cleveland Avenue and is a one-story structure except for a small portion in front devoted to office uses. It is of the sawtooth roof type of construction, with brick walls and steel concrete reinforced roof and wood flooring laid over a concrete sub-base, and the roof is supported by steel piers or columns 22 feet high and spaced at 20 foot intervals. The No. 2 building was constructed in 1928-1929 at the rear or west end of building No. 1, along the south property line, as an extension of No. 1, and is of the*58 same type construction but of smaller size. The No. 3 building was constructed in 1941 at the rear or west end of No. 2 building along the south property line, and is a monitor type building 50 feet wide by 100 feet long. The No. 1 building is of roughly square dimensions, substantially greater than the dimensions of No. 3 building, and the No. 2 building is of greater length than width, being about 1/2 as long and less than 1/3 as wide as the No. 1 building. The three structures are joined together as one building and are sometimes referred to as the main plant or building. As a single building the structures form a wide base L, with the No. 1 structure as the broad base or horizontal line and the No. 2 and No. 3 extensions as the narrow upright or perpendicular line. This main building covers an area of about 2 or 2 1/2 acres of the tract of land. In addition to the main building there are several outbuildings, consisting of a coal storage bin, two scrap sheds, a lumber shed and a garage, which are placed generally within the area of the L formed by the main building, i.e., at the rear of the north side of the No. 1 structure and roughly parallel to and on the north side of the No. *59 2 and No. 3 structures. Entering the property from the front or Cleveland Avenue side and a few feet from the north side of the No. 1 structure is a large driveway which petitioner has to have for big trucks coming in and unloading, with sufficient space to permit the big trucks to turn around after loading and unloading. From the west side of the property, abutting the main line railroad tracks, a spur railroad track runs into the property about 180 feet from the south boundary line. On May 25, 1942, the United States Government gave petitioner notice of intention to condemn 9.1 acres of its land, which were adjacent to that portion of the tract upon which the plant was constructed, and on the same date the Government filed suit in the United States District Court for the Southern District of Ohio, Eastern Division, for condemnation of such 9.1 acres. On December 31, 1943, after extended negotiations between the parties, the District Court entered its decree finding and determining, in conformity with the agreement between the parties, that $69,000, exclusive of interest, was just compensation for the land so condemned and directing payment of such amount to petitioner. The amount*60 of the award so determined was paid to petitioner on February 2, 1944. On February 7, 1944, petitioner applied to the Commissioner of Internal Revenue for permission to establish a replacement fund with the proceeds of the award and such permission was granted on April 17, 1944. The proceeds of the award, $69,000, were deposited by petitioner on February 2, 1944, in a special and separate bank account under the style of "The Columbus Die, Tool and Machine Co. - Replacement Fund" and the Commissioner of Internal Revenue was advised of such deposit. Petitioner also set up on its books on April 27, 1944, a separate account marked "Replacement Fund." The cost to petitioner of the 9.1 acres so condemned, as determined by the respondent for tax purposes, is $19,492.80. In connection with the condemnation of the 9.1 acres and in the conduct of the negotiations between petitioner and the United States preceding the entry of the Court's decree fixing just compensation petitioner engaged the services of a lawyer and of an independent real estate analyst and appraiser, and in the taxable year 1944 paid $2,508.90 for such services. The fair market value of the 9.1 acres on May 25, 1942, as determined*61 by the appraiser, was $75,000, or about $8,500 an acre. The 9.1 acre parcel taken by the Government was vacant land at the time of the taking and was a strip of the northern portion of the tract, contiguous on the north side to the area upon which petitioner's plant was constructed. Part of this parcel was used by petitioner for parking purposes. Petitioner considered that this parcel could be used by it in the event of future expansion. Prior to the condemnation of the parcel, the Timken Roller Bearing Co. and the Defense Plant Corporation discussed with Price the possible purchase of a portion of the parcel, but petitioner, through Price, refused to sell or put any price on the property, stating that petitioner needed it. Since the condemnation, buildings of Timken Company plant have been constructed on the parcel. The 9.1 acre parcel is irregular in shape. It has a frontage of 277 feet on Cleveland Avenue, being about 1/2 the Cleveland Avenue frontage of the entire tract previously owned by petitioner. The parcel condemned extends from Cleveland Avenue about 1,255 feet in a westerly direction along the northern boundary of the original tract to the main line railroad tracks, and*62 about 363.53 feet in a southerly direction along the railroad tracks. From thence the parcel runs in an easterly direction about 574 feet, and thence in a northerly direction 86.53 feet, and thence again in an easterly direction to Cleveland Avenue. After the taking of this parcel by the Government, petitioner had left about 6.4 acres of the original tract, of which about 2 acres are occupied by the main plant of petitioner, and additional portions are occupied by the several outbuildings of the plant. The main plant or building occupied about 190.47 feet of the Cleveland Avenue frontage left to petitioner, and the rest of the frontage, being 86.53 feet, is devoted to the wide driveway into petitioner's property which was necessary to accommodate the large trucks loading and unloading and turning around at the plant. The vacant land left to petitioner was a strip at the rear or west of petitioner's plant, being about 180 feet wide from north to south and 574 feet long from east to west, extending from the rear of the plant to the railroad. The railroad spur track occupying about 20 feet runs into the property along the new northern boundary line at the rear of the portion left to petitioner. *63 The vacant land left to petitioner after the taking of the 9.1 acre parcel is suitable for ordinary industrial use but was thought by petitioner not to be adaptable for future expansion of its plant and facilities. It was thought not to be of use because it was narrow and was about 3 feet above grade level with the railroad in the rear. On or about April 27, 1944, within three months from receipt by petitioner of the condemnation award, petitioner purchased from Price a tract of unimproved land consisting of approximately 18 acres. Petitioner paid Price $69,000 for the land, being the proceeds of the award received by petitioner from the United States for the condemned property. This tract of land, sometimes called the St. Clair Avenue property, is located at the northeast corner of 5th Avenue and St. Clair Avenue, Columbus, Ohio, about 5 blocks east of Cleveland Avenue and about the same distance from petitioner's plant. The dimensions and bounds of the tract, which is roughly rectangular in shape except for 69.5 feet by 315.5 feet out of the northwest corner, are 1411.6 feet on 5th Avenue, on the south, by 543.35 feet on the N & W and the Pennsylvania (C.A. and C.) railroads, on*64 the east, by 1112.75 feet on Shoemaker Avenue, on the north, by 468.85 feet on St. Clair Avenue, on the west. The topography is flat and level with the surrounding streets and railroad. The tract is zoned industrial property and is near the corner of East Fifth Avenue and Cleveland Avenue, which are thoroughfares east and west and north and south. Cleveland Avenue, a 3-C highway, is the highway that connects with all other highways leading into and out of Columbus. It is a corner property about on grade with the streets bordering on the south and west and with the main line of a principal railroad that is contiguous to and runs along the east side of the property, making readily available a spur track into the property. It has the advantage of public utilities and paved streets, and the same pool of labor is available as to the Cleveland Avenue property of petitioner. These factors and facilities - the zoning, size, shape, topography, railroad facilities, highway facilities and utilities - make the property best adaptable to industrial use. The fair market value of this property on April 12, 1944, as determined by an independent expert real estate analyst and appraiser, was about*65 $4,000 per acre. When the Government condemned the 9.1 acres petitioner knew that it would be necessary to acquire another site or tract of land similar to the Cleveland Avenue property so that it could expand as contemplated and build a modern type plant suitable to the efficient operation and conduct of its business and the economical manufacture of the type of work then being done and to be done in the future. The building or plant in which petitioner was operating was not suited to the type or class of work it was then doing and expected to continue, and it was known that, if petitioner was to continue and prosper in business, a new building would have to be built in a new location. The Cleveland Avenue property left to petitioner after the taking of the 9.1 acres was not suitable or adaptable to the purposes of expansion and improvement petitioner felt was necessary. The portion taken included about 280 feet of Cleveland Avenue frontage, which petitioner had intended to use for erection of a new building, and the vacant property left was irregular in shape, was not level ground, and was a long, narrow strip not suited for a building of the type required for petitioner's business. *66 Petitioner was one of the pioneer companies in the job tool and die business, and in the early days it did a lot of small work for which its buildings and equipment were adapted. In later years, sometime after World War I, petitioner undertook the manufacture of heavier machines or larger work in order to meet the competition of the great increase in small tool shops. The larger work required the use of heavier and larger equipment. Petitioner was able to perform this work in its existing plant, but it could have performed it with greater efficiency and economy if the plant were equipped with overhead travelling cranes. Petitioner's existing building does not permit the installation of such cranes. The officers of petitioner consulted Arthur E. Daley, an expert real estate analyst and appraiser of Columbus, Ohio, with respect to securing another tract of land somewhat similar to the Cleveland Avenue tract if they found it necessary to acquire a tract for future expansion. These consultations began soon after the condemnation. Daley was instructed to make a survey of available industrial properties in the general area of the Cleveland Avenue property, which he did, reporting his findings*67 to petitioner's officers from time to time. Daley also checked industrial sites in other sections of the Columbus area. He reported that the St. Clair Avenue property was the only tract in the general area of the Cleveland Avenue property approximating the original size of the Cleveland Avenue property and having similar attributes. Both the original Cleveland Avenue and the St. Clair Avenue properties are zoned as industrial properties; they are approximately the same size, shape, and dimensions, with railroads and main transportation facilities improved and adjacent. Prior to the taxable years petitioner's officers, directors, and accountant and consultant discussed the need for expansion and improvement of its plant. In 1939 or 1940 Price discussed plans for expansion and improvement of the plant with the Austin Company, a large contracting company which constructed petitioner's No. 3 building. Representatives of that company made some sketches for proposed buildings, but no completed blueprints or specifications were made. The plans were not carried out because of intervening obstacles and intervening conditions. The condemnation of part of the Cleveland Avenue property eliminated*68 the desirability of expansion on that site. During the war period, 1942 to 1945, petitioner found it necessary to devote all of its time to the production of war materials. After the termination of the war, business uncertainty and increasing high building costs caused petitioner to further postpone any plans for expansion and improvement. Petitioner intends at some time to build a new plant on the St. Clair Avenue property when conditions are more favorable. The St. Clair Avenue property was similar or related in service or use to the Cleveland Avenue property. Petitioner's business is the designing and manufacture of special machines and tools such as jigs and fixtures, i.e., special or single purpose machines and special parts. Petitioner is what may be called a jobbing tool shop or a special order jobbing machine factory and, in normal times, it does not produce any substantial amount of standard articles. Petitioner manufactures the machines and tools with which other manufacturers produce standard articles. In its early days it primarily produced "small work", but after World War I, this class of work was more or less abandoned to the smaller so-called alley machine shops, *69 and petitioner produced medium size or larger machines and tools. During World War II petitioner produced many standard parts under war subcontracts. During this period it also continued to manufacture some special machines and, after the war, it returned to its regular line of designing and manufacturing special machines, tools and parts. About 50% of petitioner's orders require it to design the product as well as manufacture it. Such orders require petitioner to design and produce a machine which will accomplish the desired purpose. For this type of work, petitioner maintains a staff of engineers and, if the job is particularly large, it employs additional engineers. Drawings and blueprints must be made and estimates are required of labor and materials as well as a layout of the job for the factory and the manufacturing operations when petitioner designs the product. There is a lapse of from thirty days on small tools to nine months or a year on orders for larger machines from the time of placing an order to the first shipment and invoicing, and the receipt of any payments on the order. During such interim petitioner has to pay out substantial sums, which sometimes amount to as*70 much as 60% or 75% of the contract price, for labor and materials before any payments are received by it. Petitioner occasionally received payment for one large order while working on other orders and, to this extent, its financing problem was diminished. Petitioner's business does not remain on a level plane from year to year, but runs in uneven cycles of varying volumes of business and widely fluctuating profits or losses. Petitioner does not have a steady or stable market or demand for its product, and it very seldom receives a repeat order for the products it manufactures. Its risks and hazards are substantial. Inadequate estimates may result in a loss or diminution of normal profits. Petitioner takes the risk of the failure of the products it designs to perform their required functions. Such failure may result in a loss to petitioner. Any business that utilizes the method of bidding on a price basis in order to obtain business faces risks and hazards. Petitioner obtained its business in this fashion. For the fiscal years ended April 30, 1917, to 1950, inclusive, the net sales, cost of goods sold, and the net profit or loss, not reflecting any adjustments by the Bureau of*71 Internal Revenue or with respect to renegotiation of excessive profits are as follows: Cost ofNet ProfitYearSalesGoods Soldor (Loss)1917$ 322,843.68$ 36,353.33$ 56,016.021918476,216.01261,990.0843,327.831919557,833.07310,134.9045,746.221920464,497.58261,982.3829,168.011921436,448.70244,223.9440,810.671922177,092.2487,358.84(10,272.26)1923150,679.7177,061.46(21,484.24)1924632,084.54385,614.32135,584.381925197,962.93146,007.30(19,749.73)1926250,774.78184,238.435,771.791927279,782.57205,561.9114,753.371928291,873.90223,918.2613,019.291929420,356.27359,582.81(6,919.15)19301,254,287.08774,839.40352,579.561931132,219.1399,741.45(25,954.92)193240,539.2147,337.21(38,884.20)193320,555.8826,511.55(65,408.33)1934105,827.5275,364.74(1,758.28)193584,768.9267,815.09(13,608.00)1936146,479.14107,549.37(5,342.65)1937310,401.64219,486.5526,001.201938464,575.87315,995.0745,966.521939114,060.53105,233.3013,136.691940296,374.40210,813.613,282.021941589,552.59351,500.9870,112.821942909,698.77455,500.60137,706.9619431,692,555.58766,858.53212,176.14* ($153,761.51)19441,445,018.70660,203.44173,156.97* ($126,413.74)19451,289,214.84732,561.91107,790.241946679,420.51452,765.4259,879.8219471,665,891.061,070,307.41271,387.7519481,262,807.50443,571.91435,287.731949503,434.27381,828.8619,446.771950282,682.92259,049.94(67,638.99)*72 The 1922 and 1923 losses resulted from a low volume of business. The 1924 profits were attributable to a large contract from Western Electric Company. The losses and meager profits during the period from 1925 through 1929 were due to increased costs and insufficient volume of business. The 1930 profit was again attributable to a large contract from Western Electric Company. The years 1931 through 1936 reflected low volume of business and increased costs. The 1941 through 1945 profits were attributable to the rearmament and war program. Profits for 1946 through 1949 were again attributable to a large contract from Western Electric Company. After the termination of World War II, petitioner did not have sufficient business to keep its entire plant and all of its employees busy, and it had to reduce the number of employees. After petitioner in 1928 or 1929 shifted its emphasis from small work to designing and manufacturing special machines and tools, the use of materials and the production of larger machines required it to have larger and heavier machinery and equipment. Most of petitioner's equipment is large or*73 medium size and consists generally of standard machine tools such as boring mills, shavers, planers, lathes of various types and sizes, grinders, jog borers, shapers, and milling machines. These machines cost from $8,000 to $35,000 apiece to replace. There have been vast improvements in such equipment since petitioner installed its machinery. Petitioner's equipment is less efficient, less productive, and more expensive to operate than the more modern machines. Petitioner has pursued a policy of keeping abreast of the constant improvements in machine tools and has replaced some of its machinery from time to time, but it has not replaced all of it in any one year, and in recent years has made very few replacements, particularly of the larger machines. Prior to World War II petitioner consistently maintained its equipment in good repair. During and after that war period petitioner found it difficult to maintain its machinery in this manner because of the additional operation during the war and because of the inefficiency and lack of skill in its workmen. Petitioner's buildings are not adaptable to remodeling for efficient and economic handling of the type of business in which petitioner*74 has been engaged since before the taxable years. The building's construction does not permit the installation of overhead traveling cranes to provide the most efficient and economic movement about the factory of heavy and large materials and machines. Without such cranes, the materials and machines must be moved by hand and hand trucks which is slow and expensive. Petitioner obtained priorities from the United States Government for necessary materials to construct an addition to its building in 1941. Petitioner made no other applications for priorities for building additions after 1941. Petitioner also obtained Government priorities for machinery and equipment during the taxable years 1942, 1943 and 1944. During the period from April 30, 1920 to April 30, 1944, petitioner made additions to its plant and equipment costing $496,358.26; there were charged off items having a cost of $171,797.12 resulting in net additions of $324,561.14. As of April 30, 1944, the plant and equipment used in the business had a cost of $547,691.77. The plant and equipment on hand April 30, 1944, included items acquired during the period 1910 to 1924 at a cost of $69,184.89, items acquired during the period*75 1925 to 1934 at a cost of $87,584.93 and items acquired in the period 1935 to 1944 at a cost of $390,921.95. Of those items acquired in 1935 to 1934, items costing $116,462.26 were acquired in 1938 and items costing $107,923.43 were acquired in 1942. In the period 1945 to 1949, inclusive, there were additions to plant and equipment at cost of $56,549.71 and there were charged off items at cost of $7,193.40 or net additions at cost of $49,356.31. The plant and equipment - depreciable property - in use at April 30, 1944, included property acquired in the years and at costs as follows: Shop Fix-MachineryFurniture andAutostures andTools andYearBuildingsGaugesFixturesand TrucksEquipmentEquipment1937 andPrior$107,652.54$ 685.44$ 133.92$ 3,902.12$ 86,147.531938236.964,803.25103,814.431939673.651,548.39194023,173.121941771.28362.381,113.07950.00$ 3,141.9548,993.35194230,227.48188.04310.169,015.2861,302.971943693.51199.001,230.0015,217.4419444,750.0028,314.00$144,094.81$1,425.86$1,794.11$10,329.03$13,387.23$368,511.23Total$539,542.27Obsolete machinery per R.A.R.$15,700.00Capital improvements per R.A.R.1,849.5017,549.50$557,091.77Less: Assets restored by R.A.R. 1938$ 8,000.00Less: Increase in capital gain R.A.R. 19421,400.009,400.00Total plant and equipment$547,691.77*76 At April 30, 1944, the estimated remaining life, as determined by Internal Revenue Agents, of the buildings was 4 years, of shop fixtures and equipment was 4 1/2 years, of machinery, tools and equipment was 12 years, and of gauges, office furniture and fixtures, and autos and trucks was variable. In determining depreciation rates petitioner estimated the useful life of the buildings and of the shop fixtures and equipment would expire in 1948 and the useful life of autos and trucks would expire in 1946. The depreciation for machinery and equipment was determined upon the basis of productive hours of use and not upon years of life. The normal productive hours of use was determined to be 175,000 per year. During the war years the productive hours of use were much greater, being 440,000 in one year. The years of useful life would be variable, with a minimum of ten years. At least 75% of the machinery and equipment was 10 years old or more as of 1942. The plant, exclusive of land, and equipment at cost, the depreciation reserve based upon cost, the capital stock and the surplus of petitioner for each of the fiscal years 1916 to 1950, inclusive, as shown by its books and not reflecting*77 any adjustments by the Bureau of Internal Revenue or with respect to renegotiation of excessive profits, are as follows: Plant andDepreciationYearEquipmentReserveCapital StockSurplus1916$157,126.41$ 20,666.38$ 60,000.00$152,201.301917166,514.7032,253.6460,000.0093,949.871918195,367.7546,414.48120,000.00176,842.591919203,141.5273,708.39120,000.00212,235.691920218,430.6686,930.69200,000.00138,720.481921233,250.85110,705.19200,000.00182,712.361922239,949.98128,719.00200,000.00155,033.541923239,949.98147,418.86200,000.00133,549.301924244,654.44167,868.57200,000.00242,158.371925244,654.44186,200.06200,000.00213,926.621926244,654.44199,488.53200,000.00219,698.411927244,654.44187,818.84200,000.00256,604.301928251,691.36197,146.90200,000.00270,496.571929318,410.00207,324.95200,000.00262,704.461930326,276.89222,034.52200,000.00615,284.021931326,276.89232,311.06200,000.00589,329.101932326,276.89242,455.82400,000.00346,444.901933326,276.89247,510.35400,000.00273,036.571934326,276.89252,433.79400,000.00267,278.291935178,355.37106,864.11400,000.00249,670.291936178,131.99113,395.98400,000.00251,012.941937200,704.14124,608.47400,000.00276,531.101938306,361.03141,352.21400,000.00296,189.051939322,984.82159,747.99400,000.00305,325.741940348,007.44174,955.23400,000.00304,607.761941399,502.39207,144.10400,000.00380,646.271942497,296.82240,835.80400,000.00503,119.151943514,627.77287,859.27400,000.00711,295.291944547,691.77329,103.56400,000.00880,452.261945548,314.57371,462.03800,000.00352,903.781946548,314.57403,657.27800,000.00342,733.601947596,066.76448,586.98800,000.00574,121.351948595,975.27468,667.62800,000.00969,409.081949597,048.08489,299.52800,000.00947,721.841950593,083.54501,935.06800,000.00879,174.85*78 The depreciation reserves shown in the foregoing statement are based upon the original cost of buildings, machinery and equipment and other depreciable assets. The cost of replacement in January 1948 of the buildings of petitioner is $497,864.43, including power mains and piping, the replacement costs of which are $17,213.38 and $2,088.93, respectively. At April 30, 1944, the actual cost of the buildings, which then had an estimated remaining life of 4 years, to the petitioner is $144,094.81. No additions to the buildings were made by petitioner between April 30, 1944, and April 30, 1948. The cost of replacement or reproduction of the buildings at April 30, 1944, is 70% of such cost as of January 1948 ($497,864.43), which is $348,505.10, and there is no appreciable difference in such cost at April 30, 1942, 1943 and 1944, when prices were frozen under Government war time controls. The cost of replacement in January 1948 of all equipment used in petitioner's business, exclusive of power mains and piping included in the buildings, is $1,349,651.65 ($1,368,953.96 minus $19,302.31). Included in such general classification of equipment are gauges, office furniture and fixtures, autos*79 and trucks, shop fixtures and equipment, and machinery, tools and equipment as classified on petitioner's records. The cost of replacement in January 1948 of the gauges is $15,896.83; of the office furniture and fixtures is $13,030.86; of the autos and trucks is $880; of the shop fixtures and equipment is $31,631.82; and of the machinery, tools and equipment is $1,288,212.14. At April 30, 1944, the actual cost to petitioner of the machinery, tools and equipment is $368,511.23 and of all equipment in all of the several classifications is $395,447.46. Between April 30, 1944 and April 30, 1948, petitioner charged off equipment in the amount of $7,193.40 and made additions to equipment in the amount of $55,476.90, or net additions in the amount of $48,283.50. The cost of replacement or reproduction of the equipment of all classifications as a whole at April 30, 1944, is 67% of such cost in January 1948 ($1,349,651.65), which is $904,266.61 and there is no difference in such cost at April 30, 1942, 1943 and 1944. The depreciation reserves for plant and equipment at April 30, 1942, 1943 and 1944, computed on the replacement costs at such dates is about three times the depreciation reserves*80 computed upon actual costs and as shown on the records of petitioner, or $722,507.40 for 1942, $863,577.81 for 1943, and $987,310.68 for 1944. As shown by the books of petitioner, not reflecting any adjustments by the Bureau of Internal Revenue or with respect to renegotiation of excessive profits, the current assets, the current liabilities, the cash and bonds, the inventories and the receivables for each of the fiscal years 1916 to 1950, inclusive, are as follows: CurrentCurrentReceivablesYearAssetsLiabilitiesCash and BondsInventoriesAccts. and Notes1916$ 74,987.41$ 30,378.24$ 3,480.63$ 52,201.10$ 18,452.80191799,738.85112,653.508,273.6562,859.0225,842.471918143,820.3835,836.3716,726.1284,277.0338,819.631919175,636.9615,083.2582,019.6262,004.7624,367.961920207,938.4937,488.6479,760.2471,924.6755,179.281921235,786.7512,390.71134,592.4031,815.1268,625.171922220,009.638,274.51144,797.0829,709.8145,238.271923244,379.4335,428.69139,317.6747,187.5857,723.601924345,939.1012,634.04238,875.3550,257.4153,662.181925345,596.3822,191.58226,867.0832,597.4383,313.871926345,963.993,498.93220,353.6540,129.7682,884.441927371,080.193,378.93227,919.9057,328.6383,866.641928387,591.573,706.90273,627.6231,552.9780,051.281929437,300.31117,756.34212,278.26120,209.24101,151.601930708,967.6853,441.77593,417.8023,736.0587,882.631931645,372.2910,296.08558,916.4024,188.8057,130.711932631,260.7832,161.14529,285.0620,970.4376,060.631933568,450.016,247.42481,487.6918,699.3466,433.101934572,520.3511,152.60429,244.6119,447.27121,886.311935582,570.0440,956.95528,605.3824,083.6028,191.171936585,504.1435,793.15451,235.0030,891.64101,464.611937626,146.2562,779.61448,239.2751,866.18123,674.981938534,472.8239,808.53452,278.5719,497.5760,851.281939532,798.6213,202.40395,584.7913,245.32110,897.011940518,185.0520,235.05347,616.0828,405.44140,869.801941620,836.4865,986.77431,018.4529,406.35157,919.501942823,877.00212,248.29613,890.3142,913.98162,960.4519431,503,096.88655,631.301,147,072.1253,016.76300,880.5719441,564,612.25539,663.091,370,327.5543,404.19149,713.1619451,362,727.04423,781.841,214,063.5930,339.72117,777.2119461,226,087.63265,329.741,118,620.0762,943.8843,794.1319471,409,586.56220,345.081,242,988.4264,777.55101,202.2919481,899,393.51294,008.621,820,222.6331,914.3043,940.6019491,628,956.8124,543.481,554,636.3636,684.8834,173.0919501,655,210.29102,642.631,549,105.8157,697.9147,491.45*81 The bonds included in the column Cash & Bonds are United States Government bonds, except for an amount of $20,000 which represents a certificate of deposit in a building and loan association that petitioner has carried for years more as a matter of sentiment than anything else. The depreciation reserve based upon cost, the inventories, the receivables, the total of such items, and the surplus of petitioner for each of the fiscal years 1940 to 1944, inclusive, and for each of the fiscal years 1945 to 1950, inclusive, are as follows: DepreciationYearReserveInventoriesReceivablesTotalSurplus1940$174,955.23$28,405.44$140,869.80$344,230.47$304,607.761941207,144.1029,406.35157,919.50394,469.95380,646.271942240,835.8042,913.98162,960.45446,710.23503,119.151943287,859.2753,016.76300,880.57641,756.60711,295.291944329,103.5643,404.19149,713.16522,220.91880,452.261945371,462.0330,339.72117,777.21519,578.96352,903.781946403,657.2762,943.8843,794.13510,395.28342,733.601947448,586.9864,777.55101,202.29614,566.82574,121.351948468,667.6231,914.3043,940.60544,522.52969,409.081949489,299.5236,684.8834,173.09560,157.49947,721.841950501,935.0657,697.9147,491.45607,124.42879,174.85*82 The inventories, the materials purchased, the payrolls, the total thereof, and the net current assets of petitioner for each of the fiscal years 1940 to 1944, inclusive, and for each of the fiscal years 1945 to 1949, inclusive, are as follows: MaterialsNet CurrentYearInventoriesPurchasedPay RollsTotalAssets1940$28,405.44$ 23,068.33$235,709.45$ 287,183.22$ 497,950.00194129,406.3523,598.47371,204.49444,209.31554,849.71194242,913.9839,525.68458,919.74541,359.40610,828.71194353,016.76136,386.47674,408.81863,812.04847,465.58194443,404.19129,074.66557,879.79730,358.641,024,949.16194530,339.72229,862.68527,014.84787,217.24938,945.20194662,943.8883,225.78442,917.01589,086.67960,757.89194764,777.55385,868.67726,832.581,177,478.801,189,241.48194831,914.3058,838.34405,774.96496,527.601,605,384.89194936,684.8886,005.87346,112.71468,803.461,604,413.33During part of the fiscal year 1942, all of the fiscal years 1943 and 1944, and until near the close of the fiscal year 1945 petitioner was engaged almost exclusively in war work*83 such as the production of cam cases used in hydraulic equipment for lifts and steering mechanism on battleships and ammunition hoists. During this period skilled labor was scarce and the labor obtainable was inefficient, indifferent and not more than 60% as productive as labor prior to the war. This inefficiency and nonproductivity continued into the post-war period. During the war and post-war periods petitioner employed union labor under union contracts and was always being pressed for increases, pensions and other fringe benefits. The costs of labor and materials during 1942 to 1945 were substantially higher than previous costs, and these costs continued to increase thereafter. Petitioner's war work slacked off near the close of its fiscal year 1945, and there were cancellations of contracts for such work. Although petitioner had no notice of termination of any war contracts prior to the early part of 1945, it had experienced the drastic economic readjustments after World War I, and anticipated during the taxable years that a substantial slackening of business would occur immediately after World War II. Petitioner has always financed its operations, expansions, and improvements*84 with the earnings of the business. Except for an occasional small demand loan from the bank as a temporary expedient, petitioner has not borrowed in any form. Petitioner did not receive any financing from the Government or from its prime contractors during the years 1942 to 1945, and it did not receive advances at any time from its customers on jobs under order. Petitioner never made any investigations in order to ascertain whether any financing method was feasible other than out of earnings. Petitioner's officers were unaware of how its competitors financed their operation. Before the close of its fiscal year 1942 petitioner knew of the legislation then pending in Congress which became the first Renegotiation Act, and knew that its earnings and profits might be subject to renegotiation. They had been informed of this through Business Services, to which they subscribed, as well as having read about it in the newspapers. By letter dated April 17, 1944, which was the first official notice to petitioner in connection with renegotiation of its contracts and profits, the War Department of the United States advised petitioner that the matter of conducting its statutory renegotiations under*85 the law, copies of which were enclosed, had been assigned to the indicated office of the War Department and requested that petitioner furnish the information called for by the "Standard Form Of Contractor's Report" enclosed with the letter. By letter dated April 7, 1945, the War Department of the United States notified petitioner that the Under Secretary of War had made a unilateral determination that $550,000 of the profits realized by it during its fiscal year April 30, 1943, under its contracts subject to renegotiation, were excessive and enclosed an executed original of such unilateral determination. Payment to the United States of the excessive profits so determined, less the tax credit provided by section 3806 Internal Revenue Code, was directed. By letter dated April 18, 1945, the War Department advised petitioner that, as reported by the Internal Revenue Agent in Charge, it was entitled to a tax credit in the amount of $456,744.01 against the excessive profits determined for the fiscal year 1943 and demanded payment of the balance of such excessive profits, amounting to $93,255.99, with notice that interest at the rate of 6% per year on any amount thereof*86 unpaid would accrue from and after April 30, 1945. On April 27, 1945, petitioner paid to the United States the excessive profits so determined for its fiscal year 1943, after credit for taxes paid, in the net amount of $93,255.99. For its fiscal year 1943 petitioner paid excess profits taxes in the amount of $584,146.25 and income taxes in the amount of $30,899.81 or aggregate income and excess profits taxes in the amount of $615,046.06. For its fiscal year 1942 petitioner paid excess profits taxes in the amount of $115,660.02 and income and declared value excess profits taxes in the amount of $66,083.14 or aggregate income and excess profits taxes in the amount of $181,743.16. On January 23, 1945, in response to a long distance telephone request about two or three days or a week prior thereto from the War Department, petitioner furnished the War Department a breakdown of its sales for its fiscal year ending April 30, 1944. On February 24, 1945, petitioner was advised that renegotiation proceedings under the Renegotiation Act for its fiscal year April 30, 1944, would be conducted by the Navy Department, that a representative of the Navy Price Adjustment Board would visit its plant*87 on March 2, 1945, and that a conference with petitioner with respect to the matter had been set for 9:00 A.M., April 2, 1945, at Washington, D.C. Thereafter, petitioner entered into a Renegotiation Agreement dated April 13, 1945, with the Navy Price Adjustment Board, acting in the name of the United States, determining and agreeing that $420,000 of the profits derived by petitioner during its fiscal year April 30, 1944, were excessive and should be eliminated pursuant to the Renegotiation Act. It was provided that petitioner was entitled to a tax credit in the amount of $360,700.82 in respect of such excessive profits and petitioner agreed to pay to the Government the net amount of such excessive profits less the tax credit, namely, $59,299.18 in instalments. This amount was paid to the United States by petitioner in practically equal instalments on April 27, 1945, July 5, 1945, November 5, 1945, and March 4, 1946. For its fiscal year 1944 petitioner paid income taxes in the amount of $38,222 and excess profits taxes in the amount of $467,432 or aggregate income and excess profits taxes in the amount of $505,654. In August 1945 petitioner was notified that its profits and contracts*88 for its fiscal year April 30, 1945, would be renegotiated and thereafter it was determined that its profits for such year were excessive in the amount of $190,000. Petitioner paid $27,550 to the United States being the amount of such excessive profits less the tax credit applicable thereto. For its fiscal year 1945 petitioner paid income taxes in the amount of $46,714 and excess profits taxes in the amount of $275,623 or aggregate income and excess profits taxes in the amount of $322,337. Petitioner was not renegotiated by the United States Government with respect to excessive war profits for the taxable years ended April 30, 1941, and 1942. Petitioner carried substantial amounts in Government securities as a form of repository for its funds, and not for the income return on an investment, because it felt that such form was the best way to keep its money rather than leave it in a bank account. The securities could be cashed at any time petitioner required the funds and they were considered another form of cash. The officers and directors, and the consultant, of petitioner considered that the surplus carried and maintained by petitioner was essential to meet the reasonable needs*89 of the business and that the business required petitioner to maintain a substantial liquid financial position. On several occasions petitioner had received a large order of a million dollars or more primarily because of its ability to finance the job and its operations without requesting advances from the customer or borrowing, which jobs petitioner had reason to believe it would not have obtained had it not been in a strong liquid financial position. The normal ratio of current assets to current liabilities, the normal working capital position, for petitioner's type of business is about 6 to 1. Petitioner declared and paid cash dividends in each of the years since December 20, 1931, in the amount of $4,000 or at the rate of $1 per share on its outstanding capital stock, except in the fiscal year 1938 when it declared and paid a cash dividend of $20,000. It paid cash dividends of $150,000 in 1916 and $50,000 in 1923. In each year the dividend was declared and paid after due consideration by the directors of the current and prospective business of petitioner and of its financial position. During the depression years of 1931 and following the directors of petitioner found it necessary, *90 because of adverse business conditions, to reduce the salary of its President, on his own motion, from $50,000 to $20,000 per year, to reduce the salaries of other officers and employees, and to otherwise curtail expenses. The directors, and the consultant or fiscal advisor of petitioner, were not influenced in determining the dividends to be paid by the fact that larger dividends would increase the tax liability of the stockholders. In connection with the 1932 stock dividend, the minutes of the meeting of petitioner's Board of Directors held on January 5, 1932, contain in part the following: "The President stated that due to adverse business conditions, the operations of the Company for the eight months ended December 31, 1931, had resulted in a loss. He further stated that every effort was being made to economize, that expenditures for expense, repairs, maintenance, etc., etc., had been curtailed. Also that salaries and wages had been reduced so that losses could be reduced to the minimum and particular attention was being directed to maintaining the financial position of the Company so that sufficient working capital would be available to finance the Company's operations without*91 borrowing, when business was again restored to normal. "Having regard to present conditions and the desire of the management to conserve working capital, the President stated that he would not recommend the advisability of further cash dividend payments for at least the present. "A Balance Sheet of the Company as of December 31, 1931, was presented for inspection and discussion. During the discussion the suggestion was offered that in view of the surplus shown by the Balance Sheet and the fact that the Company held Two Thousand (2,000) Shares of its authorized and heretofore unissued Capital Stock, of the par value of $100.00 per Share, that a Stock Dividend might be distributed. "The President stated that he had no objection to such action, provided that for the present at least, it would involve no cash outlay. He then stated that he would entertain a motion. "On motion made, duly seconded and unanimously carried, the following Resolution was adopted. "RESOLVED, that a Stock Dividend equal to One Hundred (100) per cent of the Company's stock outstanding be and the same is hereby declared, the same to be issued to holders of Stock of Record as of January 25, 1932. Be it*92 further resolved that the said Stock Dividend equal to Two Hundred Thousand (200,000.00) Dollars be charged to Surplus. "There being no further business to come before the Board of Directors, upon motion made, duly seconded and carried, the meeting adjourned." The books of petitioner disclose a "loan" to Price in 1939 in the amount of $63,583. This represents the cash surrender value of life insurance previously carried by petitioner on the life of Price, which Price purchased from petitioner in 1939, giving his demand note to petitioner in that amount. Payments on the note were made from time to time, and interest was paid on the amounts due. The note was paid in full in cash before the close of the fiscal year 1944. Petitioner carried open or running accounts on its books for each of the stockholder members of the Price family, to which there were credited the salaries and other amounts due to them from petitioner and to which there were charged amounts paid out by petitioner for their personal account or benefit. These open accounts at times showed credit balances in favor of the stockholder and all accounts have been fully paid to petitioner from time to time. Except for the*93 open accounts of the three children, of whom one owned only 2 shares of stock and the other two owned only 1 share of stock each in the taxable years, interest was charged and paid on monthly average balance in the open accounts. Petitioner's earnings or profits were not permitted to accumulate during the taxable years beyond the reasonable needs of the business as they existed during such taxable years. Petitioner was not availed of during the taxable years for the purpose of preventing the imposition of surtax on its stockholders by permitting gains and profits to accumulate instead of being divided or distributed. Opinion KERN, Judge: Petitioner and respondent are agreed that the question of whether this petitioner is liable for the surtax imposed by section 102 of the Internal Revenue Code is essentially a fact question and must depend upon a resolution of all the evidence and the weighing of all the pertinent factors established by the voluminous record herein. See Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282. After a careful review of the entire record and after weighing to the best of our ability the pertinent factors established*94 by the evidence, we have concluded and found that petitioner's accumulations of earnings and profit were not beyond the reasonable needs of its business during the taxable years which were fraught with the extraordinary problems of global war and its economic aftermaths, and that petitioner was not availed of during the taxable years for the inhibited purpose. These ultimate conclusions dispose of the issue relating to the applicability of section 102 to petitioner during the taxable years. However, it should be clearly noted that we do not attempt now to decide any such issue relating to prior or subsequent years, or indicate our view as to how long petitioner could properly continue to accumulate its earnings. The next issue is whether the gain on the condemnation of property belonging to petitioner is not to be recognized under I.R.C. Section 112 (f). The introductory provisions of the section and the section itself are as follows: "SEC. 112. RECOGNITION OF GAIN OR LOSS. (a) General Rule. - Upon the sale or exchange of property the entire amount of the gain*95 or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. * * *"(f) Involuntary Conversions. - If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain)." Respondent does*96 not here contend that petitioner has not complied with the statutory requirements relating to the establishment of the replacement fund and its use to purchase the new property. Respondent appears primarily to resist the application of section 112 (f) because the disparity in size between the two pieces of property eliminates the possibility of the two properties being "similar or related in service or use", as required by the pertinent section, and points out the peculiar importance of such disparity in a case such as this where the two properties are unimproved. No two pieces of real estate can be similar in all respects; and the same might be said of many types of personalty. We are satisfied that considerable latitude in respect to the similarity of property was contemplated by the statute and must be permitted. Indeed, the addition of the phrase "or related in service or use" demonstrates the legislative intent to give a broad interpretation to the statute. See Paul Haberland, 25 B.T.A. 1370">25 B.T.A. 1370. And we have recently noted that section 112 (f) is a relief provision which should be liberally construed to effectuate its purpose. Massillon-Cleveland-Akron Sign Co., 15 T.C. 79">15 T.C. 79, 83.*97 A few examples of previous adjudications disclose how great this latitude of interpretation has been. In August Buckhardt, 32 B.T.A. 1272">32 B.T.A. 1272, 2 1 /2 acres of the taxpayer's 5 1/2-acre farm were condemned. The taxpayer acquired a 20-acre farm which was held to be "similar or related in service or use". In Cotton Concentration Co., 4 B.T.A. 121">4 B.T.A. 121, the substituted storage shed was about double the capacity of the replaced one, and we held that there was no taxable gain under an earlier statute, which was of like import to the one here considered. The new property here was of similar class and location in that it was industrial property located in the same city and adjacent to the same public services and labor market; and the variation of size we do not regard as of controlling significance. Both the piece sold and the piece acquired adequately served petitioner as the site for its contemplated plant expansion. Nor are we concerned under the present facts by reason of the circumstance that petitioner acquired the new site from its president and substantial stockholder. The evidence establishes to our satisfaction that the purchase price was approximately the*98 then current fair market value of the property, and that the site was appropriate to petitioner's purposes. But even if petitioner had a "bargain purchase", there appears no reason why this should foreclose the application of section 112 (f). See Kimbell-Diamond Milling Co., 10 T.C. 7">10 T.C. 7. The last issue concerns the deductibility of attorney fees and real estate appraiser fees. Petitioner contends that the fees in question were spent resisting the sale of the real estate to the Government and protecting petitioner's interests therein, and that these fees can not be eliminated as deductible expenses because they were in defense of title or costs of the sale. Some part of these fees, however, were clearly incident to the negotiation and ascertainment of the purchase price. This being so, L. B. Reakirt, 29 B.T.A. 1296">29 B.T.A. 1296, affd. (CA-6) 84 Fed. (2d) 996 which is primarily relied upon by petitioner and which dealt only with fees connected with an attempt to enjoin the condemnation of property, can not control here. And Chicago Dock & Canal Co., 32 B.T.A. 231">32 B.T.A. 231, affd. (CA-7) 84 Fed (2d) 288, also relied upon by petitioner, is*99 distinguishable as a case treating only with fees relating to the reduction of the amount of an assessment. We perceive no error in respondent's position that these fees are not deductible expenses, but are capital items which would ordinarily be offset against the amount received for the property, but under the present circumstance of a section 112 (f) non-taxable transaction must be added to the basis of the new property. Cf. William Justin Petit, 8 T.C. 228">8 T.C. 228, and H. C. Naylor, 17 T.C. 959">17 T.C. 959. Decision will be entered under Rule 50. Footnotes*. Not including Post War Refund Credit for excess profits tax.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624423/

MUSKEGON MOTOR SPECIALTIES COMPANY, A DELAWARE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Muskegon Motor Specialties Co. v. CommissionerDocket Nos. 68783, 75475.United States Board of Tax Appeals35 B.T.A. 851; 1937 BTA LEXIS 829; April 6, 1937, Promulgated *829 Where a Delaware corporation, organized November 24, 1928, to effect a combination of the businesses of two Michigan corporations, acquired all the stock of such corporations on December 6, 1928, and such corporations were dissolved and their assets formally transferred on January 23, 1929, to the Delaware corporation, the latter corporation having taken over and operated the businesses of the two Michigan corporations as of January 1, 1929, held, upon all the evidence, that the acquisition of the stock of the Michigan corporations by the Delaware corporation and the dissolution of the Michigan corporations and the transfer of their assets to the Delaware corporation constituted parts of an entire plan and not separate transactions; that the period January 1 to January 23, 1929, was not a consolidated return period and the basis for depreciation of assets acquired by the Delaware corporation is not limited to the basis in the hands of the Michigan corporations. Laurence A. Masselink, Esq., for the petitioner. E. C. Algire, Esq., and Joseph P. McMahon, Esq., for the respondent. ARUNDELL*851 These consolidated proceedings involve deficiencies*830 for the calendar years 1930 and 1931 in the amounts of $8,097.48 and $10,958.14, respectively. The only question in controversy is whether cost of properties to the transferors or their fair market value at date of acquisition by the petitioner is the proper basis to be used for the purpose of *852 computing the amount of depreciation allowable to the petitioner for the respective years involved. A stipulation of facts was supplemented by certain oral testimony. FINDINGS OF FACT. In 1928 the Muskegon Motor Specialties Co., hereinafter called the Muskegon Co., and the L. O. Gordon Manufacturing Co., hereinafter called the Gordon Co., both Michigan corporations, were engaged in the business of manufacturing automobile cam shafts at Muskegon, Michigan. In that year the officers and directors of the two companies formulated a plan to combine the businesses of the two companies in a new corporation. In November 1928 all or substantially all of the stock of the two Michigan corporations was deposited by the stockholders in escrow for the purpose of carrying out the plan. On November 24, 1928, the petitioner was organized as a Delaware corporation with an authorized*831 capital stock of 62,500 shares of class A convertible preference stock and 187,500 shares of common stock, both classes being no par stock. On November 27, 1928, the petitioner entered into an agreement with a group of bankers whereby the bankers agreed to buy all of petitioner's class A stock and 15,000 shares of its common stock for a total cash consideration of $1,385,000. The petitioner agreed therein to issue 110,000 shares of its common stock and to pay $1,445,004.17 to the holders of all of the capital stock of the Muskegon Co. and Gordon Co. The difference of $60,004.17 between the amount to be received from the bankers and the amount to be paid to the old stockholders was to be recouped by means of a dividend to be paid to petitioner by the Gordon Co. It was further agreed that the petitioner might at any time after acquiring the stock of the Muskegon Co. and Gordon Co. acquire their assets upon surrender of the stock. At the time the petitioner was organized it was contemplated by the organizers and by the bankers who financed it that it would as soon as practicable acquire the assets of the Muskegon Co. and Gordon Co. At about the time of the financing agreement*832 with the bankers the petitioner organized two subsidiary holding companies which are only incidentally involved here. On December 6, 1928, the financing agreement was closed and the petitioner sold to the bankers its stock as agreed upon for $1,385,000. On the same date petitioner acquired all the stock of the Muskegon Co. and all of the stock of the Gordon Co., paying therefor part cash, part stock of its subsidiary holding companies, and part in its own stock. In the meantime, the Muskegon Co. had changed its name to the Cam Shaft Manufacturing Co. *853 Upon acquisition by petitioner of the stock of the old companies preparations were made for the transfer of assets of the old companies and for their dissolution and liquidation. There were differences of opinion among several attorneys who were working on the transaction and one of the attorneys was out of the city and had to be consulted by mail. By reason of this situation formal resolutions and transfers were not made until January 23, 1929. On that date formal resolutions were adopted authorizing the conveyance of the properties of both companies to the petitioner and on the following day certificates of dissolution*833 were filed. Both of the old companies continued operations in their respective plants through 1928 and until the time of their dissolution, but under the management of the petitioner. Their operations were recorded on their separate books; at least some of the books were maintained as separate books throughout the year 1929. Separate income tax returns for 1929 were filed by each of the old companies and by the petitioner. In each of those three returns it was stated that it was not a consolidated return. The returns of the old companies were marked "Final Return" and both carried the following notation: "Merged into Muskegon Motor Specialties Company of Delaware as at January 1, 1929." The return of the petitioner for 1929 covered the entire calendar year and included the income from the operation of the two plants of the old companies from January 1 to January 23, 1929, inclusive. The petitioner's return contained the following statement: Merger January 1, 1929, of Muskegon Motor Specialties Company, L. O. Gordon Manufacturing Company, and Cam Shaft Manufacturing Company. The Balance Sheet at the beginning of the year is a consolidated balance sheet of the two companies*834 before the merger. The fair market value of the depreciable assets acquired by petitioner from the old companies was at the time of acquisition $855,580.98 and the fair market value of the land acquired was $66,963.75. OPINION. ARUNDELL: In computing depreciation allowances on the properties acquired by the petitioner from the two Michigan corporations, the respondent has used as a basis the cost of the properties to those two corporations. The petitioner says that the proper basis is the cost to it. The respondent originally had alternative theories for his position: First, that the assets were acquired in a nontaxable reorganization, and, second, that they were acquired through liquidation of subsidiaries during a consolidated return period. He has abandoned the frst one. The law and regulations cited by the respondent to sustain his position are section 113(a)(12) of the Revenue Act of 1928 and *854 sections related thereto by cross-reference and article 38 of Regulations 75. The statute and regulations, in so far as material here, provide that during a consolidated return period the basis for depreciation shall be the same as if the corporations were not*835 affiliated and that such basis shall not be affected by reason of a transfer of property during the consolidated return period. The supposed fact situation underlying the respondent's view is that the period January 1 to January 23, 1929, was a "consolidated return period" within the meaning of the regulations. It is on this point that the parties differ. The filing of a consolidated return is a matter of election by affiliated corporations. . The regulations lay down detailed instructions as to the formalities to be complied with by corporations seeking the privilege of making a consolidated return. Among other things, the consolidated return must be made by the parent for the group. The parent must prepare and file form 851 and the subsidiaries must prepare and file form 1122 consenting to the regulations and authorizing the parent to file for them. These formalities were not met. Each corporation filed its own return and neither form 851 nor form 1122 was filed. What is more important is that according to the evidence these matters were considered and a deliberate election was made not to file a consolidated*836 return and not to meet the conditions which were necessary to the filing of such a return. On the contrary, it was intended that separate returns be filed and that was done. Consequently, it can not be held that a consolidated return was filed. The remainder of the argument rests largely on the assumption that there was a consolidated return period for which a consolidated return was filed. It is in substance that the petitioner's acquisition of stock of the two Michigan corporations was separate and distinct from the acquisition of the assets and that until the liquidation of the Michigan corporations they were separate and taxable entities. The original plan of consolidation devised and adopted by the officers and directors of the two Michigan corporations was not, as far as the record shows, reduced and outlined in detail in any one writing. What such plan was must be gathered from all the agreements, minutes, transactions and testimony of the parties who assisted in formulating and in carrying out the plan. Considering all the evidence, it is our opinion that the dissolution of the two companies and the acquisition of their assets by the petitioner were all a part of the*837 original plan of consolidation which was made effective as of January 1, 1929. That the acquisition of the assets of the two companies and their dissolution were not specified in the agreements and other writings as absolutely necessary to the plan of consolidation is not decisive. The writings disclose that such action was within the *855 scope of the plan and the companies were in fact dissolved and their assets were transferred to the petitioner and the petitioner assumed the responsibility of operating and carrying on the combined businesses of the two companies. It appears from the evidence that the formalities incident to the transfer of the properties and the dissolu-tion of the companies were delayed through the absence of counsel, which necessitated the submission of such matters to him by mail for his approval. However, as conceded on brief by the respondent, the element of time elapsing between the date the stock was acquired and the date of dissolution is not so important. The plan of consolidation, though not completed in form, was put into practical effect as of January 1, 1929. Although the two companies were, until January 23, 1929, legally existent, they*838 were inactive; mere form without substance. In view of the above, we hold that petitioner does not come within section 113 (a)(12) of the statute and article 38 of Regulations 75. It is, therefore, entitled to use as its basis the cost to it of the depreciable properties. Cost in this case is agreed to be the value of the properties when acquired. The parties have also agreed upon the subsequent additions. Rates are not in dispute except as to one group of buildings and on that point there is no evidence to show error in the respondent's computation. Reviewed by the Board. Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624424/

J. G. Stoller and Geraldine Stoller v. Commissioner.J. G. Stoller & Geraldine Stoller v. CommissionerDocket No. 37343.United States Tax Court1953 Tax Ct. Memo LEXIS 112; 12 T.C.M. (CCH) 1061; T.C.M. (RIA) 53313; September 18, 1953Richard R. Hollington, Esq., for the petitioners. Michael J. Clare, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent has determined a deficiency of $5,344.42 in the petitioners' income tax for the year 1947. The only issue for decision is whether respondent erred in disallowing a farm loss claimed by the petitioners for the year 1947. The respondent's "Explanation of Adjustments" in the deficiency notice was as follows: "(a) In Schedule E, page 2 of your 1947 income tax return, you claimed a farm loss of $10,536.85. It is held that the loss claimed is not allowable under the provisions of Section 23 (e) of the Internal Revenue Code." Findings of Fact Part of the facts were stipulated*113 and are incorporated herein by this reference. Other facts are found from oral evidence. The petitioners are husband and wife, residing at 659 Palisades Drive, Akron, Ohio. They filed a joint income tax return for the calendar year 1947 with the collector of internal revenue for the 18th district of Ohio. In 1937 petitioners purchased at a foreclosure sale a farm located in Richfield Township, Summit County, Ohio, approximately 5 miles north of Akron. The farm consisted of 84 acres with a house, barn and miscellaneous farm buildings. The purchase price was $6,300. Prior to making the purchase the petitioner, J. G. Stoller, sometimes hereinafter referred to as the petitioner, went over the entire farm with his brother, Hugh Stoller, and they discussed its various features and possibilities. Petitioner and his brother were born and had lived on a farm for 20 years and had participated in all phases of general farming. Since 1933 petitioner has been employed as a representative of Cannon Mills. Prior to 1933 he was secretary of General Tire and Rubber Company. The prior owner of the farm had allowed it to deteriorate. The land had not been worked for a considerable period, the*114 buildings, particularly the barn, were in poor shape and the fences needed repair. After petitioners purchased the farm, they replaced the barn at a cost of $15,183.12 and repaired the fences. The farm had been operated as a dairy farm and petitioners continued this type of farming. In 1938 and 1939 they operated on a share-crop basis. This proved unsatisfactory and in 1940 they hired a tenant to manage and operate the farm. The tenant farmer continued in petitioners' employ until the fall of 1946. In February 1946, petitioners purchased for $5,000 an additional tract of 74 acres directly across the road from their original purchase. There were no buildings on the 74-acre tract. This land was also run down, but, since it was so handily located, it could be worked without additional equipment and with little added expense. During the period 1938-1946 petitioners made extensive efforts to build up the first farm. They have increased and now maintain a herd of 30 to 40 head of dairy cattle. They purchased necessary farming equipment and spent yearly sums for the repair and maintenance of machinery, equipment and buildings. They consulted the county agent with respect to ways and means*115 of improving the farm. In 1946 they became dissatisfied with their tenant farmer and advertised in the newspapers in the area for a new tenant farmer. After interviewing several applicants petitioners hired Robert Mohn, sometimes hereinafter referred to as Mohn, to manage the farm. He was paid a salary of $150 per month plus living accommodations. Mohn had worked on farms for over six years doing general farm work. Petitioner and Mohn discussed plans for the long range improvement of the farm and to that end consulted Robert Yoder, Chief Agronomist of the Ohio Experiment Station, and Earl P. Carlton, the local county soil conservationist. These men inspected the farm and drew up a complete plan for its development. The plan included a cropping plan, an outline of conservation operations, an outline of livestock and feed requirements, pasture requirements and anticipated crop production. As a result of these plans petitioners have spent yearly sums in liming and fertilizing the fields and have planted a considerable number of trees on land not suitable for cultivation to check land erosion. Petitioners also installed a large amount of tile in 1947 to improve the drainage of the land. *116 The following amounts were expended for fertilizer and lime for the years 1938-1947, inclusive: 1938$702.681939383.251940226.351941618.271942463.131943165.341944189.981945258.101946392.361947667.65In December 1947, petitioners purchased an additional parcel of land consisting of 15 acres for $8,000. This acreage adjoined the land purchased the previous year and provided an outlet for the drain tile. Since purchasing the farm, petitioners have made improvements thereon. A schedule showing the kind of improvements, the year made and the amount expended is as follows: CapitalYearImprovementsAcquiredCostBarn1938$15,183.12Hog pen1939516.09Ventilator1940312.62Sheds1942626.99Fence1938269.561939391.491940394.67194674.16Tile19472,526.4119481,516.02Calf shed19505,101.93As shown by the above schedule, from the time of purchase of the first farm in 1937 through the taxable year 1947 the petitioners expended $20,295.11, which was charged by them to capital improvements. Since 1947 petitioners have expended $6,617.95. The following farm equipment*117 was purchased by petitioners during the indicated years and at the stated cost and were used in the operation of the farm: YearItemYearFarm equipmentacquiredcosttotalSpreader1938$ 25.00Wagon193845.00$ 70.00Water heater1939122.75Equipment193911.76Plow1939105.25Disc193997.15Saw193939.55376.46Grain drill1940162.00Strainer194031.41Spreader1940235.00Cart194013.31Freight19401.11Binder1940135.00Clipmaster194020.15597.98Corn sheller194114.85Ventilator1941110.00Tools194138.44Cultivator19414.50Weeder194139.90Scale194119.21Rake1941123.75Cultivator1941112.50Wagon194172.00Cornbinder 244.301941Limespreader 92.801941337.10872.25Hammer mill1942125.25Trailer194248.16Equipment1942128.39Hog feeder194230.00331.80Ensilage cutter1943335.00Lard cutter194318.00Used brooder194325.00378.0019440.00Farm scales194515.00Farm scales19459.68Farm tool grinder194518.50Farm power saw194540.0883.26Power mower1946121.03121.03Corn picker1947820.00Farm heater194750.85Fire extingquisher194750.00Sewer pipe1947100.271,021.12Spring toothharrow1948115.00115.001 Baler19491,220.551 Combine19491,500.002,720.551 Baler19501,242.85Pig pen guards195034.251,277.106 Water bowls195148.201 18inch Disc1951210.001 Manure spreader1951296.00554.20$8,518.75Tractor1939$ 889.60$ 889.60Tractor19491,353.001,353.00*118 The petitioner has been active in the supervision and operation of the farm since its purchase. He has never lived on the farm but spends week-ends there, and frequently during the week goes to the farm to discuss its operation with Mohn. He also helps with the farm work during harvest. On some occasion his brother helps with the farm work. Also, he occasionally hires other people as temporary farm laborers. Usually petitioner pays for the extra labor but is not reimbursed from the farm account. There are no recreational facilities of any kind on the farm, and petitioners have never used the farm for picnic parties or social gatherings. An 8-room house which has always been occupied by the share-croppers or the tenant farmer and his family is located on the premises. The petitioners have no room set aside for their use and have stayed at the farmhouse upon one occasion only since its purchase. One horse is kept on the farm which is used for farm purposes and not for petitioners' recreation. Petitioners obtain virtually no produce from the farm. Petitioners maintain a small bank account to defray all minor farm purchases. These purchases are made by Mohn, who makes a monthly accounting*119 to petitioners. The monthly reports are incorporated in a two-column farm journal kept by petitioners. Receipts from sales of milk and livestock are also entered in the journal. Petitioners have increased their chicken and egg business which has been productive, and plan to raise beef cattle which will require less labor than the dairy herd. All of these activities were entered into by petitioners with the expectation of realizing a profit. During the taxable years 1938-1951, inclusive, the petitioners' Federal income tax returns disclosed income, expenses and losses from the operation of the farm in the following amounts: YearIncomeExpensesLosses1/21938 *$ 598.08$ 2,598.93$ 2,008.85$1,004.431939 *1,373.822,867.381,493.56746.781940944.324,824.283,879.9619412,036.375,274.353,237.9819422,303.996,008.353,704.3619433,070.495,779.972,709.4819442,218.155,168.482,950.3319453,490.156,551.713,061.5619461,932.389,152.947,220.5619474,417.6514,954.5010,536.8519484,591.8812,358.477,766.5919494,401.5612,263.727,862.1619505,736.0312,431.416,695.3819517,269.6711,021.733,752.06*120 The 1947 loss was due partially to the extremely wet spring weather which prevented the planting of corn until late in the year and from the failure of the previous tenant to put in sufficient feed crops in 1946 to take care of the livestock in 1947. This increased the feed bill in 1947 to $3,267.63, whereas in prior years it had not exceeded $1,100. Petitioners have also been forced to pay high wages because of the high labor cost in the Akron-Cleveland industrial area. The price of milk has been low in this area as compared with other sections because of a price-cutting milk dealer located in Akron. These factors caused petitioners in 1952 to dispose of the dairy herd and to begin raising beef cattle. During the taxable year 1947 petitioners spent $1,669.54 to coat the roofs of all buildings on the farm with liquid asbestos. The roof coating was guaranteed by the manufacturer for 10 years. Petitioners also paid $5,211.65 for farm labor in 1947. Of this amount, $1,000 was a capital expenditure. Petitioners operated the farm as a business in the pursuit of profit during the taxable year 1947. Opinion The only question*121 for decision is whether petitioner carried on a farm operation for the purpose of making a profit. Regulations 111, Section 29.23(e)-5, 1 governs the deduction of farm losses. Ultimate decision rests upon the intent of the taxpayer, which intent must be determined from the particular facts of each case. Norton L. Smith, 9 T.C. 1150">9 T.C. 1150. Respondent contends that petitioner had no intent to operate the farm as a business enterprise for the purpose of making a profit during the taxable year 1947. In support of this contention respondent relies upon the following conclusions which he argues must be accepted as proven fact: (1) Petitioner's primary and major interest was that of a cotton broker, (2) all*122 efforts were directed to building up the soil and developing a country estate rather than increasing dairy production, (3) that the operation of the farm resulted in continuous losses, and (4) the farm was used to furnish farm products for petitioner and his tenant. The record supports respondent's contention that petitioners have suffered continual losses on the farm from the time it was purchased in 1937 through 1951, but that fact alone is not determinative of the issue. If it be shown that petitioners' purpose in owning and operating their farm was to realize an eventual profit therefrom their losses are deductible. Norton L. Smith, supra; Israel O. Blake, 38 B.T.A. 1457">38 B.T.A. 1457; Hamilton F. Kean, 10 B.T.A. 97">10 B.T.A. 97. The petitioners have endeavored to make the farm a profitable enterprise by spending yearly sums for lime and fertilizer to reclaim the soil, by consulting the county agent and the agronomist to determine the best use to make of the land, by changing from share farming to a farm manager when they realized the share farmer could or would not carry out their plans for improvement, by purchasing new land to increase pasturage and crop production*123 which would cut down the amount of feed needed to be purchased for the dairy herd, and by changing to other types of farming, i.e., poultry and beef cattle, when it became apparent that dairy farming was not going to be profitable. A consideration of the record convinces us that petitioners' intention at all times has been to operate the farm at a profit. We can not agree with respondent that petitioners' plan was to build a country estate. It was necessary for petitioners to reclaim the soil with lime and fertilizer in order to produce feed for cattle. The record does not disclose any expenditures by the petitioners to erect an expensive home or beautify the farm. While it is true petitioner enjoyed working on the farm, this does not negate an intent to operate the farm for profit. As stated in Wilson v. Eisner, 282 Fed. 38: "Success in business is largely obtained by pleasurable interest therein." The fact that petitioner had another occupation is of no significance, as Regulations 111, Section 29.23(e)-5, contemplates that a farm may be operated as an additional business of the taxpayer. In regard to respondent's contention that the farm was used to furnish food*124 for petitioners and the farmer, the record indicates that the amount of food obtained from the farm by the petitioners was very small and the cost of raising such food was more than offset by the labor petitioners brought to the farm and paid for out of pocket, but which was never deducted from their tax return. The food used by the tenant was mostly from a garden cultivated by him for his own use and was not part of the major production of the farm. Norton L. Smith, supra. Respondent contends in the alternative that if we find the farm was operated as a business, then some of the expense items are not ordinary and necessary expenses of operation of the farm but were capital in nature or were personal expenses. In this connection, respondent states that the cost of feeding the horse and the payment of utility bills on the farm were personal expenses. We can not agree. The record discloses no use to which the horse was put other than farm use. The feed costs for the horse are clearly deductible as a necessary business expense. The utilities furnished the tenant farmer were part of the cost of having him on the farm and accordingly were a necessary expense. Respondent*125 further contends that the amount expended for covering the leaks in the roof should be capitalized. New roofs had been put on the farm buildings when petitioners purchased the farm in 1937. They began to leak because of expansion and contraction caused by the weather. The application of the liquid asbestos roofing did not prolong the life of the roofs but simply maintained the roofs in an ordinarily efficient condition. This was a maintenance cost and is deductible as an ordinary and necessary business expense. See Pierce Estates, Inc., 16 T.C. 1020">16 T.C. 1020; reversed on another issue, 195 Fed. (2d) 475. Lastly, respondent contends that part of the labor cost for 1947 was expended for erecting fences, planting trees, laying tile and clearing fields, and should be capitalized as was the cost of the materials. The record does not disclose that any fences were erected in 1947, and we assume that the cost of the drain tile, which was stipulated, included the labor to install it. However, the planting of trees to prevent soil erosion and the clearing of fields were capital expenditures. See Thompson & Folger Co., 17 T.C. 722">17 T.C. 722. We have, therefore, found as*126 a fact that $1,000 of the labor cost for 1947 represented capital expenditures. Cohan v. Commissioner, 39 Fed. (2d) 540. Decision will be entered under Rule 50. Footnotes*. 1938 and 1939 farm operated on share-crop basis.↩1. Sec. 29.23(e)-5. Losses of Farmers. - Losses incurred in the operation of farms as business enterprises are deductible from gross income. * * * If an individual owns and operates a farm, in addition to being engaged in another trade, business, or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure. * * *↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624425/

TRACY M. STRIGHT AND EILEEN G. STRIGHT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStright v. CommissionerDocket No. 14144-91United States Tax CourtT.C. Memo 1993-576; 1993 Tax Ct. Memo LEXIS 587; 66 T.C.M. (CCH) 1490; December 7, 1993, Filed *587 Decision will be entered for respondent. P, an airline pilot, was employed by a U.S. corporation, but lived in the United Kingdom for the years in issue. P elected to exclude a portion of his income pursuant to sec. 911, I.R.C.Held: P was not qualified to elect under sec. 911, I.R.C., because he did not have a tax home in a foreign country for the years in issue. For petitioner: David J. Cartano. For respondent: Linette B. Angelastro. NIMSNIMSMEMORANDUM OPINION NIMS, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: YearDeficiency1987$ 12,929.06198811,213.27Unless 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. The issues for decision are: (1) Whether petitioner Tracy Stright (petitioner) had a foreign tax home. (2) Whether petitioner was a bona fide resident of a foreign country. (3) Whether petitioner had foreign earned income. All of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this *588 reference. Petitioners filed joint Federal income tax returns for the years in question and resided in Phoenix, Arizona, at the time they filed their petition. Petitioner was employed by Trans World Airlines (TWA), a U.S. corporation, as an airline pilot during 1987 and 1988. Throughout 1987 and 1988, he was based at John F. Kennedy International Airport in New York, New York. Petitioner and his wife, petitioner Eileen Stright (Mrs. Stright), were married in 1985 and remained married throughout 1987 and 1988. According to TWA's records, petitioners maintained a residence at 10 Upper Addison Road, London, England, from August 1, 1985, through January 17, 1989. Petitioner stayed there when he was physically present in the United Kingdom during 1987 and 1988. While present in the United States or other countries in the performance of his job duties during 1987 and 1988, petitioner stayed in hotels or motels. Petitioner is a U.S. citizen, and Mrs. Stright is a citizen of the United Kingdom. Petitioner owned real property located at 20246 Midland Drive, Sonora, California, during 1987 and until December 12, 1988, when such property was sold. Petitioner owned this property with*589 his ex-wife Georgiana Stright. This property was occupied by Georgiana Stright, and petitioner did not live or stay at this address. On December 30, 1988, petitioners purchased real property located at 4642 E. Karen Drive, Phoenix, Arizona. During 1987 and 1988, petitioner had an interest in the Stright-McConnell Partnership, which invested in United States real property. During 1987 and 1988, petitioner maintained U.S. bank accounts. One account was located at the Arizona Bank; two accounts were located at the Security Pacific National Bank. Petitioner also maintained an account at the TWA Credit Union in Kansas City, Missouri. Petitioner deposited his pay from TWA into his U.S. bank accounts. Petitioner maintained only credit cards issued by U.S. banks and/or corporations during 1987 and 1988. Petitioners elected to exclude part of their income pursuant to section 911 on both of their 1987 and 1988 Federal income tax returns. Section 911(a) provides: (a) Exclusion From Gross Income. -- At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation*590 under this subtitle, for any taxable year -- (1) the foreign earned income of such individual, and (2) the housing cost amount of such individual.Section 911(b) provides in pertinent part: (1) Definition. -- For purposes of this section -- (A) In General. -- The term "foreign earned income" with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.Section 911(d) provides in pertinent part: (1) Qualified Individual. -- The term "qualified individual" means an individual whose tax home is in a foreign country and who is -- (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or (B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least*591 330 full days in such period.* * * (3) Tax Home. -- The term "tax home" means, with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.Thus, to be qualified for the section 911 foreign earned income exclusion, a taxpayer must meet three criteria: 1) he must have a tax home in a foreign country; 2) he must either be (a) a U.S. citizen who, in accordance with criteria spelled out in section 911(d)(1)(A), is a bona fide resident of a foreign country, or (b) a citizen or resident of the United States who is present in a foreign country for 330 days during 12 consecutive months; and 3) he must have foreign earned income. We first address the issue of whether petitioner had a "tax home" in the United Kingdom, a "foreign country", in 1987 and 1988, because if not, petitioner cannot prevail regardless of whether he was a "bona fide" resident of the United Kingdom in those years. The burden is on petitioners to establish that petitioner's tax home was *592 in a foreign country for the years in question. Rule 142(a). The term "tax home" is statutorily defined as an "individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States." Sec. 911(d)(3). "Tax home" for purposes of section 911 is considered to be located at an individual's regular or principal (if more than one regular) place of business, but an individual is not considered to have a tax home in a foreign country for any period for which his abode is in the United States. Sec. 1.911-2(b), Income Tax Regs.; see Harrington v. Commissioner, 93 T.C. 297">93 T.C. 297, 303 (1989) ("Section 911(d)(3) defines the term 'tax home' as the taxpayer's home for purposes of section 162(a)(2)"). The United States Court of Appeals for the Ninth Circuit (the court to which an appeal of this case would normally lie) has held that "a taxpayer's 'home,' for purposes of I.R.C. section 162(a)(2), is the taxpayer's abode at his or her principal place of employment." Folkman v. United States, 615 F.2d 493">615 F.2d 493, 495 (9th Cir. 1980)*593 (citing Coombs v. Commissioner, 608 F.2d 1269">608 F.2d 1269, 1273-1276 (9th Cir. 1979), affg. in part and revg. (on a different issue) in part 67 T.C. 426">67 T.C. 426 (1976)); see also, Lagrone v. Commissioner, T.C. Memo. 1988-451, affd. without published opinion 876 F.2d 893">876 F.2d 893 (5th Cir. 1989). Thus a taxpayer's home, for purposes of section 162(a)(2), focuses on two elements: 1) an abode; and 2) a principal place of employment. We take up the issue of a taxpayer's principal place of employment first. The Court of Appeals for the Ninth Circuit has addressed this issue in Folkman v. United States, supra, which involved two taxpayers, both of whom were airline pilots for Pan American Airlines. One of the taxpayers had his airline duty base in New York, New York, and the other taxpayer had his airline duty base in San Francisco, California. When the taxpayers were at their duty bases, they stayed at motels. Both taxpayers were also members of the Nevada Air National Guard (Guard) in Reno, Nevada, and received wages from the Guard. Each taxpayer and his family *594 lived in Reno and claimed Reno as his tax home. To determine whether Reno or the respective airline duty bases were the taxpayers' tax homes, the court applied the three factors set out in Markey v. Commissioner, 490 F.2d 1249 (6th Cir. 1974), revg. T.C. Memo 1972-154">T.C. Memo 1972-154. Folkman v. United States, 615 F.2d at 495. These factors are: 1) The length of time that the taxpayer spent in each of the two locations; 2) the degree of the taxpayer's business activity in each place; and 3) the relative proportion of the taxpayer's income derived from each place. Markey v. Commissioner, supra at 1252. The Court of Appeals in Folkman concluded that the airline duty bases were the taxpayers' tax homes because although the taxpayers spent a majority of their time in Reno, both taxpayers devoted significantly more working time to Pan American base-related activities than to their Guard duties. Folkman v. United States, supra at 496. While Folkman focused on which of two places of employment constituted the taxpayers' principal place of employment, *595 the instant case involves a taxpayer who had only one employer. The very nature of a pilot's employment requires him to fly into and out of different airports. Thus our inquiry becomes whether an airline pilot can be said to have more than one principal place of employment because he flies into and out of more than one airport during the course of his employment. The Court of Appeals considered this proposition in Folkman: The taxpayers argue that we should not consider time spent on Pan American flights away from their duty posts or income attributable to that time because, in applying the Markey criteria, only employment activity at the duty posts is relevant. Adoption of this restrictive concept of "tax home" would create virtually insurmountable practical and administrative difficulties in identifying the section 162(a)(2) "homes" of taxpayers who travel on the job. This we decline to do. * * * [Id. at 496 n.12.]We hold that all of petitioner's employment activities related to his airline duty base will be attributed to that duty base. Petitioner had only one source of employment and only one duty base during 1987 and 1988. *596 Petitioner was employed by TWA and his duty base was John F. Kennedy International Airport in New York, New York. Therefore, petitioner's principal place of employment in 1987 and 1988 was New York, New York. See Jones v. Commissioner, 927 F.2d 849">927 F.2d 849, 855-857 (5th Cir. 1991), revg. on a different issue T.C. Memo 1989-616">T.C. Memo. 1989-616. We turn next to the definition of abode. We find Coombs v. Commissioner, 608 F.2d at 1275-1276, to be enlightening: as between various possible "abodes," the abode or at least the locale of the abode which is located in the vicinity of the taxpayer's principal place of business or employment, or as close thereto as possible, will be considered the taxpayer's tax home for purposes of * * * section 162(a)(2). In addition, when a taxpayer accepts employment either permanently or for an indefinite time away from the place of his usual abode, the taxpayer's tax home will shift to the new location -- the vicinity of the taxpayer's new principal place of business. In such circumstances, the decision to retain a former residence is a personal choice, and the expenses of traveling*597 to and from that residence are non-deductible personal expenses. [Fn. ref.; citations omitted.]We interpret this passage to mean that a taxpayer may have more than one abode and that his tax home shifts in accordance with his principal place of employment, even though he may choose to maintain other abodes. Petitioner's work necessitated his staying in motels and hotels while working. These motels and hotels became petitioner's abodes in addition to his usual abode at 10 Upper Addison Gardens, London. However, it was his abode at New York, New York, his principal place of business, that was petitioner's tax home in 1987 and 1988. Petitioner did not have a tax home in a foreign country in 1987 and 1988; thus he was not a qualified individual who may elect section 911 for those years. Because petitioner lacks one of the criteria necessary to elect section 911, we need not address the remaining criteria. Decision will be entered for respondent.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624426/

Joseph Martuscello and Mary Martuscello v. Commissioner.Martuscello v. CommissionerDocket No. 3759-63.United States Tax CourtT.C. Memo 1965-10; 1965 Tax Ct. Memo LEXIS 318; 24 T.C.M. (CCH) 47; T.C.M. (RIA) 65010; January 27, 1965Andrew M. Pinckney, for the petitioners. James Q. Smith, for the respondent. HOYTMemorandum Opinion HOYT, Judge: Respondent determined income tax deficiencies against petitioner Joseph Martuscello and, also, additions to tax under sections 291(a), 293(b), 294(d)(1)(A), and 294(d)(2) of the Internal Revenue Code of 1939, and sections 6653(b) and 6654 of the Internal Revenue Code of 1954, for the calendar years and in the amounts, as follows: ADDITIONS TO TAXFailureto filereturnFraudDefi-Sec.Sec.Yearciency291(a)293(b)1944$ 7,945.27$ 3,972.6419454,674.702,337.3519464,617.462,308.7319471,724.45862.2319482,464.081,232.0419492,270.871,135.441951936.29468.151952864.82$216.21432.4119536,094.023,047.01195411,509.5019556,234.3619566,345.07195719,071.3519588,152.04$82,904.28$216.21$15,796.00*319 ADDITIONS TO TAXFailure toUnder-pay-make andment offile declara-Under-es-esti-tion of esti-timate ofmatedFraudmated taxestimatedtaxSec.Sec. 294tax Sec.Sec.Year6653(b)(d)(1)(A)294(d)(2)665419441945$ 280.481946283.051947103.471948150.301949140.15195161.051952$ 77.831953574.741954$ 5,754.751,086.4719553,117.18$ 8.3719563,172.548.1319579,535.687.3619584,076.029.63$25,656.17$1,739.04$1,018.50$33.49Note: No deficiency was determined for the year 1950, and that year is not before us. Respondent determined an income tax deficiency against petitioners Joseph Martuscello and Mary Martuscello and, also, additions to tax under sections 6653(b) and 6654 of the Internal Revenue Code of 1954, for the calendar year 1959, as follows: ADDITIONSTO TAXUnder-paymentof Esti-Income TaxFraud Sec.mated TaxYearDeficiency6653(b)Sec. 66541959$15,486.99$7,743.50$13.17Petitioners are individuals*320 with residence at 18 Coolidge Road, Amsterdam, New York. Joseph prepared and filed individual Federal income tax returns for the years 1944 through 1949, for the year 1951, and for the years 1953 through 1958. A joint Federal income tax return was prepared and filed by Joseph for himself and his wife, Mary, for the year 1959. Neither Joseph nor his wife, Mary, filed a Federal income tax return for the year 1952. Respondent issued statutory notices of deficiency for all years indicated on April 30, 1963. Thereafter on July 29, 1963, petitioners mailed their petition to this Court and said petition was filed as of July 31, 1963. The envelope in which the petition was mailed showed the return address as "Andrew M. Pickney, Esquire, 90 State Street, Albany 7, New York" and the petition was notarized by Andrew M. Pinckney under date of July 29, 1963. Respondent thereafter, on September 16, 1963, filed a motion with the Court to require a further and better statement of the allegations of error and fact set forth in the petition which was served on petitioners. At the time of hearing on said motion there was no appearance by or on behalf of the petitioners, nor did petitioners file any*321 response to the motion. 1 The motion was granted and petitioners were allowed until December 13, 1963, to file an amended petition complying with the Court's rules. In the absence of the filing of such amended petition, the petitioners were ordered to show cause at 10:00 a.m., December 18, 1963, why the case should not be dismissed or other appropriate action taken. At the hearing on December 18, 1963, an entry of special appearance was filed, limited to the hearing on the order to show cause only, by Scott G. Rigby. Rigby advised the Court that he entered his appearance at that time merely for the purpose of requesting an extension of three weeks so as to permit the petitioners' attorney in Albany, New York, to file an amended petition. He informed the Court at that hearing that he had received a call and telegram from Pinckney "who will be attorney of record in this matter" asking him to appear and request the 3-week extension. The motion was granted and the return date on the Court Order of November 13, 1963, was extended*322 to January 15, 1964. On January 15, 1964, when the case was again called the petitioners did not appear either in person or through counsel. No amended petition had been filed at that time. Upon motion of respondent in open court the Court ruled that if no amended petition were filed that date, the order of November 13, 1963, would be absolute and the case would be dismissed as to the deficiencies and retained only as to the additions to tax for fraud. On January 17, 1964, the Court received an amended petition in an envelope postmarked January 15, 1964, showing the return address as William F. McDermott, Esquire, 90 State Street, Albany, New York. This amended petition was also notarized by Andrew M. Pinckney under date of January 14, 1964. By order of Court leave was granted for petitioners to file the amended petition that date. Thereafter respondent filed his answer herein on March 18, 1964, which was served on the petitioners on March 20, 1964. In this answer respondent set forth numerous allegations of fact both with respect to the determination of deficiencies and the amounts of the additions to tax and the alleged fraud with respect to all taxable years involved. Among*323 other things, the respondent set forth the reported adjusted gross income for each year except 1952, the reported tax liability for each year except for 1952, the correct adjusted gross income and the correct tax liability. The petitioners thereafter failed to file any reply to the respondent's answer as required by Rule 15 of this Court's Rules of Practice and no entry of appearance by any lawyer or other representative was made on petitioners' behalf. On May 26, 1964, respondent filed a motion, under Rule 18, for an order that affirmative allegations of fact in his answer be deemed admitted. Upon due notice, service of which was made on petitioners, this motion was set for hearing on June 24, 1964, at which time there was no appearance by or on behalf of petitioners. On June 24, 1964, we entered an order granting respondent's motion and stating that "the undenied affirmative allegations in respondent's answer are deemed admitted." This order was served on petitioners. On August 31, 1964, the case was set for trial, notice thereof being issued and served that date upon petitioners. This notice advised petitioners that their case was set for trial on December 7, 1964, at New*324 York, New York. On December 7, 1964, the case was called from the trial calendar at New York City, pursuant to the aforementioned notice. At that time there was no appearance by or on behalf of petitioners and there was not evidence or argument presented. However, by telegram dated December 6, 1964, from Andrew M. Pinckney at Albany, New York, addressed to the Court at New York, and received by the Court and filed herein on December 7, 1964, the Court was informed that McDermott, attorney for the petitioners, had died and that Andrew M. Pinckney "is substituted as attorney of record." McDermott had never entered his appearance herein and was not attorney of record at any time in this case. In this telegram request was made for an "adjournment" of this case because the attorney seeking substitution was at that time actively engaged in another case. By order of Court at that time, trial was continued to afford the petitioners an opportunity to appear and thereafter on December 15, 1964, the case was again called at the New York trial session of this Court, which had begun on December 7, 1964. The petitioners did not appear at that time but Andrew M. Pinckney appeared on their behalf. *325 He requested a delay of a few days in which to discuss the matter with his clients after having stated in open court that he was not in a position to advise that the petitioners would be able to prosecute this action nor to state that there is a triable issue of fact here. In response to an inquiry by the Court he stated that he was unable to say that anything would be gained by the requested slight delay. The Court denied the petitioners' counsel's oral motion for additional time within which to consult with his clients. No evidence or further argument was presented on petitioners' behalf. Respondent moved that as to the deficiencies in income taxes the case be dismissed for want of prosecution and for judgment on the pleadings with respect to the additions to the tax for fraud, because of the affirmative allegations in the respondent's answer, deemed admitted by order of the Court previously entered. The facts taken as admitted under the Court's order of June 24, 1964, establish the omission from income tax returns and the failure to report for 1952, substantial amounts of income received in each of the years involved herein. We hereby incorporate all of such facts herein by*326 this reference and adopt them as our findings of fact. With respect to the asserted deficiencies in income tax and additions to tax under sections 291(a), 294(d)(1)(A), 294(d)(2) of the 1939 Code, and section 6654 of the 1954 Code, for the respective taxable years, and upon respondent's motion made at the trial on December 15, 1964, the case will be dismissed for lack of prosecution. The burden of proof with respect to these deficiencies and additions was on petitioners and they have failed to meet this burden Accordingly, decision will be entered for respondent that there are deficiencies in income tax and said additions to tax in the amounts and for the years as set forth in the deficiency notice. With respect to the asserted additions to tax for fraud under sections 293(b) of the 1939 Code, and section 6653(b) of the 1954 Code, as to which the burden of proof rests upon respondent, the facts taken as admitted and included herein by reference, present undisputed, clear, and convincing evidence of fraud. Some part of the deficiency or underpayment of tax for each of the years involved, is due to fraud with intent to evade tax. Accordingly, we find that respondent has met his burden*327 of proof of fraud for each of the years involved herein, and decision will be entered for him for the said additions to tax for fraud in the amounts and for the years as set forth in the deficiency notice. See Louis Morris, 30 T.C. 928">30 T.C. 928 (1958). Decision will be entered in accordance with the foregoing opinion. Footnotes1. First hearing on this motion was held October 30, 1963, but the matter was continued to November 13, 1963, at which time we ruled in favor of respondent.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624427/

HOWES BROTHERS HIDE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HOWES BROTHERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Howes Bros. Hide Co. v. CommissionerDocket Nos. 25483, 28972.United States Board of Tax Appeals17 B.T.A. 129; 1929 BTA LEXIS 2350; August 22, 1929, Promulgated *2350 Affiliation denied. Robert A. Littleton, Esq., and James A. Councilor, C.P.A., for the petitioners. E. C. Lake, Esq., for the respondent. MORRIS*130 These proceedings were consolidated for hearing and decision since the question presented in each case is whether the petitioners, together with the Huntington Shoe & Leather Co., should be considered an affiliated group for the calendar years 1918 and 1920. The respondent denied that the companies were entitled to affiliation and determined a deficiency against the petitioner, Howes Brothers Hide Co., for 1918 in the amount of $3,978.23. Against the petitioner, Howes Brothers Co., respondent determined a deficiency for 1920 in the amount of $25,035.72. FINDINGS OF FACT. The petitioner, Howes Brothers Co., sometimes hereinafter referred to as the Company, was incorporated under the laws of the State of Massachusetts, and has its principal office and place of business at 321 Summer Street, Boston, Mass. The petitioner, Howes Brothers Hide Co., hereinafter referred to as the Hide Co., was incorporated in 1917 under the laws of the State of Maine, but its principal place of business*2351 is 321 Summer Street, Boston. The Huntington Shoe & Leather Co. was incorporated under the laws of the State of Indiana and its principal office and place of business is in Huntington, Ind.The petitioners herein occupy the same office space and have the same employees. The company buys raw hides in domestic and foreign markets and ships them to tanneries where they are manufactured into leather. The leather is then shipped to the Company's warehouses at St. Louis or Boston. Upon sale of the leather by the Company it is shipped to the customer, the sale being made by the Company for the account of the tannery. The Company derives its profits primarily from the commissions which it receives for selling the leather, and from interest charged upon the total cost of the hides from their purchase until their sale as leather. If the completed transaction shows a loss the Company collects the deficit from the tannery, but if there is a balance after deducting the cost, commissions and interest from the sale price of the leather such balance is paid over to the tannery. The Company's authorized capital stock was $3,000,000, par value $100 per share. The stock was divided into*2352 first preferred series A, $600,000, first preferred series B, $900,000, second preferred $350,000, and common, $1,150,000. The stock was owned during 1918 and 1920 as follows: 1918First preferredStockholderCommonSeries ASeries BSecond preferredErnest G. Howes1,9201,355F. L. Howes1,9201,355H. S. Howes8875370S. C. Howes88632370G. C. Howes88750Howes Brothers Hide CoSundry small stockholders5,7744,189Total6,5005,8114,1893,5001920First preferredStockholderCommonSeries ASeries BSecond preferredErnest G. Howes1,9201,355F. L. Howes1,9201,355H. S. Howes8875370S. C. Howes88632370G. C. Howes88750Howes Brothers Hide Co5,000Sundry small stockholders5,7749,189Total11,5005,8119,1893,500*131 The first preferred stock was sold by the Company to secure additional capital for its business, which required a large amount of available cash. The first preferred series A stock paid 7 per cent cumulative dividends, and the 5,811 shares outstanding*2353 were principally held by stockholders owning 50 or more shares. The first preferred series B stock paid 6 per cent cumulative dividends and about 75 per cent of the stock was held by stockholders owning less than 50 shares. The first preferred shareholders almost without exception were absent from stockholders' meetings, and as a number of them were relatives, friends or business associates of the five Howes brothers, or were employees of the Company, the preferred stock that was voted at stockholders' meetings was by proxies given two of the Howes brothers. The first preferred stock carried with it certain limitations and preferences such as the right of the Company at any time to redeem the stock upon written notice of not less than 90 days at $11o per share plus accumulative dividends and interest at 7 per cent per year from the last date for payment of a dividend to the date of redemption. No mortgage could be created by the Company unless authorized by a vote of 75 per cent of all first preferred shares then outstanding. No dividends could be paid on second preferred or common stock which would reduce the Company's quick assets to less than 150 per cent of the par value*2354 of all first preferred stock outstanding. Neither the first nor second preferred stockholders were entitled to share in any issue of additional stock or increase of capital, and it was expressly provided on the back of each share of first preferred stock that, "If the dividend for any quarter is not paid in full on all the first preferred stock at the time outstanding and such default continues for a period of eighteen (18) months, the holders of first preferred stock shall thereafter, as long as any default in the payment of dividends thereon continues, be entitled to exclusive voting power." *132 The directors of the Howes Brothers Co. were the five Howes brothers and John B. Fallon. The Hide Co. was primarily a holding company which the five Howes brothers had organized to hold stock that they owned individually in various tanneries, chemical enterprises, and a shoe company. The Hide Co. financed the tanneries and companies in which it held stock, and in addition purchased hides through the Company. The Hide Co. had only one class of stock - common, and it was held during 1918 and 1920 as follows: E. G. Howes5,669F. L. Howes5,670S. C.Howes2,619H. S. Howes2,618G. C. Howes2,619Total19,195*2355 The Huntington Shoe & Leather Co. had three classes of stock - first preferred, second preferred, and common, but from and after April 22, 1918, only the latter had voting rights. During 1918 and 1920 the common stock was held as follows: Stockholder19181920Eldora W. Howes7575George C. Howes105105Henry S. Howes10E. P. Melson250125C. A. Sawyer, jr680680H. M. Webster125Edna M. Webster4040Clarence A. Howell2525Helen B. Howes10Other stockholders15151,2001,200The above stockholders bore the following relationship to the five Howes brothers: Eldora Howes, wife of George C. Howes; George C. and Henry Howes, two of the five Howes brothers; E. P. Melson, father of Edna Webster; C. A. Sawyer, jr., nephew of Ernest G. Howes; H. M. Webster, brother-in-law of George C. Howes; Edna Webster, wife of H. M. Webster; Clarence A. Howell, employee of Howes Brothers Co. The 680 shares of stock standing in the name of C. A. Sawyer, Jr., were purchased with funds advanced by the Hide Co., the advance being made either to Sawyer, G. C. Howes, or both. Eldora Howes held 40 shares of first preferred, series A, in*2356 Howes Brothers Co., and Clarence A. Howell owned 100 shares of the same stock, while C. A. Sawyer, Jr., owned 50 shares of the Howes Brothers Co.'s first preferred, series B, stock. Since its organization the Huntington Shoe & Leather Co. has been financed by the petitioners. At the close of 1918 the Huntington Co. owed Howes Brothers Co. approximately $325,000 for leather purchased. At the close of 1920 the Huntington Co. had received advances from Howes Brothers Co. of $375,000 and from the Hide *133 Co. of $150,000, in addition to approximately $325,000 of leather from Howes Brothers Co. None of this indebtedness had been liquidated by the Huntington Co. up to 1920, and only about $100,000 since then. The balance sheets attached to a revenue agent's report of the three companies show a surplus or deficit for each company at the end of the year as follows: CompanyDec. 31, 1917Dec. 31, 1918Dec. 31, 1919Dec. 31, 1920Howes Brothers Co.surplus$957,680.09$1,045,399.29$1,281,529.08$1,413,099.67Howes Brothers HideCo. surplus196,620.95359,618.34540,576.44498,250.46Huntington Shoe & Leather Co. deficit-813.60-192,385.80-195,809.61-341,591.86*2357 The balance sheets also show that the assets of the Howes Brothers Co. consisted almost entirely of cash, accounts receivable and Liberty bonds. The Howes Brothers Co. has never passed a dividend on its first preferred stock. For 1918 and 1920 the three companies filed consolidated returns. The respondent denied them affiliation in each of the years, determining a deficiency of $3,978.23 against the Hide Co. for 1918, and a deficiency of $25,035.72 against Howes Brothers Co. for 1920. OPINION. MORRIS: These proceedings raise the question of the petitioners' right to affiliation with each other and with the Huntington Shoe & Leather Co. for the calendar years 1918 and 1920. Affiliation of two or more corporations is provided for by section 240(b) of the Revenue Act of 1918, which states that corporations shall be deemed affiliated "(1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests." The petitioners contend that since the Howes Brothers Co. had*2358 the right to redeem its first preferred stock at any time, that the five Howes brothers, who owned all the common stock and all the second preferred, owned and controlled substantially all the stock of Howes Brothers Co.; and that the Howes brothers, together with members of their families and relatives, owned or controlled 1,035 shares out of 1,200 shares of the common stock of the Huntington Shoe & Leather Co. We are unable to agree with the petitioners' first contention, as it is our opinion that the same interests did not own or control substantially *134 all the stock of Howes Brothers Co. All of the capital stock of this company exercised voting rights, and the outstanding first preferred was equal to the total outstanding second preferred and common stock It is true that at all times the five Howes brothers owned and controlled 50 per cent of the voting stock, but the evidence fails to show that they ever had a beneficial interest in any substantial amount of first preferred stock. It must be admitted that the Howes brothers dominated the company, directed its policies, and managed its business, but the test of the statute makes no mention of these factors in*2359 laying down the rule governing affiliation. The statute provides that substantially all the stock must be owned or controlled by the same interests, and "substantially all" can not be construed to mean a bare majority. Counsel would have us hold that, since the common stockholders had it within their power to call the first preferred for redemption at any time, they effectually controlled this class of stock within the meaning of section 240(b) of the 1918 Act. It is undoubtedly true that the first preferred stockholders held their stock subject to call after proper notice, but it is just as true that this power was never exercised, and that the first preferred stockholders exercised their voting rights at every stockholders' meeting. The power or ability to control is not the control required by the statute, and it can not be said from the evidence before us that the first preferred stockholders were lacking in any of the elements of ownership of their stock. The fact that as a general rule the first preferred stockholders elected to vote by proxies is proof in and of itself that the Howes brothers did not have the control over the first preferred stock required by the statute. *2360 It should be further noted that the first preferred stockholders had the exclusive voting power in case of default in payment of dividends on their stock for a period of 18 months. With respect to the Huntington Shoe & Leather Co., it appears that only two of the Howes brothers owned shares of its common stock, and an effort was made to show that 630 of the shares held by C. A. Sawyer, Jr., a nephew of the Howes brothers, were held by him as trustee for the Hide Co. and George C. Howes. Even if it be conceded that these 630 shares were owned or controlled by the same interests, it is our opinion that this fact would be insufficient to justify us in overruling the determination of the respondent. In view of the language used in numerous opinions of the Board and the courts, it is patent that, while friends, relatives, and business associates may concur in and work harmoniously with the management of the corporation, nevertheless, this control is not the control required by the statute, which refers to stock control. ; *2361 . *135 In deciding these proceedings we have considered the cases cited by counsel and especially our opinion in . In that case the minority stockholders represented less than 25 per cent in one company, and less than 30 per cent in the other company, of the voting stock, while in these proceedings the minority stockholders of the Howes Brothers Co. constitute something less than 50 per cent of the voting stock. In our opinion these proceedings are governed by the principles laid down in the Hirsch case, supra, and in , and, accordingly, we approve the determination of the respondent. Judgment will be entered for the respondent.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624428/

Anthony J. Cincotta and Terese M. Cincotta v. Commissioner.Cincotta v. CommissionerDocket No. 74223.United States Tax CourtT.C. Memo 1960-45; 1960 Tax Ct. Memo LEXIS 243; 19 T.C.M. (CCH) 222; T.C.M. (RIA) 60045; March 22, 1960*243 Held, Tax Court lacks jurisdiction to go behind respondent's determination of income tax deficiency. Decision for respondent in the amount of deficiency stipulated. William P. Christy, Jr., Esq., Syracuse-Kemper Building, Syracuse, N. Y., for the petitioners. John J. Madden, Esq., for the respondent. BRUCE Memorandum Opinion BRUCE, Judge: The respondent determined a deficiency in income*244 tax of the petitioners for the taxable year 1954 in the amount of $12,993.38. The petitioners filed their petition in this Court alleging as follows: (a) The respondent erred in that he failed to determine a tax deficiency within the meaning and intent of sections 6211 and 6212 of the Internal Revenue Code of 1954; (b) The respondent erred in failing to determine that the assessment and collection of income tax for the year 1954 is barred by the statute of limitations; (c) The respondent erred in disallowing all the business and nonbusiness deductions of the petitioners in the amount of $30,713.45 for the year 1954; and (d) The respondent erred in computing the alleged deficiency for the year 1954 by failing to credit petitioners with the correct amount of net income reported in their 1954 tax return. The respondent answered, specifically denying these allegations. On March 20, 1959, the petitioners filed a motion to dismiss the petition on ground of lack of jurisdiction, alleging in support thereof that the statutory notice of deficiency was not based upon a determination of a deficiency, which is a prerequisite for the issuance of said notice of deficiency, *245 within the meaning and intent of section 6212 of the Internal Revenue Code of 1954, and further, that the notice of deficiency was issued for the sole purpose of extending the period within which additional taxes could be assessed against the petitioners. On April 1, 1959, the respondent, with leave of Court, filed an amendment to his answer alleging that petitioners received additional income in the amount of $1,280.86 in the taxable year 1954 which they did not disclose in their return for that year. These allegations were not denied by petitioners and are therefore deemed to be admitted. Rule 18, Rules of Practice, Tax Court of the United States. At the call of the case for trial on the merits and hearing on the motion to dismiss on April 13, 1959, the parties filed a written stipulation in which it was agreed that "there is a deficiency in income tax due from petitioners for the taxable year 1954 in the amount of $1,695.36." It was further agreed that: "Said stipulation is without prejudice to the petitioners' right which is hereby expressly reserved, to maintain that respondent's notice of deficiency was improperly issued as alleged in petitioners' *246 motion to dismiss the petition which was filed with the Court on March 20, 1959, and which motion is set for hearing in Buffalo, New York, on April 13, 1959. In the event that the Court should deny said motion of petitioners then the Court may enter its decision in accordance with the said stipulation of deficiency." The case was thereupon taken under submission by the Court on the motion and stipulation with leave to the parties to file briefs. The single issue for decision is whether petitioners' motion to dismiss is well taken. The stipulation of the parties set forth above is adopted as findings. The petitioners presented no evidence at the hearing. The following facts were alleged by petitioners and admitted by respondent in the pleadings. The petitioners are individuals residing at West River Road, Fulton, New York. The return for the year here involved was timely filed with the district director of internal revenue for the twenty-first district of New York at Syracuse, New York. On February 26, 1958, the respondent sent petitioners a letter requesting them to execute Form 872 enclosed therewith extending the statute of limitations as to the taxable year involved. This*247 request was refused by petitioners. The notice of deficiency was mailed to petitioners on April 4, 1958. The deficiency determined therein resulted from the disallowance by respondent of all of the petitioners' business and nonbusiness deductions in the amount of $30,713.45. The petitioners contend that this Court lacks jurisdiction because the statutory notice was not issued in conformity with the statute and therefore is invalid. Section 6212(a) of the Internal Revenue Code of 1954, on which petitioners rely, reads as follows: "If the Secretary or his delegate determines that there is a deficiency in respect of any tax imposed by subtitles A or B, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." The quoted statute requires that the respondent determine that a deficiency exists prior to the sending of a notice of deficiency. The filing of a petition with this Court within 90 or 150 days, as the case may be, after the mailing of the notice of deficiency, confers jurisdiction upon this Court to consider and determine the correctness of respondent's determination. Sections 6213(a) and 6214(a), Internal Revenue Code*248 of 1954. An examination of the notice of deficiency attached to the petition herein reveals that the respondent did indeed determine that there was a deficiency in respect to a tax imposed by subtitle A in the case of petitioners. He thereupon mailed to petitioners the notice of deficiency. The petitioners filed their petition in this Court within the prescribed time. These events having occured, we have jurisdiction to consider and determine the correctness of such determination. Petitioners would have us go behind the respondent's determination and inquire into what prompted him to determine the deficiency. This we may not do. In the case of Charles Crowther, 28 T.C. 1293">28 T.C. 1293, affirmed as to this point, 269 F.2d 292">269 F.2d 292 (C.A. 9, 1959), we said: "In their petitions the petitioners have assigned certain errors and made certain allegations of fact, all of which the respondent has denied in his answer, and on brief have advanced certain contentions challenging the propriety of the administrative policy and procedures employed by respondent prior to his determination of the deficiencies here involved and challenging the propriety of his motives in making such determinations. *249 We have jurisdiction to consider and determine, and have considered and determined in the light of the evidence of record, the correctness of the respondent's determinations of the deficiencies here involved. But we are without jurisdiction to consider and determine the propriety of the respondent's motives in making such determinations, H. F. Kerr, 5 B.T.A. 1073">5 B.T.A. 1073, or the propriety of the administrative policy and procedures he employed prior to making such determinations, Clois L. Greene, 2 B.T.A. 148">2 B.T.A. 148; Southern California Loan Association, 4 B.T.A. 223">4 B.T.A. 223; Levine Brothers Co., Inc., 5 B.T.A. 689">5 B.T.A. 689." We consider this case, and the cases cited therein, dispositive of the issue presented and the motion is denied. The respondent mailed to petitioners a notice of deficiency within three years of the time of filing of the return for the taxable year 1954 and, accordingly, the case is not barred by limitations. Pursuant to the stipulation, we determine that there is a deficiency in income tax due from the petitioners for the taxable year 1954 in the amount of $1,695.36. Decision will be entered for the respondent in the amount of $1,695.36. *250

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ALLIANCE MILLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Alliance Milling Co. v. CommissionerDocket No. 15649.United States Board of Tax Appeals10 B.T.A. 457; 1928 BTA LEXIS 4109; February 1, 1928, Promulgated *4109 1. Determination of Commissioner denying loss and obsolescence on machinery approved due to lack of evidence. 2. Increase in invested capital determined. G. D. Hunt, Esq., L. B. Smith, C.P.A., and Fred H. Miner, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. MILLIKEN *457 This proceeding results from the determination by respondent of a deficiency in income and excess profits taxes for the year 1919, in the sum of $6,763.10. In the words of the amended petition, two errors are assigned: (1) The respondent erred in failing to allow petitioner a deduction on account of a loss in the sum of $16,107.31 sustained in the year 1919, in ascertaining net taxable income, for that he determined that the salvage value of certain abandoned machinery and plant equipment belonging to the petitioner was the sum of $1,392.69 instead of $17,500, at December 31, 1918; (2) the respondent erred in determining that the invested capital of the petitioner, for the year 1919, was $114,096.48 instead of $129,832.80 for that the respondent asserts that the surplus of the petitioner at December 31, 1918, was $56,000.65 instead of $72,107.96, subject*4110 to adjustment of 1918 income tax. FINDINGS OF FACT. Petitioner is a Texas corporation with principal office and place of business at Denton, Tex., and is engaged in the manufacture and sale of flour and feed products from milling of wheat and other grains and is also engaged in the buying and selling of wheat and other grains. *458 In the year 1916 petitioner installed machinery and equipment in its plant at a cost of $45,000. Soon thereafter, it became apparent that the equipment so installed was inadequate to meet the growing needs of the business. In December, 1916, a contract was made for the purchase of new machinery to take the place of that installed in the year. In March, 1918, petitioner began dismantling the machinery installed in the year 1916, and placing in its stead the new machinery for which it had contracted in December, 1916. By the fall of 1918, all the machinery installed in 1916 had been dismantled and removed from the plant. During the year 1918, part of the machinery removed was sold for $7,000 or $7,200. On December 31, 1918, petitioner had on hand machinery removed during the year which had a salvage value at that date of $17,500. During*4111 the year 1919, petitioner sold a part of the machinery, which it thus had on hand, for the sum of $1,392.69. In years subsequent to 1919, petitioner sold other parts of the machinery, and in August, 1927, had on hand approximately 228 pieces of machinery or equipment resulting from the dismantling of its plant in 1918. Secondhand wheat milling machinery and equipment was difficult to procure during the year 1918, and the price which was received for same was approximately one-half the value of new machinery. The demand and price for secondhand machinery was less in 1919 than in 1918. In computing petitioner's invested capital for the year 1919, respondent allowed as the value of the dismantled machinery on hand at December 31, 1918, the sum of $1,392.69, the amount received from the sale of a part thereof in 1919. OPINION. MILLIKEN: At the hearing, petitioner offered in evidence a report of a revenue agent dated July 22, 1924, for the sole purpose of showing the basis upon which respondent predicated his action in determining the deficiency in controversy. At that time, petitioner was denied the right to introduce said report in evidence, but was permitted to have the*4112 report marked for identification and noted of record. Upon reconsideration, it is our opinion that the report should be admitted in evidence for the sole purpose for which it was sought to be introduced. The only issues presented by the petition are those set out in the opening paragraph. Petitioner, in the brief filed in its behalf, now insists that it is entitled to an allowance for obsolescence in the amount claimed as a loss. *459 The pertinent parts of section 234 of the Revenue Act of 1918 read: SEC. 234(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; * * * (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence; * * * The above subdivisions are mutually exclusive. The deduction which may be taken for losses sustained is an entirely different deduction from that which may be taken for exhaustion, wear and tear and obsolescence. In order to sustain its claim for a loss*4113 on discarded machinery, petitioner must show either that it was disposed of during the taxable year at less than its salvage value when discarded or that during the taxable year it became entirely valueless. It has introduced no evidence on this point. We do not know what was the salvage value of the particular machinery, which was sold. All we know is that the value of all the discarded machinery on hand on December 31, 1918, was $17,500, and that an indefinite part of this aggregate was sold for $1,392.69 in the year 1919. From this data, we are unable to compute petitioner's loss, if any, on this particular sale. Neither was the machinery remaining after the sale valueless. Petitioner also sold in years subsequent to 1919, other parts of such machinery and now has on hand 228 pieces, concerning the value of which we are not informed. It is clearly impossible for us to find that petitioner suffered a loss in 1919 of $16,107.31. This amount represents the whole of the salvage value of the machinery on December 31, 1918, less the exact amount received on sales made in 1919, and includes machinery sold in years subsequent to 1919, and also machinery now on hand. To make any*4114 finding that petitioner sustained a loss in 1919, with respect to this machinery, would be to indulge in pure speculation and this we decline to do. Next, petitioner claims that it is entitled to an allowance for 1919, for further obsolescence, represented by the difference in value of the machinery on December 31, 1918, and the sum received from the sale of a part thereof in 1919. While it seems clear that the discarded machinery became obsolete in 1918, when it was discarded, and that what petitioner asserts was further obsolescence was in fact shrinkage in value, which can not be determined as a loss until the machinery is disposed of, we are not called upon to decide this question for the reason, as above pointed out, we have no sufficient *460 data upon which to find as a fact what was the amount of the further obsolescence, if any. We are clearly of the opinion that petitioner is not entitled, upon the record presented, to any further deduction in the nature of a loss or obsolescence. When we come to the question of petitioner's invested capital for the year 1919, an entirely new issue is presented which in no way involves issues as to losses and obsolescence. *4115 We have found as a fact that the discarded machinery, after taking into consideration an allowance for obsolescence, was worth $17,500 on December 31, 1918. This whole amount should be included in petitioner's invested capital. Since respondent has included in invested capital for 1919, of the above amount, $1,392.69, petitioner is entitled to have his invested capital further adjusted by addition thereto of $16,107.31. Judgment will be entered on 15 days' notice, under Rule 50.

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Winnifred Guminski v. Commissioner. Joe Guminski v. Commissioner.Guminski v. CommissionerDocket Nos. 21409, 21410.United States Tax Court1951 Tax Ct. Memo LEXIS 313; 10 T.C.M. (CCH) 173; T.C.M. (RIA) 51051; February 28, 1951*313 Nash R. Adams, Esq., Republic Bank Bldg., Dallas, Tex., and William P. Fonville, Esq., for the petitioners. D. Louis Bergeron, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: In these consolidated proceedings respondent determined income tax deficiencies for the calendar year 1945 as follows: Winnifred Guminski, $15,097.17, Joe Guminski, $15,067.16. The sole question for determination is whether respondent erred in failing to subtract from gross receipts, as cost of goods sold, the excess over the O.P.A. prices paid by petitioners for meat which they then sold through their wholesale meat business, known as Superior Wholesale Market, of Fort Worth, Texas. Other adjustments by the Commissioner are not contested by petitioners. Findings of Fact Some of the facts were stipulated and are so found. Evidence was also introduced. Petitioners, Joe and Winnifred Guminski, husband and wife, are residents of Fort Worth, Texas, and under the community property laws of Texas each filed a separate income tax return for the calendar year 1945 with the collector of internal revenue for the second district of Texas. Joe Guminski, *314 as head of the marital community, is herein referred to as petitioner. In the year 1945 petitioner was engaged in the wholesale meat business under the name of Superior Wholesale Market of Fort Worth, Texas, and in that year he received from the sale of meat the gross sum of $1,320,070.52. In the purchase of this meat for resale, petitioner paid prices therefor in excess of the ceiling prices then established by the Office of Price Administration. This sum in excess of O.P.A. prices was paid by petitioner in cash to various individuals, and amounted in the aggregate to $35,346.72. Respondent in effect determined that sums paid in "excess of over ceiling prices established by the Office of Price Administration" should be excluded in determining, for income tax purposes, the cost of goods sold, since such payments constitute "black market transactions." Opinion We have here the identical question passed upon adversely to respondent's contention in . We adhere to our holding in that case and accordingly hold that the sum of $35,346.72 paid in excess of O.P.A. ceiling prices by petitioners may be included by them in determining the cost*315 of goods in the computation of their taxable income. Decisions will be entered under Rule 50.

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https://www.courtlistener.com/api/rest/v3/opinions/4624432/

STEPHEN B. SCHNEER AND NANCY K. SCHNEER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSchneer v. CommissionerDocket No. 24864-90United States Tax CourtT.C. Memo 1993-372; 1993 Tax Ct. Memo LEXIS 379; 66 T.C.M. (CCH) 437; August 19, 1993, Filed *379 Decision will be entered for respondent. For petitioners: Richard L. Gold and Robert Sylvor. For respondent: Howard J. Berman. HAMBLENHAMBLENMEMORANDUM OPINION HAMBLEN, Chief Judge: Respondent determined deficiencies in petitioners' Federal income tax for the taxable years 1980, 1981, and 1982 in the amounts of $ 22,743, $ 25,568, and $ 38,443, respectively. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the taxable years at issue, and Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the sole issue for decision is whether respondent is barred by the statute of limitations from determining a deficiency resulting from her adjustment of a net operating loss deduction where the assessment period for the year in which the loss was generated is open by agreement, but the assessment periods for the years to which the loss was carried back have expired. This case was submitted fully stipulated under Rule 122. The stipulation and attached exhibits are incorporated by this reference. Petitioners resided in Croton-On-Hudson, New York, at the time the petition was filed in this case. Petitioners*380 timely filed their 1980, 1981, and 1982 tax returns with the Internal Revenue Service. Petitioners did not execute any consents to extend the time to assess tax with respect to their 1980, 1981, or 1982 income tax liabilities. Petitioners timely filed their 1983 income tax return. On the Schedule C of their 1983 tax return, petitioners claimed a loss in the amount of $ 250,000 relating to an alleged investment in Trend Coal. As a result of the claimed loss from Trend Coal, petitioners reported a net operating loss in the amount of $ 237,605 for the taxable year 1983. Petitioners, on April 18, 1984, filed an application for tentative refund seeking to carry back their claimed 1983 net operating loss to their 1980, 1981, and 1982 taxable years. Subsequently, the Internal Revenue Service allowed petitioners' application for tentative refund. On February 13 and February 18, 1987, petitioners and respondent, respectively, executed a special consent to extend the time to assess tax (Form 872-A) with respect to petitioners' 1983 tax liabilities. The Form 872-A stated, inter alia, that: Coal Operations The amount of any deficiency assessment is to be limited to that resulting *381 from any adjustment to: (a) items affected by the carryover or continuing tax effect caused by adjustments to any prior tax return, and, (b) any item of income, gain, loss, deduction or credit resulting from coal operations claimed on Form 1040, and including any consequential changes to other items based on such adjustment.On August 7, 1990, respondent mailed notices of deficiency to petitioners relating to their 1980, 1981, and 1982 income tax liability. The entire amount of each of the deficiencies emanates solely from the net operating loss carrybacks claimed by petitioners from their 1983 taxable year. As of August 7, 1990, neither petitioners nor respondent had terminated the period of assessment governed by the Form 872-A that the parties executed in February 1987. On December 18, 1990, respondent executed and mailed to petitioners a notice of termination of special consent to extend the time to assess tax. In their petition, petitioners alleged that they properly claimed net operating loss carrybacks in 1980, 1981, and 1982 from their claimed net operating loss on their 1983 tax return. In the stipulation of settled issues filed by the parties on May 20, 1992, petitioners*382 conceded that they were not entitled to their claimed deduction of $ 250,000 in 1983 relating to Trend Coal and that the entire amount of the deficiencies in dispute for the taxable years 1980, 1981, and 1982 is a result of the $ 250,000 loss claimed by petitioners. Notwithstanding petitioners' concessions that they improperly claimed and carried back the $ 250,000 deduction, petitioners contend that respondent is barred by the general 3-year statute of limitations under section 6501(a) from determining a deficiency in their 1980, 1981, and 1982 income tax. Petitioners bear the burden of establishing that respondent's notices of deficiency are barred by the statute of limitations. Rules 39, 142(a); Amesbury Apartments, Ltd. v. Commissioner, 95 T.C. 227">95 T.C. 227, 240-241 (1990); Schulman v. Commissioner, 93 T.C. 623">93 T.C. 623, 639 (1989). Overriding our analysis in this case is the Supreme Court's admonition in Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386, 392 (1984) (quoting Lucia v. United States, 424 F.2d 565">424 F.2d 565, 570 (1973)) that "'limitations statutes barring the collection of taxes*383 otherwise due and unpaid are strictly construed in favor of the Government.'" See E.I. Dupont De Nemours & Co. v. Davis, 264 U.S. 456">264 U.S. 456, 462 (1924). Section 6501(a) provides the general rule that a deficiency must be assessed within 3 years following the filing of the return. However, there are exceptions to this general rule. One such exception to the general rule is found in section 6501(c)(4), which provides that the taxpayer and the Secretary may agree in writing to an extended assessment period. 1*384 Additionally, section 6501(h) establishes an exception which extends the assessment period in situations where a net operating loss carryback is at issue. Section 6501(h) provides: In the case of a deficiency attributable to the application to the taxpayer of a net operating loss carryback * * *, such deficiency may be assessed at any time before the expiration of the period within which a deficiency for the taxable year of the net operating loss * * * which results in such carryback may be assessed.Section 6501(h) thereby "permits the Commissioner to assess a deficiency stemming from a net operating loss carryback deduction at any time before the expiration of the limitations period for the taxable year in which the net operating loss was created." Smith v. Commissioner, 925 F.2d 250">925 F.2d 250, 253 (8th Cir. 1991), affg. T.C. Memo 1989-432">T.C. Memo. 1989-432. Petitioners contend that the general 3-year rule of section 6501(a), rather than the rule of section 6501(h), applies in this case. Specifically, petitioners contend that section 6501(h) does not apply when (1) respondent must rely upon an extension agreement entered into pursuant*385 to section 6501(c)(4) in order to make a deficiency determination, (2) the extension agreement is limited in scope, and (3) the limitations contained in the agreement do not include the carryback of any net operating loss arising from issues that are expressly left open to assessment by virtue of the terms of the extension agreement. In essence, petitioners contend that as a matter of law section 6501(c)(4) overrides the limitation period provided for in section 6501(h). However, petitioners presented no legal precedents or legislative history in support of their novel contention. Petitioners' contention that section 6501(h) does not apply to carryback years when the parties extend the assessment period of the loss year by agreement is without merit. Section 6501(h) contains no language indicating that it applies only when the assessment period for the loss year remains open by reason of the general 3-year limitations period of section 6501(a). The plain language of section 6501(h) provides that the determination as to whether the deficiencies are time-barred depends upon whether the period for assessing a deficiency for 1983 expired prior to the time the notices of deficiency*386 relating to the 1980, 1981, and 1982 tax years were mailed. In this case, it had not yet expired at the time the notices of deficiency were mailed. In Centennial Sav. Bank FSB v. United States, 887 F.2d 595">887 F.2d 595 (5th Cir. 1989), affd. in part and revd. in part on other grounds 499 U.S.    , 111 S. Ct. 1512 (1991), the taxpayer, under facts similar to the case before us today, argued that assessment was barred by the statute of limitations because the assessment was for amounts attributable to the carryback years, which presumably were closed by the general 3-year limitations period, while the consent form concerned only tax due for the year the loss was generated. The court concluded that the taxpayer's argument was "in flat contradiction of the plain words of section 6501(h). Section 6501(h) makes the period of assessment for carryback years coterminous with the limitations period for the year giving rise to the loss." Id. at 599 (emphasis added). The court further reasoned that under section 6501(h), "when a taxpayer agrees under section 6501(c)(4) that the tax for the loss year may be assessed beyond the normal*387 three year period, he is automatically extending the limitations period for the assessment of that loss as applied to the carryback years." Id. (emphasis added). Petitioners have presented no sound reason for departing from the reasoning or holding in Centennial Sav. Bank FSB v. United States, supra.Section 6501(h) was intended to enlarge, not restrict, the Government's ability to assess tax deficiencies resulting from erroneously allowed carryback deductions. Smith v. Commissioner, supra at 254. Moreover, the courts addressing this specific issue have held that an agreement to extend the period of assessment for the year in which the loss was incurred also extends the period for assessment for the carryback years. Centennial Sav. Bank FSB v. United States, supra; Nalley v. Ross, 308 F. Supp. 1388">308 F. Supp. 1388, 1393 (N.D. Ga. 1969); In re Crist, 85 Bankr. 807, 815-816 (Bankr. N.D. Iowa 1988); see also Pesch v. Commissioner, 78 T.C. 100">78 T.C. 100, 134 n.57 (1982). Petitioners' response to this line*388 of cases is merely that the cases were wrongly decided. Petitioners attempt to distinguish their case from the above precedents based on the wording of the Form 872-A agreement. In support of their position, petitioners argue that the language of the Form 872-A is "clear and unambiguous". We reject petitioners' argument that the Form 872-A was specifically limited to adjustments in their 1983 tax year. The plain language in the Form 872-A broadly extends the limitations period for "any item of income, gain, loss, deduction or credit resulting from coal operations claimed on Form 1040, and including any consequential changes to other items based on such adjustment." The disallowance of the net operating loss carrybacks claimed by petitioners, as a result of the losses they reported on their 1983 tax return from Trend Coal, is a consequential change and as such is specifically covered by the parties' extension agreement. See Bauer v. Commissioner, T.C. Memo. 1992-257 (a "consequential change" refers to "a change which occurs as a consequence of some specified antecedent action, or effect on an antecedent item"). Moreover, in the line of cases addressing*389 this issue, the wording of the extension agreements was of no consequence to the result of each case. The courts held as a matter of law that extending the limitations period of the loss year automatically extended the limitations period for the carryback years. Finally, relying on Calumet Industries, Inc. v. Commissioner, 95 T.C. 257">95 T.C. 257 (1990), petitioners contend that section 6501(h) was meant only to address the net operating loss carryback case where, but for section 6501(h), respondent would have been barred by the general 3-year statute of limitations for the carryback year before the events giving rise to the net operating loss occurred. Petitioners rely exclusively on the Court's statement that "Section 6501(h) was meant to address the typical NOL carryback case -- where, but for section 6501(h), the limitations period for the year to which an NOL is carried back would expire before the limitations period for the year the NOL is incurred." Id. at 278. Petitioners' reliance on this statement is misplaced for at least two reasons. First, petitioners inaccurately contend that such statement is based on the legislative*390 history of section 6501(h). To the contrary, there is no such limiting language in the legislative history. Secondly, petitioners attempt to take the statement out of context. In Calumet Industries, the entire analysis of section 6501(h) revolved around the conclusion that section 6501(h) was enacted to enlarge, not shrink, the assessment period. In Calumet Industries, the taxpayer incurred a loss in its 1981 tax year which it carried back to its 1979 tax year. Subsequently, the taxpayer extended the Commissioner's time to assess the tax with respect to its 1979 tax year by means of a general extension agreement. The Court, therefore, addressed the issue of whether the Commissioner was barred from assessing a deficiency attributed to a net operating loss carryback where the year for which the loss is carried back and for which the deficiency was determined is open by agreement, but the assessment period for the year in which the loss arose has expired. The Court noted that "if the year in which the NOL arose is open, then the year to which the NOL is carried back is also open for purposes of assessing a deficiency attributable to the carryback." Calumet Industries, Inc. v. Commissioner, supra at 272.*391 We find nothing in Calumet Industries, Inc. v. Commissioner, supra, which would contravene our holding today. Based on the above analysis, we hold that, since petitioners' 1983 taxable year was open for assessment on the date the notices of deficiency were mailed with respect to their claimed losses from Trend Coal, the deficiencies asserted for petitioners' 1980, 1981, and 1982 years, relating exclusively to the net operating loss carrybacks, were also open for assessment. To reflect the foregoing, Decision will be entered for respondent. Footnotes1. Sec. 6501(c)(4) provides: (4) Extension by agreement. -- Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.↩

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WEST VIRGINIA COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.West Virginia Coal Co. v. CommissionerDocket No. 14790.United States Board of Tax Appeals16 B.T.A. 378; 1929 BTA LEXIS 2598; May 3, 1929, Promulgated *2598 1. Determination of proper adjustment of invested capital incident to the exchange of certain assets of petitioner for other property. 2. Cost of mining lease and equipment and amount of coal reserve determined. H. Kennedy McCook, Esq.., and George R. Davis, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. ARUNDELL*378 For the year 1918 respondent determined a deficiency in income and profits taxes in the amount of $11,239.41. Errors alleged by petitioner are: (a) Reduction of invested capital as the result of *379 an exchange of property; (b) computation of depreciation and depletion; (c) computation of invested capital by treating certain marginal accounts as inadmissible assets; (d) selection of comparatives in computing profits taxes; (e) reduction of amounts available for dividends on account of current year's taxes; (f) failure to adjust invested capital on account of a refund of taxes for the year 1917. Errors (c) and (e) were waived at the hearing. Hearing upon error (d) was, upon motion duly filed, postponed until after disposition of the other questions involved. FINDINGS OF FACT. *2599 Petitioner is a Virginia corporation, having its principal office At Richmond, and during the taxable year was engaged in the business of jobbing and distributing coal. In October, 1917, it acquired all the capital stock of the Elmo Mining Co., consisting of 500 shares, issuing in exchange therefor 1,250 shares of its capital stock. The Elmo Mining Co. was engaged in mining under a lease dated March 31, 1917, which provided for royalties of 10 cents per ton for the first 20 years and 15 cents per ton for the next 20 years. The lease covered a tract of about 1,100 acres in the New River fields in Fayette County, West Virginia, on the main line of the Chesapeake & Ohio Railroad. The coal seam was clean and approximately 3 feet in thickness. The coal, which was mined by the drift method, was high grade, and because of its low ash content and high units of heat value was particularly well suited for export. During the year ended June 30, 1917, the coal extracted from the Elmo mine amounted to 25,583 gross tons. The estimated coal recoverable at the time the Elmo stock was acquired by petitioner was 2,621,847 tons. The indebtedness of the Elmo Mining Co. was about $40,000. *2600 The acquisition of the Elmo Mining Co. stock was recorded on petitioner's books by the following journal entry (Journal page 242, Oct. 31, 1917): DR.CR$125,000.00 investment a/c capital stock$125,000.001,417. 1,250 shares of Capital Stock of W Va. Coal Co. issued in exch. for 500 shares (being the entire issue capital stock) of the Elmo Mining Co. as authorized by Board of Directors at meeting held Oct. 30, 1917.Petitioner by check dated December 17, 1917, paid $35,000 of the indebtedness of the Elmo Mining Co. The actual cash value of the Elmo Mining Co. stock when acquired by petitioner was $125,000. *380 During the year 1917 petitioner carried on negotiations with one Thomas C. Beury with the view of obtaining the lease on the Stone Cliff mine which the Stone Cliff Coal & Coke Co. then held and under which it operated. This property was in Fayette County, W. Va. The coal seam, known as the Fire Creek seam, was 3 1/2 feet in thickness, and, like that of the Elmo mine, was of high quality and suitable for export. In the year ended June 30, 1917, coal production from this property amounted to 42,964 gross tons. The lease held by the Stone*2601 Cliff Coal & Coke Co. required the payment of royalties at the rate of 10 cents per gross ton, with minimum annual royalties of $4,000. Beury in 1917 was president of the Stone Cliff Coal & Coke Co. and owned 477 shares of a total issue of 600 shares of its stock. The company had authorized the issuance of bonds in the face amount of $50,000, which bonds in the year 1917 were in the hands of a bank as collateral for a note of Beury's. Beury was also indebted in 1917 to the petitioner. In November, 1917, petitioner and Beury came to terms and it was agreed that petitioner was to deliver to Beury the 500 shares of Elmo Mining Co. stock and to give Beury a credit of $37,500 against his indebtedness, and Beury was to procure an assignment to petitioner of the Stone Cliff lease and to deliver to petitioner the Stone Cliff bonds. This agreement was carried out by the parties. Funds to secure the release of the bonds from the bank then holding them were furnished to Beury by petitioner. The petitioner took over the Stone Cliff lease with the improvements on the premises, which were included in the assignment of the lease, in December, 1917, and operated the property throughout*2602 the year 1918. Petitioner recorded the transaction whereby it acquired the Stone Cliff properties on its journal by the following entry (Journal, p. 267, Dec. 22, 1917): DR.CR.$125,000.00 T. C. Beury investment a/c$125,000.001568. Sale of entire Cap. Stock of Elmo Min. Co.$162,500.00 Investment a/c T. C. Beury162,500.001569. Purchase of Stone Cliff C. & C. Co. Lease of property.$5,000.00 Elmo Mining Co., T. C. Beury5,000.001570. Note of E.M. Co. assumed by T. C. B.The $5,000 item in the above entries represents a credit to Beury for a note of the Elmo Mining Co. which he assumed. On January 7, 1921, the United States Attorney for the Southern District of West Virginia, acting in behalf of the United States, filed a bill in the United States District Court against the Stone Cliff Coal & Coke Co., and Beury and others as directors and stockholders of the company for the recovery of taxes alleged to be owing by that company. The bill as subsequently amended alleges inter alia that *381 Beury and his codefendants acting for the company did "sell all of the assets of every nature belonging to the said Stone Cliff Coal & Coke Company, *2603 for the sum of $162,500 in cash or property received by said company of a substantially equivalent value * * *." The defendants, in their answer, deny this allegation. In a valuation schedule for the year 1918, executed by officers of the petitioner in 1921, the following valuations were assigned to the Stone Cliff Coal & Coke Co. property as of the date acquired: Leasehold$120,000.00Plant and equipment34,101.24Store merchandise8,398.78162,500.00These amounts represent the actual cash values of the properties at the date they were acquired by petitioner. At the time the Stone Cliff properties were acquired the coal recoverable from the leased premises was estimated at 1,000,000 tons. The part of the property then being worked, which contained 280,000 tons estimated recoverable, was separated from the remainder by a fault, and at December 1, 1917, an entry had penetrated to the fault. As other operators working beyond the fault on property adjacent to the Stone Cliff property were in good coal, it was believed by petitioner that if an opening could be driven through the fault the coal underlying the remainder of the property would be recoverable. *2604 During the greater part of 1918 petitioner did endeavor to drive through the fault and penetrated it several hundred feet without reaching coal. By the end of 1918, the demand for coal having decreased, petitioner abandoned its efforts to drive an entry through the fault. Allowing for the fault, the estimated coal recoverable at the close of 1918 amounted to 600,000 tons. In its valuation schedule for the year 1918, above mentioned, petitioner set forth the unexhausted coal in the Stone Cliff properties at 300,000 tons. The production from the Stone Cliff mine in 1918 was as follows: Net tonsJanuary2,941.40February2,933.30March3,593.01April2,469.45May3,453.95June687.80July2,442.85August1,461.55September1,202.85October709.70November1,214.25December862.35Total23,972.46Respondent determined that the 500 shares of the Elmo Mining Co. had no value at the time they were paid in for 1,250 shares of petitioner's stock, and, accordingly, allowed no value for the stock in computing petitioner's invested capital. Respondent allowed in *382 the computation of invested capital the sum of $35,000 determined*2605 by him to be the cost of the 500 shares of Elmo stock, which amount represented the amount of indebtedness due by the Elmo Mining Co. which was discharged by petitioner. Respondent also included in his computation of invested capital the accounts receivable of $37,500 due petitioner by Beury. OPINION. ARUNDELL: One of the allegations of error is that respondent failed to adjust invested capital as the result of a refund of income and profits taxes for 1917 in the amount of $3,642.54. No facts were alleged or proved with respect to this item. The respondent's determination in this particular must therefore be sustained. There remains for disposition the question of the proper adjustments to be made in invested capital as the result of the acquisition of the Elmo Mining Co. stock and the subsequent exchange of that stock and of other assets for the Stone Cliff Coal & Coke properties, and the amount of depletion and depreciation to which petitioner is entitled because of its ownership of the lease and operation of these properties in 1918. Petitioner, in October, 1917, acquired for 1,250 shares of its capital stock all the capital stock of the Elmo Mining Co. This stock, *2606 the evidence establishes, had a value of $125,000. After acquiring the stock petitioner paid off an indebtedness of the Elmo Mining Co. in the amount of $35,000. In the same year, 1917, petitioner acquired from the Stone Cliff Coal & Coke Co. the coal lease under which that company was then operating, together with the plant and equipment on the leased property. What was paid for this lease is a question on which there is a conflict of testimony. Under date of November 20, 1917, petitioner entered into an agreement with Thomas C. Beury whereby it agreed to sell to Beury the Elmo Mining Co. stock for $125,000 cash. On the same date the petitioner entered into an agreement with the Stone Cliff Coal & Coke Co., of which Beury was president and majority stockholder, whereby petitioner agreed to buy from the Stone Cliff Co. all of the latter's assets for $162,500 cash. These agreements, it was testified by officers of petitioner and by Beury, were never carried out and for that reason we have not incorporated them in our findings of fact. Beury's testimony as to how the transaction was carried out is that petitioner issued a check to the Stone Cliff Coal & Coke Co. in the amount*2607 of $37,500 in full payment for the lease, which check he, as president of the company, endorsed and handed back and the amount was credited to his personal indebtedness on petitioner's books; that petitioner advanced funds to him to secure the release of the $50,000 face value of Stone *383 Cliff Coal & Coke Co. bonds which were then held by a bank as security for a note of Beury's, and that upon his obtaining the release of the bonds he turned them over to petitioner in exchange for the 500 shares of Elmo Mining Co. stock. Petitioner's officers testified differently. They say that no check for $37,500 was issued payable to either Beury or the Stone Cliff Coal & Coke Co. in either 1917 or 1918; that they acquired the Stone Cliff lease and plant for the Elmo Mining Co. stock plus the $37,500 credit to Beury; that they had been informed and believed that the Stone Cliff bonds had never been issued by the company and they insisted on the delivery of the bonds to prevent their falling into the hands of innocent purchasers. We find it difficult to give full credence to Beury's version of the transaction. It does not seem likely that the petitioner would advance funds to secure*2608 the release of the $50,000 Stone Cliff bonds and then give in exchange for them the Elmo Mining stock, which was worth at least $125,000. And it hardly seems possible that Beury, a practical operator who knew the value of the Stone Cliff lease, would sell for a credit of $37,500 the lease and plant and equipment. The gist of the transaction, as we gather it from the conflicting views of the witnesses, was this: Petitioner owned all the stock of the Elmo Mining Co., which at the time it was paid in to petitioner was worth $125,000. This stock, plus a credit of $37,500 against what Beury owed petitioner, was traded in 1917 for the lease and physical property of the Stone Cliff Coal & Coke Co., the property acquired having an actual cash value of $162,500. How should petitioner's invested capital reflect this transaction which took place in December, 1917? We have found the value of the Elmo Mining Co. stock at the time paid for petitioner's stock to be $125,000. The substitution of some other item of property for that paid in for stock would not affect petitioner's invested capital, except as there might be an adjustment as to inadmissibles and of surplus because of gain or*2609 loss on the exchange. The Commissioner has allowed as an item to be included in invested capital after the exchange of properties, the amount of $35,000 which was paid upon the indebtedness of the Emlo Mining Co. after the petitioner acquired its stock, plus an amount of $37,500 credited to Beury upon the exchange of properties in December, 1917. He has disallowed any value for the Elmo stock as of the date of acquisition for petitioner's stock, which, as stated above, we have found to be $125,000. If there had been no exchange of property with the Stone Cliff Co., and disregarding for the time being any question of affiliation, then by reason of our findings petitioner's invested capital would be increased $125,000 over the amount allowed by respondent, subject *384 to any necessary adjustment for inadmissibles. Petitioner, however, has exchanged for properties of the Stone Cliff Co. having a fair market value of $162,500 at the time of the exchange 500 shares of Elmo Mining Co. stock, and has canceled an indebtedness due it by Beury in the amount of $37,500. It has therefore substituted for assets reflected in its invested capital at $197,500, assets of the value of $162,500. *2610 This transaction serves to reduce petitioner's earned surplus by $35,000. It follows that in the computation of petitioner's invested capital as of the beginning of 1918 the sum of $162,500 should be used in place of the $72,500 used by respondent in his determination. We have found that the entire cost of the Stone Cliff properties was $162,500, and of this cost petitioner in its valuation schedule attributed $120,000 to the cost of the lease and $34,101.24 to the plant and equipment, the balance being assigned to store merchandise. We see no reason, on the evidence, for disturbing these allocations, and they should serve as a basis in determining petitioner's depletion and depreciation. There is no evidence to indicate that the plant and equipment had a period of useful life longer or shorter than the coal supply and it is accordingly our opinion that deductions for the exhaustion of this property should be computed on the same basis as those for depletion of the coal reserve. The cost for computations of depletion and depreciation, is, therefore, $154,101.24. The evidence is that at the time the Stone Cliff properties were acquired there was an estimated reserve of 1,000,000*2611 tons of coal. Efforts made during 1918 to drive through the fault to the reserve beyond it disclosed it to be of greater extent than it was originally believed to be, and upon the discovery being made the estimate of recoverable coal was reduced to 600,000 tons. Both of these estimates were made by an engineer of many years experience in that field, and it is our opinion that the "reasonable allowance" for depletion should be based on the revised estimated reserve of 600,000 tons. In the valuation schedule filed the estimated recoverable coal was put at 300,000 tons, but this figure is not supported by the evidence. While the petitioner did not reach the coal beyond the fault, there is no evidence to show that it did not exist or that it could not be reached by an opening on some other part of the property. In fact, it appears that further efforts to reach the reserve beyond the fault were abandoned largely because of the drop in the demand for coal at the end of 1918. Our finding of a cash value of $162,500 for certain assets, in lieu of a value of $72,500 determined by the Commissioner, may affect the matter of abnormalities under section 327 and computation of the petitioner's*2612 profits tax for the taxable year under the provisions *385 of section 328 of the Revenue Act of 1918 as was done by the Commissioner in his deficiency notice. In any event, the income and profits tax will be affected by a change in depreciation and depletion. It is directed, therefore, that prior to further consideration of the proceeding upon assignment of error (d) as to the proper rate of profits tax, the Commissioner give consideration to the determination of the Board herein and that he file with the Board a recomputation of the tax liability for the taxable year. Further proceedings will be had under Rule 62(d).

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624434/

ARTHUR J. AND MINETTE HILLMAN, ROMAN T. HOUGHT, BECKY A. HOUGHT, FLORINE C. PETERSEN, ARMAND J. AND INEZ J. SARTI, BARTON F. SCHOENEMAN AND ESTATE OF KATHRYN SCHOENEMAN, DECEASED, BARTON F. SCHOENEMAN, CO-INDEPENDENT EXECUTOR, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, RespondentHillman v. CommissionerDocket No. 16907-86United States Tax CourtT.C. Memo 1993-151; 1993 Tax Ct. Memo LEXIS 155; 65 T.C.M. (CCH) 2342; T.C.M. (RIA) 93151; April 7, 1993, Filed *155 For Becky A. Hought, petitioner: Nancy R. Crow. For respondent: James E. Gehres. JACOBSJACOBSMEMORANDUM FINDINGS OF FACT AND OPINIONJACOBS, Judge: Respondent determined a deficiency of $ 17,262 for 1981 with respect to the joint Federal income taxes of Becky A. Hought (petitioner) and her former husband, Roman T. Hought (Dr. Hought). Subsequent to the issuance of the notice of deficiency (dated March 4, 1986), Dr. Hought paid the Internal Revenue Service $ 8,631, or one-half of the deficiency, and the interest then due on one-half of the deficiency payment. The deficiencies involved are attributable to the disallowance of losses and deductions claimed by the Houghts and the other captioned petitioners from purported trading transactions with Hillcrest Securities (Hillcrest transactions). By stipulation, all petitioners agreed to the adjustments determined by respondent with regard to the losses and deductions claimed with respect to their Hillcrest transactions. Petitioner, however, claims (in an amendment to her petition) entitlement to innocent spouse relief under section 6013(e). Thus, the sole issue to be herein decided is whether petitioner qualifies for *156 such relief. We hold she does. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Boulder, Colorado, at the time the petition was filed. Petitioner studied interior architecture and design at the University of Oregon at Eugene for 1 year and at Oregon State College at Corvallis for an additional year. She had no training in business, tax, or accounting either before or during her marriage to Dr. Hought. Dr. Hought received a D.M.D. degree from the University of Oregon dental school in 1975, and completed a 3-year oral surgery residency program at Denver General Hospital in Colorado in 1978. He took some business classes in college. Petitioner married Dr. Hought in 1968. After their two daughters were born in 1976 and 1978, and Dr. Hought had begun his oral surgery practice, petitioner managed their household. Before, during, and after 1981, petitioner*157 worked part-time for Dr. Hought's professional corporation. (Petitioner was not a shareholder of the corporation and had little involvement with its financial affairs.) She scheduled appointments, posted accounts receivable and patients' charts, mailed out statements, and developed x rays. Her 1981 compensation was $ 10,100. In 1981 petitioner and Dr. Hought maintained a joint checking account at the First Bank of Gunbarrel in Boulder, Colorado. Dr. Hought deposited money in their joint bank account to pay household expenses. His other funds were kept in separate bank accounts in his or his corporation's name. Dr. Hought made all investment decisions for the family; all investments were held solely in his name. Petitioner was not familiar with the nature of the investments and had little, if any, contact with Dr. Hought's investment advisers. Petitioner was not familiar with any of the aspects of the Hillcrest transactions, including the tax advantages sought therefrom. Dr. Hought alone engaged in such transactions. She thought Dr. Hought invested $ 1,800 in the Hillcrest transactions, whereas the actual amount invested was $ 6,250. The Houghts timely filed their 1981 joint*158 Federal income tax return with the Internal Revenue Service Center at Ogden, Utah. On Schedule A (Itemized Deductions), line 31, under the caption "Miscellaneous Deductions", the following two items were listed: Hillcrest Securities invest.advisory fees$ 1,250Govt. sec. trading loss49,837These claimed items, totaling $ 51,087, were both related to the Hillcrest transactions. Respondent disallowed deductions for the two claimed items. Petitioner does not contest such disallowance. The disallowed items are grossly erroneous items for which there is no basis in fact or law within the meaning of section 6013(e)(2)(B). The substantial understatement of tax for 1981 was $ 17,262, an amount which is greater than 25 percent of petitioner's "preadjustment year" (1985) income within the meaning of section 6013(e)(4). Dr. Hought employed an accountant to prepare the Houghts' Federal income tax returns and provided the accountant with information to complete the returns. In the early years of their marriage, before the family could afford to make investments, Dr. Hought personally prepared the tax returns. Petitioner, who knew little about financial and tax matters, *159 or about investments, trusted her husband and his advisers. For 16 years she signed the Federal income tax returns Dr. Hought or his accountant had prepared. She did not know or understand, and her husband did not tell her, the specifics of the investments reported on the tax returns. When Dr. Hought presented the 1981 Federal income tax return to her for signature, petitioner accepted what her husband and his accountant had done and saw nothing that appeared unusual to her. The deduction for the claimed loss arising from the Hillcrest transactions was obscured on Schedule A by the entry "Govt. Sec. Trading Loss -- $ 49,837". The Houghts received a tax refund of $ 14,996 for 1981 which was generated by the deductions claimed with respect to the Hillcrest transactions. On May 4, 1982, Dr. Hought deposited $ 33,155.70, including the refund check, into the Houghts' joint checking account in the First Bank of Gunbarrel. On the same day, he wrote a check for $ 36,000 to Boettcher Co., a stock brokerage house, where he maintained a money market account in his name. The funds in his Boettcher Co. account were used for other investments, including First Blood Associates, a motion *160 picture investment. The Houghts made no unusual household purchases nor did their standard of living change significantly as a result of the receipt of the 1981 Federal tax refund in 1982. Dr. Hought bought himself a new Rolex watch and bought petitioner a relatively inexpensive necklace. The Houghts purchased new automobiles in 1983. Dr. Hought's automobile was a $ 36,844.56 Porsche, purchased by his professional corporation for cash. Petitioner's automobile was a 1983 Volvo station wagon which was purchased on credit. The Houghts separated in 1983. Their marriage was dissolved in 1984. Pursuant to a negotiated Separation and Property Settlement Agreement signed in August 1984, the marital property was divided between them as follows: Roman Hought:Professional corporation stock$ 106,000 655 Poplar Equity20,000 1025 Maxwell Equity39,000 Profit sharing plan65,299 Volvo loan liability(9,500)Jeep and motorcycle2,450 Personal property12,485 Joint liabilities, including First Blood(45,200)Liability to Becky(46,500)Benchmark & Cinste stock0 TOTAL VALUE:$ 144,034 Becky Hought:4466 Dallas Place Equity$  47,000 Volvo16,500 Cash27,000 Note19,500 United Energy Technology stock380 Personal property (includes daughters'furniture)34,130 Benchmark & Cinste stock0 TOTAL VALUE:$ 144,510 *161 The separation and property settlement agreement, which was approved by the District Court of Jefferson County, Colorado, in its Decree of Dissolution of Marriage, provided: For the years 1968 through 1983 the parties believe that they have duly paid all income or other taxes due for such years and that they do not owe any interest or penalties with respect thereto. No tax deficiency proceeding is pending or threatened against them thereon, and no audit is pending with respect to any such joint returns to the best of their knowledge. If the parties' state or federal income tax liability for any such year is hereafter adjusted, by audit or otherwise, any refund or tax obligation shall be split equally between Husband and Wife. This recognizes that both parties equally shared in any benefits or liabilities during the (1968-1983) time period.At the time the Houghts' marriage was dissolved, they were unaware that there was a potential tax liability with respect to the claimed deductions arising from the Hillcrest transactions. Subsequent to the dissolution of their marriage, petitioner agreed to forgive $ 4,500 of the interest due on a note she received in the property settlement, *162 as well as approximately $ 6,000 of family support. In the fall of 1990, the Houghts appeared before the Referee of the District Court of Boulder County, Colorado, in connection with petitioner's request for a modification of the previous family support arrangement. At that time Dr. Hought's monthly income was $ 14,400, while petitioner's monthly income, other than family support, was $ 579. The District Court found that petitioner, who suffers from rheumatoid arthritis, was capable of earning no more than $ 1,580 a month. The Court ordered Dr. Hought to pay petitioner $ 3,250 a month in family support. The Court stated: On the basis of the aforesaid exhibits and testimony, this Court finds that the unallocated family support payments currently made by Respondent [Dr. Hought] are insufficient to enable Petitioner to reasonably provide for the care/or education of the minor children. The Court further finds that applying the evidence presented to the applicable legal standards, that the amount of unallocated family support currently paid by Respondent [Dr. Hought] is unconscionable in view of the change of circumstances relative to the income of Respondent [Dr. Hought], Petitioner's*163 expenses, Petitioner's physical condition, the increased needs of the parties' children, Petitioner's potential tax liability and the disparity in the standard of living between Petitioner and Respondent [Dr. Hought].In addition, the Court held that Dr. Hought was liable to pay 67 percent of the tax liability involving the disallowance of the claimed deductions arising from the Hillcrest transactions. OPINION Section 6013(d)(3) provides that, in the case of a joint return, the tax liability of a husband and wife shall be joint and several. However, under section 6013(e) 1 an "innocent spouse" is relieved of liability if he or she proves: (1) That a joint return has been made for a taxable year; (2) that on such return there was a substantial understatement of tax; (3) that the understatement exceeds a certain percentage of the preadjustment year income of the spouse seeking relief; 2 (4) that the substantial understatement of tax is attributable to grossly erroneous items of the other spouse; (5) that the spouse seeking relief did not know, and had no reason to know, of such substantial understatement when he or she signed the return; and (6) that after consideration of*164 all the facts and circumstances, it would be inequitable to hold him or her liable for the deficiency in income tax attributable to such substantial understatement. Estate of Simmons v. Commissioner, 94 T.C. 682">94 T.C. 682, 683 (1990); Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 234-235 (1986), affd. 826 F.2d 470">826 F.2d 470 (6th Cir. 1987). Petitioner bears the burden of establishing that each of the requirements of section 6013(e) has been satisfied. Purcell v. Commissioner, 826 F.2d at 473. *165 The requirements of section 6013(e) are conjunctive. Therefore, a failure to meet any of the requirements will prevent a spouse from qualifying for relief. Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 138 (1990). The parties agree that a joint Federal income tax return was filed; that the understatement of tax was substantial; that the understatement exceeds the percentage of income requirements of section 6013(e)(4); and that the claimed deductions are grossly erroneous items for which there is no basis in fact or law within the meaning of section 6013(e)(2)(B). Thus, the controversy herein focuses on three requirements: (1) Whether the grossly erroneous deductions relating to the Hillcrest transactions were items attributable only to Dr. Hought; (2) whether petitioner did not know, and had no reason to know, of the substantial understatement when she signed the 1981 income tax return; and (3) whether it would be inequitable to hold petitioner liable for the income tax deficiency attributable to such substantial understatement. Turning to the first of the aforementioned three requirements, we conclude that the Hillcrest transactions were items attributable*166 to Dr. Hought alone. Although petitioner was told by Dr. Hought that he was making the Hillcrest transactions, she did not know any details about the transactions. There is nothing to show that any of the Houghts' investments were ever titled in their joint names. Petitioner, whose testimony we regard as credible, stated that Dr. Hought made all investment decisions, and that his name alone was on all investment accounts and documents. Petitioner never signed an investment document. Her name was not on any investment or stock brokerage account. Indeed, she had no meaningful involvement in the family investments. Consequently, the Houghts were not jointly involved in the Hillcrest transactions. With regard to the second of said three requirements, we are persuaded that, in signing the 1981 joint Federal income tax return, petitioner did not know, and had no reason to know, of the substantial understatement of tax with respect to the claimed Hillcrest deductions. She was unsophisticated and untrained in financial matters. She relied on Dr. Hought to make investments. She relied on him and his accountant to prepare joint tax returns. To her untrained eye, even relatively *167 large deductions inconspicuously included under "Miscellaneous Deductions" did not arouse her suspicion. Moreover, from the obscure manner in which the accountant listed the deductions, it appears that only advisory fees of $ 1,250, rather than a trading loss of $ 49,837, pertained to the Hillcrest transactions. Petitioner testified that she thought the most that could be lost on the Hillcrest transactions was $ 1,800, which she believed to be the amount of the investment. Actually Dr. Hought had invested $ 6,250. We note that a number of innocent spouse cases have focused on the circumstances which might give a spouse "reason to know" of erroneous deductions. The inquiry has been whether a reasonably prudent taxpayer should have known that the return he or she signed contained a substantial understatement of tax. In Bokum v. Commissioner, supra at 151, using the "knowledge of the transaction" standard, we declined to adopt the more lenient "facts and circumstances" approach used in Price v. Commissioner, 887 F.2d 959">887 F.2d 959, 962 (9th Cir. 1989), revg. an Oral Opinion of this Court dated Dec. 16, 1987. See also Erdahl v. Commissioner, 930 F.2d 585">930 F.2d 585 (8th Cir. 1991),*168 revg. T.C. Memo. 1990-101, which followed the Price approach. This case is not appealable to either the Ninth or Eighth Circuit, so the Bokum rationale will be applied here. In Bokum we held that in order to be eligible for innocent spouse relief with respect to erroneous deductions, the allegedly innocent spouse must show that he or she was unaware of the circumstances that gave rise to the error on the tax return. Merely being unaware of the tax consequences of a transaction is not sufficient. A comparison of the facts in Bokum with those present in this case reveals striking differences between the two cases. Unlike Mrs. Bokum, who was well aware of the sale of the ranch whose tax treatment was in question, petitioner did not understand either the Hillcrest transactions or the desired tax advantages. Unlike the Bokums' tax return, which set forth prominently a distribution of over $ 2 million, the Houghts' tax return placed its erroneous tax deductions inconspicuously on Schedule A in a rather confusing manner which would not have alerted a reasonably prudent person in petitioner's circumstances. In Bokum, we stated that Mrs. *169 Bokum should have been alerted by the failure of the tax return preparer's failure to sign the return. By contrast, Dr. Hought's accountant did sign the return, and petitioner relied on him to prepare it correctly. Petitioner was provided with so little information about the Hillcrest transactions that she had no reason to suspect that they were reported incorrectly. Indeed, even Dr. Hought was vague about the nature of the transactions. Under the Bokum standard, petitioner must have had sufficient knowledge of the circumstances of the Hillcrest transactions to permit her to inquire into its appropriate tax treatment. Under the circumstances of this case, we do not think mere knowledge that petitioner's husband had written a check for $ 1,800 to make such an investment is sufficient knowledge of the transaction to put an unsophisticated taxpayer like petitioner on notice of a need to inquire into the correct treatment of an item on a tax return that has been prepared by an experienced accountant. In Stevens v. Commissioner, 872 F.2d 1499">872 F.2d 1499 (11th Cir. 1989), affg. T.C. Memo 1988-63">T.C. Memo. 1988-63, the Court of Appeals for the Eleventh*170 Circuit, in refusing to grant innocent spouse relief, approved our application of its "reason to know" standard. The Court of Appeals stated that the "reason to know" standard is based on whether a "reasonably prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the tax liability stated was erroneous or that further investigation was warranted." Id. at 1505 (fn. ref. omitted). As the Court of Appeals articulated the test, the proper inquiry is whether "the spouse had sufficient knowledge of the facts underlying the claimed deductions such that a reasonably prudent person in the taxpayer's position would question seriously whether the deductions were phony." Id. Certainly by applying this test to the facts of this case, petitioner is entitled to innocent spouse relief. Like Bokum, the facts in Stevens are distinguishable from petitioner's situation. Mr. Stevens was a tax shelter promoter who provided his family with a lavish lifestyle. The family owned two opulent residences, three Excalibur automobiles worth $ 45,000 each, various other expensive cars, and several boats. *171 Mr. Stevens showered Mrs. Stevens with jewelry. Mrs. Stevens was aware that he had invested in a real estate partnership and was present at her husband's presentations of tax shelters to investors. In her role as corporate officer and bookkeeper, she had ready access to, if not active participation in, the family's investment records. By contrast, petitioner played no active role in her husband's business, was never present at an investment discussion, and had no ready access to her husband's investment records. Under the circumstances of the Houghts' married life, in which Dr. Hought was in charge of investments (and invested exclusively in his own name), it would not be reasonable to require petitioner, a financially unsophisticated housewife, to investigate and query her husband's and his accountant's treatment of his transactions on the tax return. In our judgment, the facts of this case are more closely aligned with those in Bell v. Commissioner, T.C. Memo. 1989-107, and Bouskos v. Commissioner, T.C. Memo. 1987-574, holding that the taxpayers were entitled to innocent spouse relief. Finally, as to the last of*172 the three aforementioned requirements, we think it would be inequitable under these facts and circumstances to hold petitioner liable for the tax deficiency created by Dr. Hought's participation in the Hillcrest transactions. An important consideration is whether petitioner benefited significantly from the understatement of tax. Bell v. Commissioner, supra; see sec. 1.6013-5(b), Income Tax Regs. In our opinion she did not. The property settlement between the Houghts was, at least in terms of agreed value, substantially equal, and petitioner's share was not particularly large. Dr. Hought retained his profit sharing plan, and his oral surgery practice continued to provide him with a comfortable income. While petitioner was able to complete her college education after the divorce, she has been unable to find suitable employment because of her arthritic condition. And, as found in the 1991 Colorado District Court Referee's order modifying family support payments, there is a substantial financial disparity between the former spouses. Petitioner and her two minor daughters received only normal family support during the marriage and afterwards. *173 It is well established that normal family support is not considered in deciding whether it would be inequitable to hold a purported innocent spouse liable. Belk v. Commissioner, 93 T.C. 434">93 T.C. 434, 440 (1989); sec. 1.6013-5(b), Income Tax Regs.Respondent argues that petitioner should not be granted innocent spouse relief because she and her daughters received a large amount of money in family support payments. What respondent fails to point out is that these payments were made over a 10-year period for the support of three family members. Respondent contends that, after Dr. Hought fell behind in his family support payments in 1986 and had to borrow $ 30,000 from his professional corporation to pay the arrearage, petitioner received a total of $ 54,400 in 1987. In a time period generally coinciding with her receipt of the $ 30,000, petitioner, on the advice of her accountant, transferred $ 20,000 into accounts in the names of each daughter over a 2-year period in order to save income taxes, and as petitioner testified, "I thought that that would be a way to ensure that if I died, the money would go to my daughters". Respondent argues that petitioner should*174 have used the $ 30,000 she received in family support arrearage to discharge her obligation to the Internal Revenue Service under the terms of her negotiated separation and property settlement agreement. We reject respondent's argument. 3There is no evidence that petitioner received any significant benefit in terms of lavish expenditures or gifts from Dr. Hought as a result of the tax refund generated by the Hillcrest transactions. After the refund check was received, the subsequent expenditures benefited Dr. Hought, namely, the purchase of a Porsche automobile, a Rolex watch, and the First Blood motion picture investment. Respondent advances the argument that because Dr. Hought knew as little as petitioner about the Hillcrest transactions, they were both equally ignorant and, therefore, they should both be held equally liable. We reject this argument*175 as untenable. The evidence is clear that only Dr. Hought engaged in the Hillcrest transactions, and that he at least had some understanding of the financial and tax consequences, while petitioner knew nothing about it. Although Dr. Hought and his accountant may have misunderstood or misinterpreted the income tax laws, they nonetheless had access to the offering materials presented by Hillcrest Securities; petitioner did not. Dr. Hought made the decision to participate in the transactions; petitioner did not. In our opinion, it would be inequitable to hold petitioner liable for the tax deficiency. Based on this record, we hold that petitioner has satisfied all the requirements to qualify as an innocent spouse under section 6013(e). She is therefore relieved of liability for the deficiency owed with respect to the 1981 joint Federal income tax return filed by her and Dr. Hought. To reflect the foregoing, An appropriate decision will be entered. Footnotes1. Although the year before us is 1981, we apply the statute as amended in 1984. This is because sec. 424(a) of the Tax Reform Act of 1984 (division A of the Deficit Reduction Act of 1984), Pub. L. 98-369, 98 Stat. 494, 801-802, amended sec. 6013(e) retroactively to all open years to which the Internal Revenue Code applies.↩2. This requirement does not apply to any liability attributable to the omission of an item from gross income, as opposed to liability attributable to a deduction, credit, or basis. Sec. 6013(e)(4)(E).↩3. However, it is not for us to decide whether petitioner has any liability to Dr. Hought under the provisions of the separation and property settlement agreement.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624435/

Estate of Jean Acord, Deceased, Sterling Ernest Norris, Personal Representative, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Acord v. CommissionerDocket No. 17271-87United States Tax Court93 T.C. 1; 1989 U.S. Tax Ct. LEXIS 97; 93 T.C. No. 1; July 5, 1989July 5, 1989, Filed *97 Decision will be entered under Rule 155. W died 38 hours after H as a result of injuries sustained in a common accident. H's will provided for devise to others than W "in the event [W] dies before I do, at the same time that I do, or under such circumstances as to make it doubtful who died first." Held: Ariz. Rev. Stat. Ann. (1975) sec. 14-2601 (Uniform Probate Court sec. 2-601), requiring survival by 120 hours, does not apply because will contained language dealing explicitly with simultaneous deaths and requiring that W survive in order to take under the will. H's share of community property is includable in W's estate. James L. Norris, for the petitioner.Sherri L. Munnerlyn, for the respondent. Cohen, Judge. COHEN*1 OPINIONRespondent determined a deficiency of $ 151,544.96 in the estate tax of petitioner. After concessions, the issue for decision is whether decedent's gross estate includes property passing from her spouse, who died 38 hours prior to decedent as a result of injuries sustained in a common accident.*2 All of the facts have been stipulated, and the stipulated facts are incorporated as our findings by this reference. Petitioner *98 Sterling Ernest Norris, Personal Representative of the Estate of Jean Acord, was a resident of California at the time the petition was filed.Jean Acord died on June 25, 1983, as a result of injuries received in an automobile accident. Her death followed by 38 hours the death of her husband, Claud Acord, on June 24, 1983, as a result of the same accident. Mr. and Mrs. Acord were domiciled in Arizona at the time of their deaths. They owned community property having a fair market value of $ 779,106.75 and joint tenancy property having a fair market value of $ 22,484.The will of Claud Acord contained the following provisions:SECOND: I hereby give, devise, and bequeath all my property, whether real, personal or mixed in character, unto my beloved wife, JEAN ACORD, to have and to hold, completely and absolutely, unto herself, her heirs and assigns forever.THIRD: In the event my beloved wife, JEAN ACORD, dies before I do, at the same time that I do, or under such circumstances as to make it doubtful who died first, I hereby give, devise and bequeath all of my property as follows:(1) One-half to my brother, MELVIN F. ACORD. In the event my brother, MELVIN F. ACORD, predeceases*99 me, then in such event, such share shall be distributed to my nephew, ROBERT CLAUD ACORD.(2) One-half to be divided in equal shares between my nephews and niece, JIM NORRIS, BOB NORRIS, JEANNE PUEPPKT and STERLING ERNIE NORRIS.A comparable provision was contained in the will of Jean Acord. Other provisions of the wills are not material to our decision in this case.Petitioner contends that Jean Acord received nothing from the estate of Claud Acord at the time of her death because she did not survive him by 120 hours. Petitioner's position is based on the following provisions of Ariz. Rev. Stat. Ann. (1975) (A.R.S.) sec. 14-2601:SEC. 14-2601. Requirement that devisee survive testator by one hundred twenty hoursA. A devisee who does not survive the testator by one hundred twenty hours is treated as if he predeceased the testator, unless the will of *3 decedent contains some language dealing explicitly with simultaneous deaths or deaths in a common disaster, or requiring that the devisee survive the testator or survive the testator for a stated period in order to take under the will.B. If the time of death of the testator, the devisee or both cannot be determined and *100 it cannot be established that the devisee has survived the testator by one hundred twenty hours, it is deemed that the devisee has failed to survive for the required period.Respondent contends that A.R.S. sec. 14-2601 does not apply because Claud Acord's will contained provisions specifically dealing with simultaneous deaths and requiring survivorship by Jean Acord. Because she survived her husband, respondent contends that Jean Acord succeeded to Mr. Acord's share of their property and that all of it is taxable in her estate.The parties represent that no Arizona case has construed A.R.S. sec. 14-2601. A.R.S. sec. 14-2601A, however, is adopted from sec. 2-601 of the Uniform Probate Code. Respondent argues that Claud Acord's will contained a provision dealing with simultaneous deaths and required that Jean Acord survive Claud Acord in order to take under his will. Respondent relies on various commentaries on Arizona law and on In re Estate of Kerlee, 98 Idaho 5">98 Idaho 5, 557 P.2d 599">557 P.2d 599 (1976). In Kerlee, the Supreme Court of Idaho decided that Idaho's comparable provision from the Uniform Probate Code did not apply when the will of the*101 decedent conditioned a devise on survival of the devisee. The commentators cited by respondent similarly consistently indicate that A.R.S. sec. 14-2601 does not apply where a will sets forth a devise conditioned on survival. R. Effland, Arizona Probate Code Practice Manual (1973); R. Effland, "Estate Planning Under the New Arizona Probate Code," 1974 Ariz. St. L.J. 20">1974 Ariz. St. L.J. 20, 21; W. Van Slyck, Decedents' Estates Provisions of the 1974 Arizona Probate Code (3d. ed. 1981).Among the General Comments to the Uniform Law is the following:Part 6 deals with a variety of construction problems which commonly occur in wills. All of the "rules" set forth in this part yield to a contrary intent expressed in the will and are therefore merely presumptions. * * * [8 Uniform Laws Annotated p. 128 (West 1983).]*4 Petitioner contends that the General Comment:requires that sec. 2-601 will yield only when there is a "contrary intent expressed in the will." In the case now before the Court, there is no provision in Claud Acord's will that is contrary to the A.R.S. sec. 14-2601 requirement that Jean Acord must survive Claud Acord by 120 hours or else she will be treated*102 as predeceasing him. Claud Acord's will does not state that Jean Acord should be required to survive him by more than, or less than, 120 hours, or any other time period. In fact, Claud Acord's will is totally silent as to any requirement that Jean Acord is to survive him by any time period.Petitioner argues that the language in Claud Acord's will is consistent with, not contrary to, A.R.S. sec. 14-2601. Further, petitioner argues:sec. 14-2601 reference to simultaneous death was a drafting error because if there is a simultaneous death, there is factually no need to consider any survivorship by 120 hours because the simultaneous death prevents any possible survivorship. A.R.S. sec. 14-2601 should be interpreted to apply only to explicit language in a will dealing with a common disaster or a will provision requiring the devisee to survive the testator by some stated period of time other than 120 hours. The reference to simultaneous death should not be applied. * * *We cannot accept petitioner's construction of the statute.A.R.S. sec. 14-2601 does not, by its terms, require that the provision in the will be contrary to the 120 hours presumption. The operative language*103 in the statute is "unless the will of the decedent contains some language dealing explicitly with simultaneous deaths or deaths in a common disaster, or requiring that the devisee survive the testator * * *." (Emphasis added.) Thus the statute takes effect in the absence of provisions dealing with that subject matter and does not merely amplify such provisions. This plain language cannot be overcome by a General Comment in a Uniform Law, if that comment were inconsistent with our conclusion. In context, however, there is no inconsistency.Following A.R.S. sec. 14-2601 in the Arizona Probate Code is sec. 14-2603, which provides:Rules of construction and intentionThe intention of a testator as expressed in his will controls the legal effect of his dispositions. The rules of construction expressed in the *5 succeeding sections of this article apply unless a contrary intention is indicated by the will.The succeeding sections are numbered 14-2604 through 14-2612. The contrary intention language, therefore, does not apply to sec. 14-2601.Petitioner also argues that Claud Acord's will did not provide that Jean Accord takes under the will if she survives, require that*104 Jean Acord survive in order to take under the will, or use the word "survive" at all. This argument is untenable in view of Articles Second and Third, quoted above. Devises to Mrs. Acord under Mr. Acord's will are made to other persons only if she dies before him, at the same time as he does, or in other circumstances where the order of deaths cannot be determined. None of these events occurred, and the contingent devises do not take effect.In order to implement the agreements of the parties,Decision will be entered under Rule 155.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624436/

JESSIE G. BROWN, AS EXECUTRIX OF THE LAST WILL AND TESTAMENT OF MILTON HAY BROWN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brown v. CommissionerDocket No 91093.United States Board of Tax Appeals40 B.T.A. 934; 1939 BTA LEXIS 774; November 24, 1939, Promulgated *774 On October 28, 1923, Kate Hay Brown died intestate, leaving as her only heirs at law her husband, Stuart Brown, and three children, one of whom is the decedent in this proceeding. The husband inherited a one-third undivided interest in fee and each of the three children a two-ninths interest in fee in the estate of Kate Hay Brown. On December 24, 1923, the heirs transferred their undivided interests in the estate to a trustee who, on the same day, by quitclaim deed transferred the property back to the heirs at law in trust. By the terms of the trust instrument Stuart Brown was to receive the income of his one-third share for life, with a limited power of appointment exercisable by will. Subject to the beneficial interest of Stuart Brown and subject to his limited power of appointment, each of the three children was to receive an equal share of the income of the trust estate for life, with a similar limited power of appointment. The trust instrument also provided that the trust could be revoked in whole or in part by a written instrument signed by the three children, with the written consent of Stuart Brown, if living, and an uncle, Logan Hay, if living. Stuart Brown died intestate*775 on October 26, 1924. Thereafter each of the three children received one-third of the income of the trust estate until March 12, 1935, when Milton Hay Brown, one of the children and the decedent herein, died testate exercising the limited power of appointment possessed by him. The respondent has determined that the value of the one-third interest in the trust estate is includable in the gross estate. Held, that the value of only a two-ninths interest in the trust estate is includable in the gross estate. Albert C. Schlipf, Esq., and Logan Hay, Esq., for the petitioner. Franklin F. Korell, Esq., for the respondent. SMITH *934 This proceeding is for the redetermination of a deficiency in estate tax of $7,681.77. The petition alleges that the determination of the deficiency is based upon the following errors: (a) The Commissioner of Internal Revenue erred in including in the estate of Milton Hay Brown the value of the property transferred by deed of trust dated December 24, 1923. *935 (b) Waived. (c) The Commissioner of Internal Revenue erred in not allowing a deduction from the value of the property transferred by said*776 deed of trust, in the amount of $1,219.07, representing the proportion of the excess of accrued expenses over accrued rents chargeable to Milton Hay Brown at the date of his death. (d) The Commissioner of Internal Revenue erred in that he taxed property conveyed by Stuart Brown to the Trustees named in said deed of trust as if the same had been conveyed by Milton Hay Brown. (e) The Commissioner of Internal Revenue erred in not crediting the amount of the deficiency with the amount of $677.57 by reason of payment of Illinois State Inheritance taxes. Substantially all of the facts are contained in a written stipulation filed with the Board and incorporated herein by reference. At the hearing of this proceeding counsel stipulated that the provisions of the decedent's will respecting the trust property were carried into effect. The parties have further stipulated that the state inheritance tax on the estate of Milton Hay Brown was paid in the amount of $1,374.16, that due proof of payment thereof has been made to the Commissioner, and that no claim for refund of that tax or any part thereof has been made or will be made. FINDINGS OF FACT. The petitioner is the executrix*777 of the last will and testament of Milton Hay Brown, who died a resident of Illinois on March 12, 1935. The executrix filed an estate tax return which showed a total gross estate of $50,898.72 and total deductions therefrom of $176,504.28. The respondent amended this return by adding to the gross estate $243,027.52 representing the alleged value at date of death of decedent's one-third interest in the trust estate, and determined a net estate under the Revenue Act of 1926 of $67,348.06 and under the Revenue Act of 1934 of $117,348.06. The respondent concedes the allegation of error in paragraph (c) above. In other words, he admits that the value of the decedent's one-third interest in the trust estate was only $241,808.45. The decedent's mother, Kate Hay Brown, died intestate on October 28, 1923, leaving her surviving Stuart Brown, her husband (decedent's father), and Milton Hay Brown, Christine Brown Penniman, and Jane Logan Brown, her children, as her only heirs at law. She also left surviving her a brother, Logan Hay, who is still living. The principal property left by Kate Hay Brown was an undivided one-half interest in many farms and other real estate in Illinois which*778 she inherited from her father. Logan Hay inherited a like interest in the property. On December 24, 1923, Stuart Brown (decedent's father) and the above named children of Kate Hay Brown, together with their *936 spouses (except that of Jane Logan Brown, a spinster), conveyed by warranty deed to Lucy C. Williams, a spinster, as trustee, all of their interests in the estate of Kate Hay Brown, deceased, except the personal and household effects and all personal property, including automobiles used in or about or in connection with the home place, and except certain real property in Oak Ridge Cemetery. The warranty deed stated that the grantors: * * * CONVEY and WARRANT and ASSIGN and TRANSFER [certain interests in the estate of Kate Hay Brown] to LUCY C. Williams of the City of Springfield, Illinois, to her own use as trustee, but upon and subject to the trusts hereinafter set forth, * * * On December 24, 1923, the same day on which the warranty deed was executed, Lucy C. Williams conveyed, quitclaimed, assigned, and transferred to the four grantors the same property subject to the same trusts which were contained in the warranty deed to her. The trust instrument provided*779 in part as follows: PARAGRAPH ONE. To hold, manage, possess and dispose of all said property as a single and undivided trust estate: The beneficial interests in said trust estate shall be as follows: As to an undivided one-third for the use and benefit of Stuart Brown, husband of said Kate Hay Brown, for and during his natural life and after the death of the said Stuart Brown for the use and benefit of such of the then surviving or thereafter born descendants of the said Kate Hay Brown as the said Stuart Brown may be his last will and testament appoint and direct and for such persons in such proportions and for such estates as he may by his said last will and testament appoint and direct. PARAGRAPH TWO. Subject to the said beneficial interest of said Stuart Brown and subject to said power of appointment, an undivided one third to and for the benefit and use of each of Milton Hay Brown, christine Brown Penniman and Jane Logan Brown respectively for and during their respective natural lives, and after the death of the respective life tenants Milton Hay Brown, Christine Brown Penniman and Jane Logan Brown, as to such undivided one third for the use and benefit of such of*780 the then surviving or thereafter born descendants of said Kate Hay Brown as the said respective life tenants may by last will and testament appoint and direct and for such persons in such proportions and for such estates as such life tenant by last will and testament may appoint and direct and in default of such appointment, for the benefit and use of the children and descendants of predeceased children of such respective life tenant them surviving, they to take per stirpes and not per capita and in default of any such children or descendants surviving, then to the then surviving descendants of the said Kate Hay Brown, they to take per stirpes and not per capita, and in case of default of any descendants of said Kate Hay Brown then surviving them for the benefit of such of the descendants of Milton Hay, grandfather of the said life tenants, and to such persons in such proportions and for such estates as the said respective life tenants by last will and testament appoint and direct and in default of such appointment, then to the then surviving descendants of said Milton Hay, they to take per stirpes and not per capita. *937 PARAGRAPH THREE. Upon the death of any of the*781 said Stuart Brown, Milton Hay Brown, Christine Brown Penniman and Jane Logan Brown there shall be paid to his or her proper legal representatives within thirty days a sum equal to one-half of the income accruing upon the undivided share of such person so dying for the four quarters preceding such life tenant's death and such sums paid under this paragraph shall be a charge against and repaid to the trust estate out of the income thereafter accruing upon the undivided share of the trust estate in which such life tenant so dying had a life estate and except as recouped therefrom shall be a lien upon the corpus of such undivided interest. * * * PARAGRAPH SIX. Any of the said Stuart Brown, Milton Hay Brown, Christine Brown Penniman and Jane Logan Brown shall be entitled upon three months written notice to the Trustees to have advanced to him or her as the case may be, such sums as he or she may designate provided that the total of such advances to any such person at any time outstanding shall not exceed fifty thousand dollars. For any sums advanced hereunder the person obtaining the advance shall give his or her principal note payable on or before his or her death and bearing*782 interest at six percent per annum payable quarter-annually. * * * PARAGRAPH SEVEN. Subject to the foregoing provisions other than paragraph Two hereinbefore and anything in said paragraph Two notwithstanding, each of the said Milton Hay Brown, Christine Brown Penniman and Jane Logan Brown may by his or her last will and testament appoint that the income or any part thereof of the undivided share in which the appointor has a life interest shall be paid to the surviving spouse of the appointor for and during the natural life of such spouse or for and during a term not extending beyond the life of such spouse. * * * PARAGRAPH ELEVEN. The trust hereby created shall endure until the death of the survivor of Stuart Brown, Milton Hay Brown, Christine Brown Penniman and Jane Logan Brown and upon the death of such survivor the entire trust estate shall be divided among and distributed to the parties entitled thereto provided that any shares in which limited interests then exist shall continue to be held in trust until such limited interests expire but, if not theretofore distributed to the beneficiaries, said trustees shall distribute such shares to the person, persons or corporations*783 entitled thereto twenty-one years after the death of the survivor of the descendants of Kate Hay Brown now living. * * * PARAGRAPH FOURTEEN. If any person having a vested beneficial interest in any undivided interest, or in case such person is incompetent, his or her legal representative, shall by a written instrument duly signed and acknowledged, filed with the trustees, so request, then it shall be the duty of the trustees to set off such undivided interest separate and apart from the remainder of the property held hereunder in trust. * * * * * * PARAGRAPH *938 TWENTY-FOUR. The power is reserved to the said Milton Hay Brown, Christine Brown penniman and Jane Logan Brown with the written consent of Stuart Brown, if living, and of Logan Hay, if living, by written instrument signed and acknowledged by them and recorded in the Recorder's office of Sangamon County, Illinois, to revoke in whole or in part all or any of the trusts in this instrument contained and by such instrument to appoint and direct that the entire trust estate or any part or parcels then held under this instrument shall be conveyed absolutely and in fee simple to such person, persons or corporations*784 as directed by said instrument or shall be held upon the uses and trusts directed by said written instrument and thereupon the trustees then acting hereunder shall hold all the property then held in trust under this instrument upon and subject to the uses and trusts directed by said instrument of revocation and new appointment and direction. Stuart Brown died intestate on October 26, 1924, leaving him surviving his three children as his only heirs at law. He did not exercise the power of appointment granted to him by paragraph one of the trust instrument. On March 12, 1935, Milton Hay Brown, the decedent herein, died testate leaving him surviving Jessie Gridley Brown, his widow, and three children, namely, Stuart Brown, Catherine Logan Brown, and Milton Hay Brown. By his will he appointed and directed that there should be paid to Jessie Gridley Brown, his widow, so long as she should live, one-third of the income of the undivided share of the trust estate over which he held a special power of appointment and provided that if the widow's share of the income in any one year should be less than $5,000 there should be paid to her from the income of his share the amount by which*785 the said one-third of the income was less than $5,000. He further appointed Jessie Gridley Brown as his successor in trust under the trust instrument. The decedent, Milton Hay Brown, was 36 years of age when the trust estate was created in 1932, and at that time was suffering from no mortal illness and was in normal health for a man of his age. OPINION. SMITH: The only question for the determination of the Board is whether the decedent's interest in the trust estate created on December 24, 1932, should be included in his gross estate at the value thereof at the date of his death, and, if not the whole thereof, whether any portion should be so included. The respondent contends that the decedent had a one-third interest in the trust estate and that the total value of that one-third interest at the date of his death. March 12, 1935, namely $241,808.45, should be included in the gross estate. The petitioner, on the other hand, contends that no part of the value of that one-third interest should be so included. *939 The following provisions of section 302 of the Revenue Act of 1926, as amended by sections 401 and 404 of the Revenue Act of 1934, are applicable to the*786 issues raised: 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, except real property situated outside the United States [as amended by sec. 404, Act 1934] - (a) To the extent of the interest therein of the decedent at the time of his death * * *; * * * (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * (d) (1) [As amended by sec. 401.] To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of*787 a bona fide sale for an adequate and full consideration in money or money's worth. * * * (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth; and * * * (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 or after the enactment of this Act. Prior to her death on October 28, 1923, Kate Hay Brown owned an undivided one-half interest in a number of farms and other parcels of real property inherited by her from her father. Upon her death her husband, Stuart Brown, inherited a one-third undivided interest in fee and each of their three children inherited a two-ninths interest in fee in the estate. The heirs*788 decided that it was impracticable to set off their interests in metes and bounds and decided that it was to the interest of all to keep their interests undivided. They therefore created a trust, evidenced by the trust instrument executed on December 24, 1923. Stuart Brown contributed his undivided one-third interest and each of the three children contributed his two-ninths interest to the trust estate, the spouses of the married children joining in the conveyance. Under the trust agreement Stuart Brown was to receive and did receive during his life the income upon his one-third interest in the trust estate and each of the children received the income upon the two-ninths interest contributed by each. After *940 the death of Stuart Brown, who died intestate on October 26, 1924, each of the three children received the income upon a one-third undivided interest in the trust estate. Under the terms of the trust agreement each of the three children had the right to receive one-third of the income of the trust estate for life. Each also had a limited power of appointment as to one-third of the corpus of the trust estate after the death of Stuart Brown on October 26, 1924. *789 It is the contention of the respondent first that there should be included in the gross estate of Milton Hay Brown, the decedent herein, the value of one-third of the corpus of the trust estate, admitted to be $241,808.45. He claims that section 302(d) of the Revenue Act of 1926, as amended by section 401 of the Revenue Act of 1934, warrants such inclusion. That section, however, requires the inclusion in the gross estate of any interest in property "of which the decedent has at any time made a transfer." Since the property transferred to the trust estate by Milton Hay Brown was only a two-ninths interest in the estate of his mother, we shall first consider whether the value of that two-ninths interest is includable in the gross estate. The respondent cites section 302(c) of the Revenue Act of 1926 as being applicable to this case. That subdivision of section 302 requires the inclusion in the gross estate of property transferred by the decedent "in contemplation of or intended to take effect in possession or enjoyment at or after his death." No contention is made by the respondent that the transfer made to the trust by Milton Hay Brown on December 24, 1923, was in contemplation*790 of death and the stipulated facts are that at the time of the transfer he was 36 years of age and was suffering from no mortal illness and was in normal health for a man of his age. This stipulation conclusively shows that the transfer to the trust by the decedent was not in contemplation of death. Neither is any contention made by the respondent that the transfer made by Milton Hay Brown on December 24, 1923, was "intended to take effect in possession or enjoyment at or after his death." The decedent, his sisters, and their father all made their transfers to the trust on the date that the trust instrument was executed. The trustees held title to the property after that date and the decedent and his sisters and father had the enjoyment of the income from the property from that date. We therefore are of the opinion that section 302(c) of the Revenue Act of 1926 has no application to this case. Section 302(d) of the applicable statute requires the inclusion in the gross estate of a transfer made by the decedent "by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or*791 in conjunction with any person, to alter, amend, or revoke." It will be noted that the provision does not require that *941 the transferor have a power to alter, amend, or revoke the trust instrument. If he has any power to change the enjoyment of the property up to the date of his death the value of the transferred property is includable in the gross estate. The Board and the courts have so held in numerous cases. The petitioner contends that the transfer by Milton Hay Brown was made prior to the time that the provision contained in section 302(d) was in effect; that it was a completed transfer prior to the effective date of the statute, and that therefore the value of the transferred property may not be included in the gross estate. It should be noted, however, that section 302(h) of the Revenue Act of 1926 provides that that section is effective whether the transfer was made before or after the enactment of the Revenue Act of 1926. The Board and the courts have held in numerous cases that transfers made prior to the effective date of the Revenue Act of 1926 are controlled by section 302(d). All that is necessary to make the subdivision operative is that the transferor*792 shall have up to the date of his death the right to change or alter the enjoyment of the property. See Bank of New York & Trust Co., Administrator,20 B.T.A. 677">20 B.T.A. 677, 684; Day Kimball et al., Administrators,29 B.T.A. 60">29 B.T.A. 60; affd., per curiam (C.C.A., 2d Cir.), 71 Fed.(2d) 1011; Luis James Phelps et al., Executors,27 B.T.A. 1224">27 B.T.A. 1224; Mary A. B. duPont Laird et al., Executors,29 B.T.A. 196">29 B.T.A. 196. In Frederick Foster et al., Executors,31 B.T.A. 769">31 B.T.A. 769, the Board sustained the respondent's determination that the value of a trust was properly includable in the computation of his gross estate with the following statement: The respondent has included the value of the trust corpus, in the amount above set out, in gross estate of the decedent under section 302(d) of the Revenue Act of 1926. The respondent concedes that the trust was irrevocable, but takes the position that the retained power of the decedent to direct the disposition of the trust property constitutes a power to alter or amend. The statutory provision cited by the respondent requires the inclusion in gross estate of property transferred*793 in trust by a decedent "where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power * * * to alter, amend, or revoke." Under the trust instrument in this case the trust property would go to the grantor's children if he died intestate. But he reserved the power in the trust instrument to provide by will for the holding of the property upon further trusts "for the benefit of such children or their survivor or isssue." The power thus retained was one to change materially the enjoyment of the trust property. The grantor could, and did by his will and codicil, divest the children of the remainder interest they would have taken under the trust indenture had he died intestate, and make them life tenants. In this respect the present case differs from that of Equitable Trust Co. of New York, Administrator of Beresford,31 B.T.A. 329">31 B.T.A. 329, where it was held that under the grantor's retained power she "could not divest the class named as remaindermen but could only designate the proportions in which the members of the class would take." In the instant case, as pointed out above, the grantor could do much more; he could not only*794 change the remainder interests of the *942 children inter sese, but could entirely divest them of any remainder interest. This was a power to materially change the enjoyment of the property, and as said in Dort v. Helvering, 69 Fed.(2d) 836, if the trust instrument "contain a right to change the enjoyment, it is within the terms of the act." We are of the opinion that the power retained by the decedent to change the enjoyment of the property comes within the provisions of the statute and the trust property should be included in gross estate. See Porter v. Commissioner,228 U.S. 436">228 U.S. 436; Hoblitzelle v. United States,3 Fed.Supp. 331; Bank of New York & Trust Co., Administrator,20 B.T.A. 677">20 B.T.A. 677; H. T. Cook et al., Executors,23 B.T.A. 335">23 B.T.A. 335; affd., 66 Fed.(2d) 995; Day Kimball et al., Administrators,29 B.T.A. 60">29 B.T.A. 60. In Estate of Daniel Guggenheim,39 B.T.A. 251">39 B.T.A. 251, the Board said: The cited cases [*795 Helvering v. Helmholz,296 U.S. 93">296 U.S. 93, and White v. Poor,296 U.S. 98">296 U.S. 98] are authority for holding that the mere power to terminate a trust and distribute the proceeds to the beneficiaries is not a power to alter, amend or revoke; but this was not the only power reserved by the settlor. He reserved the power to "alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof." This is the power which formed the basis of respondent's determination that the trust corpus should be included in his gross estate. The obvious purpose of Congress in enacting section 302(d), supra, was to prevent the avoidance of estate taxes in cases where settlors retained control over trust estates by reserving in themselves the power to alter, amend, or revoke, even though title could not be regained by them. Until the death of the decedent there was always the possibility of the exercise by him of the reserved power to change and alter the relative interests of the beneficiaries. This power to alter and change the economic benefit gave the decedent a substantial control over the trust property, and his death, therefore, *796 was "the source of valuable assurance passing from the dead to the living." Porter v. Commissioner,288 U.S. 436">288 U.S. 436. Such power can not be considered a trivial or inconsequential one. Hoblitzelle v. United States,3 Fed Supp. 331; Holderness v. Commissioner, 86 Fed.(2d) 137; Commissioner v. Chase National Bank of New York, 82 Fed.(2d) 157; certiorari denied, 299 U.S. 552">299 U.S. 552; Porter v. Commissioner, supra; Witherbee v. Commissioner, 70 Fed.(2d) 696. Under the trust instrument of December 24, 1923, Milton Hay Brown reserved a power exercisable by will to change the devolution of the property contributed by him to the trust. If that power had not been exercised his three children would have inherited a right to receive the income of Milton Hay Brown's share of the trust estate and also to receive their portions of the corpus. Milton Hay Brown had, however, reserved the right to control the devolution of his interest in the trust estate. He could have cut off any one or all three of his children and his wife and have named his sisters or any other descendants of*797 Kate Hay Brown to receive his interest in the trust property. This power of control over the trust property warrants the inclusion in the gross estate of the property which he transferred to the trust. Dort v. Helvering, 69 Fed.(2d) 836; certiorari denied, 293 U.S. 569">293 U.S. 569. It was immaterial whether the power which he retained was a special power or a general power. So long as he had the power to control the course of the devolution of the property, it was includable in his gross estate under section 302(d) of the applicable statute. *943 The only question remaining for decision is whether the respondent was correct in including in the decedent's gross estate the one-ninth interest in the trust estate which represented a one-third interest in the trust estate owned by Stuart Brown up to the date of his death in 1924. Prior to the creation of the trust on December 24, 1923, Stuart Brown had an undivided one-third interest in fee in the estate of Kate Hay Brown. Joining with his children he transferred this property to the trust on December 24, 1923, with the right to receive the income for life and with the further right to say who of the*798 descendants of Kate Hay Brown should receive his share upon his death. He died in 1924 without exercising such limited power of appointment Upon his death his three children, one of whom was the decedent in this proceeding, each succeeded to one-third of his one-third interest in the trust estate or a one-ninth interest in the total trust estate. The decedent had the right during his life to receive and did receive the income from this one-ninth interest. He also had by virtue of the trust instrument a limited power of appointment in respect of that one-ninth interest the same as he had formerly possessed with respect to the two-ninths interest transferred by him to the trust. It is clear that if Stuart Brown had deeded to Milton Hay Brown a right to receive for life one-third of the income of his share of the trust estate, the value of that one-third interest would not be includable in the gross estate; for the life estate would have come to an end at his death and no property would be transferred from the dead to the living as the result of his death. *799 May v. Heiner,281 U.S. 238">281 U.S. 238. The gift would have been made prior to the amendment of the estate tax law on March 3, 1931, and hence the amendment would not control. Hassett v. Welch,303 U.S. 303">303 U.S. 303. There can be no difference between a gift by deed of a life interest and an inheritance of a life estate. See Morsman v. Burnet,283 U.S. 783">283 U.S. 783. But Milton Hay Brown also acquired upon the death of his father a limited power of appointment in respect of the remainder interest in one-ninth of the trust estate acquired by him from his father. The value of a limited power of appointment is not includable in the gross estate. Farmers' Loan & Trust Co. v. Bowers (C.C.A., 2d Cir.), 29 Fed.(2d) 14; Whitlock-Rose v. McCaughn, 21 Fed.(2d) 164: Leser v. Burnet (C.C.A., 4th Cir.), 46 Fed.(2d) 756. The question arises as to whether the inheritance by Milton Hay Brown of a life estate coupled with a limited power of appointment as to the remainder interest warrants the inclusion of the one-ninth interest in his gross estate. We think it does not. The simple facts are that*800 the interest in the corpus of the trust estate owned by his father, Stuart Brown, never became a part of the decedent's estate. He simply had a right to receive the income for *944 life from one-third of his father's interest in the trust estate, with a limited power of appointment with respect thereto. Since the property never became a part of the decedent's estate, there was no transfer of that property from the dead to the living as a result of the death of Milton Hay Brown. If he had not exercised the limited power of appointment his children would have succeeded to his share of his father's interest in the trust estate as a result of the conveyance by Stuart Brown to the trust estate in 1923. The respondent contends, however, that the entire one-third interest in the trust estate over which Milton Hay Brown had a limited power of appointment up to his death in 1935 is includable in the gross estate by virtue of paragraph twenty-four of the trust instrument. That paragraph gave to the three children of Kate Hay Brown, with the written consent of Stuart Brown, if living, and of Logan Hay, if living, the power to revoke in whole or in part all or any of the trusts in*801 the instrument and to appoint and direct that the entire trust estate or any part or parcels then held under the instrument should be conveyed absolutely and in fee simple to such person, persons or corporations as directed by the instrument of revocation. The only applicable provision of the taxing act which requires the inclusion in the gross estate of transfers of property where there is a power of revocation is section 302(d), and that, as above pointed out, refers only to transfers by "the decedent." It may be true, however, that where a decedent has power by an instrument of revocation to bring property under his own dominion and control, the value of such property may be included in the gross estate under section 302(a) of the statute. That requires the inclusion in the gross estate of the interest in property "of the decedent at the time of his death." We do not think, however, that a power of revocation which may not be exercised by the decedent alone could constitute an interest in property within the meaning of subdivision (a). The case of *802 Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339, involved seven trusts created by the decedent. The Supreme Court held that two were taxable because subject to a power of revocation in him alone. In each of the others the decedent reserved a power to limit, change, or modify, to be exercised in four of the trusts by joint action of himself and a single beneficiary, and in the remaining one by himself and a majority of the beneficiaries acting jointly. As the title was put beyond the decedent's control at the time of the creation of the trust instrument, the Supreme Court held that these transfers were not includable in the gross estate. In Mackay v. Commissioner (C.C.A., 2d Cir.), 94 Fed.(2d) 558, it was held that the power to revoke which was not exercisable by the decedent alone rendered transfers made by the decedent (not in contemplation of death) beyond the pale of the statute, where, as *945 here, the trust was created prior to the effective date of the Revenue Act of 1924. The decedent's two sisters had an interest in the trust estate. The sole purpose for the creation of the trust in 1923 were to keep the interests of the*803 heirs of Kate Hay Brown together. Kate Hay Brown inherited an undivided one-half interest in the estate of her father, which consisted of many farms and other pieces of real estate. The properties had never been separated between herself and her brother, Logan Hay. A joint operation of the farms and other pieces of real property was believed to be for the interest of all. Logan Hay, the decedent's uncle, had a one-half undivided interest in the many farms and other pieces of real property exactly the same as the children of Kate Hay Brown had. Presumably this was the reason that his consent was to be obtained before there could be any revocation of the trust instrument. Since the decedent did not alone have a right to revoke the trust instrument, we think that the power of revocation contained in paragraph twenty-four does not warrant the inclusion in the gross estate of the decedent of the interest in the trust estate acquired by him from his father. Helvering v. City Bank Farmers Trust Co.,296 U.S. 85">296 U.S. 85; *804 White v. Poor,296 U.S. 98">296 U.S. 98, Estate of Waldo C. Bryant,36 B.T.A. 669">36 B.T.A. 669, 672. The respondent's action is reversed in including in the gross estate of the decedent any more than a two-ninths interest in the trust estate. Reviewed by the Board. Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624438/

T. Jack Foster, et al. v. Commissioner. 1Foster v. CommissionerDocket No. 1088-64.United States Tax CourtT.C. Memo 1967-207; 1967 Tax Ct. Memo LEXIS 54; 26 T.C.M. (CCH) 1021; T.C.M. (RIA) 67207; October 24, 1967Roy C. Lytle, 824 Commerce Exchange Bldg., Oklahoma City, Okla., for the petitioners. J. C. Linge, for the respondent. SCOTT Supplemental Memorandum Findings of Fact and Opinion SCOTT, Judge: Certain substantive differences arose between the parties in their computations under Rule 50 submitted to the Court resulting in amendments to the pleadings being filed by the parties. Petitioners filed a motion to amend their petition which included a proposed amendment relating to loss carrybacks from years subsequent to the years here in issue. Petitioners later withdrew their motion insofar as it related to such claimed*55 loss carrybacks, thus causing the area of disagreement between the parties to center on the basis of Likins-Foster Honolulu Corporation (hereinafter referred to as Honolulu) in the stock of Likins-Foster Monterey Corporation (hereinafter referred to as Monterey) for computing gain on redemption by Monterey in the fiscal year ended June 30, 1957, of its class A stock and the basis of Honolulu in the stock of Monterey, Likins-Foster Ord Corporation, Likins-Foster El Paso Corporation, and Likins-Foster Biggs Corporation for the purpose of computing Honolulu's gain from amounts received from these corporations in the fiscal year ended June 30, 1959, after the corporations had passed resolutions of dissolution and liquidation. The difference between the parties as to the basis of Honolulu in the class A stock of Monterey for computing Honolulu's gain for the fiscal year 1957 is whether the basis of the class A and class B stock is $215,000 or $230,000. In our Memorandum Findings of Fact and Opinion, filed December 27, 1966, we stated: * * * It may be that the class B stock did not have a basis of $15,000 in addition to the $215,000 basis stipulated to be that of the class A stock, but*56 respondent has failed to show that this is a fact and therefore we hold that in prorating the reduction in basis to the various classes of stock the value of the class A stock to be used is $215,000 and the value of the class B stock is $15,000. Our conclusion as to the original basis of Honolulu in the class A and class B stock of Monterey is in accordance with our Memorandum Findings of Fact and Opinion, filed December 27, 1966. The total amount of losses of Monterey for the fiscal years ended June 30, 1954, 1955, and 1956, which were used in computing its consolidated net income with Honolulu and subsidiaries for those years is set forth in our Memorandum Findings of Fact and Opinion, filed December 27, 1966, as being in the amounts of $23,877, $78,664, and $72,090, respectively. The total of these amounts is $174,631. However, the parties apparently are in agreement in the proposed recomputations that the total of these losses is $174,631.63, and we now determine this to be the amount of such losses. In our Memorandum Findings of Fact and Opinion filed December 27, 1966, we determined that the basis of Honolulu in the stock of Monterey to be used in computing the gain by*57 Honolulu from distributions in liquidation received from Monterey in the fiscal year 1959 was zero. Petitioners in their Rule 50 computation used a basis of Honolulu in Monterey's stock, in computing gain for the fiscal year 1959 in the amount of $171,897.69 plus certain amounts representing taxes of Monterey which petitioners claimed after the entry of decision in this case Honolulu would be required to pay, an issue which will be hereinafter discussed. It is petitioners' contention that the facts as set forth in our Memorandum Findings of Fact and Opinion filed December 27, 1966, show that a greater reduction in the basis of Honolulu in Monterey's stock should be used in computing Honolulu's gain on redemption of Monterey's stock in the fiscal year 1957 than the amount of such reduction which had been claimed by respondent and determined by the Court and that the making of the adjustment reducing Honolulu's basis in the fiscal year 1957 because of previously used losses requires a contra-adjustment in the fiscal year 1959. The parties agreed that respondent might file an amendment to his amended answer claiming the increased deficiency resulting from the decrease in Honolulu's basis*58 in Monterey's stock for computing Honolulu's gain upon redemption of such stock in the fiscal year 1957 and that petitioners might file an amended petition claiming the reduction in Honolulu's tax in the fiscal year 1959 resulting from using as Honolulu's basis in Monterey's stock the amount petitioners claimed to be the proper amount for computing Honolulu's gain for that year. Such amendment to amended answer and amended petition were filed. It is petitioners' position that the following provisions of section 1.1502-34A(a), (b)(1) and (2), and (c)(1) and (2), Income Tax Regulations, support their method of determining Honolulu's basis in Monterey's stock for the purpose of computing the gain of Honolulu from the amount received as a liquidating distribution from Monterey in the fiscal year 1959: Section 1.1502-34A Sale of stock; basis for determining gain or loss. (a) Scope of section. This section prescribes the basis for determining the gain or loss upon any sale or other disposition (hereinafter referred to as "sale") by a corporation which is (or has been) a member of an affiliated group which makes (or has made) a consolidated return for any taxable year, of any share of*59 stock issued by another member of such group (whether issued before or during the period that it was a member of the group and whether issued before, during, or after the taxable year 1929), and held by the selling corporation during any part of a period for which a consolidated return is made or required under the regulations under section 1502. * * * (b) Sales made while selling corporation is member of affiliated group. If the sale is made within a period during which the selling corporation is a member of the affiliated group, whether or not during a consolidated return period, and whether or not, as a result of such sale, the issuing corporation ceases to be a member of the group, the basis shall be determined as follows: (1) The aggregate bases of all shares of stock of the issuing corporation held by each member of the affiliated group (exclusive of the issuing corporation) immediately prior to the sale, shall be determined separately for each member of the group, and adjusted in accordance with the other provisions of subtitle A of the Code, but without regard to any adjustment under the last sentence of section 1051 relating to losses of the issuing corporation sustained*60 by such corporation after it became a member of the group. (2) From the combined aggregate bases as determined in subparagraph (1) of this paragraph, there shall be deducted the sum of - (i) All losses of such issuing corporation sustained during taxable years for which consolidated income tax returns were made or were required (whether the taxable year 1929 or any prior or subsequent taxable year) after such corporation became a member of the affiliated group and prior to the sale of the stock to the extent that such losses could not have been availed of by such corporation as net loss or net operating loss in computing its net income or taxable income, as the case may be, for such taxable years if it had made a separate return for each of such years, * * *reduced by any losses of the issuing corporation approtioned under this section to its stock sold or otherwise disposed of in a prior transaction, disregarding any transaction between members of the affiliated group during a consolidated income or excess profits tax return period which did not constitute a partial liquidation of the issuing corporation. * * *(c) Sales after selling corporation has ceased to be*61 member of affiliated group. If the sale is made after the selling corporation has ceased to be a member of the affiliated group, such basis shall be determined in accordance with paragraph (b) of this section, except that - (1) The aggregate basis (under paragraph (b)(1) of this section) shall be determined for all shares of the issuing corporation held by each member of the group immediately prior to the time the selling corporation ceased to be a member of the group (rather than immediately prior to the sale); (2) The reduction (under paragraph (b)(2) of this section) with respect to losses apportioned to stock sold or otherwise disposed of in prior transactions shall be determined without regard to the transaction which terminated the affiliation and all subsequent transactions; * * *Petitioners interpret the provision, "The aggregate bases of all shares of stock of the issuing corporation held by each member of the affiliated group * * * immediately prior to the sale * * * shall be * * * adjusted in accordance with the other provisions of subtitle A of the Code * * *" to require starting with an $11,900 basis of Honolulu in Monterey's stock as of the year 1959, which*62 represents the amount they consider to be the portion of a $15,000 original basis of Honolulu in Monterey's class B stock which is not applicable to the stock transferred in February 1958 when Monterey ceased to be a part of the affiliated group entitled or required to file consolidated returns. Petitioners then state that under the provisions of paragraph 1.1502-34A(b)(2) there is no amount or zero amount of losses of such issuing corporation sustained during taxable years for which consolidated income tax returns were made that "could not have been availed of by such corporation as net loss or net operating loss in computing its net income * * * if it had made a separate return for each of such years," since Monterey's income computed in accordance with the opinion of this Court was sufficient for the fiscal year 1958 and for that portion of that year prior to February 1958 when it ceased to be a part of the consolidated group to have offset all of its prior losses both separate and those previously used by the consolidated group. Petitioners state that, therefore Honolulu's original basis in Monterey's stock is to be reduced by zero minus any "losses of the issuing corporation apportioned*63 under this section to its stock sold or otherwise disposed of in a prior transaction, * * *." Petitioners state this results in the amount to be subtracted from $11,900 being a minus amount, which requires that the $11,900 be increased by such amount. We stated in our Memorandum Findings of Fact and Opinion, filed December 27, 1966, as follows: In connection with the allocation between class A and class B stock of losses availed of by Monterey which would not have been available to it except for the filing of a consolidated return, we put a basis of $15,000 on the class B stock of Monterey from a balance sheet figure appearing in the record. We took this balance sheet figure because of the fact that respondent had the burden of proof and had not shown that this amount did not represent Honolulu's basis in the stock. However, in the instant case respondent determined that the full $888,576.13 was taxable to Honolulu as a liquidating distribution and therefore the burden of showing that a lesser amount is taxable to Honolulu is on petitioners. We do not consider the facts in this case to be sufficient to show that Honolulu's original basis in the class B stock of Monterey was $15,000, *64 or if such were the original basis, what portion of such original basis should be allocated to the portion of Monterey's stock which Honolulu disposed of in its fiscal year 1958 when Monterey ceased to be a member of the consolidated group. We therefore conclude that Honolulu's original basis in Monterey's stock to be used for the purpose of computing Honolulu's gain from the distribution received by it from Monterey in the fiscal year 1959 is zero. However, if an original basis of zero is used for the class B stock, it is still necessary to determine whether petitioners are correct that the zero basis should be reduced by zero minus the amount of the 1957 adjustment so that the basis in 1959 is the amount by which the 1957 basis was reduced. The purpose of the regulation requiring the adjustment for previous losses used by the consolidated group which could not have been used by the member of the consolidated group if that member had filed separate returns is to avoid a double use of losses and the purpose of, in effect, restoring prior apportioned losses is not to have an adjustment which results in effect in denial of one use of such losses. Here the income of Monterey for the*65 portion of the year it was a member of the consolidated group in the fiscal year 1958 in accordance with our Memorandum Findings of Fact and Opinion, filed December 27, 1966, is approximately $600,000. Therefore, it had sufficient income in this year to use its approximately $112,000 of separate losses, the approximately $174,000 of its losses used by the consolidation in prior years, and the approximately $49,000 loss in the fiscal year 1957. Therefore, there were not as of the time in 1958 when Monterey was removed from the consolidated group any losses for any prior year which it could not have used if it had filed separate returns. Therefore, in 1959 it is necessary to correct for an adjustment made in 1957 when circumstances were different in this respect. This correction results in the basis of Honolulu in the stock of Monterey in the fiscal year 1959 being the same amount as the reduction in Honolulu's basis in Monterey stock in the fiscal year 1957 computed under section 1.1502-34A(b)(2) of respondent's regulations. In our Memorandum Findings of Fact and Opinion, filed December 27, 1966, we stated with respect to petitioners' contention that there were liabilities of Likins-Foster*66 Ord Corporation, Likins-Foster Biggs Corporation, Likins-Foster El Paso Corporation, and Monterey which should be used to reduce the distributions by those corporations to Honolulu before computing any gain to Honolulu in its fiscal year 1959 from such distributions, as follows: * * * If at some later date it were determined that some liability did exist which Honolulu was required to pay, the amount would be a capital loss to Honolulu in a later year. Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6 (1952). If petitioners had in mind some liability of Honolulu as a transferee for income taxes of the Wherry corporations, the amounts would not be proper reductions of the distributions but any adjustment would be made in Honolulu's income in the year that the liability for such taxes is determined or paid. James Armour, Inc., 43 T.C. 295">43 T.C. 295, 312 (1964). Petitioners argue that since Honolulu is not only liable as a transferee of its former subsidiaries but also because for some years prior to the fiscal year 1959 it filed consolidated returns with these affiliates, the holdings in Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6 (1952), and James Armour, Inc., 43 T.C. 295">43 T.C. 295 (1964),*67 are inapplicable. Any deficiencies in tax which may be determined when the decision of this Court is entered with respect to Monterey and other "Wherry" corporations which Honolulu is required to pay are not a liability which is finally determined until the decision of this Court is entered. It was because such liability was not fixed or paid until a later year, and not merely because the liability was a transferee liability, that formed the basis of the holding in Arrowsmith v. Commissioner, supra, and in James Armour, Inc., supra, that the deduction should be taken in the later year. Therefore under the holdings of these cases, Honolulu is not entitled to deduct any amounts of the liabilities of the "Wherry" corporations which it may ultimately be called upon to pay until they are either finally determined or paid. In effect, Honolulu is attempting to obtain a deduction for the yet undetermined taxes of the "Wherry" corporations which it may eventually be called upon to pay by reducing its gain from liquidating distributions from such corporations in the fiscal year 1959 by the yet undetermined amounts. An appropriate order will be entered in Docket No. *68 1088-64. Footnotes1. Memorandum Findings of Fact and Opinion filed December 27, 1966, involved this and other dockets that were consolidated. This Supplemental Memorandum Opinion involves only Likins - Foster Honolulu Corp., et al., Docket No. 1088-64. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624439/

Sydney B. Carragan v. Commissioner.Carrag v. . Comm'nDocket No. 24281.United States Tax Court1951 Tax Ct. Memo LEXIS 291; 10 T.C.M. (CCH) 259; T.C.M. (RIA) 51074; March 19, 1951John G. Turnbull, Esq., 111 John St., New York 7, N. Y., for the petitioner. Stephen P. Cadden, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion This proceeding involves deficiencies in the petitioner's income tax for the years 1943 and 1944 in the amounts of $7,343.94 and $597.89, respectively. The year 1942 is involved by reason of the forgiveness feature of the Current Tax Payment Act of 1943. There are two questions presented for our determination: First, *292 whether a payment of $19,200 which petitioner received in 1942 from his employer corporation whose assets were held by the Alien Property Custodian was compensation for services rendered, or was a gift; and second, whether $1,380 expended by petitioner in 1944 for living expenses in Philadelphia is deductible as a business expense. Findings of Fact The stipulated facts are incorporated herein by reference. The pertinent facts are as follows: Petitioner is an individual residing in New York. His return for 1943 and 1944 were filed with the collector of internal revenue for the first district of New York. The pertinent facts are as follows: The Takamine Corporation, hereinafter referred to as Takamine, was a New York corporation organized in 1923 to acquire an importing and exporting business previously transacted by predecessor companies. The petitioner had been employed by these predecessor companies from the years 1916 to 1923. He continued in the employment of Takamine until its liquidation in 1942. The stock of Takamine consisted of 1,600 shares of common no par value stock on December 7, 1941. One-half of the stock was owned by Eben T. Takamine, a Japanese national residing*293 in New York City, and the other half was owned by Sankyo Company, Limited, of Tokyo, Japan, a Japanese corporation. After December 7, 1941, all transactions involving Takamine were controlled by the Secretary of the Treasury of the United States upon recommendation of the Federal Reserve Bank of New York City. A custodian was installed on December 8, 1941, by the Federal Reserve Bank and under his direction the affairs of Takamine were rapidly liquidated. On May 20, 1942, the liquidation had been completed to the extent that all assets had been converted to cash except $10,000 face amount of Japanese bonds and some accounts receivable from Japanese debtors. At that time the board of directors of the corporation was still functioning subject to approval of their acts by the Secretary of the Treasury. On that date the board of directors held a meeting and adopted a resolution authorizing payment of severance allowance to regular employees. This resolution reads as follows: "WHEREAS, The liquidation of Takamine Corporation has been substantially completed; and "WHEREAS, In accordance with precedent, the directors deem it fitting and proper to recognize the length of time its officers*294 and employees have served the Corporation and the value of their services by granting to each, respectively, a severance allowance commensurate; "NOW, THEREFORE, be it "RESOLVED, That the following severance allowances be paid: "Sydney B. Carragan, in recognition of the faithful services rendered to the Corporation and its predecessors over a period of 26 years and for which services, the compensation received by Mr. Carragan has been entirely inadequate, the sum of $19,200. "Shukichi Masui, in recognition of the faithful services rendered to the Corporation and its predecessors over a period of 20 years, the sum of $3,500. "Torazo Nishio, in recognition of the efficient services rendered to the Corporation during the last 16 years, the sum of $2,500. "Katherine Rooney, in recognition of her loyal and conscientious work performed for the Corporation during the last 8 years, the sum of $1,500. "Florence Kupper, in recognition of her loyal services performed for the Corporation during the last 6 years, the sum of $650. "Icona Nation, in recognition of her loyal services performed for the Corporation during the last 5 years, the sum of $475. "John Gilmore, in recognition*295 of the meritorious work performed by him for the Corporation, particularly in connection with the liquidation of various of its assets, the sum of $100." On the same date application was made to the Secretary of the Treasury for permission to pay the severance allowances authorized by the above resolution. Attached to the application was a copy of the above resolution and also a statement as to the relationship to Takamine of each of the officers and employees to whom the proposed severance allowances were to be paid. As to petitioner, the statement reads as follows: "The severance allowances to be paid to each of the persons herein had been discussed with Mr. Eben T. Takamine, the holder of fifty percent of the capital stock of this Corporation, and such payments have his full approval. The balance of the capital stock of the Corporation is owned by Sankyo Company, Limited, of Tokyo, Japan, who has in times past, approved like severance allowances. "The facts that actuated the Board of Directors of Takamine Corporation in fixing the respective allowances in the amounts specified are as follows: "SYDNEY B. CARRAGAN is a native born American citizen. He has resided at 129 Wellington*296 Road, Garden City, New York, for twenty-two years last past. "Mr. Carragan was first employed by a predecessor of Takamine Corporation in 1915, and during the 26 years since that time he has served the Corporation and its predecessors continuously. During that period he has been in full charge of its foreign business, both export and import, with the exception of the toothbrush business. For the last five years he has been the chief operating executive of the Corporation. "Mr. Carragan obtained all of the agencies for export of goods to Japan which the Corporation had. Among such agencies were MAX MILLER, INC., NATIONAL CARBON COMPANY, ACHESON GRAPHITE COMPANY, and SHARPLESS CORPORATION. Many other less well known American companies also placed their Japanese business with Takamine Corporation through the efforts of Mr. Carragan. The development of business for those American companies was directed by him. He made trips to Japan in 1935 and 1937 and established and developed connections there which resulted in constantly expanding business down to the time that exports to Japan were restricted. All imports from Japan, except toothbrushes, were made under his direction and were*297 the result of orders he obtained from American concerns. "All of this business was profitable. In 1937 when Mr. Carragan assumed direction of the Corporation's affairs, its financial condition was bad. Under his leadership and because of his efforts, the financial condition of the Corporation steadily improved. Had not the war, and prior thereto, international complications intervened, the future of the Corporation would be very bright, indeed, and almost altogether through Mr. Carragan's efforts. "Mr. Carragan was first employed by Takamine Laboratory in 1915 after graduating from Yale University, Michigan Law School, and being admitted to the Bar of the State of New York. Two years later he entered the employ of the predecessors of Takamine Corporation, and joined Takamine Corporation when it was organized in 1923. He has received a very low salary at all times with the understanding that if he made the Corporation prosper, he would be rewarded with a substantial interest in it. His base salary has been $4800 a year since 1938, and prior thereto it was even less. Bonus payments for the last few years have averaged about $2,700 a year. "Because of the liquidation of the Corporation*298 it will be impossible for Mr. Carragan to secure the benefit of the work he has done. The amount the Corporation desires to pay Mr. Carragan, $19,200, has been approved by Eben T. Takamine, the holder of 50 per cent of the stock of the Company. The only other stockholder is Sankyo Company, Ltd., a Japanese national in Japan. The payment of a severance allowance in such amount is in line with the policy adopted by the Corporation at the time of retirement of T. Kusanobu a former general manager. At that time the stockholders of the Corporation were the same as they are now, but the Corporation was not in nearly as good financial condition. Mr. Kusanobu received a total severance benefit of approximately $18,700. His service to the Corporation measured by results achieved is not to be compared with the services rendered by Mr. Carragan. Mr. Kusanobu's length of service was also much shorter, being only 14 years. "Mr. Carragan has devoted 26 years to the work of Takamine Corporation and its predecessors. He has amply earned the severance allowance of $19,200." On June 10, 1942, the Federal Reserve Bank of New York approved the application and on June 12, 1942, the petitioner, along*299 with the other officers and employees, received payment of the severance allowances authorized by the resolution. During the year 1942 petitioner was vicepresident and treasurer, and a director of Takamine and the holder, under a voting trust agreement, of all the outstanding shares of its capital stock. He was the senior officer and manager of the corporation. His salary and bonus for each of the years of his employment and the profits and losses of Takamine, before payment of any bonus, were as follows: Earnings of CorporationBefore Payment of BonusFiscal YearTotalEndingSalaryBonusCompensation(Profit)(Loss)1923$ 4,100$ 4,10019244,4004,40019254,6004,60019265,0005,00019274,877$ 3005,17719284,8002005,00019294,8007005,50019305,4002505,650$ 6,41619315,400755,4757,77019324,7004,700$20,62019333,870753,94521,0761934$4,620$ 400$ 5,020$ 8,49719354,0008504,85011,33119364,2006004,8009,89219374,8005005,30025,54219384,8002,0426,84218,27319394,8003,6508,45021,67919404,8005,55010,35032,43419414,8003,0007,8009,502*300 On July 25, 1941, petitioner was chairman of a special meeting of stockholders where Eben T. Takamine, Tarazo Nishio, and Shukichi Masui, all Japanese nationals, resigned as directors of the corporation, and Katherine V. Rooney and John G. Turnbull were elected to succeed them. The petitioner was the other director of the corporation. On the same day petitioner presided as chairman of a special meeting of the board of directors, consisting of himself, Katherine V. Rooney and John G. Turnbull, at which Eben T. Takamine resigned as president and petitioner resigned as secretary. It was decided to leave the office of the president of the corporation vacant but petitioner was elected treasurer and John G. Turnbull was elected secretary. Since petitioner had previously been elected vice president of the corporation he continued as its senior officer. In December 1941 and during 1942 Sankyo Company, Limited, and Eben T. Takamine each owned one-half of the capital stock of Takamine. This stock was all held by the petitioner under a voting trust agreement dated October 26, 1940. The petitioner and other regular employees of Takamine continued in the employ of the corporation under*301 the control and supervision of the custodian until June 1, 1942. Takamine had no profits in 1942. The severance allowances paid in that year were not charged on the books of Takamine as additional salary or expense. Neither were they reported as gifts in any gift tax return filed by Takamine. Takamine was not legally obligated to pay petitioner any additional compensation in 1942. In April or May 1943 petitioner obtained employment with Sharples Corporation in Philadelphia, Pennsylvania. He was employed by that company in Philadelphia throughout the remainder of that year and the entire year 1944. At the time petitioner accepted this position with Sharples Corporation his home was in Garden City, New York, where he resided with his wife and daughter-in-law. A grandson was born in September 1944. Petitioner was unable to find satisfactory living quarters in Philadelphia and continued to maintain his family residence at Garden City. The offices of Sharples Corporation and petitioner's post of duty with the company were in Philadelphia. The company was engaged in war work and it was understood that petitioner's employment with it would terminate when the war was over. All of*302 petitioner's services to Sharples Corporation were rendered in Philadelphia. Petitioner rented a room in Philadelphia for which he paid $50 a month. The estimated cost of his meals there were $3 per day, or $780 for the 260 days spent in Philadelphia during the year 1944. Petitioner usually spent Saturday and Sunday with his family in Garden City, leaving Philadelphia Friday evening and returning Sunday evening of each week. In his income tax return for 1944 petitioner claimed as a business deduction the aforesaid items of living expense totaling $1,380. The respondent disallowed this deduction. Opinion LEMIRE, Judge: The respondent has determined that the $19,200 which petitioner received in 1942 as a severance allowance from Takamine is taxable to him as additional compensation, under section 22(a), Internal Revenue Code. Petitioner contends that it was a gift and therefore not includible in his taxable income. The question whether the payment was a gift or was additional compensation depends largely upon the intention of the parties who made the payment and on the presence or absence of consideration for the payment, such as would negate the gift. See*303 Michael Laurie, 12 T.C. 86">12 T.C. 86. Because of its particular appropriateness here we quote the following excerpt from our opinion in the Michael Laurie case: "More specifically, it has been decided that, even if a payment were called a gift and treated as such by the parties, these factors in themselves would not be controlling, highly important as they might be; for intention must be gathered not only from the language used and bookkeeping entries, but from all the surrounding circumstances. Charles Schall, 11 T.C. 111">11 T.C. 111; Fisher v. Commissioner, 59 Fed. (2d) 192. Furthermore, if services have been performed for the payer directly or for him indirectly, as where he reaps substantial benefits from them, it is ordinarily presumed that the amount received is for the services and is not a gift. Batterman v. Commissioner, 142 Fed. (2d) 448; certiorari denied, 322 U.S. 756">322 U.S. 756; Nickelsburg v. Commissioner, 154 Fed. (2d) 70; Grace v. Commissioner, 166 Fed. (2d) 1022. Such presumption is particularly strong where the employer-employee relationship exists. Wilkie v. Commissioner, 127 Fed. (2d) 953;*304 certiorari denied, 317 U.S. 659">317 U.S. 659; cf. Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34. And this is not overcome merely by showing that the payments were not treated as expenses by the payor. N. H. Van Sicklen, Jr., 33 B.T.A. 544">33 B.T.A. 544; Thomas v. Commissioner, 135 Fed. (2d) 378. The fact that the payments may have been voluntary ones, made without legal obligation on the part of the payor, is not of itself sufficient to characterize the receipts as gifts. See, e.g., Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716; Noel v. Parrott, 15 Fed. (2d) 699; certiorari denied, 273 U.S. 754">273 U.S. 754. Payments made in recognition of long and faithful service, George B. Lester, 19 B.T.A. 549">19 B.T.A. 549; N. H. Van Sicklen, Jr., supra, or in anticipation of future benefits from the services of the payee, Davis v. Commissioner, 81 Fed. (2d) 137, or for the maintenance of his continuing loyalty as an employee, see Bogardus v. Commissioner, supra, have been generally regarded as taxable compensation and not as tax-free gifts." The payment in question was referred to in the formal resolution*305 authorizing it as a "severance allowance" commensurate with the length of time and the value of petitioner's services to the company. The application filed with the custodian for permission to make the payment also referred to it as a "severance allowance," and, after outlining the history and nature of petitioner's services with the company, stated that: "* * * He has received a very low salary at all times with the understanding that if he made the Corporation prosper, he would be rewarded with a substantial interest in it. His base salary has been $4800 a year since 1938, and prior thereto it was even less. Bonus payments for the last few years have averaged about $2,700 a year. * * *"Mr. Carragan has devoted 26 years to the work of Takamine Corporation and its predecessors. He has amply earned the severance allowance of $19,200." Nowhere in the resolution or in the representations to the custodian is there any mention of a gift or anything that would suggest that a gift as distinguished from compensation was intended. The strongest if not the only support for petitioner's case is found in the testimony of Eben T. Takamine that he regarded the payment as a gift in*306 keeping with what he referred to as an old Japanese custom of paying "tear money" to an employee upon termination of his long and faithful services. The petitioner testified that he also regarded the payment as a gift. He and Eben T. Takamine had been close personal friends for a long time and had discussed the matter of the severance payments. There may be said to be an element of gift, in the ordinary sense of the term, in every payment made to an employee beyond what is required by agreement or prompted by a moral obligation. However, in a legal sense, and especially in regard to the income tax laws, a distinction must be drawn between gifts and remunerations in any form. Bogardus v. Commissioner, supra. For all the evidence shows the payment to the petitioner, even though "tear money" according to the Japanese concept, was nothing more than what is commonly referred to as "severance pay" in recognition of long and faithful services. See George B. Lester, 19 B.T.A. 549">19 B.T.A. 549; N. H. Van Sicklen, Jr., 33 B.T.A. 544">33 B.T.A. 544; and Michael Laurie, supra. In his brief, the respondent argues with considerable force that under the Trading With*307 The Enemy Act of 1917, which governed the distribution of funds of Takamine after December 8, 1941, and when the payment in question was made, no gift of Takamine's funds could lawfully have been made to anyone and that the payments to petitioner and the other employees could have been made only as "claims for services rendered." He cites section 34(a)(b) of the Trading With The Enemy Act of 1917, as amended, 50 U.S.C.A., § 34 (War Appendix). Respondent further points out that these payments were approved, and could have been approved, by the custodian only because they were represented in the application which the officers of the company filed as compensation for services previously rendered. In any event, we think that the evidence fails to establish that the payment of the amount in question to the petitioner was a gift rather than compensation for services. The remaining question for our consideration is whether the $1,380 claimed by petitioner in his 1944 income tax return as a business expense is deductible. The facts are that early in 1943 the petitioner accepted employment in Philadelphia for the duration of the war. The offices of the company*308 employing petitioner were in Philadelphia, his post of duty with the company was at that place and all his services to the company were rendered there. Being unable to find suitable living quarters for his family in Philadelphia, petitioner continued to maintain his home at Garden City, New York, and spent most of his week ends there. He rented a room in Philadelphia for himself at a cost of $50 per month. He paid an estimated $3 a day for meals for a total of 260 days spent in Philadelphia during the year 1944. Numerous cases involving facts substantially the same as are here involved have been before this Court and we have uniformly held that such expenses were personal living expenses and not deductible business expense. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465; George F. Thompson, 6 T.C. 285">6 T.C. 285, affirmed per curiam, 161 Fed. (2d) 185; John D. Johnson, 8 T.C. 303">8 T.C. 303; and Leon Falk, Jr., 15 T.C. 49">15 T.C. 49. On authority of these cases the respondent's disallowance of this deduction is sustained. Decision will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624440/

APPEAL OF WALCOTT LATHE CO.Walcott Lathe Co. v. CommissionerDocket No. 1142.United States Board of Tax Appeals2 B.T.A. 1231; 1925 BTA LEXIS 2131; November 6, 1925, Decided Submitted August 10, 1925. *2131 1. The taxpayer acquired land, constructed buildings and acquired other facilities for the production of articles contributing to the prosecution of the war, and, less than three years after the official termination of the war, sold said land, buildings, and other facilities. Held, that the amortization of war facilities allocable to the year 1918 is the difference between the cost of such facilities and the sale price thereof, assigning under the evidence to the land sold the same sales price as its cost. Held, that, in the interim between the termination of hostilities and the date the property was disposed of, no allowance for exhaustion, wear, and tear should be computed on the property not actually employed in the taxpayer's post-war business. Held, further, that land is not a subject for an allowance for amortization of war facilities. 2. Adjustments on account of surplus resulting from a dividend disallowed. Appeal of L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135. Loss on account of scrapping of equipment allowed. Obsolescence of drawings not allowed for lack of evidence. 3. Improper computation of allowance for exhaustion, wear, and tear of property*2132 not the subject of amortization, held not proven. George Maurice Morris, Esq., for the taxpayer. A. Calder Mackay, Esq., for the Commissioner. JAMES*1232 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This is an appeal from the determination of a deficiency in income and profits taxes for the years 1916 to 1919, inclusive, in a net amount of $7,785.02, additional taxes being asserted for the years 1916 and 1918 in the amounts, respectively, of $349.58 and $12,161.29, and overassessments being conceded for 1917 and 1919 in the amounts, respectively, for $3,318.92 and $1,406.93. The taxpayer concedes the correctness of the Commissioner's determinations in respect of the years 1916 and 1917. FINDINGS OF FACT. The taxpayer is a Michigan corporation with its principal office and place of business at Jackson. During the year 1918 the taxpayer was engaged in manufacturing articles contributing to the prosecution of the war and in connection therewith purchased land, constructed buildings, and acquired machinery and equipment at a total cost of $230,204.84. Its investment in land for that purpose was $29,070. It constructed a building*2133 known as building No. 7 at a cost of $100,594.93, a new heating plant (building, stack, and tunnels only) at a cost of $15,316.98, and acquired machinery for the purpose at a cost of $85,222.93. The heating plant (building No. 8) and the above building No. 7 were erected upon the land above mentioned and all were sold in August, 1923, together with two cranes in building No. 7 costing $13,188, for an aggregate consideration of $87,500. The two cranes so sold were included in the machinery acquired for the production of articles for war purposes, the total cost of all of which was set forth above as $85,222.93. Building No. 7 was completed late in 1918 and was never used for the production of war articles. It was a very substantially built steel, concrete, and brick building. The heating plant (building No. 8) was built primarily because the then existing heating plant of the taxpayer was inadequate to supply heat to the enlarged plant. The two cranes sold in connection with building No. 7 were *1233 never used in connection with the production of war articles or afterwards, except as set forth below. Between 1918 and 1923 building No. 7 and cranes were not used*2134 in the regular business of the taxpayer. The taxpayer rented storage space for the storage of binding twine and automobiles and stored some articles of its own in the plant. The heating plant was, after its completion, used in connection with the heating of the old plant of the taxpayer, to which it confined its regular business after 1918, and was operated at approximately 50 per cent of its capacity from the time it was completed until the date it was sold. The Commissioner allowed amortization of war facilities on account of the above-mentioned land, building No. 7, building No. 8 and cranes in a total amount of $57,299.10, in connection with the determination of the deficiency here in question, and also allowed amortization on building No. 3, in the amount of $4,796.04, and machinery subdivided into two classes in the amounts, respectively, of $61,518.53 and $6,906.69, a total amortization of $130,520.36, from which, however, he deducted $6,203.38 on account of depreciation in building No. 8, making the net allowance for amortization in the Commissioner's determination $124,316.98. The taxpayer at all times claimed a larger amount. The Commissioner, at the hearing, amended*2135 his answer so as to deny that he was correct in allowing an amortization on account of land in the amount of $9,555.80, and asserted that the true amortization allowable was $118,896.39, dividing this allowance into buildings, $37,657.31; heating plant, $4,901.06; machinery in class 1, $69,431.33 (including the cranes above mentioned), and machinery in class 2, $6,906.69, thus departing in respect of the amortization from the determination theretofore made. During the years 1915 and 1916 the taxpayer expended upon its old heating plant the sum of $5,818.89, upon which it deducted depreciation in 1918 in the amount of $278.35. In that year the equipment so added was scrapped in connection with the construction of the new heating plant, and there was realized from such scrapping the amount of $400. From this operation the taxpayer sustained a loss in 1918, not claimed in its return, in the amount of $5,131.54. In the computation of the taxpayer's deficiency for the year 1918 the Commissioner decreased invested capital on account of a dividend in excess of earnings to the date thereof in the amount of $5,219.04, basing that computation upon an alleged accrual of the 1918 income*2136 and profits taxes as a measure of whether to the date of the dividend the taxpayer had current earnings sufficient to pay it. The Commissioner in computing depreciation for the year 1918 excluded from machinery account the amount of $7,671.44, and in 1919 excluded $2,320.63, and, in addition, transferred $15,316.98 *1234 from the machinery account to the heating-plant account. No balance sheets accompany the Commissioner's deficiency letter and it is impossible to determine from the evidence submitted whether, as claimed by the taxpayer, this operation results in denying the taxpayer depreciation upon $15,316.98 properly regarded as machinery after allowance for amortization of war facilities. DECISION. The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 15 days' notice, in accordance with Rule 50. OPINION. JAMES: The taxpayer alleges five grounds as a basis for its appeal: (1) The improper computation of its allowance for amortization; (2) an unallowed loss on account of the scrapping of equipment in the old heating plant; (3) obsolescence of drawings; (4) an improper computation of depreciation*2137 on machinery account; and (5) an improper adjustment of invested capital on account of a dividend, all relating to the year 1918 and affecting 1919 only in respect of the obsolescence of drawings and the necessary adjustments of invested capital resulting from whatever may be the decision of the Board in connection with 1918. Two of the above contentions are readily disposed of. The Board has held in the , that the Commissioner may not reduce invested capital on account of income and excess profits tax to accrue on the income of a taxable year in connection with the computation of the amount of earnings available for current dividends. We have also found as a fact that the taxpayer did sustain a loss in 1918 on account of the scrapping of the equipment in its old heating plant. This narrows the questions to (1) the obsolescence of drawings, (2) the amortization of war facilities, and (3) the depreciation of machinery in 1918. The taxpayer asked for an additional allowance on account of exhaustion, wear and tear of property as a result of the alleged obsolescence of drawings for the years 1918 and 1919 of one-third*2138 of the balance after deducting regular depreciation in the amount of $2,094.81 from the asset account of $15,711.08 for the year 1918. The evidence as to obsolescence is not convincing and the determination of the Commissioner in respect of the proper allowance for exhaustion of drawings is approved. The important question in this appeal is the correct appraisal and the amount of the allowance to the taxpayer for amortization of *1235 war facilities under the provisions of section 234(a)(8) of the Revenue Act of 1918, which reads as follows: Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost*2139 of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time within three years after the termination of the present war the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. The above provision was substantially reenacted by section 234(a)(8) of the Revenue Act of 1921, except that Congress inserted the date March 3, 1924, which was three years from the official termination of the war, instead of the provision in the Revenue Act of 1918, giving the Commissioner authority to redetermine the amortization at any time within three*2140 years after the termination of the war. It is conceded by both parties that any deduction allowable in the instant appeal relates to the taxable year 1918. It appears also to be conceded that the amortization computed on building No. 3 of $4,796.04, on machinery in class 1 of $61,518.53, and on machinery in class 2 of $6,906.69 is correct. The sole issue relates to the correct computation of amortization upon the land, buildings 7 and 8, and the cranes in building No. 7 sold by the taxpayer in 1923. At the outset, then, we have to deal with the simple situation of property acquired by the taxpayer, as set forth in our findings of fact above, at a total cost of land, $29,070; building No. 7, $100,594.93; building No. 8, $15,316.98; and two cranes costing, respectively, $8,368 and $4,820, and all, within the period granted the Commissioner in which to revise the computations of amortization, sold for $87,500. This loss of $70,669.91 is concededly to be deducted in some year and in some manner. The parties differ only as to the time and manner of deduction. The purpose of the so-called amortization section in the Revenue Act of 1918 was fully explained in committee reports*2141 and on the floor *1236 of the House and Senate at the time the Revenue Act of 1918 was under consideration. That Act imposed profits taxes as high as 80 per cent, to which was added a normal tax for the year 1918 of 12 per cent, bringing the maximum rate of tax to 82.4 per cent of the profits of a business in the highest bracket. Taxation as drastic as this could be imposed without serious hardship and obstruction of industry only if all proper deductions in determining profits were granted. The purpose of the high rates was, in effect, to confiscate so-called war profits and to prevent the making of extortionate profits from the war, but it was recognized that in many cases facilities had been provided for the production of articles for war use which would be useless, or nearly so, upon the termination of hostilities. Manifestly, the cost of such facilities could not be regarded as recoverable over a long life of wear and tear, but could be regarded as recoverable only against the articles which that capital was invested to produce. In other words, the extraordinary investment on account of war facilities was properly recoverable out of war profits, and Congress in sections*2142 214(a)(9) and 234(a)(8) so provided. The controversy in the instant appeal is divisible into three parts: (1) Whether land is a proper subject of amortization; (2) whether building No. 7 in the above-mentioned computation shall be decreased as to value recoverable from amortization by ordinary wear and tear, year by year, after 1918 and prior to its sale, either in the amount determined by the Commissioner or in some other amount; and (3) whether the allowance on building No. 8 shall be subject to a like reduction? The Commissioner has computed amortization of the taxpayer by decreasing the amortizable amount for the year 1918 by depreciation on building No. 7 for four and one-half years, a total amount of $9,353.55, and upon building No. 8 for the same period in a total amount of $6,892.64, as to a portion of which latter amount he now confesses error in the rate applied. By this process he spreads the taxpayer's loss of $70,669.91 over the years 1918 to 1923, inclusive. Reverting for the moment to the proven facts in the appeal, it is established that, so far as the taxpayer's post-war business is concerned, the land sold, building No. 7 and the cranes in it were none of*2143 them used in connection with the business. All were facilities acquired or constructed to provide articles for the prosecution of the war and all were useless to the taxpayer the moment hostilities ceased and its contracts were canceled. As to the heating plant, the evidence is that it continued to be used at one-half capacity by reason of the fact that the taxpayer had scrapped its smaller heating plant. Upon that state of facts the Commissioner asserts that depreciation should be computed upon these facilities and allowed as deductions *1237 in the years 1919 to 1923, inclusive, under the provisions of section 234(a)(7), which reads: A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. [Italics ours.] The undisputed testimony is that the property here in question was not used in the trade or business of the taxpayer in any proper sense, nor can we regard it as used in the trade or business merely because, pending sale, the taxpayer chose to recover a small amount of revenue through the rental of an expensive factory as a storehouse. The only possible use in the*2144 trade or business of the taxpayer after the war of the facilities here in question was the use of the heating plant, building No. 8, for the purpose of heating its regular establishment. Even that use was limited to approximately one-half the capacity of the plant. Reverting also to the purpose of the amortization provisions, it is clear that Congress intended that taxpayers should be permitted to eliminate from their capital accounts as an expense of producing war articles the cost of the capital assets provided for that purpose which became useless thereafter. This use of the term "amortization" is supported by Bouvier, in which it is said that the word "is used colloquially in reference to paying off a mortgage or other debt by installments, or by a sinking fund." Rawle's, Third Revision, volume 1, page 190. This use is also supported by the definition in Webster, "To clear off, liquidate, or otherwise extinguish, as a debt, usually by a sinking fund." The word chosen to express the idea was perhaps unfortunate. In most ordinary colloquial use it presupposes a period of time for amortization and is used most commonly as above noted in connection with the payment of long-term*2145 debts. If it was the intent of Congress to permit writing off of capital assets acquired for war purposes against war profits, this purpose clearly is defeated if depreciation be imputed to such property though not used in the trade or business for the period elapsing between the cessation of hostilities and the date of disposal of the property. To allow depreciation over this period is in effect to amortize the property not against war profits but against peace profits. Moreover, the entire allowance on account of amortization presupposes that the property will not be useful, either in whole or in part, during the post-war period, or that it, will not be useful at least to the extent of its excessive cost, due to the exigencies of war construction. It seems to us, therefore, that depreciation or, in the statutory words, exhaustion, wear and tear of property used in the trade or business, in the very nature of things, can not relate to property acquired for war facilities and not useful in the post-war *1238 period. Section 234(a)(7) excludes depreciation upon such property from deductions, and it is unthinkable that Congress intended to provide a special allowance*2146 for the recovery of such capital expenditures in section 234(a)(8), but at the same time left the Commissioner free to impair that allowance by a forced deduction for exhaustion merely because the property could not be immediately disposed of at the close of the war. If the above reasoning be sound, it must follow that the entire amount of loss sustained by the taxpayer upon the sale of the facilities here in question in 1923 is properly allocable to the year 1918 and should be allowed in that year in the amount of $70,669.91. When to this amount is added the amounts not in dispute as allowed by the Commissioner, the entire allowance in the year 1918 is $143,891.17, and the deficiency should be recomputed on this basis, except as to the depreciation upon building No. 8, as set forth below. It appears in respect of the heating plant that approximately one-half the cost was related to the war activity and that the plant was used to approximately one-half capacity during the period intervening between the cessation of the war and the sale of the property. Under these circumstances, we are of the opinion that this plant, of equally substantial construction with that of building*2147 No. 7, should be depreciated in the years 1919 to 1923, inclusive, or, in other words, for a period of 4 1/2 years at a rate of 2 per cent, but this depreciation should be applied only to one-half of the $15,316.98, which the property cost. This was the amount actually computed by the examining engineer, and his figures are adopted in this regard. It remains only to consider the Commissioner's contention that land can not be regarded as included in "buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, * * * for the production of articles contributing to the prosecution of the present war, * * *" for the purpose of computing the deduction under section 234(a)(8). As pointed out by counsel for the taxpayer, however, the position of the Commissioner, even though correct in this particular, is an entirely moot one in this appeal, since the evidence is to the effect that the land at all times had a value of $29,070, and if it be regarded as having been sold for cost in the total consideration of $87,500 for all the facilities sold, there results merely a decrease in the amount realized upon the buildings and cranes, with no difference*2148 in the net result. As indicated in the findings of fact upon the third issue, it is impossible to determine from the evidence whether the Commissioner in fact did exclude an amount of machinery not subject to amortization from the computation of depreciation allowable thereon through an auditor's error in interpreting the account called "heating *1239 plant." Inasmuch, however, as we have allowed the entire amortization in the year 1918 on account of the heating plant, and inasmuch as the Commissioner allowed liberal rates of depreciation upon machinery, we are of the opinion that no adjustment is necessary on this account, since the total allowance by the Commissioner for exhaustion, wear and tear of property used in business appears to have been reasonable.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624441/

Earl Curtis v. Commissioner.Curtis v. CommissionerDocket Nos. 5070-68, 1883-69SC.United States Tax CourtT.C. Memo 1970-299; 1970 Tax Ct. Memo LEXIS 62; 29 T.C.M. (CCH) 1387; T.C.M. (RIA) 70299; October 26, 1970. Filed Earl Curtis, pro se, 817 Quinlan St., Kerrville, Tex. Robert J. Curphy, for the respondent. SIMPSONMemorandum Findings of Fact and Opinion SIMPSON, Judge: The respondent determined deficiencies in the income tax of the petitioner of $370.23 for 1965, $327.07 for 1966, and $336.00 for 1967. The issue for decision is whether the petitioner's living expenses in Dolton, Illinois, are deductible as amounts paid while away from home in the pursuit of a trade or business under section 162 of the Internal Revenue Code of 1954. 1 The answers depends upon whether the petitioner's "home" for tax purposes during those years was located in Kerrville, Texas, *63 as he claims, or in Dolton, Illinois, as the respondent has determined. Findings of Fact Some of the facts have been stipulated, and those facts are so found. The petitioner, Earl Curtis, filed separate Federal income tax returns for the taxable years 1965, 1966, and 1967 with the district director of internal revenue, Austin, Texas. The parties have agreed that the United States Court of Appeals for the Fifth Circuit shall have jurisdiction of any petition for review of the decision in this case. The petitioner and his wife, Dorothy M. Custis, acquired a residence in Kerrville, Texas, in 1949. They have continued to own such residence since that time. The petitioner, who is now retired, was a pipefitter by trade. In 1947, a "right-to-work law was enacted in Texas. 2 Since then, the petitioner has not worked in Texas, because he could find no work there at the wage level approved by his union. He subsequently worked in a number of different states, the last of which was Illinois. From 1964 to the time of his*64 retirement in September 1968, the petitioner was a member of Local Union No. 597 of the Pipefitter's Association, located in Chicago, Illinois. In 1965, the petitioner worked at 7 different jobs, the durations of which ranged from 1 week to 16 weeks. In 1966, he worked at 10 jobs, with durations ranging from 1 week to 11 weeks. In 1967, he worked at 9 jobs, with durations ranging from 2 weeks to 18 weeks. The distances between each of these jobsites and Dolton, Illinois, ranged between 1 mile and 22 1/2 miles. During the years 1965 through 1967, and until the time of his retirement in 1968, the petitioner lived in four successive houses in Dolton, Illinois, which he rented on a month-to-month basis. During some of that time, one of his two sons lived with him. The petitioner at first rented a furnished house, but later supplied his own furniture. During those years, he maintained a Texas driver's license. He did not vote in those years, either in Illinois or in Texas. 1388 Mrs. Curtis continued to live at the Kerrville residence. An important reaons for her refusing to go elsewhere was the beneficial effect of that climate on her health. That residence consisted of two buildings*65 - a house and a separate apartment unit. During 1965, 1966, and 1967, Mrs. Curtis rented the house and lived in the apartment unit. When the house was rented, a room and bed were reserved in the apartment unit for the petitioner. The petitioner took income tax deductions for his living expenses in the amounts of $1,175 in 1965, $1,200 in 1966, and $1,200 in 1967. He spent at least those amounts for rent and utilities at the houses in Dolton. Opinion Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary traveling expenses, including amounts expended for lodging, paid or incurred while away from home in the pursuit of a trade or business. The petitioner has expended certain amounts for lodging which he maintained in Dolton, Illinois, while he pursued his trade in the nearby areas. The deductibility of such amounts depends upon whether he was "away from home" while in Dolton. Ordinarily, a taxpayer's "home" for purposes of section 162(a)(2) is considered to be in the vicinity of his principal place of employment. Emil J. Michaels, 53 T.C. 269">53 T.C. 269, 273 (1969); Rendell Owens, 50 T.C. 577">50 T.C. 577, 580 (1968); Ronald D. Kroll, 49 T.C. 557">49 T.C. 557, 561-562 (1968);*66 Floyd Garlock, 34 T.C. 611">34 T.C. 611, 614 (1960); Mort L. Bixler, 5 B.T.A. 1181">5 B.T.A. 1181, 1184 (1927). If a taxpayer for personal reasons chooses to reside in a different vicinity than that of his principal employment, his residence is not recognized as his home for tax purposes. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946), rehearing denied 326 U.S. 812">326 U.S. 812 (1946); Lloyd G. Jones, 54 T.C. 734">54 T.C. 734, 740 (1970), on appeal (C.A. 5, Aug. 20, 1970). Only when a taxpayer is working in an area temporarily, at a place removed from his personal residence, can he deduct his lodging expenses in the vicinity of his temporary employment. Hollie T. Dean 54 T.C. 663">54 T.C. 663 (1970); Emil J. Michaels, supra; Laurence P. Dowd, 37 T.C. 399">37 T.C. 399 (1961). Although the petitioner argues that he maintained his home in Kerrville at all times, he has completely failed to show any reasons, other than personal considerations, for maintaining that residence. He had not worked in Texas for about 18 years prior to the start of the period here in issue, and clearly had no intention of ever returning to Texas to work. Further, the record does not*67 demonstrate that he spent any time in Kerrville during 1965, 1966, or 1967. On the contrary, his work in Dolton was more than temporary. Through the years 1965, 1966, and 1967, and for some months thereafter, the petitioner worked in one, and only one, geographic area: the vicinity of Dolton. The record does not establish that his work took him farther than 22 1/2 miles from Dolton at any time during those years. The union local to which he belonged, and which apparently assisted his in finding work, was situated nearby in Chicago. Also, he actually lived in Dolton, maintaining a succession of rented houses during that time, and one of his sons lived with him for some time. The petitioner stresses the fact that the jobs on which he worked were temporary in nature. This Court has held that a taxpayer who is kept away from his family residence because of his work at a series of temporary jobs in disparate georgraphical areas is considered "away from home" while so employed. Hollie T. Dean, supra.However, in the present case, the petitioner lived and worked within the same area and no other for a protracted length of time. Tax relief is granted to taxpayers who are*68 temporarily away from home for business reasons "to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses." Ronald D. Kroll, supra at 562. There is no showing that duplicate living expenses were required by the petitioner's employment. With all of his employment in a single area for a period of close to 4 years, the petitioner could have moved his residence to that area. In fact, the petitioner testified that his wife did not join him because of her health, and such a reason is clearly personal. The fact of Mrs. Curtis' continued residence in Kerrville lends no substantial support to the 1389 petitioner's argument, because it is settled that a husband and wife can have different tax homes. Ronald D. Kroll, supra at 565; Robert A. Coerver, 36 T.C. 252">36 T.C. 252 (1961), affd. per curiam 297 F. 2d 837 (C.A. 3, 1962); Arthur B. Hammond, 20 T.C. 285">20 T.C. 285 (1953), affd. 213 F. 2d 43 (C.A. 5, 1954); Beatrice H. Albert, 15 T.C. 350">15 T.C. 350 (1950). Under these circumstances, we find that the*69 petitioner's "home" within the meaning of section 162(a)(2) was in Dolton, Illinois, Center Moriches, New York, at the time during the taxable years 1965, 1966, and 1967. The petitioner alleges also that he incurred lodging expenses with respect to jobs which were located more than 25 miles from Dolton, thereby requiring him to rent a hotel or motel room overnight. However, no specific evidence of any sort was presented with respect to this claim. Furthermore, the list of jobs which the petitioner prepared does not disclose any which were located that far from Dolton. Therefore, this claim is also without merit. To reflect other concessions by the parties, Decisions will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. Article 5207-A, Vernon's Annotated Texas Statutes.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624444/

James Frederick Ronan, Jr. v. Commissioner.Ronan v. CommissionerDocket No. 130-64.United States Tax CourtT.C. Memo 1966-165; 1966 Tax Ct. Memo LEXIS 120; 25 T.C.M. (CCH) 864; T.C.M. (RIA) 66165; July 12, 1966James Frederick Ronan, Jr., pro se, 32 Crosby Rd., Newton, Mass. Raoul E. Paradis, for the respondent. DAWSONMemorandum Findings of Fact and Opinion DAWSON, Judge: Respondent determined a deficiency in petitioner's income tax for the year 1962 in the amount of $313.99. Petitioner claims an overpayment of $788.10 for the same year. Prior to trial the petitioner moved "to*121 consolidate 1961 and 1963 disallowances" with this proceeding. Such motion was denied at the trial on May 20, 1966, for reasons explained to the petitioner in the record. We will briefly reiterate them here. On October 23, 1964, respondent sent a notice of deficiency to petitioner for the taxable year 1961. The 90-day period during which the petitioner could have invoked the jurisdiction of this Court with respect to the year 1961 expired on January 21, 1965. No petition for a redetermination of the deficiency for 1961 was filed with this Court during such period. As to the year 1963, respondent has never determined a deficiency and, therefore, no statutory notice has ever been issued for that year. The Tax Court has limited jurisdiction. See sections 6211 through 6215, Internal Revenue Code of 1954. It is clear that we do not have jurisdiction over the years 1961 and 1963. Cf. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418 (1943). The two issues confronting us for the year 1962 are: (1) what amount is the petitioner entitled to deduct for alimony payments made to his former wife; and (2) what amount is the petitioner entitled to*122 deduct as traveling expenses for using his automobile in connection with his trade or business. Findings of Fact Some of the facts were stipulated by the parties and are so found. James Frederick Ronan, Jr., presently resides in Newton, Massachusetts. During 1962 he lived in Duxbury, Massachusetts, and he filed his individual income tax return for that calendar year with the district director of internal revenue at Boston, Massachusetts. On December 5, 1960, petitioner was divorced from Priscilla D. Ronan under a decree of the Plymouth County Probate Court, Commonwealth of Massachusetts. Priscilla was given custody of their four children. On February 27, 1961, petitioner was ordered to pay Priscilla "the sum of seventy (70) dollars each week for the support of herself and the minor children in her custody * * *." This modification of the original decree was in effect until June 5, 1962, at which time the Plymouth County Probate Court again modified its decree in the following manner: IT IS DECREED that the decree of this Court dated December 5, 1960, and modified February 27, 1961, be, and the same hereby is, further modified in that the libellee is ordered to pay to the*123 libellant the sum of fifty (50) dollars each week for the support of the minor children only, payments to be made through the Probation Officer of the Third District Court of Plymouth. The arrearage on the payments under the previous decrees of the Court is determined to be in excess of twelve hundred (1200) dollars and will remain at the sum of twelve hundred (1200) dollars until the guardian ad litem ascertains that the libellee's income has increased sufficiently to warrant a change in the decree of the Court. * * * In his 1962 Federal income tax return, under a heading entitled "Support For Mother and Four Children," the petitioner claimed an alimony deduction of $3,640. In that year he paid no more than $1,600 to his wife under the terms of their divorce decree. Of this amount only $835 was paid under the decree as modified on February 27, 1961, and it has been allowed by the respondent as an alimony deduction. During the first eight months of 1962 the petitioner worked as a "sales coordinator" for the Brockton Taunton Gas Company of Brockton, Massachusetts. He represented the company's propane gas interests throughout a 900 square mile territory. Petitioner made sales calls*124 in his 1956 Ford, which was used for both business and personal purposes. He began most work days by reporting to one of the seven offices the company maintained within his territory. The distance between these offices and his home in Duxbury ranged as high as 50 miles. In his 1962 Federal income tax return the petitioner claimed no deduction for traveling expenses and stated that he received no "expense allowance or reimbursement" from his employer. The records of Brockton Taunton Gas Company show that petitioner received $400 as reimbursement for his automobile expenses. This amount was paid at the rate of $50 per month for his eight months of employment during 1962. The petitioner incurred no more than $1,016.32 in deductible traveling expenses during 1962. Such amount was allowed by the respondent. Opinion As so often happens when a taxpayer with limited knowledge of the Federal tax laws undertakes to represent himself in a proceeding before this Court, the record made by this petitioner is, to say the least, unsatisfactory. It is sprinkled with inconsistencies and almost wholly devoid of competent evidence. Petitioner has simultaneously raised and conceded 1 in his*125 petition the issue as to alimony payments, and then argued it again at trial. His testimony reveals that out of $3,640 claimed as an alimony deduction on his Federal income tax return, a substantial part of it was never paid. The traveling expenses were not claimed in his tax return, but were later raised to offset the effect of respondent's disallowance of $2,805 of the claimed alimony payments. In view of the decision in Commissioner v. Lester, 366 U.S. 299">366 U.S. 299 (1961), the amount paid ( $835) between January 1, 1962, and June 5, 1962, by petitioner to his wife under the*126 modification decree of February 27, 1961, is deductible as alimony payments under section 215, Internal Revenue Code of 1954. But also under the Lester decision, the payments made by petitioner after June 5, 1962, are not deductible because the modification decree of that date specifically designated that all future payments would be for "the support of the minor children only." See section 71(b), Internal Revenue Code of 1954. Petitioner testified that during 1962 he gave his wife cash "in the neighborhood of" $800. His testimony is vague and uncorroborated. In fact, it appears to be contrary to the modification decree of June 5, 1962, which shows that he was $1,200 in arrears 2 in his payments for the support of his former wife and children. We conclude that the petitioner is entitled to a deduction of $835 for alimony payments made in 1962. This is the amount allowed by the respondent and the only figure supported by the record. Therefore, *127 we sustain the respondent on this issue. Petitioner's proof as to his traveling expenses is likewise meager and unconvincing. He failed completely to substantiate his claimed deduction of $2,008.75 for automobile expenses and depreciation. All we have is his very general, and often inconsistent and unreliable, testimony. He estimated that 95 percent of the use of his automobile was for business purposes; yet it was admittedly used for commuting to work and for other personal purposes. He did not take the salvage value of his automobile into account in determining depreciation. He failed to produce any written record of expenses even though he was required by his employer to file weekly summaries of traveling expenses as part of the company's reimbursement system. He produced no receipts or cancelled checks for the claimed purchases of gasoline, oil, tires, auto servicing and repairing. Under the circumstances we think the respondent's allowance of $1,016.32 for traveling expenses was reasonable, and undoubtedly more than the evidence adduced here warrants. Respondent's determination is presumptively correct and the burden of proof is upon the petitioner to show error therein. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933).*128 All things considered, the ineluctable conclusion to be drawn from this record is that the petitioner has not proved error in the respondent's determination. Hence, we also decide the traveling expense issue in favor of respondent. Since it appears from the deficiency notice dated October 10, 1963, that there may be a net overpayment (not previously refunded) in income tax for the year 1962, Decision will be entered under Rule 50. Footnotes1. The petition consists solely of the 18 separate communications between respondent and petitioner and his evaluation of them. "Exhibit 17," as set out by petitioner, is a copy of the statutory notice which shows respondent's disallowance of part of the alimony payments. Petitioner's comment about it is as follows: This is a whitewash report keying around the alimony payments again which are not the issue, and are restated to distort the main issue. I am not protesting the alimony finding and have no grounds to do so. This was established long ago and should not be brought into focus again. * * *↩2. We are satisfied that the arrearages remained at $1,200 throughout 1962. Consequently, there is no question here as to whether payment of arrearages are deductible by petitioner in 1962.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4653926/

[J-112-2019][M.O. - Mundy, J.] IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT COMMONWEALTH OF PENNSYLVANIA, : No. 77 MAP 2018 : Appellee : Appeal from the Order of the Superior : Court at No. 1529 MDA 2017 dated : 5/25/18, reconsideration denied v. : 8/3/18, reversing the order dated : 9/15/17 of the York County Court of : Common Pleas, Criminal Division, at STEVEN WINFIELD COCHRAN, II, : No. CP-67-CR-0000361-2017, : vacating the judgment of sentence and Appellant : remanding for resentencing ARGUED: November 21, 2019 CONCURRING OPINION CHIEF JUSTICE SAYLOR DECIDED: January 20, 2021 While I join the majority opinion, I view the present circumstances as abnormal and write to suggest that bifurcated sentencing should not be undertaken without careful aforethought and on-the-record justification. In Pennsylvania, restitution is premised upon concepts of rehabilitation and deterrence, and accordingly, is an important factor for the court to consider in creating a balanced sentencing scheme. See Commonwealth v. Brown, 603 Pa. 31, 35, 981 A.2d 893, 895-96 (2009). Thus, ideally, courts will determine any appropriate period of incarceration and the restitutionary component of a sentence contemporaneously. That said, it was clear to all that the “Sentence Order” of June 29, 2017, was intended to be interlocutory, since a restitution hearing was contemplated at the initial sentencing hearing and was scheduled on the face of the order itself. See Sentence Order dated June 29, 2017, in Commonwealth v. Cochran No. CP-67-CR-0000361-2017 (C.P. York); N.T., June 29, 2017, at 2-3. Moreover, part of the sentencing court’s concern with proceeding with the incarceration portion of the sentence was to account for the fact that Appellant had already served 207 days in prison, which was far greater than the minimum sentence contemplated by the court. See N.T., June 29, 2017, at 17. Accordingly, the court initially directed that Appellant should be released from custody, subject to a detainer lodged by authorities in Maryland. See id. It was only at the request of Appellant’s own attorney that the court agreed that he would be detained longer in Pennsylvania, based on counsel’s concern for securing Appellant’s presence at the forthcoming restitution hearing. See id. at 18. Although the sentencing court’s reasoning was understandable, decoupling components of a sentencing scheme in such a fashion should only be undertaken in extraordinary circumstances, where the court has good and articulable reasons to support the proposition that one component will not affect the others. And I would be hard pressed to say that this could occur lawfully in a scenario in which the defendant did not overtly consent to this unusual procedure. Justices Todd and Dougherty join this concurring opinion. [J-112-2019][M.O. – Mundy, J.] - 2

01-04-2023

01-22-2021

https://www.courtlistener.com/api/rest/v3/opinions/4624453/

Terence H. Murphree and Mary V. Murphree, Petitioners v. Commissioner of Internal Revenue, RespondentMurphree v. CommissionerDocket No. 1000-85United States Tax Court87 T.C. 1309; 1986 U.S. Tax Ct. LEXIS 12; 87 T.C. No. 77; December 8, 1986, Filed *12 Held, the disallowance of a refundable energy credit under sec. 48(a)(10), I.R.C. 1954, is a deficiency under sec. 6211(a). James V. Looby*16 , for the petitioners.Joseph T. Chalhoub, for the respondent. Sterrett, Chief Judge. Powell, Special Trial Judge. STERRETT*1310 OPINIONThis case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7456(d) (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2754) and Rule 180 et seq.1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGEPowell, Special Trial Judge: This case is before the Court on respondent's motion to dismiss for lack of jurisdiction and to strike as to the refundable business energy investment tax credit issue filed May 17, 1985. The issue is whether this Court has jurisdiction over respondent's disallowance*17 of a credit under section 48(a)(10), 2 relating to boilers fueled by oil or gas for investment in so-called energy property.On their 1979 Federal income tax return, petitioners claimed a credit in the amount of $ 10,000. This credit arises from the alleged investment in qualifying property by Tinstaafl Corp., an electing subchapter S corporation of which petitioners were shareholders. Under section 48(e) the credit flows through to the shareholder on an apportioned basis. By a notice of deficiency dated October 19, 1984, respondent determined a deficiency in the amount of $ 10,927.75. The underlying adjustments in that notice are not related to the $ 10,000 credit that is in dispute here, and the disallowed credit does not appear in the computation of the deficiency. The notice of deficiency, however, contained a statement that "Prepayment*18 to credits in the amount of $ 10,000 have been assessed for the 1979 tax year." It is agreed that this statement refers to the credit in dispute.*1311 On January 14, 1985, petitioners filed a petition with this Court. In the petition, petitioners allege, inter alia, that respondent erred by disallowing the $ 10,000 "refundable business energy investment tax credit." Respondent subsequently filed the motion to dismiss and to strike those portions of the petition that related to respondent's disallowance of the refundable energy credit.The jurisdiction of the Tax Court is generally limited to redetermining the correct amount of a deficiency. Sec. 6214(a). A deficiency is "the amount by which the tax imposed by subtitle A" exceeds the "amount shown as the tax" on the return plus any "amounts previously assessed * * * as a deficiency" less any "rebates." Sec. 6211(a). 3 Rebates include any "abatement, credit, refund, or other repayment as was made on the ground that the tax imposed by subtitle A * * * was less than" the tax shown on the return. Sec. 6211(b)(2). If an adjustment to a taxpayer's tax liability is based on a "mathematical or clerical error," the notice of such*19 an adjustment "shall not be considered as a notice of deficiency," and the taxpayer generally has no right to review by this Court. Sec. 6213(b)(1). Furthermore, section 6211(b) specifically excludes certain tax credits from the determination of the tax imposed by subtitle A. For example, credits under section 31 for taxes withheld are not included in the computation of a deficiency. See sec. 6211(b)(1). The applicable regulations also provide "Payments on account of estimated income tax, like other payments of tax by the taxpayer, shall likewise be disregarded in the determination of a deficiency." Sec. 301.6211-1(b), Proced. & Admin. Regs. Neither section 6211(b) nor the regulations thereunder, however, specifically address the credit involved here.*20 *1312 Respondent concedes that, if the credit were a nonrefundable credit under section 38, the disallowed credit would be at issue in the statutory notice. See Martz v. Commissioner, 749">77 T.C. 749 (1981). To understand the position taken by respondent, it is necessary to describe the nature of the section 38 credit in dispute. The utilization of most section 38 credits is limited to the tax liability for the taxable year. See secs. 46(a)(3) and 46(a)(4); S. Rept. 95-529, 1978-3 C.B. (Vol. 2) 199, 263. A credit for qualified "solar or wind energy property," however, to the extent that it exceeds the tax liability for the year, is refundable. See sec. 46(a)(10); S. Rept. 95-529, 1978-3 C.B. (Vol. 2) 199, 263-264. In discussing refundable credits, we have noted ( Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 742, 746 n. 4 (1984)):the word "refundable" in this context generally refers to credits which are really not "credits" in the ordinary sense, but reflect payments already made (or amounts available for payments) that are allocable to the tax, such as the familiar *21 quarterly payments of estimated tax, withholding, and the like. Such "credits" are separately shown on the Form 1040 for 1979 as "Payments" that are applicable to discharge pro tanto the tax liability as finally computed on the return after taking the ordinary allowable credits into account. They are called refundable "because the amounts involved would be available as refunds to the taxpayer in any event." H. Rept. 95-1445, at 123 (1978), 1978-3 C.B. (Vol. 1) 181, 297. See sec. 6401(b), I.R.C. 1954. The term "nonrefundable" is used to refer to all the familiar credits such as the foreign tax credit, the investment credit, the jobs credit, and other credits of like general character. No refund is available in respect of such credits even if they should exceed the tax. [Emphasis added.]Respondent argues that, since the refundable credit here is in the nature of a payment on account, it should be disregarded in the determination of the deficiency.If provisions discussed above were the end of the statutory story, there would be a certain amount of force behind respondent's argument. Section 46(a)(10)(C)(ii), however, provides that, with regard to*22 the refundable energy credit for solar or wind energy property:for purposes of this title (other than * * * chapter 63), such credit shall be treated as if it were allowed by section 39 and not by section 38. [Emphasis added.] 4*1313 Section 6211(a), defining a deficiency, is a part of chapter 63.Respondent, ignoring the parenthetical phrase "other than * * * chapter 63" in section 46(a)(10)(C)(ii), contends that section 6201(a)(4)5*24 yokes credits under section 39 to the exception for mathematical errors and, therefore, the refundable energy credit may be assessed without regard to the notice of deficiency requirement. We, however, cannot ignore the clear language of section 46(a)(10)(C)(ii). See Huntsberry v. Commissioner, 83 T.C. at 747-748. The import of that language is that for the purpose of the deficiency*23 procedures, the refundable energy credit for solar or wind energy property shall be treated as arising under section 38 and not section 39. 6Respondent argues that, if the parenthetical phrase "other than * * * chapter 63" is given effect, the remainder of section 46(a)(10)(C)(ii) is meaningless because the only reason for treating the credit "as if it were allowed under section 39" is that it could be assessed as a section 39 credit. We disagree. There are provisions, other than those contained in chapter 63, where a section 39 credit is treated differently from section 38 credits. Section 6401(b), which is not in chapter 63, provides that "If the amount allowable as * * * [a credit] under * * * section 39 * * * exceeds the tax imposed by subtitle A (reduced by the credits allowable under * * * [sections 32, 33, 37, 38, 40, 41, 42, 44, 44A, 44B, 44C and 45]), the amount of such excess shall be considered an overpayment." That provision makes credits governed by section 39 refundable. It is certainly within the power of Congress to*25 make respondent's challenge to certain refundable credits subject to the deficiency procedures *1314 while others are not. Indeed, Congress specifically provided in chapter 63 that in certain situations, a disallowed section 39 credit would be an aspect of the computation of a deficiency and subject to review by this Court. See sec. 6211(b)(4). 7In sum, we hold that the refundable energy credit at issue here is treated as a credit under section 38 for the purposes of chapter 63. Accordingly, the result in this case is controlled by our opinion in Martz v. Commissioner, supra,*26 and respondent's motion must be denied.An appropriate order will be issued. 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 noted.↩2. Sec. 48(a)(10)↩ as involved in this case was added to the Code by the Energy Tax Act of 1978, Pub. L. 95-618, and was repealed by the Tax Reform Act of 1986, Pub. L. 99-514.3. SEC. 6211(a). In General. -- For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, 44, and 45, the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, 44, or 45 exceeds the excess of -- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus(B) the amounts previously assessed (or collected without assessment) as a deficiency, over --(2) the amount of rebates, as defined in subsection (b)(2), made.↩4. Sec. 39 provides a credit for certain uses of gasoline. The section was redesignated as sec. 34 by sec. 471(b), Deficit Reduction Act of 1984, 98 Stat. 825.↩5. Under sec. 6201(a)(4), if there is an overstatement of a credit allowable by sec. 39, the amount so overstated may be assessed "in the same manner as in the case of a mathematical or clerical error." As noted, suprasec. 6213(b)(1) provides an exception to the notice of deficiency requirement for so-called "mathematical or clerical" errors. Under this exception, if such an error is made, notice of the error is not considered a notice of deficiency, the prohibition against assessment does not arise and the tax may be assessed immediately. See Beckman v. United States, 396 F. Supp. 44">396 F. Supp. 44 (D. Kan. 1975), affd. in an unpublished opinion (10th Cir., Jan. 7, 1977). While Congress added a mechanism for review of respondent's determination of a mathematical or clerical error by the Tax Court by enacting sec. 6213(b)(2), sec. 6201(a)(4) also was amended to provide that "the provisions of section 6213(b)(2)↩ * * * shall not apply with regard to any assessment under this paragraph."6. Respondent places emphasis on the fact that the credit is claimed in the "Payments" section of the 1979 Form 1040. Even if this is correct, the form and/or instructions do not have the force of law.↩7. SEC. 6211(b). Rules for Application of Subsection (a). -- For purposes of this section --* * * * (4) The tax imposed by subtitle A and the tax shown on the return shall both be determined without regard to the credit under section 39, unless, without regard to such credit, the tax imposed by subtitle A exceeds the excess of the amount specified in subsection (a)(1) over the amount specified in subsection (a)(2).↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624454/

PHILIP D. QUINT AND FRANCINE L. QUINT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentQuint v. CommissionerDocket No. 4631-83.United States Tax CourtT.C. Memo 1985-226; 1985 Tax Ct. Memo LEXIS 411; 49 T.C.M. (CCH) 1465; T.C.M. (RIA) 85226; May 9, 1985. *411 Held, petitioner is an innocent spouse within the meaning of sec. 6013(e), I.R.C. 1954, and is therefore relieved from liability for the deficiencies in income taxes for the years in issue. Gerald H. Lean, for the petitioners. Agnes Gormley, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: By notice of deficiency dated December 6, 1982, respondent determined deficiencies in Federal income taxes for the years 1978, 1979, and 1980 against Philip D. Quint and Francine L. Quint in the respective amounts*412 of $11,313, $12,448, and $3,719. Respondent also determined that Philip D. Quint is liable for the addition to tax under section 6653(b), I.R.C. 1954, for the years 1978, 1979, and 1980 in the respective amounts of $5,657, $6,224, and $1,860. Philip D. Quint has conceded that he is liable for the determined deficiencies and additions to tax. Francine L. Quint has conceded that, if she is found liable for any deficiency for 1978, 1979, or 1980, she is liable for the amounts determined by respondent. The sole issue for decision is whether Francine L. Quint (hereinafter referred to as petitioner) is an innocent spouse within the meaning of section 6013(e), so as to be relieved from liability for the deficiencies in income taxes for the years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. At the time they filed their petition herein, Philip D. Quint and Francine L. Quint resided at 2027 Jolly Road, Baltimore, Maryland. They timely filed joint Federal income tax returns for 1978, 1979, and 1980 with the Internal Revenue Service*413 Center, Philadelphia, Pennsylvania. Petitioner is a high school graduate and has participated in continuing education courses. At the time of the trial herein petitioner and Mr. Quint had been married for 22 years. The couple had 3 children who, during the years in issue, ranged from age 7 to age 16. Petitioner worked in public relations during the marriage. Beginning in 1978 petitioner became personnel director of a corporation in Baltimore. Mr. Quint was an attorney in the private practice of law. From 1976 through August 1980 Mr. Quint was employed by the State of Maryland as a legal officer in the Single Family Homes Program, which provided low-interest mortgages to families who satisfied certain economic criteria. While acting as a legal officer for the State of Maryland, Mr. Quint deposited the proceeds from foreclosure sales into his separate business account maintained for his private law practice and converted the proceeds to his personal use from late 1976 through August 1980. During 1978, 1979, and 1980, Mr. Quint misappropriated funds from the State of Maryland in the respective amounts of $31,475, $26,866, and $33,755. Unbeknownst to the state agency employing*414 him and to petitioner, Mr. Quint was disbarred as an attorney in December 1978 for illegally misappropriating clients' funds. Mr. Quint was confronted by representatives of the Attorney General's office and fired from his job with the State of Maryland on August 19, 1980. On that date, he issued a check to the state for $35,358.87, which he represented as the amount that he owed to the state. That evening, Mr. Quint told petitioner of the confrontation and of the fact that he had been fired. Prior to that time, petitioner knew nothing about the misappropriations. On the following day, petitioner and Mr. Quint borrowed $8,000 from various family members and executed a series of promissory notes totaling the same amount for the purpose of covering the check Mr. Quint had written to the state on the previous day. Mr. Quint informed petitioner that he had repaid the full amount of the misappropriated funds, and petitioner believed him. Mr. Quint hired his brother-in-law, an attorney, to represent him following the August 19, 1980 confrontation with representatives of the Attorney General's office. Petitioner did not attend any meetings between Mr. Quint and his attorney, nor did*415 the attorney ever discuss the case with her. Mr. Quint was formally charged on March 2, 1981 with unlawfully, fraudulently, and willfully embezzling and misappropriating funds. On April 28, 1981 Mr. Quint pled guilty. After her husband's defalcations were discovered in August 1980, petitioner went to work full time and assumed primary responsibility for supporting the family. Petitioner and Mr. Quint did not report the funds misappropriated from the State of Maryland as income on their 1978, 1979, and 1980 joint Federal income tax returns. The returns for those years reported income in the following amounts: 197819791980Husband's wages--State of Maryland$20,639$22,433$17,306Wife's wages2,4996,49411,594Net income from law practice8433805,084Interest and state tax refund3611,0791,039Unemployment compensation2,160Total reported$24,342$30,386$37,183The returns for these years also reflect the following expenses: 197819791980Total medical expenses$ 2,757$ 1,501$ 1,790Taxes3,1703,1903,245Interest5,0715,3694,493Contributions830948980Miscellaneous24529494Child care3,4552,6854,550Storm windows or doors2,015IRA contribution1,700FICA and Federal income taxwithheld3,9605,2795,826Total$21,503$19,266$22,678*416 As previously stated, Mr. Quint maintained a separate bank account for his legal practice. He kept the records of that account at his office, and petitioner, who did not keep apprised of her husband's business affairs as an attorney, did not have access to those records. During the years in issue Mr. Quint paid the following nonbusiness expenses from his separate business bank account: 197819791980Mortgage payment$ 5,060$ 4,144$ 3,256Car repairs & insurance1,000821154Health & other insurance1,530237Tennis club and summer camp1,9118291,824Ocean City condo325Las Vegas trip2,8841,7253,100Colts tickets200House utilities & lawnwork1,1081,704766Refrigerators, mirrors, rug,storm windows, etc.6551,851628Checks made to the order of cashand to himself3,9597,5896,365Loan repayment1,049514Other1,500591425Total$20,656$20,293$16,755In 1978 Mr. Quint also wrote a $3,200 check on his separate account to pay for a car to be used by his father. His father subsequently reimbursed him for the purchase. Petitioner and her husband maintained joint personal checking*417 accounts, which were used and balanced almost exclusively by petitioner. In 1978 they maintained a checking account with Maryland National Bank, and in 1979 and 1980 they maintained a checking account with Equitable Trust Bank. The accounts were active checking accounts and did not accumulate any significant savings. The parties have stipulated that the following deposits were made to those accounts: 10 months in 1978$12,747(statements for 2 monthsin 1978 are unavailable)197916,468198033,292According to petitioner, she deposited into the joint accounts, her salary, her husband's paychecks from the State of Maryland, and some additional money that her husband gave her from time to time. Mr. Quint turned his paychecks over to petitioner, and she, in turn, deposited those paychecks, occasionally retaining $50 to $75 in cash for spending money. Petitioner signed virtually every check drawn on these joint personal checking accounts. Although not all of the checks drawn on these accounts were available for examination, the bank statements reveal that 301 checks were written during 10 months in 1978, 380 checks were written in 1979, and 521 checks*418 were written in 1980. Petitioner used the funds in the joint checking account to pay for various types of personal expenses and household expenses. Generally, Mr. Quint made the mortgage payments on the couple's home, which had been purchased in December 1975, and paid the telephone, utilities, and general maintenance bills out of his separate business account. Mr. Quint also paid the cost of sending the couple's children to summer camp. On occasion, Mr. Quint would give petitioner blank, signed checks from his business account to enable her to pay bills or to make purchases. During the years 1978, 1979, and 1980 neither petitioner nor her husband made any unusual or lavish expenditures. In addition, petitioner did not receive any unusual or extravagant gifts from her husband. Although petitioner took a trip to Las Vegas with Mr. Quint in each of the years in issue, the couple had taken at least one vacation trip a year throughout their marriage and in fact had made annual trips to Las Vegas for 3 or 4 years prior to 1978. Also prior to 1978 petitioner had taken trips to Ocean City with her parents. She continued to do so during the years in issue. Petitioner wrote checks*419 to pay for the lodging in Ocean City; however, petitioner's father apparently gave her money to pay for the Ocean City trips. As was their practice every summer, petitioner and her husband sent one or more of their children to summer camp during the years in issue. Their children also went skiing at Ski Roundtop in Pennsylvania, which is about 60 minutes from the family's home. Although Mr. Quint belonged to the Mercantile Country Club for a short period of time, which apparently covered two of the years in issue, petitioner did not belong to that club and rarely used it. The Quints' returns for the years in issue were prepared by an accountant. The extent of petitioner's participation in the preparation of those returns was limited to gathering information from her checkbooks and turning that information over to her husband. Petitioner did not examine the returns before she signed them. The 1980 return was signed by the accountant on March 12, 1981 and by petitioner and Mr. Quint approximately 10 days thereafter. At the time petitioner signed the 1980 return, she knew that Mr. Quint had been formally charged with embezzling funds. OPINION Petitioner seeks to be relieved*420 of liability for the deficiencies in income tax reported on the joint returns for 1978, 1979, and 1980 under the so-called innocent spouse provisions of section 6013(e). 1 To qualify her for such relief the evidence must show for each year that: (1) on such year's return there is a substantial understatement 2 of tax attributable to grossly erroneous items 3 of petitioner's spouse; (2) petitioner 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 petitioner liable for the deficiency attributed to such understatement. The parties agree that the first condition is satisfied. 4 It is the second and third conditions that are in dispute. *421 We begin by focusing on the condition that petitioner did not know and had no reason to know of the substantial understatement. In determining whether petitioner actually knew of the omissions from income that resulted in substantial understatements for each of the years in issue, we necessarily must rely in large part on petitioner's own testimony and our evaluation of her credibility. The record establishes to our satisfaction that petitioner did not have actual knowledge of the omitted income. We believe her testimony that she did not review the returns before she signed them and her general denial of actual knowledge of the omissions. The question of whether she had reason to know of the omissions is more difficult. The test to be applied is whether a reasonably prudent taxpayer in similar circumstances would not be expected to have knowledge of the omitted income. Sanders v. United States,509 F.2d 162">509 F.2d 162, 166-167 (5th Cir. 1975). Respondent advances several arguments to support his position that petitioner had reason to know of the omissions from income.His primary argument is that the family's expenditures so substantially exceeded the income reported on*422 the returns that petitioner should have been put on notice that something was awry. Respondent has calculated an excess of expenditures over reported income of $25,782 in 1978, $20,638 in 1979, and $29,981 in 1980. Petitioner objects to respondent's calculations on the basis that many of the figures used in the calculations are duplicative. Petitioner has calculated an excess of expenditures over reported income of only $506 in 1978 and $3,121 in 1980 and an excess of reported income over expenditures of $5,461 in 1979. Having reviewed respondent's calculations, we are included to agree with petitioner that, at least in theory, certain of the expenditures taken into account by respondent may be duplicative or otherwise in error. For example, in calculating expenditures, respondent took into account checks drawn on Mr. Quint's separate business account and made payable to the order of cash or to Mr. Quint and also assumed that total deposits to the joint checking account were expended. However, petitioner testified that, from time to time, she deposited into the joint account, cash given to her by her husband. Thus, by taking both of the foregoing items into account as distinct*423 and separate items of expenditure, respondent may well be guilty of doubling up on the total amount of expenditures. Respondent also viewed as an expenditure, a $3,200 check drawn on Mr. Quint's separate account for the purchase of a car. However, petitioner testified that the car was purchased for Mr. Quint's father and that Mr. Quint was reimbursed by his father several days later. We believe petitioner's testimony on this point; therefore, it is erroneous to include the $3,200 check as an item of expenditure. In addition, respondent considered expenses reflected on the 1978, 1979, and 1980 tax returns as separate expenses, without taking into account that some of the expenses may have been paid out of the deposits to the joint account, which respondent had already counted as expenditures. In his calculations, respondent also considered the total amount of FICA and Federal income taxes withheld during 1978, 1979, and 1980 as expenditures; however, he failed to give petitioners credit for refunds of Federal income tax of $2,046 and $1,172 attributable to 1978 and 1979, respectively. Suffice it to say that respondent's calculations are too riddled with errors to be of much use to*424 us. At the same time, it appears that petitioner's calculations may be equally faulty in the opposite direction. The parties stipulated that petitioner's deposits to the joint checking accounts totaled $12,747 during 10 months in 1978, $16,468 in 1979, and $33,292 in 1980. However, petitioner testified that she deposited her salary, the entire amount of her husband's paychecks from the State of Maryland (with the exception of an occasional $50 to $75 of cash retained from those checks), and additional cash that her husband would give her from time to time. The amount of petitioner's salary and Mr. Quint's salary from the State of Maryland amounted to $23,138 in 1978, $28,927 in 1979, and $28,900 in 1980. Obviously with respect to the amount of deposits in 1978 and 1979, the stipulation and petitioner's testimony are inconsistent. 5 Petitioner's calculations comparing expenditures to income assume that all deposits to the joint account were expended during the years in issue. In making this assumption, petitioner further assumes that deposits equaled those stipulated to rather than those petitioner testified to. Petitioner's calculations fail to account for the destiny of*425 the excess of the salaries in 1978 and 1979 over the deposits as stipulated to; therefore, it is not at all unlikely that petitioner's calculations may be marred by omitting certain expenditures. In short, neither respondent's nor petitioner's calculations represent a satisfactory comparison of total expenditures to total reported income. Moreover, having reviewed the entire record, we have concluded that any attempt on our part to reconstruct such a comparison would be entirely too speculative to serve as a basis for determining whether expenditures exceeded reported income to such an extent that petitioner should have been alerted to the misappropriations. Even assuming that petitioner knew that the family was spending more than the aggregate of her salary and her husband's salary from the State of Maryland, which we do not necessarily believe is true, that knowledge would not have been sufficient to put petitioner on notice of her husband's misappropriations. Petitioner testified that she was unaware of the fact that her husband had been disbarred from the practice of law in 1978. We find petitioner's testimony in this*426 respect to be credible. After all, Mr. Quint was demonstrably a master at concealment as proven by his ability to misappropriate funds from the State of Maryland while acting as a legal officer from late 1976 through August 1980, during part of which time, of course, he was disbarred from the practice of law. Given that petitioner was unaware that her husband had been disbarred, it was reasonable for her to assume that her husband was generating income from his private law practice. Respondent contends that the family's lavish lifestyle should have given petitioner reason to question the source of the funds. While it is certainly true that "a spouse cannot close her eyes to unusual or lavish expenditures, or to other facts, that might give her reason to know of the unreported income", ( Terzian v. Commissioner,72 T.C. 1164">72 T.C. 1164, 1170 (1979)), the record does not support respondent's contention that the Quints enjoyed a luxurious lifestyle and made lavish expenditures during the years in issue. The lavishness of an expense must be measured from each family's relative level of ordinary support. 6 The use of unreported income to provide ordinary support would not*427 ordinarily give a spouse reason to know of the income's existence within the meaning of section 6013(e). Mysse v. Commissioner,57 T.C. 680">57 T.C. 680, 698 (1972). Looking to the facts of this case, we see a family whose standard of living was reasonably high but substantially unchanged during the years in issue. The fact that the family's lifestyle was substantially unchanged during the years in issue is hardly surprising, given that prior to those years Mr. Quint's private law practice served as an additional source of income. In arguing that the expenses paid to send petitioner's children to summer camps and the expenses incurred in vacationing were "lavish" expenditures, respondent totally ignores the fact that the Quints had incurred similar expenses for a number of years prior to the years in issue. In our view there was no reason for petitioner suddenly to view these expenditures as unusual. Furthermore, petitioner testified with respect to the Ocean City vacations that her parents always paid for those trips.Respondent's assertion that the Quints lived an extravagant lifestyle as witnessed*428 by their membership in a country club and their habit of patronizing an out-of-town ski resort seems stretched, at the very least. Only Mr. Quint was a member of the Mercantile Country Club, and his membership was short-lived. With respect to respondent's assertion that the Quints patronized a ski resort, petitioner testified that Ski Roundtop is not a resort to them but was simply a place to go skiing about 60 minutes away from the Quints' home. She further testified that her children had visited Ski Roundtop, but that she had never been there. Based on petitioner's testimony, which we credit, it seems relatively clear that petitioner's children made occasional day trips to Ski Roundtop. We scarcely find that fact indicative of an extravagant lifestyle. Respondent also contends that petitioner is not a naive or unsophisticated person, that she assisted in the preparation and filing of the income tax returns for the years in issue, and that she had a sound knowledge of the family finances and of her husband's business account. While petitioner impressed us as a reasonably intelligent person, we think that respondent reads entirely too much into the record. Petitioner credibly*429 testified that the extent of her participation in the preparation of the income tax returns was limited to gathering information from her checkbooks and turning that information over to her husband. While we do not intend to imply that we condone petitioner's failure to examine the returns that she signed, we believe that, in fact, she did not examine these returns and that she by and large left the preparation of the returns to her husband and the accountant. Respondent's contention that petitioner had a sound knowledge of her husband's separate business account finds very little, if any, support in the record. The record indicates, and we have found as a fact, that petitioner did not keep apprised of her husband's business affairs as an attorney, nor did she have access to the records of his business account. There is essentially no evidence in the record to contradict this finding. Respondent contends that, because petitioner was advised of her husband's misappropriations as early as August 19, 1980 and knew that her husband had been formally charged on March 2, 1981 with embezzling and misappropriating funds, petitioner had knowledge of the omission from gross income at least*430 with respect to the 1980 taxable year. While admittedly a closer case, we on balance disagree. The record establishes to our sufficient satisfaction that, although petitioner was aware at the time she signed the 1980 return that her husband had misappropriated funds from the State of Maryland, she believed, based on her husband's assurance, that all of the misappropriated funds had been repaid in August 1980. Thus, we do not believe that petitioner knew, or reasonably should have known, of the omission on the 1980 return. Having found that petitioner neither knew nor reasonably should have known of the substantial understatements of tax for 1978, 1979, and 1980, we shift our focus to the remaining condition for relief under section 6013(e); that is, whether, taking all of the facts into consideration, it is inequitable to hold petitioner liable for the deficiency attributable to those understatements. Whether petitioner significantly benefited from the substantial understatements is a factor to be considered in making this determination. 7*431 Respondent contends that petitioner significantly benefited from the income that was omitted from the returns during the years in issue because the Quints enjoyed a standard of living far higher than would have been possible on the amounts reported on their income tax returns. Respondent's argument has some appeal; however, it does not find support in the decided cases. It is well settled that a significant benefit does not exist in a situation where the omitted income is used primarily for the normal support of the family. Section 1.6013-5(b), Income Tax Regs.; Terzian v. Commissioner,supra at 1172; Mysse v. Commissioner,supra at 698-699. In the instant case, as we previously stated, we fail to see any unusual or lavish expenditures during the years in issue or any noticeable change in the family's style of living during those years. Finally, respondent, emphasizing that the Quints had been married for 22 years and were still married at the time of trial, contends that the relief provisions of section 6013(e) were intended primarily for the benefit of spouses who are deserted, divorced, or separated.Since petitioner was not placed*432 in any of those situations, respondent argues that it is not inequitable, within the meaning of the statute, to hold her liable for the deficiencies. S. Rept. No. 91-1537 (1970), 1 C.B. 606">1971-1 C.B. 606, 608. There is nothing in section 6013(e) to indicated that its relief was intended to be limited to spouses who are victims of broken marriages. Mysse v. Commissioner,supra at 700. The above-referenced committee report indicates that whether the spouse has been separated or divorced is only one of the factors to be considered in determining whether it is inequitable to hold her liable for the deficiencies. We do not believe that petitioner herein is to be denied relief simply because she is still married to her husband. Moreover, we note that after Mr. Quint's defalcations were discovered, petitioner dutifully assumed the primary responsibility of supporting her family. After a review of the facts and circumstances of this case and in light of our finding that petitioner did not significantly benefit from the omitted income, we conclude that it would be inequitable to charge her with the tax liabilities incurred by her husband on his unreported income.*433 Decision will be entered under Rule 155.Footnotes1. After trial and briefing herein sec. 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 of 1939 applies. See Pub. L. 98-369, sec. 424, 98 Stat. 801; H. Rept. No. 98-432, Pt. 2 (Mar. 5, 1984) 1501, 1503. 2. A "substantial understatement" means an understatement that exceeds $500. Sec. 6013(e)(3)↩. 3. "Grossly erroneous items" include omissions from gross income. Sec. 6013(e)(2)↩. 4. Sec. 6013(e) as in effect at the time of trial and briefing herein required an omission from gross income in excess of 25 percent of the amount of gross income stated in the return. The parties stipulated that such condition existed for each of the years in issue. From said stipulation it is clear that the parties agree that there was a "substantial understatement" of tax attributable to a "grossly erroneous item", as those terms are defined under amended sec. 6013(e)↩, for each of the years in issue.5. Part of this inconsistency is due to withholding.↩6. Enterline v. Commissioner,T.C. Memo. 1980-200↩.7. Section 6013(e)(1)(C), prior to its amendment, explicitly required that we consider "whether or not the other spouse significantly benefited directly or indirectly from the items omitted from gross income * * *." While section 6013(e), as amended, does not specifically require that the determination of whether it would be inequitable to hold the spouse liable include the consideration of whether such spouse benefited from the erroneous items, that factor should continue to be taken into account. See H. Rept. No. 98-432, Pt. 2 (March 5, 1984), supra↩ at 1502.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4334525/

ANTONIO L. AND ERNESTINE THOMAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentThomas v. Comm'rNo. 3263-02L United States Tax CourtT.C. Memo 2003-231; 2003 Tax Ct. Memo LEXIS 230; 86 T.C.M. (CCH) 216; T.C.M. (RIA) 55253; August 1, 2003, Filed *230 Decision was entered for respondent. Antonio L. and Ernestine Thomas, pro se.Monica D. Armstrong, for respondent. Gale, Joseph H.GALEMEMORANDUM FINDINGS OF FACT AND OPINIONGALE, Judge: This case arises from a petition filed pursuant to sections 6320(c) and 6330(d)(1)(A). 1 After concessions, 2 the issue for decision is whether respondent's determination to proceed with a collection with respect to petitioners' Federal income tax liabilities for 1991 should be sustained. We hold that it should.             FINDINGS OF FACTMost*231 of the facts have been stipulated and are so found. The parties' stipulation of facts and the accompanying exhibits are incorporated herein by this reference.At the time of filing the petition in this case, petitioners resided in East Point, Georgia.Petitioners filed their 1991 joint Federal income tax return (1991 return) on September 28, 1993, reporting a tax due of $ 8,343, which was not paid. Respondent assessed the tax shown as due on the 1991 return on October 18, 1993, as well as additions to tax under sections 6651(a)(1) and (2) and 6654, plus interest (return assessment).On or about March 6, 1995, respondent notified petitioners that their 1991 income tax return had been selected for examination.On March 10, 1995, 3 petitioners filed a petition (bankruptcy petition) in the U.S. Bankruptcy Court for the Northern District of Georgia, thereby commencing a bankruptcy proceeding under chapter 7 of title 11 of the United States Code.*232 On March 20, 1996, petitioners amended their bankruptcy petition to include their Federal tax liabilities for 1991.On March 21, 1996, respondent issued a statutory notice of deficiency to petitioners with respect to 1991, determining a deficiency of $ 31,560, an addition to tax under section 6651(a)(1) of $ 8,004, and a penalty under section 6662(a) of $ 6,312.On June 12, 1996, the bankruptcy court entered a "DISCHARGE OF DEBTOR(S) WITH ORDER APPROVING TRUSTEE'S REPORT OF NO DISTRIBUTION, CLOSING ESTATE AND DISCHARGING TRUSTEE" with respect to petitioners (discharge order), granting petitioners a discharge pursuant to 11 U.S.C. sec. 727 (2000). The return assessment was abated shortly after issuance of the discharge order.On June 19, 1996, petitioners filed a petition with this Court with respect to the notice of deficiency for 1991. Petitioners ultimately settled the deficiency proceeding by agreeing to a deficiency in tax of $ 13,914 plus an addition to tax under section 6651(a)(1) of $ 3,478.50. A decision was entered on October 20, 1997, reflecting the foregoing agreement. The deficiency and addition to tax, plus interest of $ 10,457.90, were assessed*233 on December 29, 1997 (examination assessment).On August 29, 2000, respondent filed a notice of Federal tax lien with the Clerk of Superior Court in Fulton County, Georgia. The notice of Federal tax lien was issued with respect to petitioners' income tax liabilities for the years 1985, 1991, 1997, and 1998. With respect to 1991, the Notice of Federal Tax Lien indicated an unpaid balance of $ 22,227.91. On September 1, 2000, respondent mailed to petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320.On October 5, 2000, petitioners filed with respondent a Form 12153, Request for a Collection Due Process Hearing. On the Form 12153, petitioners alleged as grounds for relief: (1) "IRS assessed taxes after the date a petition for discharge filed"; (2) "IRS mailed Notice of Deficiency to wrong address"; (3) "The statute of limitation for collection has ended"; and (4) "Agreement was reached in Tax Court". Petitioners did not raise any spousal defenses or offer collection alternatives. A face- to-face meeting was scheduled between petitioners and a settlement officer of respondent for November 19, 2001. Petitioner Antonio Thomas*234 telephoned the settlement officer on November 14, 2001, to postpone this meeting because his representative was ill, and the scheduled meeting did not take place. A second meeting was scheduled for December 3, 2001, at 10 a. m. Petitioners failed to appear, and in the afternoon of that day, a representative of petitioners contacted the settlement officer to request a further postponement. The representative was advised that Appeals would close the case and issue a determination.On December 12, 2001, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/ or 6330 (determination letter). Therein, the settlement officer first determined that all applicable laws and administrative procedures had been met for all liabilities at issue except for the 1985 taxable year; for 1985, the settlement officer determined that petitioners' liability had been discharged in the bankruptcy proceeding. With respect to issues raised by petitioners, the determination letter concluded that all of the issues raised by petitioners related to the validity of the assessments and that all of the assessments except for the one relating to 1985 were valid. Finally, the*235 determination letter concluded that the proposed collection action appropriately balanced petitioners' interests with the need for efficient tax collection, noting a "pattern of unresponsiveness" in that petitioners had failed to appear for two scheduled hearings.On February 11, 2002, petitioners filed their petition in the present case. The petition alleged: (1) That petitioners' 1991 liabilities had been discharged in the bankruptcy proceeding; (2) that the amount of the 1991 liabilities asserted by respondent was incorrect; and (3) that contrary to the determination letter, petitioners and their representative had called the settlement officer to request that the hearings be rescheduled. At trial, petitioners further argued that the lien should be released because the 1991 liabilities had been paid.                OPINIONSection 6321 imposes a lien in favor of the United States on all property and rights to property of a person when a demand for payment of that person's taxes has been made and the person fails to pay those taxes. Such a lien arises when an assessment is made. Sec. 6322. Section 6323(a) requires the Secretary to file a notice*236 of Federal tax lien if the lien is to be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor. Lindsay v. Comm'r, T.C. Memo 2001-285">T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800">56 Fed. Appx. 800 (9th Cir. 2003).Section 6320 provides that the Secretary shall furnish the person described in section 6321 with written notice of the filing of a notice of lien under section 6323. The notice required by section 6320 must be provided not more than 5 business days after the day of the filing of the notice of lien. Sec. 6320(a)(2). Section 6320 further provides that the person may request administrative review of the matter (in the form of an Appeals Office hearing) within 30 days beginning on the day after the 5-day period. Section 6320(c) provides that the Appeals Office hearing generally shall be conducted consistent with the procedures set forth in section 6330(c), (d), and (e) .*237 Section 6330(c)(2) prescribes the matters that a person may raise at an Appeals Office hearing. Under that section, a person may raise any relevant issue related to the unpaid tax or noticed lien, but may only contest the existence or amount of the underlying tax liability if the person did not receive a notice of deficiency for the tax liability or did not otherwise have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604">114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 180-181 (2000). Section 6330(d) provides for judicial review of the administrative determination in the Tax Court or a Federal District Court, as may be appropriate. Where the underlying tax liability is not at issue, the Court will review the Appeals officer's determination for abuse of discretion. Sego v. Commissioner, supra at 610.The Underlying LiabilitiesAlthough petitioners allege various errors in the deficiency respondent determined with respect to 1991, they may not raise these issues in the instant proceeding. The underlying liabilities for 1991 that respondent seeks to collect 4 were the subject of a notice of deficiency*238 that petitioners received. Accordingly, pursuant to section 6330(c)(2)(B), petitioners are precluded from challenging the existence or amount of the underlying tax liabilities for 1991 in this proceeding.The Bankruptcy DischargePetitioners also allege that they owe no tax for 1991 because all of their liabilities for that year were discharged in the bankruptcy proceeding. Petitioners further note that they amended their bankruptcy petition specifically to include their 1991 income tax liabilities. Respondent agrees that the return assessment was discharged in that proceeding but contends that the examination assessment was not.We have jurisdiction to decide whether a tax liability for which collection is at issue in a section 6330(d)(1) proceeding has been discharged in bankruptcy. Washington v. Comm'r, 120 T.C. 114">120 T.C. 114, 121 (2003).Respondent argues that the*239 examination assessment was not discharged in bankruptcy pursuant to 11 U.S. C. secs. 523(a)(1)(A) and 507(a)(8)(A)(iii) (2000). Those sections provide collectively that an income tax liability that is "not assessed before, but assessable * * * after" commencement of the bankruptcy proceeding, is not dischargeable. Thus, respondent argues, the examination assessment, which was not made before the commencement of the bankruptcy proceeding on March 10, 1995, but instead was made after commencement, on December 29, 1997, was not dischargeable pursuant to the foregoing provisions.We agree that the examination assessment was not dischargeable but disagree with respondent's analysis. Specifically exempted from the nondischargeability rule for income taxes that were not assessed before but are assessable after commencement of bankruptcy proceedings are income taxes with respect to which a return was filed after its due date (including extensions) and after 2 years before the filing of the bankruptcy petition. See 11 U.S.C. secs. 507(a)(8)(A)(iii), 523(a)(1)(B)(ii) (2000). Such taxes are nondischargeable without regard to the timing of the assessment. *240 Petitioners' 1991 return was untimely filed on September 28, 1993, which is after 2 years before the filing of the bankruptcy petition on March 10, 1995. 5 Accordingly, pursuant to 11 U.S. C. sec. 523(a)(1)(B)(ii) the examination assessment was not discharged in the bankruptcy proceedings.6*241 PaymentAt trial, petitioners raised an additional issue; namely, that any amount owed with respect to 1991 that was not discharged in the bankruptcy proceeding had been paid. In support of this contention, petitioners introduced a letter issued to them from respondent dated July 21, 1997, indicating that the total amount owed with respect to 1991 was $ 20. Petitioners allege that they paid this amount and "additional payments" with respect to 1991.Petitioners' argument has no merit. The July 21, 1997, letter on which they rely precedes by 3 months their October 20, 1997, execution of the stipulated decision in the Tax Court proceedings covering 1991 in which they agreed there was a deficiency for that year of $ 13,914, plus an addition to tax of $ 3,478.50. Thus, while the letter of July 21, 1997, may have been an accurate statement of petitioners' 1991 liabilities before the examination assessment, it obviously did not reflect the deficiency to which they agreed in October 1997. Accordingly, the letter provides no support for the claim that petitioners' 1991 liabilities were satisfied.To the contrary, respondent has submitted a certified copy of Form 4340, Certificate of Assessments, *242 Payments, and Other Specified Matters, for petitioners' 1991 tax year. Absent some showing of irregularity, which petitioners have not made, the Form 4340 provides presumptive proof of its contents. See Hansen v. United States, 7 F.3d 137">7 F.3d 137, 138 (9th Cir. 1993); United States v. Chila, 871 F.2d 1015">871 F.2d 1015, 1019 (11th Cir. 1989); Craig v. Comm'r, 119 T.C. 252">119 T.C. 252, 262-63 (2002); Davis v. Commissioner, 115 T.C. 35">115 T.C. 35, 40-41 (2000). The Form 4340 indicates that six payments of $ 400 each were made by petitioners during 1998 with respect to their 1991 liabilities and does not indicate that any further payments were made. The Form 4340 indicates that the total amount of the examination assessment was $ 24,647.91. The amount that respondent seeks to collect, $ 22,247.91, is $ 2,400 less than the amount of the examination assessment. The Form 4340 also indicates that the return assessment was abated shortly after it was discharged. Accordingly, we conclude that all payments that petitioners have made since the examination assessment have been accounted for, and the amount respondent seeks to collect is correct.Necessity of a Face-to-Face Meeting*243 Finally, petitioners contend that their right to a hearing under section 6330(b) was compromised by the settlement officer's issuing the determination letter without conducting a face-to-face meeting. The parties have stipulated that a meeting scheduled for November 19, 2001, was canceled by petitioners by telephone on November 14, 2001, because of the illness of their representative. A second meeting was scheduled for December 3, 2001, at 10 a. m. Further, the parties have stipulated that petitioners failed to appear for this second meeting, and that a representative of petitioners telephoned the settlement officer later in the day to ask that the meeting be rescheduled. Rather than schedule a third meeting, the settlement officer elected instead to close the case and issue a determination letter.We find it unnecessary to decide whether, in these circumstances, petitioners' right to a hearing under section 6330(b) was infringed upon when respondent's settlement officer refused to offer petitioners a third opportunity for a face-to-face meeting. The issues that petitioners have raised herein and indicated they would have raised in a face-to-face meeting -- namely, the correctness*244 of the 1991 deficiency and the bankruptcy discharge of the 1991 liabilities or their payment -- have been considered in this proceeding and found to lack merit. Thus, regardless of whether petitioners were initially accorded their right to a hearing under section 6330(b), they have not been prejudiced, and we do not believe it is "either necessary or productive" to remand this case for a hearing on the claims we have found legally insufficient to forestall collection. See Lunsford v. Comm'r, 117 T.C. 183">117 T.C. 183, 189 (2001); Moore v. Comm'r, T.C. Memo 2003-1">T.C. Memo. 2003-1.ConclusionPetitioners have not raised any spousal defenses, other challenges to the appropriateness of the collection action, or collection alternatives. We have considered every contention raised by petitioners, and conclude that each is without merit. We therefore hold that respondent may proceed with the proposed collection action. To reflect the foregoing,An appropriate order and decision will be entered. Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code, as amended.↩2. The notice of determination that is the subject of this action covered petitioners' liabilities with respect to taxable years 1985, 1991, 1997, and 1998. Respondent conceded in the notice that his collection action with respect to 1985 was not appropriate, and petitioners seek review herein only with respect to 1991.↩3. The parties have stipulated that the bankruptcy petition was filed on Mar. 10, 1995, although the bankruptcy court's discharge order indicates that the petition was filed on Oct. 10 of that year. As discussed infra note 5, since the result in this case would be the same under either filing date, we need not resolve this discrepancy.↩4. Respondent has abated the 1991 liability that petitioners reported on their return for that year (i. e., the return assessment).↩5. We note that there is a discrepancy in the record regarding the filing date of the bankruptcy petition. The parties have stipulated that the petition was filed on Mar. 10, 1995; however, the bankruptcy court's discharge order indicates that the petition was filed on Oct. 10, 1995.Even if Oct. 10, 1995, were the correct filing date of the bankruptcy petition, it would not change the result herein because the examination assessment would still be nondischargeable. If the filing date of the bankruptcy petition were Oct. 10, 1995, the nondischargeability rule of 11 U.S. C. secs. 523(a)(1)(A) and 507(a)(8)(A)(iii) (2000)↩, relied on by respondent, would apply. That is, the examination assessment made on Dec. 29, 1997, would be nondischargeable because it was not assessed before, but was assessable after, the commencement of the bankruptcy proceeding on Oct. 10, 1995.6. Petitioners' amendment of their bankruptcy petition to specifically list their 1991 Federal income tax liabilities has no effect on their dischargeability.↩

01-04-2023

11-14-2018

https://www.courtlistener.com/api/rest/v3/opinions/4562853/

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA SYDNEY E. SMITH, : : Petitioner, : Civil Action No.: 19-1763 (RC) : v. : Re Document Nos.: 17, 18, 19, 23 : SCOTT FINLEY, : : Respondent. : MEMORANDUM OPINION DENYING PETITIONER’S MOTION TO ALTER OR AMEND JUDGMENT; GRANTING PETITIONER’S MOTION FOR LEAVE TO AMEND PLEADING; GRANTING PETITIONER’S MOTION FOR A CERTIFICATE OF APPEALABILITY; GRANTING PETITIONER’S MOTION FOR LEAVE TO PROCEED ON APPEAL IN FORMA PAUPERIS I. INTRODUCTION On March 30, 2020, this Court granted Respondent Scott Finley’s motion to dismiss Petitioner Sydney E. Smith’s “Petition for a Writ of Habeas Corpus.” See Mem. Op. (“MTD Mem. Op.”), ECF No. 14. Petitioner now moves under Federal Rule of Civil Procedure 59(e) to ask this Court to alter or amend that decision. See Mot. Alter or Amend J. (“Mot. Amend”), ECF No. 17. Petitioner also requests that this Court grant his application for a certificate of appealability pursuant to 28 U.S.C. § 2253(c) and moves for leave to proceed on appeal in forma pauperis. See Mot. Cert. of Appeal, ECF No. 18; Mot. for Leave, ECF No. 23. For the reasons discussed below, the Court will deny Mr. Smith’s motion to alter or amend judgment but grant Mr. Smith’s requests for a certificate of appealability and to proceed in forma pauperis. 1 1 Petitioner also moves for leave to amend his pleading, ECF No. 19, which the Court will grant for the reasons explained below. 1 II. FACTUAL BACKGROUND On November 19, 2001, Mr. Smith was convicted of first-degree murder in D.C. Superior Court. See Am. Pet. at 1, 2 ECF No. 3. On February 1, 2002, Judge Retchin sentenced Mr. Smith to a term of imprisonment of thirty years to life. Id. On November 10, 2003, Mr. Smith, through counsel, filed a motion to vacate his conviction pursuant to D.C. Code § 23-110, the statutory mechanism for collateral review of a conviction in the District of Columbia. Id. The trial court denied Mr. Smith’s § 23-110 motion by an order dated April 9, 2004. Mot. Dismiss at 3, ECF No. 8. Mr. Smith filed a timely notice of appeal of that decision on April 28, 2004. Id. The District of Columbia Court of Appeals (DCCA) consolidated the direct appeal of his conviction and the § 23-110 appeal. See id. at 3–4; see also Shepard v. United States, 533 A.2d 1278, 1280 (D.C. 1987) (noting that “if [a] § 23-110 motion is denied, the appeal from its denial can be consolidated with the direct appeal”). Mr. Smith continued filing successive collateral review challenges, to no avail. Am. Pet. at 1–3. On June 11, 2019, Mr. Smith, proceeding pro se, made a filing styled as a petition for habeas corpus under 28 U.S.C. § 2254. See Pet., ECF No. 1. In an amended petition, Mr. Smith argued that his initial collateral review counsel, Mr. Myers, was constitutionally ineffective. Am. Pet. at 8. He claimed that Mr. Myers did not adequately explore his claim of ineffective assistance of trial counsel (“IATC”), specifically because Mr. Myers did not respond to a particular motion by the government during the collateral review proceedings or explore related alleged misconduct by Mr. Smith’s trial counsel, Mr. Clennon. Id. at 10. 2 Because the filings in this case are not consecutively paginated throughout, the Court refers to the ECF page numbers. 2 In an opinion issued on March 30, 2020, this Court dismissed Mr. Smith’s habeas petition for lack of subject matter jurisdiction. See generally MTD Mem. Op. The Court first noted that, generally, a federal court in this district only has jurisdiction under § 2254 when a D.C. Superior Court prisoner claims that appellate counsel was constitutionally ineffective in a direct appeal, i.e., not for claims brought under § 23-110. See Williams v. Martinez, 586 F.3d 995 (D.C. Cir. 2009). Mr. Smith’s claims had no apparent relation to the conduct of his counsel on direct appeal. See Mot. Dismiss at 5; Am. Pet. at 10. The Court also identified two other potential avenues that might provide jurisdiction. The first is contained in § 23-110(g), which provides that a D.C. prisoner may seek a federal writ of habeas corpus if it “appears that the remedy by motion [under § 23-110] is inadequate or ineffective to test the legality of his detention.” D.C. Code § 23-110(g). The second was the Supreme Court’s Martinez/Trevino line of cases, which under certain circumstances, allows federal review of procedurally barred collateral review claims. See generally Trevino v. Thaler, 569 U.S. 413 (2013); Martinez v. Ryan, 566 U.S. 1 (2012). Notably, Trevino widens the exception espoused by Martinez to state court systems that do “not offer most defendants a meaningful opportunity to present a claim of ineffective assistance of trial counsel on direct appeal.” Trevino, 569 U.S. at 428. This Court explained, however, that both of these exceptions appeared unavailing to Mr. Smith. First, Mr. Smith had not explained why his § 23-110 remedy was inadequate or ineffective. See MTD Mem. Op. at 3. Second, the Court concluded, consistent with earlier decisions, that the District of Columbia review scheme is “not so constrained” as those in Martinez/Trevino. See id. at 7 (quoting Richardson v. United States, 999 F. Supp. 2d 44, 49 (D.D.C. 2013)). Accordingly, Mr. Smith’s claims could not be heard by this Court. 3 Mr. Smith disagrees with this analysis, and now moves to alter or amend the Court’s March 30, 2020 dismissal of the action. See Mot. Amend. He also applies for a certificate of appealability under 28 U.S.C. § 2253(c), see Mot. Cert. of Appeal, which requires that a petitioner make a “substantial showing of the denial of a constitutional right,” 28 U.S.C. § 2253(c)(2). III. MOTION TO ALTER OR AMEND JUDGMENT A. Legal Standard Rule 59(e) permits a party to file a motion to “alter or amend a judgment” within 28 days of the entry of that judgment. Fed. R. Civ. Pro. 59(e). Rule 59(e) motions are “disfavored and relief from judgment is granted only when the moving party establishes extraordinary circumstances.” Niedermeier v. Office of Baucus, 153 F. Supp. 2d 23, 28 (D.D.C. 2001) (quoting Anyanwutaku v. Moore, 151 F.3d 1053, 1057 (D.C. Cir. 1998)). A court may grant a motion to amend or alter a judgment only: “‘(1) if there is an ‘intervening change of controlling law’; (2) if new evidence becomes available; or (3) if the judgment should be amended in order to ‘correct a clear error or prevent manifest injustice.’” Leidos, Inc. v. Hellenic Republic, 881 F.3d 213, 217 (D.C. Cir. 2018) (quoting Firestone v. Firestone, 76 F.3d 1205, 1208 (D.C. Cir. 1996)); see also Solomon v. Univ. of S. Cal., 255 F.R.D. 303, 304 (D.D.C. 2009). Relief under Rule 59(e) is not appropriate when the moving party seeks to “relitigate old matters, or to raise arguments or present evidence that could have been raised prior to the entry of judgment.” Niedermeier, 153 F. Supp. 2d at 28 (citation and internal quotation marks omitted); see also Turner v. U.S. Capitol Police, No. 12-45, 2014 WL 169871, at *1 (D.D.C. Jan. 16, 2014). The party seeking reconsideration bears the burden of establishing that relief is warranted. Elec. Privacy Info. Ctr. v. U.S. Dep’t of Homeland Sec., 811 F. Supp. 2d 216, 226 (D.D.C. 2011). 4 B. Analysis Petitioner moves to alter or amend this Court’s March 30, 2020 judgment pursuant to Rule 59(e). See Mot. Amend. As best the Court can discern, Mr. Smith’s motion raises several arguments concerning Respondent’s reliance on Williams, 586 F.3d at 995, and the standard for dismissal under Rule 12(b). Id. at 4. For the reasons set forth below, Mr. Smith fails to establish that he is entitled to relief under Rule 59(e) or other avenues for seeking reconsideration of judicial decisions. As a preliminary matter, this Court must address the timeliness of Petitioner’s Rule 59(e) motion. 3 Under Rule 59(e), a motion is only timely if it is filed within 28 days of the entry of the judgment. Fed. R. Civ. P. 59(e). A motion for reconsideration filed outside the 28-day window provided by Rule 59(e) is typically viewed as a Rule 60(b) motion. See McMillian v. District of Columbia, 233 F.R.D. 179, 179–80 n. 1 (D.D.C. 2005) (holding that motions for reconsideration filed within Rule 59(e)’s time limit are treated as Rule 59(e) motions, while those filed outside it are treated as motions under Rule 60(b)); 4 Computer Professionals for Soc. Responsibility v. U.S. Secret Serv., 72 F.3d 897, 903 (D.C. Cir. 1996). It appears from Mr. Smith’s attached certificate 3 Mr. Smith also moves for leave to amend his 59(e) motion, presumably under Federal Rule of Civil Procedure 15(a)(2). See Mot. Amend Pleading, ECF No. 19. Though his 15(a)(2) motion is not drafted with perfect clarity, Smith appears to use it as a means to justify any delay in receipt of his 59(e) motion. See id. at 1–2. Petitioner asserts that he did not receive a complete copy of this Court’s March 30, 2020 Order until April 4, 2020. See Mot. Amend Pleading at 1. Mr. Smith also cites FCI Schuylkill’s modified operations under Covid-19 as additional grounds for delay. See id. at 2, 4. To the extent the motion to amend seeks to introduce these additional arguments regarding timeliness, it is granted. As the Court explains below, whether Mr. Smith’s 59(e) motion is timely or not does not alter the outcome here. 4 Rule 60(b) motions allow a party to seek relief from a final judgment “within a reasonable time” after entry of the judgment, but only for specified reasons. See Fed.R.Civ.P. 60(b). These reasons include among other things, “mistake, inadvertence, surprise, or excusable neglect,” id. at (60)(b)(1), “newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b),” id. at (60)(b)(2), and “any other reason that justifies relief,” id. at 60(b)(6). 5 of service that he placed a copy of his Rule 59(e) motion in the FCI Schuylkill mail system on April 29, 2020. See Mot. Amend at 5. Accepting April 29, 2020 as the filing date, 5 the date would seem to fall more than 28 days after entry of the Court’s March 30, 2020 judgment, meaning that Petitioner’s motion should be treated as one under Rule 60. Ultimately, however, “this Court need not determine under which Rule [Mr. Smith’s] motion was brought or should be considered, however, because as explained below, the Court finds that [Mr. Smith’s] motion should be denied regardless of whether it is treated as a motion for reconsideration pursuant to Rule 54(b), 59(e), or 60(b).” Ali v. Carnegie Inst. of Washington, 309 F.R.D. 77, 82 (D.D.C. 2015), aff’d, 684 F. App’x 985 (Fed. Cir. 2017). Indeed, Mr. Smith fails to raise any “intervening change of controlling law,” allege any new evidence, or establish any clear error in the Court’s prior ruling as required under Rule 59(e). Fed. R. Civ. P. 59(e); see Firestone, 76 F.3d at 1208. Mr. Smith also fails to allege fraud or any other reason that would justify relief under Rule 60(b). See Fed. R. Civ. P. 60(b). Instead, Mr. Smith appears to challenge Respondent’s reliance on Williams and this Court’s application of Rule 12(b) in dismissing his habeas petition. 586 F.3d at 995. Mr. Smith states that Williams “deal[s] with a constitutional right, [and] Martinez argue[s] a[n] equitable right;” and, Williams “speaks to [a] direct appeal which is brough[t] in the appella[te] court, whereas Martinez speaks to collateral appeal which is brough[t] i[n] the trial court.” Mot. Amend at 4; see Williams 586 F.3d at 995; Martinez, 566 U.S. at 16. However, to the extent that Respondent’s reliance on Williams was misplaced, Williams alone did not inform this Court’s decision to dismiss Smith’s action. The Court has an 5 Under the “mailbox rule,” the operative filing date for a pro se prisoner litigant is “that on which petitioner placed his motion in the prison mail system to be sent to the Court.” Davis v. Cross, 825 F. Supp. 2d 200, 201 (D.D.C. 2011). 6 independent duty to “to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party.” Arbaugh v. Y&H Corp., 546 U.S. 500, 501 (2006) (emphasis added). Accordingly, Mr. Smith’s motion for reconsideration cannot be granted on these grounds. Mr. Smith also quotes Am. Nat. Ins. Co. v. F.D.I.C., which states that when “considering a motion to dismiss under Rule 12(b)(1) for lack of jurisdiction, the court must accept as true all uncontroverted material factual allegations contained in the complaint and ‘construe the complaint liberally[.]’” 642 F.3d 1137, 1139 (D.C. Cir. 2011); see Mot. Amend at 4. Mr. Smith claims that because Respondent “has not denied any material factual allegation[s]” contained in his complaint, the Court must accept all facts alleged by him as true. Mot. Amend at 4. But the Court accepted all of Mr. Smith’s allegations as true and assumed, for the purpose of the motion, that his counsel in state collateral review proceedings was ineffective. 6 Nonetheless, as explained in this Court’s opinion, even under the facts alleged, the Court does not have jurisdiction over a habeas petition challenging the adequacy of Mr. Smith’s collateral review counsel. See MTD Mem. Op at 5–8; see also Williams, 586 F.3d at 1001 (noting that a prisoner “lack[s] a constitutional entitlement to effective assistance of counsel in state collateral proceedings”). This Court likewise lacks jurisdiction over any claims Mr. Smith might be attempting to raise concerning the IATC because such claims could have been brought on direct appeal of the criminal case. See Martinez, 566 U.S. at 17; see also MTD Mem. Op at 7. Thus, the Court remains convinced it lacks jurisdiction over his petition. 6 Mr. Smith, in his habeas petition, states that he was “denied access to the court, due process, and equal protection of the law by the state court accepting a fraudulent motion and affidavit from the government and ineffective assistance of collateral review counsel.” See Am. Pet. at 6. Accordingly, he contests the “integrity of his Initial Collateral Review proceeding” and, thus, the “correctness” of the collateral review court’s ruling. Id. at 9. 7 Because Mr. Smith fails to identify any proper basis for reconsideration under any standard, his motion to amend this Court’s March 30, 2020 decision is denied. IV. MOTION FOR CERTIFICATE OF APPEALABILITY A. Legal Standard A “prisoner seeking an appeal from a decision on a petition for habeas corpus and whose detention arose from state court proceedings must first seek a certificate of appealability from a circuit justice or judge” pursuant to 28 U.S.C. § 2253(c). Baisey v. Stansberry, 777 F. Supp. 2d 1, 4 (D.D.C. 2011); see also Slack v. McDaniel, 529 U.S. 473 (2000) (explaining that a petitioner’s right to appeal an order denying habeas relief is “governed by the requirements [] found at § 2253(c)”). A certificate of appealability may issue only if the petitioner “has made a substantial showing of the denial of a constitutional right.” 28 U.S.C. § 2253(c)(2). A “substantial showing” includes “showing that reasonable jurists could debate whether . . . the petition should have been resolved in a different manner or that the issues presented were ‘adequate to deserve encouragement to proceed further.’” Slack, 529 U.S. at 483–84 (quoting Barefoot v. Estelle, 463 U.S. 880, 893 & n. 4 (1983)). If the certificate is granted, the court must specify which issues raise such a substantial showing. United States v. Weaver, 195 F.3d 52, 53 (D.C. Cir. 1999). In instances where a court denies a habeas petition on procedural grounds “without reaching any underlying constitutional claims,” a “certificate of appealability ‘should issue when the prisoner shows, at least, that jurists of reason would find it debatable whether the petition states a valid claim of the denial of a constitutional right and that jurists of reason would find it debatable whether the district court was correct in its procedural ruling.’” Baisey, 777 F. Supp. 2d at 5. 8 B. Analysis Mr. Smith asserts several grounds for issuance of a certificate of appealability. First, he asserts that a “reasonable jurist could debate whether the government responded to [his] complaint, whether the government responded to [his] habeas corpus, and whether that response was timely.” Mot. Cert. of Appeal at 3. He also states that a “reasonable jurist” could debate whether the “underlying infective assistance of trial counsel claims are ‘substantial’ and such prisoners can establish that their post-conviction counsel was ineffective under the Strickland standard.” Id. Generally, he contends that this Court has jurisdiction over his IATC claim because his initial collateral review counsel was ineffective during collateral review proceedings. Id. As noted previously, the Court does not see any conceivable merit in Mr. Smith’s procedural arguments regarding timeliness or waiver relating to Respondent’s conduct in this litigation. 7 But, as Mr. Smith’s references to Martinez or Trevino indicate, there is a potential argument that Mr. Smith’s underlying IATC should not be procedurally barred. As mentioned, his main objection appears to be that he was never able to fully explore the IATC claim because his collateral review counsel was ineffective in raising that argument and his further attempts to litigate the issue were barred as successive petitions. Although a prisoner “lack[s] a constitutional entitlement to effective assistance of counsel in state collateral proceedings,” Williams, 586 F.3d at 1001, Trevino holds that when a state system, whether by design or operation, deprives defendants of a “meaningful opportunity” to 7 The record indicates that the Respondent’s motion was timely filed: the order to show cause was served on Respondent on August 6, 2019, see Executed Show Cause Order, ECF No. 7, and the government filed its motion to dismiss twenty-eight days later on September 4, 2019, within the thirty-day period allotted by the show cause order. 9 raise an IATC on direct review, a federal court should not be barred from considering that IATC claim if counsel in the collateral review proceeding was absent or ineffective, 569 U.S. at 428. As explained in this Court’s memorandum opinion and reiterated above, the Court is not convinced that Martinez/Trevino are relevant to the District of Columbia’s review scheme, which allows IATC claims to be raised on direct review. See Mem. Op. at 7–8; see also Richardson, 999 F. Supp. 2d at 49 (determining that the D.C. systems “is not so constrained” as those implicated by Martinez/Trevino, because a petitioner “could raise—and actually did raise— ineffective assistance of trial claims on direct appeal”). But Trevino appears to contemplate a sensitive, fact-bound analysis of the actual operation of a state’s appeal and post-conviction system. 569 U.S. at 418 (indicating that the question is whether the “procedural system—as a matter of its structure, design, and operation—does not offer most defendants a meaningful opportunity to present a claim of ineffective assistance of trial counsel on direct appeal”) (emphasis added). The fact that state law technically permits a petitioner to raise IATC claims on direct review is not automatically determinative. See id. at 417 (noting that the Texas system at issue “appears at first glance to permit (but not require) the defendant initially to raise a claim of ineffective assistance of trial counsel on direct appeal”). Indeed, the D.C. Court of Appeals has noted that, because a direct appeal is limited to evidence in the trial record, “[i]neffective assistance of counsel is the type of serious defect which is typically not correctable on direct appeal and is therefore an appropriate ground for a collateral attack.” Ramsey v. United States, 569 A.2d 142, 146 (D.C. 1990) (citing Proctor v. United States, 381 A.2d 249, 252 (D.C.1977); Angarano v. United States, 329 A.2d 453, 457–58 (D.C. 1974) (en banc)); see also Trevino, 569 U.S. at 428 (noting that “practical considerations, such as the need for a new lawyer, the need to 10 expand the trial court record, and the need for sufficient time to develop the claim, argue strongly for initial consideration of the claim during collateral, rather than on direct, review”). For these reasons, and because the Circuit does not appear to have directly addressed the issue, the Court concludes that jurists of reason would (or could) find it debatable whether the Court was correct in its procedural ruling that the D.C. system is “not so constrained” as the one at issue in Trevino. Accordingly, the Court will grant Mr. Smith’s request for a certificate of appealability. In light of the seriousness of the underlying issue, Mr. Smith deserves a chance to at least present this argument. See Martinez, 566 U.S. at 1 (“A prisoner’s inability to present an ineffective-assistance claim is of particular concern because the right to effective trial counsel is a bedrock principle in this Nation’s justice system.”). Given the issuance of a certificate of appealability and Mr. Smith’s uncontested representations of his financial status, his motion for leave to proceed in forma pauperis, ECF No. 23, is also granted. V. CONCLUSION For the foregoing reasons, Mr. Smith’s motion to alter or amend judgment (ECF No. 17) is DENIED, Mr. Smith’s motion for leave to amend a pleading (ECF No. 19) is GRANTED, Mr. Smith’s motion for certificate of appealability (ECF No. 18) is GRANTED, and Mr. Smith’s motion for leave to proceed on appeal in forma pauperis (ECF No. 23) is GRANTED. An order consistent with this Memorandum Opinion is separately and contemporaneously issued. Dated: September 3, 2020 RUDOLPH CONTRERAS United States District Judge 11

01-04-2023

09-03-2020

https://www.courtlistener.com/api/rest/v3/opinions/4562854/

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA : : IN RE: SONYA LARAYE OWENS : Civil Action No.: 19-2491 (RC) : : Re Document No.: 18 : : MEMORANDUM OPINION DENYING PETITIONER’S MOTION FOR RECONSIDERATION I. INTRODUCTION On April 20, 2020, this Court dismissed Ms. Sonya LaRaye Owens’s pro se appeal from the U.S. Bankruptcy Court for the District of Columbia because the Court found that the Bankruptcy Court did not clearly err in its finding of facts or abuse its discretion, and because appeals of several of the orders were moot. See Mem. Op., ECF No. 16. Ms. Owens now asks this Court to reconsider that dismissal. See Mot. Reconsideration, ECF No. 18. Ms. Owens has also included a petition for a writ of error coram nobis pursuant to 28 U.S.C. § 1651(a). Because Ms. Owens has not sufficiently established that she is entitled to relief under Federal Rule of Civil Procedure 60(b) or Section 1651(a), the Court denies her motion for reconsideration. II. FACTUAL BACKGROUND The instant motion for reconsideration involves several related proceedings centered around the foreclosure and sale of Ms. Owens’s home and subsequent eviction proceedings before the D.C. courts. 1 On February 21, 2017, Ms. Owens’s home was foreclosed upon and sold to Reliance Partners LLC (“Reliance”). Ms. Owens subsequently filed a bankruptcy 1 Additional factual background for this action is outlined in the Court’s April 20, 2020 memorandum. See Mem. Op. at 1–6. petition, which temporarily stayed eviction proceedings, but was later evicted from the property after the bankruptcy petition was dismissed by the Bankruptcy Court. See Mem. Op. at 1–2, 4. On August 26, 2019, after filing an initial notice of appeal from the Bankruptcy Court, Ms. Owens filed an amended notice of appeal indicating she was broadly challenging “[a]ll orders, judgments, and decrees from July 19, 2019 thru present, including 7-26-19, 8-1-19, 8-6- 19, and hereafter.” Amended Notice of Appeal, ECF No. 3. On August 29, 2019, the Bankruptcy Court enjoined Ms. Owens from making any future bankruptcy filings under which an automatic stay would arise and frustrate Reliance’s attempts to take possession of the property. See Order at 3, Bankruptcy Case No. 19-489, ECF No. 61. On appeal, Ms. Owens asked this Court to “vacate all the decisions of the Bankruptcy court.” Appellant Br. at 1, ECF No. 8. As a result, this Court understood Ms. Owens to be appealing the following orders of the Bankruptcy Court: (1) a July 29, 2019 order shortening the time Ms. Owens had to respond to Reliance’s emergency motion for relief from an automatic stay; (2) an August 1 order granting Reliance’s motion and thus relief from the automatic stay; (3) an August 1 order denying Ms. Owens’s motion to continue a related hearing; (4) an August 6 order dismissing Ms. Owens’s bankruptcy petition; (5) an August 19, 2019 order denying reconsideration of dismissal; and (6) the August 29 order temporarily enjoining Ms. Owens from future bankruptcy filings and granting prospective relief from any automatic stay. See Mem. Op. at 4–5. On April 20, 2020, this Court found that Ms. Owens’s appeal of Judge Teel’s order shortening the time frame to respond to Reliance’s emergency motion was equitably and constitutionally moot. See Mem. Op. at 7. Ms. Owens’s appeals of Judge Teel’s orders granting relief from the automatic stay and the denial of her motion to continue were likewise moot. Id. at 2 8. This Court also affirmed the dismissal of Ms. Owens’s case, Judge Teel’s denial of her motion to reconsider the dismissal, and Judge Teel’s order enjoining future filings. Id. at 9–11. Ms. Owens now asks this Court to reconsider its April 20, 2020 decision. See Mot. Reconsideration. She has also filed a notice of appeal to the D.C. Circuit. Id. III. LEGAL STANDARD Ms. Owens moves for reconsideration of this Court’s April 20, 2020 decision, presumably under Rule 60(b). 2 Rule 60(b) motions allow a party to seek relief from a final judgment “within a reasonable time” after entry of the judgment, but only for six enumerated reasons. See Fed. R. Civ. P. 60(b). Such reasons include, among other things, “mistake, inadvertence, surprise, or excusable neglect,” id. at (60)(b)(1), “newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b),” id. at (60)(b)(2), and “any other reason that justifies relief,” id. at 60(b)(6). The Rule “was intended to preserve ‘the delicate balance between the sanctity of final judgments and the incessant command of the court’s conscience that justice be done in light of all the facts.’ It cannot be employed simply to rescue a litigant from strategic choices that later turn out to be improvident.” Smalls v. United States, 471 F.3d 186, 191 (D.C. Cir. 2006) (quoting Good Luck Nursing Home, Inc. v. Harris, 636 F.2d 572, 577 (D.C. Cir. 1980)). 2 Ms. Owens does not specifically identify the rule under which she seeks reconsideration. However, because she filed the instant motion over two months after entry of this Court’s final judgment, Rule 59(e) relief is unavailable to her. See Fed. R. Civ. P. 59(e) (“A motion to alter or amend a judgment must be filed no later than 28 days after the entry of the judgment.”). Accordingly, the Court considers her motion under Rule 60(b), which sets forth a more lenient filing schedule. See Fed. R. Civ. P. 60(b) (“A motion under Rule 60(b) must be made within a reasonable time—and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.”). But the Court notes that her petition for reconsideration would fail even under the less stringent requirements set forth in Rule 59(e). See Fed. R. Civ. P. 59(e). 3 Indeed, district courts enjoy “a large measure of discretion” in ruling on Rule 60(b) motions. Randall v. Merrill Lynch, 820 F.2d 1317, 1320 (D.C. Cir. 1987); see also 11 C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure § 2857 (3d ed. 2012). The party seeking relief under Rule 60(b) bears the burden of showing that he or she is entitled to relief. Jarvis v. Parker, 13 F. Supp. 3d 74, 77 (D.D.C. 2014) (citing Norris v. Salazar, 277 F.R.D. 22, 25 (D.D.C. 2011)). IV. ANALYSIS For the reasons set forth below, Ms. Owens fails to establish that she is entitled to relief under Rule 60(b) or any other specified avenues for seeking reconsideration of judicial decisions. Ms. Owens’s motion for reconsideration raises a number of claims, none of which are developed or supported by relevant legal authority. 3 She alleges that this Court erred in its prior decision, demonstrated “animus[] towards the Appellant” and “work[ed] to hide fraud and racial discrimination.” Id. at 2. Ms. Owens further represents that the “Reliance Group LLC falsely alleged circumstances existed that required the bankruptcy court to grant their emergency motions against [her],” “Reliance Group LLC had no authority to dictate procedures to the bankruptcy court,” and that “there is no court order that vacat[ed] or amend[ed] [the Bankruptcy 3 Ms. Owens also objects to this Court’s denial of her renewed motion for CM/ECF access, stating that “[t]here is nothing ‘moot’ about denying a pro se litigant the privilege of electronic filing when [she] has fully met the requirements to do so and is ordered to stay-at- home, just like the rest of the general public.” Mot. Reconsideration at 2; see Mem. Op. at 12 n.6. As explained in this Court’s April 20, 2020 memorandum, Ms. Owens’s motion for CM/ECF access was denied as moot because her appeal had been dismissed. Whether a pro se party may obtain a CM/ECF user name and password from the Clerk “is within the discretion of the judge to whom the case is assigned.” Loc. Civ. R. 5.4(b)(2). Ms. Owens does not provide authority for the position that dismissal of a case does not moot such a motion or explain how she was prejudiced by the Court’s denial. As mentioned, even if Ms. Owens’s motion for reconsideration had been filed earlier and considered under Rule 59, it would still fail. 4 Court’s] decisions on July 19, 2019.” 4 Id. at 5. In any event, she argues that the Bankruptcy Court lacked jurisdiction to issue its decision. However, none of Ms. Owens’s allegations amount to evidence of any “mistake, inadvertence, surprise, or excusable neglect” that would justify relief under Rule 60(b). Fed. R. Civ. P. 60(b)(1)). She likewise does not allege, let alone demonstrate, any new evidence that “could not have been discovered in time to move for a new trial under Rule 59(b).” Fed. R. Civ. P. 60(b)(2). Instead, she attempts to relitigate old matters, see e.g., Mot. Reconsideration at 5 (“Reliance Group LLC falsely alleged circumstances existed that required the bankruptcy court to grant their emergency motions against [her]”), and unconvincingly disputes the jurisdiction of the Bankruptcy court to hear her petition. 5 None of these arguments undermine the Court’s earlier conclusions (1) that most of the appeals of the challenged orders are moot and (2) that the Court has no authority to grant the primary relief Ms. Owens seeks, the return of her property. See Mem. Op. at 7–8. According to Ms. Owens, she also petitions for a writ of error coram nobis. Mot. Reconsideration at 2. A petition for a writ of coram nobis is “an extraordinary remedy” that allows defendants to attack their convictions after they are no longer in custody. United States v. 4 As discussed in the Court’s earlier opinion, on August 6, 2019, Ms. Owens’s bankruptcy petition was dismissed for failure to file a proper mailing matrix and failure to pay the filing fee or obtain leave to pay the fee in installments. See Mem. Op. at 3. 5 Ms. Owens claims that “[a]n incomplete voluntary bankruptcy petition does not vest a bankruptcy court with jurisdictional authority under Title 11.” Mot. Reconsideration at 4. However, what is meant by an “incomplete” petition is unclear. The record shows that Ms. Owens filed for Chapter 11 bankruptcy before Judge Teel in the D.C. Bankruptcy Court on July 19, 2019, see Ch. 11 Voluntary Pet., Bankruptcy Case No. 19-489, ECF No. 1, and that petition was later dismissed. See also Washington Mut., Inc. v. F.D.I.C., No. 09-533, 2010 WL 8741981, at *1 (D.D.C. Jan. 7, 2010) (“Federal district courts and bankruptcy courts have concurrent jurisdiction over claims arising under Title 11 of the Bankruptcy Code.”). 5 Morgan, 346 U.S. 502, 511 (1954); see also United States v. Faison, 956 F. Supp. 2d 267, 269 (D.D.C. 2013). “Although now abolished in civil proceedings, see Fed. R. Civ. P. 60, federal courts retain the authority to grant a writ of error coram nobis in criminal proceedings under the All Writs Act, 28 U.S.C. § 1651(a).” United States v. Lee, 84 F. Supp. 3d 7, 8–9 (D.D.C. 2015). Because this is a civil matter, as opposed to a criminal prosecution, the Court lacks any authority to grant a writ of error coram nobis pursuant to the All Writs Act. Regardless, even if the Court possessed such authority, Ms. Owens provides no basis for it to grant such a writ. V. CONCLUSION For the foregoing reasons, Ms. Owens’s Motion for Reconsideration is DENIED. An order consistent with this Memorandum Opinion is separately and contemporaneously issued. Dated: September 3, 2020 RUDOLPH CONTRERAS United States District Judge 6

01-04-2023

09-03-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624455/

RICHARD B. ENTENMANN and PATRICIA I. ENTENMANN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEntenmann v. CommissionerDocket Nos. 21471-82, 21473-82.United States Tax CourtT.C. Memo 1984-643; 1984 Tax Ct. Memo LEXIS 30; 49 T.C.M. (CCH) 288; T.C.M. (RIA) 84643; December 11, 1984. Richard B. Entenmann, pro se. Charlotte A. Mitchell, for the respondent. PETERSON MEMORANDUM FINDINGS OF FACT AND OPINION PETERSON, Special Trial Judge: This case was assigned to Special Trial Judge Marvin F. Peterson pursuant to the provisions of section 7456(c) and (d), 1 and General Order No. 8, 81 T.C. XXIII (1983). Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax for the taxable years 1978 and 1979, respectively, as follows: Additions to TaxI.R.C. 1954YearDeficiencySec. 6651(a)Sec. 6653(a)1978$1,213$488.36$292.0819794,979248.95At the trial of this case the parties reached*31 a settlement on all of the issues. The parties agreed to submit a stipulation for the entry of a decision by the Court. However, the parties have been unable to reach an agreement as to the agreed adjustments. Accordingly, it is necessary for the Court to issue an opinion in this case based on the stipulation of facts filed by the parties at the trial and the oral stipulation read into the trial record. For the year 1978, petitioners are entitled to a casualty loss deduction in the amount of $373.40. Also, petitioners incurred medical expenses in the amount of $1,543. Petitioners are not entitled to a charitable contribution deduction for cash contributions or non-cash contributions. For the year 1979, petitioners are entitled to an employee business expenses deduction in the amount of $6,251; petitioners received a state income tax refund in the amount of $552; petitioners are not entitled to any charitable contribution deduction; petitioners are entitled to an interest deduction in the amount of $3,349; petitioners incurred medical expenses in the amount of $1,694.72; petitioners are entitled to a deduction for miscellaneous expenses in the amount of $442; and petitioners*32 are entitled to a deduction for taxes in the amount of $2,524. Decisions will be entered under Rule 155.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624456/

ROSENBAUM BROTHERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rosenbaum Bros., Inc. v. CommissionerDocket No. 13050.United States Board of Tax Appeals11 B.T.A. 736; 1928 BTA LEXIS 3736; April 20, 1928, Promulgated *3736 A corporation was organized under the laws of Illinois in 1890, its charter expiring by limitation July, 1915. The officers of the corporation did not become aware of that fact until several months later. On February 24, 1916, the petitioner was organized under the laws of Illinois under the same name, with the same capitalization and with the same stockholders, officers and directors as the corporation the charter of which had expired. On the same day the petitioner issue all of its capital stock to the corporation whose charter had expired, in exchange for all of the assets subject to the liabilities of that corporation. Held, that the petitioner may include the assets so acquired in its invested capital at their actual cash value at the date of acquisition. J. C. Halls, Esq., for the petitioner. J. Harry Byrne, Esq., for the respondent. MARQUETTE *736 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1918 amounting to $1,199.91. The deficiency arises by reason of the disallowance by the respondent of the sum of $157,665.94 as invested capital, this amount*3737 being the difference between the book value of certain assets and their actual value when they were acquired by the petitioner in February, 1916, in exchange for its capital stock. The facts of this case were stipulated by the parties as follows: FINDINGS OF FACT. That Rosenbaum Brothers, Inc., a corporation, was organized under the laws of the State of Illinois; that its charter was issued *737 in 1890 for a term of 25 years; that its authorized and issued capital stock was $200,000 par value; that said charter expired by limitation on July 9, 1915; that through an oversight this fact did not become known to the petitioner's officers until the following year, when a new charter having a life of 99 years was secured; that this charter last referred to was issued on February 24, 1916, under the laws of the State of Illinois, the same State under which the first charter was issued; that this charter last referred to authorized, and there was issued, capital stock of a par value of $200,000. That in the interim between the date the old charter expired, to wit, July 9, 1915, and the date the new charter was secured, to wit, February 24, 1916, the business continued to operate*3738 and function in the same manner as it had operated and functioned under the corporate charter secured in 1890. That when the new charter was issued there was no change of domicile, capitalization, officers, directors, stockholders, assets, or name, nor of business methods or practices. That at the time the new charter was issued the assets and liabilities remained on the books at the same figure as they appeared on the books prior to the issuance of said new charter. At the time the new charter was issued on February 24, 1916, the attached instrument, Exhibit A, which is a true copy of the original, was executed and delivered. That the attached instrument, Exhibit B, is a true excerpt from the minutes of the subscribers of the capital stock of the petitioner held on February 19, 1916. It is further stipulated and agreed that in the event the Board of Tax Appeals should hold that the petitioner is entitled to evaluate its assets, for invested capital purposes, as of the date the new charter was issued on February 24, 1916, the petitioner is entitled to an increase of its invested capital for the year 1918 of $157,665.94. EXHIBIT A. KNOW ALL MEN BY THESE PRESENTS, *3739 That Rosenbaum Brothers, a corporation organized under the laws of the State of Illinois on July 9, 1890, whose charter expired by limitation on July 9, 1915, party of the first part, in consideration of one dollar and other good and valuable considerations this day to it in hand paid, at or before the ensealing and delivery of these presents, by Rosenbaum Brothers, a corporation organized under the laws of the State of Illinois on the 24th day of February 1916, party of the second part, the receipt whereof is hereby acknowledged, has granted, bargained, sold and delivered and by these presents does grant, bargain, sell and deliver unto the said party of the second part, all of the business, property, assets and effects of said Rosenbaum Brothers, a corporation organized under the laws of the State of Illinois on July 9, 1890, including the entire goodwill, leasehold interests, trade names, trade rights, trademarks, choses in action, and all interests, legal or equitable , belonging *738 to said corporation, or in which it now or at any time heretofore has had any interest whatsoever. It is expressly understood that the second party shall and hereby does assume the payment*3740 of all debts and liabilities of every kind and nature now or at any time heretofore existing, of said Rosenbaum Brothers, a corporation organized under the laws of Illinois on the 9th day of July, 1890. IN WITNESS WHEREOF, the said parties have caused this instrument to be executed by their respective proper officers, and have caused their respective corporate seals to be hereto affixed, as of the 24th day of February, 1916. ROSENBAUM BROTHERS, A corporation organized under the laws of Illinois, on July 9, 1890.Attest: (Signed) W. C. RENSTROM, Secretary.[SEAL.] By (Signed) E. L. GLASER, President.Attest: (Signed) W. C. RENSTROM, Secretary.[SEAL.] EXHIBIT B. The Chairman stated that the Commissioners had accepted as payment in full for all of said subscriptions to the capital stock of this company, aggregating $200,000 par value, a transfer of the business, property, assets and effects of Rosenbaum Brothers, a corporation organized under the laws of the State of Illinois, on July 9, 1890, and whose charter expired by limitation on July 9, 1915 - said transfer being subject to the payment of all the dabts and liabilities of said corporation. *3741 OPINION. MARQUETTE: The real question presented by the record in this proceeding upon the answer to which our decision herein must rest, is: Is the petitioner a new corporation organized in 1916, so as to make that date the basic point for the computation of its invested capital, or is it merely a continuation of Rosenbaum Brothers, Inc., that was chartered in 1890? The petitioner contends that Rosenbaum Brothers, Inc., chartered in 1890, although identical with the petitioner as to name, capital stock, stockholders, officers and directors, business and business methods, was, nevertheless, a separate and distinct legal entity; that the petitioner came into existence February 24, 1916, and not before, and that Rosenbaum Brothers, Inc., chartered in 1890, passed out of existence on July 9, 1915, and was extinct from that date forward. It is further contended by the petitioner that at the time of its creation in 1916 it acquired for its capital stock assets, the actual cash value of which was $157,665.94 more than the amount at which they were entered on the petitioner's books, and that it is entitled to increase its invested capital so as to include such actual value. *739 *3742 The respondent admits that the petitioner received a new corporate charter in February, 1916, and that the actual cash value of the assets acquired at that time was greater than their book value, in the amount claimed. The respondent maintains, however, that there is no essential difference between the petitioner and the old corporation of the same name, capital stock, etc.; that looking through form to substance, Rosenbaum Brothers, Inc., has had a continuing existence, at least for taxation purposes, since 1890, and that therefore it can not write up its invested capital to correspond with the increased value of its assets. It may be stated, and it appears to be conceded by both parties hereto, that if Rosenbaum Brothers, Inc., chartered in 1916, is a new, separate, legal entity, and not a continuation of Rosenbaum Brothers, Inc., chartered in 1890, it is entitled to include the assets in question in its invested capital at their value on February 24, 1916, the date it acquired them. (Section 326(a)(2) and (3), Revenue Act of 1918.) In our opinion the petitioner is a new entity, separate and distinct from the old corporation of the same name, and under section 326(a)(2) of the*3743 Revenue Act of 1918, may claim as invested capital the full actual cash value of the assets acquired in February 1916. It may be true, as the respondent contends, that the old company remained in existence, as a de facto corporation, after its charter expired. There are a number of Illinois decisions which apparently sustain that view. However, when the petitioner was incorporated in 1916 it was as a new, distinct and separate entity. It was undoubtedly organized for the purpose of continuing under corporate form the business theretofore carried on by the old corporation. But the purpose in the minds of the incorporators can in no way diminish the power and authority of the State of Illinois to grant a new charter and by the granting thereof to create a new corporation. We are here dealing, not with the renewal of an old charter, but the granting of a new one; not with the extension of the life of an old corporation, but with the creation of a new corporate life. The grant of a new charter under the same corporate name in itself shows that the State considered the old company defunct and non-existent. *3744 Nor does the fact that the stockholders of both the old and the new company were the same individuals affect the situation. A corporation is separate and distinct from its stockholders. In re Watertown Power Co.,169 Fed. 252, 255;Seep v. Ferris-Haggerty Copper Mining Co.,201 Fed. 886; Fietsam v. Hay,112 Ill. 293">112 Ill. 293. This identity of stockholders might affect the situation if this case came under the provisions of section 331 of the Revenue Act of 1918, but as that section has no bearing upon corporate organizations prior to March 3, 1917, it does not apply here. *740 This Board has several times been called upon to pass upon similar questions. In Nazareth Cement Co.,4 B.T.A. 1121">4 B.T.A. 1121, both predecessor and successor companies were organized under the same State law, with the same name, same amount of capital stock, the same officers and directors, and many, if not all, of the same stockholders. We held there "that the petitioner was an entirely new corporation," and that its invested capital was the actual cash value of the property - former assets of the old company - paid in at the time the new*3745 company was organized. Again in National Bakers' Egg Co.,3 B.T.A. 1205">3 B.T.A. 1205, where a successor corporation took over the assets of its predecessor, we held that the cash value of such assets, at the time they were taken over, was the measure of the invested capital of the second corporation. The respondent relies largely upon the cases of Weiss v. Stearn,265 U.S. 242">265 U.S. 242; Marr v. United States,268 U.S. 536">268 U.S. 536, and perhaps also upon H. E. Brubaker,4 B.T.A. 1171">4 B.T.A. 1171. In our opinion none of these cases is really in point. While to some extent the facts resembled those in the instant proceeding, the questions involved and to which the decisions were directed, were entirely different. Our decision is that the petitioner is entitled to include the assets acquired from the old corporation in its invested capital at their actual cash value at the date of acquisition. The amount has already been stipulated by the parties. Judgment will be entered on 15 days' notice, under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624457/

Jack Smith and Rose Mae Smith, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentSmith v. CommissionerDocket No. 63284United States Tax Court32 T.C. 1261; 1959 U.S. Tax Ct. LEXIS 84; September 23, 1959, Filed *84 Decision will be entered for the petitioners. The Boston Shoe Company was organized as a family partnership in 1943 with petitioners, husband and wife, and trusts for their two children as partners. A judgment rendered August 23, 1954, by the United States District Court, Central Division, of the Southern District of California, held the Commissioner was correct in disregarding the trusts as partners in the Boston Shoe Company for the years 1945 to 1948, inclusive. In the present case involving the question of whether the trusts are to be recognized as partners in the Boston Shoe Company for the years 1952 and 1953, it is held (1) petitioners are not collaterally estopped from litigating the same question decided in the former suit involving earlier years and (2) under the law and regulations applicable in the years in question and under the record presented, the trusts should be recognized as partners for the years 1952 and 1953. Henry C. Diehl, Esq., and Charles E. Horning, Jr., Esq., for the petitioners.Richard W. Janes, Esq., and Cyrus A. Johnson, Esq., for the respondent. Mulroney, Judge. MULRONEY *1262 The respondent determined deficiencies*85 in petitioners' income tax for the years 1952 and 1953 in the amounts of $ 13,950.43 and $ 6,936.92, respectively.The issue is whether respondent was correct in not recognizing as partners in the Boston Shoe Company, the trustees of certain trusts created by the petitioners for the benefit of their two children.FINDINGS OF FACT.Some of the facts have been stipulated and they are found accordingly.Petitioners, Jack Smith and Rose Mae Smith, his wife, sometimes hereinafter referred to as Jack and Rose, reside in Beverly Hills, California. They filed their joint income tax returns for the years in question with the district director of internal revenue at Los Angeles, California. Prior to their marriage in 1931, Jack operated a wholesale shoe distributing company called the Boston Shoe Company as an individual proprietorship. After their marriage, the Smiths considered the business was community property to which the husband's earning capacity contributed. On December 31, 1942, Jack bought out Rose's interest for the sum of $ 102,933.89, giving her a series of promissory notes totaling said sum.On September 29, 1943, Jack and Rose created, by written instruments, two trusts *86 for the benefit of their children, Howard, then aged eleven, and Barbara, then aged three. Rose was trustee of the Howard Smith Trust and Jack was trustee of the Barbara Smith Trust. On the same day Jack assigned to Rose, trustee of the Howard Smith Trust, bonds totaling $ 30,000, and Rose assigned to Jack, trustee of the Barbara Smith Trust, Jack's $ 30,000 promissory note, which he had given to her as one of the series of notes the previous December. Also on the same day Rose purchased from Jack an undivided 30 per cent interest in the business and assets of the Boston Shoe Company, giving in exchange therefor two of Jack's $ 30,000 promissory notes, which were also in the series of notes given to Rose the previous December. The next day the trusts exchanged their assets for 15 per cent each in the Boston Shoe Company and simultaneously a partnership agreement was executed wherein all of the owners of the individual interests in the Boston Shoe Company contributed such interests to the partnership. The partnership was a general partnership which was to continue for a period of 20 years unless sooner terminated.*1263 The partners and their interests in the Boston Shoe Company*87 were as follows:InterestPartner(per cent)AmountJack40$ 80,000Rose3060,000Jack, trustee for Barbara Trust1530,000Rose, trustee for Howard Trust1530,000The trusts were made irrevocable and they gave the children a graduated right to the distribution of the corpus; one-fourth upon reaching the age of 25, one-fourth at age 30 and the balance at age 35.The partnership agreement gave Jack a salary of $ 25,000 per year and Rose a salary of $ 2,400 per year and the net proceeds of the business were to be distributed in accordance with the capital ownership. Jack and Rose were to be the main partners and Jack was made the managing partner with broad powers to conduct the business of the partnership.Shortly thereafter the fact that the Boston Shoe Company had commenced to operate as a partnership with the trusts as owners of partnership interests was made known to Dun & Bradstreet and to creditors and customers of the Boston Shoe Company and to the bank with which the partnership did business.Certificates of doing business under a fictitious name were filed and published in 1943 and 1945 as required by California law. These certificates showed that*88 the trusts owned interests in the Boston Shoe Company.For a time between 1945 and 1948 a key employee named Weishaupt was a 10 per cent partner. His partnership interest was derived from 10 per cent reduction of each of the other partners' interests. When he dropped out in June 1948, the partnership continued as before.For the years 1943 to 1948, inclusive, the Commissioner determined that the trusts were not to be recognized as partners in the Boston Shoe Company and the trust income derived from the partnership was attributable to Jack and Rose Smith and deficiencies were accordingly determined against Jack and Rose. They paid the deficiencies and, after denial of their claims for refund, brought suit for refund in the United States District Court, Central Division, of the Southern District of California. The judgment in the case rendered August 23, 1954, was for the Commissioner, the Court holding the Commissioner was correct in disregarding the trusts as partners. Smith v. Westover, 123 F. Supp. 354">123 F. Supp. 354.The decision of the District Court case, Smith v. Westover, supra, was affirmed on appeal to the United States Court of Appeals for*89 the Ninth Circuit, Smith v. Westover, 201">237 F. 2d 201.*1264 The trust and partnership agreements, together with the other instruments previously referred to herein, are the same as the trust and partnership agreements and other instruments in effect between the parties in the previous case of Smith v. Westover, supra.By an agreement dated December 11, 1950, between the partners it was agreed that donations to charities by the partnership were not to be charged to the trusts' shares of profits. The partnership returns for the years ending January 31, 1952, and January 31, 1953, show charitable donations in the sums of $ 9,812.25 and $ 10,095.34, respectively. These entire charitable contributions were taken as deductions by petitioners in their 1952 and 1953 joint returns.The partnership agreement contained provisions for earned capital accounts for the partners made up of net profits allocated to the partners but not distributed. However, during the entire life of the partnership substantial sums were withdrawn by all the partners and the funds withdrawn by the trusts were invested in income-producing properties not related to the*90 Boston Shoe Company business, such as savings accounts, Government bonds, and land ventures.By the end of 1952 the Howard Smith Trust had a net worth of $ 71,086.34, of which only $ 36,008.72 was represented by the trust's capital account in Boston Shoe Company; by the end of 1953, its net worth was $ 74,041.70, of which only $ 36,008.72 was represented by its partnership capital account. By the end of 1956 the net worth of the trust exceeded the trust investment in the Boston Shoe Company partnership by $ 54,693.74.By the end of 1952 the Barbara Smith Trust had a net worth of $ 79,144.29, of which only $ 41,778.50 was represented by the trust's capital account in Boston Shoe Company; by the end of 1953, its net worth was $ 82,154.21, of which only $ 41,778.50 was represented by its partnership capital account. By the end of 1956, the net worth of the trust exceeded the trust investment in the Boston Shoe Company partnership by $ 63,685.40.No trust funds were ever withdrawn or used by petitioners for the support or education of either of their children.In 1957, when Howard became 25, there was distributed to him the sum of $ 33,077.80, in accordance with the terms of his trust. *91 After the decision in the Court of Appeals in Smith v. Westover, supra, Jack and Rose Smith, as individuals, entered into a written agreement (dated January 2, 1948) with Jack and Rose as trustees wherein it was provided the two trusts would pay to petitioners sums equal to the amount of taxes petitioners paid or would have to pay in the future by reason of the trusts being not recognized as partners. Pursuant to the terms of this agreement the Howard Trust paid to Jack $ 37,289.73 and the Barbara Trust paid to Rose $ 31,480.20.*1265 In 1956 the Boston Shoe Company was incorporated, with all partners, including the trusts, receiving stock in proportion to their capital ownership in the partnership, i.e., Jack 40 per cent, Rose 30 per cent, and each trust 15 per cent.The Boston Shoe Company kept its books and filed its partnership returns on a fiscal year basis ended January 31. During the year 1952 the Howard Trust and the Barbara Trust each reported partnership income in the sum of $ 9,829.15. During the year 1953 the Howard Trust and the Barbara Trust each reported partnership income in the sum of $ 5,218.75. Said amounts in each case represent 15 per cent of *92 the partnership net profits for the fiscal years ended January 31, 1952, and January 31, 1953. The deficiencies here involved result from respondent increasing petitioners' partnership income by the amounts reported by the trusts as set forth above.As of January 31, 1952, the Boston Shoe Company carried an inventory of $ 308,051.73 and on January 31, 1953, it carried an inventory of $ 290,820.10. It carried receivables in excess of $ 170,000 for each of said years. On the average, the Boston Shoe Company had about $ 367,000 per year tied up in inventory and receivables over a 13-year period.During the years in question and at all times material herein, capital was a material income-producing factor in the business of the Boston Shoe Company.The Boston Shoe Company was, during the years in question, a valid family partnership, for income tax purposes, in which the Howard Smith Trust and the Barbara Smith Trust each owned a 15 per cent capital interest.OPINION.Respondent argues petitioners are collaterally estopped to assert the trusts should be recognized as partners for Federal income tax purposes, during 1952 and 1953, because of the case of Smith v. Westover, 123 F. Supp. 354">123 F. Supp. 354,*93 affd. 237 F. 2d 201. The cited case held the trusts should not be recognized as partners for Federal income tax purposes for the years 1943 through 1948.In tax cases involving income taxes in different taxable years, a judgment on the merits operates as an estoppel to any subsequent proceeding in a different taxable year between the same parties where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remained unchanged. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591. In the cited case the Supreme Court warned that tax inequality can result by the application of collateral estoppel if factual changes or a change or development in the controlling legal principles has intervened, and the opinion states:*1266 It naturally follows that an interposed alteration in the pertinent statutory provisions or Treasury regulations can make the use of that rule [collateral estoppel] unwarranted. * * *Petitioners admit that the facts with regard to the creation of the trusts and the formation of the partnership have not*94 changed since the earlier litigation. They argue the same facts there presented, plus new facts and circumstances, occurring since that litigation and designed to show the reality of the trusts' ownership of capital interests in the partnership, preclude the application of the doctrine of collateral estoppel. They also argue that there has been a change in the law by the enactment of section 340, Revenue Act of 1951, 1 as an amendment to the Internal Revenue Code of 1939, pertaining to family partnerships.*95 We agree with petitioners that this is not a case for the application of the doctrine of collateral estoppel. Petitioners are not precluded by the judgment in Smith v. Westover, supra, where it was held that the Commissioner was correct in not recognizing the trusts as partners for the years 1943 to 1948, inclusive, from again litigating *1267 the question for the years 1952 and 1953. The last clause of the amendment making it applicable to years after December 31, 1950, and warning against drawing inferences because it was not made applicable to earlier years shows quite clearly that Congress did not consider the family partnership provisions of the 1951 amendment to be a mere restatement or codification of existing law. See S. Rept. No. 781, 82d Cong., 1st Sess., 1951-2 C.B., pp. 458, 487.Prior to January 1, 1951, the law applicable to family partnerships was to be found in a series of cases of which Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, was the last pronouncement of the Supreme Court of the United States. It would serve no useful purpose to make a detailed examination of all of the case-made law*96 governing family partnership cases and state the governing law we draw from the authorities. It is enough to state that there was much lack of harmony in the opinions. Indeed, the legislative history of section 340, Revenue Act of 1951, shows Congress felt that in this area there was confusion in the law. H. Rept. No. 586, 82d Cong., 1st Sess., 2 C.B. 357">1951-2 C.B. 357, 380-381. In Henry S. Reddig, 30 T.C. 1382">30 T.C. 1382, we set forth much of this legislative history and stated it showed that the Congressional intent, in enacting the said section 340, was "to settle this confusion." This alone would be sufficient to preclude the application of the doctrine of collateral estoppel here for certainly a statute which is designed to make clear the governing rules of law that have prior thereto rested in confusion, is a sufficient "change or development in the controlling legal principles," within the doctrine of Commissioner v. Sunnen, supra.Added to the law, we now have the regulation of Commissioner (Regs. 118, sec. 39.191-1(b)) applicable to the family partnership problem for the years beginning after December*97 31, 1950. And this regulation makes special mention of the situation where the alleged partner is a trust. Regs. 118, sec. 39.191-1(b)(7). See Henry S. Reddig, supra, where portions of the cited regulations are set forth.We are of the opinion the legal principles controlling family partnership situations were changed by the 1951 amendment and the Commissioner's regulations thereunder and these changes are sufficient, at least, to prevent the application of the doctrine of collateral estoppel.In addition to the changes in the governing law we do have new evidence of facts, not before the Court in the prior case, which has particular significance on the partnership issue to be decided now under the law and the regulations for the years after December 31, 1950. Moreover, some of the acts that occurred in prior years take on new significance in the years after December 31, 1950, when the amendment was made applicable. The record shows the partnership's bank, their customers and creditors, and Dun & Bradstreet, were all made *1268 aware that the partnership included the trusts as partners. The certificates of doing business under a fictitious*98 name which were filed and published as required by California law in 1943 and 1945, showed, among other things, that the trusts were participants in the business carried on under the fictitious name of Boston Shoe Company. Regulations 118, section 39.191-1(b)(7), states that, when considering whether a trustee is a partner,if the grantor * * * is the trustee, the following factors will be given particular consideration:(a) Whether the trust is recognized as a partner in business dealings with customers and creditors, and(b) Whether, if any amount of the partnership income is not properly retained for the reasonable needs of the business, the trust's share of such amount is distributed to the trust annually and paid to the beneficiaries or reinvested with regard solely to the interests of the beneficiaries.From the above it will be seen there are now new significant facts that are to be considered and old facts that are to be given "particular consideration" as bearing upon the question of whether the trusts are to be recognized as partners during the years in question. We feel this also precludes the application of the doctrine of collateral estoppel.This leaves for consideration*99 the question of whether the trusts are to be recognized as partners for the years 1952 and 1953. This issue is to be decided upon the record now presented and under the 1951 amendment and the Commissioner's regulation thereunder. We have found that capital was a material income-producing factor in the business of the Boston Shoe Company. We do not understand respondent to argue otherwise. In our findings we have set forth the large inventories and receivables which the business found it necessary to carry.All of the series of interrelated transactions, consisting of the formations of the trusts, assigning assets to the trusts, transferring interests in the business to the trusts, and creating partnership capital interests in the business, amount to gifts of partnership interests in the Boston Shoe Company by petitioners to trusts for their two children. Petitioners admit this and they make no contention that the partnership interests of the trusts were created other than by gift.The basic requirement for a completed transfer to a donee of a partnership interest that is to be recognized for tax purposes is set forth in the 1951 amendment which provides for such recognition "if*100 he [donee] owns a capital interest." And the tests, set forth in Regulations 118, section 39.191-1, are designed to search out whether the donee actually does own the partnership interest purportedly given to him or whether the gift is a mere sham.*1269 In Henry S. Reddig, supra, we said:The gift or sale of the partnership interest is not to be a "mere sham." It must be a bona fide gift or transfer and because it is a family transaction there must be close scrutiny. It is not to be recognized as a family partnership if, after the gift or sale, the transferor retains so many of the incidents of ownership that he will continue to be recognized as a substantial owner of the interest which he purports to have given away as was held by the Supreme Court in an analogous trust situation involved in the case of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. In determining the bona fides of the gift or sale, all of the facts and circumstances at the time of the transfer and during the periods before and after it may be considered.Respondent argues the retention of control over the interests purportedly given to the trusts can*101 be found in the trust instruments, partnership agreement, and other documents and it is also revealed by the conduct of the parties. The documents were legally sufficient to accomplish the gifts. It is true the partnership agreement gave broad management control to Jack and the capital ownership of Jack and Rose together gave them a dominant interest in the partnership. However, it seems quite normal that petitioners, who ran the business, and especially Jack, who had started it, should have superior management control. The mere fact that the trusts had a minority voting position does not mean the donors retained control over the donated interests. We have not set forth the documents, but insofar as they speak for themselves, each establishes its own validity on its face. Respondent admits the validity of the trusts and recognizes them as taxable entities. Respondent does not assail the sufficiency of the partnership instrument to create a partnership at least as to Jack and Rose. As stated, we do not think the mere presence in the partnership agreement of clauses giving Jack superior management control should mean the trusts should be excluded. We do not find anything in*102 the instruments providing retention of control by the donor sufficient to show the donees were not the real owners of the partnership interests.The reality of the donees' ownership of interests in the partnership is not established by the legal sufficiency of the instruments of gift and partnership. In these family partnership cases the donor parents often are, as respondent suggests in the instant case, in a position to impose their will as parents, and reduce what appears to be a gift, to a mere sham. This is especially true when the donees are young children. The conduct of the parties is to be closely scrutinized to see if the parents treated all the related transactions as creating, in reality, bona fide gifts of the partnership interests. Here the record shows the parents' general recognition of the trusts as owners of partnership interests; their disclosure to the partnership customers, *1270 creditors, and bank that the trusts were partners; the fact that they filed notice under fictitious name statutes that the trusts were partners; a recognition of the trusts as partners in the partnership returns; the proper distribution of the partnership profits to the trusts*103 as partners; and, finally, recognition of each trust as owner of a 15 per cent capital interest in the 1956 incorporation of the partnership business where each trust received a 15 per cent stock interest.Respondent points to petitioners' acts in having the partnership's donations to charities charged to their shares of partnership profits so they could take the deductions on their individual income tax returns, as showing retention of control. We fail to see how such acts demonstrate any nonrecognition of the trusts as partners.The conduct of petitioners with respect to the trusts is also to be examined. Here the record shows the trust funds were invested in bonds, savings and loan associations, and real estate ventures. Trust funds were not spent for the support or education of the children. Partial distribution was made to Howard when he reached 25 years of age, as the trust provided.Respondent points to the petitioners' acts in causing the payment by the trusts to themselves of the net deficiencies resulting from the nonrecognition of the trusts as partners. It may be that the action of having the trusts pay the deficiencies resulting from their nonrecognition as partners, *104 was invalid. Perhaps in a proper action the trustees could be made to account for these expenditures. We need not decide this, however, for we are only examining the conduct of petitioners to see if it amounts to diverting the trust property for petitioners' benefit, in a manner which would indicate retention of control over the gift. When so viewed, we do not feel such conduct warrants a conclusion that petitioners were retaining control of the donated partnership interests for their own benefit. The fact remains that the income on which the tax was based did not go to petitioners. They saw to it that it was turned over to the trusts. It is true, as respondent argues, that using trust funds to pay trustee's obligations, is generally strong evidence of retention of control over the donated property. However, under the special circumstances of these expenditures, for taxes relating to the very income the trusts actually received, we believe no conclusion of retention of control is warranted.We hold the two trusts should be recognized as partners in the Boston Shoe Company for the years in question.Decision will be entered for the petitioners. Footnotes1. SEC. 340. FAMILY PARTNERSHIPS.(a) Definition of Partner. -- Section 3797(a)(2) is hereby amended by adding at the end thereof the following: "A person shall be recognized as a partner for income tax purposes if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person."(b) Allocation of Partnership Income. -- Supplement F of chapter 1 is hereby amended by adding at the end thereof the following new section:"SEC. 191. FAMILY PARTNERSHIPS."In the case of any partnership interest created by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensation for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to donated capital is proportionately greater than the share of the donor attributable to the donor's capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service. For the purpose of this section, an interest purchased by one member of a family from another shall be considered to be created by gift from the seller, and the fair market value of the purchased interest shall be considered to be donated capital. The 'family' of any individual shall include only his spouse, ancestors, and lineal descendants, and any trust for the primary benefit of such persons."(c) Effective Date. -- The amendments made by this section shall be applicable with respect to taxable years beginning after December 31, 1950. The determination as to whether a person shall be recognized as a partner for income tax purposes for any taxable year beginning before January 1, 1951, shall be made as if this section had not been enacted and without inferences drawn from the fact that this section is not expressly made applicable with respect to taxable years beginning before January 1, 1951. In applying this subsection where the taxable year of any family partner is different from the taxable year of the partnership -- (1) if a taxable year of the partnership beginning in 1950 ends within or with, as to all of the family partners, taxable years which begin in 1951, then the amendments made by this section shall be applicable with respect to all distributive shares of income derived by the family partners from such taxable year of the partnership beginning in 1950, and(2) if a taxable year of the partnership ending in 1951 ends within or with a taxable year of any family partner which began in 1950, then the amendments made by this section shall not be applicable with respect to any of the distributive shares of income derived by the family partners from such taxable year of the partnership.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624458/

Octavio J. Valdes and Hortensia C. Valdes, Petitioners v. Commissioner of Internal Revenue, RespondentValdes v. CommissionerDocket Nos. 4279-71, 6659-71, 5672-72United States Tax Court60 T.C. 910; 1973 U.S. Tax Ct. LEXIS 60; 60 T.C. No. 96; September 17, 1973, Filed *60 Decisions will be entered under Rule 50. Held, a claim on Form 843 for the refund of income taxes paid for 1964, which stated "We are claiming Cuban Casualty Losses, Revenue Act 1964," was not an election of the extended carryover provisions of sec. 172(b)(1)(D), I.R.C. 1954. Manuel Zaiac, for the petitioners.Paul R. Stanton, for the respondent. Featherston, Judge. FEATHERSTON*910 Respondent determined deficiencies in petitioners' income taxes for 1966, 1967, and 1968, and an addition to tax under section 6651(a) 1 for 1967, as follows:Docket No.YearDeficiencyAddition to tax(sec. 6651(a))4279-711967$ 3,485.59$ 14.096659-7119663,141.6605672-7219685,390.810The parties have stipulated that, in 1960, petitioners sustained a Cuban expropriation loss which resulted in an $ 80,806.60 net operating*63 loss carryover after December 31, 1965. The sole issue is whether petitioners made an election as required by section 172(b)(3)(C)(iii) to have the extended foreign expropriation loss carryover provisions of section 172(b)(1)(D) apply in computing their taxable income for the years in controversy.FINDINGS OF FACTPetitioners are husband and wife who were U.S. taxpayers during the taxable years in issue and who currently reside in Hato Rey, Puerto Rico. Petitioners filed their joint Federal income tax returns for 1966, 1967, and 1968 with the Internal Revenue Service.Petitioners left Cuba and arrived in the United States on or before June 30, 1960. After they became resident aliens of the United States, but before the end of 1960, their business property in Cuba was expropriated by the Government of Cuba. Neither the fair market value of the expropriated property nor petitioners' basis therein is shown; however, the parties have stipulated that, after December 31, 1965, *911 the net operating loss carryover resulting from the 1960 expropriation was $ 80,806.60. 2*64 Apparently sometime after petitioners had filed their income tax return for 1964, Octavio J. Valdes (hereinafter referred to as petitioner) was advised by a friend that he was entitled to a deduction for his Cuban expropriation losses. Following the advice of his friend, petitioner contacted a bookkeeper. On the basis of the information provided by petitioner, the bookkeeper prepared a claim for refund on Form 843, and, on December 20, 1965, petitioners filed that form with the Internal Revenue Service (the Service).The Form 843 stated that petitioners' claim was filed for the refund of taxes illegally, erroneously, or excessively collected in the calendar year 1964, and requested the refund of all taxes paid for that year. Other pertinent information provided on the form included the names, address, and social security numbers of petitioners; the district in which the 1964 income tax return was filed; and the amount of the assessment and the amount to be refunded, which were the same. In block 11 on the form, which states "The claimant believes that this claim should be allowed for the following reasons," the response was "We are claiming Cuban Casualty Losses, Revenue Act 1964." *65 This is the only statement filed by petitioners with the Service purporting to be an election under section 172(b)(3)(C)(iii) to carry forward Cuban expropriation losses pursuant to section 172(b)(1)(D).OPINIONAs the law stands without regard to section 172(b)(1)(D), which is an elective provision, an alien whose business property is expropriated by the Cuban Government after he becomes a resident of the United States is allowed a loss deduction under section 165 (a) with respect to the property. To the extent that the loss is not consumed as a deduction in the year of the expropriation, it is subject to carryback to each of the 3 preceding years and carryover to each of the 5 succeeding years in accordance with section 172(b), subparagraphs (b)(1) (A)(i), (b)(1)(B), and (b)(2). Cf. Cayetano R. Ribas, 54 T.C. 1347">54 T.C. 1347 (1970). Thus, if section 172(b)(1)(D) does not apply in the instant case, petitioners' expropriation loss was subject to carryback to 1957, 1958, and 1959, and over to 1961 through 1965, but the unused portion of the loss at the end of 1965 is not deductible for any of the 3 years here in controversy.*912 We turn then to section 172(b)(1)(D)*66 and related provisions dealing specifically with the carryover of foreign expropriation losses. Believing that "the expropriations by foreign governments which have occurred in recent years represent * * * [an] example of larger than usual losses * * * [and that] the usual 8-year carryover period for losses is inadequate," Congress enacted section 210 of the Revenue Act of 1964, Pub. L. 88-272 (Feb. 26, 1964), 78 Stat. 47. This enactment amended section 172 on net operating losses by adding, along with other provisions, sections 172(b)(1)(D) and 172(b)(3)(C). S. Rept. No. 830, 88th Cong., 2d Sess., p. 65 (1964), 1964-1 C.B. (Part 2) 505, 569-570.Section 172(b)(1)(D)3 provides an exception to the general carryover rule, described above, where a taxpayer has suffered a foreign expropriation loss in any taxable year ending after December 31, 1958. In lieu of the carryback otherwise allowable in such cases, this new provision permits a net operating loss attributable to a foreign expropriation loss to be carried forward 10 years. 4 However, section 172 (b)(3)(C)(iii)5 was added to provide, in pertinent part, that the expropriation-loss-extended-carryover*67 rule shall apply only if "the taxpayer elects (in such manner as the Secretary or his delegate by regulations prescribes) on or before December 31, 1965" to have section 172(b)(1)(D) apply.*68 Pursuant to section 172(b)(3)(C), temporary regulations were issued on April 2, 1964. 6*69 These temporary regulations were replaced by substantially identical permanent regulations issued November 11, *913 1965. 7 They require an electing taxpayer to file, on or before December 31, 1965, his statement of election with the district director in whose office the taxpayer filed his income tax return for the taxable year of the foreign expropriation loss. In general terms, the statement of election is to include: (1) Information identifying the taxpayer; (2) a statement that he elects to have section 172(b)(1)(D) apply; (3) the amount of the net operating loss for the year; and (4) a schedule showing the computation of the foreign expropriation loss. The question in this case is whether the Form 843 filed by petitioners on December 20, 1965, was a sufficient election.*70 This Court has recognized that literal compliance with all provisions of a regulation on how an election is to be made is not always required. Cf. Alfred N. Hoffman, 47 T.C. 218">47 T.C. 218, 237 (1966), affirmed per curiam 391 F. 2d 930 (C.A. 5, 1968). Directions which merely contribute to the orderly and prompt conduct of business but which, if not met within the stated deadline, will cause no prejudice to either party may not be essential. See discussion in Fred J. Sperapani, 42 T.C. 308">42 T.C. 308, 329-333 (1964), and cited cases. In other words, a taxpayer may substantially comply with the applicable requirements even though all of the directions of the regulation have not been followed. Cf. L. S. Ayres & Co. v. United States, 285 F.2d 113">285 F. 2d 113, 115-116 (C.A. 7, 1960).In ascertaining whether a particular provision of a regulation stating how an election is to be made must be literally complied with, it is necessary to examine its purpose, its relationship to other provisions, the terms of the underlying statute, and the consequences of failure to comply with the provision in *71 question. In Indiana Rolling Mills Co., 13 B.T.A. 1141">13 B.T.A. 1141, 1144 (1928), the question of whether substantial compliance *914 with a statute had been achieved was framed as "What is the essence of the thing required to be done by this statute?"As an absolute minimum, we think it apparent, for the reasons we shall discuss, that an election under section 172(b)(3)(C) must reflect the taxpayer's unequivocal agreement to take the benefits and burdens of section 172(b)(1)(D) and related provisions.The reasons for requiring a clear-cut election of the extended carryover provisions of section 172(b)(1)(D) emerge from a careful study of the related provisions. As noted above, this election carries with it the denial of loss carrybacks as well as an extension of the length of the carryover period. In addition, the election affects the time for making or changing any choice or election relating to the foreign tax credit, sec. 172(b)(3)(D)(i), as well as the application of the statute of limitations on the assessment of deficiencies, sec. 172(b)(3)(D)(ii), and the filing of claims for refund, sec. 172(b)(3)(D)(iii), for certain years. 8*72 Furthermore, under section 172(b)(2)9 the extended carryover election (sec. 172(b)(1)(D)) becomes important in calculating the allowable deduction. If no such election is made, a foreign expropriation loss of business property is treated merely as any other net operating loss in computing the amounts of carrybacks and carryovers from a loss year. However, an expropriation loss to which section 172 (b)(1)(D) applies is treated separately from any remaining net operating loss for the same year. The regular net operating loss not attributable to the expropriation is carried back and used to offset income in the 3 prior years. Then, if any of the regular net operating loss still remains, it is carried forward to the next year and used first. Only after the regular net operating loss is fully applied in a carryover *915 year will any expropriation loss from the same loss year be used. Thus, the expropriation loss is considered the last portion of the total net operating loss applied in any case, although the expropriation loss carryover from a given year will be applied before the regular net operating loss carryover from any succeeding year. S. Rept. No. 830, 88th Cong., *73 2d Sess., p. 65, 1964-1 C.B. (Part 2) 505, 570.These detailed statutory provisions on the consequences flowing from an election of the extended carryover provisions of section 172(b)(1)(D) serve to emphasize the importance of having an unequivocal statement from the taxpayer if he chooses to elect to have that section apply. *74 That Congress fixed a deadline of December 31, 1965, for making the election suggests that a taxpayer was not to be allowed to file an ambiguous statement which would permit him to wait and see whether the benefits would outweigh the burdens of the election in his individual case. Rather, as a minimum, the taxpayer is required to definitely commit himself as to whether he elects to have section 172(b)(1)(D) apply so that the carryback or carryover of his net operating and foreign expropriation losses may be applied and computed and the specially applicable limitations periods can be known with certainty.Turning to the merits of the instant case, we find that most of the facts were stipulated in a rather sketchy way, leaving gaps which can be filled only, if at all, through hazardous supposition. 10 Based upon the few objective facts which do appear in the record, we think petitioners have not shown that they made an unequivocal election to use the extended expropriation loss carryover provisions.*75 The claim for refund filed by petitioners for 1964 will not suffice as a section 172(b)(1)(D) election. That document related only to 1964. Nothing on its face suggests it was intended to be an election affecting other tax years. It merely stated "We are claiming Cuban Casualty Losses, Revenue Act 1964," and it sought the refund of only the taxes paid for 1964. It did not commit petitioners in any way as to other tax years, nor did it clearly express their intention to avail themselves of the extended carryover provision.Petitioners filed nothing which, if the tables were turned (e.g., if a deficiency were assessed for a prior year under section 172(b)(3)(D) (ii) or if a claim based on loss carrybacks were filed), would show that they were committed to that election and its statutory consequences. *916 Nor did they file anything which would alert the Internal Revenue Service to maintain the files needed to verify their subsequent returns under the rules governing the extended carryover election. See Angelus Milling Co. v. Commissioner, 325 U.S. 293">325 U.S. 293 (1945); compare Georgie S. Cary, 41 T.C. 214 (1963). 11*76 Indeed, the statement in the claim for refund, when objectively viewed, more clearly refers to a section in the 1964 Act other than the extended carryover provisions for expropriation losses. Apart from the 1964 Act provisions allowing the section 172(b)(1)(D) election (i.e., section 210 of the Act), section 238 of that Act added 1954 Code section 165(i), which has nothing to do with loss carryovers. This latter provision treated a loss of property arising from a Cuban expropriation as a loss from a casualty within the meaning of section 165 (c)(3). Section 210 of the 1964 Act, when enacted, applied generally to expropriation losses without mentioning Cuba, while section 238 of that Act is specifically limited to losses arising from Cuban expropriations. We think this difference in the language of sections 210 and 238, coupled with the use of the word "casualty" in the Form 843 statement, *77 would lead one familiar with the Act to conclude that the claim for refund referred to section 238 of the Act rather than to section 210. 12We recognize that the extended carryover provisions were available to petitioners if they had complied with section 172(b)(3)(C). However, that section requires an election to be made (in such manner as the Secretary or his delegate by regulations prescribes) on or before December*78 31, 1965. Without the barest showing that a statement was filed with the Internal Revenue Service reflecting petitioners' intent so to elect, we are unable to conclude that petitioners are entitled to the extended carryover provisions.To give petitioners the benefit of the capital loss carryover provisions, referred to in footnote 2 supra,Decisions will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.↩2. Sometime before Dec. 5, 1961, several Cuban corporations in which petitioners owned capital stock also were seized by the Government of Cuba, thereby rendering the capital stock worthless. After Dec. 31, 1965, the capital loss carryover resulting from the stock's worthlessness was $ 500,000, and respondent has conceded that this capital loss carryover is available to petitioners (subject to the limitations contained in secs. 1211 (b) and 1212(b)).↩3. SEC. 172. NET OPERATING LOSS DEDUCTION.(b) Net Operating Loss Carrybacks and Carryovers. -- (1) Years to which loss may be carried. -- * * * *(D) In the case of a taxpayer which has a foreign expropriation loss (as defined in subsection (k)) for any taxable year ending after December 31, 1958, the portion of the net operating loss for such year attributable to such foreign expropriation loss shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 10 taxable years following the taxable year of such loss * * *↩4. In 1971, Congress amended sec. 172(b)(1)(D)↩ by extending the carryover period for Cuban expropriation losses to 15 years. Pub. L. 91-677 (Jan. 12, 1971), sec. 2(a), 84 Stat. 2061.5. SEC. 172(b)(3). Special rules. -- (C) Paragraph (1)(D) shall apply only if -- * * * *(iii) in the case of a foreign expropriation loss for a taxable year ending after December 31, 1958, and before January 1, 1964, the taxpayer elects (in such manner as the Secretary or his delegate by regulations prescribes) on or before December 31, 1965, to have paragraph (1)(D) apply.↩6. Temp. Regs. sec. 19.1-1 (T.D. 6719) was published in the Federal Register for Apr. 3, 1964, 29 Fed. Reg. 4770. See also 1964-1 C.B. (Part 1) 618. These temporary regulations were superseded by sec. 1.172-11, Income Tax Regs., T.D. 6862 (Nov. 11, 1965), 2 C.B. 57">1965-2 C.B. 57↩, 69.7. The complete text of Income Tax Regs. sec. 1.172-11(c)(2) and (3) is as follows:(2) Taxable years ending after December 31, 1958, and before January 1, 1964. In the case of a taxpayer who has a foreign expropriation loss for a taxable year ending after December 31, 1958, and before January 1, 1964, the election referred to in paragraph (a) of this section shall be made by filing on or before December 31, 1965, with the district director for the district in which the taxpayer filed his income tax return for the taxable year of such foreign expropriation loss, a statement containing the information required in subparagraph (3) of this paragraph. Such election shall be irrevocable after December 31, 1965. See paragraph (d) of this section for special rules relating to taxable years affected by an election under this subparagraph.(3) Information required. The statement referred to in subparagraphs (1) and (2) of this paragraph shall contain the following information:(i) The name, address, and taxpayer account number of the taxpayer;(ii) A statement that the taxpayer elects under section 172(b)(3)(C)(ii) or (iii), whichever is applicable, to have section 172(b)(1)(D) of the Code apply;(iii) The amount of the net operating loss for the taxable year; and(iv) The amount of the foreign expropriation loss for the taxable year, including a schedule showing the computation of such foreign expropriation loss.In addition, if a taxpayer makes the election under subparagraph (2) of this paragraph, the taxpayer shall specify the internal revenue district in which he filed his return for the three taxable years immediately preceding the taxable year of the foreign expropriation loss. * * *↩8. SEC. 172(b)(3). Special rules. -- (D) If a taxpayer makes an election under subparagraph (C)(iii), then (notwithstanding any law or rule of law), with respect to any taxable year ending before January 1, 1964, affected by the election -- (i) the time for making or changing any choice or election under subpart A of part III of subchapter N (relating to foreign tax credit) shall not expire before January 1, 1966,(ii) any deficiency attributable to the election under subparagraph (C)(iii) or to the application of clause (i) of this subparagraph may be assessed at any time before January 1, 1969, and(iii) refund or credit of any overpayment attributable to the election under subparagraph (c)(iii) or to the application of clause (i) of this subparagraph may be made or allowed if claim therefor is filed before January 1, 1969.↩9. SEC. 172(b)(2). Amount of carrybacks and carryovers. -- * * * ** * * For purposes of this paragraph, if a portion of the net operating loss for the loss year is attributable to a foreign expropriation loss to which paragraph (1)(D) applies, such portion shall be considered to be a separate net operating loss for such year to be applied after the other portion of such net operating loss, and, if a portion of a foreign expropriation loss for the loss year is attributable to a Cuban expropriation loss, such portion shall be considered to be a separate foreign expropriation loss for such year to be applied after the other portion of such foreign expropriation loss.↩10. Much of petitioners' brief is devoted to an argument that the contents of an amended return filed by petitioners for 1964 should be considered along with the Form 843 stipulated in evidence. No such amended return is in evidence. Since the question whether an election to have sec. 172(b)(1)(D)↩ apply may be important in later years, the parties were informally advised that a motion to reopen the record to permit the amended return to be admitted in evidence would be considered. Petitioner responded that no such amended return could be located.11. Petitioner testified rather cryptically that he had no U.S. earnings prior to 1964, but he gave no substantiating details.↩12. Petitioners' counsel argues on brief that sec. 165(i)↩, as amended and in effect at the time the Form 843 was filed, was inapplicable to petitioners (the amendment limited the section to persons who were U.S. residents in 1958 and petitioners did not become residents until 1960) and that, by process of elimination, the reference was only to sec. 210 of the Act. But an election must be at least informative enough to let the Internal Revenue Service know it is being made, and the Form 843 contained no information as to when petitioners entered this country or that an election of any kind was intended.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624460/

Chester Matheson and Marjorie E. Matheson, Petitioners v. Commissioner of Internal Revenue, RespondentMatheson v. CommissionerDocket No. 4427-78United States Tax Court74 T.C. 836; 1980 U.S. Tax Ct. LEXIS 96; July 24, 1980, Filed *96 Decision will be entered for the petitioners. Held, that part of sec. 1.165-11(e), Income Tax Regs., which imposes a 90-day time limitation for revoking an election is invalid because a time limitation for revoking an election, which is shorter than the time limitation for making an election under sec. 165(h), I.R.C. 1954, as amended, effectively frustrates the purpose of the statute. David I. Kaufman and George E. Ward, for the petitioners.Joseph C. Hollywood, for the respondent. Tietjens, Judge. Chabot, J., concurring. Sterrett, J., agrees with this concurring opinion. Nims, J., dissenting. Featherston, Dawson, Tannenwald, Simpson, Wilbur, and Parker, JJ., agree with this dissenting opinion. TIETJENS*837 OPINIONRespondent determined a deficiency of $ 10,514 in petitioners' Federal income tax for 1976. 1*98 The sole issue for our determination is whether petitioners may revoke their election under section 165(h). 2This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and exhibits attached thereto are incorporated herein by reference.Petitioners, cash basis taxpayers, timely filed joint Federal income tax returns for 1975 and 1976. At the time they filed their petition, petitioners resided at Palm Desert, Calif.Petitioners suffered a disaster loss in September 1976. On October 28, 1976, they filed an amended Federal income tax return for 1975 electing under section 165(h) to treat the disaster loss as if it had occurred in 1975 and, thereby, claiming itemized deductions of $ 29,558 attributable to that loss.Ninety-five days later, on January 31, 1977, petitioners filed a second amended Federal income tax return for 1975 in which they attempted to revoke the election they had made pursuant to section 165(h). The return was accompanied by a check payable to the Internal Revenue Service in the amount*99 of $ 6,286, representing the refund of $ 5,986 received from the first amended return plus $ 300 in estimated interest payments.Petitioners claimed a disaster loss of $ 29,558 in their 1976 joint Federal income tax return.At all material times during 1975 through 1977, petitioners resided at Palm Desert, Calif., and employed Gerald B. Queen, a certified public accountant and a partner in a Taylor, Mich., accounting firm, to advise them about tax matters and to prepare for them all returns and amended returns for 1975 and 1976. Petitioners relied on their accountant's advice in most material respects. After consulting with Internal Revenue Service personnel on location at the disaster site and upon advice and concurrence of Mr. Queen, petitioners decided to treat the disaster as if it had occurred in 1975 and later decided to revoke *838 their election. Mr. Queen prepared petitioners' second amended 1975 Federal income tax return after petitioners submitted facts to him on January 19, 1977.Petitioners assert that since their attempted revocation was made 2 1/2 months before the deadline for the original election, they should be allowed to revoke their section 165(h) election. *100 In making this argument, petitioners urge us to find that the part of section 1.165-11(e), Income Tax Regs., which limits revocations of elections under section 165(h) to 90 days after a taxpayer's election, is unreasonable and unrelated to any valid Government interest. They cite Delegation Order No. 127 (Rev. 1), 32 C.B. 463">1973-2 C.B. 463, to show that respondent recognized that extensions of the period for revocation, even after the election became irrevocable under the terms of the regulation, were not inimical to any Government interest. Alternatively, petitioners contend that the regulation is subject to an implied exception that postpones the commencement of the time limit for revocations where the taxpayer has made an early election. For this contention, petitioners chiefly rely on National Lead Co. v. Commissioner, 336 F.2d 134">336 F.2d 134 (2d Cir. 1964), revg. 40 T.C. 282">40 T.C. 282 (1963), cert. denied 380 U.S. 908">380 U.S. 908 (1965).*101 Respondent, by contrast, argues that the record does not justify allowing petitioners to revoke the election they knowingly made, that the attempted revocation of the section 165(h) election is barred by section 1.165-11(e), Income Tax Regs., that the doctrine of substantial compliance with the regulation is not applicable to the case at bar since the time requirement for revocations goes to the essence of the statute, and is, therefore, mandatory, 4 and that even if we find the regulation invalid, petitioners' original election is irrevocable for all the reasons for irrevocability cited in Taylor v. Commissioner, 67 T.C. 1071">67 T.C. 1071, 1079-1080 (1977). In his reply brief, respondent further contends that a deadline for revoking a previous section 165(h) election *839 that is earlier than the deadline for making a section 165(h) election for the disaster loss year is reasonable and that the unqualified 90-day right to revoke a section 165(h) election is reasonable and protects the Government's interests.*102 Section 165(h) provides for an election to deduct certain disaster losses in the taxable year immediately preceding the one in which the disaster occurred. 5 According to S. Rept. 92-1082 (1972), 2 C.B. 713">1972-2 C.B. 713, 714-715, the purpose of section 165(h) is to allow taxpayers suffering these losses to receive an immediate tax benefit to help restore their lost homes or businesses. By so doing, section 165(h) aims to prevent any hardship for the taxpayer who otherwise would have been required to wait for relief until he filed his return for the year in which the disaster actually occurred.*103 Section 1.165-11(e), Income Tax Regs., prescribes the time and manner for making an election under section 165(h):An election to claim a deduction with respect to a disaster loss * * * must be made by filing a return, an amended return, or a claim for refund clearly showing that the election provided by section 165(h) has been made. * * * An election in respect of a loss arising from a particular disaster occurring after December 31, 1971, must be made on or before the later of (1) the due date for filing the income tax return (determined without regard to any extension of time granted the taxpayer for filing such return) for the taxable year in which the disaster actually occurred, or (2) the due date of filing the income tax return (determined with regard to any extension of time granted the taxpayer for filing such return) for the taxable year immediately preceding the taxable year in which the disaster actually occurred. Such election shall be irrevocable after the later of (1) 90 days after the date on which the election was made, or (2) March 6, 1973. * * * [Sec. 1.165-11(e), Income Tax Regs.]Petitioners ask us to invalidate that part of section 1.165-11(e), Income Tax*104 Regs., which limits to 90 days the time for revoking an election under section 165(h). Both parties have acted and argued their positions as though they do not challenge *840 the validity of the time restrictions the regulation places on making an election under this section. We will, therefore, narrow our examination to the validity of the time limitations placed on the revocation of an election; however, we feel that we cannot determine the validity of this part of the regulation without reference to the time limits for making an election. 6The part of the regulation at issue is interpretive and promulgated pursuant to the respondent's general rule-making authority under section 7805(a). 7 As such, it must be sustained unless unreasonable and plainly inconsistent with the revenue statutue. Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 501 (1948).*105 Considering the time limits at issue in light of the purpose of section 165(h), we conclude that the time limits for revoking an election under the regulation are unreasonable and contrary to the intent of the statute. The purpose of section 165(h) is to allow a taxpayer to receive an immediate tax benefit so that he need not wait for the benefit until the due date for filing his return for that year. Yet, under the regulation, the taxpayer may elect to treat the loss as having occurred*106 in the immediately preceding year until the time for filing his return for that year. If, for example, a calendar year taxpayer incurs a loss, described in the statute, on January 1, 1979, he may elect on April 15, 1980, to treat the loss as having occurred in 1978. Without the enactment of section 165(h), however, he could have received a tax benefit by filing his 1979 tax return on April 15, 1980, claiming a deduction for the disaster loss in the year the loss actually occurred.Yet, the effect of the regulation's limitations on revoking an election may well be to make taxpayers, like petitioners, reluctant to make an election soon after their loss since, if they were to wait until the time for filing their return for that year, they could compare the relative tax benefits of ascribing the loss *841 to the immediately preceding tax year or to the tax year in which the loss actually occurred. In this way, the regulation tends to thwart the tax benefit intended by the enactment of the statute. 8*107 Essentially, after examining the statute and its legislative history, we find it unreasonable for the regulation to impose greater restrictions on the time for revoking an election under section 165(h) than on the time for making an election under this section. Therefore, that part of the regulation which imposes a time limit for a taxpayer's revocation of an election under section 165(h) which is shorter than the time for making an election under that section is declared invalid. 9Decision will be entered for the petitioners. CHABOTChabot, J., concurring: I join in the majority opinion, but believe it may be useful to add the following remarks.When the Congress legislates, it is free to act, within the limits of the Constitution, as broadly or as narrowly as its collective wisdom and sense of the body*108 politic move it to act. Legislative history affords a guide to the meaning of what the Congress has done. However, the Congress is free to enact legislation in language that extends beyond the confines of the problem described in the legislative history.Although section 165(h) clearly was intended to permit taxpayers to secure the tax benefits of disaster loss deductions sooner than they normally would, the language that was enacted is not so limited. The statutory language imposes no requirement *842 that the rules of this subsection are to apply only if they would result in an earlier tax benefit. The statutory language merely provides that the taxpayer has a choice, without stating or necessarily implying when or why the choice is to be made.The regulation here in dispute ( sec. 1.165-11(e), Income Tax Regs.) acknowledges that a disaster loss election may be made by filing a claim for refund. Under the general rules of section 6511, the time for filing a claim for refund for 1975 income tax did not expire before April 15, 1979, and for 1976, not before April 15, 1980.Section 165(h) does not provide any special authorization of regulations power to the Secretary of the*109 Treasury. Nevertheless, the Secretary has general regulatory authority and has responsibility (within the confines of the Constitution, the statute, and his budget) to provide for proper administration and avoidance of abuses. Also, it is appropriate for the Secretary to explore the meaning of the statutory language and issue regulations expounding his understanding of this meaning. (See, e.g., Associated Hospital Services, Inc. v. Commissioner, 74 T.C. 213 (1980), on appeal (5th Cir., June 4, 1980).)Regulations under section 165(h) may appropriately be designed to protect against potential "whipsaw" abuses that might arise from the differing expiration dates of the statutes of limitations with respect to the year in which the disaster occurred and the immediately preceding year. Further, it might well be appropriate for regulations to minimize the complexity of the interaction between section 165(h) and the net operating loss provisions. Moreover, regulations might appropriately guard against other abuses that can fairly be conceived of.However, respondent's regulatory authority should not be allowed to cut back the benefits authorized by the*110 statutory language, including the language of section 6511, in the absence of appropriate justification. The Secretary's general authority to write regulations does not carry with it the same presumption of validity as the Congress' constitutional authority to write legislation. Although the courts have stated that legislation generally will be upheld if the courts can conceive of any circumstance justifying the legislation (e.g., Bryant v. Commissioner, 72 T.C. 757">72 T.C. 757, 764 (1979), and cases cited therein), surely we should demand something more from respondent when he seeks *843 to justify regulations which appear to cut back on the benefits apparently conferred by the words of the statute.The legislative history of section 165(h) suggests no justification, by way of protection against abuse or against undue complexity in administration, for the severe regulatory restriction on revocations in dispute in the instant case. The record in the instant case suggests no such justification. The dissenting opinion suggests a concern about net operating loss carryback complexities. However, the instant case does not appear to present such a complexity*111 and, in fact, respondent has not in the instant case sought to justify the regulation by reference to such a complexity.The majority opinion invalidates only so much of the regulation as imposes a time limit for revocation which is shorter than the time limit for making the section 165(h) election. In response to a concern that this holding "can only lead to administrative chaos," it may be helpful to look at the last sentence of the regulation here in dispute. This sentence provides that, in the case of a section 165(h) election with regard to losses arising from disasters occurring after December 31, 1961, and before January 1, 1972, "Such election shall be irrevocable after the date by which it must be made," i.e., that the period for revocation does not expire before the period for election expires. The original section 165(h) regulations provided the same rule, albeit in somewhat different words. Since that is essentially what the majority do with respect to the revocation in the instant case, and since no "administrative chaos" has been reported as a result of respondent's own regulation with respect to pre-1972 disasters, I do not understand why the holding of the majority, *112 herein, which permits petitioners to come under the regular deduction rules, will inevitably lead to "administrative chaos." NIMSNims, J., dissenting: Whether or not the regulation in question is "interpretive" or "legislative," it was certainly within the Commissioner's authority to promulgate and, unless the regulation is unreasonable or plainly inconsistent with section 165(h), it should not be overruled except for weighty reasons. Sec. 7805(a); *844 Bingler v. Johnson, 394 U.S. 741">394 U.S. 741 (1969); Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496 (1948). While this Court has it within its power to hold a regulation invalid, we should be chary of exercising that power in such a way as to unduly interfere with the administrative process. It is one thing to invalidate a regulation which is inconsistent with the statute, but here it seems to me we are essentially questioning the Commissioner's exercise of judgment on a matter well within his prerogative to determine.Section 1.165-11(e) of the regulations was promulgated in response to an amendment of section 165(h) by section 2(a) of Pub. L. 92-418, effective as*113 to disasters occurring after December 31, 1971. Section 165(h), as amended, gives affected taxpayers an election substantially more liberal than that previously provided. And, as indicated in the majority opinion, the regulation provides the aforementioned taxpayers with an extended period within which to make the election. The time prescribed in the regulation was undoubtedly within the Commissioner's authority to prescribe under section 6071(a), which provides that "When not otherwise provided for * * * the Secretary shall by regulations prescribe the time for filing any return, statement, or other document required by [the Code] or by regulations."Delegation Order No. 127 (Rev. 1), 2 C.B. 463">1973-2 C.B. 463, which was issued on September 4, 1973, and revoked on May 25, 1975 (when its purpose had been served), and by which petitioner attempts to justify his relaxed attitude toward the 90-day revocation deadline, was, in fact, a further liberalization, albeit temporary. The need for the delegation order was obvious: Since amended section 165(h) has been made effective for years beginning after December 31, 1971, and since the present regulation did not become*114 final until March 6, 1973, taxpayers who had made an election regarding January 1, 1972 -- March 6, 1973, disaster losses, but without benefit of regulations, justifiably needed, in many cases, additional time within which to reconsider their positions, and Delegation Order 127 made that possible. In no way should such action be read to justify petitioner's theory that extensions of the period for revocation, even after the election becomes irrevocable under the terms of the regulation, are not inimical to any Government interest.The regulation in its present form puts no particular pressure on the taxpayer to make the election -- as the majority observes, *845 he may wait as late as the due date of the disaster-year return to do so, or possibly even later. The majority, however, would permit the taxpayer to immediately make the election, obtain his refund, and then change his mind at his leisure. Such a procedure, if imposed by us upon the Government, can only lead to administrative chaos.For example, it might logically be envisioned that in many cases involving business disaster losses, an election to claim the loss in the preceding year will result in a net operating *115 loss for such year, which, in turn, may result in refunds for yet earlier years. If such refunds are all in due course processed by the Internal Revenue Service, and much later, the taxpayer revokes his election under the majority's open-ended extension of time, the resulting confusion will be monumental. And it must be remembered that disaster losses by definition involve not one, but hundreds or even thousands of similarly situated taxpayers.Therefore, if the taxpayer is going to revoke his election, the Commissioner is entitled to know about it promptly. The opportunity to obtain quick cash in the wake of a disaster is a humane response to a taxpayer's plight provided by Congress, but the tollgate through which the taxpayers must pass is that the election must be irrevocable except as modified by the 90-day change-of-mind provision. It is incorrect, therefore, for us to call the 90-day limitation unreasonable.Furthermore, by our striking the 90-day provision, taxpayers generally are left uncertain as to when their election becomes irrevocable. Under the doctrine of election as enunciated in prior decisions of this Court, once there has been a clear exercise of the election, *116 it becomes binding on the taxpayer. Thorrez v. Commissioner, 31 T.C. 655">31 T.C. 655, 668 (1958); Alabama Pipe Co. v. Commissioner, 23 T.C. 95">23 T.C. 95, 98 (1954). This puts the taxpayer in a worse position than before.For the foregoing reasons, I would hold for respondent. Footnotes1. Subsequent to Feb. 28, 1978, when respondent issued to petitioners a statutory notice of deficiency for 1976, on Mar. 13, 1978, petitioners timely filed a claim for a refund for 1975 in the amount of $ 5,986 based upon respondent's disallowance of a disaster loss for 1976.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue, unless otherwise stated.↩3. This order was issued on Sept. 4, 1973, and revoked on May 25, 1975. Delegation Order No. 127 (Rev. 1), 1 C.B. 640">1975-1 C.B. 640↩.4. See Sperapani v. Commissioner, 42 T.C. 308">42 T.C. 308 (1964); Penn-Dixie Steel Corp. v. Commissioner, 69 T.C. 837 (1978). Substantial compliance with a regulation, however, has been found where the regulation's requirements do not go to the essence of the statute. See Hewlett-Packard Co. v. Commissioner, 67 T.C. 736">67 T.C. 736 (1977); Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5↩ (1973).5. Sec. 165(h) provides:Notwithstanding the provisions of subsection (a), any loss attributable to a disaster occurring in an area subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Disaster Relief Act of 1974 may, at the election of the taxpayer, be deducted for the taxable year immediately preceding the taxable year in which the disaster occurred. Such deduction shall not be in excess of so much of the loss as would have been deductible in the taxable year in which the casualty occurred, based on facts existing at the date the taxpayer claims the loss. If an election is made under this subsection, the casualty resulting in the loss will be deemed to have occurred in the taxable year for which the deduction is claimed.↩6. In so doing, we do not comment on whether the time restrictions the regulation places on making an election under sec. 165(h)↩ are valid.7. An interpretive regulation may be contrasted to a legislative regulation, one which is mandated specifically in the statute and has the force and effect of law. Union Electric Co. of Missouri v. United States, 158 Ct. Cl. 479">158 Ct. Cl. 479, 305 F.2d 850">305 F.2d 850 (1962); Regal, Inc. v. Commissioner, 53 T.C. 261">53 T.C. 261 (1969), affd. per curiam 435 F.2d 922">435 F.2d 922 (2d Cir. 1970); Robbins Door & Sash Co. v. Commissioner, 55 T.C. 313">55 T.C. 313↩ (1970).8. It is clear that respondent is aware of this effect of the regulation. In his reply brief, he states:"In reply, the respondent agrees with petitioners that they could have waited until the due date of their 1976 return to make their section 165(h)↩ election. A delay in making the election would have allowed petitioners to fully appraise themselves and their advisor of the facts prior to making their election. In retrospect, this would have been a wise course of action. However, this did not occur."9. While we hold invalid any time restriction for revoking an election which is shorter than the time for making an election under sec. 165(h)↩, we do not otherwise comment on what the time limit should be.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624461/

H. OLIVER THOMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Thompson v. CommissionerDocket No. 30571.United States Board of Tax Appeals17 B.T.A. 987; 1929 BTA LEXIS 2204; October 17, 1929, Promulgated *2204 Ground rent received by petitioner from the mayor and city council of Baltimore, Md., the leased land being used by the city for school purposes, held not exempt from Federal income tax. John Philip Hill, Esq., for the petitioner. F. Easby-Smith, Esq., for the respondent. ARUNDELL*987 The respondent has determined a deficiency in income tax for the year 1924 of $26.21. The petitioner cites as error the action of the respondent in including in gross income the sum of $700 received by petitioner within the taxable year from the mayor and city council of Baltimore, Md., as ground rent on certain property owned by petitioner. FINDINGS OF FACT. The petitioner received within the taxable year 1924, $700 under a long-term lease renewable forever, with the mayor and city council of Baltimore. By the terms of the lease the lessee, a political subdivision of the State of Maryland, agreed to pay to the lessor, in two annual installments, a total sum of $700 per year. A school house was built upon the leased property by the municipal authorities, which is now and has been for many years in use for the purpose for which it was constructed. *2205 The lease also contained the following covenants: The Mayor and City Council of Baltimore, it successors and assigns paying, therefor, to the said Elizabeth Oliver, her personal representatives and assigns, the rent or yearly sum of Seven Hundred Dollars, and that in equal half yearly sums of Three Hundred and Fifty Dollars, each accounting from the day of the date hereof and payable thereafter on the 1st day of May and November in every year during its demise over and above all deductions for taxes and assessments of every kind assessed and levied, or to be assessed and levied thereon hereafter, and on the rent hereby reserved. * * * The Mayor and City Council of Baltimore for itself, its successors and assigns hereby covenants to pay said yearly rent at the period above mentioned for the payment thereof, and also to pay all taxes and assessments of every kind assessed and levied or hereafter to be assessed and levied on the said property, and on the said yearly rent hereby reserved thereon. OPINION. ARUNDELL: Petitioner contends that the ground rent received by him from the mayor and city council of Baltimore is exempt from *988 taxation under section 231(b)(4)(A) *2206 of the Revenue Act of 1924, which provides as follows: (b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title: * * * (4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, * * * It is argued that the ground rent arises from an obligation of a political subdivision of a State to pay for the use of land, and that this ground rent is in the nature of interest and as such is exempt from taxation under the above quoted provisions of the Act. The lease itself designates the amount to be paid as rent and not interest, and having in mind the recognized distinction between the terms rent and interest we can not believe that Congress used the term interest as inclusive of the term rent. Interest is a "consideration paid for the use of money or for forbearance in demanding it when due." . Rent is a sum stipulated to be paid for the use and enjoyment of land. The occupation of the land is the consideration for the rent. In re Roth & Appel, 104 C.C.A. 649; *2207 . See, also, the definitions in Webster's New International Dictionary. Moreover, leases such as we have here are regarded by the courts of Maryland as establishing the relation of landlord and tenant and the obligation of the lessee is spoken of as rent. ; ; ; ; . But even though the annual payment required under the lease can be considered as in the nature of interest, it is still not interest upon an "obligation" within the meaning of the Revenue Act, but would rather fall within the principles laid down in , holding that interest due from the United States Government to railroads on the use of property during the period of Federal control is not interest on "obligations of the United States" as that term is used in the statute. The further argument of petitioner is that the tax asserted by the respondent will hamper the local government in its efforts to obtain as low a rent as possible on*2208 its use of school lands, and, hence, is an interference with the exercise by the State of its sovereign powers and functions. On this point are cited a number of cases on the well established doctrine of exemption of each government, and its instrumentalities, from taxation by the other and which is set forth in , in these words: *989 As the States cannot tax the powers, the operations, or the property of the United States, nor the means which they employ to carry their powers into execution, so it has been held that the United States have no power under the Constitution to tax either the instrumentalities or the property of a State. For a full discussion of many of the cases involving this principle of exemption see . Only a few cases, those which are most nearly in point, need discussion here. , presented the question of the right of the State of Oklahoma to tax as a part of the property of the oil company a lease on tax-exempt Osage Indians lands, which lease*2209 the oil company had acquired by assignment. The court held the tax invalid, saying: A tax upon the leases is a tax upon the power to make them, and could be used to destroy the power to make them. This quotation followed a reference to , in which the State had attempted to collect a tax from the company, measured by its revenues from coal removed from the land of Indian wards of the United States under a lease made pursuant to an act of Congress. The tax was held invalid on the ground that the company was an instrumentality through which the United States was carrying out a duty to its wards. , holds invalid a State tax imposed on net income derived from operations under a lease of restricted Indian lands. The decision was put upon the same ground as the Choctaw & Gulf case, namely, that the operator of the leased land was an agency through which the United States was performing a duty to its wards. In each of these cases it will be noted that there was involved a lease which was "the instrument which the government has chosen to use in fulfilling*2210 its task of developing to the fullest the lands and resources of its wards," , and "a tax upon the leases is a tax upon the power to make them," . In the present case the lease to which the mayor and city council of Baltimore were parties was not founded upon any obligation such as rested upon the United States in the Indian lease cases above set out; nor is the tax asserted, even if it is on the power to make leases, invalid, as it is not asserted against the mayor and city council of Baltimore, but against the lessor, who clearly can not be said to have been performing any governmental function. It must also be borne in mind that under the common law the lessor and lessee each has a separate estate in the land. ; . In the latter case the opinion reads in part: *990 As long as different interests may exist in the same land, we think it plain that an exemption granted to the owner of the land in fee does not extend to an exemption*2211 from taxation of an interest in the same land, granted by an owner of the fee to another person as a lessee for a term of years. The two interests are totally distinct, and the exemption of the one from taxation plainly does not thereby exempt the other. Petitioner further calls attention to the clause of the lease providing that the rent covenanted to be paid is to be paid "over and above all deductions for taxes and assessments" and the provision whereby the mayor and city council covenant "to pay all taxes and assessments * * * on the said property and on the said yearly rent hereby reserved thereon." Petitioner argues that under these provisions he can require the mayor and city council to reimburse him for the amount of the deficiency asserted, and, therefore, the effect of sustaining the deficiency in tax will be to compel the City of Baltimore to pay an increased amount for the use of the land. It is a sufficient answer to this to say that these provisions of the lease amount to no more than to put the rent on a sliding scale. The respondent is not asserting a tax against the City of Baltimore and if the city reimburses the lessor for the taxes he is required to pay, it*2212 is not paying a tax, but merely meeting a contract obligation. Judgment will be entered for the respondent.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624462/

B. J. Martin and Auline Martin, et al. 1 v. Commissioner. Martin v. CommissionerDocket Nos. 63808, 63832, 94362, 94363. .United States Tax CourtT.C. Memo 1964-25; 1964 Tax Ct. Memo LEXIS 312; 23 T.C.M. (CCH) 123; T.C.M. (RIA) 64025; January 31, 1964*312 Held: (1) That all petitioners understated their taxable income for the years 1949, 1950 and 1951 by overstating expenses. (2) That some part of the deficiency in income tax of petitioners Paul A. and Mary L. Martin, for the years 1949 to 1951, inclusive, was due to fraud with intent to evade taxes and that the assessment and collection of the deficiencies and additions to tax determined against them are not barred by the statute of limitations. (3) That petitioners Paul A. and Mary L. Martin have failed to prove error on the part of respondent in determining additions to tax provided under sec. 294(d)(2), Code of 1939, for 1950 and have failed to prove error on the part of respondent in determining additions to tax provided by sec. 294(d)(1)(A), Code of 1939, for 1951. (4) That respondent has failed to prove fraud with respect to the years 1949-1951, inclusive, on the part of petitioners B. J. and Auline Martin and that assessment and collection of deficiencies in tax and additions to tax for the years 1949 and 1950 are accordingly barred. (5) That petitioners B. J. and Auline Martin have failed to prove error on the part of respondent in determining deficiency and additions*313 to tax (except under section 293(b)) for the year 1951. Sidney T. Schell, 1105 Fulton National Bank Bldg., Atlanta, Ga., for the petitioners. Ford P. Mitchell, for the respondent. FISHERMemorandum Findings of Fact and Opinion FISHER, Judge: Respondent determined deficiencies in income tax and additions to tax against petitioners for the years and in the amounts as follows: B. J. Martin and Auline MartinAdditions to Tax, I.R.C. 1939DocketSec. 294Sec. 294No.YearDeficiencySec. 293 (b)(d)(1)(A)(d)(2)943621949$ 9,429.14$4,714.57195014,616.087,308.04$1,603.926380819511,177.06588.53$92.1661.43Paul A. Martin and Mary L. Martin943631949$ 9,429.14$4,714.57195014,616.087,308.04$1,603.926383219511,177.06588.53$92.1661.43*314 The cases were consolidated for hearing pursuant to agreement of the parties. The issues for decision are: (1) Whether the petitioners understated their taxable income for the years 1949, 1950, and 1951. (2) Whether any part of each deficiency in income taxes for the years 1949 to 1951, inclusive, was due to fraud with intent to evade taxes, and whether the assessment and collection of the deficiencies for the years 1949 and 1950 are barred by the statute of limitations; and (3) Whether petitioners have demonstrated error on the part of respondent in determining additions to tax for the year 1950 under section 294(d)(2), Code of 1939, and additions to tax for the year 1951 under section 294(d)(1)(A), Code of 1939. Respondent concedes the addition to the tax for the year 1951 under the provisions of section 294(d)(2), Code of 1939, in Docket Nos. 63808 and 63832. Findings of Fact Some of the facts are stipulated and are incorporated herein by reference. Petitioners, Paul A. Martin (hereinafter sometimes referred to as Paul) and Mary L. Martin, are husband and wife and lived at 274 McAfee Road, Decatur, Georgia, during part of 1949 and at 3159 Tilson Road, Decatur, *315 Georgia, from November 1949 through 1955, and filed timely joint Federal income tax returns with the collector of internal revenue, Atlanta, Georgia, for the taxable years 1949, 1950, and 1951. Petitioners, B. J. Martin (hereinafter sometimes referred to as B. J.) and Auline Martin, are husband and wife and lived at 274 McAfee Road, Decatur, Georgia, during part of 1949 and at 3175 and 3151 Tilson Road, Decatur, Georgia, from November 1949 through 1953 and filed timely Federal joint income tax returns with the collector of internal revenue, Atlanta, Georgia, for the taxable years 1949, 1950, and 1951. Paul A. Martin is the adopted son of B. J. Martin. Paul A. Martin and B. J. Martin were partners in a partnership known as Paul A. and B. J. Martin (hereinafter sometimes referred to as partnership No. 1) during the taxable year 1949. Paul A., Mary L., B. J., and Auline Martin were partners in a partnership known as Martin and Martin (hereinafter sometimes referred to as partnership No. 2) during the years 1950 and 1951. The only active members of partnership No. 2 were Paul and B. J. The principal offices of the two partnerships were at 274 McAfee Road, Decatur, Georgia, during*316 part of 1949 and at 3159 Tilson Road, Decatur, Georgia, from November 1949 through 1951. Timely partnership returns were filed for partnership No. 1 for the taxable year 1949 and for partnership No. 2 for the taxable years 1950 and 1951 with the collector of internal revenue, Atlanta, Georgia. The principal business of both partnerships during 1949 and 1950 was the building of residential houses for sale and the principal business of partnership No. 2 during 1951 was the building of two duplex houses for rental purposes. The partnership agreement of Martin and Martin was recorded in DeKalb County, Georgia. No dissolution agreement or settlement agreement of Martin and Martin has been recorded in Georgia. Partnership No. 1 built 38 houses in 1949 and sold 36 of them in that year for a total sales price of $347,200. Thirty-two of the houses sold for $9,750 each and 4 of the houses sold for $8,800 each. Partnership No. 1 reported total gross receipts for 1949 of $347,450. The additional $250 was from minor miscellaneous income. In 1948 a six-acre tract of land fronting on McAfee Road and adjoining a tract of land owned by J. W. Toney was purchased from the wife of Gustaf B. *317 Borg for $3,500. The deed was taken in the name of B. J. Martin. Partnership No. 1 developed 18 lots from this tract of land. In 1949, partnership No. 1 paid Toney $2,705 for one-half the cost of paving and curbing the street which separated the six-acre tract purchased from Borg's wife and the tract owned by Toney which also consisted of 18 lots. Later the same year partnership No. 1 purchased this land from for sale and the principal business of partnership No. 2 during 1951 was the building of two duplex houses for rental purposes. The partnership agreement of Martin and Martin was recorded in DeKalb County, Georgia. No dissolution agreement or settlement agreement of Martin and Martin has been recorded in Georgia. Partnership No. 1 built 38 houses in 1949 and sold 36 of them in that year for a total sales price of $347,200. Thirty-two of the houses sold for $9,750 each and 4 of the houses sold for $8,800 each. Partnership No. 1 reported total gross receipts for 1949 of $347,450. The additional $250 was from minor miscellaneous income. In 1948 a six-acre tract of land fronting on McAfee Road and adjoining a tract of land owned by J. W. Toney was purchased from the wife*318 of Gustaf B. Borg for $3,500. The deed was taken in the name of B. J. Martin. Partnership No. 1 developed 18 lots from this tract of land. In 1949, partnership No. 1 paid Toney $2,705 for one-half the cost of paving and curbing the street which separated the six-acre tract purchased from Borg's wife and the tract owned by Toney which also consisted of 18 lots. Later the same year partnership No. 1 purchased this land from Toney for $15,300. Toney was paid from the proceeds of sale of the houses built on the land he sold the partnership as each house was sold. The 36 houses sold by the partnership in 1949 were built on the 36 lots purchased from Borg and Toney. The two houses which were built by partnership No. 1 in 1949, but not sold in that year, were the two homes of the petitioners located at 3159 and 3175 Tilson Road, Decatur, Georgia. These houses were located some distance away from the tract of land on which the 36 other houses were built. Paul owned the lot at 3159 Tilson Road and B. J. owned the lot at 3175 Tilson Road. These two houses contained facilities such as washing machines, venetian blinds, built-in breakfast suites, forced air furnaces and garages, which were*319 not installed in any of the other 36 houses built by partnership No. 1 in 1949. The entire cost of these two houses was charged to partnership expenses and was claimed as expenses on partnership No. 1's return for 1949. The petitioners did not keep separate records or segregate the cost of any of the 38 houses which were built by partnership No. 1 in 1949. The cost of constructing the two Tilson Road houses was approximately $10,000 each. Petitioner employed F. D. Presley, an accountant, to prepare the 1949 partnership and individual income tax returns. Presley personally did not prepare the returns. They were prepared by his daughter, Frances P. Bailey, from information supplied by Paul. When Frances prepared the returns she was not aware that the two houses on Tilson Road were the residences of the petitioners or that the cost of these two houses was charged to partnership expenses. The petitioners did not keep a set of partnership books for 1949. At the end of the year Frances prepared a detailed check analysis covering the entire year. This check analysis is comparable to a cash journal and consisted of 55 sheets of 11-column paper and a recapitulation sheet. The information*320 reflected on the 1949 partnership return is the same as that shown on the recapitulation sheet attached to the journal. The total cost of materials as shown on the partnership return and on the recapitulation sheet for the year 1949 was $172,862.17. The amount of material expense accounted for on the 55 sheets of the journal was $141,055.59, leaving a difference between the check analysis and the partnership return of $31,806.58. Paul gave Frances a book purporting to list cash payments which appeared to account for the overstatement. She was not supplied with invoices or other evidences which would substantiate cash expenditures for building materials in the amount of $31,806.58. The totals of the other columns of the check analysis were approximately the same as the totals shown on the recapitulation sheet, the differences amounting to only $631.99. The 55th sheet of the check analysis and the recapitulation sheet were missing at the time of trial, but were in existence in 1953 when the records were audited by the investigating officers. At that time adding machine tapes of all sheets were made and from those tapes the 55th sheet was reconstructed in order to arrive at the totals*321 on the various expense columns. Paul and B. J. contributed materials to their church during 1949 and the cost of these materials was absorbed in the cost of the houses built and sold in that year. In 1950, the petitioners' only source of income was from partnership No. 2. Partnership No. 2 built 71 houses in 1950 and sold 70 of them for $9,650 each for total sales receipts of $675,500. The total gross receipts reported on the 1950 partnership return was $675,500. The one house which was not sold during the year was the personal residence of B. J. and Auline Martin at 3151 Tilson Road. The partnership books for the year 1950 were kept by Ruth Hobby who at that time was Ruth Manning. Ruth was a part-time employee of the partnership and prepared the books in the evening at her home. The books consisted of a cash journal and a general ledger which remained in her home until they were turned over to the petitioners at the end of the year. The cash journal was a record of cash receipts and disbursements. The columns in the journal were footed and the totals posted monthly in the general ledger. Both the cash journal and the general ledger for the year 1950 were missing at the time*322 of trial. Ruth made entries on the books from information supplied to her by Paul in the form of oral information, checks, check stubs, bank statements and bank deposit slips. Paul made all notations on the check stubs. Ruth posted every item that went in and out of the bank and did not disregard or eliminate any alleged expense. She never saw any invoices and advised Paul to keep invoices to substantiate alleged purchases made personally for the partnership. Partnership No. 2's returns for 1950 and 1951 along with the joint income tax returns of the petitioners for 1950 and 1951 were prepared by Don P. Walker. The amount of building materials expense claimed on the 1950 return of partnership No. 2 was $305,205.68, while the cost of materials as shown on the partnership's books and records was $301,646.87. On October 19, 1950, partnership No. 2 issued check No. 2992 to B. J. Martin in the amount of $16,000. The explanation on the check stub is "Property Paid in Full." This expenditure was charged to building materials expense on the books of partnership No. 2 for 1950 and claimed as a materials expense on the partnership return for that year. Both B. J. and Paul endorsed*323 the check and Paul cashed the check on October 26, 1950, at the Fulton National Bank. On October 26, 1950, Paul made a $20,000 deposit in the account of No. 2 partnership at the East Atlanta Bank. The house and lot at 3175 Tilson Road, was traded to Arthur Brand in June 1950 in exchange for a 12-acre tract of land and an old farmhouse which were deeded to partnership No. 2. There was no money involved in this transaction. In October of 1950 the partnership issued a check to E. J. Faust in the amount of $3,451. This amount was charged to building materials expense on the partnership's books. This check was not used to purchase building materials but was actually a loan to Faust. In the same month a check was issued to Grey Skelton in the amount of $2,605. This was also charged to building materials expense but was actually payment for four lots purchased in 1950, but not developed or sold by the partnership during that year. On May 24, 1950, partnership No. 2 issued a check to W. C. Cobb in the amount of $826.25. This amount was charged to building materials expense on the books of the partnership. Of this amount, $800 was for the purchase of a lot and $26.25 was for legal fees. *324 The lot was not sold until 1951. On July 7, 1950, the partnership issued a check to Cobb and Cobb in the amount of $115. This expenditure, which was charged to building materials expense, was to cover a title fee on property acquired from Arthur Brand in 1950 but not developed or sold until 1951. In July 1950 a house was built by partnership No. 2 at 3151 Tilson Road at a cost of $10,000 and claimed as an expense on the partnership tax return of 1950. B. J. and Auline lived at this house from the time it was completed until their moving to Alabama in 1953. On September 13, 1950, Paul and Mary Martin deeded the lot at 3151 Tilson Road to B. J. On June 26, 1950, the partnership issued check No. 2623 payable to Marvin Griffin in the amount of $250. The explanation on the check stub was "materials." This expenditure charged to building materials on the books of partnership No. 2 was actually a political contribution. A check in the amount of $600 was issued to Koolvent Metal Company in August of 1950. This amount was charged to building materials expense for 1950. The payment was actually for awnings which were attached to the houses at 3159 Tilson Road and 3151 Tilson Road at a*325 cost of $300 to each house. During the year 1950 partnership No. 2 issued the following checks to Paul A. Martin: DateCheck No.Amount3-12-502062$ 35.004-21-5022526.356- 8-50251454.087-13-50272670.857-27-502804159.108- 3-50283574.038-14-502872555.878-17-502878511.749- 1-502906105.559-26-5029541,159.1610-11-50297842.9611- 6-503013618.0812- 8-503053736.61 These checks were charged to building materials expense on the books of the partnership for 1950. There were no invoices or other supporting documents to substantiate these expenditures, although attached to some of the check stubs were adding machine tapes totaling the amount of the individual check. During 1950 the partnership issued the following checks to B. J. MartinDate Check No. Amount 4-21-50 2251 $ 72.305-19-50 2416 150.005-25-50 2438 150.007- 7-50 2704 69.507-13-50 2725 312.509-12-50 2941 331.6912-18-50 3054 105.71 These checks were charged to building materials expense for 1950. There were no invoices or other supporting documents to substantiate these. There were, however, adding machine tapes for some*326 of the checks. During 1950 partnership No. 2 issued the following checks: PayeeAmountEast Atlantic Bank$3,500.00Chas. S. Martin DistributingCo.156.32Georgia Power Company766.68Jenkins Key Co.31.70Georgia Automatic Gas Co.18.90Norton Photographers50.00Cobb and Cobb28.60 These checks were charged to building materials expense on the books and records of the partnership for 1950. There were no invoices or other supporting documents to substantiate these expenditures. Partnership No. 2 issued two checks in 1950 payable to Paul and B. J. Martin. The first check, No. 2215, dated April 11, 1950, was in the amount of $1,033 and the second check, No. 2311, dated May 2, 1950, was in the amount of $190.27. These expenditures were charged to building materials on the books of the partnership and were not substantiated by invoices or other supporting documents. Adding machine tapes were attached to the check stubs. On December 27, 1950, a check was issued to J. F. Senn in the amount of $2,000. The explanation on the check stub is "Bonus." This amount was charged to "Donations, Utilities and Miscellaneous Costs" on the books and records of the*327 partnership for 1950. The $2,000 was reported as "Bonus-Christmas" expense on the 1950 partnership return. Senn is the father-in-law of Paul. Paul had stated to a revenue agent that Senn had only worked for the partnership approximately two weeks and the $2,000 payment was to keep Senn from living in Atlanta. The partnership of Martin and Martin (partnership No. 2) was not dissolved in 1951. Paul and Mary reported one-half and B. J. and Auline reported one-half of the partnership's net income on their respective joint income tax returns for the year. During the year 1951 the petitioners' only source of income was from partnership No. 2. Partnership No. 2's books for the year 1951 were prepared by Ruth Hobby. The books were of the same nature as the ones prepared by Ruth in 1950 consisting of a cash journal and a general ledger. The journal was a record of receipts and disbursements and the columns were footed and totals posted monthly to the general ledger. The journal and ledger for the year 1951 were missing at the time of the trial as were the checks and check stubs. During 1951 the partnership built two duplex houses, one at 3067-3069 Cannon Street and the other at 627-629 Glen*328 Iris Drive, both in Decatur, Georgia. Each of these houses contained at least two apartments and the total cost of these houses as reflected on the partnership return was $30,317.63. These two houses were not sold in 1951, but were held as rental property. In 1951 the land known as the Brand property was sold for a total sales price of not less than $30,100. On March 17, 1951, partnership No. 2 issued a check payable to B. J. in the amount of $10,000. This expenditure was charged to the cost of the Brand property on the books and records of the partnership for 1951. According to a notation on the face of the check it was for a house at 3442 McAfee Road, which was the old farmhouse located on the Brand property when partnership No. 2 acquired it in 1950. B. J. personally never owned this house which was in fact owned by partnership No. 2 and was traded to J. W. Toney in 1950 for work done in improving and subdividing the Brand property. The $10,000 check was not to buy B. J.'s interest in the partnership. The partnership was not dissolved in 1951. Paul telephoned Presley during the latter part of 1952 and told him Remillard would be around to see him. He told Presley to tell Remillard*329 that information had been lost. Presley knew of no lost information. The 55th sheet was missing when respondent's agent examined the check analysis after the conversation between Paul and Presley. Neither Presley nor Frances advised petitioners to carry the two houses at 3159 and 3175 Tilson Road on a cash basis or to deduct the cost of the two houses during 1949 and to report the profit from the sale of the two houses when sold in another year. The income tax returns of petitioners Paul A. and Mary L. Martin for the years 1949, 1950, and 1951 were false and fraudulent and were made with intent to evade tax. Part of the deficiency with respect to Paul A. and Mary L. for each of said years is due to fraud with intent to evade tax. The income tax returns of petitioners B. J. and Auline Martin for the years 1949, 1950, and 1951 were false. There is no clear and convincing evidence, however, that said returns were fraudulent or filed with intent to evade tax. There is also no clear and convincing evidence that any part of any of the deficiencies of B. J. and Auline was due to fraud with intent to evade tax. B. J. supervised the laborers on the construction jobs. He wrote no checks, *330 collected no money, and had nothing to do with the books and records. He left the business affairs of the partnership to Paul. Opinion Deficiencies - General As will appear from both our Findings and from our discussion, infra, we have found that the returns of B. J. and Auline in question were not L. Martin for the years 1949, 1950, and 1951 were false and fraudulent and were made with intent to evade tax. Part of the deficiency with respect to Paul A. and Mary L. for each of said years is due to fraud with intent to evade tax. The income tax returns of petitioners B. J. and Auline Martin for the years 1949, 1950, and 1951 were false. There is no clear and convincing evidence, however, that said returns were fraudulent or filed with intent to evade tax. There is also no clear and convincing evidence that any part of any of the deficiencies of B. J. and Auline was due to fraud with intent to evade tax. B. J. supervised the laborers on the construction jobs. He wrote no checks, collected no money, and had nothing to do with the books and records. He left the business affairs of the partnership to Paul. Opinion Deficiencies - General As will appear from both our Findings*331 and from our discussion, infra, we have found that the returns of B. J. and Auline in question were not fraudulent, and no part of their deficiencies was due to fraud with intent to evade taxes. As a consequence, the deficiencies determined against B. J. and Auline for the years 1949 and 1950 are barred by limitations. The issue of limitatations is not raised by them as to 1951. Since the bases for determination of deficiencies are the same, with respect to Paul A. and Mary L., as with respect to B. J. and Auline (except as to the element of fraud, which we find applicable to Paul A. and Mary L. for all three years involved, in accordance with our discussion infra) we may save time by joint consideration of the factor of deficiencies of all petitioners involved. Deficiencies - 1949 The petitioners' only source of income in 1949 was from the partnership of Paul A. and B. J. Martin. The principal business of the partnership for the year in question was the building of residential houses for sale. The partnership reported $347,450 gross receipts from the sale of houses during this year. Thirty-two of the houses were sold for $9,750 each and the remaining 4 were sold for $8,800 each. *332 The proceeds from the sale of these 36 houses account for $347,200 of the total gross receipts reported by the partnership. The remaining $250 represents unexplained small amounts amounts of cash received by the partnership at various times during the year. The petitioners did not keep a set of partnership books for 1949. At the end of the year, however, Frances (who prepared the partnership return) prepared a detailed check analysis covering the entire year which was complete and accurate to the extent of the information furnished to her. It consisted of 55 sheets of 11-column paper and a recapitulation sheet. Respondent disallowed as an expense item the entire cost of constructing two houses which were in fact personal residences of the petitioners, the cost of which was not deductible as an expense of the partnership. The two houses were located at 3159 and 3175 Tilson Road. Paul A. and Mary L. lived at 3159 Tilson Road from 1949 to 1955 and B. J. and Auline lived at 3175 Tilson Road from 1949 until June of 1950 when they moved into another house built by the partnership where they lived until 1953. We sustain the respondent in disallowing the deduction of the cost of the*333 two houses occupied by the partners in 1949 because of the obvious fact that such cost was not an expense of the partnership. The cost of the two houses was necessarily estimated because petitioners did not keep separate records or segregate the cost of any of the 38 houses which the partnership built in 1949. The cost was determined by estimating that the cost of materials for each house was $5,000 and that the cost of materials was 50 percent of the total cost of building each house. We think this approach is quite reasonable. We sustain respondent's determination of overstatement of cost of land by $4,245. The cost of land as shown on the 1949 return was $25,750. Actually, only $21,505 was properly attributable to cost of land. Petitioners have failed to show error in respondent's determination insofar as it limits the cost of land in 1949 to $21,505. We likewise sustain respondent's disallowance of $32,801.40 as an overstatement of cost of building materials for 1949. The partnership return claimed materials expense in the amount of $172,862.17 while the check analysis or journal showed a total of $141,055.59. Petitioners were unable to account for the discrepancy and failed*334 to meet the burden of proof or error in respondent's determination. Respondent disallowed the deduction $500of as estimated cost of materials contributed by petitioners to their church (since they had elected to use the standard deduction). Petitioners do not deny that a contribution was made or that the cost was charged to partnership expense. The amount was estimated. The item is de minimus, but there is no reason to believe that the estimate was unreasonable, and in any event, petitioners have failed to prove error in respondent's determination in this respect. We therefore sustain respondent. Respondent disallowed a deduction of $494.82 claimed as materials expense. The money was used to purchase a power saw and filing cabinet. Those items were properly capitalized by respondent. Other minor adjustments were made by respondent for 1949, but, since petitioners offered no evidence in connection therewith, we hold that the presumption of correctness of the determination requires us to hold for respondent as to the items in question. Deficiencies - 1950 During 1950, the partnership again overstated the cost of building materials in the amount of $34,943.80. The largest*335 specific item disallowed by respondent was a $16,000 check payable to B. J. The check stub indicated it was for "Property Paid in Full." It was entered on the books in the material column. The check was endorsed by both B. J. and Paul. The latter admitted that he personally cashed the check. We need not go into the details of Paul's inconsistent statements as to this item. An example is the story that the purpose of the check was to reimburse B. J. for trading his home at 3175 Tilson Road for a 12-acre tract of land and an old frame house which was deeded to the partnership. The facts show, however, that B. J. did not receive the proceeds of the $16,000 check. Moreover, when B. J. traded 3175 Tilson Road, he immediately moved into another house built by the partnership, the cost of which was charged to partnership. We think that the affirmative evidence supports the view that the $16,000 check represented a withdrawal of profits by Paul. In any event, it was neither a materials expense item nor a payment to B. J. for property. We may add that Paul's obvious untruths could not be taken as sufficient to sustain the burden of proof of sustaining error on the part of respondent in*336 disallowing this item, and we find no other acceptable evidence to support the burden. The second 1950 item of materials expense disallowed was a check to E. J. Faust in the amount of $3,451. Since the check was actually a loan to Faust and was not used to purchase materials, it is clear that respondent must be sustained. While the next item to be considered is trifling in amount, we mention it because of its reflection on treatment of other items. Check No. 2623, issued to Marvin Griffin in the amount of $250 and charged to materials expense was actually a political contribution. We sustain respondent. Respondent disallowed a deduction of $600 paid to Koolvent Metal Company. The explanation on the check was "materials," but the payment was in fact for awnings on the two Tilson Road houses occupied as personal residences by petitioners. Respondent is sustained. Respondent disallowed the deduction of a check for $766.68 which was charged by the partnership to materials expense. The expenditure was in fact for appliances which were installed in the Tilson Road houses occupied by petitioners. Respondent is sustained. We see no reason to discuss an item of $115 evidenced by a*337 check to Cobb and Cobb. Respondent disallowed the item in 1950 but allowed it in 1951. We sustain respondent. A check in the amount of $2,605 was charged by the partnership to building materials expense. It was actually paid by Grey Skelton for four lots purchased in 1950 but neither developed nor sold by the partnership in 1950. Respondent's disallowance is sustained. A check for $826.25 payable to W. C. Cobb was charged to building expense. The check stub showed "legal fees." $800 of this amount was for the purchase of the lot, and $26.25 was for legal fees. The lot was sold by the the partnership in 1951 and is allowed in that year. Respondent is sustained. Respondent disallowed 22 checks issued to Paul or B. J. or both. The checks were charged to building expense. Petitioners had no invoices or other significant supporting evidence. A few of the stubs had adding machine tapes attached, but these did not establish the purposes for which the checks were issued. We sustain respondent because of want of substantiation on the part of petitioners. Respondent also disallowed as building material expense, the following checks: DateCheck No.AmountPayee1-13-501762$3,500.00East AtlantaBank5-25-502436156.32Chas. S. MartinDistrib. Co.7- 5-50267231.70Jenkins KeyCompany7-13-50272718.90Ga. AutomaticGas Co.10- 2-50296050.00Norton Photog-raphers10-10-50297728.60Cobb and Cobb*338 The only substantiation offered was the unsupported testimony of Paul. We think it apparent from the whole record that Paul is unworthy of belief. Moreover, by 1950, at least he was well aware of the requirement to keep invoices and like supporting data to substantiate the partnership expenditures. Under the circumstances, we think respondent was justified in disallowing the items in question and that petitioners have failed to meet the burden of proving error by respondent. We sustain the disallowance. Respondent disallowed a deduction of $2,000 paid to J. F. Senn, father-in-law of Paul. The explanation on the check stub indicated that the $2,000 was paid to Senn as a bonus. The expenditure was charged to "Donations, Utilities and Miscellaneous Costs" on the partnership books and was claimed as "Bonus-Christmas" expenses on the 1950 partnership return. Paul told a revenue agent that his father-in-law had worked for the partnership for two weeks and the $2,000 was paid to keep Senn from living in Atlanta. It is clear that the only possible part of the payment deductible for tax purposes was compensation for the two weeks of services alleged to have been rendered by Senn. Assuming*339 (although we do not so hold)that Senn did render services for two weeks, there is no evidence of the amount paid him therefor, or the reasonable value of such services. Under the circumstances, we sustain the disallowance. In 1950, petitioners charged the cost of another personal residence (occupied by B. J.) to the partnership. The entire cost was absorbed in the cost of building 70 houses ultimately sold by the partnership. The house was located at 3151 Tilson Road. We think the amount (estimated) of $10,000 was properly disallowed, the petitioners have failed to meet the burden of proving error in respondent's determination. The following adjustments were also made by respondent for 1950: AdjustmentAmountTaxes overstated$ 327.86Depreciation overstated780.48Truck maintenance overstated1,982.40Utilities overstated297.97Miscellaneous expenses overstated8.27Attorney fees overstated100.00Capitalized tools charged to expense1,000.00As to these items, respondent's determinations are presumed to be correct and petitioners have offered no evidence upon which we might find error. We therefore sustain respondent. Deficiencies - 1951*340 Respondent disallowed a deduction of $30,317.63 which represents the cost of building two duplex houses. The entire cost of constructing the duplex houses was charged to partnership expense for 1951. The duplexes, however, were not sold during this year, and in fact were rented in 1951. Respondent's determination is sustained. Respondent determined that petitioners overstated cost of land in 1951 by $10,000. The expenditure of $10,000 was evidenced by a check in that amount dated April 17, 1951, payable to B. J. According to a notation on the check, it was paid to B. J. for a house at 3442 McAfee Road. This was the old frame house which was on the Brand property when it was acquired in 1950. The Brand property, including the house at 3442 McAfee Road, however, was acquired in 1950 in a trade for B. J.'s house at 3175 Tilson Road and there is no acceptable evidence that there was any occasion to pay $10,000 out of partnership funds to B. J. The conflicting affidavit and testimony by Paul in this connection are not worthy of belief. We sustain respondent's determination. Petitioners also understated income from the sale of the Brand property in 1951. The partnership returned $20,118.75*341 as income from the sale. The precise amount of the correct sales price is not ascertainable but is at least $30,100. We accept this as the amount to be included in gross income and to this extent sustain respondent. The remaining adjustments for 1951 are not substantial. We sustain respondent in this respect in the absence of evidence establishing error on respondent's part. Fraud The respondent has determined additions to tax provided in section 293(b) 2 of the 1939 Code for fraud for the years 1949, 1950, and 1951 as to all petitioners. The respondent, on this issue, has the burden of proving by clear and convincing evidence that there is some deficiency in the year or years in question, some part of which in each year is due to fraud with intent to evade taxes. Respondent is not permitted to rely upon*342 his own determination as a basis for sustaining his burden. On the other hand, neither he nor we are limited to or circumscribed by his own evidence. In deciding the issue, we may consider the entire record properly before us. Respondent may rely upon circumstantial evidence and need prove only that some part of each deficiency in issue is due to fraud. . An affirmative willful attempt to defeat and evade income tax may be inferred from conduct such as false entries or alterations in the books and records, false invoices or documents, concealment of assets, covering up sources of income, failure to keep records usual in the carrying on of a business, and, in general, any conduct the likely effect of which would be to mislead or to conceal. . That there was fraud with intent to evade taxes in this case in all three years involved, we think is quite apparent from the record. We think it would serve no useful purpose to reanalyze and discuss at length our Findings, or to repeat and elaborate upon our discussion of deficiencies. Eliminating all items of the deficiencies which depend*343 on respondent's determination, we nevertheless find abundant evidence of fraud. We need only refer briefly to the consistent and persistent overstatement of cost of building materials in all three years; the treatment of the cost of the Tilson Road properties for 1949; the Faust, Griffin and Senn items for 1950; and the overstatement of cost of land in 1951; to arrive at the necessary conclusion that there was fraud in each year. The next question is what person or persons committed the fraud. There is no doubt in our minds that Paul was one of those persons. He was the partner in charge of all expenditures, wrote all checks, received all funds, took charge of the bank accounts and acted as general manager of the business. A detailed discussion of the testimony is not necessary. We need only add that an examination of the entire record leads to the necessary inference that Paul was fully aware that the frauds were being committed, and caused or participated in them. It is likewise clear that his actions in this respect occurred in all of the years in question. We therefore conclude that some part of the deficiency in each of the years in question was due to fraud on the part of*344 Paul, whose returns were likewise false and fraudulent with intent to evade taxes. While no fraud is suggested with respect to Mary L., since joint returns were filed, she is jointly and severally liable with Paul. As to B. J., the situation appears to be quite different. B. J. wrote no checks, collected no money, made no deposits, and had nothing to do with the books and records. He did little, if anything, more than supervise the laborers on the job. He appeared to rely upon Paul to handle the business affairs of the partnership other than supervising construction, and apparently did what Paul told him or left matters to Paul without question. While we are not convinced of B. J.'s complete innocence, we must conclude that, as to B. J., the respondent has failed to meet his burden of proving by clear and convincing evidence that some part of the deficiencies applicable to B. J. and Auline were due to fraud with intent to evade taxes during the years in question or that any of their returns for those years was fraudulent with intent to evade taxes. Limitations Since we have held that Paul and Mary L. filed false and fraudulent returns with intent to evade taxes for all years*345 in issue, the bar of the statute of limitations is not open to them. Sec. 276(a) of the Code of 1939. As to B. J. and Auline, however, we have found no fraud in any year. Accordingly, limitations apply for the years 1949 and 1950. There appears to be no issue before us in relation to limitations for 1951. Additions to Tax It is apparent on the basis of our rulings supra that additions to tax under section 293(b) are applicable to Paul and Mary L. for all years in issue. Conversely, no such additions are applicable to B. J. and Auline for any year. It is also apparent that additions to tax under section 294(d)(1)(A) are applicable to B. J. and Auline, as well as Paul and Mary L. for the year 1951 since no evidence was adduced in relation thereto to support an inference that respondent's determination was erroneous. Additions to tax determined as to B. J. and Auline under section 294(d)(2), for the year 1950 are not to be applied in view of our holding as to them that the deficiency determined for that year is barred by limitations. . Additions under that section are, however, applicable to Paul and Mary L. for 1950. *346 Respondent concedes that additions to tax under section 294(d)(2) are not to be applied for 1951 in dockets 68808 (B. J. and Auline) or 63832 (Paul and Mary L.). Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Paul A. Martin and Mary L. Martin, Docket No. 63832; B. J. Martin and Auline Martin, Docket No. 94362, and Paul A. Martin and Mary L. Martin, Docket No. 94363.↩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/4624463/

ELLA C. LOOSE, EXECUTRIX, ESTATE OF JACOB L. LOOSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Loose v. CommissionerDocket Nos. 8699, 8701.United States Board of Tax Appeals15 B.T.A. 169; 1929 BTA LEXIS 2908; January 31, 1929, Promulgated *2908 1. Interest accrued on corporate bonds owned by decedent but not matured at time of his death becomes part of the corpus of his estate and when collected is not income to the estate. 2. Interest coupons matured prior to death of decedent on bonds of solvent corporations which would have paid the same on presentation and which coupons were not cashed by reason of the illness of decedent, held to have been constructively received by decedent during his lifetime and to constitute income to him. Paul R. Stinson, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. VAN FOSSAN *170 In Docket No. 8699 petitioner asks redetermination of a proposed deficiency in income taxes of $650.85 for the period September 18, 1923, to December 31, 1923. In Docket No. 8701 the alleged deficiencies amount to $1,912.86 for 1922 and $12,974.86 for the period January 1, 1923, to September 18, 1923. The amount in controversy in this proceeding is $9,447.73. FINDINGS OF FACT. The following facts were stipulated in Docket No. 8699: 1. Petitioner is the executrix and sole residuary beneficiary of the will of Jacob L. Loose, deceased. Jacob*2909 L. Loose died on September 18, 1923, the petitioner was appointed executrix of his will by the Probate Court of Jackson County, Missouri, at Kansas City, and qualified as such. 2. After the death of Jacob L. Loose, but before December 31, 1923, there matured out of corporate bonds owned by him at his death interest coupons totaling $7,187.50. The petitioner as executrix collected these interest coupons during the year 1923. Of the $7,187.50 of said interest coupons, the sum of $1,451.04 accrued after the death of Jacob L. Loose, and the balance accrued prior to September 18, 1923. 3. In making her income-tax return as executrix, petitioner reported as taxable income for the period September 18, 1923, to December 31, 1923, from said coupons the sum of $1,451.04, being the portion representing interest accruing after the death of Jacob L. Loose. In her return petitioner called attention to the basis upon which she was reporting the income upon such bond coupons. 4. The petitioner reported the accrued but unmatured interest up to September 18, 1923, as a part of the gross estate of Jacob L. Loose, deceased, and paid the Federal estate tax thereon. 5. Under the will*2910 of Jacob L. Loose, deceased, the taxpayer was named sole residuary legatee. The taxpayer has paid all debts of the estate of Jacob L. Loose, deceased, and all legacies under his will, including the portion of his estate to her as residuary legatee thereunder. The taxpayer made her final settlement as executrix and was discharged by the Probate Court of Jackson County, Missouri, on the 26th day of November, 1924; the amount received by the taxpayer as residuary legatee aforesaid and now held and owned by her is far in excess of whatever may be necessary to pay all taxes *171 and other obligations, if any there be, of the estate of Jacob L. Loose, deceased. The taxpayer, because of having been executrix under the will of Jacob L. Loose, deceased, and because of being residuary legatee under the will of Jacob L. Loose, deceased, and having received the residuary estate, is liable for the payment in full of any and all taxes, including the amount herein in dispute, which are or may be owed by the estate of Jacob L. Loose, deceased, to the exclusion of other legatees and devises under the will of said Jacob L. Loose, deceased. 6. If all of the $7,187.50 in bond coupon interest*2911 collected by the petitioner as heretofore shown is taxable income to her as executrix for the year 1923, then there is a deficiency in favor of the respondent Commissioner in the sum of $650.85. If that part of such bond coupon interest which accrued prior to September 18, in the year 1923, is not taxable as income, then there is no deficiency and nothing due to the Commissioner as and for income tax for the period September 18, 1923, to December 31, 1923, from petitioner as executrix of the will of Jacob L. Loose, deceased. In Docket No. 8701 the following facts were stipulated: 1. Identical with paragraph No. 1 in Docket No. 8699. 2. Immediately upon qualifying as executrix, there came into the possession of the petitioner corporate bond interest coupons in the total sum of $34,687.50, all of which coupons matured between December 31, 1922, and September 18, 1923, during the life of Jacob L. Loose, but which he did not cash or collect prior to his death, September 18, 1923. The corporations which issued the bonds owned and held by Mr. Loose were solvent, and the interest money represented by the coupons would have been paid at maturity if such coupons had been presented*2912 for payment. 3. During his lifetime Jacob L. Loose kept his books and records and made his Federal income-tax returns for calendar years on a cash receipts and disbursement basis. 4. The taxpayer in making income-tax return for Jacob L. Loose, deceased, for the portion of the year 1923 during which he was alive, did not report those corporate bond interest coupons as taxable income of Jacob L. Loose, and called attention to this fact in her return. Taxpayer deducted $774.54 tax paid at source. 5. The $34,687.50 so received by and brought into the possession of the petitioner as executrix was reported to and found by the Commissioner to be a part of the assets of the estate of Jacob L. Loose, deceased, subject to the Federal estate tax, and the Federal estate tax thereon has been paid. 6. Identical with paragraph No. 5 in Docket 8699. 7. If the taxes (sic.) (amounts) in controversy were and are income of Jacob L. Loose for the year 1923 and taxable as such, then *172 the amount due the Commissioner is $9,477.73. If such bond coupons were and are not taxable income for the year 1923 during the lifetime of said Jacob L. Loose, then there is no deficiency*2913 and nothing due to the Commissioner as and for income taxes of Jacob L. Loose, deceased, for the period of January 1, 1923, to September 18, 1923. The following facts are also established by the record: Some five years previous to his death decedent suffered a stroke of paralysis, followed by a two-months' illness. Thereafter he was able to be around with the help of a nurse until May, 1923, when he had another severe illness from which he never recovered. On June 6, 1923, during this last illness, decedent was taken from Kansas City to his summer home in Gloucester, Mass., where he remained until his death on September 18, of that year. During the taxable years and for some years theretofore decedent had kept in a safety-deposit box in a New York bank a certain number of corporate coupon-bearing bonds. Prior to the illness of 1918 it was decedent's practice to go to New York alone twice each year to clip and cash the matured coupons on these bonds. After his first illness this trip to New York was made an incident of the trip from Kansas City to Gloucester, Mass., and return in June and September, respectively, decedent always being accompanied by his wife (executrix and*2914 petitioner herein), who performed the actual operation of clipping the coupons and attended to his other business affairs in New York. Due to the seriousness of his physical condition it would have been impossible for decedent to have gone to the bank during the trip to Gloucester and this condition existed up to the time of his death. Decedent's wife had access to the safety-deposit box but felt unable to leave her husband during his last illness. In many instances during the years 1915 to 1922 decedent did not cash bond interest coupons for several months after the same matured and often not until the next taxable year. OPINION. VAN FOSSAN: The issue raised by the facts in proceeding 8699 brings the case squarely within our decisions in , and . The bond interest which had accrued at the time of decedent's death, though the coupons had not matured, represents, nevertheless, a debt due decedent. At his death it became a part of the corpus of his estate subject to the estate tax. Upon collection by the executrix there was a conversion of a debt into its equivalent in*2915 money, but the funds so derived did not constitute income to the estate. *173 . Respondent erred in treating the same as such. The question presented in proceeding 8701 is whether or not petitioner's decedent, Jacob L. Loose, received certain income during his lifetime. Briefly the facts, more fully set out in the findings of fact, are that Loose, who kept his accounts upon a cash basis, lived in Kansas City, Mo., but kept certain interest-bearing bonds in a safety-deposit box in New York. It was his custom to stop in New York twice each year while en route between Kansas City and his summer home in Gloucester, Mass., to clip and cash the matured coupons. Decedent's wife always accompanied him on these trips. In May, 1923, Loose was suffering from a severe illness and the condition of his health prevented him from stopping for the usual mid-year business visit in New York. His disability continued until his death in September of the same year. The consequence of this situation was that the interest coupons that matured between December 31, 1922, and the time of his death on September 18, 1923, were not clipped or cashed*2916 until after his death when his estate came into the hands of his wife as executrix. It is stipulated that the issuing corporations were solvent and that the coupons would have been cashed on presentation. The only reason assigned for the failure to clip and cash the coupons was the ill health of decedent. In making the income tax return for the period of 1923 ending at decedent's death petitioner, as executrix, did not report the amount received from said coupons as income of decedent. It was, however, reported as part of the assets of the estate of decedent and the estate tax was paid thereon. Respondent determined that the decedent Loose constructively received during his lifetime the interest represented by the coupons and found a deficiency accordingly. We have repeatedly said that the doctrine of constructive receipt of income by one on a cash basis of accounting should be sparingly applied and we adhere to that position. The facts in this case, however, seem to us to present a situation constituting the exceptional case where the application of the doctrine is called for. It is stipulated that the interest coupons had matured; that the issuing corporations were*2917 solvent; and that the coupons would have been paid on presentation. Nothing remained to be done except the presentation of the coupons for cashing. This action was not taken solely because of decedent's ill health. In , salary credited to but not received by the taxpayer in the taxable year as an officer of a corporation which was controlled by the taxpayer and another person and was able to pay such salary, was held to have been constructively received. In discussing the principal of constructive receipt the Board there said: *174 Doubtless, however, there are clear cases of constructive receipt, such, for example, as that of the bond owner who chooses not to cash his coupon but to permit it to remain uncut in the possession of another. He will not be heard to say that the amount of the coupon is not his income because he did not in fact receive it. The receipt is entirely within his own control and disposition. Though the above statement was, in that case, in part obiter dicta, we believe it to be a correct enunciation of the law. A contrary holding would grant the taxpayer a practically complete right of selection*2918 of the year in which income would be reported, something not contemplated by the revenue acts. Applying the above test, clearly Loose received income. The fact and time of physical receipt have become a matter solely within his own control. Though in this case decedent was physically unable to attend to the actual operation of clipping and cashing the coupons, there is no evidence of mental infirmity and there appears no reason why this operation might not have been performed by a properly accredited agent or why the bonds might not have been sent to petitioner's home and the matter of the clipping of the copons there attended to. We do not believe the fact of the decedent's serious illness alters the legal consequence of his failure to cash the coupons. The receipt of the cash represented by the coupons was entirely within his own disposition and control. Moreover, an examination of Exhibit 2 filed by petitioner reveals that Loose often allowed bond interest coupons to lie uncashed for months or longer after maturity. Considering all the facts, we are impelled to the conclusion that the interest represented by the matured coupons here involved was constructively received*2919 by Loose before his death and that it represented taxable income to him, which should be accounted for by his personal representative. The cases urged by petitioner as authority to the contrary are all distinguishable on their facts. In , the amount of commissions involved was not determined until after the close of the year; while in , the question was whether interest due decedent at death, but uncollected, was, on collection, income to the estate or part of the corpus thereof. In , the issue was substantially identical with that in the Frank case, the same item having been taxed as income of the estate and part of the corpus. This issue is not presented in the instant case and the Board has heretofore indicated its concurrence with the conclusion of the Court of Claims that the same item may not be both income of an estate and also part of the corpus. The reasoning leading to this conclusion does not apply to income actually or constructively received by decedent before his death. What was taxable as income to*2920 *175 him in life, if in possession at death, becomes part of the corpus of his estate. As such it may properly be subject to the estate tax. The incidence of the income tax during decedent's lifetime and of the estate tax after his death on that which was income in the former and part of the corpus in the latter instance is not double taxation in the proper interpretation of that term, nor is there here the question of taxing to the decedent income received by the estate. The income here involved was received by Loose, within the meaning of the law, during his lifetime. Other cases cited by the petitioner are similary distinguishable. Judgment will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624464/

NANCY J. JOHNSON BAYER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBayer v. CommissionerDocket No. 11408-89United States Tax CourtT.C. Memo 1991-282; 1991 Tax Ct. Memo LEXIS 325; 61 T.C.M. (CCH) 2980; T.C.M. (RIA) 91282; June 24, 1991, Filed *325 Petitioner filed a motion for administrative and litigation costs requesting reimbursement pursuant to Rule 33(b), Tax Court Rules of Practice and Procedure, or alternatively, section 7430, Internal Revenue Code. Held: Because of the Federal Government's sovereign immunity, the Internal Revenue Code is the basic authority allowing an award of administrative and litigation costs against the Federal Government for cases involving Federal taxes as defined in section 7430. Pursuant to section 7430, respondent's position regarding whether the notices of deficiency were mailed to petitioner's last known address was not substantially justified. Held further: Petitioner is the prevailing party and is entitled to reimbursement for her reasonable administrative and litigation costs. Thomas J. O'Rourke, for the petitioner. Diane D. Helfgott, for the respondent. DRENNEN, Judge. 1DRENNENMEMORANDUM OPINION This matter is before the Court on petitioner's motion for litigation costs pursuant to Rule 33(b), or alternatively, section 7430*326 and Rule 231, which we treat as a motion for administrative and litigation costs. All section references are to the Internal Revenue Code, as amended and in effect during the relevant time periods. Unless otherwise stated, all Rule references are to the Tax Court Rules of Practice and Procedure. By statutory notices of deficiency, respondent determined the following deficiencies in the Federal income taxes of petitioner and Mr. Johnson (petitioner's former husband). Additions to Tax--SectionsTaxable YearDeficiency6651(a)(1)6653(a)1979$ 3,302.00$  40.80$ 272.851980$ 3,291.00$ 331.00$ 403.00 Additions to Tax--SectionsTaxable YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)1981$ 3,810.00$ 102.00$ 581.85*The underlying issue was whether the notices of deficiency were mailed to petitioner's last known address within the meaning of section 6212. Respondent eventually conceded that they were not. The issues for decision herein*327 are (1) whether petitioner is entitled to administrative and litigation costs pursuant to either section 7430 or Rule 33(b), and, if so, (2) the amount of administrative and litigation costs to be awarded. A summary of petitioner's total claim for attorneys' fees and administrative costs is as follows. ITEMAMOUNTAttorneys' Hourly Fees$ 14,062.00Miscellaneous Attorneys' Expenses$    129.69Automated Equipment Charges$    669.50Tax Court Filing Fee$     60.00IRS Fees for Freedom ofInformation Act (FOIA) material$    102.65TOTAL$ 15,023.84No claim is being made for any amounts incurred prior to August 17, 1989, with the exception of the $ 60 filing fee paid to this Court and the $ 102.65 fee paid to respondent for the material received pursuant to petitioner's FOIA request. The petition herein was filed with this Court on May 30, 1989. At that time, petitioner was a resident of Washington, D.C. Petitioner and Mr. Johnson separated in November 1979. During the summer of 1980, petitioner moved to Wichita, Kansas, and lived with her parents. Petitioner used this Wichita address as her permanent address at all relevant times herein, *328 although petitioner did not notify respondent in writing of her change of address. Petitioner and Mr. Johnson agreed to, and did, file joint Federal income tax returns for 1979 and 1980, using the filing status "married filing jointly." Mr. Johnson also filed a joint Federal income tax return on behalf of petitioner and himself for the year 1981. Petitioner did not sign this return. 2 Petitioner and Mr. Johnson were divorced in January, 1983. *329 The following is a paraphrased summary of the relevant events leading up to and including petitioner's motion for litigation costs under consideration herein. DateActivity5-23-801979 joint return was filed using Wayne, PA address. 9-9-811980 joint return was filed using Donachie Rd.,Baltimore, MD address (hereinafter Donachie.)6-23-821981 joint return was filed by husband using Donachieaddress.10-27-82Husband wrote to R requesting more time for audit,citing his difficulty getting information from his wifesince she had moved. Husband also informed Rof husband's change of address to 502 Evesham,Baltimore, MD (hereinafter 502 Evesham or Evesham.)1-26-83Husband again requested more time. He wrote on bottomof Form 872-A, Consent to extend the time to assesstax, that he was in Kansas where he was trying to getthe information from his "ex-wife." This form listedboth spouses' names and alleged signatures.2-28-83Notice of deficiency re: 1979 mailed to 502 Evesham.8-3-83Notice of deficiency re: 1980-81 erroneously mailed toan unknown Annapolis, MD address.9-19-83Notice of deficiency re: 1980-81 mailed to 502 Evesham.8-13-84Notice of deficiency re: 1981 again mailed to erroneousAnnapolis address.5 YEAR HIATUS5-11-89R issued notice of levy on P's bank account in Kansasand seized $ 3,465.39.5-18-89R issued notice of levy on P's employer in Kansas.5-24-89P filed Freedom of Information Act (hereinafter FOIA)request for relevant documents from R.5-30-89P filed petition with Tax Court.7-89FOIA information received by P.7-17-89R filed motion to extend time in which to answerpetition since R had not received his ownadministrative files re: years in issue.8-16-89Counsel for R and P met. R and P reviewed all FOIAinformation received by P. P asked R to concede.8-17-89P sent letter to R confirming P's position and againasked R to concede tax deficiencies, repay amountsseized from levies, and pay P's litigation costs.9-7-89R received his administrative files re: years at issue.9-12-89R filed Answer to P's petition denying all materialallegations in petition.9-12-89R sent letter to P requesting all addresses at whichP lived from 1980-1983.9-14-89P sent letter to R with requested information. 6 MONTH HIATUS3-13-90P sent letter to R again requesting that R concede.4-2-90P filed motion to dismiss.4-26-90R filed response to P's motion and conceded that anotice of deficiency had not been mailed to P's lastknown address.5-1-90Tax Court entered Order of Dismissal for Lack ofJurisdiction5-31-90P filed motion for award of administrative andlitigation costs.6-1-90Tax Court issued Order setting aside previous Orderof Dismissal and reinstating case for purposes ofthe motion for award of administrative and litigationcosts.7-27-90R filed his objection to P's motion.8-30-90P filed a reply to R's objection.*330 After receiving an extension of time for filing his Answer, respondent received his administrative files. Respondent subsequently filed an Answer to the petition which denied all material allegations, including the restatement of the amounts in controversy. Petitioner's attorney advised respondent at their first meeting held on August 16, 1989, that it was important to petitioner that this case be resolved quickly in order to minimize costs to petitioner. Petitioner's concern for a speedy resolution was repeated at subsequent meetings. Because respondent had been successful in seizing petitioner's savings and levying on her wages, petitioner did not have the funds to pursue a protracted legal proceeding. Additionally, on March 13, 1990, petitioner's attorney advised respondent that petitioner was eligible for a promotion but could not be considered for that promotion until her tax liability at issue was resolved. An analysis of the detailed invoices from petitioner's attorney, attached to his affidavit filed with the motion for administrative and litigation costs, yields the following information regarding amounts billed to petitioner for litigation and administrative costs *331 incurred in this proceeding. For convenience, we have bifurcated the fees and administrative costs into several different time periods, as indicated below. Amounts claimed by petitioner through 1-31-90: 3Attorneys' Fees:O'Rourke3.1 hours x $ 175$  542.50Townsend.5 hour x $  90$   45.00Townsend.7 hour x $  95$   66.50Subtotal:$ 654.00Costs claimed:Filing fee$  60.00FOIA Documents fee$ 102.65Subtotal:$ 162.65TOTAL:$ 816.65Amounts incurred from 2-1-90 through 4-24-90 relating to petitioner's Motion to Dismiss filed on 4-2-90: Attorneys' Fees:O'RourkeFebruary .5 hr.March17.2 hrs.April 2.8 hrs.20.5 hours x $ 190$ 3,895.00MansourFebruary17.6 hrs.March14.7 hrs.April 3.6 hrs.35.9 hours x $  90$ 3,231.00Mansour 5.4 hours x $  00.00Subtotal:$ 7,126.00Costs claimed:Word processing and computer research$   650.00Miscellaneous Attorneys' Expenses$   104.95Subtotal:$   754.95TOTAL:$ 7,880.95*332 Amounts incurred from 5-4-90 through 5-25-90 relating to petitioner's motion for award of administrative and litigation costs: Attorneys' Fees:O'Rourke23.3 hours x $ 190$ 4,427.00 4.1 hours x $   0$     0.00Townsend .5 hour x $ 105$    52.50Mansour32.5 hours x $  90$ 2,925.0020.0 hours x $   0$     0.00Subtotal:$ 7,404.50Costs:Word processing and computer research$   422.50Miscellaneous Attorneys' Expenses$    80.75Subtotal:$   503.25TOTAL:$  7,907.75TOTAL FEES AND COSTS INCLUDED IN AFFIDAVITS:$ 16,605.35We note that this total is somewhat higher than the total claimed by petitioner. This is partly due to mathematical errors by petitioner's counsel in summarizing this information, and partly due to an initial low estimate of the time spent preparing the motion for administrative and litigation costs. However, for purposes herein petitioner claims reimbursement for only a portion of the time billed for preparing the motion for administrative and litigation costs. She claims reimbursement for 20 hours for Mr. O'Rourke's time and 20 hours for Mr. Mansour's time spent preparing the motion. Petitioner's*333 motion for administrative and litigation costs and accompanying legal memorandum include arguments supporting recovery pursuant to either Rule 33(b) or section 7430. Respondent bases his objections to petitioner's motion for administrative and litigation costs solely on arguments pertaining to section 7430. Respondent contends his position was substantially justified at all times during this proceeding. Petitioner's response to respondent's objection contends that section 7430 is applicable only if we find Rule 33(b) not to apply to these facts and circumstances. We will first analyze petitioner's contentions as stated in her motion for administrative and litigation costs pursuant to Rule 33(b). Rule 33(b) provides as follows: Rule 33. Signing of Pleadings. * * * (b) Effect of Signature: The signature of counsel or a party constitutes a certificate by the signer that the signer has read the pleading, that, to the best of the signer's knowledge, information, and belief formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed*334 for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. * * * If a pleading is signed in violation of this Rule, the Court, upon motion or upon its own initiative, may impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, including reasonable counsel's fees.Petitioner contends respondent's Answer is not well grounded in fact nor warranted by existing law. Petitioner further contends respondent's Answer denied all material allegations for purposes of delay and to needlessly increase the cost of litigation. Petitioner alleges that an award pursuant to Rule 33(b) is not subject to the $ 75 per hour limit for attorneys' fees imposed by Congress in section 7430. Petitioner cites two factors indicating Rule 33(b) is not subject to the $ 75 per hour limit. One, this Court has recognized that reasonable fees charged by tax attorneys in metropolitan areas frequently exceed the $ 75 per hour limit imposed by Congress, Stieha v. Commissioner, 89 T.C. 784">89 T.C. 784, 792 (1987);*335 and two, respondent does not dispute that petitioner's counsel's fees are in accord with those normally charged by attorneys with similar experience in the Washington, D.C., metropolitan area. We first decide whether petitioner may recover all of her litigation costs pursuant to Rule 33(b). The stumbling block is the longstanding principle of sovereign immunity. In general, the United States government is immune from any suits brought against it by private parties. Sovereign immunity must be specifically waived by Congress. As the Supreme Court has long held, "The general rule is that, in the absence of a statute directly authorizing it, courts will not give judgment against the United States for costs or expenses." United States v. Chemical Foundation, Inc., 272 U.S. 1">272 U.S. 1, 20, 71 L. Ed. 131">71 L. Ed. 131, 47 S. Ct. 1">47 S. Ct. 1 (1926). As we discussed in McQuiston v. Commissioner, 78 T.C. 807">78 T.C. 807 (1982), affd. without opinion 711 F.2d 1064">711 F.2d 1064 (9th Cir. 1983), there was no authority for this Court to award costs or attorneys' fees against the Federal Government prior to 1983. This was subsequently changed by Congress when it enacted section 7430 which is applicable to civil proceedings*336 commenced after February 28, 1983. Section 7430 constitutes a specific waiver by Congress of the sovereign's immunity against suit by a private party for litigation costs. The legislative history confirms that when enacted, section 7430 was intended to be the only exception to the Government's sovereign immunity against suits for litigation costs in Federal tax cases. The House of Representatives Ways and Means Committee Report, the Senate Finance Committee Report and the House-Senate Conference Committee Report all contain the following statement: "Section 7430 is the exclusive provision for awards of litigation costs in any action or proceeding to which it applies." H. Rept. 99-426, 1986-3 C.B. (Vol. 2) 839; S. Rept. 99-313, 1986-3 C.B. (Vol. 3) 198; H. Rept. 99-841 (Conf.), 1986-3 C.B. (Vol. 4) 800. 4*337 As the Supreme Court held: Except to the extent it has waived its immunity, the Government is immune from claims for attorney's fees, Alyeska [Pipeline Co. v. Wilderness Society, 421 U.S. 240">421 U.S. 240, 44 L. Ed. 2d 141">44 L. Ed. 2d 141, 95 S. Ct. 1612">95 S. Ct. 1612,] 267-268 and n. 42. Waivers of immunity must be "construed strictly in favor of the sovereign," McMahon v. United States, 342 U.S. 25">342 U.S. 25, 27, 96 L. Ed. 26">96 L. Ed. 26, 72 S. Ct. 17">72 S. Ct. 17 (1951), and not "enlarge[d] . . . beyond what the language requires." Eastern Transportation Co. v. United States, 272 U.S. 675">272 U.S. 675, 686, 71 L. Ed. 472">71 L. Ed. 472, 47 S. Ct. 289">47 S. Ct. 289 (1927). In determining what sorts of fee awards are "appropriate," care must be taken not to "enlarge" * * * [the] waiver of immunity beyond what a fair reading of the language of the section requires.Ruckelshaus v. Sierra Club, 463 U.S. 680">463 U.S. 680, 685, 77 L. Ed. 2d 938">77 L. Ed. 2d 938, 103 S. Ct. 3274">103 S. Ct. 3274 (1983). Rule 33(b) was amended by this Court in 1986 to provide sanctions, including an award of reasonable expenses and attorneys' fees, in certain circumstances. As indicated in the note following the amended Rule 33(b): The amendment to par. (b) of Rule 33 is derived from the 1983 amendment to Rule 11 of the Federal Rules of Civil Procedure. It is designed to emphasize the responsibilities*338 of counsel and deter dilatory and abusive tactics by imposing effective sanctions therefor. The amendment imposes upon counsel the duty to make reasonable inquiry as to both the facts and the law prior to the filing of any pleading. The standard is one of reasonableness under the circumstances. What constitutes a reasonable inquiry may depend on such factors as how much time for investigation was available to the signer; whether he had to rely on a client for information as to the underlying facts; whether the pleading was based on a plausible view of the law; or whether he depended on forwarding counsel or another member of the bar. Although the Rule as amended also applies to unrepresented parties, the Court has discretion to take into account the special circumstances that may arise in pro se situations.Amendments to Rules of Practice and Procedure of the United States Tax Court, 85 T.C. 1121">85 T.C. 1121, 1126 (effective July 1, 1986). The Fourth Circuit has considered a claim for attorney's fees sought by a taxpayer against the Federal Government pursuant to Rule 11 of the Federal Rules of Civil Procedure (hereinafter Rule 11), regarding tax refund litigation*339 brought in a Federal District Court. As noted in the above quotation, Rule 33(b) is derived from Rule 11, indeed the language of Rule 33(b) is taken directly from Rule 11. The Fourth Circuit held: Section 7430(a) by its terms governs the availability of costs and fees in "any civil proceeding . . . brought by or against the United States . . . [for the] collection of any tax," * * *. This section prescribes in detail how and under what circumstances fees may be allowed in litigation over federal taxes. This precision would be pointless if fees could also be awarded in such cases under Rule 11 standards. For this reason, section 7430 must be considered the only waiver of sovereign immunity in this context, and the exclusive authority for an award of attorney's fees in the class of cases described by section 7430. Rule 11 does not afford [the taxpayer] a basis for recovery.United States v. McPherson, Jr., 840 F.2d 244">840 F.2d 244, 246 (4th Cir. 1988). Because this case is appealable to the District of Columbia Circuit, we are not bound to follow the Fourth Circuit. Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971).*340 However, we note that the District of Columbia Circuit, which we are bound to follow, has awarded fees against the Federal Government in very strict compliance with the appropriate Federal statute. Hirschey v. F.E.R.C., 250 U.S. App. D.C. 1">250 U.S. App. D.C. 1, 777 F.2d 1">777 F.2d 1, 5 (D.C. Cir. 1985). We also conclude that statutory law provides the authority herein for the Federal Government's waiver of sovereign immunity for purposes of an award of administrative and litigation costs. Alternatively, petitioner argues she is entitled to an award of costs pursuant to section 7430 and Rule 231. Section 7430, as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3743-3747 (applicable to proceedings commenced after November 10, 1988), provides that the prevailing party may be awarded a judgment for reasonable administrative costs incurred in connection with administrative proceedings within the Internal Revenue Service, and reasonable litigation costs incurred in connection with a court proceeding. Any party in any proceeding is considered the prevailing party only if it is established that (1) the position of the United States in the proceeding was not substantially*341 justified; (2) the party substantially prevailed with respect to the amount in controversy or with respect to the most significant issue(s) presented; and (3) the party in question has a net worth not in excess of 2 million dollars at the time the proceeding was commenced. Sec. 7430(c)(4)(A). Additionally, a judgment for reasonable litigation costs will not be awarded unless we determine that the prevailing party had exhausted the administrative remedies available within the Internal Revenue Service prior to commencing an action in this Court. Sec. 7430(b)(1). Respondent does not contend that petitioner unreasonably protracted the Court proceeding within the meaning of section 7430(b)(4). Respondent concedes all issues except that the position of the United States was not substantially justified. 5 Additionally, in the event we find that petitioner is the prevailing party, respondent contends that the amount of costs claimed by petitioner is not reasonable. *342 In order to determine whether or not the position of the United States was not substantially justified, we must determine when the position of the United States was first established. Pursuant to section 7430(c)(7), the position of the United States is the position taken by respondent in the court proceeding and in the administrative proceeding as of the earlier of (1) the date petitioner receives the notice of the decision of the Internal Revenue Service Office of Appeals, or (2) the date of the notice of deficiency. The applicable dates herein are February 28, 1983, and August 3, 1983, the dates the notices of deficiency for 1979 through 1981 were initially issued by respondent. The "substantially justified" standard applied to respondent is a "reasonableness standard," i.e., whether respondent's actions were substantially justified during the relevant time period in light of legal precedents as applied to the factual development of the case. Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 84 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988). As we noted in Sher, we will continue to look to the legislative history for section 7430 as it was enacted in 1981*343 for guidelines. The relevant legislative history is as follows: The committee intends that the determination by the court on this issue is to be made on the basis of the facts and legal precedents relating to the case as revealed in the record. Other factors the committee believes might be taken into account in making this determination include, (1) whether the government used the costs and expenses of litigation against its position to extract concessions from the taxpayer that were not justified under the circumstances of the case, (2) whether the government pursued the litigation against the taxpayer for purposes of harassment or embarrassment, or out of political motivation, and (3) such other factors as the Court finds relevant. * * *H. Rept. 97-404, at 12 (1981). A taxpayer seeking litigation costs bears the burden of proving entitlement to them. To meet this burden, the taxpayer must show that legal precedent does not substantially support the government's position given the facts available to respondent. Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685">94 T.C. 685 (1990); DeVenney v. Commissioner, 85 T.C. 927">85 T.C. 927, 930 (1985).*344 The underlying issue in petitioner's case is whether respondent mailed any of the notices of deficiency to petitioner's last known address. Whether or not the notices of deficiency were properly mailed is a factual determination upon which the taxpayer has the burden of proof. Rule 142(a). Whenever there is a factual determination, respondent is not obliged to concede the case until he receives the necessary documentation to prove the taxpayer's contention. See Egan v. Commissioner, 91 T.C. 705">91 T.C. 705, 713 (1988); Brice v. Commissioner, T.C. Memo 1990-355">T.C. Memo 1990-355. At the very latest, respondent received the necessary documentation on September 7, 1989, when he received the relevant administrative files. Respondent had previously reviewed this same information at the August 16, 1989, meeting with petitioner's counsel. Respondent contends he was not certain after reviewing his administrative files that he had clear and concise notice that petitioner and Mr. Johnson had established separate residences. Therefore, he contends, it was not clear that he was required to send duplicate notices of deficiency pursuant to section 6212(b). Accordingly, respondent*345 contends he was substantially justified in his position. Section 6212(b)(2) provides that if respondent has been notified by either spouse that separate residences have been established, then duplicate originals of the joint notice of deficiency shall be sent to each spouse at his last known address. We interpreted this statutory provision in Abeles v. Commissioner, supra at 1030-1031, and held: compliance with * * * [section 6212(b)(2)] requires respondent to send duplicate originals of the joint notice of deficiency to each spouse's last known address whenever respondent has been notified, prior to the time that the notice of deficiency is to be issued, that the joint filers maintain separate last known addresses. Further, this rule shall apply so long as respondent is given notice that the two spouses do not share the same last known address, even if respondent is given notice of only one of such spouses' last known addresses. [Citations omitted.]After reviewing the record we disagree with respondent's contentions. Respondent's administrative files contain ample information confirming that petitioner and Mr. Johnson had established separate*346 residences. Therefore, pursuant to section 6212(b), respondent was required to send duplicate originals of the notices of deficiency to petitioner and Mr. Johnson at their separate last known addresses. A taxpayer's last known address is the address noted on that taxpayer's last filed Federal income tax return absent clear and concise notification to the contrary. Abeles v. Commissioner, 91 T.C. 1019 (1988). Petitioner did not give respondent clear and concise notice of any change in her address. Petitioner's address on her last filed return was the Donachie address, to which no notice of deficiency was sent. Respondent had received all relevant information as outlined above by September 7, 1989. Respondent then requested all addresses at which petitioner lived during the relevant time period, which he received on September 14, 1989. Respondent then did nothing for six months. Petitioner wrote another letter asking respondent to concede based upon the facts contained in the administrative files. Respondent again did nothing and petitioner's attorneys proceeded by filing the motion to dismiss, incurring $ 7,881 in attorneys' fees. All factual information*347 contained in the motion to dismiss was also contained in respondent's administrative files. Respondent conceded the case shortly after the motion to dismiss was filed. We find that respondent's position during the time period prior to his concession was not substantially justified. Respondent did nothing for over six months when there was clear evidence in his administrative files that he had not issued a valid notice of deficiency to petitioner. We find this inactivity to be unreasonable. It appears from the record that respondent was using the costs and expenses of litigation to extract concessions from the taxpayer that were not justified under the circumstances of the case. Therefore, we hold that petitioner is the prevailing party and is entitled to an award of administrative and litigation costs pursuant to section 7430. The next issue for our decision is whether the amount of petitioner's requested litigation costs is reasonable, and, if not, the amount of litigation costs and administrative fees to be awarded. Therefore, we must decide whether the miscellaneous costs, the number of hours billed, and the rate at which those hours were billed are reasonable as claimed*348 by petitioner. Section 7430(c)(1) defines reasonable litigation costs in part as reasonable fees paid or incurred for the services of attorneys in connection with the court proceeding. Reasonable administrative costs are likewise defined. Sec. 7430(c)(2)(B). In cases brought pursuant to section 7430 the taxpayer has the burden of proof. 6 In cases involving the factual determination of a taxpayer's last known address, it is often difficult for a taxpayer to prove why respondent sent the notice of deficiency to the wrong address, and subsequently why respondent pursued the case. On this record, we believe this warrants expenditure of additional time by counsel to adequately prepare and present the taxpayer's case. Petitioner's counsel billed 56.4 hours regarding work done preparing the motion to dismiss. We do not find this to be unreasonable. Petitioner's counsel billed 57.5 hours regarding work done preparing the motion for litigation costs; however, petitioner is only claiming reimbursement for 40 hours. We find 40 hours to be reasonable considering the detailed motion and affidavits submitted by petitioner. Amounts billed prior to February 1, 1990, which are amounts *349 incurred prior to preparation of the motion to dismiss, will not be reimbursed because the taxpayer must bear the expense of establishing the factual basis for the taxpayer's position against respondent. See Egan v. Commissioner, 91 T.C. 705">91 T.C. 705 (1988). Respondent argues that previously we have limited the number of hours for an award of litigation costs in a case involving the factual determination of a taxpayer's last known address to 35 hours. Hubbard v. Commissioner, 89 T.C. 792">89 T.C. 792 (1987). Respondent's argument is misleading. In Hubbard, counsel for the taxpayer claimed reimbursement for 35 hours and we awarded the full amount claimed. This does not mean that we limited the compensable hours to 35; that was*350 all that was claimed. Section 7430(c)(1)(B)(iii) limits the hourly rate for attorneys' fees to $ 75, with allowances for increases in the cost of living or other special factors. We have held that this rate may be adjusted for increases in the cost of living. Cassuto v. Commissioner, 93 T.C. 256">93 T.C. 256 (1989), and section 7430(c)(1)(B)(iii) specifically authorize this. Respondent argues that the cost of living adjustments to the $ 75 per hour rate limitation should be computed from January 1, 1986, the effective date of amended section 7430(c)(1)(B)(iii) which first imposed the hourly restriction. Petitioner argues the cost of living adjustments should be computed from October 1, 1981, the date of the original enactment of the Equal Access to Justice Act (hereinafter EAJA). As we discussed in Cassuto v. Commissioner, supra at 272-273, Congress amended section 7430(c)(1)(B) in order to conform section 7430 with the EAJA provision for attorneys' fees, e.g., 28 U.S.C. section 2412(d)(2)(A). Therefore, as we concluded in Cassuto v. Commissioner, supra, the cost of living increases date from 1981. The District of Columbia*351 Circuit, to which this case is appealable, also has allowed the cost of living adjustment dating from 1981. Hirschey v. F.E.R.C., 250 U.S. App. D.C. 1">250 U.S. App. D.C. 1, 777 F.2d 1">777 F.2d 1, 5 (D.C. Cir. 1985). As we discussed in Cassuto v. Commissioner, supra at 273, the Consumer Price Index (hereinafter CPI) for all urban consumers (hereinafter CPI-U) was 279.3 as of October 1, 1981, using 1967 as the standard reference base period. The hours billed by petitioner's attorneys for which petitioner is entitled to be reimbursed were all rendered between February and May of 1990. As detailed in the Appendix, the hourly limit during these months ranges from $ 102.90 to $ 103.88. Because Mr. Mansour's hourly rate of $ 90 is within this limitation, his time will be reimbursed at the requested rate. Mr. O'Rourke's time will be reimbursed as set forth in the Appendix. Petitioner, in her legal memorandum in support of the motion for litigation costs, also argues that other special factors are present in this case to warrant an award of the full amount claimed, i.e., the $ 190 per hour rate charged by Mr. O'Rourke. Petitioner contends respondent's conduct was egregious and warrants an award*352 of all fees requested. We conclude that although many of respondent's actions appear to have been taken for purposes of delay to discourage petitioner from litigating this case, those very factors were cited in the legislative history when Congress enacted section 7430 as quoted above. We therefore presume that the subsequent limitations placed upon claims for reimbursement were seen by Congress as adequate compensation in situations such as petitioner's. Therefore, we hold that the hourly rate of compensation for purposes herein may not exceed the basic cap of $ 75 per hour plus the appropriate cost of living increases as computed in the Appendix. The miscellaneous expenses claimed by petitioner are allowed in part as follows. As noted in Hirschey v. F.E.R.C., supra at 6, overhead and secretarial fees are traditionally covered by attorneys' fees and are not charged separately. The affidavits submitted by petitioner's counsel also include a single amount each month claimed for "automated equipment time." This is explained as amounts expended for word processing and computer research. We decline to award any costs for amounts expended for word processing, *353 as this is a part of general secretarial fees. However, the portion of the $ 1,072.50 claimed for automated equipment time that is specifically for computer research is an allowable expense under section 7430. Hirschey v. F.E.R.C., supra; Keyava Construction Co. v. United States, 15 Cl. Ct. 135">15 Cl. Ct. 135 (1988). Section 7430(c) defines reasonable administrative and litigation costs essentially as those administrative fees imposed by respondent or by this Court, plus amounts expended for expert witnesses and expert or third party reports necessary for litigation in addition to reasonable hourly fees paid for the services of attorneys. Under Hirschey v. F.E.R.C., supra, law office overhead does not fall within any of these categories and so is not allowed. The miscellaneous expenses billed by the attorneys are not within any categories specified in section 7430 and are not allowed. Hirschey v. F.E.R.C., supra at 6. However, amounts expended for computer research necessary for developing the case for litigation are within the parameters of this definition. See Hirschey v. F.E.R.C., supra;*354 Keyava Construction Co. v. United States, supra.The filing fee and FOIA documents fee, totalling $ 162.65, are also within this definition. In conclusion, pursuant to section 7430, we award petitioner attorneys' fees in the amount of $ 9,229.27 as set forth in the appendix. In addition, we award petitioner costs in the amount of $ 162.65 plus the portion of the $ 1,072.50 that is specifically for computer research. An appropriate order will be issued. APPENDIX All Consumer Price Index (CPI) information herein is taken from the CPI Detailed Report, United States Department of Labor, Bureau of Labor Statistics, which is published monthly. All information is from either the December 1981 edition or from the May 1990 edition. All information is from Tables entitled Consumer Price Index for All Urban Consumers: U.S. city average (CPI-U). The CPI-U measures the average change in prices of goods and services purchased by all urban consumers. Beginning with the release of data for January 1988, the standard reference base period for the Consumer Price Index is 1982-84. The figures we used in Cassuto v. Commissioner, supra, utilized*355 the former 1967 reference date. Both figures are set forth below. CPI-U1967 = 1001982-84 = 100September 30, 1981279.393.3 7December 1981281.594.0February 1990383.3128.0March 1990385.5128.7April 1990386.2128.9May 1990386.9129.2For purposes of figuring the cost of living percentage increase on the $ 75 hourly limit for attorneys' fees, we will use the standard reference base period of 1982-84 because it is more current. CPI increaseLimit onHourlysince 10/81Hourly RateHoursRateFees February 199037.2%$ 102.90O'Rourke.5$ 102.90$    51.45Mansour17.6$  90.00$ 1,584.00March 199037.9%$ 103.43O'Rourke17.2$ 103.43$ 1,779.00Mansour14.7$  90.00$ 1,323.00April 199038.2%$ 103.65O'Rourke2.8$ 103.65$   290.22Mansour3.6$  90.00$   324.00May 199038.5%$ 103.88O'Rourke20.0$ 103.88$ 2,077.60Mansour20.0$  90.00$ 1,800.00TOTAL ATTORNEYS' FEES AWARDED$ 9,229.27*356 Footnotes1. By order of the Chief Judge, petitioner's motion for award of litigation costs was assigned to Judge Drennen for disposition.↩*. To be determined.↩2. Although respondent is not held accountable for addresses reflected on Federal income tax returns filed subsequent to the date the notices of deficiency were issued, Abeles v. Commissioner, 91 T.C. 1019">91 T.C. 1019, 1035↩ (1988), we note that petitioner filed a Federal income tax return for the year 1981 using the filing status "married filing separate" on August 14, 1984. This return showed a refund due petitioner, and reflected her address in Wichita, Kansas. There is no evidence contained in the fully-stipulated record regarding returns filed by petitioner for taxable years subsequent to 1981.3. As noted above, petitioner does not claim reimbursement for attorneys' fees incurred prior to 8-17-89.↩4. We note that section 6673 (applicable to positions taken after December 31, 1989, in proceedings which are pending on, or commenced after such date) also provides a waiver of sovereign immunity for an award of costs against the United States in Federal tax cases in certain situations not applicable herein. Section 6673 allows this Court to require, in part, that the United States pay excess costs, expenses, and attorneys' fees if an attorney appearing on behalf of the Commissioner has multiplied the proceedings in any case unreasonably and vexatiously.↩5. See Commissioner, I.N.S. v. Jean, 496 U.S. 154">496 U.S. 154, 110 S. Ct. 2316">110 S. Ct. 2316, 110 L. Ed. 2d 134">110 L. Ed. 2d 134↩ (1990) wherein the Supreme Court recognized the validity of awards for "fees for fees" and held that an award of fees under the Equal Access to Justice Act does not require a second finding that the government's position in fee litigation itself was not substantially justified.6. In civil cases brought pursuant to the Equal Access to Justice Act regarding claims for litigation costs, the government bears the burden of proof. Equal Access to Justice Act, Pub. L. 96-481, 94 Stat. 2325. See 5 U.S.C. sec. 504 (1988); 28 U.S.C. sec. 2412 (1988)↩.7. This figure was mathematically determined from the December 1981 figures.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624465/

WILLIAM D. PERKINS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPerkins v. CommissionerDocket No. 7794-76.United States Tax CourtT.C. Memo 1977-158; 1977 Tax Ct. Memo LEXIS 281; 36 T.C.M. (CCH) 669; T.C.M. (RIA) 770158; May 25, 1977, Filed; As Amended June 10, 1977 William D. Perkins, pro se. Thomas R. Ascher, for the respondent. DRENNENMEMORANDUM OPINION. DRENNEN, Judge: On October 8, 1976, respondent filed a motion to dismiss the petition in this case on the grounds that it was not timely filed within the time prescribed by sections 6213(a) or 7502 of the Internal Revenue Code of 1954. 1 Petitioner*282 filed an objection to the motion to dismiss for the reason that the petition was allegedly placed in a receptacle of the U.S. Post Office on the night of the last day for filing a timely petition and that it apparently was not picked up and postmarked until the next day. Respondent's motion was set for hearing in Detroit, Mich., on March 14, 1977. Respondent appeared by counsel and petitioner was present in person and was accompanied by an attorney admitted to practice law in Michigan but not admitted to practice in the U.S. Tax Court. Upon receiving his assurance that he would immediately apply for admission to practice in the Tax Court, the Court recognized the attorney as counsel for petitioner for purposes of the hearing. Oral arguments were heard from counsel for both parties and from petitioner. Respondent also filed with the Court a written memorandum of authorities in support of his motion. Thereafter, at the request of petitioner and his counsel, the Court took respondent's motion under advisement in order to give petitioner time to file a written memorandum of authorities in support of his position. *283 Petitioner has failed to file the written memorandum within the time provided by the Court so the Court will consider respondent's motion on the written memorandum filed by respondent and the oral argument made in support of petitioner's objection by petitioner and his counsel. Respondent mailed a notice of deficiency to petitioner William D. Perkins by certified mail on May 17, 1976, determining deficiencies in petitioner's income tax for each of the years 1969 through 1973, and also asserting additions to tax under section 6653(b) of the Code for each of those years except 1973. Petitioner mailed to the Court a petition on a form provided by the Court, primarily for use in small tax cases to be conducted under section 7463 of the Code, which was received and filed by the Court on August 20, 1976. A clearly legible U.S. postmark was stamped on the envelope containing the petition which bore the date August 17, 1976. Section 6213(a) provides that within 90 days after the notice of deficiency is mailed a taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. This 90-day period for filing a petition is jurisdictional and this Court has no jurisdiction*284 unless the petition is timely filed. Denman v. Commissioner,35 T.C. 1140">35 T.C. 1140; Estate of Moffat v. Commissioner,46 T.C. 499">46 T.C. 499. However, section 7502 provides that if a document required to be filed within a prescribed period is, after such period, delivered by U.S. mail to the office with which the document is required to be filed, the date of the U.S. postmark stamped on the cover in which the document is mailed shall be deemed to be the date of delivery. The petition herein was received by the Court and filed on August 20, 1976, which was the 95th day after the mailing of the notice of deficiency. Consequently, the petition was not timely filed and this Court has no jurisdiction to redetermine the deficiencies. Petitioner asserted in argument that when he received the notice of deficiency he attempted to contact the Tax Court in Detroit for information about filing a petition but could find no address for it; that when he finally wrote to the Court in Washington he received from the Clerk of the Court a form petition for use in small tax cases and he was confused about the form of petition he should use for his case which involved more than $1,500, *285 the limit prescribed in section 7463 for "small tax cases." 2 He finally contacted an attorney who advised him that it was the last day for filing a timely petition and to fill in the form that he had and mail it to the Court at once. Petitioner allegedly placed the petition in a mail box that night, which presumably would have been Sunday, August 15, since that was the 90th day after the mailing of the notice of deficiency. * Petitioner recognizes that the postmark date on the envelope was too late but argues that his confusion over not being able to find the Tax Court in Detroit and then receiving a small tax case form petition from the Clerk of the Court should excuse his late filing, particularly in light of the fact that he deposited the petition in the U.S. mail box on the 90th day. *286 In light of the amount of the deficiencies involved in this case, we are reluctant to deny petitioner's equitable plea because it may be difficult for petitioner to raise enough money to pay the deficiency first and then bring an action for a refund in the District Court or the Court of Claims. However, since the timely filing of a petition is jurisdictional in this Court, we cannot extend our jurisdiction because of the alleged circumstances. We are at somewhat of a loss to understand why petitioner should have been confused about where and how to file a petition with the Tax Court.The notice of deficiency sent to petitioner describes in some detail how, when, and where the taxpayer should file a petition in this Court if he chooses to do so. Presumably petitioner received a copy of the rules of this Court along with the form petition, which also describes how to file a petition in this Court and contains a form of petition for use in all cases. 3 Furthermore, even if petitioner did not receive the rules, he could have consulted an attorney prior to the last day for filing the petition or he could have made certain that a timely postmark was placed on the envelope or a certified*287 or registered mail receipt. See sec. 7502(c).With respect to petitioner's argument that placing the envelope containing the petition in a U.S. mail box on the 90th day should be considered timely filing, the authority is all against petitioner. Subsection (c) of section 301.7502-1 of the regulations provides: (c) Mailing requirements. (1) Section 7502 is not applicable unless the document is mailed in accordance with the following requirements. * * *(iii)(a) * * * If the postmark does not bear a date on or before the last date, or the last day of the period, prescribed for filing the document, the document will be considered not to be filed timely, regardless of when the document is deposited in the mail. * * * If the postmark on the envelope or wrapper is not legible, the person who is required to file the*288 document has the burden of proving the time when the postmark was made. * * * Under circumstances very similar to those in this case this Court held in Estate of Moffat v. Commissioner,supra, that the timely mailing-timely filing statute (sec. 7502) does not make the filing date depend on when the cover containing the petition was placed in a U.S. mailbox, citing authorities in support thereof. The Court also distinguished cases in which the postmarks had been illegible, thus giving the taxpayers the opportunity to prove by evidence aliunde the time when the postmark was made. As in the Moffat case, the postmark here is clearly legible and only that date can be considered the date of delivery. Since that date was after the 90-day period had expired we must grant respondent's motion to dismiss for lack of jurisdiction. An appropriate order will be entered. Footnotes1. All section references are to the Internal Revenue Code of 1954.↩2. Upon request the Clerk of the Tax Court will mail to small taxpayers a packet which contains a printed form petition, instructions for using same and a booklet containing the Rules of Practice and Procedure of the U.S. Tax Court. A petition on this form will be accepted and filed by the Clerk regardless of the amount of deficiency involved in order to preserve jurisdiction; it can be amended later if necessary. na1 By Official Tax Court Order dated June 10, 1977, and signed by Judge Drennen↩, this Sentence was revised.3. A separate notice of deficiency was issued to petitioner's wife with an amount which qualified as a small tax case.A petition was filed by her at the same time. Shirley J. Perkins,↩ docket No. 7795-76S. Respondent's motion to dismiss her petition was heard at the same time the motion in this case was heard but the cases have not been consolidated.

01-04-2023

11-21-2020

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ABE SEROT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSerot v. CommissionerDocket Nos. 13904-90, 25391-92United States Tax CourtT.C. Memo 1994-532; 1994 Tax Ct. Memo LEXIS 543; 68 T.C.M. (CCH) 1015; October 24, 1994, Filed *543 Decisions will be entered under Rule 155. For petitioner: Mark E. Cedrone. For respondent: Michael P. Corrado and Ruth Spadaro. DAWSON, DINANDAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These consolidated cases were assigned to Special Trial Judge Daniel J. Dinan pursuant to section 7443A(b)(4) and Rules 180, 181, and 1983. 1 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE DINAN, Special Trial Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax in docket No. 13904-90 as follows: YearDeficiency1 Sec. 6653(b) 1979$ 16,791$ 8,395198040,15620,078198181,29940,649198267,42833,714*544 Respondent determined deficiencies in petitioner's Federal income taxes in docket No. 25391-92 as follows: YearDeficiency1985$ 7,08619864,419After petitioner's concessions, 2 the issues for decision are: (1) Whether petitioner's two wholly owned corporations, Lauren Beth, Inc., and Living Better, Inc., should be disregarded for Federal income tax purposes; (2) if such corporations should be disregarded, whether petitioner was in the trade or business of lending money; (3) whether petitioner incurred business bad debt losses in the years 1979 through 1982; (4) whether petitioner incurred a theft loss in 1982; and (5) whether petitioner's alleged losses in the years 1979 through 1982 are sufficient to offset his income for those years. 3*545 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by this reference. Petitioner resided in Bala Cynwyd, Pennsylvania, at the time the petitions were filed in these cases. Petitioner's lending activities and his investment activities were interrelated; however, for convenience, we will discuss the activities separately. 1. Lending ActivitiesPetitioner, as he admitted, was a "lender * * * of last resort." Petitioner would lend money to those unable to obtain a loan from a bank or other regular financial institution. Petitioner made what would be considered high-risk loans. He charged an interest rate and a service fee which he determined to be commensurate with such risk. Interest rates charged by petitioner varied from the then-current prime rate to over 1 percent a day, and service fees frequently equaled 10 percent of the total amount of the loan. Petitioner did not advertise his lending services to the general public. However, his particular lending services were known throughout the local financing community. Petitioner commonly received referrals from bank officers*546 and employees of title companies. Mr. Berk, petitioner's long-time friend and attorney, recommended clients to him. On many occasions, petitioner made loans to persons brought to him by a "bird-dogger", the slang name for an individual who was paid a commission for arranging difficult financing.At the time of trial, petitioner was 70 years old. He had been lending money since the early 1950s. Shortly after World War II, petitioner became actively involved in the acquisition and sale of low-priced real estate in and around the Philadelphia, Pennsylvania, area. Petitioner's involvement with low-priced real estate, on occasion, put him in contact with individuals in need of short-term loans who were willing to pay above-market interest rates. Petitioner discovered that making such loans could be very lucrative, provided the amounts lent could be collected. Most lending by petitioner was actually conducted through his two wholly owned corporations, Lauren-Beth, Inc. (Lauren-Beth), 4 and Living Better, Inc. (Living Better). In 1966, petitioner incorporated Lauren-Beth in Pennsylvania, and in 1970, petitioner incorporated Living Better, also in Pennsylvania. From their inception, *547 neither Lauren-Beth nor Living Better ever filed a Federal income tax return. Between 1979 and 1982, Lauren-Beth and Living Better filed Pennsylvania corporate income tax returns claiming to be inactive and paid a $ 10 self-assessing Pennsylvania capital stock tax. 5 Lauren-Beth and Living Better have never issued stock, held board meetings, elected officers, or observed other corporate formalities. Neither corporation has ever had an address other than petitioner's home address; on corporate letterhead and checks, petitioner referred to his apartment number as a suite number. Neither corporation has ever had a telephone number other than petitioner's personal telephone number. Petitioner paid personal expenses from corporate accounts and corporate expenses from his personal accounts. During the years in issue, the corporations had separate*548 bank accounts. Petitioner generally would lend money from one of the corporate accounts. Living Better maintained a corporate bank account at Industrial Valley Bank (IVB) while Lauren-Beth maintained a corporate bank account at Fidelity Bank. There was no business reason why a loan was made from one corporate account as opposed to the other corporate account. At trial, petitioner introduced into evidence approximately 71 separate loan files spanning the years 1973 through 1986. The records show that from 1976 through 1984, approximately 53 different loans were made either by petitioner, Lauren-Beth, or Living Better. In all instances the loans were made to persons or entities unrelated to petitioner. In most instances the loans were secured by a mortgage on real estate or a judgment note. The loans ranged in value from a few thousand dollars to over $ 100,000. Approximately one-half of the loans are for amounts exceeding $ 10,000. The total amount of money lent approximated $ 1,200,000. Petitioner and the borrower rarely entered into a loan agreement. In most cases the terms of the loan can only be determined by reference to the security; i.e., a mortgage or judgment note. *549 Almost all of the loans are for periods of 6 months or less. 6Petitioner, Lauren-Beth, and/or Living Better, may have, and most likely did, make other loans in addition to those mentioned above. It is also quite possible that some of the information in petitioner's loan files is erroneous. The loan records submitted by petitioner were generally disorganized. They were not organized by amounts, years, or borrowers. From each loan file it is virtually impossible to determine: Who made the loan (Lauren-Beth, Living Better, or petitioner); the interest rate; the length of time of the loan; the repayment terms; the service fees; the security, if any; *550 and, more importantly, the ultimate disposition of the loan. This is not to imply that all of the loan files are missing all of the above-listed information, but that many of the loan files are lacking some of the information. Petitioner also failed to maintain, or, at least, to submit at trial, comprehensive books or records of his lending activities. As petitioner admitted, from the 71 loan files submitted at trial, the income he earned on the loans during 1979 through 1982 simply cannot be determined. Petitioner opined, however, that the loans were very profitable. Petitioner has not shown that he reported any income from his lending activities on his Federal income tax returns from 1979 through 1982. Petitioner made loans, other than those discussed above, between 1979 and 1983, for which there is significantly better documentation and from which petitioner claims large losses. Each of these loans, or series of loans, will be discussed separately. a. Tuchinsky LoansBeginning in 1979 and continuing until late 1982, Lauren-Beth advanced $ 132,599 to a number of different corporations controlled by or related to Arthur Tuchinsky (corporate loans). 7 Apparently, *551 the loans were for corporations that Mr. Tuchinsky was attempting to organize. Mr. Tuchinsky claimed to have been the owner of or involved in over 18 different corporations as of October 1981. Each loan was made out either to the corporation receiving the loan or to a corporate officer of the corporation receiving the loan for use by the corporation. As security for the loan, petitioner would receive stock in the corporation receiving the loan, or stock in another corporation owned by Mr. Tuchinsky. No formal loan documents were drawn up for any of the loans. Petitioner recalled that the interest rate on the loans varied from a minimum of 2 percent a month and up. The vast majority of Mr. Tuchinsky's corporations failed. In August 1982, Market Management (MM), a corporation controlled by Mr. Tuchinsky, paid $ 24,200 to Lauren-Beth. In 1984, Mr. Tuchinsky informed*552 Internal Revenue Service Special Agent Walker, who was conducting a criminal investigation of petitioner, that his records indicated that between 1979 and late 1982 he repaid $ 102,679 to petitioner or his corporations. This amount did not include the 1982 MM payment. During the same years, Lauren-Beth also advanced approximately $ 170,366 to Mr. Tuchinsky personally. 8 As before, no formal loan documents were drawn up for any of the personal loans. For the personal loans, petitioner did not require security. Petitioner claimed Mr. Tuchinsky never repaid the loans made to him. 9In April 1989, Mr. Tuchinsky, in a letter to petitioner, listed*553 the outstanding loan balance due petitioner, and his estimate of the value of collateral held by petitioner. 10 Mr. Tuchinsky stated that the loan balance was $ 490,000, exclusive of service and interest charges. Mr. Tuchinsky estimated the market value of collateral held by petitioner to be $ 187,000. In particular, Mr. Tuchinsky stated that petitioner owned stock in Amglo Industries worth $ 37,000, part of Gulf Port Films worth $ 140,000 (there was no value for the stock), and other miscellaneous stock worth $ 10,000. In March 1989, petitioner sold his stock in Amglo Industries for $ 56,980. Petitioner still owns the stock in Gulf Port Films and the miscellaneous stock referred to in the letter. *554 On January 29, 1990, Mr. Tuchinsky signed an affidavit regarding the ultimate disposition of the corporate loans. The affidavit included a schedule of the corporate loans, the date the funds were borrowed, the amount borrowed, and the year the entity ceased doing business. 11 Mr. Tuchinsky stated in the affidavit that five of his corporations, which had received $ 64,229, failed in 1981, and two of his corporations, which had received $ 10,420, failed in 1982. On January 30, 1990, Mr. Tuchinsky signed a revised affidavit. The revised affidavit was identical to*555 the first affidavit in all respects except that it included additional information on other corporate loans. The revised affidavit corresponds directly with checks written from Living Better to entities controlled or owned by Mr. Tuchinsky, which were introduced into evidence. The revised affidavit stated that one of his corporations, which had received $ 10,000, failed in 1979, six of his corporations, which had received $ 100,479, failed in 1981, and two of his corporations, which had received $ 22,120, failed in 1982. 12*556 b. Controlled Sanitation LoanOn March 3, 1975, Lauren-Beth signed an agreement with Controlled Sanitation Corp. (Control) which provided that Lauren-Beth would advance to Control over time approximately $ 100,000. The agreement was secured by a judgment obtained by Control against the International Association of Machinists and Aerospace Workers, which had previously been assigned to the Southeast National Bank. 13 Pursuant to the agreement, Control instructed the law firm in charge of collecting the judgment, Morgan, Lewis, & Bockius (Morgan), to distribute any surplus of moneys available in the account at the bank resulting from collection of the judgment after Control's obligation to the bank had been satisfied, to Lauren-Beth. Ultimately petitioner advanced $ 32,000 to Control pursuant to the agreement. *557 Due to an error by a Morgan associate, no funds were ever distributed to Lauren-Beth. Petitioner did not attempt to collect from Control, reasoning that to do so would be futile. Petitioner provided no explanation as to why he considered that any attempt to collect from Control would be futile. Instead, petitioner filed suit against Morgan in the Common Court of Pleas of Montgomery County. On January 17, 1980, petitioner's case against Morgan was dismissed. Petitioner appealed the dismissal to the Pennsylvania Superior Court. On or about March 28, 1982, the Pennsylvania Superior Court affirmed the Common Court of Pleas' Order of Dismissal. Petitioner then submitted an application for reargument, which was denied. Finally, petitioner filed a petition for review to the Pennsylvania Supreme Court. In October 1982, the Pennsylvania Supreme Court denied the petition. c. Lipschutz LoansIn 1979 or thereabouts, William Richman, a "bird-dogger" often used by petitioner, introduced him to Leonard Lipschutz. When petitioner first met Mr. Lipschutz, he was the president and owner of Pulmonary Equipment Rental Corp. (PERC). PERC was in the business of leasing medical equipment, *558 primarily life-support systems, to medical facilities throughout the eastern seaboard. Mr. Lipschutz sold his interest in PERC about August 1981, but continued to act as PERC's president. It is unclear whether petitioner was aware of Mr. Lipschutz' sale of his interest in PERC. Mr. Lipschutz informed petitioner that he was interested in expanding PERC's leasing operation, but, in order to do so, the corporation needed financing. Petitioner agreed to lend money so that Mr. Lipschutz or PERC could purchase equipment to be leased. As security for the loans, petitioner was to receive an assignment of the leases or ownership of such equipment. 14On February 4, 1980, Mr. Lipschutz received $ 16,200*559 from Living Better. The loan was purportedly secured by an assignment of a lease of three respirators to the Richmond Memorial Hospital. The loan was to be repaid in 36 monthly payments of $ 875, for a total payment of $ 31,500. Mr. Lipschutz made 15 payments on the loan, $ 13,125. In August 1980, petitioner purportedly received an assignment of a lease from St. Mary's Hospital signed by an employee by the name of C.C. Kurtz. It was later discovered that this individual did not exist. In September 1980, Mr. Lipschutz and Linda Lipschutz, his spouse, received $ 9,820 from Living Better. The loan was secured by a mortgage on the Lipschutzes' personal residence in the name of Living Better. Mr. Lipschutz defaulted on the mortgage. Petitioner never foreclosed on the property. Mr. Lipschutz no longer lives in the home. Between January 1, 1981, and July 20, 1981, Mr. Lipschutz received $ 35,000 from Living Better. On March 2, 1981, $ 41,990 was wired from Living Better to Oxymed, Inc., for the purchase of four "Bear I" ventilators for PERC. The invoice listed Living Better as the purchaser of the units. On July 27, 1981, the Living Better account was credited in the amount*560 of $ 35,000. The credit slip indicates that the credit was a payment on the Lipschutz loan. Between July 28, 1981, and October 27, 1981, Mr. Lipschutz received $ 71,300 through eight advances from Living Better. On October 30, 1981, Mr. Lipschutz signed a judgment note in which he agreed to pay $ 137,894 to Living Better on or before November 22, 1981. In return for the note, Mr. Lipschutz received $ 20,000 from Living Better. The note provided that if payment was not made by the due date, interest would accrue at the rate of 1 percent per day. Mr. Lipschutz did not make any payment by the due date. Approximately one month later, on November 24, 1981, Mr. Lipschutz executed a second judgment note in which he agreed to pay $ 179,494 to Living Better on or before December 10, 1981. Upon signing the note, Mr. Lipschutz received another $ 20,000 from Living Better. Again, Mr. Lipschutz did not pay by the due date. On May 3, 1982, and June 1, 1982, petitioner gave Mr. Lipschutz certified checks drawn on his account at Bank Hapoalim in the amounts of $ 20,000 and $ 50,000, respectively. On June 4, 1982, Mr. Lipschutz received another $ 7,500 from Lauren-Beth. During the first*561 week of July 1982, petitioner deposited checks for $ 63,750 and $ 20,000 from Mr. Lipschutz into the Lauren-Beth account. At first the checks were not honored, but on the second attempt they were honored. On July 6, 1982, Mr. Lipschutz signed a no-interest $ 144,000 demand note payable to Lauren-Beth. As part of this loan transaction, Mr. Lipschutz entered into an agreement with Lauren-Beth which provided that Mr. Lipschutz was to lease 12 respirators from Lauren-Beth for $ 12,000 a month for 12 months. On the same day, Mr. Lipschutz received another $ 87,000 from Lauren-Beth. Mr. Lipschutz made no payments on the demand note, nor did he make any payments pursuant to the lease. On August 17, 1982, Mr. Lipschutz received $ 25,000 from Lauren-Beth. One week later, Mr. Lipschutz received another $ 25,000 from Lauren-Beth. On September 30, 1982, Lauren-Beth signed an agreement in which Lauren-Beth purchased from Mr. Lipschutz all his interests in certain personal property listed in an attached schedule for the sum of $ 1. The schedule attached to the agreement listed 65 respirators by serial numbers. Of the 65 listed respirators, 25 were duplicate listings of the same serial*562 numbers, and 12 were respirators that Lauren-Beth was actually leasing to Mr. Lipschutz, according to the July 1982 lease agreement. In October 1982, Mr. Berk, for the first time, began filing security interests on all personal property owned by Mr. Lipschutz. For reasons unstated, in connection with the filing of the security interests, Mr. Berk became concerned about the actual existence of the equipment and the leases reportedly owned or assigned to petitioner by Mr. Lipschutz. On October 25, 1982, petitioner gave Mr. Lipschutz another $ 40,000 from his account at Bank Hapoalim. During the next month or so, Mr. Berk made inquiries of the various medical facilities that Mr. Lipschutz indicated were leasing equipment from him or PERC. Mr. Berk also made inquiries of the manufacturer of some of the respirators, Puritan-Bennett Corp. (Puritan), as to whether Puritan had actually manufactured respirators with serial numbers the same as those listed on the September 30, 1982, agreement. Mr. Berk also began a belated investigation into the financial situation of Mr. Lipschutz. By the end of 1982, Mr. Berk had discovered that all the respirators, which petitioner believed he had*563 owned, either did not exist, were owned by other entities, or were already fully collateralized by others. 15 With respect to the leases assigned to petitioner, Mr. Berk discovered that they were all fraudulent. 16 Mr. Berk also discovered that Mr. Lipschutz was an alcoholic, a compulsive gambler, a manic depressive, and, in his view, judgment proof. At the end of 1982, Mr. Lipschutz stated that he was destitute and estimated his gambling debts at approximately $ 1 million. Petitioner did not pursue criminal charges against Mr. Lipschutz. Rather, on February 6, 1983, Mr. Berk required Mr. Lipschutz to sign an agreement in which he stated that he owed Lauren-Beth $ 415,000. Under*564 the agreement, Mr. Lipschutz was to pay Lauren-Beth the sum of $ 2,500 per month, and, if Mr. Lipschutz were to regain control of PERC, he was to cause PERC to guarantee the loan. When the agreement was signed, Mr. Berk did not expect Mr. Lipschutz to ever pay petitioner. Mr. Berk advised that such an agreement would be a good precaution in the unlikely situation where Mr. Lipschutz might come into any significant amount of money. When Mr. Lipschutz defaulted on the note, petitioner did not attempt to collect. In a letter dated February 8, 1983, Puritan confirmed that seven respirator serial numbers were fraudulent. Petitioner's involvement with Mr. Lipschutz did not end with the signing of the February 1983 agreement. In April or May of 1983, Mr. Lipschutz contacted Mr. Berk and informed him that he was due money as a result of an accident and that he would be willing to repay petitioner some of what he owed him. Mr. Lipschutz explained to Mr. Berk that the funds from the accident were only payable in the form of a certificate of deposit (CD) and that he would be willing to have petitioner stated as the owner of the CD in exchange for immediate cash. A day or so later, Mr. *565 Lipschutz visited Mr. Berk at his office and brought with him a $ 75,000 CD from the Philadelphia Savings Fund Society (PSFS) payable to petitioner 91 days from issuance. Mr. Berk called PSFS and verified that a $ 75,000 CD was issued by PSFS in the name of petitioner. Mr. Berk then contacted petitioner, who agreed to purchase the CD from Mr. Lipschutz. Using Mr. Berk as a middle man, Mr. Lipschutz received from Lauren-Beth $ 11,000 and, 4 days later, $ 26,000. The difference between the $ 75,000 and the $ 37,000 advanced was to be petitioner's profit on the near 90-day loan. Mr. Lipschutz returned to Mr. Berk on three other occasions. On each occasion, Mr. Lipschutz had a 90-day or so CD from a different bank that was made payable to petitioner: A $ 50,000 CD from Home Unity Savings; a $ 25,000 CD from Trevose Bank; and a $ 75,000 CD from Germantown Savings Bank. Against these three CD's, Mr. Lipschutz received $ 30,000, $ 17,200, and $ 40,200. In all, Mr. Lipschutz received $ 124,400 against CD's with a reported value of $ 225,000. When petitioner attempted to redeem the CD's, he discovered that they were all fraudulently obtained and, accordingly, worthless. Mr. Lipschutz*566 had purchased the CD's with checks drawn on accounts with insufficient funds. Again, petitioner did not file criminal charges or attempt to collect from Mr. Lipschutz. In summary, petitioner or his corporations advanced Mr. Lipschutz the following amounts between the years 1981 and 1983: YearAmount1980$ 26,0201981188,2901982254,5001983124,400On or about January 26, 1984, Mr. Lipschutz and his wife instituted a bankruptcy proceeding. Petitioner did not file a proof of claim in the bankruptcy proceeding. 2. Investment ActivitiesIn addition to lending money, petitioner used Living Better to purchase IVB commercial paper and Eurodollars. 17 Apparently, IVB did not issue a Form 1099 with regard to the purchase of IVB commercial paper or Eurodollars in an amount that exceeded $ 100,000. Accordingly, investments by Living Better in IVB commercial paper or Eurodollars were for $ 100,000 or more. From such investments, during 1979 and 1980, Living Better earned $ 36,066 and $ 55,727, respectively, in interest income. *567 In October 1980, petitioner opened a joint bank account at the Philadelphia Branch of Bank Hapoalim in the name of Abe Serot and Lauren Beth Serot (Abe-Lauren account). 18Bank Hapoalim is an international bank that is based in Tel Aviv, Israel, and has branches in many parts of the world, including the Cayman Islands. During October 1980, petitioner transferred $ 750,000 from Living Better into the Abe-Lauren account at Bank Hapoalim. In May 1982, petitioner deposited another $ 250,000 into the account from unknown sources. On May 4, 1981, petitioner opened a different account at Bank Hapoalim in the name of petitioner and Sylvia Serot, petitioner's spouse (Abe-Sylvia account). 19 The next day, petitioner deposited $ 25,000 into the account, $ 5,000 of which came from Living Better. Over the next*568 5 months, petitioner deposited an additional $ 198,330. In total, $ 223,330 was deposited into the Abe-Sylvia account at Bank Hapoalim, and of that $ 223,330, over $ 110,000 came from Living Better. Petitioner requested that the funds at Bank Hapoalim be transferred to the Cayman Islands' branch. Petitioner used the Cayman Islands' branch to invest in foreign funds being offered by Bank Hapoalim, primarily in Eurodollars. The Cayman Islands' branch offered an interest rate approximately one-half to 1 percent higher than the interest rates offered by U.S. banks. Bank Hapoalim did not generate a Form 1099 for funds deposited with its Cayman Islands' branch. During 1980, 1981, and 1982, petitioner earned interest income from his investment at Bank Hapoalim in the amounts of $ 16,349, $ 131,491, and $ 137,007, respectively. Nearly*569 all of the amounts earned in the Bank Hapoalim accounts during the years 1980 through 1982 were either reinvested into the accounts from which they came or directly deposited to Living Better or Lauren-Beth. Between the time when the accounts at Bank Hapoalim were opened and 1982, a total of $ 726,487 was disbursed from the accounts at Bank Hapoalim. Of the $ 726,487 disbursed, $ 103,254 was transferred to Living Better, and $ 219,274 was transferred to Lauren-Beth. Petitioner also willfully failed to report the interest income earned in Living Better's account at IVB and at Bank Hapoalim on his Federal income tax returns for the years 1979 through 1982. On June 3, 1985, following a 5-day jury trial, petitioner was convicted on four counts of tax evasion for the years 1979, 1980, 1981, and 1982, and four counts of making and subscribing to false tax returns for the same years. The conviction relates to his failure to report investment income earned by Living Better at IVB and Bank Hapoalim, and not to his failure to report the income from his lending activities. OPINION Issue 1. Disregard of CorporationsThe first issue for decision is whether Lauren-Beth and Living*570 Better should be disregarded for Federal income tax purposes. Respondent contends that, for the purposes of the investment income earned by Living Better, the corporation should be disregarded and the income attributed to petitioner individually. On this point, petitioner agrees with respondent. Inexplicably, respondent contends, however, that, for purposes of any income or losses relating to the lending activities conducted by Living Better, the corporation should be recognized as a separate and distinct entity from petitioner. On this point the parties disagree. Generally, a corporation, including one wholly owned by one shareholder, is a taxpayer separate and distinct from that shareholder. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435, 442 (1934); Burnet v. Commonwealth Improvement Co., 287 U.S. 415">287 U.S. 415, 419-420 (1932). A corporation is to be respected as a taxable entity separate and distinct from its owners where the corporation either is formed for a business purpose or carries on a business purpose after the corporation is formed. Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436, 438-439 (1943).*571 The corporate business purpose or the quantum of business activity required for recognition of the separate existence of the corporation is generally rather minimal. Hospital Corp. of America v. Commissioner, 81 T.C. 520">81 T.C. 520, 579-580 (1983); Strong v. Commissioner, 66 T.C. 12">66 T.C. 12, 24 (1976), affd. without published opinion 553 F.2d 94">553 F.2d 94 (2d Cir. 1977). The general rule is that a taxpayer, having chosen the advantages of a corporation in which to do business, must also accept the disadvantages of that choice. Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 477 (1940). However, there is an exception to the general rule where the corporation will not be recognized for Federal income tax purposes. Ogiony v. Commissioner, 617 F.2d 14">617 F.2d 14, 16 (2d Cir. 1980), affg. and remanding T.C. Memo. 1979-32; Noonan v. Commissioner, 52 T.C. 907">52 T.C. 907, 910 (1969), affd. per curiam 451 F.2d 992">451 F.2d 992 (9th Cir. 1971). In circumstances where the corporation is merely a passive dummy or is used solely for *572 tax avoidance purposes, the corporate form will be disregarded. Jackson v. Commissioner, 233 F.2d 289">233 F.2d 289, 290-291 (2d Cir. 1956), affg. 24 T.C. 1">24 T.C. 1 (1955); Strong v. Commissioner, supra at 22; Marcus v. Commissioner, T.C. Memo 1992-234">T.C. Memo. 1992-234. We find that the situation in these consolidated cases falls within the exception to the general rule. Based on the record before us, we conclude that Living Better and Lauren-Beth were used during the years in issue solely as vehicles for petitioner to avoid paying Federal income taxes. The corporations were nothing more than bank accounts that petitioner used to fraudulently hide his income from the Government. See Marcus v. Commissioner, supra.Petitioner never considered the corporations separate and distinct entities from himself. The corporations never filed Federal income tax returns and, as to the State, they claimed to be inactive. Petitioner never observed any corporate formalities. He moved money back and forth among the corporate accounts and his personal accounts, paying business*573 and personal expenses from either. Furthermore, we conclude that respondent's attempt to disregard the corporation only with respect to the investment income is untenable. We have found no cases, and respondent has cited no cases, where a corporation was to be disregarded only for certain business activities and only for selected years. We are unwilling to hold that with respect to a single bank account some of its earnings are personal to the major stockholder and some are corporate. Issue 2. Trade or Business of Lending MoneyHaving concluded that the corporations should be disregarded for tax purposes, the second issue for decision is whether petitioner was in the trade or business of lending money during the years 1979 through 1982. Section 166(a) allows a deduction for a business debt that becomes worthless during the taxable year. Section 166(d)(2), which defines a nonbusiness debt, by implication defines a business debt as a debt created or acquired in connection with a trade or business of the taxpayer, or a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. For petitioner to be entitled to a business bad debt deduction, *574 he must first establish that he was in the trade or business of lending money during the years in question. This Court has held that a trade or business of lending money is limited to those "exceptional" situations where the taxpayer's lending activities are "so extensive and continuous as to elevate that activity to the status of a separate business." Imel v. Commissioner, 61 T.C. 318">61 T.C. 318, 323 (1973); Sales v. Commissioner, 37 T.C. 576">37 T.C. 576, 580 (1961); Rollins v. Commissioner, 32 T.C. 604">32 T.C. 604, 613 (1959), affd. 276 F.2d 368">276 F.2d 368 (4th Cir. 1960). Some of the factors which have been considered in determining whether a taxpayer is engaged in the trade or business of lending money include: The total number of loans made; the time period over which such loans were made; the adequacy and nature of the taxpayer's records; whether the loan activities were kept separate and apart from the taxpayer's other activities; and whether the taxpayer sought out the lending business. Ruppel v. Commissioner, T.C. Memo. 1987-248; McCrackin v. Commissioner, T.C. Memo. 1984-293.*575 We have also considered the amount of time and effort expended in pursuit of the lending activity and the relationship between the taxpayer and his debtors. See Zivnuska v. Commissioner, 33 T.C. 226">33 T.C. 226, 237-238 (1959); Fuller v. Commissioner, 21 T.C. 407">21 T.C. 407, 412-413 (1953); see also United States v. Henderson, 375 F.2d 36">375 F.2d 36, 41 (5th Cir. 1967). We find that the number of loans and the amounts advanced by petitioner are indicative of one in the trade or business of lending money. Not including the loans to Mr. Lipschutz, Mr. Tuchinsky, and Control, between the years 1976 and 1986, petitioner made approximately 55 separate loans, involving approximately $ 1,200,000. Between 1979 and 1982, again not including the loans to Mr. Lipschutz, Mr. Tuchinsky, and Control, petitioner was still able to make approximately 15 other loans. Over the same time, petitioner advanced nearly $ 750,000 just to Mr. Tuchinsky, his corporations, and Mr. Lipschutz. Respondent argues that petitioner's failure to maintain comprehensive records of his lending business demonstrates that he was not in the trade or business*576 of lending money. We agree that petitioner's records with respect to his lending activities are inadequate and disorganized. He did not maintain separate books of his lending activities. Relying on petitioner's records, we are unable to determine the total amount of his income or losses for the years 1979 through 1982. Yet, the records are sufficient for us to reasonably determine the extensiveness of petitioner's lending activities. The records maintained by petitioner are voluminous. On the whole, they do demonstrate a long history of lending money. In light of the other factors, we do not find petitioner's failure to maintain accurate records dispositive on this issue. Although petitioner did not advertise his lending services to the general public, he did actively seek out lending opportunities. He was known in the community as an individual willing to make loans to those unable to qualify for bank loans. Petitioner received referrals from bankers, title companies, his lawyer, and frequently from "bird-doggers". Moreover, lending money was clearly petitioner's primary business activity during the late 1970s and early 1980s. Petitioner devoted approximately 40 to 50*577 hours per week to his lending activities. Most of petitioner's working day was spent generating loans or collecting on loans already made. The lack of any relationship between petitioner and those he lent money to is another indication that he was in the trade or business of lending money. Petitioner was not related to any of the individuals who received money from him, and he did not have an interest in any of the companies that received money from him, other than that of a creditor. Based on the foregoing, we conclude that petitioner was in the trade or business of lending money between 1979 and 1982. Issue 3. Claimed Bad Debt LossesThe third issue for decision is whether petitioner actually incurred any bad debt losses, and, if so, in what amounts. A bad debt is deductible in the taxable year during which the debt becomes wholly or partially worthless. Sec. 166(a). The burden of proving that the debt is worthless and the year the debt became worthless is on the taxpayer. Rule 142(a); Mueller v. Commissioner, 60 T.C. 36">60 T.C. 36, 41 (1973), affd. in part, revd. in part and remanded 496 F.2d 899">496 F.2d 899 (5th Cir. 1974). *578 There is no standard test or formula for determining the worthlessness of a debt within a given taxable year; the determination must depend upon the particular facts and circumstances of each case. Crown v. Commissioner, 77 T.C. 582">77 T.C. 582, 598 (1981). However, it is generally accepted that the year of worthlessness is fixed by identifiable events that form the basis of reasonable grounds for abandoning any hope of recovery. Id. at 598; Federated Graphics Cos. v. Commissioner, T.C. Memo. 1992-347. We will first address the worthlessness of the Tuchinsky corporate loans. Petitioner contends that the Tuchinsky corporate loans were worthless in the years the businesses receiving the loans ceased operation, as stated by Mr. Tuchinsky in his revised affidavit. Respondent argues that petitioner has failed to prove either that the corporate loans to Mr. Tuchinsky are worthless, or when they became worthless. Respondent contests the accuracy of the revised affidavit. There is no need for us to address the accuracy of either of the Tuchinsky affidavits. We find that petitioner failed to demonstrate*579 that he has incurred any loss on the Tuchinsky corporate loans. One reason is that petitioner commonly received collateral in the form of stock of a Tuchinsky corporation other than the corporation actually receiving the loan. Where a creditor takes collateral or otherwise secures a loan, there can be no worthlessness of the debt until the security itself becomes worthless. Orrell v. Commissioner, T.C. Memo 1979-129">T.C. Memo. 1979-129; Jessup v. Commissioner, T.C. Memo. 1977-289; see Hunt v. Commissioner, 33 B.T.A. 946">33 B.T.A. 946, 950-951 (1936); 8 Mertens, Law of Federal Income Taxation, sec. 30.80 at 208-209 (1989 rev.). Petitioner claimed losses on loans to the Tuchinsky corporations in the total sum of $ 132,599. If the Tuchinsky corporate loan losses are only as much as petitioner claims, there is no evidence that petitioner actually suffered any loss. Mr. Tuchinsky listed the collateral held by petitioner as having a total value of $ 187,000, which would eliminate any loss by petitioner. We note that petitioner has failed to adequately explain why Mr. Tuchinsky stated that he owed $ 490,000 to petitioner *580 in 1989. Petitioner argues that we should reject Mr. Tuchinsky's April 1989 letter as a self-serving attempt to inflate the value of the collateral and, accordingly, to lower the amount of his total debts. Based on the evidence, it appears that the value assigned by Mr. Tuchinsky to petitioner's collateral was less than the actual market value. One month later, petitioner was able to sell stock in Amglo Industries, which Mr. Tuchinsky valued at $ 37,000, for over $ 56,000. We also find that the majority of petitioner's testimony with respect to the Tuchinsky loans is not credible. Petitioner seemed to frequently forget repayments made by Mr. Tuchinsky. Petitioner stated that he was not paid by Mr. Tuchinsky. Yet, between 1979 and 1982, he received at least $ 102,679, not including the $ 24,200 from MM. When asked to explain the discrepancy, petitioner stated that the $ 102,679 in payments related to other loans, but failed to produce evidence of other such loans and simply ignored the $ 24,200 MM payment. We next turn to the question as to whether the Control loan was worthless. Petitioner claims that, in retrospect, after evaluating his legal claim, the Control loan became*581 worthless in 1980 when his case against Morgan was originally dismissed. We conclude that petitioner's debt to Control became worthless when the Pennsylvania Supreme Court denied his petition for review in 1982. Until such time petitioner had a reasonable prospect of recovery. The debt was not rendered worthless merely because petitioner did not attempt to collect his loan from Control, as contended by respondent. Legal action is not required where all circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment. Sec. 1.166-2(b), Income Tax Regs. While we have some doubts in this area, petitioner did expend substantial sums of money to pursue a legal action against Morgan in an attempt to collect from them. Petitioner chose not to initiate collection activities against Control because he felt to do so would be futile. There is no evidence that petitioner's decision in this regard was unreasonable or unwarranted, although his reasons for not proceeding against Control were left unexplained. Issue 4. Claimed Theft LossThe fourth issue is *582 whether petitioner incurred a theft loss on the loans to Mr. Lipschutz. Section 165 allows as a deduction a theft loss sustained during the taxable year and not compensated for by insurance or otherwise. Sec. 165(a), (c)(3). Section 165(e) provides that the deduction for such loss shall be treated as sustained in the taxable year in which the taxpayer discovered the loss. Sec. 1.165-8(a)(2), Income Tax Regs. A loss is considered to be discovered when a reasonable person in similar circumstances would have realized the fact that a loss due to theft had occurred. Cramer v. Commissioner, 55 T.C. 1125">55 T.C. 1125, 1134 (1971). The issue of whether a theft loss occurred must be determined under the laws of the State or other jurisdiction wherein the loss was allegedly sustained. West v. Commissioner, 88 T.C. 152">88 T.C. 152, 162 (1987); Paine v. Commissioner, 63 T.C. 736">63 T.C. 736, 740 (1975), affd. without published opinion 523 F.2d 1053">523 F.2d 1053 (5th Cir. 1975); Farber v. Commissioner, T.C. Memo 1987-267">T.C. Memo. 1987-267. The nature of a theft, whether it be larceny, embezzlement, obtaining*583 money by false pretense, or other wrongful deprivation of property of another, is of little importance provided it constitutes a theft. Edwards v. Bromberg, 232 F.2d 107">232 F.2d 107, 111 (5th Cir. 1956); Monteleone v. Commissioner, 34 T.C. 688">34 T.C. 688, 692-693 (1960); sec. 1.165-8(d), Income Tax Regs.Pennsylvania law defines "theft by deception", in relevant part, as follows: A person is guilty of theft if he intentionally obtains or withholds property of another by deception. A person deceives if he intentionally: (1) creates or reinforces a false impression, including a false impression as to law, value, intention, or other state of mind * * *18 Pa. Cons. Stat. sec. 3922(a) (Purdon 1983). A theft by deception occurs if an individual induces another to lend him money, with no intention of repaying that money. E.g., Commonwealth v. Atwood, 411 Pa. Super. 137, 601 A.2d 277">601 A.2d 277, 286 (1991); Commonwealth v. Edwards, 399 Pa. Super. 545, 582 A.2d 1078 (1990). A theft loss is deductible regardless of whether the alleged theft is prosecuted*584 so long as there was an illegal taking of property under the laws of the State where the loss occurred. Viehweg v. Commissioner, 90 T.C. 1248">90 T.C. 1248, 1253 (1988); Bagur v. Commissioner, 66 T.C. 817 (1976), remanded 603 F.2d 491">603 F.2d 491, 501 (5th Cir. 1979). A criminal conviction is not a necessary element of the taxpayer's proof in this Court. Monteleone v. Commissioner, supra at 694. Respondent disputes petitioner's claim of a theft by Mr. Lipschutz. Respondent points to the numerous discrepancies in the documents provided by petitioner, and his demonstrated lack of credibility. Respondent concludes that petitioner must have been an active participant in some scheme of Mr. Lipschutz' and not a victim, as he claims. We do share respondent's skepticism with respect to the Lipschutz loans. However, there are many aspects of petitioner's loans to Mr. Lipschutz that do make sense. In these cases, we have more than the self-serving statements of petitioner and the conflicting documents. Mr. Berk and, in particular, Mr. Lipschutz, confirmed essential elements of petitioner's*585 claim. Mr. Lipschutz admitted borrowing money from petitioner using as security fraudulent leases and nonexistent or fully collateralized equipment. He conceded that when he borrowed the money he did so with no expectation or ability to repay the amounts borrowed. With regard to the equipment, at one point, Mr. Lipschutz stated on cross-examination: I am trying to say that a lot of these transactions [petitioner] was -- unfortunately he had thought that he had collateral on this equipment, but a lot of the times the equipment was never purchased, the money was used for something else, or the equipment was already owned by PERC and already had a lien on it from the banks.The remainder of Mr. Lipschutz' testimony makes it clear that when he stated "a lot of the times", he meant all the time. Respondent has offered no plausible reason for us to disregard Mr. Lipschutz' testimony on this point. We found Mr. Berk to be a credible and trustworthy witness. Mr. Berk, who has been practicing law in the Philadelphia area for nearly 50 years, was petitioner's attorney during the relevant years. Mr. Berk further corroborated Mr. Lipschutz' testimony and confirmed many of the key*586 elements of petitioner's claim. In particular, in late 1982, Mr. Berk stated that he undertook an extensive investigation of Mr. Lipschutz. As a result of his investigation, he discovered that equipment petitioner assumed he owned as security was either nonexistent, owned by other entities, or already fully collateralized. Based on the record, we find and hold that there was a theft by Mr. Lipschutz under Pennsylvania law. Having concluded that a theft occurred, we must determine the year that the theft was discovered. Respondent contends that, assuming there was a theft, it was not confirmed or discovered until 1983. Respondent emphasizes that the Puritan letter, which states that seven of the respirator serial numbers were fraudulent, was not received until February 1983 and that the agreement, in which Mr. Lipschutz admitted owing Lauren-Beth $ 415,00, was also not signed until February 1983. Any loss from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss. Cramer v. Commissioner, supra; sec. 1.165-1(d)(3), Income Tax Regs. We do not find the Puritan letter dispositive. Mr. Berk's investigation*587 into the accuracy of the serial numbers was only one part of his total investigation conducted on behalf of petitioner. Mr. Berk credibly testified that he discovered in late 1982 that petitioner had been swindled by Mr. Lipschutz. The agreement to pay the money back just happened to be signed in 1983. Accordingly, we conclude the theft regarding the loans was discovered in 1982. The loss with respect to the CD's are not deductible in 1982 as the transactions did not occur until 1983. We must now decide the amount of the loss suffered. Once again, petitioner appears to have overlooked repayments made on his loans. While we find that petitioner lent $ 468,810 to Mr. Lipschutz between 1979 and 1982, we also find that Mr. Lipschutz repaid $ 131,875 20 to petitioner, resulting in a loss of $ 336,935. We find *588 that the remainder of respondent's arguments denying the theft loss have no merit. Issue 5. Whether Petitioner's Losses Offset IncomeThe last issue for decision is whether the losses from the Control and Lipschutz transactions are sufficient to offset petitioner's earnings from his lending activities and his investments. Petitioner concedes that the earnings from his lending activities cannot be determined. However, he argues that his losses on the Control and Lipschutz loans are so large as to completely -- or nearly completely -- offset earnings from his investments and lending activity, whatever that income may be. Deductions are strictly a matter of legislative grace. New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435 (1934). The taxpayer bears the burden of proving that the Commissioner's determination in the statutory notice of deficiency is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Section 6001 requires that every person liable for any tax shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time*589 to time prescribe. Section 1.6001-1, Income Tax Regs., provides that any person subject to tax shall keep such permanent books of account or records as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. See DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 867 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992). The records required shall be kept accurately, but no particular form is required for keeping such records. Sec. 1.6001-1, Income Tax Regs.Petitioner has submitted records of his lending activities during the 1970s and 1980s. Approximately 71 loan files relate to what petitioner considered to be very profitable loans. However, these loan files are disorganized and in complete disarray. From these loan files it is impossible to determine the amount of income petitioner earned. Petitioner has also introduced evidence of other loans that he made during the same years. The record with respect to these particular loans is significantly better. From these records, we are able to determine that petitioner suffered*590 large losses. Petitioner is required to maintain records establishing his gross income, not just his losses. Sec. 6001; sec. 1.6001-1, Income Tax Regs. Petitioner, either consciously or due to inadequate record keeping, has failed to submit records from which his gross income could be determined. Without being able to determine petitioner's gross income, we are unable to conclude that petitioner's losses offset such income. For us to conclude otherwise would be no more than mere speculation on our part. Therefore, we conclude that petitioner has failed to meet his burden of proof, and we sustain respondent's determinations. We note in closing that we found it very peculiar that petitioner's records of transactions from which he concedes he has earned substantial income are incomplete and in disarray while his records from which he claims offsetting losses are complete, at least complete enough for us to reasonably determine that a loss was incurred. To reflect the foregoing and concessions made by petitioner, Decisions will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩1. The fraud addition to tax for 1982 is codified under sec. 6653(b)(1) and (2).↩2. Petitioner concedes that he failed to report interest income for the years 1979 through 1982 in the amounts of $ 36,066, $ 72,077, $ 131,492, and $ 137,077, respectively. He also concedes that he is estopped from denying fraud for the years 1979 through 1982 because of a prior criminal conviction for those years.↩3. The deficiencies for the years 1985 and 1986 relate solely to respondent's disallowance of a claimed net operating loss carry forward from 1982 related to petitioner's lending activities.↩4. The corporation was named after petitioner's only daughter, Lauren Beth Serot.↩5. It is unclear whether the corporations filed inactive State returns in earlier years.↩6. In 1984, petitioner also entered into an accounts receivable factoring relationship with Yellow Limousine Services, Inc. (Yellow), of Philadelphia. The agreement provided that petitioner would advance funds against Yellow's accounts receivable. As Yellow received payments on the accounts receivable, it was responsible for transferring such payments to petitioner.↩7. Petitioners provided to Tuchinsky's corporations the following amounts: ↩YearAmount1979$ 10,00019808,250198194,729198219,6208. The following amounts were loaned to Mr. Tuchinsky personally during 1979 through 1982: ↩YearAmount1979$ 6,500198014,500198198,766198250,6009. Until Mr. Tuchinsky's death on May 9, 1990, petitioner considered the personal loans to be collectible. Petitioner stated he presumed that at some point in time Mr. Tuchinsky would repay the amount owed.↩10. The letter is directed to petitioner and refers to the outstanding balance due from Mr. Tuchinsky as being owed to petitioner. It is unclear whether the outstanding balance includes personal loans, as the amount claimed to be owed by Mr. Tuchinsky is greater than the amount that petitioner claimed Mr. Tuchinsky owed him.↩11. The affidavit included the following information: ↩Corporate NameLoan DateAmountFailure YearTurning Basin, Inc.2/08/80$ 4,0001981Turning Basin, Inc.3/09/8117,0001981Carpet Buyers, Inc.5/26/8120,0001981Blue Mountain Exp.8/10/818,6291981OCS Recovery Systems8/13/8110,0001981Guardian Inv. Corp.8/14/814,6001981Willowick Management6/14/826,4201982Morbet Management Corp.7/19/824,000198212. The revised affidavit added the following information: NameLoan DateAmountFailure YearVeronics, Inc.1/05/79$ 4,0001979Veronics, Inc.1/25/796,0001979Turning Basin, Inc.2/06/804,2501981Turning Basin, Inc.4/20/818,0001981Turning Basin, Inc.4/24/816,0001981Turning Basin, Inc.7/10/816,5001981Best Energy Systems Inc.8/14/815,0001981Turning Basin, Inc.10/05/813,5001981Turning Basin, Inc.10/07/813,0001981Market Management, Inc.10/31/812,5001982Market Management, Inc.5/17/823,0001982Market Management, Inc.6/14/823,7001982Market Management, Inc.7/19/824,0001982Market Management, Inc.8/30/822,5001982Morbet Management Corp. was not listed on the revised affidavit.↩13. Petitioner became involved in the loan through a referral by Herbert Bagley, a loan officer at Southeast National Bank. Mr. Bagley referred clients to petitioner when the bank was unable to make the individual or entity a loan. In the early 1980s, Mr. Bagley was investigated for banking law violations. In connection with that investigation, Mr. Bagley referred the Government investigators to petitioner for possible income tax violations.↩14. At the end of 1979, there is evidence that Mr. Lipschutz already owed petitioner $ 7,320. In Jan. 1981, Mr. Lipschutz gave Living Better a check in the amount of $ 7,320. The check was returned for insufficient funds. Considering petitioner's interest rates, there is no way of determining the amount of the loan.↩15. In 1983, the Bear I ventilators purchased from Oxymed were listed as assets of Medical Rental Co. (MRC), a subsidiary of PERC. Mr. Lipschutz did not have an interest in MRC in 1983.↩16. On Nov. 29, 1982, St. Mary's Hospital informed Mr. Berk that no person by the name of C.C. Kurtz had ever been associated with the hospital.↩17. The IVB account was opened on the recommendation of Mr. Bagley, who had left Southeast National Bank.↩18. Lauren Beth Serot did not file income tax returns for the years 1979 and 1980. She did file returns for the years 1981 and 1982, but did not report any of the interest from IVB or Bank Hapoalim in either year.↩19. Sylvia Serot filed separate Federal income tax returns for the years 1979 through 1982. She did not report any of the interest income from IVB or Bank Hapoalim for the years in issue.↩20. The $ 131,875 is the sum of the $ 13,125 payment under the lease assignment, the $ 35,000 payment on July 27, 1981, and additional payments of $ 63,750 and $ 20,000 during the first week of July 1982.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624467/

Sayers F. Harman, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. Henry Harman, Petitioner, v. Commissioner of Internal Revenue, RespondentHarman v. CommissionerDocket Nos. 1145, 1146United States Tax Court4 T.C. 335; 1944 U.S. Tax Ct. LEXIS 19; November 24, 1944, Promulgated *19 Decisions will be entered under Rule 50. 1. Petitioners were devised undivided life interests in coal lands in West Virginia, under the law of which they became vested with legal title. The lands were, under the facts, not subject to payment of the testator's debts. Held, that loss sustained upon sale and execution of deed by the petitioners of their life interests was that of the petitioners, and not of the testator's estate, and was a capital loss.2. Petitioner paid an attorney a lump sum for legal advice in connection with a condemnation proceeding and for procuring a loan. Held, that the expense of legal advice in procuring the loan is not deductible as ordinary and necessary expense of business, and, the amount paid not being divisible, the entire amount is disallowed as a deduction. George E. H. Goodner, Esq., and Scott P. Crampton, Esq., for the petitioners.Lloyd W. Creason, Esq., for the respondent. Disney, Judge. Murdock, J., dissenting. Smith and Opper, JJ., agree with this dissent. DISNEY*336 Petitioner in Docket No. 1145 contests the determination of a deficiency in income tax for the calendar year 1940 in the amount of *20 $ 2,663.85. In the deficiency notice the Commissioner added the sum of $ 16,495.63 to petitioner's net income, describing the adjustment as an "Increase in fiduciary income" and offering therefor the following explanation:It is held that the loss on sale of coal lands by the Estate of W. F. Harman does not constitute an allowable deduction in computing your net taxable income.The correctness of the Commissioner's determination in this respect presents the sole issue in Docket No. 1145; none of the other adjustments made by the Commissioner was assigned by petitioner as error.Petitioner in Docket No. 1146 contests the determination of a deficiency in income tax for the calendar year 1940 in the amount of $ 4,043.34. As in Docket No. 1145, the Commissioner, in the deficiency notice, adjusted petitioner's net income by adding thereto the sum of $ 16,495.62, thus presenting for decision in Docket No. 1146 the same issue as that involved in Docket No. 1145. Another issue is also presented in Docket No. 1146, namely, whether petitioner, who inherited a life interest in certain farm lands under the will of his father, whose estate was still in the process of administration during *21 the taxable year herein involved, is entitled to deduct from his gross income sums in the amount of $ 755 paid to an attorney for legal advice in connection with (a) condemnation proceedings regarding rights of ways across these farm lands and (b) the securing of a loan for the purpose of purchasing livestock to place on this farm. All other assignments of error in Docket No. 1146 have been abandoned. The two proceedings were consolidated for trial and, from the evidence adduced, we make the following findings of fact.FINDINGS OF FACT.Petitioner Sayers F. Harman (Docket No. 1145) is an individual residing at Yukon, West Virginia, and his return for the calendar year 1940 was filed with the collector for the district of West Virginia.Petitioner C. Henry Harman (Docket No. 1146) is an individual residing at Tazewell, Virginia, and his return for the calendar year 1940 was filed with the collector for the district of Virginia.On January 15, 1924, W. F. Harman died testate. The fourteenth clause of his will, dated November 16, 1923, provided in part as follows:I give, devise and bequeath, * * * to my two sons, C. Henry Harman and Sayers F. Harman, during their natural lives, one-half*22 to each during his natural life, the following property, to-wit:(a) All my farming lands in Tazewell County, Virginia, which I may own or be entitled to at the time of my death;* * * **337 (c) All my interest in lands in McDowell County, West Virginia, lying on Dry Fork and its waters and leased to the Yukon-Pocahontas Coal Company, together with all rents, issues and royalties therefrom;* * * *The will contained other clauses relating to the coal lands devised by the fourteenth clause. By the twenty-first clause of his will W. F. Harman empowered his sons "to jointly lease for such term or terms of years as they may see proper, any and all coal or mineral lands * * * including the lands mentioned in clause Fourteen of this will, * * *" and devised and bequeathed to them "one-half to each during his natural life, all the rents and royalties received from the leases * * *." By a codicil dated November 23, 1923, W. F. Harman authorized his sons "to jointly make such exchange or exchanges * * * of any of my coal lands * * * in McDowell County, West Virginia * * * for coal lands * * * adjoining any leasehold or leaseholds in which my coal lands * * * are included * * *; and*23 any and all properties received in any exchange or exchanges herein by this clause of this codicil to my will authorized are to be held the same as the property so exchanged is directed by my will to be held * * *." The twenty-second clause of W. F. Harman's will provides as follows:The rents, issues, profits, royalties and dividends from my properties mentioned or referred to in clause Fourteen * * * which I have hereinbefore given my said two sons, or either of them, during their respective lives, are intended to be, and are, given them absolutely, and said rents, issues, profits royalties and dividends accruing during their respective lives shall not go and pass under clauses Fifteen and Sixteen of this will; * * *The twentieth clause of this will authorizes Sayers F. Harman and C. Henry Harman to jointly sell and transfer in fee simple all properties bequeathed and devised to them for life except the properties set forth in clause fourteen.The last will and testament and the codicil thereto of W. F. Harman were duly probated on February 19, 1924, in the Circuit Court of Tazewell County, Virginia. C. Henry Harman and Sayers F. Harman were appointed executors of the estate*24 of W. F. Harman, deceased, and have continued to act in that capacity from that time throughout the taxable year 1940. A copy of the will and of the codicil thereto and of the certificate of probate by the Circuit Court of Tazewell County, Virginia, were admitted to probate in the County Court for McDowell County, West Virginia, on July 10, 1925. The estate of W. F. Harman, deceased, was still in the process of administration during 1940, the taxable year herein involved.At the time of the death of W. F. Harman the coal lands covered by the fourteenth clause of the will were leased under an agreement dated January 12, 1911, to Yukon-Pocahontas Coal Co. (hereinafter sometimes referred to as the coal company). The rights under this *338 lease were assigned on March 15, 1929, by the coal company to Yukon Pocahontas Fuel Co. (hereinafter sometimes referred to as the fuel company). The lease dated January 12, 1911, was for a period of 96 years, from December 1, 1910, to November 30, 2006, and the lessee agreed to pay the lessors as rental 10 cents per ton for each and every ton of 2,240 pounds of coal to be used for any other purpose than the manufacture of coke for shipment, *25 and 15 cents per ton for each and every ton of 2,240 pounds of coke manufactured from coal taken from the premises. This lease further provided, inter alia, that "the lessee shall be relieved from mining any part of the coal on said lands which * * * can not be mined at a profit, by reason of the thinness of the vein, or the unmerchantable character of the coal [clause two] * * *" and that "when all the merchantable coal has been mined and removed from said lands, which * * * can be mined at a profit, by reason of the thinness of the vein or the unmerchantable character of the coal, then the payment of royalties shall cease under this lease contract and in that event said lease contract shall terminate [clause fifteen] * * *."In 1911, at the time of the lease to the coal company, W. F. Harman owned 50 percent of the stock of the coal company; and in 1929, at the time of the assignment of the lease to the fuel company, the estate of W. F. Harman, Sayers F. Harman, and C. Henry Harman were all stockholders in both the coal company and the fuel company.Part of the coal lands devised by W. F. Harman by the fourteenth clause of his will to his sons Sayers F. Harman and C. Henry *26 Harman for life included a four-ninths interest in fee in approximately 3,191 acres of coal land. These 3,191 acres of coal land were included in and constituted a part of item No. 13 of schedule A in the return for Federal estate tax (Form 706) filed in January 1925 by the executors of the estate of W. F. Harman. Item No. 13 reads in part as follows:D. G. Sayers, Dry Fork and Slate Creek lands, McDowell County, West Virginia, 4/9 undivided interest in whole area containing 4139 acres, and, if conveyance by Mrs. Harman valid, 2/9 undivided interest in addition in part estimated at 1000 acres, making W. F. Harman's interest 2006 2/9 acres common and undivided. * * *Actual Value on day of decedent's death$ 100,311.11The fuel company continued to operate the coal lands covered by clause fourteen of the will until 1939. The average annual production of the coal company for the 10 years prior to January 15, 1924, was 166,686.81 gross tons. The total production from 1924 to 1940 was 2,560,867.77 net tons of coal.On May 29, 1940, these 3,191 acres of the coal lands were conveyed in fee simple to Pond Creek Pocahontas Co., of which neither the estate of W. F. Harman nor Sayers*27 F. Harman nor C. Henry Harman was a stockholder at the time of the conveyance. The deed of conveyance *339 was signed on behalf of the vendors not only by Sayers F. Harman and C. Henry Harman, both individually and as executors of the estate of W. F. Harman, deceased, but also by all of the other devisees and legatees who had any vested or contingent interest in the estate of W. F. Harman, deceased, and by the coal company, the fuel company, and the Hall Mining Co. The deed of conveyance recited that 3 tracts of coal lands, totaling 3,237 acres, were being sold. Tract No. 1 was divided into 2 parts as follows: (1) A 708-acre tract in which according to the deed of conveyance the W. F. Harman estate owned a five-ninths undivided interest, C. Henry Harman owned individually a one thirty-sixth undivided interest, and Sayers F. Harman owned individually a one-eighteenth undivided interest; (2) a 2,452-acre tract in which the W. F. Harmon estate owned a four-ninths undivided interest, C. Henry Harman owned individually a one thirty-sixth undivided interest, and Sayers F. Harman owned a one-eighteenth undivided interest. Tract No. 2 consisted of approximately 31 acres and tract*28 No. 3 consisted of approximately 46 acres. The cash consideration recited in the deed was $ 12,400, and it covered all 3 tracts. The deed of conveyance, in explanation of the individual interests of C. Henry Harman and Sayers F. Harman, recites in part as follows:* * * The said C. Henry Harman acquired his interest therein [the tracts of land conveyed by the will of W. F. Harman] (other than life estate) by inheritance from his mother, Amelia G. Harman, who died intestate on the 28th day of January 1937. Sayers F. Harman acquired one-half of his interest therein * * * by a joint deed from Amelia G. Harman dated April 16, 1931, * * * and the said Sayers F. Harman acquired his remaining interest therein (other than life estate) by inheritance from his mother, Amelia G. Harman * * *The deed of conveyance dated May 29, 1940, was approved and confirmed by the County Court of McDowell County, West Virginia, on June 17, 1940, and each individual's share of the proceeds was determined by that court. Sayers F. Harman and C. Henry Harman each received $ 1,608.20 as his share. The sale was induced by the fact that it had become unprofitable to mine the coal due to its dirty and unmerchantable*29 quality. This fact was first observed in 1937 and 1938 and later proved by various tests. Prior to reaching this unmerchantable coal the mine was always operated at a profit.Sayers F. Harman and C. Henry Harman, as executors of and on behalf of the estate of W. F. Harman, filed a fiduciary income and defense tax return (Form 1041) for the calendar year 1940. In that return, they deducted from gross income the sum of $ 32,991.25 representing net loss from the sale of 3,280 acres of coal land ("property other than capital assets"). These 3,280 acres include the 3,191 acres which had been devised to Sayers F. Harman and C. Henry Harman *340 for life by the fourteenth clause of the will of W. F. Harman and which were part of the property transferred by the deed of conveyance dated May 29, 1940. The computation of the loss is set forth in schedule F, "Gains and losses from sales or exchanges of property other than capital assets," as follows:1. Kind of Property2. Date3. Gross4. Cost orAcquiredSales Priceother basisInterest in 3.234 a. Coal Land1924$ 14,640.39$ 82,662.23Coal Land 46 a1924176.18860.00Loss     1. Kind of Property5. Expense6. Depletion7. Gainof saleAllowedor LossInterest in 3.234 a. Coal Land$ 407.50$ 36,121.91$ (32,307.43)Coal Land 46 a$ (683.82)Loss     $ (32,991.25)*30 The following is a summary of page one of the fiduciary income and defense tax return for 1940 filed by the estate of W. F. Harman, showing the deduction of the $ 32,991.25 from the estate's income:INCOME1. Dividends $ 36,491.60 2. Interest 492.71 6. Rents and Royalties 4,358.97 7. (c) Net loss from sale of property other than capital assets (32,991.25)10. Total Income$ 8,352.03 DEDUCTIONS12. Taxes$ 1,960.84 13. Other deductions authorized by law2,978.98 14. Total deductions4,939.82 15. Balance$ 3,412.21 16. Less amount distributable to beneficiaries$ 3,412.21 17. Net income (taxable to fiduciary)$ None Item No. 6, designated rents and royalties, included, according to schedule C, net profit from "Coal Land" in the sum of $ 3,803.97. The loss of $ 32,991.25 was reported in the fiduciary return of the estate because that transaction was carried on the books of the estate.Sayers F. Harman and C. Henry Harman each reported the receipt of $ 1,706.10 from the estate of W. F. Harman in their respective individual income tax returns for 1940, an amount equal to one-half of the sum of $ 3,412.21 reported by the estate of W. F. Harman*31 as "distributable to beneficiaries."At the time of his death, January 15, 1924, W. F. Harman owned real estate valued at $ 339,174.05 stocks and bonds valued at $ 268,558.67, mortgages, notes, cash, and insurance valued at $ 4,567.51, and other jointly owned miscellaneous property valued at $ 631,364.55. Funeral expenses and administration expenses including executors' fees, attorneys' *341 fees, and other miscellaneous items totaled $ 31,343.02, and the decedent's debts equaled $ 80,777.15.C. Henry Harman (petitioner in Docket No. 1146) became associated with his father in the coal business in 1910. Upon his father's death in 1924, C. Henry Harman, who was then 35 years old, became president of the coal company and continued in that capacity until 1935, supervising its operations. He was also president of the Buchanan Coal Co. from 1920 to 1936 and of the Sayers Pocahontas Coal Co. from 1917 throughout 1940, as well as being a member of the board of directors of Banner Raven Coal Co. since 1925. He devoted from one-half to three-quarters of his time to the coal business during the operating period. During the calendar year 1940 he received salaries from Yukon-Pocahontas*32 Coal Co., Sayers Pocahontas Coal Co., and Buchanan Coal Co.C. Henry Harman also engaged in the business of farming during the calendar year 1940, and he was operating for profit two large dairies as well as raising grain, cattle, and hogs. In connection with his 1940 income tax return, he claimed a loss as a result of his farm operations in the amount of $ 8,387.51. In Form 1040-F, attached to his income tax return for 1940, C. Henry Harman listed as one of his farm expenses for the taxable year an item in the amount of $ 1,358, which he described as "Legal Expenses -- State road condemnation & other matters about the farm." Of this amount of $ 1,358, the sum of $ 755 was paid during 1940 to an attorney for legal services rendered in connection with two matters. The first of these matters was the successful effort in causing a proposed state highway to be diverted from the location, upon the farm devised to petitioners by W. F. Harman, originally intended for it, to a new location which, though upon the same farm, was less detrimental and expensive to the farming operations. The second of these matters was the obtaining of a loan from the Abingdon Production Credit Corporation*33 of approximately twenty to twenty-five thousand dollars for the purpose of purchasing livestock for the farm. The money was obtained and used for farming purposes. The farm lands upon which C. Henry Harman conducted his farming operations consisted of about 2,500 acres of land in Virginia which he and his brother, Sayers F. Harman, inherited in equal shares for life under the will of their father, W. F. Harman.OPINION.The first issue presented for decision is the right of each of the petitioners to deduct from their income as increased by the Commissioner the amount of a loss incurred upon the sale of certain *342 coal lands which they inherited for life under the will of their father. This issue suggests the following questions: 1. Was the loss that of the individual taxpayers or that of the estate of W. F. Harman?2. What is the amount of the loss?3. Is the loss capital or ordinary?In seeking the solution to the first problem we must start with the premise, as enunciated by the Supreme Court in the case of Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, that "Grantees under deeds, wills and trusts, alike, take according to the rule of the state*34 law." The coal lands here in question being located in West Virginia, the law of that state must control our decision as to whether these coal lands were part of the estate of W. F. Harman, or belonged to petitioners. In the case of Tyler v. Reynolds, 121 W. Va. 475">121 W. Va. 475; 7 S. E. (2d) 22 (1939) the Supreme Court of Appeals of West Virginia stated that, "The devisees, under the will of F. M. Reynolds, became vested with the legal title to parcels of real estate devised to them respectively, but subject to the provisions of Code, 44-8-3, which made these properties assets for the payment of the debts of the testator; and subject also to the provision of the will which authorized the executors to sell and convey these properties. Having the legal title, they had the right to redeem them from the debts of the testator * * *. In this cause the devisees * * * were parties to this suit as individuals, and in their capacity as such had the right to appeal from the decree which directed the sale of property, the legal title to which was vested in them under the will. * * *" (Italics supplied.) Reference is made to "Code, *35 44-8-3" in the material quoted above. This provision is the same as section 3 of chapter 86 of the 1923 edition of the West Virginia Code, which provides as follows:§ 3. Liability of estate for debts. -- All real estate of any person who may hereafter die, as to which he may die intested, or which, though he die intestate [sic], shall not by his will be charged with or devised subject to the payment of his debts, or which may remain after satisfying the debts with which it may be so charged, or subject to which it may be so devised, shall be assets for the payment of the decedent's debts and all lawful demands against his estate, in the order in which the personal estate of a decedent is directed to be applied.In the instant proceedings, the assets of the estate of W. F. Harman that consisted of personal property were more than sufficient to pay the decedent's debts and other lawful demands against the estate of W. F. Harman. It is also to be noted that the provisions of the will of W. F. Harman expressly except the coal lands devised by the fourteenth clause from the property as to which the executors are given a power of sale in the twentieth clause. The real estate herein*36 involved was, therefore, under the law of West Virginia, not subject under the facts to the payment of the debts of decedent. Dearing v.*343 , 50 W. Va. 4">50 W. Va. 4; 40 S. E. 478 (cited in 24 C. J. § 594); Reid v. Stuart, 13 W. Va. 338">13 W. Va. 338 (cited in 69 C. J. § 2459). Cf. also George v. Brown, 84 W. Va. 359">84 W. Va. 359; 99 S. E. 509; Arbenz v. Arbenz, 114 W. Va. 804">114 W. Va. 804; 173 S. E. 881; Harris v. Eskridge (W. Va. 1942), 20 S. E. (2d) 465.We are, therefore, of the opinion that legal title to a life estate in the coal lands devised by the fourteenth clause of the will of W. F. Harman passed under that will to the taxpayers. That life interest was sold by the petitioners, by deed.In Amy H. DuPuy, 32 B. T. A. 969, we considered a situation very similar to that herein involved; for there the petitioner, as here, was bequeathed a life estate in real estate as well as personalty, and, as did the will in this case, in effect, *37 the will therein provided that the "rents, issues, income and profits thereof accruing during her life" should be "her absolute property" (the language in the Harman will being that the "rents, issues, profits, royalties and dividends * * * are given them absolutely * * *"). We held that gains realized from the sale of certain securities were taxable to the petitioner. The executors sold the securities. As in the instant case, no trust was set up. Cf. William R. Todd, 44 B. T. A. 776 (784), where petitioner was bequeathed the life estate in personal property, including securities, with right to income during life, and where we held under the law of Ohio that gains from the sale of the securities were not properly included in the petitioner's gross income. We there distinguished Amy H. DuPuy, supra, on the ground that in that case the right to profits as well as income, rents, and issues was given during the life estate; also that the rents, issues, income, and profits went to the beneficiary "as her absolute property," which was not found in the Todd case. Since in the instant case the devisees not only received*38 the "profits," but such rents, issues, profits, royalties, and dividends were "given them absolutely," the parallel of the DuPuy case herein is accented by William R. Todd, supra.See also Arrott v. Heiner, 92 Fed. (2d) 773; Abbot v. Welch, 31 Fed. Supp. 369; Guaranty Trust Co. of New York, Executor, 30 B. T. A. 314. The loss was sustained during the taxable year and incurred in a transaction entered into by petitioners for profit, within the meaning of section 23 (e) (2), Internal Revenue Code. Any loss sustained upon such sale of the life interests is deductible by the petitioners.The respondent cites the following cases in support of his contention that the loss, if any, is deductible by the estate of W. F. Harman: Abell v. Tait, 30 Fed. (2d) 54; T. Rosslyn Beatty, 28 B. T. A. 1286; Peoples National Bank of Charlottesville, Virginia, Administrator, 39 B. T. A. 565; J. Cornelius Rathborne, 37 B. T. A. 607; affd., 103 Fed. (2d) 301;*39 and DeVer H. Warner, Trustee, 7 B. T. A. 1292; affd., 26 Fed. (2d) 1023. All these cases are distinguishable from the instant *344 proceedings for the reason that the property involved in the cases cited by the respondent was personal property, title to which was in the estate or trust without question at the time the loss was incurred.The respondent also relies upon section 24 (d) of the Internal Revenue Code. 1 However, he fails to cite in his brief any authorities in support of his position that section 24 (d) and the Commissioner's regulations expressly prohibit such a deduction as is claimed by the petitioners, and we have been unable to find any. Section 24 (d) first appeared in section 215 (b) of the Revenue Act of 1921. House of Representatives Report No. 350, 1st sess., 67th Cong., dated August 16, 1921 (C. B. 1939-1 (Part 2) p. 177) explained this provision in the following terms:Sec. 219: Under existing law persons receiving by gift, bequest, devise, or inheritance a life or other terminable interest in property, frequently capitalize the expected future income, set up the value of this expectation as *40 corpus or principal, and thereafter claim a deduction for exhaustion of this so-called principal on the ground that with the passage of time the "principal" or corpus is gradually shrinking or wasting. This section explicitly provides that no such deduction shall be recognized.See also Senate Report No. 275, 1st sess., 67th Cong., dated September 26, 1921 (sec. 215) (C. B. 1939-1 (Part 2), pp. 191, 192). A reading of the Congressional Reports, section 19.24-7 of Regulations 103, and section 24 (d) itself convinces us that section 24 (d) of the Internal Revenue Code should not be extended by judicial interpretation to cover the case of a loss sustained by the life tenant upon the sale of property acquired by inheritance. Caroline T. Kissel, 15 B. T. A. 705 (709). We conclude, therefore, that section 24 (d), Internal Revenue Code, does not operate to prevent the deduction claimed by petitioners in the instant cases.*41 Having decided that the petitioners herein are entitled to deduct the amount of their loss upon the sale of these coal lands, the next inquiry is concerned with the amount of that loss. The evidence in this respect leaves much to be desired. However, the burden of proof is upon petitioners and any omissions or inconsistencies in the evidence are to be resolved against them. Each petitioner claims the right to deduct $ 28,086.93. This figure is arrived at by subtracting from the *345 sum of $ 52,154.43, which petitioners contend represents the fair market value 2 of each of the life estates which they inherited under the will of their father, the sum of $ 22,478.73 representing depletion, and the additional sum of $ 1,608.20 which each petitioner received as his share of the proceeds of the sale of these coal lands. This figure of $ 52,154.43 can not be accepted because it assumes that, because the average annual production from these coal lands for the 10 years prior to January 15, 1924, was 166,686.81 gross tons, the average annual production for the remainder of petitioners' lives will be 166,686.81 gross tons. No competent evidence has been introduced to show that*42 these coal lands possessed sufficient coal to produce 166,686.81 gross tons annually over the lives of the petitioners, each of whom, under the stipulation of the parties, had a life expectancy of 31.8 years. Petitioner sought to establish this fact by offering in evidence, over respondent's objection, a letter dated April 14, 1924, from the Deputy Commissioner of Internal Revenue addressed to A. T. Henderson & Co., Accountants, Lynchburg, Virginia, attached to which was a copy of a report made by the Coal Valuation Section. The taxpayer involved in that communication was the coal company, the then lessee of these coal lands. In that report, made "strictly in accordance with agreement arrived at in conference" (italics supplied), it is stated in paragraph 2 that "In protest dated December 1923, taxpayer establishes values and coal en bloc at the basic dates as follows: * * * Tons en bloc at acquisition approximately 73,722,766 N. T. * * *." (Italics supplied.) Ruling having been reserved, we now rule that this communication is inadmissible in evidence. Cf. Henry Wilson, 16 B. T. A. 1280. (The same ruling of inadmissibility is made as to exhibits*43 8, 9, and 10, offered by petitioner, as to which ruling was reserved.)There is no direct evidence in the record of the value of the life estate in the 3,191 acres herein involved. Article 15 of Regulations 63 (1922 Ed.), relating to estate tax under the Revenue Act of 1921, covers the "Valuation of annuities, and of life and remainder interests." It provides that "where the decedent was entitled to receive the entire income of certain property during the life of another person * * * [and] where the rate of annual income is not determinable * * * a hypothetical annuity at a rate of 4 *44 percent of the value of the property should be made the basis of the calculation." Table A, which is part of article 15, gives the present value of $ 1 due *346 at the end of each year during the life of a person of 35 years of age as $ 16.14437. Using article 15 of Regulations 63 as a guide, it would be possible to compute the value of the life estate of each of the petitioners provided the evidence establishes the value of the fee in these 3,191 acres as of January 15, 1924. The 3,191 acres are undoubtedly included in the 4,139 acres referred to in item No. 13 of schedule A of the return for Federal estate tax. The actual value as of January 15, 1924, of the four-ninths interest which W. F. Harman possessed at the time of his death in these 4,139 acres together with a questionable two-ninths interest in approximately 1,000 acres more is stated in the return for Federal estate tax as $ 100,311.11. The 3,191 acres herein involved are also part of, if not in fact identical with, the 3,234 acres found in schedule F of the 1940 fiduciary income and defense return, and in the fiduciary return the "cost or other basis" of the 3,234 acres is stated as $ 82,662.23. The more reliable*45 of these figures -- $ 100,311.11 and $ 82,662.23 -- appears to be that of $ 82,662.23 because we know that the deed of May 29, 1940, transferred 3 tracts and that of these 3 tracts, tracts Nos. 1 and 2 totaled 3,191 acres and tract No. 3 contained 46 acres. We also know that schedule F purports to cover the same coal lands conveyed in fee by the deed of May 29, 1940. Inasmuch as schedule F treats the loss sustained upon the sale of the 46 acres separately, the inference is that the 46 acres are the same as tract No. 3 and that the 3,234 acres cover tracts Nos. 1 and 2 (3,191 acres, in fact). We, therefore, adopt $ 82,662.23 as the value of the fee in the 3,191 acres herein involved as of January 15, 1924. Multiplying $ 82,662.23 by .04, then multiplying the result thus obtained by 16.14437, and then dividing that result by 2, equals $ 26,690.59, which is the unadjusted basis 3 to be used by each petitioner in computing his loss upon the sale of the 3,191 acres sold during the taxable year. In order to obtain the adjusted basis 4 for determining that loss, we subtract from $ 26,690.59 the sum of $ 18,060.96, which is one-half of the depletion allowed since January 15, 1924, *46 according to schedule F of the fiduciary return. Thus, the adjusted basis for each petitioner is $ 8,629.63. From the sum of $ 8,629.63, we further subtract the sum of $ 1,608.20, which each petitioner received as his share of the proceeds from the sale, leaving as the net loss of each petitioner the sum of $ 7,021.43.Having determined that each petitioner sustained a loss upon the sale of the 3,191 acres of coal land to the extent of his life interest therein in the amount of $ 7,021.43, we are required because of section *347 23 (g) (1) of the Internal Revenue Code5 to determine whether this loss was a capital loss. Section 117 (a) (1) of the Internal Revenue Code, effective during the taxable year 1940, reads as follows: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), *47 but does not include 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, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l); * * *We are of the opinion that the life estates in these 3,191 acres of coal lands were held by the taxpayers herein primarily for investment and not for sale and that these life estates do not come within any of the three exceptions to the meaning of the term "capital assets" as defined by the statute set forth above. Therefore, we hold that petitioners' life estates in these coal lands are capital assets. It follows that each petitioner may deduct only one-half of the sum of $ 7,021.43 or $ 3,510.72, since the loss herein involved was a long term capital loss within the meaning of that term as it is defined in section 117 (a) (5), Internal Revenue Code. Estate of Johnson N. Camden, 47 B. T. A. 926; affd., 139 Fed. (2d) 697;*48 Bell v. Commissioner, 137 Fed. (2d) 454, reversing 46 B. T. A. 484.The last issue for consideration presents the question of the right of C. Henry Harman, under section 23 (a) (1) (A) and section 23 (a) (2), Internal Revenue Code, 6 to deduct from his gross income the sum of $ 755 paid to an attorney during the taxable year for legal advice in connection with (a) condemnation proceedings regarding a right of way across the farm lands which he inherited for life under the will of *348 his father and (b) the securing of a loan for the purpose of purchasing livestock to place on this farm. We are of the opinion that the amounts paid to the attorney by petitioner for his services in procuring*49 the loan from the Abingdon Production Credit Corporation to petitioner are not deductible by petitioner as an ordinary and necessary business expense in the year in which paid, but are in the nature of a capital expenditure. Emil W. Carlson, 24 B. T. A. 868; M. P. Klyce, Administrator, 41 B. T. A. 194 (197). Cf. also I. N. Burman, 23 B. T. A. 639 (643). This being so, it is impossible to allow the petitioner, C. Henry Harman, any part of the $ 755 claimed as a deduction under section 23 (a) (1) (A) or section 23 (a) (2), because there is no evidence in the record as to how much of the $ 755 was paid to the attorney for the latter's services solely in procuring the loan. It would, therefore, be futile and we do not consider it necessary to decide whether the amounts paid by the petitioner to the attorney for the latter's services in connection with the condemnation proceedings are deductible. On this issue, namely, the deductibility by the petitioner in Docket No. 1146 of the sum of $ 755 under section 23 (a), Internal Revenue Code, we sustain the Commissioner.*50 Decisions will be entered under Rule 50. MURDOCK Murdock, J., dissenting: The enjoyment of a life estate through the receipt of income, profits, or gain of any kind is subject to income tax in its entirety. Irwin v. Gavit, 268 U.S. 161">268 U.S. 161. The sale of a life estate is but the anticipation of that taxable income. Any loss from the sale is at most the loss of anticipated income which would have been subject to tax if received. That kind of a loss can not be turned into a deductible loss. It is inconsistent with Irwin v. Gavit to allow a life tenant to deduct any basis upon the sale of his property where, as here, he has acquired that property by devise without paying out any cost for it. Cf. Estate of F. S. Bell, 46 B. T. A. 484; reversed, 137 Fed. (2d) 454.Moreover, if the petitioners are entitled to a basis for gain or loss, then that basis should be determined in accordance with section 19.113 (a) (5)-1, (f) of Regulations 103. A life estate exhausts ratably with the life upon which it is limited. Thus, the life estate which is sold is a shorter estate than the life*51 estate which was acquired at the death of the father. The life tenant has enjoyed a part of it. The regulation takes this into consideration and is the most satisfactory solution for this difficult question which has come to my attention. Footnotes1. SEC. 24. ITEMS NOT DEDUCTIBLE.* * * *(d) Holders of Life or Terminable Interest. -- Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this chapter (except the deductions provided for in subsections (l) and (m) of section 23↩) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled.2. SEC. 113 [I. R. C.]. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that --* * * *(5) Property transmitted at death. -- If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *↩3. Sec. 113 (a) (5), I. R. C.↩4. Sec. 113 (b) (1) (B), I. R. C.↩5. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:* * * *(g) Capital Losses. --(1) Limitation. -- Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117↩.6. 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, * * ** * * *(2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624468/

APPEAL OF D. B. DEARBORN, JR.Dearborn v. CommissionerDocket No. 2196.United States Board of Tax Appeals2 B.T.A. 59; 1925 BTA LEXIS 2567; June 12, 1925, Decided Submitted April 30, 1925. *2567 Partnership income was derived principally from commissions for negotiating charter parties, computed upon fixed percentages of the charter hire. Commissions were earned when charters were signed, but the amounts were not ascertained or paid until the owner received his charter hire. Tentative estimates of commissions earned were entered in a "commission" book, and thereafter, when ascertained and paid, the exact amounts of such commissions also were entered therein. Estimated commissions were not transferred to any other books, and at the end of each year commissions actually paid were totaled and transferred to profit and loss accounts for the respective years in which the charters were signed, such accounts being held open for that purpose. Other partnership income and expenses apparently were accounted counted for on a cash basis. Held, that the method of accounting employed did not clearly reflect the partnership net income, and under section 212(b) of the Revenue Act of 1918 the cash receipts and disbursements method should be applied in ascertaining the individual tax liability of the partners. George E. Cleary, Esq., for the taxpayer. Ward Loveless,*2568 Esq., for the Commissioner. STERNHAGEN *60 Before STERNHAGEN, PHILLIPS, and LOVE. This appeal is from a deficiency in income tax of $4,010.62 for the calendar year 1918. The Commissioner determined that the books of D. B. Dearborn & Co., a partnership of which the taxpayer was a member, were kept on a cash receipts and disbursements basis instead of on an accrual basis, which determination resulted in an increase in taxpayer's distributive share. FINDINGS OF FACT. The taxpayer was a member of the partnership of D. B. Dearborn & Co., which was during the year 1918 engaged in the business of steamship agents and brokers, and as such derived its income in a large part from commissions or brokerage on charters of vessels and management fees. The taxpayer had a one-third interest in this partnership. The income received by the taxpayer was derived from (1) commissions on chartering ships, (2) management fees for the operation of ships, (3) insurance commissions, and (4) interest on bank deposits. The major portion of the income was from commissions or brokerage on chartering ships, and the manner of doing business was as follows: When a charter was*2569 negotiated for an owner of a vessel, the brokerage was fixed at a percentage of the freight or charter hire. As soon as the charter was signed, the firm entered upon its "commission" book a synopsis of the transaction, and entered thereon, in red ink, an estimate of the commission. The signing of the charter party was all that was necessary for the earning of the commission by the firm. The commissions, however, were not actually paid until the freight or charter hire was paid to the *61 vessel owner, which was, in most instances, within several months after the charter was negotiated. Later, when the exact amount of the commission was known, the amount was entered, in black ink, opposite the original estimate, and the date paid was indicated in red ink. A typical example of the entries covering a ship charter was as follows: April 30, 1918S. S. Ryder Hanify Chartered toTerrer & Robassa Cargo of Sugar from Cienfuegos to New Orleans at 39 1/2?? per 100 lbs.Paid 6/7/18 1J. R. Hanify & Co. Commission 2 1/2 $375 1 12,597 Bags 4,122,900 lbs. at 39 1/2?? $16,253.59$406.34In the above illustration the amount $375 was*2570 entered on the books April 30, 1918, the date of the signing of the charter, and represented the estimated commission. The amount $406.34 was actually collected and the correct amount of the commission, and the notation at the left, "Paid 6/7/18," indicated when paid. The estimated amounts of the commissions, appearing in the commission books, were not transferred to any other books of the firm, but the cash received amounts, appearing in the commission book, were columnized and subsequently entered into an account of the ledger, called by the taxpayer a profits and loss account. The estimated commissions were not transferred to a ledger. At the end of each year all the commissions paid were transferred to this so-called profit and loss account of the ledger for the respective years in which the charters were signed. Thus, an item of 1917 business collected in 1918 would go into the profit and loss account of 1917, which would be held open for that purpose. The difference between the estimated commissions and the actual commissions depended upon whether there was any variance in the estimated capacity of the vessel, whether the vessel was loaded to full capacity, the amount*2571 of demurrage, if any, whether there was an extension in the time covered by the charters, and for causes specified in charters. For the year 1918 there was a variance of about 6 per cent. The estimated commissions on the books for 1918 were $86,424.88, while the amount subsequently collected for these same transactions was $92,915.88 (collected in 1918 and 1919). At the end of the year 1918 there was collected $48,806.73 of the 1918 business, and there were outstanding accounts (estimated commissions) of $39,737.64, making a total of $88,544.37. *62 The charters contained provisions respecting payment of commissions substantially as follows: Commission of five per cent (5%) of the estimated amount of Freight and Demurrage is due on assignment hereof to D. B. Dearborn & Company, ship lost or not lost. It was the established practice, however, in the ship brokerage business for the owner of the vessel to pay the commission for negotiating a charter after he had received his freight or hire money, and not until then. During the calendar year 1918 the partnership received, in addition to commissions, a small income from interest on deposits in the bank, which was credited*2572 from month to month during the year, totaling $662.67. The expenses of the business were relatively small as compared with the net income and collections. These expenses were paid when due and payable. There was no evidence as to how the expenses were kept on the books, whether they were accrued or whether they were set up as paid. If the books of D. B. Dearborn & Co., for the year 1918 were considered to have been kept on a cash receipts and disbursements basis, the taxpayer's distributive share for 1918 would amount to $23,326.55, while if considered on the accrual basis the taxpayer's distributive share would be $12,003.39. The Commissioner held that the income of the partnership should be computed on a cash receipts and disbursements basis, and thereupon, as a result of the increased income distributable to the taxpayer, asserted additional income taxes in the sum of $4,010.62. DECISION. The determination of the Commissioner is approved. OPINION. STERNHAGEN: The parties rely upon different applications of section 212(b) of the Revenue Act of 1918 - the taxpayer contending that his net income is properly reflected upon the accrual basis because that is the method*2573 of accounting regularly employed in keeping the partnership books, while the Commissioner contends that the method of accounting employed by the partnership as shown by the evidence does not clearly reflect the taxpayer's income and that the cash basis should be used. There is no dispute between the parties that upon the cash basis the Commissioner's deficiency has been correctly computed. We need not undertake to define the accrual basis. It is sufficient that in this appeal we agree with the Commissioner's view that the *63 taxpayer's net income is more clearly reflected upon the cash basis than upon that which he urges. There is here no clear or well-established method of accounting. An elaborate system is apparently not necessary. There are, however, several sources of the partnership's income, and necessarily some expenses. The principal income of the partnership is from commissions and the only book of account brought to our attention is a book of original entry called a commission book, in which there is made at the time of the signing of a charter an entry in red ink of the estimated earnings. This entry does not purport to be more than an estimate and almost*2574 always varies to some extent from the amount finally received. Sometimes it is less and sometimes more. The expenses are not kept in this books but they are apparently always accounted for at the time of payment. So far as appears from the record there is no substantial reason for adopting an accrual method rather than a cash method, and for no other purpose than the individual tax liability of this taxpayer would the method of accounting be important. Indeed, from the standpoint of measuring income it would seem more reasonable to tax the partners upon what they actually receive than upon that they think they will receive as the charter parties are from time to time negotiated. This is not a situation where the estimates are merely exceptional or incidental items in a larger consistent system of accounts. The entire earnings of the business are here involved and the alleged accrual basis is sought to be evolved from this crude practice of tentative estimates. If for any reason the estimates should prove to be excessive they would not measure the taxpayer's tax liability. Conversely, he should not be permitted to substitute his own estimates for the income which he actually*2575 receives. Footnotes1. In red ink. ↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624469/

Raleigh Properties, Inc. v. Commissioner.Raleigh Properties, Inc. v. CommissionerDocket No. 86988.United States Tax CourtT.C. Memo 1962-150; 1962 Tax Ct. Memo LEXIS 161; 21 T.C.M. (CCH) 812; T.C.M. (RIA) 62150; June 22, 1962*161 Petitioner purchased a hotel in 1953 for a stated purchase price of $3,240,000. Sellers took back an 11-year note in the stated amount of $1,548,739.10. The contract recites that the note is to be without interest, but it includes a prepayment discount schedule. Earlier negotiations contemplated a purchase price of $2,800,000, with the sellers taking back a note bearing interest at 4 1/2 percent for 11 years in an amount approximately $440,000 less than the note finally given by petitioner. The discount schedule closely paralleled the interest which would have accrued under petitioner's earlier offer. Held, that the stated purchase price of $3,240,000 included $440,000 of prepaid interest, a proportional part of which petitioner is entitled to deduct in each of the taxable years. Held further, that the actual purchase price of $2,800,000 is allocable among the land and the several other classes of depreciable assets in proportion to the value of the assets at the time of the sale. Held further, that the amount of $567,000 advanced to petitioner by its sole stockholder at about the time of the acquisition of the property was a contribution to capital and deductions for interest*162 thereon not allowable. Held further, that respondent has properly asserted the addition to the tax for failure timely to file a return for 1955. Palmer Johnson Esq., 6225 Wilshire Blvd., Los Angeles, Calif., and Conrad T. Bjornlie, Esq., for the petitioner. Marion Malone, Esq., for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: Respondent determined deficiencies in income taxes and an addition to tax for the years and in the amounts which follow: Addition to TaxTaxableSec. 6651(a),Year EndingDeficiencyI.R.C. 1954October 31, 1954$37,251.16October 31, 195532,711.17$8,177.79October 31, 195643,110.29By an amendment to his answer, respondent has proposed an increase in the deficiencies and*163 addition to tax based on necessary adjustments of the depreciation allowed in the notice of deficiency as the result of the determination of the issues in controversy, as follows: October 31, 1954$25,319.36October 31, 195524,298.07$6,074.52October 31, 195621,384.97The following questions are before us for determination: (1) Whether petitioner properly accrued and deducted interest with respect to an asserted prepayment of interest in the amount of $440,000; (2) whether the purchase price of the Raleigh Hotel to be allocated among nondepreciable land and several classes of depreciable assets is $3,240,000 or $2,800,000, or some other amount, and what is the proper allocation of the purchase price; (3) whether claimed interest deductions with respect to an alleged loan of $567,000 made to petitioner by its sole stockholder are allowable; and (4) whether petitioner is liable for the 25 percent addition to tax for failure to file a timely income tax return for the taxable year ending October 31, 1955. Findings of Fact Certain facts have been stipulated and they are included herein by this reference. Petitioner is a California corporation with its*164 principal place of business in Washington, D.C. It keeps its books on an accrual basis. Its returns were for a fiscal year ending October 31. During the years involved petitioner owned and operated The Raleigh Hotel, located on the northeast corner of Pennsylvania Avenue and 12th Street, N.W., Washington, D.C. It purchased the hotel properties from Louis Berry and associates, hereinafter referred to as the sellers, on October 26, 1953. The contract of purchase and sale was negotiated by the sellers and Joe Massaglia and was assigned by Massaglia to petitioner before consummation of the sale. In these negotiations the sellers were represented by a broker, Nordblom Company, Boston, Massachusetts, and Peter A. Miller, one of Louis Berry's associates. By letter dated September 1, 1953, Nordblom Company wrote to Massaglia's attorney, Palmer Johnson, offering to sell the hotel property to Massaglia for $2,800,000. The letter was in the form of an offer from Massaglia to purchase the property. Under the terms of the offer the purchase price of $2,800,000 was for all of the property including land, buildings, building equipment and personal property used in the hotel business. There was*165 to be a cash payment of $25,000 with the offer, a further cash payment of $535,000 on closing the contract and a purchase money bond of $2,240,000, bearing interest at 4 1/2 percent and running for 21 years. On October 26, 1953, Massaglia, through his attorney, made an offer to the sellers differing in some respects from the offer of September 1, but still providing for a purchase price of $2,800,000, with a cash payment of $560,000 and interest of 4 1/2 percent on the deferred portion of the purchase price. This offer was acceptable to the sellers except that they insisted that the full amount of the interest on the deferred payments, which was computed at $440,000, be included in the face amount of the purchase money note to be held by the sellers. Massaglia accepted this condition but only on the further condition that discounts on the interest be allowed for any prepayment of the purchase money note, which was permissible under the proposed agreement. Accordingly, in the final agreement, which was dated October 26, 1953, the note for the deferred purchase price contained the additional amount of $440,000 and a schedule of discounts to be allowed for any prepayments thereon. The*166 note was made noninterestbearing. The sales agreement contained, among others, the following provisions: The purchase price shall be THREE MILLION TWO HUNDRED AND FORTY THOUSAND DOLLARS ($3,240,000.00), payable as follows: Attached hereto is my certified check for Fifty thousand dollars ($50,000.00) to be cashed by you upon your acceptance of this offer, and I will pay you an additional Five hundred and ten thousand dollars ($510,000.00) in Cashier's or certified check on the closing date, which shall be on or before December 1st, 1953, and not later. I understand that there is a certain first mortgage now against this property held by the National Life and Accident Insurance Company of Nashville, Tennessee, having an unpaid principal balance of $1,139,961.03, and bearing interest at the rate of four per cent (4%) per annum on the unpaid principal balance, and which interest thereon is paid to October 1st, 1953, and payable in installment payments of $12,500.00 per month until September 1st, 1955, and thereafter at the rate of $10,000.00 per month until the maturity date, January 1st, 1965, each installment including interest to date of payment. I will execute a purchase money*167 note payable to you and secured by a recordable second mortgage and chattel mortgage upon the building and land and personal property purchased hereby, to be prepared by your counsel, in the amount of the purchase price less the $560,000.00 total cash payment and the amount due on the said first mortgage on the closing date, and which said purchase money note shall be payable in installments of Six thousand dollars ($6,000.00) per month commencing thirty days after the closing date and on the same day of each month thereafter until September 1st, 1955, and then payable in installments of Seven thousand five hundred dollars ($7500.00) per month commencing September 1st, 1955, and on the first day of each month thereafter, all without interest thereon except after default and then at the rate of seven per cent (7%) per annum, and the entire amount of said note to be paid not later than January 1st, 1965, said note to contain an acceleration clause in the event of thirty days default and to provide for attorney fees in the event of suit thereon. Said note shall contain a pre-payment discount schedule in accordance with Schedule "A" attached hereto. I have examined the first mortgage to*168 the National Life and Accident Insurance Company of Nashville, Tennessee, and am familiar with the terms thereof, and upon closing agree to assume and perform all the conditions thereof. Schedule "A" of the above-cited document contains the following provisions: The following constitutes the pre-payment discount schedule pertaining to the second purchase money note and mortgage referred to in the attached agreement. In the event of the payment upon any installment date of the entire principal balance owing upon said second purchase money note, there shall be deducted from the unpaid principal balance the discount set forth opposite the following respective period applicable to the date of such payment in full: Discount fromPeriod (Payment Date)Principal BalanceTo and including December 1, 1954$400,000.00To and including December 1, 1955350,000.00To and including December 1, 1956300,000.00To and including December 1, 1957250,000.00To and including December 1, 1958200,000.00To and including December 1, 1959165,000.00To and including December 1, 1960130,000.00To and including December 1, 1961100,000.00To and including December 1, 196260,000.00To and including December 1, 196330,000.00*169 The contract of sale as finally entered into provides for assignment as follows: This offer may be assigned by me prior to closing to an individual or corporation to be formed for the purpose of taking title thereto, and in such event you agree to accept such assignee as the sole maker of the promissory note and second mortgage and chattel mortgage described above. The contract was assigned to petitioner by Massaglia on or about November 24, 1953, and on that date the sale of the property to petitioner was consummated in accordance with its terms. In its books petitioner entered the hotel properties at a cost of $2,800,000, and set up $440,000 as "prepaid interest." Thereafter, petitioner set up on its books each year, and claimed as a deduction in its returns, a proportional part of the $440,000 as an interest expense. The amounts claimed in the taxable years 1954, 1955, and 1956 were, respectively, $44,056.31, $48,412.19, and $46,826.13. Respondent has disallowed the deductions so claimed. The Raleigh Hotel properties are located on lots 803 and 808 in square 322. They contain a total of 27,380 square feet. The hotel building is located on lot 803. This lot has a frontage*170 of 241.23 feet on the east side of 12th Street, and 71.75 feet on the north side of Pennsylvania Avenue. It contains 23,000 square feet. Lot 808 has a frontage of 40 feet on the west side of 11th Street, starting 90 feet south of E Street, and a depth of 100.08 feet. It contains 4,380 square feet. The hotel has a maximum height of 13 stories, and has 420 rooms. It has a basement floor space of 26,649 square feet and a total above-basement floor area of 246,822 square feet. The construction is reinforced steel and brick. The north one-fourth section of the building was constructed in 1900, the adjoining one-fourth in 1906, and the south one-half in 1912. There is a service building adjacent to the main hotel building. The section thereof fronting on 11th Street is two and three stories in height; the section adjacent to the hotel has a maximum height of six stories. Together they have a basement area of 4,375 square feet and a total abovebasement floor area of 16,000 square feet. The building is only partially utilized. Square 322, on which the hotel is located, contains another hotel, The Harrington, on the northeast corner. The Evening Star Building is located on the southeast corner. *171 The square contains a number of smaller buildings occupied by drug stores, restaurants, and other small merchandising businesses. The Raleigh Hotel is near the center of Washington's downtown business area and is in close proximity to a number of Government office buildings including the Old Post Office Building and that occupied by the Internal Revenue Service, directly across Pennsylvania Avenue, the Department of Justice, in the next block to the east, the Post Office Department, directly across Pennsylvania Avenue and one block to the west, the Department of Commerce, Department of Labor, and National Archives. In its returns petitioner allocated the cost of the entire property, $2,800,000, as follows: Building$1,710,000Land300,000Plumbing and improvements(building equipment)420,000Air conditioners42,000Furniture, fixtures (other equip-ment)328,000$2,800,000In this proceeding petitioner has submitted an allocation based on an appraisal of the properties by Paul W. Schumacher, a professional appraiser who appeared at the hearing as an expert witness for petitioner. The appraiser inspected and valued each separate class of assets. *172 The respondent has made a similar allocation by a somewhat different method, using both the amount of $3,241,943.23 1 and the amount of $2,800,000 as the cost figure. His allocation is based on an appraisal made by Glen A. Ruggles, a valuation engineer in the employ of the Internal Revenue Service. He also appeared as an expert witness in this proceeding. Ruggles' allocations are as follows: (1)(2)Land$1,642,800.00$1,642,800Hotel building proper937,500.00684,525Building equipment312,500.00228,175Furniture and fixtures250,000.00182,500Window air conditioners42,000.0042,00011th Street buildings57,143.2320,000Total$3,241,943.23$2,800,000Schumacher's allocations are: Land$ 608,777Basic building structure1,368,910Mechanical building equipment399,942Window air conditioners42,000Portable equipment379,371Total$2,800,000In its allocation*173 petitioner has valued the land at an average value of approximately $30 per square foot while in respondent's allocation it is valued at an average of $60 per square foot. The value of the land alone at the time the petitioner purchased the hotel properties was $55 per square foot, or $1,505,900 for the entire area. Facts Relating to Note Held by Massaglia The corporate minutes of the petitioner state that on January 12, 1954, a special meeting of the board of directors was held and that at the request of Massaglia it was resolved that the corporation issue its promissory note to him in the amount of $567,000 for funds which had been advanced by him. It was further resolved that the note be dated January 1, 1954; that it bear interest of 3 percent per annum, payable annually; and that it be payable two years from its date. This note was replaced when it became due by a note dated January 1, 1956, in the amount of the then-remaining balance of $391,000. The new note bore the same interest rate but the interest was payable quarterly. It carried no specific maturity date, being payable one year and one month after written demand. The original note was for approximately the*174 amount of cash payment needed to complete the purchase of the hotel property. The notes were not secured in any way, either by a mortgage or pledge of collateral or by any guaranty or assumption of personal liability for the payment of the note by any of the stockholders, directors, or officers of the petitioner. The capital structure of the petitioner as of December 1, 1953, as shown by its balance sheet consisted of liabilities of $1,087,323.29 on the first trust deed, $1,524,739.10 on the second trust deed, and $567,000 due to Massaglia, or a total of $3,179,062.39. The equity represented by capital stock was $25,000. The debt-equity ratio, as of December 1, 1953, was 127.16 to 1. As of March 31, 1954, after four months of operation, the petitioner's balance sheet shows a deficit equity of $7,862.69. The petitioner made payments to Massaglia in 1954, 1955, and 1956 as follows: Approximate DatePaymentBalanceOriginal amount$567,000May 14, 1954$10,000557,000January 24, 195540,000517,000April 8, 195535,000482,000April 11, 195515,000467,000June 30, 195560,000407,000September 27, 195516,000391,000April 16, 195625,000366,000April 23, 195615,000351,000May 23, 1956500350,500*175 Petitioner accrued interest payments on the Massaglia note of $14,036.67 in 1954, $14,296.93 in 1955, and $11,185.37 in 1956. Those amounts were claimed as interest deductions in petitioner's returns and were reported as taxable income by Massaglia on his individual returns. Facts Relevant to Petitioner's Filing of Its Income Tax Return for the Fiscal Year Ending October 31, 1955 The income tax return of the petitioner for the fiscal year ending October 31, 1955, was filed on April 4, 1957. It bears the signature of Joe Massaglia, Jr., with the date of March 26, 1957, noted by his signature, and also bears the signature of another person, with the date of March 15, 1957, noted by his signature. An application for automatic extension of time to file the return, dated January 16, 1956, was received on January 17, 1956. The automatic extension was for three months under section 6081(b) of the Internal Revenue Code of 1954. By reason of the automatic extension the petitioner's income tax return for the fiscal year ending October 31, 1955, was due to be filed on or before April 15, 1956. Opinion The first question for our consideration is whether the*176 purchase price of the property was $3,240,000, as respondent contends, and as was stated in the contract of sale, or was $2,800,000, as petitioner contends, with $440,000 of the stated purchase price representing prepaid interest on the purchase money note of $1,548,739.10. If petitioner's position is sustained, it is entitled to the interest deductions of a proportional part of such prepaid interest, which is claimed in each year and which respondent has disallowed. In support of its contention that the sale price was $3,240,000, respondent relies upon the strict terms of the sale agreement, where it was so stated. In the alternative he contends that if any interest was intended to be included in the stated sale price the amount is not identifiable or ascertainable on the evidence of record. In Elliott Paint & Varnish Co., 44 B.T.A. 241">44 B.T.A. 241, a case involving somewhat similar circumstances, this Court stated at page 245: The question must turn, of course, upon what was the actual agreement of the parties. Was it an agreement to pay so much as purchase price and the balance as interest? This must be determined from all of the evidence, documentary and otherwise. *177 An intention of the parties different from that expressed in the documents witnessing their agreements will not lightly be assumed. The true substance of that intention is to be determined, however, from all of the evidence and is not limited to the formal contract or note. Elliott Paint & Varnish Co., supra; Judson Mills, 11 T.C. 25">11 T.C. 25. Facts, not semantics, govern. Cf. Court Holding Co., 324 U.S. 331">324 U.S. 331. Despite the recitation in the contract that the note is to be without interest, we are satisfied that interest was intended and paid. Petitioner's first offer to the sellers, dated October 26, 1953, proposed a price of $2,800,000 with an 11-year note in the approximate amount of $1,090,000, bearing interest at 4 1/2 percent, to be taken back by the sellers. The sellers' attorney contacted petitioner's attorney with respect to this offer. He noted that the interest thereunder would total very close to $440,000 over the term of the note, and stated that the sellers insisted that the $440,000 be added to the purchase price and to the note, and that the note be made noninterest-bearing. Petitioner's*178 attorney refused to accept this proposition, pointing out that petitioner had prepayment privileges and that the seller was, in effect, proposing that interest for the full period of the note be added thereto. Thus, if petitioner were to prepay under such circumstances, it would be paying interest for the full 11-year term of the note. The sellers' attorney then proposed a prepayment-discount schedule to be included in the contract and note, providing specified discounts in decreasing amounts over the term of the note. Petitioner's attorney accepted this proposal after satisfying himself that if petitioner prepaid the note as discounted on any of specified dates, the resultant cost to petitioner would approximate the originally-contemplated principal payments plus 4 1/2 percent interest to the date paid. The discount schedule was included in the contract and note. The $440,000 added to the stated purchase price and to the note is within $200 of the amount petitioner would have paid in interest under the terms of the buyer's offer of October 26, 1953. In Elliott Paint & Varnish Co., supra, the purchaser originally offered $27,500 in cash for a piece of property. *179 The seller refused the offer, preferring a deferred-payment plan. The final purchase price of $40,000 was agreed upon after a computation had been made for the seller showing that $27,500 plus interest thereon at 5 percent per annum for 10 years would total $41,250. This or a similar computation was discussed by the parties in arriving at the purchase price of $40,000. On brief, the petitioner therein set forth a table dividing the semiannual payments called for by the contract into principal and interest at 5 1/2 percent on a declining balance of principal. The Court rejected the assertion that part of each payment constituted interest, but noted at page 246: If the parties had actually adopted such a table as a part of their agreement, it might be pretty strong evidence in support of the petitioner's contention. In the instant case the discount schedule included in the contract and note (being a mathematical parallel of interest at 4 1/2 percent), the treatment of the amount on petitioner's books and all of the circumstances surrounding the final agreement of the parties convince us that interest was intended. Cf. Judson Mills, supra. With respect to respondent's*180 alternative contention that if the total purchase price of $3,240,00 included an element of interest the amount is neither identifiable nor ascertainable, we find that the evidence establishes both the existence and the amount of the interest. The second issue involves the proper allocation of the purchase price of $2,800,000 among the nondepreciable land and the several categories of depreciable assets. In C. D. Johnson Lumber Corporation, 12 T.C. 348">12 T.C. 348, 363, this Court stated the rule that "if the total consideration is paid for a mixed aggregate of assets, its allocation among the several properties acquired should be based upon the relative value of each item to the value of the whole." Such an allocation requires that the several assets be appraised to determine their respective fair market values at the time of acquisition. In his allocation of cost to the various assets respondent takes the figure of $2,800,000 as the maximum cost of all of the assets and, using the so-called residual asset method of allocation, datermines a value of the land of $60 per square foot, or*181 $1,642,800 for the entire tract. From this point respondent's proposed allocation, as described in this brief, is as follows: The second and third asset to be eliminated under the residual asset method are the air conditioners at their new cost of $42,000 and the Eleventh Street buildings at their value of $20,000 which leaves the residue of $1,095,200 to be allocated to the building, building equipment, and the furniture and fixtures. The further allocation to furniture and fixtures should be $182,500 or 20% of the total building value in accordance with the percentage recognized and accepted by hotel men. The allocation of the remainder of $912,700 between the building and the building equipment should be $228,175, or 25% of the total cost to the building equipment and $684,525 or 75% of the total cost to the building frame in accordance with a formula established by a survey and study of a large number of cases involving the separation of building frame and building equipment costs. Respondent's valuation and proposed allocation was made by Glen A. Ruggles, a valuation engineer in the employ of the Internal Revenue Service, who appeared as an expert witness for respondent in*182 this proceeding. He testified that in his valuation and allocation he made no physical examination of the hotel properties and that his valuation of $60 per square foot for the land was based largely on sales of comparable properties in the same general locality at about the time of petitioner's purchase of the property under consideration. Prominent among such sales was that of the McShain property which sold in 1952 for $67 per square foot, and a group of smaller parcels on which the building now occupied by Perpetual Building Association was later constructed. These several parcels of land sold in 1949 and 1950 at an average price of about $78 per square foot. The McShain property is located at the west end of the block, lying across the 12th Street from the Raleigh Hotel. It fronts on 13th Street and extends all the way from Pennsylvania Avenue to E Street and comprises 18,796 square feet. The land was vacant at the time it was purchased in 1952. It was acquired as a site for a modern office building which was later constructed. The Perpetual Building Association property is located on the north side of E Street, between 11th and 12th Streets, directly across E. Street from*183 the Raleigh Hotel square. Ruggles testified that the portion of the Raleigh Hotel property land bordering on 11th Street and occupied by the service building had a value much less than the portion occupied by the main hotel building, probably not more than $25 or $30 per square foot, and that the $60 per square foot valuation was an average for the entire tract. Paul W. Schumacher, who appeared as an expert witness for petitioner, made an appraisal of the hotel properties as of 1953 and an allocation of the costs to the various assets. He made a careful survey of all the property and a visual appraisal of each class of assets. He valued the land at approximately $30 per square foot, or $800,000 for the entire tract, the basic building structure at $1,800,212, the mechanical building equipment at $525,567, the air conditioners at $42,000, and the portable equipment at $498,535. Schumacher, like Ruggles, took into consideration the sale price of the McShain property. He also considered the sale price of the so-called Evening Star property. This latter property is located on the southeast corner of the same block in which the hotel occupies the southwest corner. The Star property*184 sold for a little over $59 per square foot in 1958. We have, however, no basis for allocating this $59 per square foot between the land and the building, for both of which the total price per square foot was paid. Schumacher did not consider the price which Perpetual Building Association had paid for some of the lots in the block immediately north of the hotel property a proper measure of the value of the hotel land. Perpetual began acquiring this property in 1949. It already owned four of the lots and needed the others to fill out the site for its new building. It purchased two more of the lots in 1949, one at $68.61 per square foot and one at $120 per square foot, and two more in 1950 at $61.90 per square foot. These prices undoubtedly reflect the pressure under which Perpetual was operating in acquiring the lots. In arriving at his value of $30 per square foot for the hotel land, Schumacher reasoned that the hotel building did not constitute the most economical use of the land and concluded that the building had, in effect, a negative impact on the land value. He computed this negative impact at 40 percent of the unencumbered land value. The Raleigh Hotel is located near many*185 Government offices, housing, among others, the Internal Revenue Service, the Department of Justice, the Department of Commerce, the Department of Labor, and the Post Office Department. Thus, it is naturally attractive to persons having business with these agencies. Furthermore, the hotel's location on Pennsylvania Avenue places it in close proximity to several national museums. Likewise, it lies on the route of parades between The White House and the nation's Capitol, and not far from many points of historic interest. These factors make it particularly attractive to tourists. While the value of the hotel land cannot be determined with exactness from the evidence of record, we have given careful consideration to the testimony of the expert witnesses and to all of the other evidence bearing on the question of value and have arrived at a value on October 26, 1953, $55of per square foot, or $1,505,900 for the entire tract. We find no reason to question or amend the values of the other assets acquired, as determined by Schumacher. He seemed to have made a careful appraisal of all of those assets and to have used sound judgment in his valuations. Accordingly, we find that the other*186 land and other assets had the following values as of the date of purchase by petitioner in 1953: Land$1,505,900Basic building structure1,800,212Mechanical building equipment525,567Window air conditioners42,000Portable equipment (furnitureand fixtures)498,535Total$4,372,214The purchase price of $2,800,000 should be allocated according to the relative value of each asset or class of assets to the value of the whole. The third issue involves the deductibility by petitioner of interest accrued on the alleged loan to it by its sole stockholder at about the time petitioner acquired the hotel property. This is essentially a factual question upon which petitioner bears the burden of establishing that a true indebtedness was intended and created. John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521. The burden on petitioner is particularly significant where, as in the instant case, there is an identity of creditor and stockholder. Petitioner relies primarily on the formal characteristics of the note and the treatment of the transaction as a loan by Massaglia and on petitioner's books. Respondent points out that the ratio of debt to*187 equity of petitioner as of December 1, 1953, was about 127 to 1, the total investment in capital stock being just $25,000; that the amount advanced as purported indebtedness was approximately equal to the cash down payment required under the contract of sale by which petitioner acquired the hotel assets; and that the note was not secured. Of a total purchase price of $2,800,000, indebtedness secured by first and second mortgages totalled more than $2,680,000. Moreover, while the original note had a fixed maturity, January 1, 1956, it was replaced at its maturity by another note which contained neither a fixed nor determinable maturity. In addition, it was not until about two months after the advance was made by Massaglia that he requested a note from petitioner as evidence of this indebtedness. Whether true indebtedness exists is to be determined upon the basis of whether true indebtedness was intended by the parties. Unitex Industries, Inc., 30 T.C. 468">30 T.C. 468, affd. 267 F. 2d 40 (C.A. 5, 1959). Massaglia, who made the advances and who was the sole stockholder of*188 petitioner, did not appear as a witness. The immediate cash requirements of petitioner were in excess of $500,000, yet the total contribution earmarked for stock was only $25,000. Petitioner has offered no evidence to prove that the initial equity investment was sufficient to finance the corporate business. The bare record indicates that quite the contrary is true. While we will not disregard the existence of a note fair on its face or the treatment of the advances as an indebtedness by both petitioner and Massaglia, such evidence is inadequate herein to establish that petitioner is entitled to the deductions claimed. We are satisfied that these unsecured advances were subject to the risks of the business; that they constituted a part of the original equity investment of Massaglia; and that they were debts of petitioner in form only. Accordingly, we hold that petitioner is entitled to no interest deduction for the years before us with respect to these advances. The addition to tax asserted by respondent for petitioner's failure to file timely its income tax return for the fiscal year ending Octber 31, 1955, was disputed in the petition. Petitioner, however, offered no evidence*189 on this issue at the trial. The return, with extensions, was due April 15, 1956. The record discloses that it was not filed until April 4, 1957. There is no showing that the failure timely to file the return was due to reasonable cause. Accordingly, respondent's determination on this issue is sustained. Decision will be entered under Rule 50. Footnotes1. The figure $3,240,000 appears in the contract of sale. The figure $3,241,943.23 apparently reflects certain minor adjustments made by the examining agent in this case. With respect to the issues before us, the figure $3,240,000 is material.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624470/

R. J. DORN & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ESTATE OF LOUIS DORN, BY RENE DORN, AGENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. R. J. DORN, BY RENE DORN, AGENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. RENE DORN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.R. J. Dorn & Co. v. CommissionerDocket Nos. 18030, 11218-11220.United States Board of Tax Appeals12 B.T.A. 1102; 1928 BTA LEXIS 3400; July 3, 1928, Promulgated *3400 1. A nonresident alien engaged in the business of selling in foreign countries goods purchased in the United States and maintaining in New York City an office for the purchase of such goods did not derive income from a source within the United States under the Revenue Acts of 1916, 1917, 1918, and 1921. 2. On September 9, 1921, the nonresident alien referred to above entered into partnership with the manager of his New York office. Held, that under the Revenue Act of 1921 the manager of the New York office is liable to income tax in respect of his pro rata share of the profits of the partnership, but that the nonresident alien partner is exempt from income tax in respect of his share of the profits of the partnership. A. W. Clapp, Esq., for the petitioners. Shelby S. Faulkner, Esq., for the respondent. SMITH *1102 These proceedings, consolidated for hearing and decision, are for the redetermination of deficiencies in profits tax and income tax as follows: R. J. Dorn & Co., Docket No. 18030:Year ended March 31, 1917$1,007.03Year ended March 31, 19184,241.35Estate of Louis Dorn, Docket No. 11218:1920335.5019214,251.53R. J. Dorn, Docket No. 11219:TaxPenalty1920$8,134.27$2,033.57192111,105.582,776.40Rene Dorn, Docket No. 11220:19205,155.0619218,208.86*3401 *1103 The assignments of error in the appeal of R. J. Dorn & Co., Docket No. 18030, are that the respondent erred: (a) In treating the petitioner as a domestic partnership; (b) In treating all of petitioner's income from the New York office as derived from sources within the United States; (c) In not computing petitioner's excess-profits tax, if any, under section 209 of the Revenue Act of 1917; and (d) In not deducting compensation to Rene Dorn and Louis Dorn, on profit-sharing basis, from petitioner's income before determining petitioner's net income. The assignments of error in the appeal of Estate of Louis Dorn, Docket No. 11218, are that the respondent has erred: (a) In treating petitioner as a member of a firm of the name of R. J. Dorn & Co.; (b) In treating petitioner's share of the profits of R. J. Dorn & Co. of New York as taxable income; and (c) In treating any of the petitioner's income as earned in the United States and as taxable. The assignments of error in the appeal of R. J. Dorn, Docket No. 11219, are that the respondent erred: (a) In determining that the taxpayer derived an income from the United States; (b) In treating petitioner's*3402 profit from the operation of R. J. Dorn & Co., New York office, as the distributable share of a domestic partnership; (c) In including all of said profit in taxable income; and (d) In assessing a penalty for failure to file returns against petitioner. The assignments of error in the appeal of Rene Dorn, Docket No. 11220, are that the respondent erred: (a) In treating petitioner as a member of the firm of R. J. Dorn & Co. from the period April 1, 1916, to September, 1921; (b) In treating petitioner as a member of a domestic partnership from September through December, 1921; and (c) In including petitioner's share of profits of R. J. Dorn & Co. in income of the calendar year in which the fiscal year of R. J. Dorn & Co. ended. FINDINGS OF FACT. On August 3, 1914, a partnership was formed in Havana, Cuba, under the firm name of R. J. Dorn & Co. This partnership was composed of R. J. Dorn and three other individuals, none of whom was a brother of R. J. Dorn. On January 4, 1915, one of the partners withdrew from the firm and thereafter R. J. Dorn continued to *1104 operate the business under the same trade name as a sole proprietorship. Under this name R. J. *3403 Dorn & Co. operated an office in Havana, Cuba, and one in Martinique, the office in Martinique being managed by Louis Dorn, a brother of R. J. Dorn. Although the firm was originally established to conduct a varied business the principal business from the first was the sale in foreign countries of goods purchased in the United States. In order to make purchases at the best advantage a New York office was opened in the fall of 1915 for the purchase of goods to be shipped to foreign purchasers upon orders sent through the Havana office. During the years 1917 to 1921 most of the goods purchased were sold in Martinique through Louis Dorn, the representative of the business in that island. Rene Dorn, another brother of R. J. Dorn, was made manager of the New York office under an agreement by which he was to receive a stipulated salary plus a percentage of the profits of the business. The profits were to be determined monthly, and Rene Dorn, having the custody of the profits could appropriate his share monthly. It was specifically agreed that Rene Dorn should not be liable for any of the losses of the business. Louis Dorn in Martinique likewise received a stipulated salary plus a*3404 percentage of the profits. In July, 1917, the contract of employment of Rene Dorn was reduced to writing. Rene Dorn desired to be admitted to partnership with his brother but R. J. Dorn, who was furnishing the capital for the enterprise, for a long time refused to admit him. His percentage of the profits of the business was increased from year to year and on September 9, 1921, Rene Dorn and R. J. Dorn organized a partnership which thereafter carried on the business under the same name, R. J. Dorn & Co. From the time that the New York office was opened in 1915, Rene Dorn continued as an employee of R. J. Dorn until he was admitted to partnership. Louis Dorn throughout the taxable years was an employee of R. J. Dorn and a resident of Martinique. He never became a partner of R. J. Dorn & Co. The New York office was continuously operated as a branch of the Havana office. The New York office was opened and conducted during the taxable years as a purchase office. No goods were bought abroad and sold in the United States. During the early years practically all orders came from points abroad. During the fiscal year ended March 31, 1917, the total sales of the New York office*3405 amounted to $150,097.48, of which sales aggregating $143,304.96 were on orders taken by Louis Dorn in Martinique, and $6,792.52 were on orders received in New York; during the fiscal year ended March 31, 1918, the total sales of the New York office amounted to $223,421.23, of which sales aggregating $182,288.91 were on orders taken by Louis Dorn in Martinique, *1105 $10,338.78 on orders taken by R. J. Dorn in Havana and $30,793.54 were on orders received in New York and Porto Rico; during the fiscal year ended March 31, 1920, the total sales of the New York office amounted to $750,025.55, of which sales aggregating $463,147.86 were on orders taken by Louis Dorn at Martinique, $88,090.89 were on orders taken by R. J. Dorn from Santa Lucia Co., Cuba, $16,605 were on orders from United Railway of Havana, $29,122.25 on orders taken by an agent in Mexico, and $153,059.55 on orders received in New York and Porto Rico; during the fiscal year ended March 31, 1921, the total sales of R. J. Dorn & Co., New York office, were $843,193.56 of which sales aggregating $292,786.31 were on orders secured by Louis Dorn in Martinique, $169,631.57 on orders secured by R. J. Dorn in Havana, $57,239.65*3406 on orders secured by an agent in Mexico, and $323,536.03 on orders received in New York and Porto Rico; during the fiscal period ended December 31, 1921, the total sales were $192,562.42, of which sales aggregating $15,478.05 were on orders secured by Louis Dorn in Martinique, $25,225.82 on orders secured by R. J. Dorn in Havana, $17,291.05 on orders secured by an office in Mexico, $2,764.99 on orders secured by an agent in Mexico, and $131,802.51 on orders received in New York. Where R. J. Dorn & Co. had a representative, as in Martinique and Cuba, it was the custom to bill the customer direct, ship the goods on open bill of lading and draw a draft on the customer for the amount. Shipments to points where the company had no representative were on order bill of lading attached. The marine insurance was taken in the name of R. J. Dorn & Co. If losses were incurred, they were borne by R. J. Dorn & Co. The accounts were kept in New York. Payment for the purchase of goods was made from New York. When the drafts were drawn on customers they were discounted by the Royal Bank of Canada in New York upon the personal guarantee of R. J. Dorn and limited to the personal amount of his*3407 credit guarantee. If payment was not made upon presentation of draft abroad, it had to be made good by R. J. Dorn & Co. The drafts included cost, insurance, and freight and the consignee paid the interest and collection charge from the time the drafts were discounted until they were paid. The actual payment was made by the consignee upon the arrival of the goods at destination. No stock was carried in New York but goods were bought on specification. The invested capital of R. J. Dorn, operating as R. J. Dorn & Co. in New York, for the fiscal years ended March 31, 1917, and March 31, 1918, was $1,149.76 and $6,221.49, respectively. During the fiscal year ended March 31, 1920, Rene Dorn withdrew on his profit-sharing account $10,092.65, of which $8,977.83 was *1106 withdrawn prior to January 1, 1920; during the fiscal year ended March 31, 1921, he withdrew on his profit-sharing account $8,121.56, of which $5,753.01 was withdrawn prior to January 1, 1921. These withdrawals were in addition in his salary. Rene Dorn, a resident of New York, attended to all tax matters for all the petitioners. After an examination by a representative of the Commissioner's office and*3408 upon advice of such representative that R. J. Dorn & Co., R. J. Dorn, and Louis Dorn were not subject to income tax, Rene Dorn did not thereafter file returns for them. Under the agreement the partnership entered into on September 9, 1921, the profits of the business were to be divided equally between R. J. Dorn and Rene Dorn after considering as an expense of the partnership 20 per cent of the net profits payable to Louis Dorn for services performed at the Martinique branch. Respondent has determined deficiencies upon the basis that R. J. Dorn & Co. throughout the taxable years 1917 to 1921, inclusive, was a partnership transacting business in the United States, and that Louis Dorn, R. J. Dorn, and Rene Dorn were members of such partnership. He has accordingly held the partnership liable to excess-profits tax upon gains for the calendar year 1917 and the other petitioners liable to income tax in respect of their shares of profits for other years involved. OPINION. SMITH: The petitioners have assigned numerous errors in the determination of these deficiencies but we think that it is necessary for us to pass upon only a few of them. The deficiencies were determined upon*3409 the supposition that R. J. Dorn & Co. was during all of the taxable years 1917 to 1921, inclusive, a partnership. The evidence shows, however, that from 1916 to September 9, 1921, the business conducted under this name was a sole proprietorship owned by R. J. Dorn, a nonresident alien of Havana, Cuba. The first point which we shall consider is whether R. J. Dorn, conducting business in Havana, Cuba, with an office in New York during the calendar year 1917, was liable to income and excess-profits tax in respect of the income which he derived from that business. Section 1(a) of the Revenue Act of 1916 provides: * * * and a like tax [2 per centum] shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. The Revenue Act of 1917 imposes an excess-profits tax upon individuals in respect of a trade or business of a nonresident individual. *1107 (Section 202, Revenue Act of 1917). The return upon which such tax*3410 shall be made up "in the same manner as is prescribed for income-tax returns under Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act." (Section 211 of the Revenue Act of 1917.) If R. J. Dorn, conducting business under the name of R. J. Dorn & Co., derived an income from a source within the United States during the year 1917, that income is liable to income and excess-profits tax. It is to be noted, however, that the activity of the New Yorkoffice of R. J. Dorn during 1917 was confined to the purchase in the United States of goods manufactured in the United States upon orders received from abroad and the shipment of such goods to the foreign consignees. We have held that where goods were manufactured abroad by a nonresident alien and sold in this country the entire profit constitutes "gross income from sources within the United States" within the meaning of section 213(c) of the Revenue Act of 1918. . We have also held that where a foreign corporation sells goods at a profit in the United States it derives an income from a source within the United States within the meaning of the statute. *3411 ; . The question as to whether certain foreign corporations and partnerships derived income from sources within the United States under the provisions of the Revenue Act of 1918 was referred by the Secretary of the Treasury to the Attorney General, who, on November 3, 1920, rendered his opinion upon the question propounded. The Revenue Act of 1918 is more specific than the Revenue Acts of 1916 and 1917 with respect to the sources of income of foreign corporations and nonresident alien individuals. Section 213(c) of that Act provides: In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. *3412 Section 233(b) contains a similar provision with respect to income from sources within the United States of foreign corporations. The Attorney General held in his opinion, 32 Ops.Atty.Gen. 336, that: No income is derived from the mere manufacture of goods; before there can be income there must be sale; and there is no income from sources within the United States from goods manufactured here unless there is, in the language of section 233(b), both "manufacture and disposition of goods within the United States." *1108 It was further held that where a partnership organized in England, with principal office at Liverpool, England, maintains a branch office at Dallas, Texas, which does not make any sales in the United States, but buys cotton therein which it ships to the home office in England for disposition, the gross income from such business is not derived from sources within the United States. The facts in the case stated are much the same as those which obtain in the case of R. J. Dorn for 1917. We think it clear that without the sale of the goods purchased by R. J. Dorn, trading as R. J. Dorn & Co., there could have been no income to R. J. Dorn. The purchasers of the*3413 goods were nonresidents; title to the goods purchased remained with R. J. Dorn until they were delivered to the foreign consignee; the money from which the income was derived was received from the foreign consignee. We think that the converse of the situation which was before us in the Birkin case, supra; the ; and , requires us to hold that the income of R. J. Dorn prior to the organization of the partnership of R. J. Dorn & Co., on September 9, 1921, was from a source without the United States and not from a source within the United States. We are, therefore, of the opinion that upon the record it must be held that R. J. Dorn & Co., Louis Dorn, and R. J. Dorn, at least prior to the organization of the partnership on September 9, 1921, are exempt from income-tax in respect of any income derived by them from operations of R. J. Dorn & Co. Section 217(e) of the Revenue Act of 1921 provides: Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or*3414 without the United States under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions property apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the case of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income; and the portion of such net income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. *3415 Gains, profits and income from (1) transportion or other services rendered partly within and partly without the United States, or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, shall be treated as derived partly from sources within *1109 and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from the country in which sold. The methods of transacting business after the organization of the partnership were not different from those in existence before that date. Under the specific provisions of the Revenue Act of 1921 the partnership derived no income from a source within the United States inasmuch as its only activity within the United States was the purchase of goods therein for sale abroad. There remains only to be considered the liability to income tax of Rene*3416 Dorn. He was admittedly a member of the partnership of R. J. Dorn & Co. from September 9 to December 31, 1921. It is not denied that he is liable to income tax in respect of his pro rata share of the profits of the partnership for this period. It is contended, however, on behalf of Rene Dorn, that under his contract with R. J. Dorn he was to receive a stipulated salary and a percentage of the profits monthly prior to September 9, 1921, when he became a partner; that the profits were to be determined monthly, and the profits were available to him monthly; and that the respondent has erred in allocating the profits upon the basis of the fiscal year of March 31, 1920, of R. J. Dorn & Co. The contentions of the petitioner, Rene Dorn, upon this point are sustained, since Rene Dorn was not a member of the partnership for such fiscal year. Reviewed by the Board. Judgment will be entered under Rule 50.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624471/

C. E. Mauldin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen T. Mauldin, Petitioner, v. Commissioner of Internal Revenue, RespondentMauldin v. CommissionerDocket Nos. 19311, 19312United States Tax Court16 T.C. 698; 1951 U.S. Tax Ct. LEXIS 237; March 30, 1951, Promulgated *237 Decisions will be entered for the respondent. In 1920, petitioner purchased 160 acres of land approximately one mile from the business center of Clovis, New Mexico, and approximately one-half mile from the city limits. His immediate plans were to use the land for grazing and feeding cattle. These plans failed to materialize and in 1924 he platted the land for sale in lots and small acreage tracts. Part of the land was incorporated into the city about 1930, and all of it had been so incorporated by 1939. Although he engaged in other business activities over the years and the number of sales were up and down in various years, petitioner continuously held lots and tracts for sale and, in the course of such holding, sold lots and tracts throughout the period from 1924 through 1945. As the town grew, and conditions and demands changed, petitioner subdivided and replatted various tracts to meet current market needs. He sold some land for school purposes and made a donation thereto of some additional acreage. He donated a lot to get the Federal Housing Administration Program started. His activities in selling varied with changing financial trends and with the needs in handling*238 his property. From 1940 to 1945, the population of Colvis almost doubled, due to the location of war facilities in that area, and during that period he devoted to his real estate operations only the time required to consider and act on the offers which came to him in due course. He was, during this period, regularly engaged in the lumber business with his son. Held, that the lots sold by petitioner in 1944 and 1945 were lots held by him primarily for sale to customers in the ordinary course of his business, within the meaning of section 117 (a) of the Internal Revenue Code, and the gain realized is includible in full in his gross income. Dorothy Ann Kinney, Esq., for the petitioners.Donald P. Chehock, Esq., for the respondent. Turner, Judge. Johnson, J., dissenting. Tietjens*239 and Rice, JJ., agree with this dissent. TURNER *699 Respondent has determined deficiencies in income tax against petitioners C. E. Mauldin and Helen T. Mauldin, for the year 1944, in the respective amounts of $ 427.19 and $ 277.18, and for the year 1945, in the amount of $ 3,798.14 against each petitioner.The only question in issue is whether certain lots sold during the taxable years were properties held by C. E. Mauldin primarily for sale to customers in the ordinary course of his trade or business, within the meaning of section 117 of the Internal Revenue Code.FINDINGS OF FACT.Petitioners are husband and wife, and residents of Clovis, New Mexico. All income in issue is community income and was so reported by them. Their returns for the taxable years 1944 and 1945 were filed with the collector of internal revenue for the district of New Mexico.C. E. Mauldin, hereinafter referred to as petitioner, was born February 23, 1877, in Pickens County, South Carolina. In 1900 he graduated from Clemson College, the A & M College of South Carolina. He later attended Iowa State College, at Ames, Iowa, and the University of Pennsylvania, from which latter school he received a*240 degree in veterinary medicine in 1904.He served several years with the United States Bureau of Animal Husbandry. For about two and one-half years he was in charge of a livestock experimental station in Louisiana, and for approximately two and one-half years was manager of the Louisiana Livestock Commission. In 1916 he moved to Albuquerque, New Mexico. Having learned from the Chief of United States Engineers there that numerous road construction jobs were available, he organized a road construction company. He had had some experience in road work and grading in his activities in Louisiana.In 1920 petitioner went to Clovis to bid on a sewer project. He was so impressed with the town, its climate for raising cattle and the cheap cattle feed available, that he immediately moved there. He began looking at property, with a view to finding something suitable for cattle feeding, yet near enough to town that the property would grow in value.In 1920 he contracted for the purchase of 160 acres of land at the price of $ 20,000, or $ 125 per acre. The land was a quarter section, situated about one-half mile from the city limits of Clovis, and about one mile from its business district. *241 At that time, Clovis had a population of less than 5,000 people. Its main street extended to the *700 southwest corner of petitioner's land. The streets of Clovis were not paved. They were dirt roads, "graded in the middle of them."The surface of the tract was uneven, and about 40 to 50 acres in the northwest corner consisted of a lake bed, with some water in it. There was a depression or draw that angled toward the southeast corner, which would afford protection to cattle. The land was grassy, and had been used for feeding cattle. At the time petitioner acquired the property, an old slaughterhouse was located on it. The farm, or ranch, house had been destroyed by fire. A water line had been extended to the property from the Clovis waterworks. At the time of purchase, the residential area of Clovis was still chiefly within the then city limits. The tract of land immediately south of petitioner's property and toward the city limits was already in town lots, but no houses had been built.Petitioner did not use the property for feeding cattle. Shortly after his purchase, the country suffered from a lack of rain, which caused crop failures. From 1921 to 1924, there *242 was a decline in the cattle market and there were bank failures in Clovis. Petitioner's financial condition became such that he made an effort to sell his property, but there was no one available who had the money to pay the price asked. He was advised by real estate dealers that if he divided the property into small tracts he would more readily be able to sell.The land was surveyed, platted and subdivided into 29 separate tracts of small acreage and four blocks of 88 lots, and was named The Mauldin Addition. The plat was filed in the county clerk's office in December 1924. The first 12 tracts, ranging from less than 3 acres to 10 acres each, were situated north of a road which diagonally crossed the quarter section from the southwest to the northeast corners. They were numbered 1 to 12, and from east to west. The other tracts and the four blocks of lots were south of the road. At the southwest corner of the addition, the road appears as an extension of Main Street, curving from a direction due north and running diagonally to the northeast corner of the addition. The right-of-way was donated by petitioner, and the dedication to public road purposes appears to have been made*243 by the filing of the plat. The road was opened in 1924 or 1925. How far it extended beyond petitioner's property is not shown. The plat shows, also, that four streets and parts of two other streets had been dedicated to the public. Four streets were continuations of streets running north from the original town of Clovis and through a subdivision called North Park Addition, situated between the town and Mauldin's Addition. They extended to the diagonal road. The streets were dedicated at the same width as they were within the city. The street extending along the eastern boundary of the blocks of lots was only 40 feet wide, the other 40 feet, presumably, to come from the *701 adjoining tract. The streets running east and west were East 14th Street and East 16th Street. East 14th Street apparently was already laid out along the southern boundary of petitioner's property, and was widened by the addition of 40 feet from petitioner's land, so as to make it 80 feet in width. East 16th Street did not run all of the way through petitioner's property, but only from the diagonal road to as far as the eastern boundary of the area platted into city lots. It was the northern boundary*244 of blocks 1, 2, and 3, consisting of 24 lots each. No street was platted corresponding to East 15th Street, so that blocks 1, 2, and 3 extended approximately two blocks from East 14th Street, on the south, to East 16th Street, on the north. Block 4 was an irregular block of 16 lots, situated on the curve of Main Street, as it entered petitioner's property. To the north, between blocks 1, 2, and 3 and the diagonal road, were six small tracts numbered 13 to 17. To the east of the lots and tracts 13 to 17, were 12 acreage tracts ranging from something under two acres to a bit over four and one-half acres. The north 6 tracts numbered 18 to 23, inclusive, abutted on the diagonal road on the north. The remaining 6 tracts, numbered 24 to 29, were immediately south of tracts 18 to 23, and were bounded on the south by East 14th Street.After opening the addition, in December 1924, petitioner sold only a few pieces of property. Economic conditions became better in the latter part of 1925 and in 1926, when other sales were made. After 1925 petitioner made sales of lots with restrictions as to the value of the houses to be built. This policy was carried out through 1945. In 1927 petitioner*245 built his home on a lot close to the center of the platted lots. This brought sales of other lots.About 1930 petitioner donated for school purposes approximately fifteen acres in tracts 11 and 12, and sold the balance, to the School Board. Part of the lake bed was in the northern portion of these tracts. Petitioner had already sold part of tract 10, which was later subdivided by the purchaser. On August 25, 1931, petitioner subdivided the south end of tract 10 into nine lots, selling one to an individual and the others to the School Board. The thought of the School Board was "to put teachers" there. In 1933 he subdivided tract 14 into two parcels, for two buyers. In 1935 he subdivided tract 3 into 13 lots. He considered this property the least in value of his holdings, and sold the lots for $ 125 each. In November 1937, he subdivided tract 9 into two blocks of 20 lots each. This plat was later vacated and the tract was incorporated in a larger subdivision. In December 1937, he subdivided into eight lots, tract 15, which was situated south of the road. He donated a corner lot to assist the Federal Housing Administration in getting started with its building program. The*246 first F. H. A. house built in Clovis was erected on this lot. Petitioner *702 sold five of these lots, and still owns the other two. In November 1938, petitioner subdivided tracts 4, 5, 6, 7, and 8. The F. H. A. objected to the way a certain street was platted and, in order to have the approval of F. H. A., petitioner vacated the plat and in July 1939 filed a new plat for the tracts mentioned. The plat for tract 9 was also vacated and that tract was included in the new subdivision. By the July 1939 plat, tracts 4 to 9, inclusive, were subdivided into 162 lots. This plat indicates that the adjoining tract, number 10, had been acquired by the School Board, since it reveals that a "Gymnasium," "Stadium and playgrounds" were located on that property. A school building was constructed on the property about 1935. One of the objections to the former subdivision was that a street ran through to the stadium and playground, and the F. H. A. was afraid someone might be injured on account of it. The new plat met the requirements of F. H. A. It also shows that the diagonal road had been named "Commerce Way."In the meantime, some other owners had subdivided the tracts they had purchased*247 from petitioner. A. L. Johnson, who had bought a portion of tract 10, was the first purchaser to subdivide his property. He filed his plat in August 1929. It appears, however, that this property, with the balance of the tract, was later acquired by the School Board, as shown hereinabove. Other purchasers from petitioner who filed plats of their respective tracts, are as follows:TractDate plat was filedS. L. Lewis26March 26, 1930.Minor G. Thompson24April 16, 1932.W. H. Collins1 28 and 31 December 3, 1938.Lester Trimble1 27 and 32 December 3, 1938.Wm. Lancaster, et al18 and 29December 5, 1938.Anne E. Janes Clark17July 26, 1940.A. L. Larue19November 30, 1940.J. H. Hill20March 21, 1944.C. C. Doris3March 16, 1945.C. C. Doris used his property commercially by setting up his machinery business thereon.Part of petitioner's addition was taken into the city about 1930, as petitioner was first assessed in 1931 with a city levy on properties in the Mauldin Subdivision to the city of Clovis. The city limits were extended so as to include all of petitioner's property*248 by 1939. Many houses had been built in and around the Mauldin Addition, and in other areas in Clovis.By the end of 1945, petitioner had sold acreage tracts of approximately 72.076 acres, and lots equal to about 34.64 acres. In addition to the acreage given to the School Board, approximately 15 acres were *703 donated by petitioner for road purposes. With the exception of about 20 acres, petitioner had disposed of all of his 160-acre tract by the end of 1945. Most of the 20 acres then held by petitioner were situated south of Commerce Way and were considered by him and real estate dealers to be his more valuable properties.After petitioner's property was taken into the city, substantial improvements, in the way of street paving, which included curbs and gutters, were made in Mauldin Addition. The usual method of procedure was for a group of property owners or the city commissioners to set up an improvement district. Time for protests was allowed, after which the necessary steps were taken to finance the work and to have it done. In the end, the work was paid for through the assessment of benefits against the property affected and collection of the levies covered thereby. *249 In the outlying districts more attention was paid to the protests of the property owners. The method of setting up the districts in Mauldin Addition, the dates or exact number thereof, their scope as to lots and parcels covered, or the terms of the financing, are not shown with any definiteness. It does not appear that petitioner was a moving spirit in the creation of any of these districts, but neither was he a protestant. In at least one instance, he was away from Clovis on the critical date.A few blocks of paving had been done prior to the time any part of Mauldin Addition was taken into the city limits. The property covered not being a part of the city, only property-holders were responsible for the setting up of the district.About 1936 or 1937, the Clovis sewer system was extended over some part or parts of Mauldin Addition. This work was done by the city as a W. P. A. project.There was a land boom in Clovis from 1926 through 1929. Petitioner sold some of his properties during this period, and thought he could have sold all his holdings if he had desired to do so. He did not desire to sell more at the prices obtainable. He was out of the city during much of this time*250 on his construction business.By 1930, there were no construction contracts available and petitioner was unable to stay in that business. During the 1930's, he held political positions or appointments under the governors of New Mexico. On highway assignments, he was usually paid on a per diem basis. On other work, he usually received a salary.Due to extensive paving, petitioner owed assessments therefor in 1937 or 1938 approximating $ 25,000, and in 1939 he was threatened with legal action for payment in one district. One reason for platting the 162 lots north of the road at the time he did was to sell enough of them at that time to pay the street and road assessments and thereby protect his more valuable property, situated south of Commerce Way, on which paving liens had been impressed. He completed payment of *704 the assessments in 1940 from money realized primarily from the sale of some of those lots, the approximate number sold being one-half or slightly less.In April 1939, after having borrowed some money from a bank, petitioner started a lumber business in partnership with his son. After 1940, and until 1949, when his health failed, he devoted his time to his lumber*251 business and to the sale of lots when solicited by the buyers.Clovis had grown in population in 1940 to about 14,000, and to 20,000 to 25,000 in 1944 and 1945. This latter growth was due primarily to the location of war facilities in or near Clovis during the war, which caused the city to develop very rapidly, and the lots in the Mauldin Addition to be in great demand. From the time petitioner filed his original plat, it was not his practice actively to seek buyers, but to sell his properties on the solicitation of buyers or of real estate men representing prospective buyers. The only period when this practice was to any extent modified, was the period 1937 to 1940. It was also his policy to sell first those properties that he considered the least valuable to hold. Also, when he began to sell lots from one block, it was a practice to continue selling from that block, rather than open up a second block. These methods and policies were generally known, especially to real estate men. Petitioner preferred to hold his better properties for greater profits in the future, as they were appreciating in value each year. He did not have a real estate office, nor a license to sell real*252 estate. He did not advertise his properties for sale either by signs on the property or by advertisements in the newspapers. With one or two possible exceptions, he had no fixed prices or scale of prices for his various lots and tracts. An individual or a real estate dealer representing a client, who wanted to buy petitioner's property, would telephone or see petitioner and ascertain if he would sell the particular parcel in which the buyer was interested and for what price. On occasion, he refused to sell, either because he did not want to sell the particular property at that time, or the prospective buyer would not pay the price petitioner asked. Petitioner would not sell lots unless he knew the cost of the house that was to be constructed thereon. He often fixed his price at 10 per cent of the estimated cost of the house to be built. This was particularly true in cases where the house was to be built under the F. H. A. program. Some sales made by petitioner during the taxable years 1944 and 1945 were made over the telephone and on the street, but principally they were made at his lumber business. Most of the lots sold in the said years were sold from the 162-lot subdivision, *253 north of the road. This was the area replatted in 1939, at the instigation of the Federal Housing Administration.The only real estate petitioner purchased after acquiring the 160-acre tract was one unsightly block of lots near his residence, and some *705 commercial properties for lumber-yard sites in Clovis, Tucumcari, and Amarillo. After cleaning up the block near his home, he sold the lots to three different buyers, at a profit.In his income tax return for 1939, petitioner showed, under Schedule D, gross income of $ 14,116.50 from "Sale of Real Estate -- Improved Lots." He deducted "Cost of Lots Sold -- $ 2,077.02; Improvements -- $ 2,300.88; Total -- $ 4,377.91." His net profit was $ 9,738.59. With deductions of $ 230.91 for interest and $ 181.39 for taxes, his net income was $ 9,326.29. This was the only income reported.In his return for 1940, he stated the nature of his business was "Real Estate." Stated details disclosed "the sale of 15 lots on contract for $ 7,315.00," the land cost as $ 1,518.40, sales costs as $ 881.91, and the cost of street and land improvements as $ 1,362.27. The profit shown was reported as ordinary income. Due, however, to a deduction *254 claimed by reason of loss on the sale of stocks, no net income was reported.Petitioner lists his business in his 1943 return as "Lumber Business." The real estate sales show a gross of $ 3,535, and a net gain of $ 2,679.51. They were reported as long term capital gains as follows:GrossDatesalesKind of propertyacquiredDate soldprice2 lots19204/43$ 1,000Lots19209/43525Lots192010/432,000Total  Gain taxableKind of propertyCostGain(50per cent)2 lots$ 72.75$ 927.25$ 463.63Lots72.75452.25226.13Lots699.011,300.01650.00Total  1,339.76His gross and net income as reported for 1943 were:Sales of lots (50 per cent of $ 2,679.51)$ 1,339.76Partnership11,876.1313,215.89Deductions:Contributions    $ 25.00Interest    278.35Taxes    380.71684.06Net      12,531.83In his original and amended returns for 1944, petitioner did not state the nature of his business. In Schedule D he reported long term capital gains from sales of lots as follows:GrossGain taxableDateDatesales(50Kind of propertyacquiredsoldpriceCostGainper cent)Lots19201944$ 5,400$ 2,130.29$ 3,269.91$ 1,634.85*255 *706 In Schedule E he reported income from the partnership, Mauldin Lumber & Builders Supply Company, of $ 13,238.20. His reported net income was $ 14,385.05.In his 1945 return, petitioner designated his occupation as "Lumber & Real Estate." He showed adjusted gross income as follows:Mauldin Lumber & Builders Supply Co$ 12,646.12Interest Received187.5012,833.62Deduct:Travel and Business Expense     $ 230.00Property Taxes     263.82Total Deductions       493.82$ 12,339.80Long-term Capital Gains:Date acquiredDateGross salesKindsoldprice41 lots19201945$ 28,512.21Adjusted Gross IncomeGain taxableKindCostGain(50 per cent)41 lots$ 8,027.37$ 20,484.84$ 10,242.4210,242.42Adjusted Gross Income$ 22,582.22In his 1946 return, petitioner designated his occupation as "Lumber." He showed adjusted gross income as follows:Long-term Capital Gains:DateGross salesKindDate acquiredsoldpriceTown lotsVar1946$ 28,739.75Schedule E -- Mauldin LumberCo., Tucumcari, N. M  Income: Mauldin Lumber &Builders Supply Co., Clovis, N. M  Deduct:Business Expenses and   Travel Expense     Property Taxes   Interest   Total Deduction     Adjusted Gross Income     *256 Taxable GainKindCostGain(50 per cent)Town lots$ 6,796.87$ 21,942.88$ 10,971.44Schedule E -- Mauldin LumberCo., Tucumcari, N. M  704.09Income: Mauldin Lumber &Builders Supply Co., Clovis, N. M  $ 26,120.79Deduct:Business Expenses and   Travel Expense     $ 678.21Property Taxes   362.85Interest   74.66Total Deduction     1,115.7225,005.07Adjusted Gross Income     $ 36,680.60Petitioner's income from real estate and lumber business during the period 1939 to 1946, inclusive, as shown in his returns, with the exception of 1941 and 1942, was as follows:Real estateReal estateLumberYearsales -- grosssales -- netbusiness -- net1939$ 14,116.50$ 9,738.59194019,115.004,653.0719433,525.002,679.51$ 11,876.1319445,400.003,269.9112,750.00194528,512.2120,484.8412,339.80194628,739.7521,942.8825,005.07Total  99,408.4662,768.8061,971.00*707 Petitioner's real estate sales during the period 1941 to 1948, inclusive, were as follows:Number ofNumber ofYeartransactionslots sold194122    1942311    194335 1/2194435 1/219451544 1/2194639    194711    19482    *257 During the above years, the lumber company, operated by petitioner and his son, did not supply any lumber for houses built on lots sold by petitioner.In determining the deficiencies herein, the respondent treated the gain from the sale of lots as ordinary income and included the full amount thereof in gross income.The lots sold by petitioner in 1944 and 1945 were held by him primarily for sale to customers in the ordinary course of his business.OPINION.The question is whether the lots sold by petitioner in 1944 and 1945 were held by him primarily for sale to customers in the ordinary course of his trade or business, within the meaning of section 117 (a) of the Internal Revenue Code. If so, the gain realized was ordinary income, as the respondent has determined. If not, it was long term capital gain, as reported by petitioner.That the lots were held primarily for sale to customers, is, we think, evident from the facts. From the time his plans for feeding and grazing cattle failed to materialize, the only plan petitioner had for the property was its sale. Being hard pressed for cash, he was at first desirous of selling the property promptly and as a unit. There were no buyers*258 at that time for such a property, and petitioner, on the advice of one or more real estate operators in the locality, subdivided the property as an addition to the town of Clovis and filed a plat thereof with the county clerk, as provided by law. From that time forward, petitioner's primary purpose, and his only purpose shown of record, was the sale of the various lots and tracts into which the property had been divided at a profit, excepting, of course, the lot on which his home was located, and such parcels as were donated for school purposes, streets, roads and for the first F. H. A. house in Clovis, all of which would tend to make the various parcels to be sold more attractive to prospective buyers. At no time was any program *708 or plan formulated for use of the properties for the purpose of producing income other than by sale.The next phase of the question is whether or not petitioner's activities preliminary to and in the actual sale of the lots were of such character as to make of them the conduct of a business. If so, the lots sold were sold in the ordinary course of his business and the gain realized therefrom was ordinary income. It is petitioner's position that*259 he was holding the properties as an investment, that during the years 1944 and 1945, he was devoting his full time to a lumber business which he conducted with his son, and that since his real estate selling activities required little time or effort on his part, it may not be said that those activities were such as to constitute the conduct of a business within the meaning of the statute. In support of this position, he stresses particularly that he maintained no real estate office, he had no real estate broker's license, he never advertised the property for sale through the papers or by signs placed thereon, and his personal activities were limited to the negotiation of sales upon the solicitation of prospective buyers or their representatives. He also regards as significant his refusal, from time to time, to sell a particular property in which someone might be interested.As indicating that his real estate activities in 1944 and 1945 did not constitute a business, he contrasts his activities in those years with his activities during the period from 1937 to 1940. For the period 1937 to 1940, he testified that he did indulge in substantial activity in the selling of tracts and *260 lots, that he would at times "chase" a prospective buyer "around the block." Also, he thought he may have listed some of his lots with real estate operators during that period, though he had previously testified that he did not list any properties after the 1926 to 1929 period. In that connection, one real estate operator could not recall that petitioner had ever listed any properties, or had ever affirmatively gone out and solicited sales or asked the assistance of real estate brokers in the sale of his tracts and lots, while another operator did testify that during the period 1937 to 1940, the petitioner had asked his assistance in the selling of lots. Although the petitioner does not categorically admit that his real estate operations in 1937 to 1940 were such as to constitute a business, within the meaning of the statute, on the other hand, he does not deny that he was in such business, but, to the contrary, argues that the change of his activities from 1940 on was such as to indicate that during the taxable years he had disengaged himself from the conduct of a business within the meaning of the statute.On the facts of record, we think that the activities of the petitioner in*261 connection with the platting, subdividing and selling of the tracts and lots in the Mauldin Addition to the City of Clovis over the years before, during and after the period 1937 to 1940, were such as to put *709 him in the business of selling tracts and lots in the addition. The fact that the personal activities of petitioner at any one time may have required much or very little of his time is not determinative. He might have been engaged in two or more businesses and the business of selling real estate might not have been his principal business. Snyder v. Commissioner, 295 U.S. 134">295 U.S. 134; Oliver v. Commissioner, 138 Fed. (2d) 910; Ignaz Schwinn, 9 B. T. A. 1304, 1308.In our opinion, the facts not only justify but require the conclusion that the petitioner, after being unable to dispose of the property as a unit shortly after his cattle-feeding business failed to materialize, entered upon a business of subdividing and selling the said property, which he then denominated Mauldin Addition. Certainly he was not a passive investor, and his activities were clearly more than mere liquidating*262 activities; and as the years passed and the town of Clovis grew, he adjusted his operations to meet the demands and needs of his business. At first, the property was divided chiefly into small acreage tracts, with only that portion nearest the city limits divided into lots. Streets were platted to tie in and conform to streets already extending from the city limits to his property. Later, as the town grew and the demand became greater and the tastes or needs of customers changed, revisions were made to attract the eye of the buying public. The School Board bought some of the land as the site for a school, and petitioner donated approximately 15 acres adjoining, for school uses. The property donated was not suitable for building purposes, but could be used, and was adapted to use, as a football or athletic field. It was low ground and flooded at times. At the time of purchase, the School Board was considering making part of the land purchased available to teachers. In 1927 Mauldin built a home for his own use on one of the lots. He had already established the practice of setting up building restrictions on lots sold. This program not only protected his home, but maintained*263 the desirability of the other lots and tracts. As time progressed, tracts which had at first been subdivided as small acreage tracts were subdivided into lots and so sold. The first house constructed under the auspices of the Federal Housing Administration in and near Clovis was built on a selected lot donated by petitioner. Subsequently, at the instigation of F. H. A., Mauldin had a plat covering a portion of the property north of Commerce Way vacated and the property replatted to meet the requirements and suggestions of F. H. A., and while he had not set up any fixed scale of prices, except possibly for some small blocks which he sold at $ 125 per lot, he did, at or about that time, follow a standard based on the loans being made under the F. H. A. program for the building of houses. He generally regarded 10 per cent of the prospective cost of the house as a fair and proper price for the *710 lot. So far as appears, however, he did not publicize this method of fixing prices.By reason of some differences between the parties as to certain of the facts and their import here, it appears desirable to take note of certain contentions made by petitioner's counsel. Much is made*264 of the fact that the taxpayer, in platting and subdividing his property, did not on his own account construct improvements, such as the paving of streets and roads, the building of curbs and gutters, and the laying of sewer and water lines. As to the water lines, the record is silent, except to show that a water line onto the property existed at the time petitioner bought the land in 1920. The sewer lines were laid by the city under the WPA program around or about 1937. The paving, in the main, was done through paving districts set up either by the property owners or the city commissioners and the cost thereof was covered by the assessment of benefits against the various tracts and lots affected by the program. Petitioner, at one point, testified, however, that the paving began about "1929 or 1930," and at another point, stated categorically that it started "before" the property was taken into the city. In such case, that project, of necessity, would have originated with the owners of the property themselves. As for the projects laid down or instituted by the city commissioners, it appears that the owners of the property affected had the right to protest, and possibly could *265 have defeated the paving program if the majority of the owners interested had been opposed to it. One witness, well informed with respect to such matters in and around Clovis, testified that the protests were of much greater force in the outlying districts. The attitude of petitioner at some points in his testimony seems to be that the paving was more or less forced upon him, even though it does appear of record that in no case did he openly oppose or protest the setting up of the paving districts, and one of his witnesses familiar with his operations was of the view that petitioner "originally" felt that the paving would benefit his property. In any event, there is nothing to indicate that petitioner even may have had any strong or adverse feeling in the matter, until he was being pressed for payment of the levies laid against the assessed benefits to his property.As far as we are able to see, the facts in this case being what they are, the question whether petitioner did, or did not, participate in setting up the paving program, is not of any controlling importance. The need or desire for paving in the business or residential areas of Clovis apparently did not develop until *266 some time after petitioner had acquired the property. When his purchase was made in 1920, according to his testimony, there were no paved streets in Clovis. They were dirt roads, "graded in the middle." Regardless of the method of its accomplishment, it seems apparent that the paving had been done by the *711 time it became a factor of any particular importance in petitioner's real estate operations. At the time petitioner's property was taken into the city, he had already sold considerable parts of the addition and, to some extent, at least, the wishes, interests and desires of other land owners would be of some force in the approval or rejection of a proposed paving district. Petitioner's position, in so far as the paving of roads and streets, or the construction of curbs, gutters and sewer lines are concerned, was obviously quite different from that of a real estate developer whose property, from the time of its first platting, was so located that improvements of the character mentioned were a prerequisite to the successful conduct of the operation.Petitioner's counsel also considers of controlling importance the fact that the step-up in petitioner's selling program between*267 1937 and 1940 was occasioned by his need or desire to raise money to pay off the accumulated paving assessments against various of his properties. The fact that the petitioner found it necessary to step up the sale of the lots for the purpose mentioned, or chose that method of raising money to pay the levies assessed against properties owned by him, does not, in any way we are able to comprehend, change the picture. To say the least, the financing of street and road paving costs through levies against assessed benefits to the properties affected is a common practice, whether the paving is done in new real estate developments or areas previously opened, and, in due course, payment of the levies must be made. The satisfaction of the levies cleared the properties in the said district and allowed the petitioner greater freedom in carrying out the subsequent sales thereof. If of any significance here, it would seem that the increased sale of lots during 1937 and 1940 supports, rather than negatives, the conclusion that petitioner's activities in platting and selling his properties in Mauldin Addition constituted the conduct of a business.Petitioner's counsel makes two other arguments*268 which are apparently regarded as of controlling importance. One is that petitioner's activities in 1944 and 1945, in so far as Mauldin Addition was concerned, were limited to the negotiation of sales in the cases where the offers to buy met with his approval and the rejection of numbers of sales where the offers were not satisfactory to him. In other words, controlling significance is attached to the fact that in the taxable years petitioner did not affirmatively conduct any selling campaign. One answer to the contention is that, while petitioner was devoting what might generally be referred to as full time to the lumber business, he did take out whatever time was necessary to carry on the desired sales activity. The population of Clovis had practically doubled by reason of the location of war plants in the vicinity, and we think it may properly be observed that during the war period there was what is generally referred to as a seller's market, and that was particularly true in areas *712 where activities connected with the conduct of the war were being carried on. Accordingly, it does not appear that any further action was required on the part of the petitioner in the conduct*269 of his real estate selling operations. The rejection of some offers would, in logic, seem to be part and parcel of the same operations. Certainly it may not be said that a rejection of some offers and the resulting holding of the lot or lots in question for better sale is, in and of itself, antagonistic to the conduct of a real estate business.In many important respects, the petitioner's activities were comparable to those of the taxpayer in Oliver v. Commissioner, supra. Neither Oliver nor the petitioner had a real estate office or a real estate broker's license. Except for the first of Oliver's tax years, when he platted his last subdivision, their activities were much the same. They merely dealt with customers who came to them. The platting and subdividing of the properties sold had previously been done. To some extent, Oliver, as did petitioner in this case, benefited by having a seller's market. Neither did any newspaper advertising, and while Oliver did have a sign on the property he was holding for sale, his property was located in a relatively much larger metropolitan area, and even with the sign, the fact that he held lots for sale*270 was probably not nearly so well established in the Washington area as was the fact that petitioner held his lots for sale, in Clovis. In each instance, both taxpayers put forth only such effort as was necessary for the conduct of their operations in any particular year. In that connection, it is interesting to note Mauldin's own testimony. Referring to the situation as it existed when giving his testimony in this proceeding, he stated that the buyers had just about quit coming to him, "and it looks like I might have to go to selling them again, and if I do, I will go to selling them."In our opinion, the lots sold by petitioner in the Mauldin Addition, in 1944 and 1945, were held by him primarily for sale to customers in the ordinary course of his real estate business of platting and selling the property, within the meaning of section 117 (a) of the Internal Revenue Code, supra, and we so hold. See and compare Snyder v. Commissioner, supra;Brown v. Commissioner, 143 Fed. (2d) 468; Snell v. Commissioner, 97 Fed. (2d) 891; Oliver v. Commissioner, supra;*271 Gruver v. Commissioner, 142 Fed. (2d) 363, affirming 1 T. C. 1204; Ehrman v. Commissioner, 120 Fed. (2d) 607, affirming 41 B. T. A. 652; Richards v. Commissioner, 81 Fed. (2d) 369, affirming 30 B. T. A. 1131; Julius Goodman, 40 B. T. A. 22; Ignaz Schwinn, supra.Frieda E. J. Farley, 7 T.C. 198">7 T. C. 198, cited and relied on by petitioner, is not this case.Decisions will be entered for the respondent. JOHNSON *713 Johnson, J., dissenting: I disagree with the conclusion reached by the majority. The evidence discloses that in 1940, when enough lots had been sold to liquidate petitioner's indebtedness to the city for paving, he decided to hold the remaining portions of his 160-acre tract and thereafter took no steps to promote sales. Such sales as he made thereafter resulted from unsolicited offers from individuals and he did not advertise his property for sale, hire any agents, erect signs, list the property, or *272 take any other steps ordinarily taken by individuals engaged in the business of selling real estate. "Business," as that term is used in the statute, "notwithstanding disguise in spelling and pronunciation, means busyness; it implies that one is kept more or less busy, that the activity is an occupation." Snell v. Commissioner, (CA-5, 1938), 97 Fed. (2d) 891; Dunlap v. Oldham Lumber Co., (CA-5, 1950), 178 Fed. (2d) 781; W. T. Thrift, Sr., 15 T. C. 366, 370; Thomas E. Wood, 16 T.C. 213">16 T. C. 213. An individual who has been active in the real estate business over a period of years can change his status if he indicates his intention to do so and refrains from activities ordinarily pursued by those engaged in such a business. Cf. Carl Marks & Co., 12 T. C. 1196, 1202. Petitioner made such a change in 1940. Thereafter he engaged in the lumber business with his son. Accordingly, in my view, the lots here in question were not, in the language of the statute itself, held by petitioner in the taxable years "primarily for sale to customers*273 in the ordinary course of his trade or business," section 117 (a) (1), I. R. C., and petitioners correctly reported the gains on the sales as long term capital gains. Footnotes1. Tracts 31 and 32 do not appear on the original plat of Mauldin's Addition.↩

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https://www.courtlistener.com/api/rest/v3/opinions/4624472/

Birmingham Terminal Company, Petitioner, v. Commissioner of Internal Revenue, RespondentBirmingham Terminal Co. v. CommissionerDocket No. 27233United States Tax Court17 T.C. 1011; 1951 U.S. Tax Ct. LEXIS 13; December 17, 1951, Promulgated *13 Decision will be entered for the petitioner. Where petitioner incurred certain retirement losses which, because of Interstate Commerce Commission regulations, it could not charge against railroads using its passenger terminal facilities, and thereafter, in a subsequent year, the regulations were changed to permit reimbursement of petitioner by the railroads on account of those losses, held, the reimbursement in the later year did not constitute taxable income, since the retirement losses did not produce any tax benefit in the earlier years. Charles M. Davison, Jr., Esq., for the petitioner.Stephen P. Cadden, Esq., for the respondent. Raum, Judge. RAUM*1011 OPINION.Respondent determined deficiencies of $ 11,094.34 and $ 5,048.37, respectively, in petitioner's income and declared value excess-profits taxes for the calendar year 1945. *14 Its returns for those taxes, reported on the accrual basis and for a calendar year period, were filed with the collector of internal revenue for the district of Maryland. The facts, completely stipulated by the parties, are not in dispute, and as stipulated are adopted as our findings of fact.Petitioner is a corporation organized under Alabama law, and has its principal office in the District of Columbia. Its stock is owned entirely and equally by six railroads 1 (to which we also refer as "the roads") which operate passenger trains to and from the City of Birmingham, Alabama. Petitioner owns and maintains a passenger station, car sheds, tracks, yards, and appurtenant facilities in Birmingham which the roads use in common. Petitioner in effect is the vehicle through which the roads cooperate to provide and maintain for themselves *1012 necessary terminal facilities in that city. Petitioner's management is jointly designated and controlled by the roads, and the funds for petitioner's operations, with the exception of a relatively small amount of incidental income, are furnished by the roads.*15 The basis for this cooperative effort was laid in an agreement of 1907, not long after petitioner was organized, to which it and the roads were parties. Petitioner agreed to grant the roads use of its terminal facilities. The roads in turn agreed to pay an annual rental, in specified installments, equivalent to the sum of several items, the chief one being petitioner's net operating expense. The cost of operating the joint terminal facilities was, in other words, to be borne jointly by the roads in the form of a rental which, the agreement provided, was to be computed --By charging in the account on the one handAll items of expense by the Terminal Company which are usually and properly charged by railroad companies to operating expenses, including taxes, maintenance, insurance, renewals and depreciation of properties, as well as all extraordinary expenses which the Board of Directors of the Terminal Company may specially authorize and direct to be charged into such account, andBy crediting in the account on the other handAll income derived by the Terminal Company from the rent of offices or privileges in or about the station building, or from any other source, including the*16 rent paid by any other railroad company or companies which may be hereafter admitted to the use of said station and facilities by the Terminal Company.In recording its expenses and income petitioner was subject to regulation by the Interstate Commerce Commission and kept its accounts in conformity with the Commission's requirements and prescribed classifications. Pursuant to the prescribed system, petitioner charged the expenses of operating and maintaining its terminal facilities to operating expense accounts, and apparently its incidental revenues were credited to revenue accounts. At the end of each month, the roads were charged with an amount equal to the charges entered in the expense accounts during the month, and were credited with the revenues entered during the same period. The roads paid petitioner the difference in their accounts between these charges and credits, so that petitioner ordinarily had no profit or loss, and on its income tax returns and in its annual reports to the Interstate Commerce Commission petitioner showed neither profit nor loss.During the period from December 1926 to September 1940, and while this method of accounting was in effect, certain facilities*17 used by petitioner in its terminal operations were withdrawn from service and retired as no longer useful in the business. The net costs of these retirements (to which we also refer as the "retirement losses") amounted to $ 50,092.18, and according to accounting requirements of the Interstate Commerce Commission, they could not be charged to its expense accounts. They therefore could not become charges *1013 to the accounts of the roads, and no collection was made from the roads on account of the retirement losses, but instead they were carried as a loss in the profit and loss account.In 1942 the Interstate Commerce Commission amended its accounting classifications to require, after January 1, 1943, that such retirement losses be charged to operating expenses rather than profit and loss, and in 1945 the Bureau of Accounts of the Commission directed petitioner to charge its operating expenses, and to credit its profit and loss account, in the amount of $ 50,092.18. The result was that in 1945, as part of the rental charge for using the terminal facilities and in accordance with the prescribed method of accounting, petitioner also charged this amount to the accounts of the *18 roads.For the years in which those retirements were made, petitioner's income tax returns did not show any net income. Only part of the retirement losses were actually deducted by petitioner on its returns; these produced no tax benefit, and petitioner would not have derived any tax benefit through deduction of the remainder of those losses. The credit of $ 50,092.18 made in its profit and loss account in 1945, was reported in its return for that year as nontaxable income. The roads, charged with that amount, accrued and deducted it on their returns for 1945 as operating expense.The deficiencies in petitioner's taxes determined by respondent for 1945 depend on increase of petitioner's income on account of two items. One of these respondent now agrees was not income to petitioner in 1945. The second was the charge of $ 50,092.18 made by petitioner to the roads in connection with the retirement losses. Petitioner denies that this amount of $ 50,092.18 was taxable income. It relies on the so called tax benefit rule, and contends, since the retirement losses did not give rise to any tax benefits when they were incurred, it ought not be taxed on the reimbursement for those losses. *19 Petitioner's position, we think, is in accord with the settled course of decision, and must therefore prevail. Dobson v. Commissioner, 320 U.S. 489">320 U.S. 489; Boehm v. Commissioner (C. A. 2), 146 F. 2d 553, 555-556, affirmed on another question, 326 U.S. 287">326 U.S. 287; Main Properties, Inc., 4 T. C. 364, 380; Chenango Textile Corporation, 147">1 T. C. 147, 160, affirmed in part and reversed in part on other grounds (C. A. 2), 148 F. 2d 296; Barnhart-Morrow Consolidated, 47 B. T. A. 590, 600-601, affirmed on other questions (C. A. 9), 150 F. 2d 285; Amsco-Wire Products Corporation, 44 B. T. A. 717; National Bank of Commerce of Seattle, 40 B. T. A. 72, 75, affd. (C. A. 9), 115 F. 2d 875; Central Loan & Investment Co., 39 B. T. A. 981. Petitioner had no net income against which to offset the retirement losses when they occurred, and it can make no difference*20 in the application of the principle recognized in these cases that it did not actually deduct all those losses in the *1014 earlier years, since it was entitled to take the deduction but would have derived no advantage had it done so. Cf. Boehm v. Commissioner, supra.But cf. Mathey v. Commissioner (C. A. 1), 177 F. 2d 259, 264. To be sure, section 22 (b) (12) of the Internal Revenue Code, 2 which was intended to achieve a like result in certain circumstances, is literally not applicable here, but it was made plain in Dobson v. Commissioner, 320 U.S. at 505-506, that the addition of these provisions to the Code did not preclude the application of a similar rule in other comparable cases.*21 The only argument respondent makes for a contrary result is rather formal and may be put as follows: the roads, in their agreement of 1907 with petitioner, undertook explicitly to pay "rent" and the sum of $ 50,092.18 was charged against them as part of their "rent"; rent constitutes income; therefore that sum must be reported as income. We say this is a formal argument because it is founded on the nominal designation of "rent" in the agreement.Undeniably, the payments and charges undertaken by the roads for the use of the terminal facilities were governed by the 1907 agreement, and this agreement clearly treats such payments and charges, including the charge of $ 50,092.18, as "rent." It is just as clear, however, that this "rent" was of a dual character, and, particularly with respect to the $ 50,092.18, was as well a reimbursement for loss or expense incurred on the terminal operation. Because of the relationship between petitioner and the roads, the latter in effect underwrote the former's *1015 operating expenses, and although their agreement spoke in terms of "rent," it was in essence an agreement by the roads to furnish the funds necessary to make available terminal*22 facilities. The very method provided in that agreement for calculating the "rent" expressly made it depend on the net expense in operating these facilities, and obligated the roads, within the limits permitted by the Interstate Commerce Commission, to make petitioner whole for its losses in maintaining and operating the terminal facilities. It is beyond the slightest doubt that the $ 50,092.18 charge was made in fulfillment of this obligation, and to reimburse petitioner for the retirement losses incurred in connection with those facilities.Where, as here, there is an accrual or receipt in reimbursement of a loss or expense, we see no reason to bar application of the principle approved in the foregoing cases just because the reimbursement or recovery is made in the form of "rent." We may assume that ordinarily rent payable by railroads to a terminal company is taxable income to the latter ( Hamilton v. Kentucky & Indiana Terminal R. Co. (C. A. 6) 289 F. 20">289 F. 20, just as the taxpayer in the Dobson case would ordinarily have to include his receipt in taxable income (cf. Harbor Building Trust, 16 T.C. 1321">16 T. C. 1321, 1333-1334).*23 The point is that what might otherwise be includible in taxable income ceases to be so because of a train of events which bring into play the so called tax benefit principle, as recognized and applied by the courts.Decision will be entered for the petitioner. Footnotes1. Southern Railway Company, Illinois Central Railroad Company, Seaboard Air Line Railway, Central of Georgia Railway Company, St. Louis and San Francisco Railroad Company, Alabama Great Southern Railroad Company.↩2. SEC. 22. GROSS INCOME.* * * *(b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter: * * * *(12) Recovery of Bad Debts, Prior Taxes, and Delinquency Amounts. -- Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount. 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.(B) Definition of Prior Tax. -- The term "prior tax"" means a tax on account of which a deduction or credit was allowed for a prior taxable year.(C) Definition of Delinquency Amount. -- The term "delinquency amount" means an amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to failure to file return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file return with respect to a tax or pay a tax.(D) Definition of Recovery Exclusion. -- The term "recovery exclusion," with respect to a bad debt, prior tax, or delinquency amount, 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, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax, or amount under this paragraph.* * * *↩

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CLIFFORD L. PAYNE AND JAN F. PAYNE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPayne v. CommissionerDocket No. 23636-90United States Tax CourtT.C. Memo 1992-22; 1992 Tax Ct. Memo LEXIS 34; 63 T.C.M. (CCH) 1778; T.C.M. (RIA) 92022; January 13, 1992, Filed *34 An order will be entered dismissing this case for lack of jurisdiction. Edwin B. Tatum, for petitioners. Pamelya P. Herndon, for respondent. DAWSON, Judge. DAWSONMEMORANDUM OPINION Respondent's motion to dismiss for lack of jurisdiction was assigned to Special Trial Judge D. Irvin Couvillion for hearing, consideration, and ruling thereon pursuant to section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE COUVILLION, Special Trial Judge: Respondent determined a deficiency of $ 63,810 in petitioners' 1985 Federal income tax and additions to tax under section 6653(a)(1) and (2), respectively, of $ 3,191 and 50 percent of the interest due on the underpayment of $ 63,810, and the addition to tax under section*35 6661 of $ 15,953. Respondent has moved to dismiss for lack of jurisdiction on the ground that the petition was not timely filed within the 90-day period prescribed by section 6213(a). Petitioners filed a notice of objection and respondent filed a response thereto. The motion was calendared for hearing at which evidence was adduced. At the time the petition was filed, petitioners resided in Lovington, New Mexico. They have always lived in Lovington. Clifford L. Payne (petitioner) is an attorney engaged in the practice of law in Lovington, New Mexico. He conducts his practice through a professional corporation. The notice of deficiency bears a date of October 12, 1989. The petition was filed October 22, 1990, some 375 days after the date appearing on the notice of deficiency. Since section 6213(a) provides that a taxpayer may file a petition with this Court within 90 days after the notice of deficiency is mailed, or 150 days if the notice is addressed to a person outside the United States, this Court has no jurisdiction over the case if a petition is filed beyond these prescribed time periods. ; .*36 Respondent's motion to dismiss is based upon this proposition. The notice of deficiency is addressed to petitioners at Box 849, Lovington, New Mexico 88260-0849. This is a post office box which petitioners acknowledge is their correct mailing address. In fact, petitioner testified that this post office box has been petitioners' mailing address since 1953 and is their box not only for their personal mail but also for their business mail, including petitioner's law practice, his professional law corporation, petitioner's mother and mother-in-law, and that of a corporation, Cotton Warehouse, Inc. Petitioners contend in their notice of objection that they received actual and constructive knowledge of the notice of deficiency on July 23, 1990. They contend that the 90-day period provided by section 6213(a) should commence as of July 23, 1990. Accordingly, they argue that their petition was timely filed. Petitioner's secretary discovered the notice of deficiency on July 23, 1990, in petitioner's professional corporation file at his law office. Petitioner's accountant and return preparer called petitioner's secretary on that date requesting that she search petitioner's records for*37 the notice of deficiency because respondent's agents had contacted the accountant for collection of an assessment of 1985 Federal income taxes against petitioners. Petitioner testified that, prior to July 23, 1990, he had no knowledge or information that a notice of deficiency had been issued, even though the notice was found in his file records. Petitioners contend they are chargeable with actual or constructive notice of the notice of deficiency only as of July 23, 1990, because they had previously executed a power of attorney, Internal Revenue Service Form 2848, at the time the audit of their 1985 income tax return commenced and, in the power of attorney, they designated their accountant as their exclusive agent and representative. In the power of attorney, respondent was directed to send the originals of all notices and all other written communications in connection with the audit to their designated agent and representative. Petitioners' accountant never received either an original or a copy of the notice of deficiency, and, because of this, petitioners contend they had no notice or knowledge of the notice of deficiency until the matter came to petitioner's attention when*38 his secretary discovered the notice of deficiency in his file. Respondent does not contend that the original or copy of the notice of deficiency was mailed to petitioners' accountant. However, he contends that the notice of deficiency was mailed to petitioners on October 12, 1989. Moreover, respondent contends the notice was mailed to petitioners' last known address. Neither party produced the power of attorney at the hearing. Petitioners' accountant testified that, at the time the audit of petitioners' return commenced, he prepared the power of attorney, obtained petitioners' signatures thereon, and gave it to respondent's agent, inadvertently failing to make a copy for his files. However, when respondent commenced demands for collection of the 1985 assessment, petitioners' accountant prepared a second power of attorney, which petitioners executed and provided to respondent's collection agents. Petitioners' accountant testified that this subsequent power of attorney was identical to the previously executed power of attorney and contained the following language: Send originals of all notices and all other written communications in proceedings involving the above tax matters*39 to the appointee first named above, and a duplicate copy of all notices and all other written communications to the taxpayer named above.At the hearing, for the first time, petitioners contended that respondent had not established proof of mailing of the notice of deficiency on October 12, 1989. This contention was not raised in their notice of objection. Respondent attached to the motion to dismiss the copy of a document alleged to be United States Postal Service Form 3877, on which petitioners' names and address appear along with a postmark by the United States Postal Service dated October 12, 1989. This document, however, does not bear any form identification number nor the name of the United States Postal Service. The document is addressed to the Internal Revenue Service office at Albuquerque, New Mexico, and, in several blocks listing various categories of mail, the block for "Certified Mail" is checked. The body of the form is captioned "Notices of deficiency, for the years indicated, have been sent to the following taxpayers". Following that, there is handwritten information showing a certified mailing number, the names and address of petitioners, and the number *40 "8512" indicating the tax year ending December 31, 1985. The document bears a postmark of October 12, 1989, and, at the bottom, the signature of the Postal Service employee who received the mailing and also a block stating that three parcels were received for mailing on that date. Petitioners have not challenged the authenticity or accuracy of any of this information. Rather, they contend that, since the document presented to the Court is not identified as United States Postal Service Form 3877, respondent failed to establish that the notice of deficiency was mailed. 2At the hearing, petitioner testified that he never personally called*41 for or picked up mail at the post office. This was the responsibility of one of his secretaries. The secretary testified that she only picked up petitioners' business mail. Any mail which appeared to be petitioners' personal mail, and mail addressed to the other parties who received mail at the post office box, was picked up either by petitioner's wife or the other addressees. The secretary opened and reviewed all the mail she picked up. She testified that "what mail he [petitioner] needs to see" was placed on petitioner's desk. This also included personal mail which she may have inadvertently picked up. Petitioner's office did not "date stamp" mail when received. Petitioner's secretary testified she did not know the date the notice of deficiency was received. However, since the notice was in petitioner's office file, she was certain that it in fact had been received in the mail and that she had picked it up at the post office, as was the case with all other mail addressed to petitioner. She further testified she had no reason to believe that the notice was received at any date other than a date within a reasonable time period after October 12, 1989. She did not recall, *42 however, ever signing for receipt of such mail as a certified parcel and was equally certain that, when the notice of deficiency was received, it was not placed on petitioner's desk for his attention because petitioner would most certainly have directed her to call petitioner's accountant to confirm whether the accountant had also received the notice. The secretary was certain that no such event transpired except on July 23, 1990, when the accountant called, requesting a search of petitioner's records for the notice of deficiency. A notice of deficiency is valid, whether or not the taxpayer receives it, if respondent mails the deficiency notice to the taxpayer's last known address. Sec. 6212(a) and (b); ; ; . Therefore, if respondent deposited the notice of deficiency with the United States Postal Service on October 12, 1989, as contended by respondent, the notice is valid if it was correctly addressed. Sec. 6213(b)(1). Petitioners agree that the notice of deficiency*43 was correctly addressed. They contend, however, that the notice: (1) Was not mailed, and (2) if mailed, was not mailed to petitioners' representative, as respondent was directed to do under the power of attorney. The fact that the notice of deficiency is not mailed to a taxpayer's representative, as directed in a power of attorney, is not fatal to the validity of the notice of deficiency. This Court has held that, even though the taxpayer directs that a copy of all communications be sent to the taxpayer's agent, the notice of deficiency is valid where it was mailed directly to the taxpayer at the taxpayer's last known address, even though a copy was not sent to the taxpayer's agent. ; ; ; . Where the power of attorney directs that "all notices and other written communications" be sent to the taxpayer's agent or representative, this Court has held that such directive renders the agent's address as the taxpayer's "last known address" *44 for purposes of section 6212(b)(1). . However, a violation of this mandate does not necessarily invalidate a notice of deficiency. In , and , this Court held that a notice of deficiency was valid even though it was not mailed to the taxpayer's "last known address" under section 6212(b)(1) if the taxpayer actually received the notice of deficiency and was not unduly prejudiced in timely filing a petition with this Court. A taxpayer's actual receipt of a notice of deficiency, without prejudicial delay, obviates the need to consider section 6212(b)(1). The "last known address" requirement of section 6212(b)(1) has been held to be a safe harbor provision to protect the Secretary where, due to the taxpayer's failure to give notice of a change of address, actual notice to the taxpayer cannot be perfected. . Under this safe harbor provision, a notice of deficiency mailed to the taxpayer's "last known address" is valid even if it is *45 never received by the taxpayer. . We note that the power of attorney in question was not produced. However, assuming such a power existed and the agent's address became petitioners' last known address, the ultimate question is whether respondent's actions satisfied the requirements of section 6212(a). If petitioners timely received actual notice, the infraction by respondent of section 6212(b)(1) becomes moot. Respondent bears the burden of proving that the notice of deficiency was properly mailed. . The date appearing on the notice of deficiency is not proof of the date of mailing. . Respondent has successfully proven the act of mailing notices of deficiency by offering Postal Service Form 3877, reflecting receipt into the mail by the Postal Service. . However, respondent's method of proof is not limited to the use of Form 3877. In ,*46 this Court held that, in the absence of Form 3877, respondent could establish proof of mailing through evidence establishing his usual customs and practices in issuing and mailing notices of deficiency, provided such evidence was supported by direct testimony or documentary evidence of mailing. In this case the record supports a finding that respondent mailed the notice of deficiency to petitioners at their last known address on October 12, 1989. Leaving aside the question of the sufficiency or adequacy of the purported Form 3877 presented by respondent, and leaving aside the question whether the issue surrounding Form 3877 was timely raised by petitioners, the fact remains that petitioner had in his possession, in his files, the notice of deficiency. Petitioner's secretary testified that this notice was received through the mail, and there was no reason to believe that it was not received within a reasonable time period after the date of October 12, 1989, appearing on the notice. The secretary acknowledged that the sequence or order in which the notice was filed with other contents in the office file confirmed her belief that the notice was received within a reasonable time period*47 of the date appearing on the notice. Petitioners presented no evidence to dispute any of the information contained on the purported Form 3877 attached to respondent's motion to dismiss. That document contained all the information that this Court has held satisfied respondent's burden of proving that a notice of deficiency was in fact mailed. See , affd. without published opinion . The provisions of sections 6212 and 6213(a) were designed to afford a taxpayer notice of respondent's determination and an opportunity to litigate the validity of such determination in this Court without first paying the claimed deficiency. , affg. . A mailing that effectively results in actual notice is what is contemplated by the statute. , affg. ; ; .*48 Here petitioners not only received the deficiency notice from respondent but they also had actual notice of the deficiency within a reasonable period after it was mailed on October 12, 1989. It is apparent that, for some reason, petitioner's office procedures did not work with respect to this particular correspondence. That failure cannot be charged to respondent. Therefore, we reject petitioners' contention that they received actual notice on July 23, 1990. Accordingly, respondent's motion to dismiss will be granted. An order will be entered dismissing this case for lack of jurisdiction. Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. On brief, respondent argued that he had no knowledge prior to the hearing that such issue would be raised by petitioners. Respondent offered that the copy of Form 3877 inadvertently failed to show the identification of the form and attached to his brief another copy of the same form in which the identification of the form clearly appears as United States Postal Service Form 3877.↩

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APPEAL OF BAKER LUMBER CO.Baker Lumber Co. v. CommissionerDocket No. 3271.United States Board of Tax Appeals2 B.T.A. 907; 1925 BTA LEXIS 2223; October 19, 1925, Decided Submitted June 18, 1925. *2223 C. O. Wellington, C.P.A., for the taxpayer. Ellis W. Manning, Esq., for the Commissioner. *907 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This appeal is from the determination of a deficiency in income and profits tax for the six-month period ended June 30, 1919, in the amount of $1,204.88. The question in issue is whether the tax *908 should be computed on the basis of a separate return of the Baker Lumber Co. or on a consolidated return including the Baker Lumber Co., Baker Box Co., and Leominster Novelty Corporation. FINDINGS OF FACT. The Baker Lumber Co. conducts a retail lumber business in Worcester, Mass. The Baker Box Co. manufactures and sells box shooks, and also deals in sawdust, shavings, etc. The Leominster Novelty Corporation manufactures and sells advertising novelties, etc. These companies occupied the same offices at 84 Foster Street, Worcester, Mass., and all were under the direct management of Charles Baker, who was the dominating and guiding spirit of each business. The companies made advances from one to the other at various times and Charles Baker loaned the companies considerable amounts, without interest, in*2224 addition to endorsing the companies' notes when loans were obtained from banks. He owned 100 per cent of the stock of the Leominster Novelty Corporation, 93.06 per cent of the stock of the Baker Lumber Co., and 86.98 per cent of the stock of the Baker Box Co., the remaining stock of the last two companies being owned by employees, as follows: Company.Name of individual.Per cent of stock.Baker Lumber CoCharles A. Swenson, superintendent of lumberyard.6.94Baker Box CoLeon M. Ludden, superintendent of box shop13.02The stock which stood in the names of the above employees was held by Charles Baker as collateral on demand notes issued to him by the respective individuals in payment for the stock. The stock certificates were actually in Baker's possession during the first six months of 1919 and were under his control as much as though they were issued to him individually. The stock was sold to the employees to be paid for out of dividends earned thereon, if desired, and under restrictions to the effect that no sale or transfer could be made by them until after Baker had first been given an option to purchase. DECISION. *2225 The deficiency determined by the Commissioner is disallowed. ; .

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11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624477/

MICHAEL R. REAGOSO AND CAROL L. REAGOSO, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentReagoso v. CommissionerDocket No. 24902-91United States Tax CourtT.C. Memo 1993-450; 1993 Tax Ct. Memo LEXIS 461; 66 T.C.M. (CCH) 850; September 28, 1993, Filed *461 An appropriate order will be entered granting respondent's motion to dismiss. Michael R. Reagoso and Carol L. Reagoso, pro se. For respondent: Joseph M. Abele and Michael P. Corrado. PARRPARRMEMORANDUM OPINION PARR, Judge: Respondent determined the following deficiencies in and additions to petitioners' Federal income tax: Addition to TaxYearDeficienciesSec. 6661 1 1983$ 6,869$ 34,47619842,075--This case is currently before the Court on respondent's motion to dismiss for lack of jurisdiction. Respondent claims that the Court lacks jurisdiction in this case because the automatic stay provisions of section 362(a)(8) of the United States Bankruptcy Code preclude the commencement or continuation of this suit in the Tax Court. Petitioners request that this Court defer action on this motion until the bankruptcy court has ruled on their request for a determination of the amount of their 1983 and 1984 income taxes or, in *462 the alternative, grants a retroactive lifting of the bankruptcy stay to validate their petition to this Court. Background On May 21, 1991, Michael R. Reagoso and Carol L. Reagoso (petitioners) filed a voluntary petition with the United States Bankruptcy Court for the Eastern District of Pennsylvania for relief under chapter 7 of the Bankruptcy Code. As a result, the automatic stay provision under 11 U.S.C. section 362(a) was activated. On May 24, 1991, the bankruptcy court issued a notice setting the initial meeting of the creditors. On July 29, 1991, respondent issued a statutory notice of deficiency to petitioners determining deficiencies in and additions to petitioners' Federal taxes for taxable years 1983 and 1984. On October 30, 1991, petitioners filed a petition for redetermination with this Court. The bankruptcy court entered an order of discharge in petitioners' bankruptcy proceeding on August 6, 1992. On July 15, 1993, respondent filed a motion to dismiss for lack of jurisdiction alleging that the petition was filed in violation of the automatic stay provision imposed by 11 U.S.C. section 362(a)(8). *463 In response, petitioners filed an opposition to respondent's motion on August 16, 1993. Petitioners contend that they were unaware that the bankruptcy stay invalidated their petition to this Court. In addition, petitioners claim they were unaware that the running of the 90-day period for filing a petition to this Court was suspended under section 6213(f) during the period of the bankruptcy stay and for 60 days thereafter. Furthermore, petitioners note that respondent had notice of their bankruptcy proceeding at the time she filed her answer and during discovery and settlement negotiations. Respondent, they claim, never raised the issue of jurisdiction until she filed the motion to dismiss. If respondent had raised the jurisdictional issue earlier, petitioners contend they could have cured the problem by filing a new petition with this Court. Instead, they feel that respondent's silence has unfairly deprived them of their right to be heard. Discussion The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985) (citing Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418 (1943)).*464 "We have jurisdiction to determine jurisdiction and 'whenever it appears that this Court may not have jurisdiction to entertain the proceeding that question must be decided.'" Normac, Inc. & Normac International v. Commissioner, 90 T.C. 142">90 T.C. 142, 146 (1988) (quoting Wheeler's Peachtree Pharmacy, Inc. v. Commissioner, 35 T.C. 177">35 T.C. 177, 179 (1960)). We also have authority to resolve all questions relating to issues of our jurisdiction. Weiss v. Commissioner, 88 T.C. 1036">88 T.C. 1036 (1987). Section 362(a)(8) of the Bankruptcy Code provides that the commencement or continuation of all Tax Court proceedings is automatically stayed upon the filing of a petition under Title 11. This provision essentially prohibits a debtor-taxpayer from filing a petition in this Court during the imposition of the stay. For an individual taxpayer, the automatic stay remains in effect until the earliest of one of three occurrences enumerated in section 362(c)(2) of the Bankruptcy Code: (2) the stay of any other act under subsection (a) of this section continues until the earliest of -- (A) the time the case is closed; *465 (B) the time the case is dismissed; or (C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.11 U.S.C. 362(c)(2) (1992). In the present case, the automatic stay provisions of the Bankruptcy Code precluded petitioners from commencing a proceeding before the Tax Court until after August 6, 1992, the date the bankruptcy court granted a final discharge in bankruptcy. The improper petition filed on October 31, 1991, therefore, was filed in violation of the automatic stay provision at a time when this Court could not acquire jurisdiction over petitioners. Accordingly, this case must be dismissed. McClamma v. Commissioner, 754">76 T.C. 754 (1981); see also Halpern v. Commissioner, 96 T.C. 895 (1991); Wahlstrom v. Commissioner, 92 T.C. 703">92 T.C. 703 (1989). In order to invoke this Court's jurisdiction to contest their Federal income tax liabilities for 1983 and 1984, petitioners should have filed a new petition. Section 6213(f) provides *466 that the running of the time for filing a petition in this Court shall be suspended for a period during which the debtor is prohibited from filing a petition in this Court (90 days under section 6213(a)) and for 60 days thereafter. Therefore, petitioners had 150 days after the automatic stay was lifted upon discharge in which to file a new petition with this Court (until January 7, 1993). Because no new petition was filed, we have no jurisdiction over the asserted deficiencies. Petitioners assert that they were unaware that the bankruptcy stay barred their petition to this Court and argue that respondent should have raised the issue of jurisdiction in time for them to cure the defective petition. We do not understand why respondent waited so long to file the motion to dismiss, and we sympathize with petitioners' predicament. However, we are constrained by firmly established law: without a valid petition, we do not have jurisdiction, regardless of any unfortunate circumstances. Additionally, petitioners claim that in a similar case, Thompson v. Commissioner, 84 T.C. 645">84 T.C. 645 (1985), when the taxpayer's bankruptcy raised questions regarding this Court's*467 jurisdiction, we held a pending order to the taxpayer to amend the petition in abeyance while the impact of his bankruptcy was clarified. Petitioners contend that we should grant a similar deferral of action on respondent's motion until the bankruptcy court rules on their requests. However, in Thompson, the discharge was still pending in bankruptcy court and the statute of limitations (150 days) had not run, unlike the case at hand. More importantly, we held in Thompson that jurisdiction could not be acquired and, consequently, the case had to be dismissed because the taxpayers had filed their original petition in violation of the automatic stay provision. Therefore, Thompson more clearly supports our conclusion rather than petitioners'. Regardless of the bankruptcy court's decision on whether to grant a retroactive lifting of the automatic stay, we ultimately have jurisdiction to decide our jurisdiction. Normac Inc. & Normac International v. Commissioner, supra. Since a valid petition is a prerequisite to our jurisdiction, we are precluded from making a determination as to the deficiencies in issue and must grant respondent's *468 motion to dismiss for lack of jurisdiction. To reflect the foregoing, An appropriate order will be entered granting respondent's motion to dismiss.Footnotes1. All section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624478/

WILLIAM E. CURRIER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCurrier v. CommissionerDocket No. 20393-90United States Tax CourtT.C. Memo 1991-194; 1991 Tax Ct. Memo LEXIS 218; 61 T.C.M. (CCH) 2526; T.C.M. (RIA) 91194; May 1, 1991, Filed *218 Decision will be entered for the respondent. William E. Currier, pro se. George W. Bezold, for the respondent. COHEN, Judge. COHENMEMORANDUM OPINION Respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows: Additions to Tax Sec.Sec.Sec.Sec.Sec.YearDeficiency6651(a)(1)6653(a)(1)(A)6653(a)(1)(B)6653(a)(1)66541986$ 2,306 $ 577 $ 115*N/A$ 11119872,182546109** N/A11819882,314579N/AN/A$ 116 148Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue. Because petitioner effectively stipulated to his receipt of taxable income and otherwise presented only frivolous arguments, the only issue for decision is the amount of the penalty to be awarded under section 6673. Because the material facts are inseparable *219 from the procedural history of this case, we combine our findings of fact with our opinion. BackgroundPetitioner was a resident of Wisconsin at the time he filed his petition in this case on September 11, 1990. That petition alleged, among other things, that respondent erred in that "Petitioner is entitled to deduct $ 20,000.00 as legitimate expenses associated with loss of property during those years." On September 26, 1990, the Court's opinion in Currier v. Commissioner, T.C. Memo 1990-515">T.C. Memo 1990-515, on appeal (7th Cir., Dec. 24, 1990), was filed with respect to petitioner's income tax liability for 1985. In that opinion, we ordered petitioner to pay to the United States a penalty of $ 500 pursuant to section 6673 by reason of his frivolous and groundless positions in docket No. 2430-89. On October 18, 1990, this case was set for trial in Milwaukee, Wisconsin, on March 18, 1991. Attached to the notice of trial was a Standing Pre-Trial Order requiring, among other things, that all facts be stipulated to the maximum extent possible and that documents to be introduced at trial, and not stipulated, be identified in writing and exchanged by the parties at least *220 15 days before the first day of the trial session. The Standing Pre-Trial Order also directed that trial memoranda be served and submitted at least 15 days before the first day of the trial session. On October 29, 1990, pursuant to leave of Court, petitioner's Amended Petition was filed. In the Amended Petition, petitioner alleged that respondent erred in determining income and not allowing deductions, but he did not identify a single item or amount of income or deduction that was the subject of an alleged error. Petitioner further alleged that the notice of deficiency "must fail"; that the burden of proof should be placed on the Commissioner; and that the Form 1040 was invalid. On December 26, 1990, petitioner's Request for Admissions of Fact was filed, showing service on respondent on December 22, 1990. Petitioner's document did not set forth any facts but, in 30 paragraphs, set forth petitioner's assertions that the notice of deficiency was illegal and fraudulent. On December 31, 1990, respondent filed Motions for Protective Order with respect to the request for admissions and certain interrogatories and requests for production of documents served by petitioner. The interrogatories*221 similarly did not relate to any facts but requested copies of laws, statutes or rules, and delegation orders. Respondent's Motions for Protective Order were granted. On January 16, 1991, petitioner filed a Motion to Strike Insufficient Defense directed at respondent's Motions for Protective Order and submitted a "Motion for Supplement to Court Order Regarding Challenged Key Evidence" that was filed as a Motion to Certify for Interlocutory Appeal. Both motions were denied. On January 17, 1991, respondent filed a Motion to Show Cause Why Proposed Facts in Evidence Should Not Be Accepted as Established. The proposed stipulation attached to respondent's motion set forth details of petitioner's receipt of annuity or pension income from the State of Wisconsin during 1986 ($ 17,800), 1987 ($ 19,488), and 1988 ($ 20,383) and petitioner's failure to file returns or pay tax for any of those years. Attached to the proposed stipulation were copies of checks and Forms W-2P issued to petitioner and a copy of a form in which petitioner elected not to have income tax withheld from the payments to him. An Order to Show Cause Under Rule 91(f), Tax Court Rules of Practice and Procedure, was issued*222 to petitioner. On January 22, 1991, petitioner filed a Motion to Show Cause Why Proposal of Facts for Evidence Should Not Be Accepted as Established, attaching a purported stipulation that repeated in substantial part the matters set forth in respondent's proposed stipulation. Petitioner's proposed stipulation, however, sought to incorporate his arguments concerning the facts and law applicable to this case. On February 21, 1991, petitioner filed a Response to Respondent's Motion to Show Cause Why Proposed Facts in Evidence Should Not Be Accepted as Established, but that response did not cast doubt on the accuracy of the facts set forth in respondent's proposed stipulation. As a result, by Order served February 25, 1991, respondent's motion was granted; the matters set forth in respondent's proposed stipulation were deemed stipulated; and petitioner's motion was denied. In addition, the Order contained the following paragraph: ORDERED: That petitioner is hereby advised that, if he continues to maintain frivolous positions in this case, the Court may, in its decision, award a penalty to the United States not in excess of $ 25,000 under the provisions of section 6673 of the *223 Internal Revenue Code, as amended and in effect for the years in issue. Petitioner is further advised that frivolous positions include, but are not limited to, assertions that petitioner is not a taxpayer; that payment in Federal Reserve notes is not subject to tax; or that procedural irregularities invalidate the notice of deficiency issued in this case or the Form 1040 prescribed for individual income tax returns.The positions thus identified as frivolous were among those previously made by petitioner in this case and included claims that the statutory notice was invalid because of lack of delegation orders. See Stamos v. Commissioner, 95 T.C. 624">95 T.C. 624 (1990), on appeal (9th Cir., Feb. 13, 1991); Ruff v. Commissioner, T.C. Memo 1990-521">T.C. Memo 1990-521; Beam v. Commissioner, T.C. Memo 1990-304">T.C. Memo 1990-304, on appeal (9th Cir., Oct. 29, 1990). On March 11, 1991, petitioner served and submitted to the Court his trial memorandum and a Motion for Pre Trial Conference. In the Motion for Pre Trial Conference, petitioner acknowledged the warning in the Court's Order dated February 22, 1991, and asserted that his "fear of proffering an alleged 'tax*224 protestor type' argument within a trial memorandum * * * has hindered the timely filing of PETITIONER'S TRIAL MEMORANDUM." In his trial memorandum, petitioner stated: Petitioner adopts the summary of facts stated in Respondent's Trial Memorandum. Petitioner relied upon the Public Protection Clause of the Paperwork Reduction Act, among others, and ignored the alleged requirement of filing federal income tax returns. These facts clearly demonstrate that Petitioner's actions were not only reasonable but are in accordance with the law. * * * 1. Petitioner is entitled to deduct for the years at issue the sum of $ 20,000.The balance of the trial memorandum set forth petitioner's argument that the Form 1040 was void because the instructions, including those for Schedule C, failed to display an Office of Management and Budget (OMB) control number. Petitioner claimed that he relied on the Paperwork Reduction Act of 1980, 44 U.S.C. sec. 3501 et seq. (1988). When the case was called for trial, the Court again advised petitioner that his claims that the statutory notice and Forms 1040 were invalid were frivolous and indicated that the only issue properly before the Court was *225 whether petitioner was entitled to any deductions. At trial, petitioner tendered no evidence with respect to deductions other than an affidavit from an employee of a law firm, who listed amounts purportedly paid to the law firm by petitioner for 1987 and 1988. Respondent's hearsay objection to the affidavit was sustained. Petitioner did not attempt to explain the nature of the legal services for which he was claiming a deduction and provided no other identification or evidence of any deductions to which he might be entitled. DiscussionSection 6673(a)(1), as applicable to positions taken after December 31, 1989, in proceedings that are pending on or commenced after that date, directs the Court to make an award to the United States if it appears that proceedings have been instituted or maintained primarily for delay or if the taxpayer's position in such a proceeding is frivolous or groundless. (Other provisions of that section are not pertinent here.) Petitioner has the burden of proving that respondent's determination of unreported income and additions to tax is erroneous. 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); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985);*226 Rule 142(a), Tax Court Rules of Practice and Procedure. Although petitioner's trial memorandum attempted to excuse his failure to file returns, it is apparent from the changing nature of his protester arguments throughout the history of his prior case and this case that he did not rely on any of the beliefs that he now professes in failing to file tax returns. It is equally apparent that petitioner is merely engaged in a continuing and contumacious refusal to file returns or pay taxes that he owes. In petitioner's trial memorandum, he cited, among other things, United States v. Collins, 920 F.2d 619">920 F.2d 619, 630-631 (10th Cir. 1990), in which the Court of Appeals for the Tenth Circuit mentioned in a footnote cases published in 1985 and 1986 and holding that tax forms are not information collection requests subject to the Paperwork Reduction Act. 920 F.2d at 630 n.12. Prior to the time that petitioner's returns were due for the years in issue, various courts had repeatedly and consistently held that the Paperwork Reduction Act did not apply to Internal Revenue forms. See, e.g., Cameron v. Internal Revenue Service, 593 F. Supp. 1540">593 F. Supp. 1540, 1556 (N.D. Ind. 1984),*227 affd. 773 F.2d 126">773 F.2d 126 (7th Cir. 1985) (characterizing the taxpayers' claims as a whole as "patently frivolous"); cases cited in United States v. Barker, 1990 U.S. Dist. LEXIS 14057">1990 U.S. Dist. LEXIS 14057, 90-3 U.S. Tax Cas. (CCH) P50,490, 71-A A.F.T.R.2d (RIA) 4596 (N.D. Cal. 1990). More recently, in United States v. Crocker, 753 F. Supp. 1209">753 F. Supp. 1209, 1214-1216 (D. Del. 1991), a criminal prosecution for failure to file tax returns, the court held that instructions for Form 1040 are not required to set forth OMB numbers. The district court stated: The Supreme Court recently addressed the meaning of "information collection request" under the PRA [Paperwork Reduction Act] in Dole v. United Steelworkers of America, 494 U.S. 26">494 U.S. 26, 110 S. Ct. 929">110 S. Ct. 929, 108 L. Ed. 2d 23">108 L. Ed. 2d 23 (1990). The Court found that most items in the statutory definition are "forms for communicating information to the party requesting that information," and held that the "reporting and recordkeeping requirement" category is limited to "only rules requiring information to be sent or made available to a federal agency, [and] not disclosure rules." Id. 110 S. Ct. at 935. IRS instruction booklets are neither "forms for*228 communicating information" to the IRS nor "rules requiring information to be sent." They are simply publications designed to assist taxpayers to complete tax forms and more easily comply with an "information collection request." 4We agree with this analysis. The Court of Appeals for the Tenth Circuit in United States v. Collins, supra, also cited Lonsdale v. United States, 919 F.2d 1440">919 F.2d 1440, 1444 (10th Cir. 1990), in which the Court of Appeals stated: To this short list [set forth in the opinion] of rejected tax protester arguments we now add as equally meritless the additional arguments made herein that (1) the Commissioner of Internal Revenue and employees of the Internal Revenue Service have no power or authority to administer the Internal Revenue laws, including power to issue summons, liens*229 and levies, because of invalid or nonexistent delegations of authority, lack of publication of delegations of authority in the Federal Register, violations of the Paperwork Reduction Act, and violations of the Administrative Procedure Act, including the Freedom of Information Act; and (2) tax forms, including 1040, 1040A, 1040EZ and other reporting forms, are invalid because they have not been published in the Federal Register. We are confronted here with the taxpayers who simply refuse to accept the judgments of the courts. * * * [919 F.2d at 1448.]Rather than supporting his claims of reliance, the authorities petitioner cites thus refute them. In any event, the Forms 1040 that petitioner was required to file all bore OMB numbers as required by the Paperwork Reduction Act. The additions to tax in issue here arose solely in relation to petitioner's failure to file Forms 1040 reporting his income, and the absence of numbers on any other forms is irrelevant, whether or not required. As the Court of Appeals for the Tenth Circuit stated in United States v. Collins, supra: [The defendant's attorney] lacked any arguable basis in fact*230 or law to argue that the noncompliance of the 1040 forms which defendant failed to file did not comply with the Paperwork Reduction Act: his argument is legally frivolous. See Neitzke v. Williams, 490 U.S. 319">490 U.S. 319, 109 S. Ct. 1827">109 S. Ct. 1827, 1831, 104 L. Ed. 2d 338">104 L. Ed. 2d 338 (1989) (defining legal frivolousness). [920 F.2d at 631.]As the Court of Appeals for the Fifth Circuit said in Crain v. Commissioner, 737 F.2d 1417">737 F.2d 1417 (5th Cir. 1984): We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit. The constitutionality of our income tax system -- including the role played within that system by the Internal Revenue Service and the Tax Court -- has long been established. * * * [737 F.2d at 1417-1418.]In Crain, the Court of Appeals for the Fifth Circuit affirmed an award under section 6673 and added further costs on appeal, after describing the taxpayer's claim as "a hodgepodge of unsupported assertions, irrelevant platitudes, and legalistic gibberish. The government should not have*231 been put to the trouble of responding to such spurious arguments, nor this court to the trouble of 'adjudicating' this meritless appeal." 737 F.2d at 1418. See also Derksen v. Commissioner, 84 T.C. 355">84 T.C. 355, 360-361 (1985); Billman v. Commissioner, 83 T.C. 534 (1984), affd. 270 U.S. App. D.C. 124">270 U.S. App. D.C. 124, 847 F.2d 887">847 F.2d 887 (D.C. Cir. 1988). The same may be said here. After petitioner was warned in our prior opinion, in the Court's Order in this case, and at the beginning of trial, he proceeded to make further frivolous arguments at his peril. See Bell v. Commissioner, 85 T.C. 436">85 T.C. 436, 442-445 (1985). Simply hopping from one frivolous position to another cannot insulate him from the statutorily prescribed consequences. Petitioner's conduct was patently willful, and his positions were taken in bad faith. Those positions are frivolous and groundless, and we conclude that this case has been instituted and maintained primarily for delay. A penalty in the amount of $ 5,000 will be awarded to the United States. Decision will be entered for the respondent. Footnotes*. 50 percent of the interest due on $ 2,306.↩**. 50 percent of the interest due on $ 2,182.↩4. If the taxpayer had to rely on the instruction booklet to create his or her own form 1040, we would come to a different conclusion. [753 F. Supp. at 1216↩.]

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624479/

Estate of Elizabeth M. Lee, Deceased, Rhoady R. Lee, Sr., Executor, and Rhoady R. Lee, Sr., Individually, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Lee v. CommissionerDocket No. 8782-75United States Tax Court69 T.C. 860; 1978 U.S. Tax Ct. LEXIS 165; March 2, 1978, Filed *165 Decision will be entered under Rule 155. At the time of her death, decedent and her husband held as community property under Washington State law 80 percent of the outstanding shares of common stock and 100 percent of the outstanding shares of preferred stock in a closely held corporation. Decedent bequeathed her interest in the common stock to her husband and her interest in the preferred stock to charity. Held, the fair market value of decedent's interest in the corporation determined as a minority interest of 40 percent of the outstanding common shares and 50 percent of the outstanding preferred shares. Held, further, the fair market value of decedent's preferred stock bequeathed to charity determined. Wayne C. Booth, for the petitioners.Darrell D. Hallett, for the respondent. Dawson, Judge. DAWSON*860 Respondent determined deficiencies in the Federal estate and gift taxes of the Estate of Elizabeth M. Lee in the amounts $ 1,924,902.71 and $ 87,075 respectively. Concessions were made by the parties. The two issues that remain for our decision relate to the estate tax deficiency. They are:(1) What was the fair market value on September 14, 1971, of decedent's interest in the 4,000 shares of common stock and the 50,000 shares of preferred stock in F. W. Palin Trucking, Inc., which shares were owned by her and her husband as community property under the law of Washington State.(2) What was the fair market value on September 14, 1971, of the 25,000 shares of preferred stock in F. W. Palin Trucking, Inc., which decedent devised to charity.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated*168 herein by this reference.Petitioners are the Estate of Elizabeth M. Lee (hereinafter referred to as Mrs. Lee) and Rhoady R. Lee, Sr. (hereinafter referred to as Mr. Lee), Mrs. Lee's husband and the executor of her estate. Mr. Lee resided in Medina, Wash., at the time the *861 petition was filed in this case. Mr. Lee filed the Federal estate tax return for Mrs. Lee's estate with the Internal Revenue Service Center in Ogden, Utah.Mrs. Lee died on September 14, 1971, at the age of 67 years. She was survived by her husband, Mr. Lee, and three adult children, Patricia Lee Burke, Rhoady R. Lee, Jr., and Sheila E. Lee (Stanford). Under Washington law Mr. and Mrs. Lee constituted a marital community. All of their property at the time of Mrs. Lee's death was community property.The major portion of the property in Mrs. Lee's estate was her one-half interest in the 4,000 shares of common stock and the 50,000 shares of preferred stock in F. W. Palin Trucking, Inc. (hereinafter referred to as Palin Trucking), which was used as an estate planning vehicle. Mrs. Lee devised her one-half interest in the preferred stock to eight different Catholic charities and her one-half interest in*169 the common stock to Mr. Lee.The planning which culminated in these bequests began in June 1969 when Mr. Lee's personal attorney, Wayne C. Booth, advised Mr. Lee that estate tax problems would be encountered if Mr. and Mrs. Lee retained their extensive realty and close corporation stock holdings in the same form until death. It was suggested by Mr. Booth that Mr. Lee consider establishing a testamentary generation-skipping trust and a corporation to function as a holding company for the various property and stock interests of the Lees. Mr. Booth recommended that a public offering of a substantial portion of the holding company stock be made after its formation. Mr. Lee took no action, however, on these proposals.In the spring of 1971 Mr. Lee discussed estate planning with employees of Touche Ross & Co., a national certified public accounting firm. By letter dated April 26, 1971, Mr. T. B. Tilford of Touche Ross & Co. suggested that the Lees transfer their personally held real estate investments and their interests in Lakeside Gravel Co., Midlakes Construction Co., and Red Samm Mining Co. to their controlled corporation, Palin Trucking, whose assets and businesses were then principally*170 related to the operation of the trucking business.As a result of these discussions, the Lees undertook actions to implement the reorganization of Palin Trucking. At that time the issued and outstanding stock consisted of 3,000 shares. Mr. *862 Lee, his son Rhoady R. Lee, Jr., and one Phil Godfrey each held 1,000 shares. Rhoady R. Lee, Jr., orally agreed to sell his 1,000 shares for $ 67,500 to Mr. and Mrs. Lee and to vote for any reorganization which they might propose. The sales agreement with modifications was consummated by Rhoady R. Lee, Jr., and Mr. Lee in 1974, years after Mrs. Lee's death. On May 15, 1971, the 1,000 shares owned by Phil Godfrey were purchased by Palin Trucking for $ 67,500. The terms of payment for Phil Godfrey's stock were $ 5,000 to be paid on April 12, 1972, and $ 1,000 or more per month beginning June 20, 1972, with interest of 7 percent on the principal balance.On May 13, 1971, shortly prior to the purchase of Godfrey's stock, the articles of incorporation of Palin Trucking were amended to provide in pertinent part as follows:The corporation shall be authorized to issue two classes of stock with the designation, preferences, limitations and*171 relative rights as follows:Common Stock: Five thousand (5,000) shares of common stock having a par value of ten dollars ($ 10.00) per share. Voting rights: Each share of common stock shall entitle the owner and holder thereof to one vote in the management and affairs of the corporation.Preferred Stock: Fifty thousand (50,000) shares of preferred stock having a par value of one hundred dollars ($ 100.00) per share. Voting rights: Each preferred share shall entitle the owner and holder thereof to one vote on any corporate action involving amendment of the Articles of Incorporation, merger or dissolution, but shall not entitle the owner and holder thereof to any vote on election of the board of directors or the general policy or management of the corporation.Dividends: No dividends shall be declared or paid on any common stock in any fiscal year of the corporation until the dividend of seven percent (7%) of the par value thereof has first been declared and paid on all of the issued and outstanding preferred stock. After payment of such preferred dividend, dividends may be declared and paid to the holders of the common stock in such amounts as the board of directors*172 may determine but no additional dividend will be paid on preferred stock in said year. Preferred stock dividends shall not be cumulative.Dissolution: On dissolution of the corporation the owners of preferred stock shall have a preference to distribution of assets of the corporation to the extent of an amount equal to two hundred percent (200%) of the par value of the preferred stock, issued and outstanding, and the balance of the assets shall be distributed to the owners of the issued and outstanding common stock.Redemption: The board of directors may from time to time call any or all of the preferred stock for redemption by the corporation and continue to exercise such calls until all of the preferred stock is redeemed. Notice of such call shall be given to the shareholders of record by certified mail directed to the address of such shareholder as shown by the corporate records stating the date the stock will be redeemed. After said date the shareholder of the share or shares *863 called for redemption shall have no further rights except to receive payment of the redemption price without interest. As a condition to receiving such payment, the owner and holder of*173 the shares called for redemption must surrender the share certificates representing the stock redeemed for cancellation. In the event only a portion of the preferred stock is called for redemption and there is more than one preferred shareholder, any partial redemption shall be made prorata [sic]. The redemption price shall be Two Hundred Dollars ($ 200.00) per share.The right of the board of directors to redeem preferred stock shall be subject to the restrictions provided in RCW 23A.16.090.In summary, the amended articles provided for two classes of stock. The 5,000 shares of common stock had voting control of the board of directors. The 50,000 shares of preferred stock were entitled under the terms of the articles to vote only on amendment to the articles of incorporation, merger, or dissolution. The preferred stock was entitled to a noncumulative 7-percent dividend before dividends could be paid on the common stock in any given year. In dissolution the preferred stock was entitled to $ 200 per share before the common stock could receive any distribution. The preferred stock also was subject to redemption at $ 200 per share.On May 19, 1971, after this amendment to the*174 articles, Palin Trucking transferred the 3,000 shares of unissued common stock and the entire 50,000 shares of preferred stock to Mr. Lee. Mr. Lee then held an aggregate of 4,000 shares of common stock and 50,000 shares of preferred stock as community property with Mrs. Lee. In exchange Mr. Lee transferred the following items of property: (1) A contract receivable from the shareholders of Lakeside Gravel Co., Inc., (2) 200 shares of common stock in Lakeside Gravel Co., Inc., (3) 260 shares of common stock in Midlakes Construction & Development Co., (4) 7,428 shares of common stock in Red Samm Mining Co., Inc., (5) one-half interest in Circle River Ranch estate joint venture, (6) 10 acres identified as Lake Sammamish High property, (7) Second and Stewart property in downtown Seattle, (8) E. Burns-Harrocks, Issaquah property (20 acres), (9) Cave Creek property located in Phoenix, Ariz.Pursuant to a resolution of the board of directors of Palin Trucking dated May 20, 1971, Mr. Lee by statutory warranty deeds dated May 21, 1971, also transferred the following parcels of real property to Palin Trucking: (1) Property located on 116th Avenue N.E., Bellevue, (2) property located at Sunset-Factoria, *175 *864 Bellevue, (3) Cedar Blocks real estate contract, and (4) Cooper Lake property. These tracts of undeveloped real property had been held by Mr. and Mrs. Lee for many years for investment purposes.In May 1971, Mrs. Lee executed a codicil to a will she had previously executed on March 5, 1971. In this codicil, Mrs. Lee stated in part as follows:My husband and I and our children are financially interested in substantial and diverse businesses and properties and have been working toward a reorganization of our business interests to the end of having a centralized management, coordination and control of said businesses; and as a part of the comprehensive plan of reorganization, it is the intent and purpose of my husband to transfer the majority of our property to one business entity; namely, F. W. Palin Trucking Company.In this codicil Mrs. Lee devised her one-half interest in the common and preferred stock in Palin Trucking to Mr. Lee in trust.The foregoing will and codicil were revoked on August 6, 1971, when Mrs. Lee executed the last will and testament which was effective upon her death on September 14, 1971. In this will she bequeathed her one-half interest in their*176 4,000 shares of Palin Trucking common stock to Mr. Lee and her one-half interest in their 50,000 shares of Palin Trucking preferred stock to eight Catholic charities as follows:The DePaul and Mt. St. VincentNursing CenterTen percent (10%)Archbishop of Seattle for St.Joseph's Carmelite MonasteryFifteen percent (15%)Forest Ridge ConventFifteen percent (15%)St. Edward's Seminary, KingCounty, WashFifteen percent (15%)Sisters of Providence, ProvidenceHospital Convent, Seattle, WashTen percent (10%)Sacred Heart Catholic Church,Bellevue, WashTen percent (10%)Our Lady of Perpetual Help Church,Scottsdale, ArizTen percent (10%)Seattle UniversityFifteen percent (15%)The bequest to the charities listed above qualifies as a charitable deduction from the gross estate of Mrs. Lee.On the Federal estate tax return filed for Mrs. Lee's estate on July 14, 1972, the 50,000 shares of preferred stock were listed as *865 having a value of $ 10 million and the 4,000 shares of common stock were listed as having a value of $ 40,000. A deduction in the amount of $ 5 million was claimed for the bequest of 25,000 preferred shares to the Catholic charities. After excluding*177 the community one-half interest of Mr. Lee as $ 5 million for the preferred stock and $ 20,000 for the common stock, the taxable estate on the return reflected the amount of $ 20,000 for decedent's interest in Palin Trucking.The parties have agreed, however, that the aggregate value of Palin Trucking was much less than the value assigned to it on the estate tax return. The fair market value of the assets of Palin Trucking as of September 14, 1971, after taking into consideration the liabilities of the corporation, was as follows:AssetValuationBellevue -- 116th$ 370,000Lake Sammamish -- 10 acresNewport Way, Bellevue80,000Eastgate-Factoria2,371,000Eastgate -- N. Frontage Road91,000Corner Stewart, Pine and 2nd, Seattle845,000Issaquah (rural)60,000Bellevue -- N.E. 24th26,000Cave Creek property100,000Contract receivable from shareholdersof Lakeside Gravel Co., Inc110,000200 Shares of common stock ofLakeside Gravel Co., Inc790,000260 Shares of common stock of MidlakesConstruction & Development Co100,0007,428 Shares of common stock ofRed Samm Mining Co., Inc181,200Circle River Ranch interest75,000Cedar Block contract32,730Trucking business250,0005,481,930*178 For the 4-year period ending December 31, 1971, Palin Trucking had declining after tax earnings: $ 72,320 in 1968, $ 46,517 in 1969, $ 37,510 in 1970, and $ 21,788 in 1971. The corporation had never paid any dividends. Mr. Lee drew from Palin Trucking a salary of $ 32,500 for the year 1971, and $ 15,000 *866 for the year 1972. He drew no salary from the corporation for the years 1973 through 1976.As of September 14, 1971, and after that time, substantially all of the parcels of real property owned by Palin Trucking were not used in connection with the operation of the trucking business. The trucking business consisted primarily of contract hauling of gravel for Lakeside Gravel Co., Inc., and was operated from offices rented from Lakeside.As of 1971, Mr. Lee had plans to develop the principal parcels of real estate which were transferred to Palin Trucking in the recapitalization of May 1971. For example, Mr. Lee had architectural plans drawn up for the development of the 96 acres of property located at the Factoria Interchange of I-90. These plans called for construction of motels, hotels, restaurants, retail shops, banks, and shopping marts on the property. Similarly*179 Mr. Lee had plans to later construct a hotel, soft goods mart, and shops on the property located at Second and Steward.Following Mrs. Lee's death and as late as 1972, Mr. Lee also considered the possibility of merging Palin Trucking with Lakeside Sand & Gravel Co. and Red Samm Mining Co., but no merger was attempted. In March 1972, Palin Trucking did guarantee a loan made to Lakeside Sand & Gravel Co. in the amount of $ 1 million from the Bank of California, and Palin Trucking agreed in connection with the guarantee of this loan that it would not sell or encumber any of its assets without the prior consent of the bank for a period of 10 years or during the term that the loan was outstanding.In September 1974, the assets and business relating to the trucking operations of Palin Trucking were sold to Lakeside Industries for a cash payment of $ 231,215.35 and an assumption by Lakeside Industries of liabilities owed by Palin Trucking in the amount of $ 162,910.25. At the time of this transaction, Lakeside Industries was a joint venture comprised of the following companies: Washington Asphalt Co., Pacific Sand & Gravel Co., Red Samm Mining Co., Sea-Tac Asphalt Co., and RLJ, Inc. All*180 of these companies except Red Samm Mining Co. were wholly owned by Rhoady R. Lee, Jr.On November 6, 1974, Patricia Burke and Sheila Lee Stanford, Mr. Lee's daughters, caused an action to be brought by Lakeside Gravel Co., Inc., against Mr. Lee, Mr. and Mrs. Rhoady R. Lee, Jr., Palin Trucking, Touche Ross & Co., and five corporations *867 wholly owned by Rhoady R. Lee, Jr., RLJ, Inc., Pacific Sand & Gravel Co., Sea-Tac Asphalt Co., Washington Asphalt Co., and Red Samm Mining Co., Inc. This lawsuit was settled in July 1975. Under the settlement Patricia Burke and Sheila Lee Stanford formed a new corporation, known as Lakeside Gravel Co. To this new corporation were transferred the sand, gravel, and concrete business, and several of the parcels of real property formerly owned by Lakeside Gravel Co., Inc. The former corporation, Lakeside Gravel Co., Inc., changed its name to Eastside Ventures, and retained some of the real property formerly owned by Lakeside Gravel Co., Inc., and Lakeside Gravel Co.'s interest in Lakeside Industries. Two hundred shares of Eastside Ventures stock were owned by Palin Trucking and 320 shares were owned by Rhoady R. Lee, Jr.Between the date of*181 Mrs. Lee's death on September 14, 1971, and April 1977, no distribution of assets was made with respect to the 50,000 shares of preferred stock. During this period the charities investigated the prospect of receiving a distribution from Palin Trucking. Attorneys for the charities met with Mr. Lee on February 6, 1973, but the issue of distributions to charities was not resolved at that time. Mr. Lee proposed a redemption plan to which the charities eventually agreed by a letter dated September 12, 1974, but this plan was not carried out. Under the plan the assets of Palin Trucking were to be distributed in liquidation and then contributed to the previously dormant Madeira Corte Corp. The plan was aimed primarily at increasing the basis of the assets to minimize taxable gain at the corporate level. The then dormant Madeira Corte Corp. was to be reorganized so that Mr. Lee and the charities would occupy essentially the same status as they held in Palin Trucking. Mr. Lee then proposed to raise capital to develop the realty and to redeem the preferred stock of the charities from the funds generated.These plans were frustrated by several circumstances. Until 1975, Mr. Lee was unable*182 to work out the appropriate highway bridge improvements necessary to the development of some of Palin Trucking's holdings. Mr. Lee's borrowing capacity was hindered by the lawsuit initiated against him by his daughters and by the issuance of the notice of deficiencies by the Internal Revenue Service on July 11, 1975. The energy crisis and building by competitors also adversely affected the plans.*868 As an alternative to the plans initially proposed, Mr. Lee and the charities agreed to each take a one-half interest in the assets of Palin Trucking in liquidation with Mr. Lee granted an exclusive 5-year management agreement. Under the management agreement the charities granted to Mr. Lee power to sell, encumber, develop, and otherwise deal with all of the assets to be distributed by Palin Trucking in liquidation. Mr. Lee agreed to act without compensation for his management and personally borrowed $ 350,000 to pay corporate debts so the assets could be distributed. Pursuant to a shareholders consent adopted August 6, 1976, Palin Trucking was liquidated with a distribution of all its assets in which the charities collectively and Mr. Lee individually took an undivided one-half*183 interest.ULTIMATE FINDINGS OF FACT(1) The fair market value on September 14, 1971, of decedent's interest in the 4,000 shares of common stock and the 50,000 shares of preferred stock in Palin Trucking which were owned by her and her husband as community property under the law of Washington State was $ 2,192,772.(2) The fair market value on September 14, 1971, of the 25,000 shares of preferred stock in Palin Trucking which decedent devised to charity was $ 1,973,494.80.OPINIONThe issues for our decision concern the valuation of the common and preferred stock in Palin Trucking for purposes of determining the gross estate and taxable estate of decedent. Palin Trucking was a closely held corporation consisting primarily of realty held for subsequent development. At the time of Mrs. Lee's death on September 14, 1971, she and Mr. Lee owned as community property 4,000 of the 5,000 outstanding shares of the common stock and all 50,000 shares of the preferred stock of Palin Trucking. The remaining 1,000 shares of common stock were owned by Rhoady R. Lee, Jr. The parties have stipulated that the net asset value of Palin Trucking was $ 5,481,930. Mrs. Lee devised her interest in the*184 common stock to Mr. Lee and her interest in the preferred stock to eight Catholic charities. Subsequently, Mr. Lee purchased the 1,000 shares of common stock from Rhoady R. Lee, Jr. Thereafter Palin Trucking was liquidated and Mr. Lee individually *869 and the Catholic charities collectively each took an undivided one-half interest in the properties of Palin Trucking. Mr. Lee also was granted an exclusive 5-year management power over all of the assets. This case requires a determination of the fair market value on September 14, 1971, of Mrs. Lee's interest in the common and preferred stock which is includable in her estate pursuant to section 2031, 1 and the fair market value of the 25,000 shares of preferred stock which is deductible as a charitable bequest under section 2055.Fair market value is defined in the regulations as "the price at which the property would change*185 hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Sec. 20.2031-1(b), Estate Tax Regs. Section 2031(b) provides that, in the absence of sales establishing market value, the value of unlisted stock and securities "shall be determined by taking into consideration, in addition to all other factors, the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange." In the instant case, however, the peculiar nature of Palin Trucking and its securities precludes comparison to other corporations. Consequently, our analysis is limited to other indicia of fair market value.For these circumstances the regulations provide that "the company's net worth, prospective earning power and dividend-paying capacity, and other relevant factors" are to be considered to value stock of a closely-held corporation. Sec. 20.2031-2(f), Estate Tax Regs. Other relevant factors include:The good will of the business; the economic outlook in the particular industry; the company's position in the industry and its management; the degree*186 of control of the business represented by the block of stock to be valued; * * * However, the weight to be accorded such comparisons or any other evidentiary factors considered in the determination of a value depends upon the facts of each case. [Sec. 20.2031-2(f), Estate Tax Regs.]After reviewing the evidence of record, we conclude that the most pertinent factors in valuing the Palin Trucking stock are its net asset value, the specific rights under the preferred and *870 common stock, and the degree of control of the business represented by the blocks of stock to be valued.Reliance on the net asset value as the starting point here is justified for several reasons. First, the assets of Palin Trucking were almost exclusively undeveloped realty. The actual trucking operation accounted for less than 5 percent of the stipulated net asset value of Palin Trucking. Furthermore, the realty offered no immediate prospects for taxable income to the corporation or dividends to the shareholders. Under these circumstances factors such as prospective earning power, dividend paying capacity, goodwill of the business, and economic outlook in the particular industry have little relevance. *187 Such factors apply primarily to a corporation which is engaged in active business operations. But at the time of Mrs. Lee's death, Palin Trucking was primarily a holding company. In this situation to the extent the enumerated factors have any significance, they are largely subsumed in a valuation of the assets of Palin Trucking.The origin of much of the controversy in this case lies in the peculiar nature of the stock of Palin Trucking. The preferred shares entitled its owners to a noncumulative, nonparticipating dividend of 7 percent of the $ 100 par value only in those years in which it was authorized by the board of directors. The voting rights of the preferred shareholders were limited to issues of liquidation and reorganization. The common shareholders were entitled to control the management of Palin Trucking and to elect the board of directors. No dividends could be paid to the common shareholders in any year unless the preferred shareholders were first paid their 7-percent dividend, and under Washington law 2 unless the value of the assets of Palin Trucking after the distribution would be greater than the amount of $ 200 per share to which the preferred shareholders*188 were entitled in preference over the common shareholders in liquidation or redemption. The common shareholders were entitled to no return unless the assets valued at $ 5,481,930 on September 14, 1971, appreciated to more than $ 10 million. In light of this unusual set of circumstances, the degree of control of the corporation represented by the block of stock to be valued becomes a particularly pertinent factor.*871 Respondent contends that the value of Mrs. Lee's interest which is includable in her estate was $ 2,421,868.50 and that the value of the charitable bequest of the preferred stock was nominal or, alternatively, was no more than $ 986,748. Respondent arrived at this conclusion by starting with the net asset value of Palin Trucking which was $ 5,481,930. He reduced this amount by $ 100,000 to account for the 20 percent common stock interest held by Rhoady R. Lee, Jr. Respondent further adjusted the net asset value by lowering it 10 percent to reflect the*189 lack of marketability of the Palin Trucking stock. Respondent valued as a block Mr. and Mrs. Lee's combined interest in 4,000 shares of common stock and 50,000 shares of preferred stock at the resulting figure of $ 4,843,737 and determined that one-half of that amount was includable in Mrs. Lee's estate.Respondent determined that the value of the 25,000 shares of preferred stock which Mrs. Lee devised to charity was nominal, however, since as a block the charities had no power to effect any dividend, redemption, or liquidation distribution. Any distribution to the charities was unlikely to occur in the foreseeable future, respondent contends, since it was in the interest of common shareholders to postpone such distributions indefinitely to obtain the ultimate benefit of all asset appreciation above $ 10 million. Respondent therefore contends that the value of the preferred stock was so speculative as to be nominal. Respondent argues in the alternative that, if the 25,000 shares preferred stock are determined by this Court to have a substantial value, such value does not exceed $ 986,748, i.e., the valuation made by respondent's expert witness.Petitioner, on the other hand, argues*190 in part that the common and preferred shares of Palin Trucking should be valued on a per share basis with each share valued as a unit and with no consideration given to controlling or minority interest factors. The common shares were of nominal value, petitioner contends, since, although they had control of the corporation, the common shareholders had no reasonable anticipation of a monetary return in the foreseeable future because all appreciation up to $ 10 million in net asset value would accrue to the benefit of the preferred shareholders. For this reason, the preferred shares should be assigned most of the net asset value of the corporation. Petitioner attempts to buttress this position by arguing that the preferred shareholders had the power to compel liquidation, that *872 Palin Trucking was destined for early liquidation, and that attempts by the common shareholders to block it would be a breach of fiduciary duty.We have considered the various intricacies of the arguments advanced by respondent and petitioner. Those arguments in which we found merit have been incorporated as considerations in our valuations of the Palin Trucking stock. For the most part, however, *191 we have charted a middle ground between the valuation methods and conclusions advanced by the parties.We first address the valuation of Mrs. Lee's interest in the common and preferred stock to be included in her gross estate. We agree with respondent's contention that Mrs. Lee's interest in the common and preferred stock should be valued as a block for this purpose. 3 The common and preferred stock each had negative features which would detract from their fair market value if sold separately. The preferred shares entitled their owner to a claim in liquidation or redemption to all the assets then owned plus all subsequent appreciation up to $ 10 million. The common shareholders had no prospect of realizing any monetary return from corporation assets for some time, yet had control over their management. In combination, however, the preferred and common shares entitled their owners to all the positive benefits while negating the detriments. As experts for both respondent and petitioner testified, the normal approach would be to market the preferred and common shares as a block. Consequently, we think determination of fair market value should also be based on that approach.*192 The next question which arises is the size of the block to be valued. Respondent relies on a valuation of the aggregate of Mr. and Mrs. Lee's combined interest in their 4,000 shares of common and 50,000 shares of preferred stock. Respondent contends that this approach is required by the basis treatment afforded the surviving spouse's interest under section 1014 4 and *873 the nature of a community property interest in Washington. We disagree.*193 Respondent misinterprets the holding of In re Estate of Patton, 6 Wash. App. 464, 494 P.2d 238 (1972), as defining each spouse's community property interest to consist "of an undivided one-half interest of the whole of all community property." In fact, In re Estate of Patton actually holds that each spouse's community property interest consists of an undivided one-half interest in each item of community property. 5*195 Under respondent's misinterpretation, valuation of the aggregate community interest might 6 be appropriate since the surviving spouse's community interest could be satisfied by property other than the interest in Palin Trucking so long as the value received by the survivor was equal to one-half of the value of the aggregate estate. Under these circumstances it is conceivable that the community interest in Palin Trucking might be conveyed in its entirety and therefore should be valued as a block of 4,000 shares *874 of common and 50,000 shares of preferred. Since Washington law prohibits such a devise, however, each spouse's undivided one-half interest in each item should be valued as such. We believe the block*194 of 4,000 shares of common and 50,000 shares of preferred constituted an item of community property in which Mr. and Mrs. Lee each had an undivided one-half interest which was equivalent to each having a separate interest in a block of 2,000 shares of common and 25,000 shares of preferred. 7 Although in the aggregate the marital community held a majority interest in the stock of Palin Trucking, for estate tax valuation purposes each held a separate minority interest. 8 See Sundquist v. United States, an unreported case ( E.D. Wash. 1974, 34 AFTR2d 74-6337, 74-2 USTC par. 13,035); supplemental opinion disposing of other issues 35 AFTR2d 75-1606 (1975).*196 We find nothing in the language of section 1014(b)(6) requiring a different approach. Section 1014(b)(6) provides a fair market value basis for "property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state, * * * if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate." 9*197 The provisions of section 1014(b)(6) can be harmonized with the valuation of the decedent's interest in specific items by determining that the value of the survivor's corresponding interest in the specific items will equal the value determined for inclusion in the decedent's gross estate. The language of section 1014(b)(6) does not dictate that valuation should be on the aggregate level. It only requires that "one-half of the whole of *875 the community interest" must have been "includible in determining the value of the decedent's gross estate." Valuation as a one-half interest in each item appears consonant with the overall statutory scheme. 10*198 Accordingly, we value Mrs. Lee's interest in Palin Trucking as a block of 2,000 shares of common and 25,000 shares of preferred stock. This block was a minority interest. A buyer would *876 recognize that control of the corporation lay in the 60 percent of the common shares held 40 percent by Mr. Lee and 20 percent by Rhoady R. Lee, Jr. Despite lack of control the holder of Mrs. Lee's interest would be entitled as a minimum, however, to one-half of the asset value up to $ 10 million in liquidation or redemption of the preferred stock and 40 percent of any appreciation thereafter by right of her common stock ownership. In the event no liquidation or redemption occurred, she would be entitled to a 7-percent nonparticipating, noncumulative dividend on her preferred stock, if declared by the board of directors, and 40 percent of the dividend declared to common shares beyond the dividends to the preferred shares. After weighing the testimony of the expert witnesses and the arguments of the parties, we conclude that the fair market value of Mrs. Lee's interest was equal to 40 percent of the net asset value of Palin Trucking. This translates into a dollar value of $ 2,192,772. *199 The second issue for our decision is the value of the 25,000 preferred shares which Mrs. Lee bequeathed to charities. This value can best be determined by contrasting the rights embodied in 25,000 preferred shares with the rights embodied in Mrs. Lee's entire interest. The block of 25,000 shares was still, of course, a minority interest which lacked control of corporate operations and was without the power to force dividend, liquidation, or redemption distributions. To the extent that Mrs. Lee's interest, including the 40-percent common stock ownership, may have had some input in corporate management, this right was lost in the 25,000 preferred shares standing alone. The 25,000 preferred shares standing alone also lost the right to receive in liquidation asset appreciation beyond $ 200 per preferred share, should it occur, and the right to participate in dividend distributions, if declared, beyond the noncumulative, nonparticipating 7 percent of par value. We do not conclude, however, that the 25,000 preferred shares were of nominal value. 11 The preferred shares *877 had preference in liquidation or redemption up to a net asset value of $ 10 million which was nearly twice*200 the September 14, 1971, net asset value of Palin Trucking. The common shareholders were entitled to no distribution until the corporation had sufficient assets to meet the $ 10 million value. This potential return to common shareholders was speculative and could be anticipated to occur, if at all, only many years later. Under these circumstances it is difficult to ascertain the fair market value of the 25,000 preferred shares. Valuing the entire 50,000 shares of Palin Trucking preferred stock, the experts testifying for the parties arrived at the widely disparate aggregate values of $ 4,300,000 and $ 1,973,495. After considering the evidence and the arguments of the parties, we conclude that the value of the 25,000 shares standing alone was 10 percent less than the value of Mrs. Lee's entire interest in Palin Trucking. Accordingly, we hold that the value of the 25,000 preferred shares bequeathed to the charities was $ 1,973,494.80.*201 To reflect concessions by the parties and our conclusions on the disputed issues ,Decision will be entered under Rule 155. Footnotes1. Unless specified otherwise, section references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue.↩2. Wash. Rev. Code sec. 23A.08.420↩ (1974).3. Petitioner's contention that the stock should be valued on a per share basis without consideration of the controlling interest is without merit. The "degree of control of the business represented by the block of stock to be valued" is specified by the regulations as a factor to be weighed in valuing stock. Sec. 20.2031-2(f), Estate Tax Regs. Control is a factor which the hypothetical willing buyer and willing seller would consider in determining a fair price for a block of stock.↩4. SEC. 1014. BASIS OF PROPERTY ACQUIRED FROM A DECEDENT.(a) In General. -- Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death, or, in the case of an election under either section 2032 or section 811(j) of the Internal Revenue Code of 1939 where the decedent died after October 21, 1942, its value at the applicable valuation date prescribed by those sections.(b) Property Acquired From the Decedent. -- For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent: * * * *(6) In the case of decedents dying after December 31, 1947, property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, Territory, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939↩.5. In re Estate of Patton was the first case to address this issue in Washington. The issue and holding as formulated in that case are informative:"What has never been made explicit, however, is whether under our community property law the equal interests of husband and wife in the community property must always be manifested as a collection of undivided half interests in each specific item of community property, or whether it is sufficient to protect the equal interests of the spouses if each is guaranteed at least an undivided one-half interest in the community property when viewed in the aggregate. In re Estate of Yiatchos, 60 Wash.2d 179, 373 P.2d 125">373 P.2d 125 (1962); Yiatchos v. Yiatchos, 376 U.S. 306">376 U.S. 306 * * * (1964). [494 P.2d 238">494 P.2d 238, 243]* * * *"We hold that one spouse may not designate whole interests in community property to pass by testamentary disposition to named beneficiaries, and therefore we must reject appellants' contention that such devises of whole interests in community property may be enforced so long as the other spouse's community interest is not impaired -- that is, as long as it can be shown that the other spouse is guaranteed at least a one-half interest in the community estate when it is viewed in the aggregate. [494 P.2d 238">494 P.2d 238, 245]"This view has been adhered to in subsequent cases. In re Estate of Bonness, 13 Wash. App. 299, 535 P.2d 823">535 P.2d 823, 829 (1975); LaHue v. Keystone Investment Co., 6 Wash. App. 765, 496 P.2d 343">496 P.2d 343, 350↩ (1972).6. We purposefully use the word might in this sentence. We reach no conclusion here on whether valuation as a minority interest would also be appropriate if State law did not grant the surviving spouse a one-half interest in each item in the marital community.↩7. If the "item" theory of community property adopted in Washington State were carried to its literal extreme, one might argue that it should be applied to each share of stock with the decedent's beneficiary and the surviving spouse each taking an undivided one-half interest therein. Indeed, if there were only one share of a specified stock that would be the result. If the marital community holds a block of fungible shares, however, it is appropriate to consider the block as one item with the surviving spouse taking one-half of the shares. In any event, this is the factual predicate in the instant case.↩8. To support his method respondent also relied on Washington probate procedure. Upon the death of one spouse, the "whole of the community property [is] subject to probate administration for all purposes of this title, including the payment of obligations and debts of the community, the award in lieu of homestead, the allowance for family support, and any other matter for which the community property would be responsible or liable if the decedent were living." Wash. Rev. Code sec. 11.02.070↩ (1974). This being as it may, it does not alter the determinative fact that under Washington law a spouse had the power to devise only his or her one-half interest in each specific item.9. In the case of a decedent dying after Dec. 31, 1976, sec. 1014 does not apply to any property for which a carryover basis is provided by sec. 1023. Sec. 1014(d).↩10. We have examined the legislative history of the applicable estate tax provisions and have found nothing to indicate that under the circumstances of the instant case valuation as a majority interest is required. Prior to 1942, estates in community property States could exclude one-half of the community property in determining tax liability. No such benefit existed in common law States. To remedy this inequity Congress enacted sec. 811(e)(2), I.R.C. 1939, which under certain circumstances included in the estate the entire interest held as community property by the decedent and surviving spouse. In 1948 Congress repealed sec. 811(e)(2), reinstated the former rule for community property, and enacted provisions for a marital deduction for property not held as community property.In explaining the reasons for repeal of sec. 811(e)(2), the legislative history cites inter alia the hardships it caused for those holding community property:"In 1942 the Congress attempted to provide more nearly equal results under the estate and gift taxes. The estate tax amendments of that year provide that the entire community property be included in the decedent's gross estate, except such portion as can be 'shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse.' Under this rule, the entire community property is taxable to the first spouse to die unless some portion of the community is economically attributable to the survivor. However, the 1942 amendments further provide that regardless of which spouse was responsible for the acquisition of the community, at least one-half of the value of the community is includible in the decedent's gross estate. The basis for this rule is the fact that rights to at least one-half the community are transferred on the death of either spouse. The rule is necessary, since the share of the spouse dying first may not be transferred to the surviving spouse and the community assets may not be economically attributable to the decedent spouse. In such a case, if no tax were imposed, the property would avoid the estate tax for one generation.* * * *"Unfortunately, a number of problems have arisen under the 1942 amendments. Most important of these is the fact that geographical equalization has not been realized in a typical situation. Furthermore, the problem of determining the economic contribution of the surviving spouse to the community has resulted in an extremely difficult problem of "tracing." Severe hardship also results where, because the entire community property is includible in his gross estate, the estate tax of the decedent is larger than the community property subject to his power of disposition. For example, if a decedent is economically responsible for the entire community this average tax rate on his estate may exceed 50 percent. However, only half of the community is subject to his power of disposition. Thus the share of the community already belonging to his spouse may be required to bear part of the tax although the spouse does not inherit any property under State law. [S.Rept. 1013, 80th Cong., 2d Sess. (1948), 1 C.B. 285">1948-1 C.B. 285, 304 (Emphasis added.)]."An inequity analogous to that which Congress sought to correct would arise in the instant case if we were to adopt the method of valuation advocated by respondent. Under respondent's method an individual would be taxed on value inherent in property over which he has no power of disposition.We are not unmindful that a major reason for the 1948 legislation was to minimize differences between the estate tax treatment in common law and community property estates. The holding in this case may run against that goal by recognizing distinctions in methods of valuation of property. Such a result is nonetheless required by the nature of the community property law in Washington State. In fact, despite the attempt to achieve equality, the legislative history recognizes "that complete equalization of the estate and gift taxes can not be achieved because of the inherent differences between community property and noncommunity property." S. Rept. 1013, 80th Cong., 2d Sess.(1948), 1 C.B. 285">1948-1 C.B. 285↩, 305.11. We reject respondent's argument that the 25,000 shares had nominal value. Although we appreciate respondent's concern that a charitable deduction should not be allowed where the substance and form of the transactions may preclude a meaningful distribution to charity, see, e.g., Commissioner v. Sternberger's Estate, 348 U.S. 187">348 U.S. 187 (1955); Humes v. United States, 276 U.S. 487">276 U.S. 487↩ (1928), we do not feel the facts of the instant case present such a situation. Under our valuation analysis we feel that the charities received the benefit of the bulk of Mrs. Lee's interest in Palin Trucking. This view is coincidentally consistent with subsequent events: Palin Trucking was liquidated and the charities collectively took an undivided one-half interest in the assets. Mr. Lee took the remaining undivided one-half interest and a 5-year right to manage the property without remuneration.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624480/

SEBASTIAN BONGIOVANNI and NORMA BONGIOVANNI, et al., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Bongiovanni v. CommissionerDocket Nos. 7847-73--7851-73.United States Tax CourtT.C. Memo 1976-131; 1976 Tax Ct. Memo LEXIS 273; 35 T.C.M. (CCH) 586; T.C.M. (RIA) 760131; April 26, 1976, Filed Max A. Reinstein and Thomas R. Dodegge, for the petitioners. Harmon B. Dow, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent has determined the following deficiencies in petitioners' Federal income tax: DocketTaxable No.(Petitioners)YearDeficiency7847-73Sebastian Bongiovanni and Norma1968$ 4,437.11Bongiovanni19693,309.447848-73Lawrence Bongiovanni and Gerald-19683,596.66ine Bongiovanni19693,026.687849-73Bongi Cartage, Ill., an Illi-196819,557.69nois corporation196915,199.767850-73Vincent Bongiovanni and Josephine19684,212.95D. Bongiovanni19693,156.857851-73Sam Bongiovanni and Josephine19683,859.55Bongiovanni19692,829.28*275 Certain concessions having been made, the issues remaining for decision are: (1) Whether corporate petitioner's payments in 1968 and 1969 for the private nursing care expenses of its shareholders' mother were ordinary and necessary business expenses under section 1622, and (2) Whether individual petitioners, the shareholders of corporate petitioner, received a constructive dividend when these medical expenses were paid by the corporation. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly.At the time their petitions were filed herein, individual petitioners were residents of Illinois. They filed their respective returns with the district director of internal revenue, Chicago, Illinois for the taxable years in issue. Petitioner, Bongi Cartage, Inc., (Bongi Cartage) is a trucking and excavating business organized and existing as a corporation under the laws of Illinois. Its principal office was in Cicero, Illinois at the time its petition was filed herein. Bongi Cartage filed its corporate income tax return for the taxable year 1968 with the district*276 director of internal revenue, Chicago, Illinois, and its corporate income tax return for the taxable year 1969 with the internal revenue service center in Kansas City, Missouri. Petitioners Vincent, Sebastian, Sam, and Lawrence Bongiovanni, each of whom owned one-fourth of the issued and outstanding stock of Bongi Cartage during the years 1968 and 1969, are the sons of Mrs. Josephine C. Bongiovanni 3 (Mrs. Bongiovanni) who died in 1969 at the age of 88 years. From 1942 to 1962, Mrs. Bongiovanni received $10 per week as an employee of Bongi Cartage.She never held a corporate office and her husband, Carl Bongiovanni, was never associated with Bongi Cartage, having died prior to 1942. Mrs. Bongiovanni's duties at Bongi Cartage consisted of making coffee for the office help and visitors, preparing a light lunch for the four brothers and two or three of the office personnel, and cleaning up afterwards.In 1962, Mrs. Bongiovanni left Bongi Cartage because of illness and old age, and did not return. Her duties*277 were taken over by secretaries who received no increase in pay. On April 1, 1954, Bongi Cartage obtained a group insurance policy covering its salaried employees, 4 including Mrs. Bongiovanni. This policy was issued by John Hancock Mutual Life Insurance Company and included the following coverage: Life Insurance$2,000Accidental Death andDismemberment2,000Hospital Insurance10 (Maximum dailybenefit)Surgical Operation10 (Maximum dailybenefit)Mrs. Bongiovanni remained insured under this policy until her death in 1969. Mrs. Bongiovanni had no funds of her own and any medical expenses beyond those covered by the policy or by Medicare were paid by Bongi Cartage. During the years 1968 and 1969 Bongi Cartage paid medical bills of Mrs. Bongiovanni in the amounts of $32,527.74 and $26,305.72, respectively. These expenses were primarily for private nursing care, and the individuals rendering such nursing services billed Bongi Cartage directly.These expenditures were deducted on the corporate*278 income tax returns as business expenses under the classification, "Legal, Acct. Ser. and Dues." Since the late 1940's Bongi Cartage has had a policy of continuing to pay salaried employees during absences due to illness. With the exception of Mrs. Bongiovanni, however, no employee of Bongi Cartage has had his medical expenses paid by the corporation, except through the hospitalization insurance policy. The corporate minutes of Bongi Cartage do not reflect the existence of any pension plan or medical reimbursement plan for Bongi Cartage employees or the existence of any corporate resolution or intention to pay the medical expenses of Mrs. Bongiovanni or to compensate her for past services. OPINION Section 162 allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Section 1.162-10, Income Tax Regulations specifically provides that amounts paid or accrued within the taxable year for a sickness, accident, hospitalization, medical expense or similar benefit plan will be deductible*279 if the expenses are ordinary and necessary. Petitioners contend that the medical expenses paid by Bongi Cartage were pursuant to a medical reimbursement plan qualifying under section 105(e)5 and are therefore expenditures properly deductible by the corporation. 6 Respondent, on the other hand, argues that Bongi Cartage did not have a plan providing for the corporate reimbursement of employee medical expenses. We agree with respondent. *280 While a section 105(e) accident or health plan need not be formal, or even written, and may discriminate between different classes of employees, it must nevertheless be a plan "or program, policy, or custom having the effect of a plan." Section 1.105-5, Income Tax Regulations; 7John C. Lang,41 T.C. 352">41 T.C. 352 (1963); Estate of Leo P. Kaufman,35 T.C. 663">35 T.C. 663 (1961), affd. 300 F.2d 128">300 F.2d 128 (6th Cir. 1962). An examination of the entire record here reveals no indication of any plan or policy to reimburse Bongi Cartage employees for their medical expenses. *281 Other than those payments made on behalf of Mrs. Bongiovanni, no medical expenses incurred by Bongi Cartage employees were reimbursed by the corporation. Moreover, there are no corporate records that suggest a policy of reimbursement. The absence of any plan or practice of reimbursement is underscored by the fact that while supervisory employees continued to draw their weekly salary during the time they were ill, these employees did not have their medical bills paid by the corporation beyond the limited coverage provided by the group insurance policy. Petitioners do not cite any instances of medical reimbursements other than Mrs. Bongiovanni but suggest that other employees in similar circumstances would be taken care of. In this vein, Vincent Bongiovanni testified that Bongi Cartage would also assist its old and faithful employees who suffered from a lack of funds. Nevertheless, such a vague intention, however laudatory, does not amount to a plan. This Court has repeatedly held that discretionary and ad hoc payments are outside the scope of section 105(e). John C. Lang,supra;*282 Estate of Leo P. Kaufman,supra.After a careful review of the evidence, we conclude that Bongi Cartage's payments for Mrs. Bongiovanni's medical expenses were not made pursuant to a section 105 medical reimbursement plan. Petitioners, however, argue alternatively that the payments made for Mrs. Bongiovanni were part of a corporate wage continuation program. We believe that the record reflects an established policy on the practice of continuing to pay salaried employees their regular salaries during the time they were away from work due to illness. Having concluded that Bongi Cartage had a wage continuation program, the question is whether the payments made on behalf of Mrs. Bongiovanni were pursuant to that plan. The record compels us to conclude that the payments for Mrs. Bongiovanni's medical expenses were not part of Bongi Cartage's wage continuation program. The wages paid under the corporate wage continuation plan were paid to full time employees temporarily out of work. By contrast, the payments in issue were not made until 6 years after Mrs. Bongiovanni had discontinued her duties at the corporation. In 1962, it could fairly be said that Mrs. Bongiovanni, *283 at the age of 82, had retired. The payments made on her behalf in 1968 and 1969 were not made with a view to her return to work. These payments were of an entirely different character than the ones made under Bongi Cartage's wage continuation program. Moreover, these payments fall well outside the statutory contemplation of wage continuation payments. Cf. section 1.105-4(a)(3)(i)(A), Income Tax Regs.Petitioners argue that the substantial sums expended for Mrs. Bongiovanni's medical care were made to compensate Mrs. Bongiovanni for the low wages she received during her period of employment. 8*284 It is clear that an employer may pay an employee compensation in recognition of past undercompensated services, and that such payments are deductible by the employer if they are reasonable in amount. Lucas v. Ox Fibre Brush Co.,281 U.S. 115">281 U.S. 115 (1930); American Foundry,59 T.C. 231">59 T.C. 231 (1972). Even assuming that Mrs. Bongiovanni was undercompensated, however, there is no evidence that the payments of these expenses were intended as restitution for this undercompensation. Cf. Paula Construction Co., 58 T.C. 1055">58 T.C. 1055, 1058 (1972) affd. per curiam 474 F.2d 1345">474 F.2d 1345 (5th Cir. 1973). Furthermore, while petitioners make this contention in connection with their argument that the payments in issue were part of a wage continuation plan, the payments for Mrs. Bongiovanni bear no resemblance to the continuation of wages in any amount. The payments were made for Mrs. Bongiovanni's medical expenses. These payments did not take the form or the character of wages.The amounts paid were determined solely by the size of the medical expense and bore no relationship to the wages Mrs. Bongiovanni had been receiving from the corporation.Moreover, the nearly $60,000 in medical expenses paid by Bongi Cartage in 1968 and 1969 represents a sum well beyond Mrs. Bongiovanni's purported underpayments even as calculated by petitioners. 9 We believe that the payments of Mrs. Bongiovanni's medical expenses cannot be reasonably characterized*285 as part of Bongi Cartage's wage continuation program. If reasonable payments were made pursuant to a wage continuation program or plan of medical reimbursement qualifying under section 105, such amounts would ordinarily be deductible under section 162. The payment of Mrs. Bongiovanni's medical expenses was not made pursuant to either plan, nor can we perceive any other justification for deducting these expenses under section 162. A deductible business expense must have an origin in the taxpayer's business and it must be directly connected with or proximately resulting from a business activity of the taxpayer. Fred W. Amend Co. v. Commissioner, 454 F. 2">454 F. 2d, 399 (7th Cir. 1971), affg. 55 T.C. 320">55 T.C. 320 (1970). In the instant case, it cannot be said that the origin of and motivation for the payments for Mrs. Bongiovanni were business related. While Mrs. Bongiovanni was a former employee of Bongi Cartage she was not a major figure in*286 the corporation. She was already advancing in age when she began to perform her light duties at the company. It is most unlikely that her modest contributions formed the basis of such exceedingly generous treatment by Bongi Cartage. The cost to the corporation in relation to its income underscores the improbability of a business motivation for the payments.Bongi Cartage reported taxable income of $58,251.88 in 1968 and paid $32,527.74 for Mrs. Bongiovanni's nursing care in that year. In 1969, taxable income slipped to $23,863.60 while nursing care payments were $26,305.72. Realistically viewed, it can only be concluded that the origin of these payments was Mrs. Bongiovanni's status as mother of the four shareholders. Her four sons directed the corporation to pay for their mother's nursing care rather than making these payments in their personal capacity. While this is a refreshing example of filial responsibility that we see too little of these days, these expenses are no less personal because the payment was channeled through the corporation. We therefore find that Mrs. Bongiovanni's medical expenses were not ordinary and necessary business expenses of Bongi Cartage. *287 Having concluded that the payments on account of Mrs. Bongiovanni's medical expenses are nondeductible, we have no alternative but to find that these payments constituted a dividend to Bongi Cartage shareholders. Generally, a distribution of property made by a corporation to its shareholders out of its current or accumulated earnings and profits is a dividend, taxable to the shareholders as ordinary income. Sections 316(a), 301(c). Where a corporation assumes the cost of benefits which are personal to the shareholders, the sums expended for these benefits will ordinarily constitute a distribution taxable to the shareholders as a dividend. See Fred W. Amend Co.,supra;John L. Ashby,50 T.C. 409">50 T.C. 409, 417 (1968). No formal declaration of a dividend is necessary. Hardin v. United States,461 F. 2d 865 (5th Cir. 1972). It is clear that in the instant case, the corporate payments were made to satisfy the personal wishes of Bongi Cartage shareholders that their mother receive the medical care which they considered desirable. We therefore*288 hold that the payments of Mrs. Bongiovanni's medical expenses by Bongi Cartage constituted dividend income 10 to the corporate shareholders. Since the shareholders hold equal interest in Bongi Cartage, and all agreed to and benefited by the payments made, they each constructively received an aliquot share of the dividend income. Decisions will be entered under Rule 155. Footnotes1. The cases of the following petitioners are consolidated herewith: Sebastian Bongiovanni and Norma Bongiovanni, docket No. 7847-73; Lawrence Bongiovanni and Geraldine Bongiovanni, docket No. 7848-73; Bongi Cartage, Inc., an Illinois corporation, docket No. 7849-73; Vincent Bongiovanni and Josephine D. Bongiovanni, docket No. 7850-73 and Sam Bongiovanni and Josephine Bongiovanni, docket No. 7851-73.↩2. All statutory references are to the Internal Revenue Code of 1954, as amended.↩3. Mrs. Josephine C. Bongiovanni is not to be confused with petitioner Josephine Bongiovanni (the wife of Sam) or petitioner Josephine D. Bongiovanni (the wife of Vincent).↩4. The salaried employees were almost exclusively supervisory personnel. About one-half of the salaried employees were relatives of the Bongiovannis.↩5. SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS. (e) ACCIDENT AND HEALTH PLANS.--For purposes of this section and section 104-- (1) amounts received under an accident or health plan for employees, and (2) amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia, shall be treated as amounts received through accident or health insurance. Generally, gross income will not include amounts received through accident or health insurance if such amounts are paid to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care of the taxpayer, his spouse and his dependents. Secs. 104(a)(3), 105(a), and 105(b)↩. 6. Respondent apparently concedes that if Mrs. Bongiovanni's medical expenses were paid pursuant to an accident or health plan qualifying under sec. 105(e)↩ then Bongi Cartage would be entitled to deduct such payments as ordinary and necessary expenses.7. Sec. 1.105-5. Accident and health plans. (a) In general.Sections 104(a)(3) and 105(b), (c), and (d) exclude from gross income certain amounts received through accident or health insurance. Section 105(e) provides that for the purposes of sections 104 and 105 amounts received through an accident or health plan for employees, and amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia, shall be treated as amounts received through accident or health insurance. In general, an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. A plan may cover one or more employees, and there may be different plans for different employees or classes of employees. An accident or health plan may be either insured or noninsured, and it is not necessary that the plan be in writing or that the employee's rights to benefits under the plan be enforceable. However, if the employee's rights are not enforceable, an amount will be deemed to be received under a plan only if, on the date the employee became sick or injured, the employee was covered by a plan (or a program, policy, or custom having the effect of a plan) providing for the payment of amounts to the employee in the event of personal injuries or sickness, and notice or knowledge of such plan was reasonably available to the employee. It is immaterial who makes payment of the benefits provided by the plan. For example, payment may be made by the employer, a welfare fund, a State sickness or disability benefits fund, an association of employers or employees, or by an insurance company. (b) Self-employed individuals. Under section 105(g), a self-employed individual is not treated as an employee for purposes of section 105. Therefore, for example, benefits paid under an accident or health plan as referred to in section 105(e) to or on behalf of an individual who is self-employed in the business with respect to which the plan is established will not be treated as received through accident or health insurance for purposes of sections 104(a)(3) and 105↩.8. To support their argument, petitioners compare the minimum hourly wage scale with Mrs. Bongiovanni's salary during the relevant employment period. Jan., 1942 - June, 1945 - 30 cents per hour;182 weeks @ $12 Assuming a 40-hour week.*↩ per week equals$ 2,184June, 1945 - Jan., 1949 - 40 cents per hour;182 weeks @ $16 * per week equals2,912Jan., 1949 - March, 1956 - 75 cents per hour;377 weeks @ $30 * per week equals11,310March, 1956 - June, 1961 - $1 per hour;273 weeks @ $40 * per week equals10,920June, 1961 - December, 1962 - $1.15 per hour;78 weeks @ $46 * per week equals3,588Total$40,914Wages paid to Mrs. Josephine C. Bongiovannifor the above period: 1,092 weeks @ $10 per week equals$10,920Underpayment difference$29,9949. Even petitioners' figures fall far short of the nearly $60,000 in medical expenses paid by Bongi Cartage in 1968 and 1969.↩10. Petitioners concede there are sufficient earnings and profits to support dividend treatment for the amounts in question.↩

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624483/

Federal Cement Tile Company, Petitioner, v. Commissioner of Internal Revenue, RespondentFederal Cement Title Co. v. CommissionerDocket Nos. 87574, 87686United States Tax Court40 T.C. 1028; 1963 U.S. Tax Ct. LEXIS 47; September 26, 1963, Filed *47 Decisions will be entered under Rule 50. The petitioner sustained net operating losses in the taxable years 1950, 1951, and 1952 in the conduct, in 15 States on or near the east coast of the United States, of a cement tile roofing business utilizing a patented Swiss process. In 1953, pursuant to agreements with an unrelated group, the petitioner's stockholders sold their stock to such unrelated group and the petitioner simultaneously transferred its land and building, fixed assets, and inventories to the selling stockholders, retaining the patent rights in the Swiss process in the United States other than in the 15 East Coast States. The new stockholders then caused an Illinois corporation, which they owned and which operated a successful cement tile roofing business in the Midwest area of the United States, to be merged into the petitioner, the latter surviving. Thereafter the petitioner profitably operated in the Midwest area the cement tile roofing business formerly operated by the Illinois corporation. Held, that the petitioner is not entitled, under sections 23(s) and 122 of the Internal Revenue Code of 1939 and section 172 of the Internal Revenue Code of 1954, to*48 carry over and deduct the net operating losses sustained by it in the years 1950, 1951, and 1952 in the conduct of the east coast business from income earned by it in the years 1953 through 1956 in the conduct of the midwest business, since the business conducted in the later years was not substantially the same business as that in which the net operating losses were sustained. Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382. Held, further, that the petitioner is precluded, by section 24(b) of the 1939 Code, from deducting any losses sustained by it in 1953 upon its transfer to the selling stockholders of its land and building, fixed assets, and inventories. Held, further, that a portion of amounts paid by the petitioner in the taxable years 1956 and 1957 to its then sole corporate stockholder and to another corporation which controlled such parent constituted ordinary and necessary expenses paid to those corporations for services rendered to the petitioner, but that the remainder of such payments did not constitute ordinary and necessary business expenses of the petitioner. Thomas Eugene Foster and William J. Killbridge, for the petitioner.Seymour I. Sherman, for the respondent. Atkins, Judge. ATKINS*1029 The respondent determined deficiencies in income tax for the taxable years 1953 to 1957, inclusive, in the respective amounts of $ 196,002.76, $ 288,146.03, $ 11,505.26, $ 111,762.82, and $ 14,085.74.Certain issues have been disposed of by stipulation of the parties. The issues remaining for decision are (1) whether the petitioner, which sustained net operating losses in the calendar years 1950, 1951, and 1952 in the conduct of a cement roofing tile business, may carry over and deduct such losses from income earned by it in the years 1953 through *51 1956 in the conduct of a cement roofing tile business acquired by it by merger in 1953; (2) whether the petitioner is prohibited by either section 24(b) or 129(a) of the Internal Revenue Code of 1939 from deducting losses sustained by it on the sale of certain of its assets in 1953 to individuals who sold their majority stock interest in the petitioner to unrelated third parties, where both transactions were carried out pursuant to simultaneously executed prior agreements; and (3) whether the petitioner may deduct any portion of the amounts paid by it in 1956 and 1957 to its sole corporate stockholder and to the corporation in control of such sole stockholder as compensation for services rendered to it by them.*1030 FINDINGS OF FACTSome of the facts have been stipulated and are incorporated herein by this reference.The petitioner is a corporation organized on September 13, 1946, under the laws of the State of Delaware. It timely filed its income tax returns for the taxable years 1953 to 1957, inclusive, with the district director of internal revenue at Chicago, Ill. For an undisclosed time prior to April 29, 1953, and continuing until May 13, 1953, John D. Dale and Louise*52 B. Dale, husband and wife, owned in excess of 50 percent in value of the petitioner's outstanding stock. They, together with members of their family, owned 69,055 of its 74,405 outstanding common shares and all 2,000 of its outstanding preferred shares.The petitioner was formed, under the name "Durisol, Inc.," to manufacture and sell lightweight cement roofing tile, using a Swiss invention known as Durisol Aggregate, which employed the use of certain types of wood shavings and chemicals.The petitioner acquired the exclusive rights in and to the Durisol name and process throughout the United States, Canada, and Mexico from the corporate owner of the basic patent, Durisol Materiaux de Construction Legers, S.A., of Switzerland, hereinafter referred to as Durisol-Swiss, by contract dated October 11, 1946. 1*53 On August 25, 1947, representatives of Durisol-Swiss filed in the U.S. Patent Office an application for a patent covering the Durisol process. By an assignment dated April 10, 1948, and recorded in the U.S. Patent Office on April 21, 1948, such persons assigned to the petitioner the full and exclusive right, for the territory of the United States, in and to the invention described in the patent application. On April 8, 1952, U.S. Patent No. 2,592,345 was issued to the petitioner as assignee of the inventors.From 1946 to May 13, 1953, the petitioner engaged in the manufacture, sale, and installation of cement roofing tiles or slabs, utilizing the Durisol process and methods, in 15 States on or near the East Coast of the United States, with its office in New York, N.Y., and its manufacturing plant and facilities in Beacon, N.Y.The petitioner consistently sustained operating losses from its inception and for the taxable years 1946 through 1952 it reported on its income tax returns net operating losses in the following amounts: *1031 YearAmount1946$ 6,897.68194743,412.531948151,048.041949225,871.861950172,221.611951197,738.781952279,618.22On or*54 about April 26, 1952, the petitioner's board of directors and its stockholders, approved a resolution that future manufacturing operations of the petitioner be suspended except insofar as necessary to complete the then unfilled contracts, and that the president of the corporation proceed to reduce the personnel and the operating expenses.At some undisclosed time a Canadian corporation started negotiations with petitioner looking toward the acquisition of the Durisol license for the United States East Coast and the content of the petitioner's factory at Beacon, N.Y., with a view to setting up a factory in Canada.At some undisclosed time the petitioner advised the union that the factory would not be operated as a Durisol factory after July 1, 1953. On February 24, 1953, the petitioner's stockholders approved a proposed sale of the Beacon factory to Louise B. Dale for $ 325,000 and the leasing back of the same property, but this transaction was never carried out. At or about the same time the Dales set up a standby corporation for possible future use. This corporation was organized under the laws of New York and was known as Durisol New York Industries Corp., hereinafter referred*55 to as Durisol -- N.Y.On March 25, 1943, there was created under the laws of the State of Illinois a corporation under the name of "The Cement Tile Corporation." Such name was changed in 1944 to "Federal Cement Tile Company." This corporation hereinafter will be referred to as IllinoisFederal in order to avoid confusion which would arise by virtue of the fact that its name was the same as the name later adopted by the petitioner. None of the shareholders of IllinoisFederal were shareholders of the petitioner prior to May 13, 1953. 2*56 *1032 Illinois Federal engaged in the business of manufacturing, selling, and installing cement roofing tiles or slabs in States located in the Midwest area of the United States, with its office at Chicago, Ill., and its manufacturing plant and facilities partly in Lake County, Ind., and partly in Cook County, Ill., but with its mailing address in Hammond, Ind.Illinois Federal consistently operated at a profit throughout its corporate existence and reported net income on its income tax returns for its fiscal years ended March 31, 1948, to March 31, 1953, inclusive, as follows:Fiscal yearAmount1948$ 397,844.361949338,331.971950202,328.711951368,661.991952552,540.961953 1319,545,53On August 29, 1952, there was organized under the laws of Illinois a corporation under the name of "S.E.S.," whose stock was held in a voting trust for the benefit of a group known as the Schulman group. Samuel E. Schulman and his family beneficially owned approximately 35 1/2 percent of such stock. The purpose of S.E.S., as stated in its charter, was to deal in personal and real*57 property of all kinds and to engage in the construction and roofing business.On or about November 26, 1952, S.E.S. acquired all the capital stock of IllinoisFederal. The key executives (former stockholders) of IllinoisFederal, named in footnote 2, remained with the corporation under new employment contracts covering the period April 1, 1953, to March 31, 1958 (March 31, 1954, in the case of Pritchett), at specified base salaries plus additional amounts of compensation based on gross sales or quantity of product manufactured.On December 31, 1952, IllinoisFederal was completely liquidated into S.E.S., which thereupon changed its name to Federal Cement Tile Co. (not to be confused with the petitioner). IllinoisFederal was dissolved on April 30, 1953.S.E.S. filed an income tax return for the period August 29, 1952, to November 30, 1952, reporting no income or expense, and a return for the period December 1, 1952, to May 31, 1953, reporting gross sales in the amount of $ 890,303.93, net income in the amount of $ 48,759.87, and tax paid in the amount of $ 19,840.31.At some time after November 26, 1952, the existence of the petitioner (at that time known as Durisol, Inc.) was brought*58 to the attention of Schulman by his attorney. Thereafter Schulman, Wilhartz, and other representatives of Federal Cement Tile Company (the Illinois*1033 corporation) investigated and inspected the product and the operations of the petitioner at both its Beacon factory and its New York offices, examined projects built by the petitioner with the Durisol product, and reviewed the petitioner's financial statements and records and its plant records. These investigations disclosed that the petitioner's cement roofing slab made of Durisol was the same size as the Federal Cement Tile Co.'s cement roofing slab, but that the petitioner's slab was much lighter and had better acoustical and insulating features, and that the petitioner also manufactured a lightweight cement block made of Durisol. The group also found that the petitioner had a backlog of commitments in the form of orders and jobs in process in excess of $ 1 million. The Schulman group was not interested in obtaining and carrying out these orders and jobs.On April 29, 1953, Schulman, on behalf of himself and his group, entered into an agreement, denominated "Durisol, Inc., Stock Purchase Agreement," with the Dales for*59 the purchase, no later than May 13, 1953, of all the issued and outstanding stock of the petitioner 3 and certain notes of the petitioner held, or to be held, by the stockholders in the amount of $ 767,260.12 (including accrued interest thereon in the amount of $ 32,501.66). The stated consideration for such stock and notes was the sum of $ 240,000, less certain indebtedness and liabilities of the petitioner (principally current liabilities) which then amounted to $ 57,133.74. 4*60 The agreement recited that the petitioner was also indebted to Louise B. Dale in the principal sum of $ 325,000, plus interest thereon, evidenced by a note or notes or bond or bonds in that amount and secured by a first mortgage upon the land and plant of the petitioner at Beacon, N.Y., and that the petitioner and Louise B. Dale had agreed that the petitioner would, prior to the closing date, convey such land and building to her in full satisfaction of such indebtedness.*1034 In the agreement the Dales represented and warranted that the Federal income and excess profits tax returns filed by the petitioner, including its return for the calendar year 1952, copies of which had been delivered to the Schulman group, were true and correct returns for the periods covered thereby, respectively.On the same date, April 29, 1953, the Schulman group and the Dales entered into a second agreement, in letter form, which provided that, simultaneously with the closing of the purchase of the petitioner's stock from the Dales, there would be transferred by the petitioner to the Dales, for a purchase price of $ 75,000, all the petitioner's inventories, all of its machinery and equipment and office*61 furniture and equipment, all of its small tools (with certain specified exceptions), and all insurance policies relating to its fixed assets, machinery and equipment, workmen's compensation, etc., together with all deposits and advances relating thereto. Therein it was agreed that the petitioner would assign to Durisol -- N.Y. all of the petitioner's orders and unfilled contracts for buildings to be erected on the East Coast. The Dales agreed to cause Durisol -- N.Y. to discharge all of such orders and contracts and to permit Durisol -- N.Y. to use the Beacon plant and such of the machinery, equipment, and inventory as was necessary for the purpose; they further agreed to personally indemnify the petitioner against any claims, loss, or damage by reason of such orders or contracts. The Schulman group agreed to cause the petitioner, upon the consummation of the stock purchase, to execute a sublicense to Durisol -- N.Y. of the exclusive patent rights covering the Durisol methods in the States on the East Coast, thereby granting, to the extent the petitioner had the right to grant them, all rights which it had in connection with the Durisol product in such area, Durisol -- N.Y. to *62 pay such royalties and sums as the petitioner was obligated to pay with respect thereto.Both of the above agreements were duly carried out. On or about May 12, 1953, the petitioner conveyed its land and building at Beacon, N.Y., to the Dales or their nominee in satisfaction of the indebtedness *1035 owing by the petitioner to Louise B. Dale. 5 On May 13, 1953, the Schulman group received 2,000 shares of preferred stock (par value $ 100 per share) of the petitioner and 74,405 shares of common stock (par value $ 1 per share) of the petitioner and notes issued by the petitioner in the principal amount of $ 734,758.46 (which includes accrued interest in the approximate amount of $ 32,500), for which such group paid a computed purchase price of $ 172,408.81. All the assets described in the letter agreement of April 29, 1953, were transferred on or about May 13, 1953. The petitioner, by Schulman as president, executed a bill of sale to the Dales, dated May 13, 1953, of the personal property described in such letter agreement. The petitioner duly entered into an agreement granting to Durisol -- N.Y. the right to use the name Durisol in the East Coast States "to the extent" it *63 "has the right to grant * * * such rights" 6 and transferring to it the unfilled orders and contracts.On May 13, 1953, immediately following the consummation of the agreement*64 of April 29, 1953, the petitioner had assets consisting of cash on hand in the amount of $ 538.51, accounts receivable in the amount of $ 37,628.16, cash received from the sale of assets to the Dales of $ 75,000, and the rights remaining to it in the Durisol process and patent with a book value of $ 80,000, or a total book value of all of such assets of $ 193,166.67. At that time the petitioner had current liabilities in the amount of $ 29,497.17 and other liabilities, consisting of the notes acquired by the Schulman group in the amount of $ 767,260.12 (including interest).On or about May 26, 1953, the Federal Cement Tile Co. (formerly S.E.S.) was merged into the petitioner, the latter surviving. As a part of the merger the petitioner changed its name to Federal Cement Tile Co. and changed the par value of the common stock from $ 1 to $ 100 per share. After the merger the Schulman group continued to beneficially own the stock of the petitioner as it had owned the stock of the Federal Cement Tile Co. (formerly S.E.S.). 7*65 *1036 After May 13, 1953, the petitioner did not own or utilize the real estate, operating assets (except the rights retained by it in the Durisol patent and process), and inventory formerly utilized by it in its east coast operations. Prior to May 13, 1953, the petitioner had never utilized or exploited the Durisol process or conducted business outside of the East Coast States. After that date it did not utilize or exploit, or seek to utilize or exploit, the Durisol patent or process in the East Coast States.Immediately after the merger the petitioner carried on the manufacture and sale of cement roofing tiles, utilizing solely the office and manufacturing facilities previously utilized by IllinoisFederal, and with its area of operations limited to the Midwest. Within 2 or 3 months after the acquisition of the stock of the petitioner by the Schulman group, the petitioner commenced efforts to produce a product made with Durisol. The petitioner made substantial investments in connection with its preparation to produce such a product, including consultations with engineering firms, the building and purchase of molds, and the purchase and setting up of a wood crusher, a mixer, *66 conveyor belts, and an overhead gib crane. The petitioner bid on and performed contracts calling for cement roofing made with Durisol. However, the petitioner experienced difficulty in acquiring the proper type of sugar-free woodshavings to be used in the manufacture of the Durisol product and also experienced difficulty with the finished Durisol product, chiefly due to separations in the slab caused by unequal expansion and contraction between the combination of the slab with Durisol, which required the petitioner to make costly corrections. The petitioner made attempts to correct these difficulties but without success. During the approximately 3 years that the petitioner attempted to manufacture and sell the Durisol product, it continued producing the same types of material which had been produced by IllinoisFederal and its successors in the midwest business prior to the acquisition of the petitioner's stock by the Schulman group, and sales of the Durisol product represented only a relatively minor part of total sales during this period.The petitioner discontinued the manufacture of the Durisol product in approximately early 1956, and on December 28, 1956, it sold all of its*67 remaining interest in the Durisol process, patent, and trademark for $ 1,000.In its income tax return for the taxable year 1953, the petitioner reported net income (before any net operating loss carryover deduction) of $ 1,301.89. It claimed a net operating loss deduction of $ 649,578.61 (consisting of net operating losses which it sustained during the taxable years 1950, 1951, and 1952).In its return for the taxable year 1954 the petitioner reported taxable income (before any net operating loss carryover deduction) of *1037 $ 557,597.03. Therein it claimed a net operating loss deduction of $ 647,119.26 (consisting of the unused portion of the aggregate net operating losses sustained during the taxable years 1950, 1951, and 1952).It its return for the taxable year 1955 the petitioner reported taxable income (before any net operating loss carryover deduction) of $ 28,637.50. Therein it claimed a net operating loss deduction in the same amount (being a portion of the unused net operating loss sustained in the taxable year 1952).In its return for the taxable year 1956 the petitioner reported taxable income (before any net operating loss carryover deduction) of $ 397,639.61. *68 Therein it claimed a net operating loss deduction of $ 60,884.73 (representing the remaining unused portion of the net operating loss sustained in the taxable year 1952).In the notices of deficiency the respondent disallowed the claimed net operating loss deductions for the taxable years 1953 to 1956, inclusive. For the taxable year 1953 the respondent determined that the claimed deduction was not allowable under sections 23(s) and 122 of the Internal Revenue Code of 1939, and held further that it fell within the purview of section 129(a) of such Code. For the taxable years 1954 and 1955 the respondent determined that the claimed net operating loss deductions were not allowable under the provisions of section 172 of the Internal Revenue Code of 1954, and held further that it fell within the purview of section 269(a) of such Code. For the taxable year 1956 the respondent determined that the claimed net operating loss deduction was not allowable under the provisions of section 172 of the 1954 Code.The business operated by the petitioner during the taxable years 1953 through 1956 was not substantially the same business as that conducted by it in the years 1950, 1951, and 1952 in*69 which it sustained net operating losses.In its income tax return for the taxable year 1953, the petitioner claimed a deductible loss of $ 71,397.49 on the disposition of its land and building at Beacon, N.Y., such loss being the difference between the adjusted basis thereof, $ 396,397.49, and the amount of $ 325,000. Therein it also claimed a deductible loss of $ 140,616.83 on account of the sale of the fixed assets to the Dales, such loss being the difference between the adjusted basis of $ 174,716.08 and $ 34,099.25, the portion of the amount of the $ 75,000 received from the Dales allocated as selling price of the fixed assets. The petitioner allocated $ 31,012.93 of the $ 75,000 as being the selling price of the inventories, which had an adjusted basis of $ 158,891.39, and treated the difference of $ 127,878.46 as a part of the cost of goods sold during 1953.In the notice of deficiency the respondent disallowed, pursuant to section 24(b) of the Internal Revenue Code of 1939, the loss deductions *1038 claimed on account of the disposition to the Dales of the land and buildings and the fixed assets. He also disallowed the amount of $ 127,878.46 as a part of the cost of*70 goods sold, and further determined that the deduction of such amount as a loss is precluded by section 24(b) of the Code.Management ServicesOn or about October 13, 1955, the Mount Vernon Co. of Mount Vernon, Ohio, acquired all of petitioner's outstanding capital stock. About July 1957 the Holly Corp. of New York acquired in excess of 50 percent of each class of the outstanding stock of the Mount Vernon Co.At the time that the Mount Vernon Co. acquired all of the petitioner's outstanding capital stock, the petitioner's then officers continued as such. Included among them were Freund, Wilhartz, Isherwood, and Baird who had existing contracts for employment for the period April 1, 1953, to March 31, 1958. 8*71 According to the petitioner's income tax returns for the taxable years 1956 and 1957 salaries were paid to officers as follows:19561957Schulman, chairman of the board$ 19,874.89$ 19,875.03Freund, president54,000.0054.000.00Wilhartz, executive vice president42,000.0042,000.00Isherwood, vice president25,000.0025,000.00Baird, vice president11,582.09Brouk, vice president12,271.46Buczynski, treasurer19,835.5619,234.20Schuster, secretary15,067.7814,817.10Allison, assistant secretary11,604.48Total211,236.26174,926.33Freund, Wilhartz, Isherwood, and Baird had conducted the business operated by the petitioner and similar businesses for a period far in excess of 25 years, and believed that they knew how to operate the business without advice. They did at times directly contract and pay for some outside technical or professional services when they deemed it necessary. In 1956 and 1957 there was expended by the petitioner for such professional services the respective amounts of $ 32,073.59 and $ 22,962.29.After the Mount Vernon Co. acquired all the stock of the petitioner in October 1955, its officers made investigations into*72 the operations *1039 and management of the petitioner, and required the petitioner to furnish it with monthly balance sheets and profit-and-loss statements for the purpose of making such suggestions as they might care to offer. However, in view of the fact that the petitioner's officers were experienced men, and since during the taxable year 1956 the petitioner was prosperous, the Mount Vernon Co. did not, to any large extent, interfere with the management of the petitioner during that year. The monthly financial reports which the petitioner submitted indicated a continuous shrinking of the petitioner's backlog of business, but the Mount Vernon Co., which knew little about the roof slab business, was not much concerned until the petitioner's sales began to decline during the taxable year 1957, when it gave more attention to the petitioner. On some occasions during 1956 and 1957 (the record not disclosing when or how often) the Mount Vernon Co. through its officers rendered some services (to an undisclosed extent) to the petitioner. On one occasion the Mount Vernon Co. assigned one of its employees to the petitioner, although it continued to pay his salary.During 1956 and*73 1957 the principal activity of the Holly Corp. was the acquisition of new operations. Its executive officers were qualified in the fields of accounting, law, engineering, finance, and banking. Generally, but not always, its executive staff dominated the boards of directors of affiliated or subsidiary companies which it controlled, and it often replaced the management of such companies. The existence of the above-mentioned employment contracts of the officers of the petitioner, which had about 8 months to run at the time the Holly Corp. obtained control of the Mount Vernon Co., precluded any immediate change in the management of the petitioner. Both before and after the Holly Corp. obtained control of the Mount Vernon Co. in July 1957, the Holly Corp. strongly recommended to the petitioner's officers that the petitioner diversify its products and made suggestions with respect thereto, but the petitioner's management was unwilling to accept the suggestions. Accordingly, the Holly Corp. could not render much service to the petitioner. It did, however, render some service to the petitioner (the extent and frequency thereof not being shown by the record). On at least two occasions*74 it sent one of its vice presidents to consult with the petitioner with respect to union contracts, on another occasion an officer of a subsidiary of Holly Corp. discussed with petitioner certain technical factors regarding prestressing concrete, and on other occasions the treasurer of the Holly Corp. and another financial employee rendered some services to the petitioner.Whatever services were performed for the petitioner by the Mount Vernon Co. or the Holly Corp. were rendered at the instance of those companies, and not at the instance of the petitioner's management. The directors and stockholders of the petitioner regularly held meetings, *1040 and minutes were kept of such meetings. No minutes purport to authorize petitioner to seek, request, accept, or pay for services from the Mount Vernon Co. or the Holly Corp. except as set forth in the minutes of meetings of the board of directors of petitioner held on October 16, 1956, and March 4, 1957.At the October 1956 meeting of the petitioner's board of directors it was resolved that the corporation accrue a management fee payable to the Mount Vernon Co. in the amount of $ 20,000 for financial services and advice for the period*75 January 1 to August 31, 1956. 9*76 The Mount Vernon Co. refused to accept the amount of $ 20,000 as being an adequate payment and made claim for payment based upon 3 percent of net sales of the petitioner. Thereupon, at a meeting of the petitioner's directors held on March 4, 1957, the matter was again considered and it was resolved that the petitioner accrue an annual service and management charge beginning January 1, 1956, predicated on 2 percent of net sales of the petitioner. 10*77 *1041 This amount was acceptable to the Mount Vernon Co. Accordingly, during the calendar year 1956, or within 2 1/2 months thereafter, the petitioner paid to the Mount Vernon Co. the amount of $ 93,355.61, representing 2 percent of its net sales for that year, and during the calendar year 1957, or within 2 1/2 months thereafter, it paid to the Mount Vernon Co. and the Holly Corp. a total of $ 62,341.98 ($ 47,333.40 to the Mount Vernon Co. and $ 15,008.58 to the Holly Corp.), representing 2 percent of its net sales for that year.The income tax returns of the Mount Vernon Co. for the taxable years 1956 and 1957 do not report the receipt of any dividends from the petitioner. In its return for the taxable year 1956 it reported taxable income (before net operating loss deduction and special deductions) of $ 135,788.55. However, it reported net operating loss carryovers totaling $ 1,146,625.14 and special deduction of $ 2,528.75, which more than offset its taxable income for the year. In its return for the taxable year 1957 it reported a net operating loss of $ 1,139,800.05. The Holly Corp. in its return for its taxable year ended July 31, 1957, reported taxable income (before*78 net operating loss deduction) of $ 272,512. However, it reported net operating loss carryovers of $ 1,098,396.21, which more than offset its taxable income for that year. In its return for the taxable year ended July 31, 1958, the Holly Corp. reported a net operating loss of $ 924,403.In its income tax returns for the taxable years 1956 and 1957 the petitioner deducted under the heading "Other deductions" the respective amounts of $ 93,355.61 and $ 62,341.98 for "Management Services." In such returns the petitioner reported for those 2 years gross income in the respective amounts of $ 1,402,388.68 and $ 755,286.03. Therein it reported taxable income (before net operating loss carryover) of $ 397,639.61 for the taxable year 1956. It reported a net operating loss of $ 22,694.73 for the taxable year 1957.In the notice of deficiency the respondent disallowed the amounts deducted for "Management Services" for the taxable years 1956 and 1957 with the explanation that the petitioner had failed to substantiate *1042 that such amounts constituted allowable deductions under section 162 or any other section of the Internal Revenue Code of 1954.The reasonable value of the services*79 rendered to the petitioner by the Mount Vernon Co. in 1956 was $ 15,000. The reasonable value of the services rendered to the petitioner by the Mount Vernon Co. and the Holly Corp. in 1957 was $ 15,000.OPINIONThe first issue is whether the petitioner in computing taxable income from the operation of the business conducted by it in the taxable years 1953 through 1956 may deduct, pursuant to sections 23(s) and 122 of the Internal Revenue Code of 1939, and section 172 of the Internal Revenue Code of 1954, 11 net losses sustained in the operation of the business which it conducted in its taxable years 1950, 1951, and 1952.*80 The respondent's principal position is that the claimed deductions must be disallowed for the same reason that the net operating losses were disallowed as deductions in Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382, that is, because the business in which the net operating losses were sustained was not substantially the same business as that which gave rise to the income sought to be offset by the carryovers. He also contends that the claimed deductions must be disallowed because of the provisions of section 129(a) of the Internal Revenue Code of 1939 and section 269(a) of the Internal Revenue Code of 1954. 12*81 *1043 In Libson Shops, Inc. v. Koehler, supra, the same interests owned 17 corporations, 16 of which were engaged in the retail clothing business and 1 of which was engaged in rendering management services to the others. Each of these 17 corporations filed separate income tax returns. The 16 sales corporations were merged into the managing corporation (the same interests continuing in control), and the surviving corporation conducted the entire business as a single enterprise. Prior to the merger three of the sales corporations had net operating losses, and the year following the merger each of the retail units formerly operated by these three corporations continued to sustain operating losses. In its income tax return for the first year after the merger the surviving corporation claimed deductions for the net operating losses of these three constituent corporations. The Supreme Court held that the claimed deductions were not allowable, stating in part:The requirement of a continuity of business enterprise as applied to this case is in accord with the legislative history of the carry-over and carry-back provisions. Those provisions were*82 enacted to ameliorate the unduly drastic consequences of taxing income strictly on an annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year. There is, however, no indication in their legislative history that these provisions were designed to permit the averaging of the pre-merger losses of one business with the post-merger income of some other business which had been operated and taxed separately before the merger. What history there is suggests that Congress primarily was concerned with the fluctuating income of a single business.* * * *The fact that § 129(a) is inapplicable does not mean that petitioner is automatically entitled to a carry-over. The availability of this privilege depends on the proper interpretation to be given to the carry-over provisions. We find nothing in those provisions which suggest that they should be construed to give a "windfall" to a taxpayer who happens to have merged with other corporations. The purpose of these provisions is not to give a merged taxpayer a tax advantage over others who have not*83 merged. We conclude that petitioner is not entitled to a carry-over since the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses.We agree with the respondent that the instant case is controlled by the decision in the Libson case.Here, in 1953 the Schulman group owned an Illinois corporation, the name of which was Federal Cement Tile Co., which, together with its predecessors, had conducted a successful cement tile roofing business in the midwest area of the United States. The petitioner prior to 1953 had operated, under the name of Durisol, Inc., an unsuccessful cement tile roofing business in 15 States on or near the East Coast of the United States. The Schulman group in May 1953 acquired control of the petitioner, and simultaneously the petitioner transferred its plant and operating assets to the old stockholders, *1044 retaining, however, the rights to use of the Durisol process except in the 15 East Coast States. Shortly thereafter Federal Cement Tile Co. was merged into the petitioner, the latter being the survivor and adopting the name "Federal Cement Tile Company." The petitioner ceased the*84 operation of the business which it had conducted in the East Coast States, but continued, successfully, to operate the same business which had been conducted in the Midwest by the Illinois corporation and its predecessors. The petitioner seeks to apply against the income of the business enterprise conducted by it in the Midwest in the years in question, the net operating losses sustained in prior years by it in the business conducted by it in the East Coast States.Clearly the business enterprise carried on by the petitioner in the years in question was not substantially the same business enterprise in which the net operating losses were sustained. Indeed, we consider them entirely separate enterprises. It is true that the petitioner did carry on in the years in question some business in the Midwest involving the Durisol process. However, the sales of the Durisol product represented only a relatively minor part of the total sales, and these were confined to the Midwest area, the petitioner having disposed of the right to use and exploit the Durisol process in the East Coast States. 13*85 The fact that the petitioner, the continuing corporation, is the same corporation which sustained the operating losses in the prior years, does not serve to render inapplicable the rule of the Libson case. J. G. Dudley Co., 36 T.C. 1122">36 T.C. 1122, affd. (C.A. 4) 298 F. 2d 750; Huyler's, 38 T.C. 773">38 T.C. 773, on appeal (C.A. 7); and Julius Garfinckel & Co., 40 T.C. 870">40 T.C. 870, and cases cited therein.Actually the Libson case was a stronger case for the taxpayer than the instant case. There the same interests which controlled all the corporations before the merger were in control of the surviving corporation. Here the group which owned the petitioner during the years in question had no interest whatever in the petitioner during the years the net losses were sustained. See Norden-Ketay Corporation v. Commissioner, (C.A. 2) 319 F. 2d 902, affirming a Memorandum Opinion of this Court; Huyler's, supra; and Commissioner v. Virginia Metal Products, (C.A. 3) 290 F.2d 675">290 F. 2d 675, certiorari denied*86 368 U.S. 889">368 U.S. 889, reversing 33 T.C. 788">33 T.C. 788.The question whether a business which sustains a net operating loss is substantially the same business which produces the income against which the net loss is claimed as an offset is to be determined upon the basis of the particular facts in each case. We have carefully examined the two cases principally relied upon by the petitioner, Kolker *1045 ., 35 T.C. 299">35 T.C. 299, and Goodwyn Crockery Co., 37 T.C. 355">37 T.C. 355, affd. (C.A. 6) 315 F. 2d 110, but find that they involved factual situations so different from that involved herein that they furnish no authority for the petitioner's position here. See Julius Garfinckel & Co., supra, in which we distinguished the Kolker case.As stated, the respondent also contends that the principal purpose for which the Schulman group acquired control of the petitioner was evasion or avoidance of tax by securing the benefit of a deduction which would not otherwise be enjoyed, and that for this reason the claimed deductions should be disallowed*87 pursuant to section 129(a) of the 1939 Code and section 269(a) of the 1954 Code. We have found that one of the purposes for the acquisition of such control was to obtain such a deduction, but in view of our holding above with respect to the application of the doctrine of the Libson Shops case, we find it unnecessary to decide whether such was the principal purpose for the acquisition of control of the petitioner. If there is no continuity of business enterprise the deduction of a net operating loss is precluded, irrespective of whether section 129(a) of the 1939 Code or section 269(a) of the 1954 Code applies. Libson Shops, Inc. v. Koehler, supra;Norden-Ketay v. Commissioner, supra; and Commissioner v. Virginia Metal Products, supra.We hold that the respondent did not err in disallowing the claimed net operating loss deductions.The second issue presented is whether the petitioner is entitled to loss deductions for the year 1953 totaling $ 339,892.78 on account of its sale or exchange to the Dales in that year of its land and buildings at Beacon, N.Y., its fixed assets, and*88 its inventories. The respondent determined that the deduction of any such losses is precluded by section 24(b) of the Internal Revenue Code of 1939. 14 In his amended answer the respondent alleged in the alternative that the deduction of such losses is precluded by section 129(a) of the Code, quoted supra in footnote 12.*89 The stipulated facts show that John D. Dale and Louise B. Dale, to whom the assets were transferred, owned more than 50 percent in value of the outstanding stock of the petitioner until May 13, 1953, the date on which they transferred their stock to the Schulman group. *1046 The agreement for the sale of the stock by the Dales to the Schulmans was entered into on April 29, 1953. Therein it was recited that the petitioner and Louise B. Dale had agreed that petitioner would, prior to the closing date, convey the land and buildings at Beacon, N.Y., to Louise Dale in full satisfaction of the petitioner's indebtedness to her in the principal sum of $ 325,000, plus interest thereon. On the same date the Dales and the Schulmans entered into another agreement which provided that, simultaneously with the closing of the purchase of the petitioner's stock from the Dales, there would be transferred from the petitioner to the Dales, for a purchase price of $ 75,000, the petitioner's inventories and fixed assets.In accordance with these agreements the petitioner on or about May 12, 1953, conveyed its land and building at Beacon, N.Y., to the Dales or their nominee in satisfaction of the*90 petitioner's indebtedness to Louise B. Dale, and by bill of sale executed on May 13, 1953, by Schulman as president of the petitioner, the inventories and fixed assets (and certain intangible assets) were transferred to the Dales for $ 75,000.The petitioner contends that section 24(b) is not here applicable. With respect to the inventories and fixed asset, it states that the transfer must have been made to the Dales after they had disposed of their stock interest in the petitioner, since the bill of sale was executed on May 13, 1953, by Schulman as the new president of the petitioner who represented the new stockholders. The petitioner concedes that the land and building at Beacon, N.Y., were transferred to the Dales on May 12, the day before the Dales transferred their stock to the Schulman group. However, it contends that because of the provisions of the stock purchase agreement of April 29, 1953, Schulman and his associates from that time should be considered the true "owners" of the petitioner's stock within the meaning of section 24(b), since they were assured of control of the petitioner.From a reading of the two agreements of April 29, 1953, it is apparent that the transfer*91 of the stock interest from the Dales to the Schulman group, and the transfer of the assets in question from the petitioner to the Dales, were parts of one plan, and that neither transfer was to occur without the other. Due to the fact that the Dales were to provide for the completion of the petitioner's existing unfilled contracts, and the fact that the petitioner was not to thereafter engage in carrying on business in the East Coast States, the substance of the transaction was the acquisition by the Schulman group of the petitioner devoid of the New York plant and the fixed assets and inventories; and there can be no question that in fixing the selling price of the stock there was taken into account the agreements with respect to the transfer of assets to the Dales.*1047 Under such circumstances we think it must be considered that, within the contemplation of section 24(b) of the Code, the sales in question were made to the Dales while they owned more than 50 percent in value of the outstanding stock of the petitioner. It is immaterial whether the Dales transferred their stock to the Schulman group before, after, or simultaneously with the transfer of the assets to them. *92 If, as contended by the petitioner, it should be considered that on April 29, 1953, the Schulman group had such rights in the stock as to amount to ownership thereof, then by the same token it would necessarily be considered that the Dales had such interest in the assets of the petitioner to be transferred as rendered them the substantial owners thereof on April 29, 1953, with the result that the sales were to stockholders owning more than 50 percent in value of the outstanding stock.The instant case is somewhat similar to W. A. Drake, Inc. v. Commissioner, (C.A. 10) 145 F. 2d 365, affirming W. A. Drake, Inc., 3 T.C. 33">3 T.C. 33. There an individual who owned more than 50 percent in value of stock of a corporation contracted with the corporation for the purchase from it of a farm, the purchase price to consist of the assumption by the individual of an outstanding mortgage and the transfer to the corporation of a portion of the individual's stock in the corporation. The individual immediately transferred a portion of the stock to the corporation, and this left him owning less than 50 percent in value of the corporation's outstanding*93 stock. About 3 months thereafter the deed to the farm was delivered to the individual after payment of the balance of the consideration. In holding that section 24(b) of the Internal Revenue Code of 1939 precluded the deduction by the corporation of a loss on the transaction, the Court stated in part:The right to deduct this loss depends upon the nature of the transaction out of which it arose. It arose out of a transaction with an individual who owned, directly or indirectly, more than fifty-one per cent in value of the outstanding stock of petitioner.It is immaterial whether title to the stock passed to the corporation before title to the land passed to Bartels, or vice versa, or whether title passed at the same time. The transaction out of which the loss occurred had its beginning with the contract of October 11, 1940, which we have held was a binding and enforceable contract from the date of its execution. This places the transaction squarely within the purview of the Act, and petitioner was not entitled to the claimed deduction.The transactions out of which the losses occurred in the instant case had their beginning with the agreements of April 29, 1953, at which time*94 there can be no question that the Dales owned more than 50 percent in value of the outstanding stock of the petitioner. Thus, we think it must be considered that here, as in the Drake case, the petitioner sold assets to stockholders owning more than 50 percent in value of its outstanding stock. The fact that here, as in the Drake*1048 case, the stockholders simultaneously relinquished their control does not permit a conclusion that section 24(b) is inapplicable. As we said in the Drake case:Nor is it important that as a result of the transaction Bartel's stock ownership became less than 50 percent. The statute makes no such exception, nor can we.The petitioner points out that the contract whereby the Dales agreed to purchase the assets in question from the petitioner was not made with the petitioner, but with the Schulman group and it claims that this was an arm's-length transaction, whereas in the Drake case the contract was between the controlling shareholder and his controlled corporation. We think, however, that the fact that the petitioner was not a party to the agreements does not alter the result. Since the agreements were between the then controlling*95 stockholders and the prospective controlling stockholders, there could be no question of compliance by the petitioner; and it did comply. In addition, it may be pointed out that the stock purchase agreement recites that the petitioner had agreed with the Dales to transfer the land and building at Beacon, N.Y., to the Dales. The applicability of section 24(b) is not dependent upon whether the transaction was bona fide or at arm's length. As stated by the Supreme Court in McWilliams v. Commissioner, 331 U.S. 694">331 U.S. 694, section 24(b) "states an absolute prohibition -- not a presumption -- against the allowance of losses on any sales between the members of certain designated groups." And in the Drake case we reviewed the legislative history of section 24(b) and concluded that Congress did not see fit to make any exception even though the sale and the loss may both have been bona fide.The petitioner contends that since in Prentiss D. Moore, 17 T.C. 1030">17 T.C. 1030, affd. (C.A. 5) 202 F.2d 45">202 F. 2d 45, we took the position that the taxpayer, by virtue of a contract for the acquisition of stock of a corporation, *96 was assured of control of such corporation (and therefore "owned" more than 50 percent in value of its stock) and that he therefore could not deduct a loss upon the transfer by him of property to the corporation, we should here hold that by virtue of the agreement of April 29, 1953, the Schulmans, and not the Dales, should be considered as the owners of more than 50 percent in value of the petitioner's stock at the time of the transfers of the property by the petitioner to the Dales. We cannot agree. As pointed out hereinabove, if it should be considered in the instant case that the Schulman group on April 29, 1953, acquired "ownership" of stock of the petitioner, it would necessarily be considered that the Dales on the same date acquired such rights in the assets to be transferred as to constitute them the owners thereof, since obviously the transfer of the stock and the transfer of the assets were integral parts of one transaction. In the Moore case both we and the Court of Appeals made it clear that there was no inconsistency between the holding there and the holding in the Drake*1049 case. Likewise, there is no inconsistency between the holding herein and the *97 holding in the Moore case.We hold that the claimed loss deductions are precluded by section 24(b) of the Code. In view of this conclusion it is unnecessary to decide whether the principal purpose of the acquisition of control of the petitioner by the Schulman group was to obtain the benefit of these loss deductions and hence whether section 129(a) of the Code precludes the deduction of such losses.The last issue for decision is whether the petitioner is entitled to any deduction under section 162(a) of the Internal Revenue Code of 195415 on account of the payment of $ 93,355.61 which it made to its parent, the Mount Vernon Co., in the taxable year 1956, and on account of the payment of $ 62,341.98 which it made to its parent and the parent's controlling stockholder, the Holly Corp., in the taxable year 1957.*98 The respondent disallowed the full amounts claimed and contends that the petitioner has not met its burden of showing that any portion of such amounts constituted ordinary and necessary business expenses of the petitioner. He relies heavily upon Heil Beauty Supplies v. Commissioner, (C.A. 8) 199 F. 2d 193, affirming a Memorandum Opinion of this Court, wherein it was held that an amount paid by a corporate taxpayer to its majority stockholder for services claimed to have been rendered had not been shown to be ordinary and necessary expenses of the corporation.That case, as well as numerous other cases, including Ingle Coal Corporation v. Commissioner, (C.A. 7) 174 F. 2d 569, affirming 10 T.C. 1199">10 T.C. 1199, and Darco Realty Corporation v. Commissioner, (C.A. 2) 301 F. 2d 190, affirming a Memorandum Opinion of this Court, holds that an arrangement between a corporation and its controlling stockholders is subject to close scrutiny to determine whether that which is claimed as compensation for services is in reality a distribution of profits, and that the question*99 is essentially one of fact.The respondent points out that any services which may have been rendered were not rendered at the request of the petitioner, and therefore contends that such services were forced upon the petitioner by the other corporations, that the petitioner was under no liability to pay therefor, and that, therefore, no amount paid can be considered as an ordinary and necessary expense of the petitioner. While the record here presented is far from satisfactory in many respects, it does establish, we think, and we have found as a fact, that some services *1050 were rendered to the petitioner by the Mount Vernon Co. in 1956 and 1957. The executive vice president of the petitioner and a vice president of the Mount Vernon Co. so testified. Also, the directors of the petitioner, as shown by the minutes of their meetings, recognized that services had been rendered to the petitioner in connection with accounting, legal, financial, and other matters, and recognized a liability to reimburse the Mount Vernon Co. for the portion of Mount Vernon's costs properly allocable to such services. The evidence also shows that some services were rendered by the Holly Corp. to *100 the petitioner in 1957. Both the executive vice president of the petitioner and the president of the Holly Corp. so testified.The difficulty here is that the petitioner has not shown any details as to the character and extent of the services rendered. Nor has it furnished any evidence upon which the value of such services can be determined with exactitude. Under the circumstances, a serious question is presented as to whether the petitioner has shown that any amount should be allowed ( Heil Beauty Supplies v. Commissioner, supra). However, as noted in the Heil case, the question of whether a deduction should be allowed and the amount thereof depends upon the evidentiary situation obtaining in each case.Here, none of the above-mentioned officers of the petitioner and of the other corporations testified as to the value of the services, and on this question the evidence we have consists almost entirely of the minutes of the meetings of the petitioner's directors. In view of the fact that the Mount Vernon Co. owned all the stock of the petitioner, we cannot view the action of the board of directors of the petitioner taken on March 4, 1957, as*101 representing an independent judgment of such directors as to the value of the services. We do not know the composition of the board of directors of the petitioner (except that Schulman was the chairman), and therefore whether such board was dominated by officers or directors of the Mount Vernon Co. (or later by the officers and directors of the Mount Vernon Co. and the Holly Corp.). There is no showing that there was any connection whatever between the value of the services rendered and 2 percent of net sales of the petitioner. 16The amount of $ 20,000 fixed by the board of directors of the petitioner on October 16, 1956, as representing a proper amount as compensation for the first 8 months of 1956, would seem to more nearly represent an independent judgment of the directors, and we think their action*102 in fixing this amount is entitled to some weight, although it is not conclusive since we cannot conclude that such action was not influenced, to some extent, by the fact that it was the petitioner's parent which was requesting the compensation.*1051 Believing, as we do, that some services were rendered to the petitioner by the other two corporations, we feel it incumbent upon us to exercise our best judgment and allow as a deduction for each year some amount as representing a reasonable allowance for compensation for such services. In the exercise of our best judgment, and bearing heavily against the petitioner who has the burden of proof and whose inexactitude is of its own making, we have found as a fact that the reasonable value of the services rendered to the petitioner by the Mount Vernon Co. in 1956 was $ 15,000, and by the Mount Vernon Co. and the Holly Corp., combined, in 1957 was $ 15,000. Cohan v. Commissioner, (C.A. 2) 39 F.2d 540">39 F. 2d 540. Those amounts will be allowed as deductions in the recomputation under Rule 50.Decisions will be entered under Rule 50. Footnotes1. Under the terms of the contract, the petitioner paid for such rights in and to the Durisol name and process an amount of $ 80,000 and agreed to pay specified royalty payments. The contract provided that if such royalties were not paid within 3 months after the due date Durisol-Swiss should have the right to take over the business covered by the contract and that if they were not paid within 6 months the petitioner would automatically, without notice, lose its rights under the contract. By such contract the petitioner pledged itself to absolute secrecy regarding the Durisol manufacturing process and all plans of machines, tools, and plant placed in its hands.↩2. The original key executives and shareholders of IllinoisFederal, each of whom at the time of incorporation had approximately 25 years of experience in the business of manufacturing cement tiles for roofing purposes, were as follows:↩Shares of stock heldCommonPreferredCheri S. Freund, president300132Leland J. Wilhartz, executive vice president300132Arthur Isherwood, sales manager10044Virgil E. Baird, chief engineer10044O. Roy Pritchett, plant superintendent100441. Actual operations were only for the 9-month period Apr. 1, 1952, to Dec. 31, 1952.↩3. The agreement expressly provided that in the event the Dales were unable to acquire and tender to the Schulman group on the closing date all of the shares of the petitioner not then owned by them, the Schulman group had the irrevocable option within 10 days from such date to purchase and acquire all of the preferred and common shares of the petitioner offered or then owned by the Dales.↩4. Attached to the agreement as exhibit A thereto was the following balance sheet of the petitioner as of Apr. 22, 1953:↩ASSETSCash In Bank:Bankers Trust Co$ 10,776.75Fishkill National Bank9,768.30$ 20,545.05Accounts Receivable49,209.56Less: Reserve for doubtful accounts11,787.2537,422.31Inventories148,830.54Prepaid Expenses14,054.62Fixed Assets -- Net as of December 31, 1952639,773.11Durisol Process80,000.00940,625.63LIABILITIESAccounts Payable$ 17,695.15Commissions Payable1,168.35Withholding from Employees11,459.28Accrued Taxes4,755.77Accrued Expenses20,855.19Truck Purchase -- Note1,200.00$ 57,133.74 Bank Note Payable200,000.00Stockholders Notes534,758.46Accrued Interest Thereon32,501.66767,260.12 Mortgage Payable325,000.00 Capital Stock and Deficit(208,768.23)940,625.635. Louise B. Dale later sold this property under contract dated Aug. 25, 1954, for $ 250,000 cash.↩6. By agreement dated May 12, 1953, the petitioner and Durisol-Swiss modified their contract of Oct. 11, 1946. Therein the petitioner released to Durisol-Swiss all right, title, and interest to the use of the Durisol name and process in Mexico and Canada, the rate of royalties was changed to a flat rate per cubic foot of Durisol sold beginning Jan. 4, 1954, and new rules were provided for the calculation of such royalties. At the same time the petitioner released to Durisol-Swiss all right, title, and interest to the use of the Durisol name and process in the East Coast States. By a contract dated May 13, 1953, Durisol-Swiss granted to Durisol -- N.Y. the exclusive right to the use of the Durisol name and process in said East Coast States.↩7. Both prior to and concurrent with the consummation of the purchase by the Schulman group of the stock of the petitioner, Schulman and his attorney and his accountant discussed the possible "availability for a tax credit" of the petitioner's net operating losses for years prior to 1953, and the fact that the petitioner had such net losses was a factor in the closing of the transaction, the fixing of the price which the group paid, and the determination of the form of the transaction. One of the purposes for which the acquisition of the control of the petitioner by the Schulman group was made was to secure the benefit of a deduction which would not otherwise have been enjoyed.↩8. Such contracts provided, for each successive 12-month period, base salaries of $ 12,000 for each of such officers plus additional compensation as follows: Freund -- an amount equal to 2.8 percent of the petitioner's gross sales up to a maximum aggregate compensation of $ 54,000 per 12-month period; Wilhartz -- an amount equal to 2 percent of the petitioner's gross sales up to a maximum aggregate compensation of $ 42,000 per 12-month period; Isherwood -- an amount equal to 0.87 percent of the petitioner's gross sales up to a maximum aggregate compensation of $ 25,000 per 12-month period; and Baird -- an amount determined by the quantity of precast slabs manufactured up to a maximum aggregate compensation of $ 20,300 per 12-month period.↩9. The minutes of the meeting of Oct. 16, 1956, provide in part as follows:"The Chairman stated that the first order of business of the meeting related to a management fee which The Mount Vernon Company, the parent of this corporation, desires to recover from this corporation for services which it has rendered. A discussion of the matter followed and it was pointed out that The Mount Vernon Company, through its various officers, has rendered valuable service to this corporation in connection with financial matters and in connection therewith, certain of its officers have spent considerable time and effort since January 1, 1956."It was the consensus that a reasonable fee for such services, payable to The Mount Vernon Company, should be accrued by this corporation and it was agreed that a fee in the amount of $ 20,000 covering the period from January 1 to August 31, 1956, would be fair and reasonable. Upon motion duly made, seconded, and unanimously carried, the following resolution was adopted:"RESOLVED, that this corporation accrue a management fee payable to The Mount Vernon Company in the amount of $ 20,000 for financial services and advice for the period January 1 to August 31, 1956."↩10. The minutes of the meeting of Mar. 4, 1957, provide in part as follows:"The Chairman stated that the meeting had been called in order that a final determination of the proper allocation of administrative and other general corporate expenses paid and incurred by the Mount Vernon Company should be made to this corporation for such management and other services Mount Vernon has rendered this company. The directors reviewed the matter and attention was directed to the $ 20,000 accrued to The Mount Vernon Company as a management and service fee for financial services and advice for the period January 1 to August 31, 1956. Mr. Boodell stated that The Mount Vernon Company refused to accept this Board's determination of this amount as being a final allocation of administrative and other general corporate expenses, including fiscal, accounting, legal, financial and other expenses of The Mount Vernon Company. He stated that on or about October 3rd, agreements had been entered into by and between The Mount Vernon Company and Holly Corporation whereby the assets of Federal Cement Tile Company would be sold to Holly, and because of this the Mount Vernon Board had not made any issue of its claim for such services based on 3% of net sales. He stated that subsequently the agreements between Mount Vernon and Holly were modified and that the assets of Federal were not contracted to be sold to Holly Corporation or any of its subsidiaries, and as a result the dispute involving the proper allocation of such charges between the two companies would have to be finally determined. He stated that in his opinion Mount Vernon, through its various officers, had rendered valuable services to this corporation in connection with general corporate, fiscal, accounting, legal, financial and other matters and in connection therewith certain of its officers and employees had spent considerable time and effort since October 6, 1955 in promoting the interests of Federal Cement Tile Company. Mr. Wilhartz stated that this matter had been discussed from time to time and that a final resolution to the problem should be made so that the Company auditors could finish the audit."It was the consensus that to attempt each time an invoice was presented to make a proper distribution between Mount Vernon and Federal would be time consuming, cumbersome and costly. Mr. Boodell again stated that the Mount Vernon board was of the opinion that a distribution of costs between the companies should be based on 3% of Federal sales which in the opinion of the Mount Vernon board was fair and equitable. Mr. Boodell stated that he had reviewed the matter with the company auditors and that such an allocation in their opinion was fair and reasonable. Mr. Freund stated that the company had enjoyed a good year and suggested that a lesser percentage allocation be agreed upon. Upon consideration and discussion, a percentage based on 2% of net sales was determined to be fair and reasonable. Messrs. Schulman and Boodell stated they would recommend such charges to the Mount Vernon board. The following resolution was thereupon unanimously adopted: "RESOLVED that this corporation accrue an annual service and management charge, beginning January 1, 1956, predicated on 2% of the net sales of the company (before deduction of sales, costs and specific administrative expenses incurred by this company) evidencing the proper allocation of administrative and other general corporate, fiscal, accounting, legal, financial and other expenses of The Mount Vernon Company incident to its ownership and operation of Federal Cement Tile Company."↩11. Sec. 23(s) of the 1939 Code provides for the deduction of the net operating loss deduction computed under sec. 122.Sec. 122(b)(2)(B) of the 1939 Code provides in part:(B) Loss for Taxable Year Beginning After 1949. -- If for any taxable year beginning after December 31, 1949, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the five succeeding taxable years * * *Sec. 172 of the Internal Revenue Code of 1954 provides in part:(a) Deduction Allowed. -- There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year. * * ** * * *(g) Special Transitional Rules. -- (1) Losses for taxable years ending before January 1, 1954. -- For purposes of this section, the determination of the taxable years ending after December 31, 1953, to which a net operating loss for any taxable year ending before January 1, 1954, may be carried shall be made under the Internal Revenue Code of 1939.It should be pointed out that sec. 381 of the 1954 Code contains special provisions for carryovers in certain corporate acquisitions, and that sec. 382 contains special limitations on net operating loss carryovers. However, it is clear that the transactions here involved occurred before the effective date of those sections. See secs. 392, 393, and 394, 1954 Code, and Irving-Kolmar Corporation, 35 T.C. 712">35 T.C. 712↩. Neither party contends that the provisions of secs. 381 and 382 are here applicable.12. Sec. 129(a) of the Internal Revenue Code of 1939 provides in part:If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, * * * and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For the purposes of clauses (1) and (2), control means the ownership of stock possessing at least 50 per centum of the total combined voting power of all classes of stock entitled to vote or at least 50 per centum of the total value of shares of all classes of stock of the corporation.Sec. 269(a) of the Internal Revenue Code of 1954↩ contains substantially identical provisions.13. It may be added that there is no showing that the portion of the midwest business consisting of the sale of the Durisol product resulted in the production of any profit.↩14. Sec. 24(b) provides in part as follows:(1) Losses disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly -- * * * *(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;* * * *(2) Stock ownership, family, and partnership rule. -- For the purposes of determining, in applying paragraph (1), the ownership of stock -- * * * *(B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family.↩15. Sec. 162(a) of the Code provides in part as follows:(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including -- (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;↩16. As pointed out in Heil Beauty Supplies v. Commissioner, (C.A. 8) 199 F. 2d 193↩, this might indicate that the payment was at least in part, a distribution to the stockholder.

01-04-2023

11-21-2020

https://www.courtlistener.com/api/rest/v3/opinions/4624484/

SUZANNE L. PORTER A.K.A. SUZANNE L. HOLMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentPorter v. Comm'rNo. 13558-06United States Tax Court132 T.C. 203; 2009 U.S. Tax Ct. LEXIS 26; 132 T.C. No. 11; April 23, 2009, FiledPorter v. Commissioner, 130 T.C. 115">130 T.C. 115, 2008 U.S. Tax Ct. LEXIS 10">2008 U.S. Tax Ct. LEXIS 10 (2008) The court entered a decision for the taxpayer.*26 P applied for relief from joint and several liability for additional tax under sec. 72(t), I.R.C., related to a distribution her husband received from his individual retirement account. R denied P's application for relief. P petitioned this Court to seek our determination whether she is entitled to relief under sec. 6015(f), I.R.C.Held: In determining whether P is entitled to equitable relief under sec. 6015(f), I.R.C., we apply a de novo standard of review, not an abuse of discretion standard of review. Held, further: P is entitled to equitable reliefunder sec. 6015(f), I.R.C.Held, further: P is entitled to equitable reliefunder sec. 6015(f), I.R.C.Suzanne L. Porter a.k.a. Suzanne L. Holman, Pro se.Kelly R. Morrison-Lee and Ann M. Welhaf, for respondent.Haines, Harry A.HARRY A. HAINES*203 HAINES, Judge: Respondent determined that petitioner is not entitled to relief from joint and several income tax liability for 2003 with respect to an early distribution from her exhusband's individual retirement account (IRA). 1 In Porter v. Commissioner, 130 T.C. 115">130 T.C. 115, 117 (2008), we held that in determining whether petitioner is entitled to relief under section 6015(f), we conduct a trial de novo and *27 we may consider evidence introduced at trial which was not included in the administrative record. We then denied respondent's motion in limine seeking to limit petitioner's right to introduce evidence outside the administrative record. The issues remaining for decision are: (1) Whether in determining petitioner's eligibility for relief under section 6015(f) we use a de novo standard of review or review for abuse of discretion; and (2) *204 whether petitioner is entitled to equitable relief under section 6015(f).FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, the exhibits attached thereto, and the stipulation of settled issues are incorporated herein by this reference. At the time she filed her petition, petitioner resided in Maryland.Petitioner holds a bachelor of science degree in business administration from the University of Maryland. In 1994 she married John S. Porter. Together, they had two children. Sometime in 2002 petitioner *28 was wrongfully discharged from her job with the Federal Government. Before returning to Government employment petitioner was employed as a bus driver. Petitioner was not aware of Mr. Porter's finances during 2003. They maintained separate checking accounts and credit cards. Petitioner did not review the monthly bank statements, nor did she pick up the daily mail. Mr. Porter was responsible for the home mortgage and car insurance payments. Petitioner was responsible for paying all other home expenses, including groceries, which she paid for with her credit cards. During 2003 petitioner received $24,285 in wages and unemployment compensation. During 2003 Mr. Porter earned $12,765 in nonemployee compensation. He also received a $10,700 distribution from his IRA. Petitioner did not know of the distribution at the time it was made because Mr. Porter refused to tell petitioner about his income for 2003. Before 2003 Mr. Porter was responsible for filing the couple's tax returns. He also prepared the couple's 2003 joint Form 1040, U.S. Individual Income Tax Return. The return reported Mr. Porter's IRA distribution and petitioner's wages and unemployment compensation. Mr. Porter's nonemployee *29 compensation was not reported on the return. He gave the return to petitioner to sign on April 15, 2004, the day it was due. Because Mr.Porter was pressuring her to sign the return quickly so he could get it to the post office, petitioner reviewed the return in haste, ensuring that her own income was properly reported. Six days after petitioner signed the *205 return, on April 21, 2004, she and Mr. Porter legally separated. 2On June 20, 2005, respondent issued petitioner and Mr. Porter statutory notices of deficiency for 2003. Respondent adjusted their 2003 income to include $12,765 in nonemployee compensation attributable to Mr. Porter. Respondent also adjusted their 2003 income tax to include 10-percent additional tax of $1,070 with respect to Mr. Porter's IRA distribution pursuant to section 72(t)(1). Neither petitioner nor Mr. Porter petitioned this Court for redetermination of the deficiency. In subsequent years petitioner has complied with all income tax laws. After their separation petitioner discovered that Mr. Porter had not filed their joint Federal income tax return for 2002. Petitioner promptly filed her own return *30 for 2002, choosing married-filing-separately status. On December 1, 2005, petitioner filed a Form 8857, Request for Innocent Spouse Relief. On June 14, 2006, respondent's Appeals officer issued a final determination regarding petitioner's request for relief. The Appeals officer determined that pursuant to section 6015(c) petitioner was entitled to relief from joint and several liability with respect to the $12,765 in unreported nonemployee compensation. However, petitioner was denied relief under section 6015(b), (c), and (f) from the 10-percent additional tax of $1,070 on Mr. Porter's IRA distribution. The Appeals officer determined that petitioner knew or had reason to know the 10-percent additional tax was not reported on the couple's return. On January 31, 2007, as a result of debt from her marriage, petitioner filed for bankruptcy. 3*31 Mr. Porter did not intervene in this case, though he was given the opportunity to do so under section 6015(e)(4). See Van Arsdalen v. Commissioner, 123 T.C. 135">123 T.C. 135, 143 (2004). *206 Rather, respondent called him as a witness at trial. He had not previously participated in petitioner's administrative hearing. OPINION I. Section 6015(f)Petitioner contends that under section 6015(f) she qualifies for relief from joint and several liability for the 10-percent additional tax on Mr. Porter's early distribution from his IRA. When a husband and wife file a joint Federal income tax return, they generally are jointly and severally liable for the tax due. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276">114 T.C. 276, 282 (2000). *32 However, a spouse may qualify for relief from joint and several liability under section 6015(b), (c), or (f) if various requirements are met. The parties stipulated that petitioner does not qualify for relief from joint and several liability on the 10-percent additional tax under section 6015(b) or (c). A taxpayer qualifies for relief under section 6015(f) if relief is not available under section 6015(b) or (c) and, in the light of the facts and circumstances, it is inequitable to hold the taxpayer liable for the tax or deficiency. This Court has jurisdiction to determine whether a taxpayer is entitled to equitable relief under section 6015(f). Sec. 6015(e)(1)(A). Our determination is made in a trial de novo. Porter v. Commissioner, 130 T.C. at 117. Therefore, we may consider evidence introduced at trial which was not included in the administrative record. Both parties submitted evidence at trial which was not available to respondent's Appeals officer.II. The Standard of ReviewWe have generally reviewed the Commissioner's denial of relief under section 6015(f) for abuse of discretion. 4 See Jonson v. Commissioner, 118 T.C. 106">118 T.C. 106, 125 (2002), affd. 353 F.3d 1181">353 F.3d 1181 (10th Cir. 2003); Butler v. Commissioner, supra; *33 cf. Wiener v. Commissioner, T.C. Memo 2008-230">T.C. Memo 2008-230 (abuse of discretion standard not applied where notice of determination did *207 not recite any analysis or factual determinations to review). In their concurring opinions in Porter v. Commissioner, supra at 142-146, Judges Goeke and Wherry contended that our existing precedent with respect to the standard of review in section 6015(f) cases is no longer applicable in the light of the 2006 amendments to section 6015. Judge Wherry urged the Court to adopt a de novo standard of review when the merits of this case would be decided. 5Id. at 144.Congress enacted section 6015*34 as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201, 112 Stat. 734. 6Section 6015(f) provides that the Commissioner "may" grant relief under certain circumstances, suggesting a grant of relief is discretionary. In its original form section 6015(e) granted us jurisdiction to determine appropriate relief under section 6015(b) and (c) but was silent as to our jurisdiction under section 6015(f). In Butler v. Commissioner, supra, we considered whether we had jurisdiction to review the Commissioner's denial of equitable relief under section 6015(f) or whether the granting of relief was committed solely to agency discretion.In the absence of any clear guidance from Congress, we held that we had jurisdiction to review the Commissioner's determinations but should review for abuse of discretion because of the discretionary language in section 6015(f). Butler v. Commissioner, supra; see Porter v. Commissioner, supra at 143 (Goeke, J. concurring). Under the statutory framework provided by Congress at *35 the time, our adoption of an abuse of discretion standard was appropriate. Porter v. Commissioner, supra at 143 (Goeke, J. concurring).Our assertion of jurisdiction over cases brought under section 6015(e) and (f) by individuals against whom no deficiency had been asserted was reversed by the U.S. Courts of Appeals for the Eighth Circuit and for the Ninth Circuit. See Bartman v. Commissioner, 446 F.3d 785">446 F.3d 785, 787 (8th Cir. 2006), affg. in part and vacating in part T.C. Memo 2004-93">T.C. Memo. 2004-93; Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), revg. 118 T.C. 494">118 T.C. 494 (2002) and vacating 112 T.C. 32">112 T.C. 32 (2004); see also *208 Billings v. Commissioner, 127 T.C. 7">127 T.C. 7 (2006). However, in 2006 Congress amended section 6015(e)(1) to confirm our jurisdiction to determine the appropriate relief available under section 6015(f). Tax Relief and Health Care Act of 2006, Pub. L. 109-432, div. C, sec. 408(a), 120 Stat. 3061. Given Congress's confirmation of our jurisdiction, reconsideration of the standard of review in section 6015(f) cases is warranted.Amended section 6015(e)(1) provides that "In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply, or in *36 the case of an individual who requests equitable relief under subsection (f)", the Court has jurisdiction "to determine the appropriate relief available to the individual under this section". (Emphasis added.) The use of the word "determine" suggests that Congress intended us to use a de novo standard of review as well as scope of review. In other instances where the word "determine" or "redetermine" is used, as in sections 6213 and 6512(b), we apply a de novo scope of review and standard of review. See Porter v. Commissioner, 130 T.C. at 118-119. Nothing in amended section 6015(e) suggests that Congress intended us to review for abuse of discretion. In similar circumstances, Congress expressly provided that we review the Commissioner's determinations for abuse of discretion. Before 1996 the Commissioner was granted the authority to abate assessments of interest in certain circumstances. Sec. 6404(e) (as in effect for tax years beginning on or before July 30, 1996). Under that statutory framework, we lacked jurisdiction to determine whether interest abatement was warranted. See Beall v. United States, 336 F.3d 419">336 F.3d 419, 425 (5th Cir. 2003); 508 Clinton St. Corp. v. Commissioner, 89 T.C. 352">89 T.C. 352, 354 (1987). *37 Congress then amended section 6404 by expressly granting us jurisdiction "to determine whether the Secretary's failure to abate interest * * * was an abuse of discretion". (Emphasis added.) Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 302, 110 Stat. 1457">110 Stat. 1457 (1996); see Hinck v. United States, 550 U.S. 501">550 U.S. 501, 127 S. Ct. 2011">127 S. Ct. 2011, 167 L. Ed. 2d 888">167 L. Ed. 2d 888 (2007) (holding that this Court is the exclusive forum for judicial review of the Commissioner's refusal to abate interest, abrogating Beall v. United States, supra).*209 Section 6015(e) was amended in a similar historical context. Sections 6015(f) and 6404(e) are taxpayer relief provisions. Under each provision the decision whether to grant relief (in the form of an interest abatement or relief from joint and several liability) was committed largely to agency discretion, and it had been determined that we lacked jurisdiction over a claim brought by a taxpayer under each provision. See Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006) (Court of Appeals determined that this Court lacked jurisdiction over cases brought under section 6015(f)); 508 Clinton St. Corp. v. Commissioner, supra (this Court lacked jurisdiction over interest abatement claim).In amending section 6404, Congress*38 provided us jurisdiction over interest abatement cases but expressly limited our jurisdiction to reviewing whether the Commissioner's failure to abate interest was an abuse of discretion. Sec. 6404(h). In amending section 6015(e), Congress provided us jurisdiction over cases brought under section 6015(f). But unlike the amendment to section 6404, the amendment to section 6015(e) gives no indication that we should review the Commissioner's determination for abuse of discretion. Congress's failure to include any such limitation in section 6015(e) when it had previously included the limitation in a similar situation indicates that our jurisdiction is not limited to reviewing the Commissioner's determination for abuse of discretion. See Franklin Natl. Bank v. New York, 347 U.S. 373">347 U.S. 373, 378, 74 S. Ct. 550">74 S. Ct. 550, 98 L. Ed. 767">98 L. Ed. 767 (1954) ("We find no indication that Congress intended to make this phase of national banking subject to local restrictions, as it has done by express language in several other instances.").An abuse of discretion standard of review is also at odds with our decision to decline to remand section 6015(f) cases for reconsideration. Friday v. Commissioner, 124 T.C. 220">124 T.C. 220, 222 (2005). Section 6330 is analogous to *39 section 6015(f) insofar as both sections consider economic hardship as a factor in determining whether relief is appropriate. In section 6330(d)(2)Congress provided that the Internal Revenue Service Office of Appeals would retain jurisdiction over collection cases to allow it to consider changes in the taxpayers' circumstances. That Congress did not include a similar provision in section 6015 is consistent with the requirement that we determine whether relief for taxpayers under *210 section 6015(f) is appropriate. See Friday v. Commissioner, supra at 222 ("There is in section 6015 no analog to section 6330 granting the Court jurisdiction after a hearing at the Commissioner's Appeals Office."). We have always applied a de novo scope and standard of review in determining whether relief is warranted under subsections (b) and (c) of section 6015. See, e.g., Alt v. Commissioner, 119 T.C. 306">119 T.C. 306, 313-316 (2002), affd. 101 Fed. Appx. 34">101 Fed. Appx. 34 (6th Cir. 2004). We believe that cases in which taxpayers seek relief under section 6015(f) should receive similar treatment and thus the same standard of review. Given Congress's direction that we determine the appropriate relief available under subsections (b), *40 (c), and (f), there is no longer any reason to apply a different standard of review under subsection (f) than under subsections (b) and (c), and we shall no longer do so.Accordingly, in cases brought under section 6015(f) we now apply a de novo standard of review as well as a de novo scope of review. Petitioner bears the burden of proving that she is entitled to equitable relief under section 6015(f). See Rule 142(a). The Commissioner analyzes petitions for section 6015(f) relief using the procedures set forth in Rev. Proc. 2003-61, 2 C.B. 296">2003-2 C.B. 296. See Banderas v. Commissioner, T.C. Memo 2007-129">T.C. Memo 2007-129. The parties have not disputed application of the conditions and factors listed in the revenue procedure.The Commissioner generally will not grant relief unless the taxpayer meets seven threshold conditions. Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297. Respondent concedes that petitioner meets these conditions. If a taxpayer meets the threshold conditions, the Commissioner considers several factors to determine whether a requesting spouse is entitled to relief under section 6015(f). Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298. We consider all relevant facts and circumstances *41 in determining whether the taxpayer is entitled to relief. Sec. 6015(e) and (f)(1). The following factors are relevant to our inquiry.*211 III. Factors Relating to Petitioner's Claim for ReliefA. Petitioner and Mr. Porter Are DivorcedPetitioner and Mr. Porter legally separated on April 21, 2004, 6 days after she signed the couple's 2003 return. They divorced on May 16, 2006. This factor favors relief. 7B. Petitioner Would Suffer Economic Hardship If Relief Were Not GrantedEconomic hardship is present if payment of tax would prevent the taxpayer from paying her reasonable basic living expenses. Sec. 301.6343-1(b)(4)(i) and (ii), Proced. & Admin. Regs. The determination varies according to the unique circumstances of the taxpayer. Id.Petitioner earns a modest income. She is the mother of two children. She has a bachelor of science degree in business administration, and presumably she will be able to be employed for many more years. Because *42 of debts she was left with after her separation and divorce from Mr. Porter, petitioner has been unable to meet her monthly expenses. Consequently, she was forced to file for bankruptcy. If relief were not granted, petitioner would be jointly liable for paying $1,070 plus related interest.Under these circumstances, we conclude that petitioner would suffer economic hardship if relief were not granted. This factor favors relief. C. Petitioner Had Reason To Know of the Item Giving Riseto the DeficiencyIn the case of an income tax liability resulting from a deficiency, we are less likely to grant relief under section 6015(f) if the requesting spouse knew or had reason to know of the item giving rise to the deficiency. If the requesting spouse did not know or have reason to know, we are more likely to grant relief. A taxpayer who signs a return is generally charged with constructive knowledge of its contents. Hayman v. Commissioner, 992 F.2d 1256">992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228.*212 In establishing that a taxpayer had no reason to know, the taxpayer must show that she was unaware of the circumstances that gave rise to the error and not merely unaware of the tax consequences. *43 Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 145-146 (1990), affd. 992 F.2d 1132">992 F.2d 1132 (11th Cir. 1993); Purcell v. Commissioner, 86 T.C. 228">86 T.C. 228, 237-238 (1986), affd. 826 F.2d 470">826 F.2d 470, 473-474 (6th Cir. 1987). Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her. Charlton v. Commissioner, 114 T.C. 333">114 T.C. 333, 340 (2000); Bokum v. Commissioner, supra.In such instances, we may impute the requisite knowledge to the putative innocent spouse unless she satisfies her duty of inquiry. Hayman v. Commissioner, supra at 1262; Adams v. Commissioner, 60 T.C. 300">60 T.C. 300, 303 (1973).Mr. Porter presented the couple's income tax return to petitioner to sign on April 15, 2004, the day it was due. Petitioner scanned the contents of the return only to ensure that her own income was reported correctly, which it was. Petitioner relied on Mr. Porter to prepare the return properly with respect to his own income. Petitioner's reliance was misplaced. Nevertheless, petitioner signed a return which clearly shows that Mr. Porter received an IRA distribution during 2003. Despite Mr. Porter's reluctance to discuss his finances with petitioner, we presume she knew that Mr. Porter had not reached the age *44 of 59, so as to except the distribution from the section 72(t) additional tax. Accordingly, petitioner had reason to know of Mr. Porter's IRA distribution. This factor favors not granting petitioner relief. D. Petitioner Did Not Receive a Significant Benefit BeyondNormal Support From the Item Giving Rise to the DeficiencyReceipt by the requesting spouse, either directly or indirectly, of a significant benefit in excess of normal support from the unpaid liability or the item giving rise to the deficiency weighs against relief. Lack of a significant benefit beyond normal support weighs in favor of relief. Normal support is measured by the circumstances of the particular parties. Estate of Krock v. Commissioner, 93 T.C. 672">93 T.C. 672, 678-679 (1989). *213 Mr. Porter testified that he used the proceeds from his IRA distribution to pay petitioner's credit card debt. Petitioner testified that she does not know how Mr. Porter spent the distribution from his IRA but that he did not use the proceeds to pay her credit card debt. We evaluated petitioner's and Mr. Porter's testimonies by observing their candor, sincerity, and demeanor. Mr. Porter was not credible. Petitioner was, and we accept her testimony. *45 However, even if we were to accept Mr. Porter's testimony that he used the proceeds of the IRA distribution to pay petitioner's credit card debt, he admitted that a portion of the credit card charges related to grocery shopping; i.e. normal support. Petitioner earned a very modest income during 2003 after being wrongfully discharged from her job. Therefore, it is reasonable to conclude that petitioner used her credit cards for necessary services and supplies in addition to groceries. We conclude that petitioner did not receive a significant benefit beyond normal support from Mr. Porter's IRA distribution. This factor favors relief. E. Petitioner Complied With All Income Tax Laws in Subsequent Tax YearsPetitioner has complied with income tax laws in all subsequent years. Furthermore, upon discovering that her husband had neglected to file the couple's joint Federal income tax return for 2002, she promptly filed her own return, choosing married-filing-separately status. This factor favors relief. IV. ConclusionFactors favoring relief are that petitioner and Mr. Porter are divorced, that she would suffer hardship if relief were not granted, that she did not receive a significant benefit *46 beyond normal support from the IRA distribution, and that she diligently complied with income tax laws in subsequent years. That petitioner had reason to know of the distribution because it appears on the face of the return favors not granting relief. Under an abuse of discretion standard, this Court has upheld the Commissioner's denial of relief under *214 section 6015(f) where the taxpayer knew or had reason to know of the item giving rise to the deficiency or that the tax would not be paid. See, e.g., Magee v. Commissioner, T.C. Memo 2005-263">T.C. Memo 2005-263; Simon v. Commissioner, T.C. Memo 2005-220">T.C. Memo 2005-220; Sjodin v. Commissioner, T.C. Memo 2004-205">T.C. Memo 2004-205, vacated 174 Fed. Appx. 359">174 Fed. Appx. 359 (8th Cir. 2006); Demirjian v. Commissioner, T.C. Memo. 2004-22. However, we are no longer restricted to determining whether the Commissioner's determination was an abuse of discretion. Under a de novo standard of review, we take into account all the facts and circumstances and determine whether it is inequitable to hold the requesting spouse liable for the unpaid tax or deficiency. We recognize that petitioner had reason to know of the IRA distribution because she signed the return and did not inquire into its contents. However, *47 this factor is tempered by the fact that petitioner regularly inquired into Mr. Porter's finances during the preceding year and he refused to answer or answered evasively. The other factors discussed above which favor relief outweigh petitioner's reason to know of her husband's IRA distribution. Accordingly, petitioner has met her burden of proving by the preponderance of the evidence that it would be inequitable to hold her liable for the section 72(t) additional tax on Mr. Porter's IRA distribution.To reflect the foregoing,Decision will be entered for petitioner.Reviewed by the Court.COLVIN, VASQUEZ, GALE, MARVEL, GOEKE, WHERRY, KROUPA, and PARIS, JJ., agree with this majority opinion.GALE; HALPERN (In Part); HOLMES (In Part)GALE, J., concurring: I agree with the position taken in the majority opinion that de novo review is the appropriate standard of review in determining entitlement to relief under section 6015(f). 1*48 I write separately to highlight certain other factors that support that position.*215 First, the statute is unclear in prescribing a standard of review. While, as the majority acknowledges, the articulation in section 6015(f) that under certain conditions the Secretary "may" relieve an individual of liability is suggestive that review should be for abuse of discretion, the use of "may" in section 6015(f) is not dispositive. Internal Revenue Code sections providing that the Secretary "may" take an action have sometimes been interpreted as mandating review for abuse of discretion, see, e.g., sec. 482; Ballentine Motor Co. v. Commissioner, 321 F.2d 796">321 F.2d 796, 800 (4th Cir. 1963), affg. 39 T.C. 348">39 T.C. 348 (1962); Dolese v. Commissioner, 82 T.C. 830">82 T.C. 830, 838 (1984), affd. 811 F.2d 543">811 F.2d 543, 546 (10th Cir. 1987); Foster v. Commissioner, 80 T.C. 34">80 T.C. 34, 142-143 (1983), affd. in part and vacated in part on another issue 756 F.2d 1430">756 F.2d 1430 (9th Cir. 1985); Ach v. Commissioner, 42 T.C. 114">42 T.C. 114, 125-126 (1964), affd. 358 F.2d 342">358 F.2d 342 (6th Cir. 1966), and sometimes de novo review, see, e.g., sec. 269(a); 2VGS Corp. v. Commissioner, 68 T.C. 563">68 T.C. 563, 595-598 (1977); Capri, Inc. v. Commissioner, 65 T.C. 162">65 T.C. 162, 178 (1975); D'Arcy-MacManus & Masius, Inc. v. Commissioner, 63 T.C. 440">63 T.C. 440, 449 (1975); *49 Indus. Suppliers, Inc. v. Commissioner, 50 T.C. 635">50 T.C. 635, 645-646 (1968); Inductotherm Indus., Inc. v. Commissioner, T.C. Memo. 1984-281, affd. without published opinion 770 F.2d 1071">770 F.2d 1071 (3d Cir. 1985). Moreover, our grant of jurisdiction to review the Secretary's (or Commissioner's) decisions concerning equitable relief is contained not in section 6015(f) but in section 6015(e)(1)(A), which provides that the Tax Court shall have jurisdiction "to determine the appropriate relief available to the individual under this section". This broad phrasing 3 must be compared, as the majority notes, to another discrete grant ofjurisdiction to the Court, a mere 2 years earlier, to review the Secretary's decisions not to abate interest. That grant, now codified in section 6404(h)(1), 4 is explicit with respect to the standard of review: "The Tax Court shall have jurisdiction * * * to determine whether the Secretary's failure to abate interest under this section was an abuse *50 of discretion". *216 When the general terms of section 6015(e)(1)(A) are compared with the specificity of the standard enunciated in section 6404(h)(1), Congress's intention regarding the review standard in the former becomes less clear. 5*51 To suggest that the "may" in section 6015(f) settles the matter in this context puts more freight on that word than it can carry. 6Second, given the statute's lack of clarity regarding the standard of review, consideration *52 of the legislative history is appropriate. The history of amendments to the joint and several liability relief provisions since the original enactment in 1971 evidences congressional dissatisfaction with the adequacy of relief afforded taxpayers. The 1971 version of "innocent spouse" relief provided relief only in the case of omitted income. See Act of Jan. 12, 1971, Pub. L. 91-679, sec. 1, 84 Stat. 2063">84 Stat. 2063. Amendments in 1984 extended relief in the case of erroneous deductions, though the deductions needed to be "grossly erroneous" and the deductions and/or the income omission had to have resulted in a "substantial" understatement of tax on the return. See Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 424(a), 98 Stat. 801">98 Stat. 801. Finding the level of relief afforded by the statute still inadequate, Congress in the 1998 amendments removed the requirement that the deductions claimed be "grossly" erroneous or that the understatement of tax be "substantial" and added provisions allowing elections to allocate liability and establishing equitable relief. See Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3201(a), 112 Stat. 734">112 Stat. 734.*217 The pattern of *53 legislative changes designed to make innocent spouse relief more readily available also reflected congressional dissatisfaction with the administration of the statute by the Commissioner. This dissatisfaction reached the apex in 1998, when section 6015(f) was enacted as part of RRA 1998. In a February 11, 1998, Senate Finance Committee hearing on "Innocent Spouse Tax Rules" presaging that legislation, Chairman William V. Roth, Jr., diagnosed the problem with the "innocent spouse" rules as due in significant part to unsatisfactory administration by the IRS.[T]he agency [IRS] is all too often electing to go after those who would be considered innocent spouses because they are easier to locate, as well as less inclined and able to fight.Part of these problems reside with the IRS, part of them are the fault of Congress. Though the agency officially acknowledges the status of innocent spouses under current law and has the ability to clear such an individual from his or her tax liability, it rarely does. [IRS Restructuring (Innocent Spouse Tax Rules): Hearings Before the S. Comm. on Finance, 105th Cong., 2d Sess. 142 (1998) (S. Hrg. 105-529, Fourth Hearing); emphasis added.]At a February *54 24, 1998, hearing 7 before the Subcommittee on Oversight of the Committee on Ways and Means concerning a Treasury Department Report on Innocent Spouse Relief, 8 Chairman Johnson stated:As the Congress develops legislation to restructure andreform the Internal Revenue Service, we have learned of a number of disturbing cases in which taxpayers have been grossly mistreated by the IRS. Out of all the horror stories that have surfaced in recent months, none have been more heart breaking than those involving innocent spouses--taxpayers who in many cases have been left to rear children as single parents, often without child support, only to find that their former spouses have saddled them with a crushing debt. Many of these *55 horror stories have been going on for years without the IRS helping the spouses who are seeking relief from mounting tax liabilities, interest, and penalties. [U.S. Treasury Department Report on Innocent Spouse Relief: Hearing Before the Subcommittee on Oversight of the House Comm. on Ways and Means, 105th Cong., 2d Sess. 5 (1998).]*218 Testifying on behalf of the Treasury Department at the hearing, Assistant Secretary for Tax Policy Donald C. Lubick conceded a problem in the Internal Revenue Service's administration of the statute:Mr. Lubick. I think you've put your finger on what I think is the most disturbing part of this whole problem [inadequacy of current arrangements for innocent spouse relief], which is that--and I think it's produced the most dramatic of the examples; that there have been some particular agents who are hardnosed and unsympathetic * * *. [Id. at 28.]One of the solutions proposed in the Treasury Department report, as described in Assistant Secretary Lubick's testimony, was to "significantly expand taxpayers' procedural opportunities to claim substantive relief under the innocent spouse provisions, by making access to Tax Court routinely available". Id. at 19. Chairman *56 Johnson endorsed the expansion of Tax Court jurisdiction as an important part of the solution to the unsatisfactory results that had been experienced under the statute.I am particularly pleased to note that the innocent spouse legislative recommendations discussed in the [Treasury and General Accounting Office] reports are included in our House-passed * * * legislation * **. To summarize, the bill expands the availability of innocent spouse relief by, No. 1, eliminating the various dollar thresholds; No. 2, broadening the definition of eligible tax understatements, and three, providing partial innocent spouse relief in certain situations, and No. 4, providing tax court jurisdiction over denials of innocent spouse relief. [Id. at 7; emphasis added.]Given the evidence of congressional dissatisfaction with the IRS's track record in administering the "innocent spouse" rulesand of the congressional perception that one solution to the problem was expanded Tax Court jurisdiction, it appears unlikely that Congress intended that a significant portion of the Court's review of the IRS's disposition of innocent spouse claims be circumscribed under the deferential standard inherent in review for *57 abuse of discretion. To conclude otherwise is to turn a tin ear to the strong critique of the Commissioner's record in administering "innocent spouse" relief evidenced in congressional hearings on the subject.Third, another specific feature of section 6015 countervails the claim that abuse of discretion review was intended for section 6015(f) claims; namely, the provision in *219 section 6015(e)(4) for intervention in a Tax Court proceeding by the spouse not seeking relief. As originally enacted, section 6015(e)(4) provided as follows:(4) Notice to other spouse.--The Tax Court shall establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) with adequate notice and an opportunity to become a party to a proceeding under either such subsection. [RRA 1998 sec. 3201(a).]Congress therefore contemplated that in Tax Court proceedings for review of section 6015 claims--or, more specifically, claims under subsection (b) or (c)--there would be interventions by non requesting spouses resulting in new evidence or argument in the Tax Court proceeding that was not available to the Commissioner as part of the administrative determination.The *58 2006 amendments by the Tax Relief and Health Care Act of 2006, div. C, sec. 408, 120 Stat. 3061, to clarify the Tax Court's jurisdiction over section 6015(f) cases did not merely modify section 6015(e)(1)(A), as discussed in the majority and dissenting opinions. The 2006 amendments also modified section 6015(e)(4) to read as follows:(4) Notice to other spouse.--The Tax Court shall establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) or the request for equitable relief under subsection (f) with adequate notice and an opportunity to become a party to a proceeding under either such subsection. [Emphasis added.]Thus, in connection with clarifying the Tax Court's jurisdiction over section 6015(f) cases not involving a deficiency, Congress simultaneously added spousal intervention rights for such cases as part of the 2006 amendments. 9*60 The conclusion is inescapable that Congress considered intervention rights to be an important component of this Court's review of section 6015 cases, including those under section 6015(f). Intervention rights entail the distinct likelihood that new *220 evidence will surface in the Tax Court*59 proceeding. Yet to review the Commissioner's administrative determination for abuse of discretion on the basis of evidence not available to him would be, at best, anomalous. The Supreme Court has instructed that, in applying an abuse of discretion standard of review, "the focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court." Camp v. Pitts, 411 U.S. 138">411 U.S. 138, 142, 93 S. Ct. 1241">93 S. Ct. 1241, 36 L. Ed. 2d 106">36 L. Ed. 2d 106 (1973). By expressly providing for intervenors in section 6015(f) review cases in the Tax Court, Congress contemplated a "new record made initially in the reviewing court" in those cases. Application of an abuse of discretion standard of review is not appropriate in such circumstances.In addition to the intervenor issue, we must bear in mind problems with the administrative record, our inability to remand, and the fact that a stand-alone non deficiency petition can bring a section 6015(f) case before us even where there has been no administrative decision. 10This case is appealable, absent stipulation to the contrary, to the Court *61 of Appeals for the Fourth Circuit. Under the rule laid down in 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), we abide by that court's precedent. The Court of Appeals for the Fourth Circuit disapproves of the odd pairing of a de novo scope of review with an abuse of discretion standard of review. See Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., 32 F.3d 120">32 F.3d 120, 125 (4th Cir. 1994) ("Thus, although it may be appropriate for a court conducting a de novo review of a plan administrator's action to consider evidence that was not taken into account by the administrator, the contrary approach should be followed when conducting a review under either an arbitrary and capricious standard or under the abuse of discretion standard."). 11*62 That is reason enough to *221 reject that mismatched standard and scope of review in this case.Given the statute's failure to specifically address the standard of review, Congress's expressed dissatisfaction with the Commissioner's history of administering the "innocent spouse" rules, and the anomalous results of the employment of an abuse of discretion standard of review in section 6015(f) cases, I believe the better interpretation of section 6015 is that it provides for de novo standard of review in all section 6015 cases, whether under subsection (b), (c), or (f).COLVIN, MARVEL, GOEKE, WHERRY, KROUPA, and PARIS, JJ., agree with this concurring opinion. HALPERN (In Part); HOLMES (In Part); WELLS; GUSTAFSONHALPERN and HOLMES, JJ., concurring in part and dissenting in part.I. ConcurrenceWe concur in so much of the majority opinion as holds the appropriate standard of review to be de novo. We do so notwithstanding our dissent in the Court's prior report in this case, Porter v. Commissioner, 130 T.C. 115">130 T.C. 115, 146-147 (2008), holding that *63 the appropriate scope of review is de novo. That holding is now binding on us, and for that reason alone we concur that "it would be incongruous to hold that review is limited to determining whether an appeals officer 'abused his discretion,' but also to conclude that the appeals officer committed such an 'abuse' by failing to weigh information that was never even presented to him." Robinette v. Commissioner, 439 F.3d 455">439 F.3d 455, 460 (8th Cir. 2006) (addressing the scope and standard of review appropriate to judicial review of an Appeals officer's decision under section 6330), revg. 123 T.C. 85">123 T.C. 85 (2004).II. DissentWe dissent from the majority's conclusion that petitioner is entitled to equitable relief. In particular we fail to see how the majority can conclude that petitioner would suffer economic *222 hardship if relief were not granted. First, the majority states that economic hardship is present if payment of the tax would prevent the taxpayer from paying her reasonable basic living expenses. Majority op. p. 14. Second, the majority holds that the hardship determination (and certain other determinations) are made with respect to the taxpayer's status "at the time of trial." Majority op. p. 14, *64 note 7. Third, the majority fails to find (and the record contains no evidence of) petitioner's reasonable basic living expenses. Fourth, and most importantly, at the time of trial, petitioner was in bankruptcy, and she was not discharged until almost 7 weeks after the trial concluded, when we assume her solvency and the hardship (if any) resulting from her joint liability to pay $1,070 would be determinable. We fail to see how the majority could determine that payment of that liability would work a hardship before it knew the disposition of her petition in bankruptcy (of which, like her reasonable basic living expenses, the record contains no evidence).WELLS, J., dissenting: I agree with and have joined Judge Gustafson's thorough and well-reasoned dissent. I respectfully write separately to address an issue that Judge Gustafson does not address in his dissent but is raised by concurring Judges and to point to additional reasons for not abandoning the abuse of discretion standard of review in section 6015(f) cases.Judges Halpern and Holmes indicate that it would be incongruous to apply the abuse of discretion standard of review on the basis of trial evidence that the "Appeals officer" *65 had never seen. 1*66 They apparently believe that the Commissioner's exercise of discretion is complete and final before trial. However, in section 6015(f) cases and in other cases where the abuse of discretion standard of review is applied after a trial de novo, I believe that the exercise of discretion that is under review is the Commissioner's position after all of the evidence is in. The final exercise of *223 discretion by the Commissioner typically is a post trial brief containing the Commissioner's reasons and arguments. Indeed, our experience is that the Commissioner often will grant partial or full relief after considering all of the evidence adduced at trial. When, however, the Commissioner finally argues that relief should be denied after all of the trial evidence is considered, it is that position (i.e., the Commissioner's exercise of discretion at that point) that we review for abuse of discretion. Additionally, I am concerned that today the Court, on the pretext that a 2006 amendment to section 6015(e) provides an occasion to reconsider our prior rulings, 2 essentially overrules our longstanding precedent that this Court reviews the Commissioner's denial of section 6015(f) relief for abuse of discretion. That precedent originated with our Opinion in Butler v. Commissioner, 114 T.C. 276 (2000), and was subsequently reaffirmed in three Court-reviewed Opinions, the latest of which was rendered in this very case less than a year ago. Porter v. Commissioner, 130 T.C. 115">130 T.C. 115 (2008) (Porter I); Ewing v. Commissioner, 122 T.C. 32">122 T.C. 32 (2004), vacated 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006); Cheshire v. Commissioner, 115 T.C. 183">115 T.C. 183 (2000), affd. 282 F.3d 326">282 F.3d 326 (5th Cir. 2002).In overruling this precedent, the majority fails to recognize the opinions of six Courts of Appeals that have affirmed our practice of holding *67 a trial de novo in section 6015(f) relief cases and then applying the abuse of discretion standard of review. Commissioner v. Neal, 557 F.3d 1262">557 F.3d 1262, (11th Cir. 2009), affg. T.C. Memo. 2005-201; Capehart v. Commissioner, 204 Fed. Appx. 618">204 Fed. Appx. 618 (9th Cir. 2006), affg. T.C. Memo 2004-268">T.C. Memo. 2004-268; Alt v. Commissioner, 101 Fed. Appx. 34">101 Fed. Appx. 34 (6th Cir. 2004), affg. 119 T.C. 306">119 T.C. 306 (2002); Doyle v. Commissioner, 94 Fed. Appx. 949">94 Fed. Appx. 949 (3d Cir. 2004), affg. T.C. Memo. 2003-96; Mitchell v. Commissioner, 292 F.3d 800">292 F.3d 800, 352 U.S. App. D.C. 96">352 U.S. App. D.C. 96 (D.C. Cir. 2002), affg. T.C. Memo 2000-332">T.C. Memo. 2000-332; Cheshire v. Commissioner, 282 F.3d 326">282 F.3d 326 (5th Cir. 2002). The most recent of these opinions was issued on February 11, 2009, and affirmed what it described as:the Tax Court's longstanding rule and practice * * * to hold trials de novo in situations where it makes determination and redeterminations, including 6015(f) cases. To prevail in the trial de novo, the taxpayer petitioner *224 must show that the Commissioner's denial of equitable relief was an abuse of discretion. [Commissioner v. Neal, supra at 1268; citations omitted.]These Courts of Appeals do not appear to have any disagreement with the abuse of discretion standard of review in a trial where evidence is taken *68 de novo.I also would like to address Judge Gale's argument in his concurring opinion that the Court of Appeals for the Fourth Circuit would reject a "mismatched standard and scope of review" in section 6015(f) cases, pursuant to its opinion in Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., 32 F.3d 120">32 F.3d 120 (4th Cir. 1994), and that we are bound to follow that outcome under the rule of 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). I believe that Sheppard is not squarely in point and is distinguishable.As noted by Judge Gale, Sheppard holds that where an abuse of discretion standard of review is applicable to a plan administrator's action under ERISA, 3 the scope of review is limited to the evidence that was taken into account by the plan administrator at the time it acted. Id. at 25. The Court of Appeals did not hold that it disapproves of any pairing of a de novo scope of review with an abuse of discretion standard of review (a holding that would run headlong into Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 532, 99 S. Ct. 773">99 S. Ct. 773, 58 L. Ed. 2d 785">58 L. Ed. 2d 785 (1979)), and it made no holding whatsoever about section 6015(f) cases under the Internal Revenue Code. Moreover, under section 6015(f)*69 we are reviewing, pursuant to the statute, the exercise of discretion of a Government agency's administrator who, as mentioned above, appears as the respondent in every case before us, as opposed to a District Court in an ERISA case reviewing a private entity's exercise of discretion conferred in a plan document. 4 Consequently, I believe that the Golsen rule has no bearing on the case before us.Our review of section 6015(f) cases differs from a District Court's review of a plan administrator's exercise of discretion *225 in another material respect. Under our precedent in Friday v. Commissioner, 124 T.C. 220">124 T.C. 220, 222 (2005), *70 we have no authority to remand section 6015(f) cases to the Commissioner, whereas in a case arising under ERISA like Sheppard, a district court has the authority to remand the case to the plan administrator. Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., supra at 125. In response to the criticism that a limited record can hide an abuse of discretion that results from a plan administrator's failure to consider or admit into the record all of the relevant facts, the Court of Appeals specifies remand as the "proper course" to bring in additional evidence when the record is otherwise lacking: "'If the court [believes] the administrator lacked adequate evidence, the proper course [is] to remand to the trustees for a new determination . . . not to bring additional evidence before the district court.'" Id. at 125 (quoting Berry v. Ciba-Geigy Corp., 761 F.2d 1003">761 F.2d 1003, 1007 (4th Cir. 1985)).In a section 6015(f) case, however, if this Court finds the factual underpinnings of the Commissioner's determination to be lacking, we have no authority, pursuant to Friday, to remand the case to the Commissioner to bring in additional evidence to allow us to review a sufficient record to test the *71 Commissioner's exercise of discretion which, as mentioned above, continues throughout the case until all of the evidence is in. Accordingly, in a section 6015(f) case, a de novo scope of review, as we held in Porter I, is the only means by which we can supplement an insufficient record.Finally, I would like to address the venerable principle of stare decisis. For the reasons cited by Judge Gustafson in his dissent and others discussed here, I think that the correct standard to use in reviewing section 6015(f) cases in this Court is abuse of discretion. Consequently, I do not think it is necessary to rely on stare decisis alone as the reason for continuing to review section 6015(f) cases for abuse of discretion. Nonetheless, stare decisis is additional support for not abandoning the abuse of discretion standard. The majority makes no mention of and gives no consideration to that principle or why it should not apply.Stare decisis should apply in the instant case for reasons stated in the recent opinion of the Supreme Court in John R. Sand & Gravel Co. v. United States, 552 U.S. 130">552 U.S. 130, 139, 128 S. Ct. 750">128 S. Ct. 750, 756-757, 169 L. Ed. 2d 591">169 L. Ed. 2d 591 (2008)(citations and quotation marks omitted):*226 stare decisis in respect to *72 statutory interpretation has special force, for Congress remains free to alter what we have done. * * ** * * Justice Brandeis once observed that in most matters it is more important that the applicable rule of law be settled than that it be settled right. To overturn a decision settling one such matter simply because we might believe that decision is no longer right would inevitably reflect a willingness to reconsider others. And that willingness could itself threaten to substitute disruption, confusion, and uncertainty for necessary legal stability. * * *In sum, the use of an abuse of discretion standard of review in a de novo trial is consistent with this Court's precedent, the of the Courts of Appeals I have cited above, the Supreme Court's holding in Thor Power, and staredecisis. For the foregoing reasons, I dissent.COHEN, THORNTON, and GUSTAFSON, JJ., agree with this dissenting opinion. GUSTAFSON, J., dissenting: I respectfully dissent from the majority opinion, which abandons the abuse-of-discretion standard for the Court's review of the IRS's denial of relief under section 6015(f) and adopts in its place a "de novo" standard of review. In so doing, the majority departs from *73 the better reading of the statute and from very substantial precedent.I. By Conferring Discretion on the Secretary, Section 6015(f)Calls for the Court To Review the Secretary's Actions for Abuse of That Discretion.A. Section 6015(f) Confers Discretion On the Secretary.Section 6015(f) provides that "the Secretary may relieve such individual of such liability". (Emphasis added.) Four features of section 6015 show that this language confers discretion on the Secretary: First, "The word 'may' customarily connotes discretion". 1Jama v. Immigration & Customs Enforcement, 543 U.S. 335">543 U.S. 335, 346, 125 S. Ct. 694">125 S. Ct. 694, 160 L. Ed. 2d 708">160 L. Ed. 2d 708 (2005). Second, *227 section 6015(f), rather than simply providing a rule, expressly names an official ("the Secretary") to apply its rule. Most provisions in the Internal Revenue Code simply state a rule and do not repeat in each instance the truism 2*75 that it will be the Commissioner who applies that rule on behalf of the Government. It is therefore a departure from the norm when a statutory provision does name an official to apply the rule--e.g., by stating that "the Secretary may" impose a given treatment, 3 or that "[t]he Secretary may waive" a certain provision, 4 or that a given treatment shall obtain *74 when it is appropriate "in the opinion of the Secretary", 5 or that a determination of an issue will be made by some specified subordinate of the Secretary. 6 When a statute thus explicitly names the agency decision-maker, this is a further indication 7*76 that the matter is committed to his or her discretion. This ought to be considered a particularly strong indication where, as with section 6015(f), that feature of the statute contrasts with its neighboring provisions, i.e., subsections (b) and (c). 8*77 If we level these distinctions and find that all the *228 forms of relief under section 6015 have the same standard of review, notwithstanding their different vocabulary, then we ignore the Congress's use of distinctive language in the various subsections.Third, section 6015(e) contrasts the discretionary character of section 6015(f) (under which one is said to "request" relief) with the nondiscretionary character of subsections (b) and (c) (under which one is said to "elect" relief). 9*78 A benefit that may be "elected" is one's right; but a benefit that must be "requested" invokes the discretion of one who may or may not grant the benefit. 10*79 Fourth, the pertinent language in section 6015(f) is identical to discretionary language in a companion provision, section 66(c) (which grants analogous relief for liability from tax on community income). The same 1998 amendment that created section 6015(f) also added an "equitable relief" provision as the last sentence of section 66(c) (emphasis added):Under procedures prescribed by the Secretary, if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either) attributable to any item for which relief is not available under the preceding sentence, the Secretary may relieve such individual of such liability.The language emphasized above is identical to language added by the same amendment to section 6015(f). 11 When *229 reviewing IRS action under this provision in section 66(c), we have reviewed for abuse of discretion. See *80 Bernal v. Commissioner, 120 T.C. 102">120 T.C. 102, 107 (2003); Morris v. Commissioner, T.C. Memo 2002-17">T.C. Memo 2002-17; Beck v. Commissioner, T.C. Memo 2001-198">T.C. Memo 2001-198. If this language in section 66(c) granted discretion to the IRS, then the identical language in section 6015(f), enacted at the same time, must have done the same.B. When a Statute Confers Discretion on an Agency, a Court Reviewing Agency Action Must Defer to That Discretion and Review It Only for Abuse.The majority acknowledges that section 6015(f) confers discretion on the Secretary, 12 but it then denies that we review the IRS's action for abuse of that discretion, insisting rather that we review "de novo", without enhanced deference to the agency's decision-making. This conception denudes that "discretion" of any effect and contradicts the essence of discretion being granted to an agency. If a Code provision that grants no discretion yields de novo review of an *81 agency's determination, and a Code provision that does grant discretion yields the same de novo review, then the discretion is illusory. The majority's approach effectively relegates the agency's discretion to being relevant only to the agency that exercises it and overlooks that discretion when the agency's action is being reviewed.Contrary to that approach, it is when agency action is being judicially reviewed that a grant of discretion has its significance. Of course, this Court can properly employ an abuse-of-discretion standard to review IRS action only where the Code has conferred discretion on the IRS. By *82 the same token, where discretion has in fact been conferred, the only proper review is for abuse of that discretion. 13 The majority *230 pays lip service to the grant of discretion in section 6015(f) but then overlooks that discretion with its de novo review.II. Abandoning the Abuse-of-Discretion Standard Contradicts Uniform Precedent.The majority acknowledges, majority op. p. 7, that "[w]e have generally reviewed the Commissioner's denial of relief under section 6015(f) for abuse of discretion", majority op. p. 7-8, and it appropriately cites Butler v. Commissioner, 114 T.C. 276 (2000), in which we held that this Court had jurisdiction over section 6015(f) and that the standard of review in a section 6015(f) case is for abuse of discretion. Butler so held (as the majority states, majority op. p. 8) "because of the discretionary language in section 6015(f)" (i.e., "the Secretary may relieve" (emphasis added)).The abuse-of-discretion standard for reviewing denial of relief under section 6015(f) was *83 employed again in Cheshire v. Commissioner, 115 T.C. 183">115 T.C. 183, 197-198 (2000), affd. 282 F.3d 326">282 F.3d 326 (5th Cir. 2002), which the Court of Appeals for the Fifth Circuit affirmed, stating:Section 6015(f)confers power upon the Secretaryand his delegate, the Commissioner, to grant equitable relief where a taxpayer is not entitled to relief under 6015(b) or (c), but "taking into account all thefacts and circumstances, it is inequitable to hold theindividual liable for any unpaid tax or any deficiency(or any portion of either)." In this case, Appellantargues that the Commissioner improperly denied herequitable relief with respect to the retirementdistributions and the interest income. This court reviews the Commissioner's decision to deny equitable relief for abuse of discretion. [282 F.3d at 338; emphasis added; fn. refs. omitted.]Similarly, in Mitchell v. Commissioner, T.C. Memo. 2000-332, affd. 292 F.3d 800">292 F.3d 800, 352 U.S. App. D.C. 96">352 U.S. App. D.C. 96 (D.C. Cir. 2002), we held, and the Court of Appeals for the D.C. Circuit affirmed, that the Commissioner had not abused discretion in denying section 6015(f) relief. In affirming the use of the abuse-of-discretion standard, the Court of Appeals relied on the language of section 6015(f) and *84 stated:As the decision whether to grant this equitable relief is committed by its terms to the discretion of the Secretary, the Tax Court and this Court review such a decision for abuse of discretion. See Flores v. United States, 51 Fed. Cl. 49">51 Fed. Cl. 49, 51 & n. 1 (2001); Butler, 114 T.C. at 291-92. We conclude that there was no such abuse, for the reasons given by the Tax Court in its decision * * *. [292 F.3d at 807; emphasis added.]*231 In Mitchell the Court of Appeals thus cites, inter alia, Flores v. United States, 51 Fed. Cl. 49">51 Fed. Cl. 49, 51 & n.1 (2001), in which the Court of Federal Claims stated that it "has jurisdiction to review whether the Commissioner has abused his discretion under section 6015(f)". Again, in Commissioner r v. Neal, 557 F.3d 1262">557 F.3d 1262, 1263 (11th Cir. 2009), affg. T.C. Memo. 2005-201, where "[b]oth parties agree[d] that the Tax Court appropriately used an abuse of discretion standard of review", the Court of Appeals for the Eleventh Circuit affirmed our holding that section 6015(f) calls for an abuse-of-discretion standard of review and a de novo scope of review. In unpublished opinions, the Courts of Appeals for the Third, Sixth, and Ninth Circuits have also affirmed the Tax Court's *85 use of the abuse-of-discretion standard for reviewing section 6015(f) cases. See Capehart v. Commissioner, 204 Fed. Appx. 618">204 Fed. Appx. 618 (9th Cir. 2006) (citing Mitchell v. Commissioner, 292 F.3d 800">292 F.3d 800, 352 U.S. App. D.C. 96">352 U.S. App. D.C. 96 (9th Cir. 2006), affg. T.C. Memo. 2000-332), affg. T.C. Memo 2004-268">T.C. Memo. 2004-268; Doyle v. Commissioner, 949">94 Fed. Appx. 949 (3d Cir. 2004) (citing Mitchell), affg. T.C. Memo. 2003-96; Alt v. Commissioner, 101 Fed. Appx. 34">101 Fed. Appx. 34 (6th Cir. 2004), affg. 119 T.C. 306">119 T.C. 306 (2002).This Court's above-cited opinions in Butler, Cheshire, Mitchell, and Neal were decided before the 2006 amendments to which the majority attaches importance and which are discussed below; but for the current point it is sufficient to observe that even after that amendment, this Court has consistently used the abuse of discretion standard. 14 See Stolkin v. Commissioner, T.C. Memo 2008-211">T.C. Memo 2008-211; Alioto v. Commissioner, T.C. Memo 2008-185">T.C. Memo 2008-185; Nihiser v. Commissioner, T.C. Memo 2008-135">T.C. Memo 2008-135; Dunne v. Commissioner, T.C. Memo 2008-63">T.C. Memo 2008-63; Gonce v. Commissioner, T.C. Memo 2007-328">T.C. Memo 2007-328; Dowell v. Commissioner, T.C. Memo 2007-326">T.C. Memo 2007-326; Golden v. Commissioner, T.C. Memo 2007-299">T.C. Memo 2007-299, affd. 548 F.3d 487">548 F.3d 487 (6th Cir. 2008); Billings v. Commissioner, T.C. Memo 2007-234">T.C. Memo 2007-234; Beatty v. Commissioner, T.C. Memo 2007-167">T.C. Memo 2007-167; *86 Butner v. Commissioner, T.C. Memo 2007-136">T.C. Memo 2007-136; Banderas v. Commissioner, T.C. Memo 2007-129">T.C. Memo 2007-129; Ware v. Commissioner*232 , T.C. Memo 2007-112">T.C. Memo 2007-112; Farmer v. Commissioner, T.C. Memo 2007-74">T.C. Memo 2007-74; Van Arsdalen v. Commissioner, T.C. Memo 2007-48">T.C. Memo. 2007-48.Thus not only this Court but also the Courts of Appeals and the Court of Federal Claims have uniformly applied the abuse-of discretion standard to review the Commissioner's exercise of the discretion granted to him by the terms of section 6015(f), and until today no court has held otherwise. Indeed, today's majority opinion is at odds with this Court's prior opinion issued less than a year ago in this very case, Porter v. Commissioner, 130 T.C. 115">130 T.C. 115, 122-123 (2008) (Porter I), in which we defended the use of an abuse-of-discretion *87 standard of review with a de novo record scope of review. The Court did state in a footnote that "we need not decide any issue relating to the standard of review", id. at 122, but the opinion concludes with these words, id. at 125:The measure of deference provided by the abuse of discretion standard is a proper response to the fact that section 6015(f) authorizes the Secretary to provide procedures under which, on the basis of all the facts and circumstances, the Secretary may relieve a taxpayer from joint liability. That approach (de novo review, applying an abuse of discretion standard) properly implements the statutory provisions at issue here and has a long history in numerous other areas of Tax Court jurisprudence.In making its about-face, the majority does not state today that this Court erred in its original holding in Butler v. Commissioner, 114 T.C. 276">114 T.C. 276 (2000), but says rather that in Butler "our adoption of an abuse of discretion standard was appropriate." Majority op. p. 9. 15*88 However, the majority has undertaken a "reconsideration" that was prompted by the 2006 amendments, to which we now turn. *233 III. The 2006 Amendment to Section 6015(e) Does Not Implicate the Abuse-of-Discretion Standard.A. The Background to the 2006 AmendmentBefore 2006, requests for section 6015(f) relief could arise in the Tax Court in various procedural contexts. Three of these--i.e.,[1] as an affirmative defense in deficiencyredetermination cases because of section 6213(a),[2] as a remedy on review of collection due process determinations because of section 6330(d)(1)(A), and [3] as relief in stand-alone petitions when theCommissioner has asserted a deficiency against a petitioner [16]-- were not implicated in the jurisdiction controversy that arose in 2006. However, a fourth procedure is the so-called "nondeficiency stand-alone petition". Where a joint tax return reports a tax liability that the *89 joint taxpayers have not fully paid, and the IRS has not asserted a deficiency, one of the spouses might request relief from that joint liability and, if the relief is denied, might file a petition under section 6015(e)(1). Such nondeficiency stand-alone petitions became a subject of controversy because of language in the first sentence of section 6015(e)(1): "In the case of an individual against whom a deficiency has been asserted". (Emphasis added.) This emphasized language had been added to section 6015(e)(1) in December 2000; and for any petitioner seeking section 6015(f) relief whose jurisdictional basis was section 6015(e), this 2000 amendment raised an obvious question whether the case could proceed in the absence of a deficiency's having been asserted.As is noted above, it was in Butler that we held that we would use an abuse-of-discretion standard to review the IRS's denial of such relief. Butler itself was a deficiency suit brought pursuant to section 6213(a) by a claimant against whom a deficiency had been asserted, but its reasoning would apply to review of section 6015(f) relief however it arose. Butler was brought and decided before the 2000 amendment that provoked the *90 particular controversy that produced the 2006 amendment on which the majority relies. In any event, cases like Butler -- a deficiency suit under *234 section 6213(a) brought by a petitioner who sought relief under section 6015(f) and against whom a deficiency had been asserted -- were not implicated in this jurisdictional problem involving section 6015(e)(1).On the basis of the language added to section 6015(e)(1) in 2000 ("against whom a deficiency has been asserted"), first the Ninth Circuit, in Commissioner v. Ewing, 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), revg. 118 T.C. 494">118 T.C. 494 (2002) and vacating 122 T.C. 32">122 T.C. 32 (2004), and then the Eight Circuit, in Bartman v. Commissioner, 446 F.3d 785 (8th Cir. 2006), revg. in part T.C. Memo 2004-93">T.C. Memo. 2004-93, held that we lacked jurisdiction under section 6015(e)(1) where no deficiency had been asserted against the taxpayer. The Tax Court accepted this analysis in Billings v. Commissioner, 127 T.C. 7">127 T.C. 7 (2006) (Billings I), 17*91 and implied that Congress should "identif[y] this as a problem and fix[] it legislatively".B. The Nature of the 2006 AmendmentCongress did identify and fix the problem. On June 15, 2006, Senators Feinstein and Kyl proposed an amendment that Senator Feinstein characterized as "only minor legislative modifications * * * [to] clarif[y] the statute's original intent" and to "provide a straightforward and uncontroversial solution to the unfair treatment of innocent spouses under current law" that resulted after "[r]ecent decisions of the Eighth and Ninth Circuit Courts of Appeals" (i.e., Ewing and Bartman). 152 Cong. Rec. S5962-5963 (daily ed. June 15, 2006). Senator Kyl similarly explained that he sought "to clarify the jurisdiction of the U.S. Tax Court in cases involving 'equitable relief' for innocent spouse claims." Id. at S5963. Congress adopted *92 their proposal and amended section 6015(e)(1) to read as follows, by adding the language that is emphasized here: 18*235 SEC. 6015(e). Petition for Review by Tax Court. --(1) In general. -- In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply, or in the case of an individual who requests equitable relief under subsection (f) --(A) In general. -- In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section * * *.(It should be noted that, apart from the language emphasized, all the language quoted above was in the statute before 2006. In particular, the pre-2006 statute *93 gave the Tax Court jurisdiction "to determine the appropriate relief" (emphasis added), and the 2006 amendments made no change to that terminology.)C. The Inapplicability of the 2006 Amendment to This CaseThe gist of the 2006 amendment was to add subsection (f) relief to the provision in section 6015(e) giving jurisdiction to the Tax Court. The amendment responded to court opinions holding that the Tax Court lacked jurisdiction over one category of section 6015(f) cases (nondeficiency stand-alone petitions). The express purpose of the 2006 amendment was to clarify Congress's intent that the Tax Court should have jurisdiction to review all types of section 6015(f) cases. To do this, the 2006 amendment simply added a phrase to the existing provision of section 6015(e). It had no effect on the other types of section 6015(f) cases. It made no change to the discretionary language in section 6015(f).The language and history of the 2006 amendment show that the amendment had nothing to do with the abuse-of-discretion standard. There is no hint in the legislative history that Congress intended to modify the long line of cases that had previously applied the abuse-of-discretion standard. Thus, *94 after the amendment, we explained its purpose and effect in Billings v. Commissioner, T.C. Memo 2007-234">T.C. Memo 2007-234 (Billings II), and stated: "We are mindful that our review of that decision [to deny section 6015(f) relief] is for abuse of discretion. See Butler v. Commissioner, 114 T.C. 276">114 T.C. 276, 287-92 (2000)." The 2006 amendment was simply a straightforward clarification of our jurisdiction.*236 In fact, the majority does not actually argue that the 2006 amendment made any change that drives their conclusion. Rather, the majority simply states that a "reconsideration" of our standard of review that is "warranted" because of "Congress's confirmation of our jurisdiction" in the 2006 amendments. Majority op. p. 9. The 2006 amendments thus appear to be not a justification but an occasion for the majority's decision, and the specific arguments in support of that decision do not actually turn on any statutory language that was changed in 2006. We now turn to those specific arguments.IV. Abandonment of the Abuse-of-Discretion Standard of Review for Section 6015(f) Cases Is Not Warranted by Any Feature of the Statute.A. The Word "Determine" in Section 6015(e)The majority opinion places great importance on *95 the fact that amended section 6015(e) provides the Tax Court with jurisdiction "to determine the appropriate relief available to the individual under this section" (emphasis added) -- language that existed before the 2006 amendment and that had been considered in Butler and all the cases after it that applied the abuse-of-discretion standard. The majority now asserts:The use of the word "determine" suggests that Congress intended us to use a de novo standard of review as well as scope of review. In other instances where the word "determine" or "redetermine" is used, as in sections 6213 and 6512(b), we apply a de novo scope of review and standard of review. See Porter v. Commissioner, 130 T.C. at 118-119. [Majority op. p. 10.]The cited passage in Porter I does discuss the significance of the word "determine" -- albeit for its implications on the scope of review. However, when Porter I came to address the standard of review, it correctly argued at some length, see 130 T.C. at 122-123, for the compatibility of a de novo trial and a review for abuse of discretion. And it could hardly have done otherwise. Anyone who would argue that an abuse-of-discretion standard of review cannot be employed *96 after a de novo trial will promptly confront the Supreme Court's contrary holding in Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 533, 99 S. Ct. 773">99 S. Ct. 773, 58 L. Ed. 2d 785">58 L. Ed. 2d 785 (1979) (cited, of course, in Porter I), which *237 approved precisely that regime. See also Ewing v. Commissioner, 122 T.C. at 40-41.In fact, the word "determine" cannot have the significance that the majority infers for the issue of standard of review. The preeminent appearance of a form of the term "determine" is in our principal jurisdictional statute, which authorizes us to give a "redetermination of the deficiency." Sec. 6213(a). In a deficiency suit, however, the standard of review may vary. See Rule 142. It may be that in most deficiency cases we do both conduct the trial de novo and decide the case "de novo", imposing on the taxpayer only a normal burden of proof by the preponderance of the evidence and entertaining only a normal presumption that the Commissioner's determination was correct. However, in some deficiency cases, we do review the Commissioner's determination for an abuse of discretion. See, e.g., Thor Power Tool Co. v. Commissioner, supra. On the other hand, in some deficiency cases, the burden of proof is on the Commissioner, who *97 must, for example, prove fraud by "clear and convincing evidence." Rule 142(b). In our "redetermination" of a deficiency, we apply the burden of proof and the standard of review called for by the law applicable to the given case.That the word "determine" does not at all preclude abuse-of-discretion review is made explicit in a statute on which, for a different point, the majority opinion expressly relies: Section 6404(h) explicitly provides, "The Tax Court shall have jurisdiction * * * to determine whether the Secretary's failure to abate interest under this section was an abuse of discretion". (Emphasis added.) As it is used in the Internal Revenue Code, the word "determine" does not imply that an abuse-of-discretion standard of review should be abandoned in favor of "de novo" review.B. The Comparison to Section 6404The point that the majority derives from section 6404(h) is that, when Congress wants to impose an abuse-of-discretion standard, it knows how to do so. The majority observes, majority op. pp. 10-11, that when Congress granted jurisdiction for review of the IRS's denial of interest abatement (suggested by the majority as analogous to Congress's *238 confirming jurisdiction in *98 section 6015(e)(1)), 19*99 it made explicit that we are to determine whether there "was an abuse of discretion". Sec. 6404(h)(1). Clearly, section 6404(h)(1) is the high-water mark of congressional clarity on this issue of standard of review. However, there is a substantial body of case law calling for abuse-of-discretion review in instances where the statute does not include the phrase "abuse of discretion". 20 Manifestly, when Congress wants to impose an abuse-of-discretion standard, it has more than one way to do so. One way it may do so is to refer (as in section 6404(h)(1)) to "abuse of discretion"; but another is to provide (as in section 6015(f)) that "the Secretary may relieve such individual of such liability." (Emphasis added.)C. The Absence of the Possibility of RemandThe majority states that "[a]n abuse of discretion standard of review is also at odds with our decision to decline to remand section 6015(f) cases for reconsideration. Friday v. Commissioner, 124 T.C. 220">124 T.C. 220, 222 (2005)." Majority op. p. 12. Tax jurisprudence would be simpler, and preferable to some, if each tax case called for either abuse-of-discretion review of an agency-level record with a possibility of remand to the agency, or else de novo decision based on a new trial record with no option of agency remand. This neat paradigm is compromised when our system calls for a decision to be based on an agency record but for the court to review the matter de novo, 21 or when our system calls for a decision to be based on a trial de novo but for the court to review for an abuse of discretion 22*101 -- but that is what our system sometimes calls *239 for. If the system would be improved by allowing the Tax Court *100 to remand section 6015(f) cases to the IRS, then Congress will have to enact a "statutory provision[] reserv[ing] jurisdiction to the Commissioner". Friday v. Commissioner, 124 T.C. 220">124 T.C. 220, 221 (2005) (denying remand of section 6015 cases).D. The Comparison to Section 6015(b) and (c)The majority opines that, since our jurisdiction to decide section 6015(f) cases has now been settled by the 2006 amendments, "there is no longer any reason to apply a different standard of review under subsection (f) than under subsections (b) and (c)". Majority op. p. 13. In fact, as we have already shown, the relief provided in subsection (f) is materially different from the relief provided in subsections (b) and (c)-both in the language of those subsections (see supra note 8) and in the characterization of those forms of relief in section 6015(e) and its amendments made in 2006 (see supra note 9). The Court currently recognizes in Lantz v. Commissioner, 132 T.C. ___, ___, 2009 U.S. Tax Ct. LEXIS 8">2009 U.S. Tax Ct. LEXIS 8, *27 (2009)), that Congress "intended that taxpayers have two kinds of remedies" -- "traditional" and "equitable". If indeed Congress intended subsection (f) to provide a distinct regime, with an equitable remedy to be "requested" rather than "elected", it is perfectly consistent with that intention that it also intended *102 us to review agency action for an abuse of discretion.Under section 6015(f), "the Secretary may relieve" from joint liability; but when the Secretary denies such relief, and we review that decision under section 6015(e)(1)(A), we should review for an abuse of discretion. I would so hold.COHEN, WELLS, FOLEY, THORNTON, and MORRISON, JJ., agree with this dissenting opinion.Footnotes1. Unless otherwise indicated, section references are to the Internal Revenue Code, as amended. Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.↩2. A judgment of absolute divorce was entered on May 16, 2006.↩3. A final decree in petitioner's bankruptcy case was issuedon May 8, 2007, lifting the automatic stay imposed pursuant to 11 U.S.C. sec. 362(a)(8). Trial was held on Mar. 27, 2007, before the automatic stay was lifted. Respondent was not aware and theCourt was not otherwise notified of petitioner's bankruptcypetition. The parties subsequently filed a joint motion forrelief from the automatic stay, nunc pro tunc, with the U.S.Bankruptcy Court for the District of Maryland. The bankruptcycourt granted the joint motion and ordered "that the automatic stay be lifted in order that * * * [petitioner] may seek innocent spouse relief from the United States Tax Court, nunc pro tunc↩; and * * * that * * * [petitioner's] innocent spouse Tax Courtproceedings and any orders and opinions issued therewith are notvoid as violating the automatic stay."4. To prevail under this standard of review, the taxpayer has the burden of proving that the Commissioner's determination was arbitrary, capricious, or without sound basis in fact or law. Jonson v. Commissioner, 118 T.C. 106">118 T.C. 106, 113, 125 (2002), affd. 353 F.3d 1181">353 F.3d 1181 (10th Cir. 2003); Butler v. Commissioner, 114 T.C. 276">114 T.C. 276↩, 5. In Porter v. Commissioner, 130 T.C. 115">130 T.C. 115, 122 n.10 (2008), we expressly reserved any determination regarding the appropriate standard of review in sec. 6015(f)↩ cases because our determination of the proper scope of review was not dependent on the standard of review.6. Sec. 6015 replaced sec. 6013(e)↩, which provided for aspouse to be relieved from joint and several liability undercertain limited circumstances.7. In analyzing such factors as the taxpayer's marital status, whether the taxpayer would suffer hardship, and whether the taxpayer has complied with income tax laws in subsequent years, our inquiry is directed to the taxpayer's status at the time of trial.↩1. It is worth noting that, while 9 Judges have voted "yes"and 8 have voted "no" in this case, two of the "no" votes agreewith the majority with respect to the standard of review. Thus,the number of Judges supporting the application of a de novostandard of review is 11 and the number opposing it is 6.2. The standard of review applied with respect to the "may" language in sec. 269(a)↩ is noteworthy in that the "may" language in the statute had previously been "shall". See Revenue Act of 1964, Pub. L. 88-272, sec. 235(c)(2), 78 Stat. 126.3. I emphasize here the entire quoted phrase from sec. 6015(e)(1)(A)↩, not just the verb "determine", on which the majority places singular emphasis.4. The grant of Tax Court jurisdiction was originally codified as sec. 6404(g)(1)↩. Taxpayer Bill of Rights 2 (TBOR 2), Pub. L.104-168, sec. 302(a), 110 Stat. 1457 (1996).5. A similar contrast emerges in the legislative history of secs. 6320 and 6330 as compared to the legislative history of sec. 6015(e)(1)(A). These Code sections were all enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, secs. 3401 and 3201, 112 Stat. 734, 746.The legislative history underlying secs. 6320 and 6330 specifies that courts are to apply an abuse of discretion standard inreviewing IRS collection determinations and a de novo standard inreviewing determinations of tax liability. H. Conf. Rept. 105-599, at 266 (1998), 3 C.B. 755">1998-3 C.B. 755, 1020; see Giamelli v. Commissioner, 129 T.C. 107">129 T.C. 107, 111 (2007). Thus, the legislative history of sec. 6330 makes clear that, to the extent specified there in, we must apply a deferential standard of review. See Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 181-182 (2000). In contrast, the legislative history underlying sec. 6015(e)(1)(A) does not specify the standard of review. See H. Conf. Rept. 105-599, supra at 250-251, 1998-3 C.B. at 1004-1005↩.6. In describing the Secretary's authority to grant equitable relief, the legislative history puts no emphasis on administrative discretion:The conferees do not intend to limit the use of the Secretary's authority to provide equitable relief to situations where tax is shown on a return but not paid. The conferees intend that such authority be used where, taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return. * * * [H. Conf. Rept. 105-599, supra at 254, 1998-3 C.B. at 1008↩.]7. The Oversight Subcommittee hearing was held after the House had passed its version of RRA 1998 (H.R. 2676, 105th Cong., 1st Sess. (1997)) on Nov. 5, 1997. However, neither the Senate nor the conference version of H.R. 2676 had been considered or passed, and the essential form of sec. 6015(f)↩ as finally enacted did not emerge until the conference version of the legislation. 8. The report had been mandated by Congress in 1996 legislation. See TBOR 2 sec. 401, 110 Stat. 1459">110 Stat. 1459↩.9. Because of the more expansive retooling of sec. 6015(f)review procedures effected by the 2006 amendments of sec.6015(e)(4), I agree with the majority's conclusion that the 2006 amendments are cause for the Court to reconsider the standard of review in sec. 6015(f) cases.The Court of Appeals for the 11th Circuit recently upheld this Court's position in Ewing v. Commissioner, 122 T.C. 32">122 T.C. 32 (2004), vacated on other grounds 439 F.3d 1009">439 F.3d 1009 (9th Cir. 2006), and Porter v. Commissioner, 130 T.C. 115">130 T.C. 115 (2008), that the scope of review in a sec. 6015(f) review proceeding should not be limited to the administrative record. Commissioner v. Neal, 557 F.3d 1262">557 F.3d 1262 (11th Cir. 2009), affg. T.C. Memo 2005-201">T.C. Memo. 2005-201. The standard of review was not in issue in Neal↩, as the parties had agreed that the standard was abuse of discretion. 10. In fact, we have recently applied a de novo standard of review in a sec. 6015(f) case. See Wiener v. Commissioner, T.C. Memo 2008-230">T.C. Memo 2008-230 ("Because we cannot ascertain what analysis was made by the Appeals officer in reaching his or her determination that petitioner is not entitled to relief under section 6015(f)↩, we cannot review the determination for abuse of discretion. [Fn. ref. omitted.] Instead, we shall examine the trial record de novo to decide whether respondent properly concluded that petitioner is not entitled to relief.").11. In the sec. 6015(f) context, we have recognized the conceptual difficulty of conducting a trial de novo while at the same time deferring to an administrative determination. See Nihiser v. Commissioner, T.C. Memo. 2008-135 ("Although rarely employed by district courts in reviewing administrative agency action, a trial de novo typically consists of independent fact-finding and legal analysis unmarked by deference to the original fact finder."); see also Black's Law Dictionary 1544 (8th ed.2004) (defining "trial de novo" as "A new trial on the entire case * * * conducted as if there had been no trial in the first instance.").1. Unlike sec. 6330, sec. 6015 does not require a "hearing" before an "Appeals officer" or that a "determination" against the taxpayer be made before filing a petition requesting relief under sec. 6015(f). As noted by Judge Gustafson in his dissent, it is the Secretary, through his delegate the Commissioner, who is vested with the discretion under sec. 6015(f)↩, and it is the Commissioner who appears as the respondent in every case before the Tax Court.2. As Judge Gustafson's dissent explains, the 2006 amendment had nothing to do with changing the standard of review in sec. 6015(f)↩ cases. 3. ERISA is the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829">88 Stat. 829, codified as amended not in the Internal Revenue Code (26 U.S.C.) but in 29 U.S.C. secs.1001-1461 (2006)↩. 4. Under the Supreme Court's holding in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101">489 U.S. 101, 115, 109 S. Ct. 948">109 S. Ct. 948, 103 L. Ed. 2d 80">103 L. Ed. 2d 80 (1989), quoted in Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., 32 F.3d 120">32 F.3d 120, 123↩ (4th Cir. 1994), the plan administrator's action is reviewed under a de novo standard of review unless the plan document vests the administrator with discretion, in which case, the action is reviewed under an abuse of discretion standard.1. The majority so acknowledges. Majority op. p. 8 ("Section 6015(f) provides that the Commissioner 'may' grant relief under certain circumstances, suggesting a grant of relief is discretionary"). See also Kirkendall v. Dept. of the Army, 479 F.3d 830">479 F.3d 830, 870 (Fed. Cir. 2007); Lantz v. Commissioner, 132 T.C. 131">132 T.C. 131, ___, 2009 U.S. Tax Ct. LEXIS 8">2009 U.S. Tax Ct. LEXIS 8, *32 (2009)) ("section 6015(f)↩, uses the discretionary term 'may'").2. See sec. 7801(a)(1) ("the administration and enforcement of this title shall be performed by or under the supervision of the Secretary of the Treasury"); sec. 7803(a)(2)↩ ("The Commissioner shall have such duties and powers as the Secretary may prescribe, including the power to * * * administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws"). 3. See sec. 482; Dolese v. Commissioner, 82 T.C. 830">82 T.C. 830, 838 (1984), affd. 811 F.2d 543">811 F.2d 543, 546↩ (10th Cir. 1987). 4. See former sec. 6659(e); Krause v. Commissioner, 99 T.C. 132">99 T.C. 132, 179 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024↩ (10th Cir. 1994).5. See secs. 446(b), 471(a); Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 532, 99 S. Ct. 773">99 S. Ct. 773, 58 L. Ed. 2d 785">58 L. Ed. 2d 785 (1979); see also Hernandez-Cordero v. U.S. INS, 819 F.2d 558">819 F.2d 558, 566 & nn.18-24, 570 (5th Cir.1987) (Rubin, J.↩, dissenting) (appendix listing 169 sections in the United States Code "placing discretion in the opinion of the President, the Attorney General, or a Cabinet Secretary" with the language "in the opinion of").6. See sec. 6330(c)(3); Goza v. Commissioner, 114 T.C. 176">114 T.C. 176, 181-182↩ (2000). 7. Admittedly, the naming of the official who makes that decision is not, by itself, an infallible marker that discretion has been granted to that official. Rather, for example, section 269(a) provides that "the Secretary may disallow" losses acquired in tax-motivated transactions, but the case law under section 269 does not indicate a special grant of discretion. Cf. United States v. Jefferson Elec. Manufacturing Co., 291 U.S. 386">291 U.S. 386, 397-398, 54 S. Ct. 443">54 S. Ct. 443, 78 L. Ed. 859">78 L. Ed. 859, 78 Ct. Cl. 846">78 Ct. Cl. 846, 1 C.B. 393">1934-1 C.B. 393 (1934) (the phrase "to the satisfaction of the Secretary" does not "invest the Commissioner with absolute authority or discretion" (emphasis added) but "means that the additional element is not lightly to be inferred but to be established by proof which convinces in the sense of inducing belief"); R.E. Dietz Corp. v. United States, 66 AFTR 2d 5772, 5779, 90-2 USTC par. 50,447, at 85,439 (N.D.N.Y. 1990) (the phrase "'to the satisfaction of the Secretary' * * * may very well indicate that the instant action should have been stylized and litigated as one * * * challenging that determination as arbitrary or capricious or as an abuse of discretion"), affd. 939 F.2d 1">939 F.2d 1↩ (2d Cir. 1991). 8. Section 6015(b)(1) provides that "the other individual shall be relieved of liability"; section 6015(b)(2) provides that "such individual shall be relieved of liability"; and section 6015(c) provides that "the individual's liability * * * shall not exceed" his or her allocable portion; but section 6015(f) departs from the pattern to provide that "the Secretary may relieve". (Emphasis added.) As is discussed infra part IV.D, we recognize the difference of these forms of relief in our opinion in Lantzv. Commissioner, supra at ___, 2009 U.S. Tax Ct. LEXIS 8 at *14↩.9. To the existing provision of section 6015(e)(1) granting jurisdiction to the Tax Court "[i]n the case of an individual * * * who elects to have subsection (b) or (c) apply", the 2006 amendment (discussed in greater detail below) added "or in the case of an individual who requests equitable relief under subsection (f)". (Emphasis added.) In addition, where existing language in subsection (e)(1)(A)(i)(II) and (B)(i) referred to "elect[ing]" relief under subsections (b) and (c), equivalent amendments were made to add reference to "request[ing]" relief under subsection (f). The majority ignores the difference between "electing" and "requesting" when they state, "Nothing in amended section 6015(e)↩ suggests that Congress intended us to review for abuse of discretion." Majority op. p. 10.10. To "request" is "to ask * * * to do something" or "to ask * * * for something", whereas to "elect" is "to make a selection of" or "to choose". Webster's Third New International Dictionary (1986). This Court has similarly "defined the legal term 'election'" as the "choice of one of two rights or things". Boardwalk Natl. Bank v. Commissioner, 34 T.C. 937">34 T.C. 937, 945 (1960) (quoting Weis v. Commissioner, 30 B.T.A. 478">30 B.T.A. 478, 488 (1934) ("The term 'election' in its legal sense means the choice of one of two rights or things, to each of which the party choosing has an equal right, but both of which he can not have, * * * as when a man is left to his own free will to take or do one thing or another, which he pleases, * * * a choice between different things, * * * the act of electing or choosing'")); see also Snow v. Alley, 156 Mass. 193">156 Mass. 193, 30 N.E. 691">30 N.E. 691, 692 (Mass. 1892) ("Election exists when a party has two alternative and inconsistent rights, and it is determined by a manifestation of a choice"); Black's Law Dictionary 557 (8th ed. 2004) (describing an "election" as "The exercise of choice; esp., the act of choosing from several possible rights or remedies").11. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201(a), (b), 112 Stat. 734">112 Stat. 734, 739. We observe in Lantz v. Commissioner, 132 T.C. at ___, 2009 U.S. Tax Ct. LEXIS 8 at *21), that section 6015(f) and the final sentence of section 66(c)↩ are "companion statute[s]". 12. See majority op. p. 11 (under section 6015(f), "the decision whether to grant relief * * * was committed largely to agency discretion"); majority op. p. 8 (the word "may" in section 6015(f) "suggest[s that] a grant of relief is discretionary"). If those statements by the majority are equivocal (qualified as they are by "largely" and "suggest[s]"),then this Court has removed all doubt by lately holding that "a commonsense reading of section 6015 is that the Secretary has discretion to grant relief under section 6015(f)". Lantz v. Commissioner, supra at ___, 2009 U.S. Tax Ct. LEXIS 8 at *34↩. 13. See Estate of Roski v. Commissioner, 128 T.C. 113">128 T.C. 113, 128↩ (2007) (noting the Commissioner's concession that "'a discretionary act * * * could only be subject to an abuse of discretion review'"). 14. Cf. Wiener v. Commissioner, T.C. Memo 2008-230">T.C. Memo 2008-230 ("Because we cannot ascertain what analysis was made by the Appeals officer in reaching his or her determination that petitioner is not entitled to relief under section 6015(f)↩, we cannot review the determination for abuse of discretion. Instead, we shall examine the trial record de novo to decide whether respondent properly concluded that petitioner is not entitled to relief" (fn. ref.omitted)).15. See Porter v. Commissioner, 130 T.C. 115">130 T.C. 115, 143 (2008)(Goeke, J., concurring) ("it was logical for the Court in Butler * * * to find that the standard of review was abuse of discretion because of the discretionary language in section 6015(f)↩"). As we argue below, nothing material has changed since Butler was decided in 2000; and if the abuse-of-discretion standard was "logical" and "appropriate" then, it remains so today. 16. Billings v. Commissioner, 127 T.C. 7">127 T.C. 7, 18 (2006) (Billings I↩). 17. The Tax Court observed in Billings I, 127 T.C. at 17, that this analysis did not deprive the Tax Court of jurisdiction over allsection 6015(f) cases, but only over those raised in so-called "non deficiency stand-alone petitions" . . . It observed that "innocent spouse relief under all subsections of 6015" (i.e., including section 6015(f) relief) remained available in deficiency cases under section 6213(a) and in collection due process cases under section 6330(d)(1)(A), as well as in "standalone petitions when the Commissioner has asserted a deficiency against a petitioner." Id.↩ at 18.18. The Tax Relief and Health Care Act of 2006, Pub. L. 109432, div. C, sec. 408(a), 120 Stat. 3061. As is discussed supra p. 4 & note 9, these 2006 amendments also added, to the existing references in section 6015(e)(1)(A)(i)(II) and (B)(i) to a taxpayer's "elect[ing]" relief under subsections (b) and (c), new references to a taxpayer "request[ing]" subsection (f) relief. Id.↩ sec. 408(b), 120 Stat. 3062.19. In this regard, section 6404 is not, in fact, a particularly close analogue to section 6015(e) but is different in two significant respects: First, the 1996 amendment of section 6404 gave the Tax Court jurisdiction where before it had none; but the 2006 amendment of section 6015(e) clarified the Tax Court's jurisdiction as to only one form of section 6015(f) relief, leaving unaffected the Court's preexisting jurisdiction as to other forms. Second, the 1996 amendment of section 6404 created a new review regime; but the 2006 amendment of section 6015(e)↩ presupposed the existence of a body of case law that had consistently recognized an abuse-of-discretion standard of review.20. See supra↩ notes 3-6.21. "[T]he standard * * * of review to be employed by the District Court [under section 7428] in examining the determination of the Secretary [as to initial qualification for tax-exempt status] * * * is to be de novo. * * * Normally, the Court's decision will be based on the facts as represented in the administrative record." Inc. Trustees of the Gospel Worker Soc. v. United States, 510 F. Supp. 374">510 F. Supp. 374, 377 n.6 (D.D.C. 1981), affd. without published opinion 672 F.2d 894">672 F.2d 894↩ (D.C. Cir. 1981).22. See Porter I, 130 T.C. at 122-123 ("Review for abuse of discretion does not * * * preclude us from conducting a de novo trial. Ewing v. Commissioner, 122 T.C. [32] at 40 [(2004)]" (citing, e.g., cases under secs. 446, 482, and 6404). Remand is not possible in a refund case, see D'Avanzo v. United States, 54 Fed. Cl. 183">54 Fed. Cl. 183, 187 (2002), or in a deficiency case; and when these abuse-of-discretion issues arise (as they do) in refund and deficiency cases, remand is not an option.

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https://www.courtlistener.com/api/rest/v3/opinions/4624485/

Interstate Truck Service, Inc. v. Commissioner.Interstate Truck Service, Inc. v. CommissionerDocket No. 64853.United States Tax CourtT.C. Memo 1958-219; 1958 Tax Ct. Memo LEXIS 3; 17 T.C.M. (CCH) 1079; T.C.M. (RIA) 58219; December 31, 1958*3 William F. Keefer, Esq., and John Wiseman, C.P.A., 1219 Chaplin Street, Wheeling, W. Va., for the petitioner. Leo A. Burgoyne, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined deficiencies of $7,928.47 and $13,646.37 in the petitioner's income tax for 1952 and 1953, respectively. The principal issue presented for decision is whether the respondent erred in disallowing deductions of $7,080.34 and $16,043.82 taken by petitioner in 1952 and 1953, respectively, as business expenses and representing the cost of tires mounted on trucks, tractors and trailers purchased in the respective years. Findings of Fact Some of the facts have been stipulated and are found accordingly. The petitioner is a West Virginia corporation, organized in 1938, and has its principal business office in Martins Ferry, Ohio. It filed its Federal income tax returns for 1952 and 1953, prepared on an accrual basis, with the district director in Cleveland, Ohio. Following its organization and throughout the years 1952 and 1953 the petitioner engaged in the business of motor freight transportation using trucks, tractors and trailers*4 in the conduct of its business. During the taxable years in question the petitioner was a "Class 1 Motor Carrier" of property under the authority of the Interstate Commerce Commission. The Uniform System of Accounts for Class 1 Common and Contract Motor Carriers of Property prescribed by the Interstate Commerce Commission in accordance with part II of the Interstate Commerce Act, Issue of 1952, Revised to January 1, 1952, provides that there shall be excluded from capitalization of revenue equipment the cost of tires and tubes furnished by the vendor with newly acquired revenue equipment. Such tires and tubes on purchased revenue equipment may either be charged directly to expense or may be charged to a prepaid account to be written off over the life of the tires and tubes. The cost to petitioner of tires and tubes furnished by vendors with newly acquired revenue equipment was $7,080.34 for 1952 and $16,043.82 for 1953. The petitioner debited those amounts on its books to expense for the respective years. In its income tax returns for 1952 and 1953 the petitioner deducted the foregoing respective amounts as business expenses. In determining the deficiencies the respondent disallowed*5 the deductions on the ground that the amounts thereof represented capital expenditures. With respect to the expenditure for tires and tubes for 1952 the respondent allowed a deduction of $1,139.26 for depreciation. With respect to the expenditure for tires and tubes for 1953 the respondent allowed a deduction of $3,137.84 for depreciation. During the years 1947 through 1951 the petitioner purchased tractors and trailers with tires and tubes mounted thereon. The cost of such tires and tubes was debited to expense on the petitioner's books and deducted as an expense in its income tax returns for the years in which purchased. Each of petitioner's tractors used 6 tires, 2 on the front axle and 4 on the 2 dual wheels mounted upon the rear axle. Each trailer used 4 tires on dual wheels mounted upon a single axle. All of the tires purchased by petitioner upon newly acquired equipment during 1952 and 1953 were interchangeable. No retreaded tire was used upon the front axle of tractors. The average mileage obtained upon tires so used was 60,000 miles before it became necessary to retread or discard the same as no longer usable. Tires mounted upon all other axles under petitioner's equipment*6 were usable on their first retread for an average of 35,000 miles with one exception. Fifteen per cent of all tires purchased by petitioner upon new equipment were damaged to an extent that they were no longer usable regardless of whether they were at that time otherwise worn out. All tires being interchangeable were constantly being interchanged by petitioner during the years at issue for the purpose of obtaining the best possible mileage therefrom. Sixty per cent of the remaining 85 per cent of such tires were retreaded and used by petitioner for an additional 25,000 miles on the average. Ten per cent of that number were retreaded and were used for an additional 25,000 miles on the average. A period of approximately 6 months was required in order for petitioner to use a given tire a distance of 35,000 miles. The average mileage for all tires used by petitioner during the years at issue was 47,000 miles. Tires purchased by petitioner upon new equipment during the years at issue were on the average consumable in less than one year. Opinion Taking the position that the useful life of tires and tubes used on the trucks, tractors and trailers operated by it in its motor freight*7 transportation business was substantially less than one year, the petitioner contends that the respondent erred in disallowing the deductions in question. In support of its contention the petitioner relies on W. H. Tompkins Co., 47 B.T.A. 292">47 B.T.A. 292. In the Tompkins case, the taxpayer used trucks in the conduct of its business as a common carrier of property. The average life of tires and tubes used on the trucks was not over 90 days and none lasted more than 6 months. The taxpayer deducted as a business expense in the year of acquisition the cost of tires and tubes purchased on the trucks. The respondent disallowed the deduction on the ground that the tires were capital items and as such were to be depreciated. There we considered at length the treatment to be accorded, for tax purposes, to tires which comprise part of a fully equipped truck at the time of the acquisition of the truck. After observing that the normal and usual rule is that the cost of the tires is to be capitalized along with the remainder of the cost of the truck and depreciated over the life of the truck as an entity, *8 we concluded that where the tires are consumable within the year there is no basic objection to excepting them from the usual rule and treating their cost as an expense deductible in full in the year of purchase. The respondent contends that the petitioner has failed to establish such a factual situation as would permit the application here of our holding in the Tompkins case. We disagree, and our ultimate conclusion of fact is dispositive of the issue. The only issue presented to us is whether petitioner's tires purchased on new equipment are to be capitalized or expensed. There is no dispute concerning petitioner's cost of such tires and tubes if such cost is deductible as an expense. We are therefore not concerned with and do not decide the number of such tires used by petitioner in those years. Having so decided, it is unnecessary for us to consider the alternative issue raised by petitioner. We find that petitioner's allocation of the cost of tires and tubes purchased upon newly acquired equipment during the years at issue is in accordance with the cost of such tires and tubes purchased by petitioner upon the open market for its inventory and that the amounts so allocated*9 are proper. Decision will be entered under Rule 50.

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