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https://www.courtlistener.com/api/rest/v3/opinions/4625116/	THE WARNER COLLIERIES COMPANY OF DELAWARE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Warner Collieries Co. v. CommissionerDocket No. 34679.United States Board of Tax Appeals26 B.T.A. 1047; 1932 BTA LEXIS 1196; September 29, 1932, Promulgated 1196 Held, on the record petitioner is not proven to be liable as a transferee. H. A. Mihills, C.P.A., for the petitioner. J. R. Johnston, Esq., for the respondent. VAN FOSSAN 1047 This proceeding was brought to redetermine the liability of the petitioner as transferee for a deficiency in income and profits taxes asserted against The Crawford Hill Coal Company for the fiscal year ending March 31, 1919, in the sum of $21,721.33. The petitioner raises the following issues: (1) Whether the statute of limitations bars the assessment and collection of the alleged deficiency. (2) Whether the petitioner is liable as transferee of the assets of The Crawford Hill Coal Company for the payment of the tax, or any part thereof, imposed on that company. (3) Whether The Crawford Hill Coal Company and The Crabapple Coal Company were affiliated during the fiscal year ending March 31, 1919. (4) Whether The Crawford Hill Coal Company was entitled to special assessment for the said fiscal year under the provisions of sections 327 and 328 of the Revenue Act of 1918. 1048 FINDINGS OF FACT. The petitioner was incorporated July 31, 1918, under1197 the laws of the State of Delaware, with its place of business at Cleveland, Ohio. Its original corporate name was The Crabapple Coal Company, but it was subsequently changed to The Warner Collieries Company of Delaware. Its officers were W. H. Warner, president; Whitney Warner, vice president and treasurer; C. H. Judkins, secretary; and the said three officers and Hoyt L. Warner, E. L. Thrower, K. B. Whitworth and L. W. Hart, directors. The petitioner owns coal acreage and produces and sells bituminous coal. The Crawford Hill Coal Company was incorporated under the laws of the State of Ohio on December 1, 1916. It was engaged in producing and selling bituminous coal. On March 31, 1919, and on October 30, 1919, its officers were W. H. Warner, president; Whitney Warner, vice president and treasurer; K. B. Whitworth, secretary; and its board of directors consisted of those officers and Hoyt L. Warner and E. L. Thrower. W. H. Warner & Company, a partnership composed of W. H. Warner and his two sons, Whitney Warner and Hoyt L. Warner, organized both the petitioner and The Crawford Hill Coal Company. The stockholders of the two corporations on the dates indicated were as follows: 1198 Shares held 9/5/18Shares held 3/31/19StockholdersCrawford HillCoal Co.Crabapple Coal Co.Crawford Hill Coal Co.W. H. Warner2502,739 1/2250Whitney Warner1501,664 1/2150H. L. Warner1001,110100K. B. Whitworth10110L. W. Hart10110Others 13801,722380Total9007,238900Shares held 3/31/19Percentage shares held 9/5/18Percentage shares held 3/31/19Crabapple Coal Co.Crawford HillCrabappleCrawford Crabapple Coal Co. Coal Co. Hill Coal Co.Coal co.2,718 1/227.7737.8527.7737.561,63116.6623.0016.6622.531,087 1/211.1115.3411.1115.0211.11.011.11.0111.11.011.11.011,79942.2223.7942.2224.867,238100100100100The common and preferred stock carried equal voting rights. On or about August 12, 1919, The Crawford Hill Coal Company filed a consolidated income and profits tax return for itself and the petitioner as affiliated corporations for the1199 fiscal year ending March 31, 1919. The petitioner had no taxable income, but its operating expenses were included in the consolidated income return. No segregation was made of such expense items, but the combined totals were set forth in detail. The schedules attached to such return reflected 1049 the assets and liabilities of each corporation as of March 31, 1919. Among the assets of The Crawford Hill Coal Company were Liberty bonds listed at $80,000, and its only liabilities were accounts payable amounting to $11,503.02. On October 30, 1919, the petitioner and The Crawford Hill Coal Company executed an agreement, from which the following excerpts are taken: ARTICLE A ON BEHALF OF THE SELLER 1. The Seller hereby agrees to sell, convey, grant, assign, transfer and set over unto the Purchaser all its property and assets, and so far as this instrument may operate as an instrument of sale, conveyance, assignment and transfer, does hereby sell, convey, grant, assign, transfer and set over unto the Purchaser, all its property and assets, of whatsoever kind, nature and description, real, personal and mixed, wheresoever the same may be situate. 2. Said Seller hereby1200 agrees that as soon as practicable and convenient after the full performance of this contract, it will proceed to dissolve, in accordance with the laws of the State of Ohio for such cases made and provided. ARTICLE B ON BEHALF OF THE PURCHASER 1. Said Purchaser hereby agrees to accept, and so far as this instrument may operate as a sale, conveyance, assignment and transfer, does hereby accept, the property and assets mentioned in Article A, subdivision 1 hereof. 2. Said Purchaser hereby assumes and agrees to perform any and all contracts, leases and agreements of whatsoever kind, nature and description, entered into by said Seller prior to June 30, 1919, which have not been completely performed, and to indemnify and save harmless said Seller from any and all claims, demands and actions in any manner arising out of such contracts, leases and agreements, and from all loss, cost, damage and expense in connection therewith. 3. Said Purchaser hereby assumes and agrees to pay and satisfy any and all obligations and liabilities of whatsoever kind, vature or description, owed or incurred by said Seller on or before June 30, 1919, and to indemnify and save harmless said Seller1201 from any and all claims, demands and actions in any manner arising out of any obligations and liabilities asserted against said Seller, and from all loss, cost damage and expense in connection therewith. 4. Said Purchaser hereby agrees to pay from time to time to said Seller, on demand, such amounts of money as may be required by said Seller for the purpose of meeting such reasonable and necessary expense and liabilities as said Seller may incur in the performance of this agreement, in the maintenance of its corporate entity and in its dissolution. 5. Said Purchaser hereby agrees to issue and deliver to said Seller, or its nominees, at Purchaser's principal office in the City of Wilmington, Delaware, a certificate or certificates evidencing the ownership by said Seller, or by said nominees, of forty-five hundred (4500) shares of said Purchaser's common stock without nominal or par value. 1050 ARTICLE C MUTUAL AGREEMENTS 1. The Seller and the Purchaser hereby mutually agree that this agreement is subject to the approval of the shareholders of the Seller, as provided in Section 8711 of the General Code of Ohio, and that in the event of such approval, it shall1202 take effect and be operative as of the 30th day of June, 1919. 2. The Seller and the purchaser hereby mutually agree that each will promptly execute and deliver such other and further documents and instruments as may be necessary fully to carry out the terms of this agreement. 3. The Seller and the Purchaser hereby mutually agree that in the handling of the property and assets mentioned in Article A, subdivision 1 hereof, and in the conduct of any and all business transacted by the Seller during the period from June 30, 1919, up to and including the date when the Purchaser may actually take over the said property and assets, said Seller shall, in pursuance of the informal agreement between the parties hereto to the effect that the property and assets hereby sold should be transferred as of June 30, 1919, at the close of business, be deemed in all respects to have acted for, and on account of said Purchaser, and said Purchaser shall indemnify and save said Seller harmless from any and all claims, demands and actions arising in any manner out of the handling of said property and assets and the conduct of said business during said period, and from all loss, cost, damage and expense1203 in connection therewith. 4. It is mutually understood that Purchaser is now in process of changing its corporate name from "The Crabapple Coal Company" to "The Warner Collieries Company". 5. The Seller and the Purchaser hereby mutually agree that this agreement contains all the representations made by either party hereto to the other. In April, 1921, The Crawford Hill Coal Company was dissolved and a certificate of such dissolution was filed with the Secretary of State of Ohio on April 26, 1921. At the request of the respondent's agent the petitioner submitted to him a copy of the agreement of October 30, 1919, between The Crawford Hill Coal Company and the petitioner. The Crawford Hill Coal Company filed corporation income and profits tax returns for the fiscal years ending March 31, 1920, and March 31, 1921, and for the period from April 1 to April 26, 1921, inclusive. On the return for the period from April 1 to April 26, 1921, appears the following notation: This company was taken over by The Warner Collieries Company as of April 1, 1919, and had no income in the period April 1, 1921 to April 26, 1921, inclusive. On April 26, 1921 The Crawford Hill Coal Company1204 was dissolved. This is its final return. The entire income of The Crawford Hill Coal Company after April 1, 1919, was included in the tax return of the petitioner for the fiscal year ending March 31, 1920. The books of the two companies were combined as of the beginning of that fiscal year. 1051 A letter dated April 18, 1924, was mailed by the respondent to The Crawford Hill Coal Company, notifying it of an additional tax for the fiscal year ending March 31, 1919, and requesting a waiver in case it desired to appeal from the respondent's conclusions. Such waiver, dated April 25, 1924, was signed by "The Crawford Hill Coal Company, by K. B. Whitworth, secretary," bore the corporate seal of the said corporation, and was effective one year after the expiration of the statutory period of limitations. Whitworth signed the waiver without instructions from anyone and with no investigation as to his right to sign as such secretary. In June, 1924, the respondent was informed by letter that the petitioner was successor to The Crawford Hill Coal Company. On April 7, 1925, the petitioner executed a waiver extending the period for making assessment to December 31, 1925, in1205 response to a request therefor from the respondent. In response to a request by the respondent a waiver dated December 7, 1925, was executed by the petitioner as "successor, The Crawford Hill Coal Company, taxpayer, by K. B. Whitworth, treasurer," and extended the period for making assessment to December 31, 1926. A similar waiver, dated October 29, 1926, was likewise executed to extend the period for assessment to December 31, 1927. All waivers subsequent to that of April 25, 1924, were executed by K. B. Whitworth without instructions or investigation by him. The income-tax returns of The Crawford Hill Coal Company and the petitioner were prepared under the supervision of K. B. Whitworth. A refund claim on behalf of The Crawford Hill Coal Company and The Crabapple Coal Company was signed by him as secretary-assistant treasurer of The Crawford Hill Coal Company and assistant treasurer of The Crabapple Coal Company. A protest filed with the respondent by the petitioner on April 18, 1924, was signed by the petitioner as successor to The Crawford Hill Coal Company "by K. B. Whitworth, secretary." On December 10, 1927, the respondent notified the petitioner of its liability under1206 section 280 of the Revenue Act of 1926. On that date The Crawford Hill Coal Company had no assets or property whatever, being then dissolved. The members of the partnership of W. H. Warner & Company had been in the coal business for many years. The partnership was extensively interested in a number of operating companies, for most of which it acted as exclusive sales agent. It served as such for the petitioner and The Crawford Hill Coal Company. Both corporations also were managed and operated by W. H. Warner & Company. It filled its whole orders indiscriminately from the mines of both producers, who were given a preference over other operating companies 1052 in the allocation of orders. The partnership furnished a general office for The Crawford Hill Coal Company, kept its books, purchased mine supplies for it, billed and collected its coal accounts and guaranteed credits on all such accounts. For such services W. H. Warner & Company received 10 cents per ton on all coal produced. That amount was less than one-half the nominal rate for administrative expenses for companies of the size of The Crawford Hill Coal Company and the petitioner. By reason of its ability1207 to buy in large quantities, the partnership secured supplies for The Crawford Hill Coal Company and the petitioner at 10 per cent under the usual prices. During the year under consideration the Fuel Administration regulations permitted to coal producers the addition of 15 cents per ton for selling expenses alone. That rate was inapplicable to the petitioner and The Crawford Hill Coal Company because of their relationship to the partnership of W. H. Warner & Company. OPINION. VAN FOSSAN: The first issue relates to the statute of limitations. The petitioner asserts that the waivers of April 25, 1924, April 7, 1925 December 7, 1925, and October 29, 1926, executed on behalf of The Crawford Hill Coal Company were not valid. But as a condition precedent to the question of validity of the waivers we must determine whether or not such an income-tax return was made by The Crawford Hill Coal Company as started the tolling of the statute. The respondent contends that the consolidated return filed by "The Crawford Hill Coal Co., consolidated with The Crabapple Coal Co." for the fiscal year ending March 31, 1919, did not set forth separately the income and deductions of the two corporations, 1208 or either of them, as required by section 239 of the Revenue Act of 1918, which provided that every corporation should "make a return, stating specifically the items of its gross income and the deductions and credits allowed by this Title." Every return must show facts upon which an assessment for the taxable period can be made. ; ; . Where such information is given the statute begins to run. In the case of consolidated returns we have held that they must be filed in good faith and must make a substantial revelation of the gross income and deductions separately for the constituent members of the affiliated group. ; ; affd., ; 1053 ; 1209 . If they do not do so they are not the returns contemplated by the statute and hence do not start the running of the statute of limitations. ; , reversing . The return in question sets forth only the income, deductions and credits of both corporations combined. Only the balance sheets reflecting the assets and liabilities of each corporation as of March 31, 1919, were included in the return. Such information is not sufficient basis for the assessment of tax. Therefore, the statute of limitations does not bar the assessment of the tax against The Crawford Hill Coal Company. The second issue presents the question of the liability of the petitioner as transferee of the assets of The Crawford Hill Coal Company. Section 602 of the Revenue Act of 1928 imposes upon the respondent the burden of proof of showing that the petitioner is liable as such transferee. The assets of The Crawford Hill Coal Company were transferred to petitioner under the terms1210 of the agreement of October 30, 1919, as of June 30, 1919. The record contains no enumeration or proof of the value of either the assets conveyed to petitioner nor of the liabilities assumed by it at June 30, 1919, the time of transfer. There is evidence that on March 31, 1919, the transferor possessed Liberty bonds in amount of $80,000 and had liabilities in the amount of $11,503.02, but there is no evidence that at June 30, 1919, it still owned such bonds and transferred them to petitioner; nor is there any evidence whether the amount of its liabilities increased or diminished between March 31 and June 30. We know only that petitioner received assets of an unproved value and assumed liabilities of an unproved amount. On this state of the record we must hold that respondent has not sustained the burden of proof placed on him by the statute. See ; . Cf. . It becomes unnecessary to consider the issue of affiliation, but we are constrained to say that the case of *1211 , is determinative thereof. Under the decision of the United States Supreme Court in that case it is apparent that the petitioner and The Crawford Hill Coal Company are not entitled to affiliation. Under our decision above the question of special assessment becomes moot. Decision will be entered for the petitioner.Footnotes1. Others holding stock in the Crawford Hill Coal Company held no stock in Crabapple Coal Companyvice versa.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625121/	Geoffrey C. Davies, Petitioner, v. Commissioner of Internal Revenue, RespondentDavies v. CommissionerDocket No. 642-62United States Tax Court40 T.C. 525; 1963 U.S. Tax Ct. LEXIS 99; June 14, 1963, Filed 99 Decision will be entered under Rule 50. Intrafamily transfer by a nonresident alien of real property situated in the United States in return for a note secured by a mortgage, the face amount of which was less than the fair market value of the property, held, on the facts, to constitute a gift of an interest in property situated in the United States; held, further, gifts of cash abroad sufficient to retire the note, made without prearrangement in a later year, were not gifts of property situated in the United States. Milton Cades and J. Russell Cades, for the petitioner.Sidney U. Hiken, for the respondent. Opper, Judge. OPPER525 Respondent has determined deficiences in gift tax against Geoffrey C. Davies on account of transfers of property of T. Clive Davies as follows:YearDeficiency1950$ 12,480195112,480Petitioner concedes his liability for any gift tax due. The issues remaining for decision are (1) whether real property situated within the United States was transferred by a nonresident alien directly or indirectly by gift; and, if so, (2) whether this transfer by gift was accomplished in either 1950 or 1951 or partially in 100 each of the years in issue.FINDINGS OF FACTThe stipulated facts are hereby found accordingly.Petitioner, a British subject, has resided in Honolulu, Hawaii, for many years. During the years in issue, petitioner was the British 526 consul in Hawaii and an employee of and stockholder in Theo. H. Davies & Co., Ltd. (hereinafter called the company). Petitioner's grandfather, Theo. H. Davies (hereinafter called grandfather), acquired control of the company in the early 1870's.Petitioner's father, T. Clive Davies, was a British subject and a resident of England during the years here in issue. He was born on September 28, 1871, and died on November 16, 1952.Property consisting of 12.92 acres of land and improvements thereon in Honolulu, Hawaii (hereinafter called Craigside), had been acquired by the grandfather toward the end of the 19th century. This property was devised in the grandfather's will to that member of the family who was in Hawaii working for the company. Two of the grandfather's sons, petitioner's father and an uncle, were living in Hawaii and working for the company at the time of the grandfather's death. The two sons reached an agreement that petitioner's 101 father would take Craigside.Petitioner's father continuously owned Craigside from the time of that agreement up to the years in issue. He was a permanent resident of Craigside until 1922, and after that time he continued to spend 2 to 3 months at Craigside every 2 or 3 years.Craigside was regarded as the family home in Honolulu. Petitioner's only brother, who was killed in September 1941 during the Second World War, occupied Craigside until some time in 1940. Petitioner and his family occupied it rent-free from some time in 1946 until petitioner acquired it from his father. During this period the father paid all of the costs of maintaining the property, including taxes, sewer assessments, and the cost of a yardman to maintain the grounds.While petitioner was visiting England in the late summer and early fall of 1949, he and his father had several discussions concerning Craigside. Petitioner's father expressed his desire to retain Craigside in the family and he manifested concern with the British exchange control regulations and the increasing cost of maintaining Craigside.During the time that petitioner's father owned Craigside, the maintenance costs were paid by the company102 and charged to the father's account. The balance in this account would be offset by quarterly dividends on the 3,000 shares of the company owned by petitioner's father. Petitioner's father indicated that he was limited in the amount of dollars he was allowed to spend by the British exchange control regulations requiring all dollar income to be remitted to England. Despite permission to withhold an amount for upkeep of Craigside, petitioner's father stated that he was having difficulty in meeting the rising costs and, for this reason, he wanted to transfer ownership to petitioner. He stated that he wanted to sell Craigside because he 527 did not want to involve himself with gift tax in the United States, since he did not think he could get a license for the dollars to pay United States gift taxes.During the conversations in 1949 regarding the possible sale of Craigside, petitioner's father stated to petitioner that he understood that any cash gifts made by him to petitioner would be included in his taxable estate and subject to British estate duty if he died within 5 years of the gift. At that time the father was 78 years of age. There was no currency problem in paying103 British estate duty.During these discussions, petitioner pointed out that he would have difficulty in financing the purchase. His father indicated his willingness to take a note and mortgage for a portion of the purchase price. Petitioner further stated that he did not have the cash available to make the downpayment. His father thereupon assured him that he would make a cash gift to him in pounds sterling of an amount sufficient to cover the downpayment and further indicated that he would, if he possibly could, help petitioner to pay off the note. Petitioner agreed to obligate himself in this way and told his father that when it became necessary to finance the note himself he probably would be able to raise the cash by using as security the land and petitioner's holdings in the company.Following these discussions in England, petitioner returned to Honolulu and, at his father's request, obtained and sent to his father an appraisal dated December 16, 1949, in which it was stated that $ 88,500 was the then "fair and reasonable market value" of Craigside. On September 15, 1950, petitioner's father wrote to him as follows:I have agreed to sell to you Craigside, comprising the buildings, 104 easements, and about thirteen acres of land, for the sterling equivalent of $ 88,500.00; or such other value as is set by the Revenue Authority. Payment is to be made £ 5000 in cash and the balance of, say, $ 74,500. by a note, secured by mortgage of the property, payable in one year from date, with interest at 2 1/2%.I hope that you will enjoy as happy a life in this family homestead as has been my lot.On September 23, 1950, petitioner's father deposited a sterling check of £ 5,000 to petitioner's sterling account at the Westminster Bank, Ltd., Petersfield, Hants, England (hereinafter called the bank). Petitioner's understanding with his father was that this would be the source of the downpayment for Craigside.On October 4, 1950, petitioner sent the following letter to his father:I am pleased that you are willing to sell me "Craigside" for the sum of £ 31,500-0-0d, payable £ 5,000 in cash and the balance of £ 26,500 by a note secured by mortgage of the property, payable one year from date, with interest at 2 1/2% per annum.I have had Smith, Wild, Beebe & Cades prepare a Deed of the property, which I am sending to be signed by you and Mother. Please return the original and105 one signed copy to Smith, Wild, Beebe & Cades.528 I also send you my check drawn on the Westminster Bank, Limited, in Petersfield for the amount of £ 5,000., and Note for the balance of £ 26,500. I have not dated the Note, but I would appreciate it if you will fill in the blank space with the same date as the Deed.I have executed a Mortgage securing the Note, a copy of which I send you herewith. The original and copies which I have signed are being held by Smith, Wild, Beebe and Cades, to be filed in the Office of the Assistant-Registrar of the Land Court at the time that the signed Deed is returned and likewise filed.Arthur Smith showed me a sketch prepared by you, of an area which you wanted to acquire from Iolani School Corporation to round out your present area at "Craigside", and he tells me that you have had this in mind for many years. He also states that he has notified the Iolani Officers that if the school ever disposes of its Nuuanu property, it should sell you the portion indicated on your sketch at the same rate per acre at which you sold the entire tract to the Church. If I am able to acquire all or any part of this area I shall, of course, expect to include106 it in my mortgage to you by a supplemental document.Mr. Smith also tells me that the enclosed copy of the Mortgage is in the form of a "Purchase Money Mortgage" generally used by the Banks and Trust Companies in Hawaii.You desire me to turn the Mortgage and Certificate of Title over to Theo. H. Davies & Company, Limited, for safe-keeping, after the same are returned from the Land Court registration office. I shall do this.The deed to Craigside was executed by petitioner's father and mother in England on October 12, 1950, and registered in the Office of the Assistant Registrar, Land court, Honolulu, on November 17, 1950, at 12:10 p.m., and the purchase money mortgage which petitioner and his wife had signed on October 4, 1950, was marked "made this 12th day of October 1950" and registered on November 17, 1950, at 12:11 p.m. The note for the unpaid balance of the agreed purchase provided as follows:ON OR BEFORE one (1) year from the date hereof, for value received, I, GEOFFREY CLIVE DAVIES, promise to pay to the order of THEOPHILUS CLIVE DAVIES, at Hawkley Hurst, Hampshire, England, TWENTY-SIX THOUSAND FIVE HUNDRED POUNDS STERLING (£ 26,500-0-0d) with interest thereon at the rate107 of two and one-half per cent (2 1/2%) per annum from the date hereof.The note was originally dated October 4, 1950. Petitioner's father, upon petitioner's direction, changed the date to October 12, 1950, to coincide with the date of the deed.The balance of the note, £ 26,500, was paid in the following manner: Petitioner's father, who also had an account with the bank, would deposit an amount in petitioner's account. As soon as the bank notified petitioner of the deposit, he would make a payment to his father by sterling check drawn against this account of an equivalent amount to be applied against the principal of the note. After receiving notification of each individual deposit, petitioner did not make any inquiries 529 of his father as to the possibility of any further deposits. The dates and amounts of these transactions were as follows:Deposit toPayment toAmountpetitioner'sfatheraccount£ 5,000Jan. 10, 1951Jan. 17, 1951£ 5,000Feb. 10, 1951Feb. 17, 1951£ 5,000Mar. 10, 1951Mar. 20, 1951£ 5,000Apr. 10, 1951Apr. 16, 1951£ 5,000May 10, 1951May 18, 1951£ 1,500June 12, 1951June 25, 1951No interest was paid on the note. With 108 the exception of these transactions, petitioner's balance in the bank never exceeded £ 100.Petitioner was surprised that his father acted so promptly in helping him solve his financial problem. Petitioner's salary from the company during this time was approximately $ 8,000 a year and he had annual dividend income of $ 6,000 on his company stock. He held 600 shares of the company's stock which had a value during the years in issue of approximately $ 135 or $ 140 a share, a total value of $ 81,000 to $ 84,000. The company's stock paid approximately $ 10 a share in each of the years 1950 and 1951. Had he not received the payments from his father, petitioner had expected to pay off the note at maturity by borrowing money at a bank, using Craigside and his stock in the company as security.On June 25, 1951, petitioner's father inscribed and signed on petitioner's note the following endorsement: "The within note has been settled in full this twenty-fifth day of June 1951." On July 18, 1951, petitioner's father executed a release of petitioner's purchase money mortgage, which release was registered in the Office of the Assistant Registrar, Land court, Honolulu, on August 23, 1951, at109 9:10 a.m.Petitioner's father made gifts to his children and grandchildren both before and after 1950. He left a gross estate after his death in November 1952 in excess of $ 1,350,000 and a net estate in excess of $ 1 million. His estate paid, in dollars, approximately $ 200,000 in U.S. Federal estate taxes. The estate was required to receive permission from the Bank of England to sell assets of the estate, pay the tax to the United States in dollars, and remit the remainder of the proceeds to Great Britain. Petitioner's father's assets were substantially the same in 1950 as in 1952 except for the effects, if any, of inflation.In the original British estate duty return for the father's estate, a cash gift of £ 26,000 to petitioner on October 12, 1950, was included in answer to the question, "Did the deceased make any gift or gifts of money or other property within five years of his death?" In the summer of 1961, an amendment was made to the estate duty return to correct 530 this and reflect the proper amount of the series of cash gifts, totaling £ 31,500. The estate duty resulting from the correction of the error and the increase of the net estate by £ 5,500 was paid by110 petitioner.In his deficiency notice, respondent determined for 1950 "that the transfer of residential property * * * made by [petitioner's father] to his son * * * on or about October 12, 1950, represented a taxable gift to the extent of the fair market value of such property of $ 88,500.00" and for 1951 that "In the event that it should be held that the transfer of residential property * * * did not constitute a completed gift in the year 1950, then it is determined, in the alternative, that a taxable gift was made in the year 1951 to the extent of the fair market value of such property of $ 88,500.00."OPINIONThere is no dispute as to the making of a gift to petitioner by his father, nor as to the valuation of any gift that was made. The parties are in disagreement only as to what it was that constituted the subject matter of the gift, and, incidentally, perhaps as to the year of its occurrence. Ordinarily it would be of no consequence that a gift was in cash rather than property where the value is concededly the same. The issue arises here because the donor was a nonresident alien and if cash gifts were made in the country of his domicile they would not be subject to U.S.111 gift tax, whereas the real property involved was situated in U.S. territory and any gift of that character carries with it a liability for Federal gift tax. "The [gift] tax * * in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States." Sec. 1000(b), I.R.C. 1939.It seems to us clear that an interest in Craigside, the family estate situated in Honolulu, was given to petitioner. He received the downpayment from the donor before any "sale" on the express condition that it be used for that purpose. It makes little difference whether we say that Craigside, a property with an agreed value of about $ 88,000, was turned over to petitioner upon his undertaking to pay some $ 74,000 for it and hence that the transfer was for less than full and adequate consideration; 1 or that a gift of an equity in Craigside of a value of approximately $ 15,000 was completed by the delivery to 531 petitioner of a deed in exchange solely for his purchase money mortgage of $ 74,000 or so. See Estate of Koert Bartman, 10 T.C. 1073">10 T.C. 1073, 1079 (1948); Gertrude H. Blackburn, 20 T.C. 204">20 T.C. 204 (1953).112 On any approach, we think there can be no question that a gift of an interest in real property in the United States was made to petitioner in 1950 by his father on the facts affirmatively appearing from the record.Respondent would have us go further and characterize, as the gift of an interest in the same property, the cash which the donor subsequently made available to petitioner and with which he paid off the purchase money mortgage. But we cannot go so far. The transfers to petitioner's credit were made in pounds sterling in Britain. They were not conditioned, as was the downpayment, 113 upon their use in any specified manner. Nor were they agreed to as part of the original transaction by either petitioner or the donor in the way that the original downpayment was treated. They did not fulfill any prearranged plan or commitment, see Nathan R. Allen, 38 B.T.A. 160">38 B.T.A. 160 (1938); Rev. Rul. 58-261, 1 C.B. 143">1958-1 C.B. 143, as respondent apparently concedes. 2 "The fact that * * [the seller] may have given * * * [the purchasers] money with which the * * * [payments] were made does not defeat the sales so long as the gifts were free and unencumbered and the money belonged to * * * [the purchasers] to do with as they pleased." Cap Andrew Tilles, 38 B.T.A. 545">38 B.T.A. 545, 547 (1938), affd. 113 F.2d 907">113 F.2d 907 (C.A. 8, 1940), certiorari denied 311 U.S. 703">311 U.S. 703.114 We conclude that these subsequent transfers were no more than cash gifts of English funds which took place in Britain. That the donor may have hoped and, indeed, expected that they would be used to clear the encumbrance on the property does not succeed in elevating the transaction to the dignity of a transfer of the real property itself any more than would be the case if the mortgage had been held by a third person.Respondent's reference to the series of transfers in pounds sterling as the attribute which is relied on by petitioner to prevent the transaction from being a gift is wide of the mark. What removed it from the category of gifts, except to the extent of the downpayment, was petitioner's valid, enforceable, and subsisting agreement to pay for the property and the effectuation of that agreement by the execution and recording of the purchase money mortgage.The fact that * * [the donor] indicated he would probably not collect on the note and would cancel portions of it from time to time if business conditions continued to be good, and the fact that the officers and incorporators of * * * 532 [the donee] did not think they would be called upon to pay the note, do115 not support a conclusion that * * * [the donor] intended to make a completed gift * * . * * The * * * [note], on * * * [its face], evidenced a binding obligation to pay a sum certain, and there is no evidence to conclude that * * * [it was] without consideration, invalid, unreal, or otherwise than what * * * [it] purported to be * * . The mere fact that the original payee indicated he might or might not attempt to collect on the * * [note], or that he might forgive all or portions of * * * [it] in the future, makes the * * * [note] no less * * * [a] binding * * * [obligation] until the events occurred which would relieve the obligation.Nelson Story III, 38 T.C. 936">38 T.C. 936, 941-942 (1962).We intimate no opinion as to what would have been the effect of a gratuitous subsequent forgiveness of this mortgage and the accompanying obligation to pay. That is not what occurred. Whether there would otherwise have ensued a gift of real property in the United States as opposed to British funds in England, we need hence not consider on this record. Cf. Nelson Story III, supra.The lack of any prior plan or arrangement serves to116 distinguish this case from Minnie E. Deal, 29 T.C. 730">29 T.C. 730, 737 (1958), Marie-Anne De Goldschmidt-Rothschild, 9 T.C. 325">9 T.C. 325 (1947), affd. 168 F.2d 975">168 F.2d 975 (C.A. 2, 1948), and John E. Andrus, Jr., 15 B.T.A. 479">15 B.T.A. 479, 482 (1929), revd. 50 F.2d 332">50 F.2d 332 (C.A.D.C. 1931).Except to the extent of the value of the downpayment or equity in Craigside transferred in 1950, we accordingly regard respondent's determinations as erroneous.Decision will be entered under Rule 50. Footnotes1. SEC. 1002 [I.R.C. 1939]. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.↩2. Respondent says in his brief: "[Petitioner] * * apparently seeks to substitute * * * arguments such as that 'the father was under no commitment, legal or moral, to make * * * deposits to petitioner's account.' Of course that is true, but it is only true to the same extent, and with the same irrelevancy, as is the fact that the father was under no commitment to make the gift of Craigside which he did make * * *."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625122/	GEORGE W. HARDY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hardy v. CommissionerDocket No. 7981.United States Board of Tax Appeals5 B.T.A. 981; 1926 BTA LEXIS 2732; December 30, 1926, Promulgated 2732 C. M. Pasquier, C.P.A., for the petitioner. W. F. Gibbs, Esq., for the respondent. KORNER981 This proceeding involves income taxes for the calendar year 1921 in the amount of $562.21. The deficiency grows out of the disallowance 982 by the respondent of deductions from income of debts alleged by the petitioner to have been ascertained to be worthless and charged off in the taxable year. The matter arises under section 214(a)(7) of the Revenue Act of 1921. FINDINGS OF FACT. Petitioner is an individual residing in Louisiana. He is a cotton grower, and during the year 1921 he owned and operated a cotton plantation of about one thousand acres. The manager of his plantation was one Gayle. Petitioner's plantation was operated on what is known as the "share basis." His tenants were negroes who paid to their landlord a portion of the crop raised by them as rent. During the year the petitioner advanced supplies and moneys to these tenants and charged their respective accounts with the amounts so advanced. These advances were made with the agreement that such accounts would become due and payable at the time the cotton was sold. All the2733 cotton and other crops raised on the plantation in 1921 were sold before the end of that year. The cotton raised by the tenants was not purchased by the petitioner from them. The cotton was placed with a cotton merchant who sold it. The proceeds were received by the petitioner, who credited the respective accounts of his tenants with the share of the proceeds belonging to each. In the year 1921, after all the crops were sold and the tenants' shares credited to their respective accounts, there were not enough of such proceeds to discharge the debts of a number of these negro tenants. The unliquidated balances so left outstanding were in the total sum of $11,194.89. The tenants were all insolvent. The petitioner knew the financial condition of all of them and that the accounts were uncollectible. On December 31, 1921, he ascertained these accounts to be worthless and charged them off his books of account as worthless. No part of the amounts so charged off in 1921 had been charged off or deducted from income by the taxpayer in any preceding year. Some of the tenants had been with the petitioner in a prior year and a portion of the amounts charged off as worthless had been2734 carried forward for such prior year. Others of these tenants had not worked for the petitioner in a prior year. Some of these tenants remained on the plantation of the petitioner in 1922 and were advanced by the petitioner in that year. One tenant did not so remain in 1922. No part of the amounts charged off in 1921 has since been collected by the petitioner. To the extent that the petitioner sold goods or made advances in kind to these tenants, he credited merchandise sales and reported income thereon accordingly. 983 Gayle, the manager, had an open and running account with the petitioner, who also held Gayle's note for $300. The total indebtedness of Gayle, including this note, was $1,475.68 at the close of the year 1921. On December 31, 1921, petitioner charged off $300 by the following entry: "December 31, 1921. Note charged off $300." No other portion of the Gayle account was so charged off. Gayle continued thereafter to manage the plantation for the petitioner. There is no showing that Gayle was insolvent or that the $300 note was uncollectible. The petitioner took deduction in his return on account of bad debts, in the amount of $11,619.52. The debts2735 of the negro tenants, plus the $300 note of Gayle, total $11,494.89, which is the amount which petitioner now contends is properly deductible. The return of the petitioner showed a net loss of $997.82, which was later corrected to $649.62. The respondent disallowed the deductions above referred to and restored the amounts thereof to income. This resulted in the deficiency here in question. The amount of the deficiency determined by the respondent, of which the petitioner was duly notified, is $562.21. OPINION. KORNER, Chairman: The evidence here is illustrative of the Biblical adage that the poor we have always with us. If these tenants were not poor they would not be "cropper" tenants in the cotton belt. Generally, they are poor and almost universally they are judgment proof. On the other hand, another set of such tenants would be just as poor. If a cotton grower is to have tenants, it is from such that he must choose them. There appears to be little choice among them. If a crop is good and brings a price fair or better, they may be able to discharge to their landlord the debts incurred for advances. If their share of the crop is sufficient for that purpose, such2736 debts are usually liquidated. The landlord generally sees to that. But if the crop is a failure or brings a low price or worse, the landlord is out of pocket and the tenant is not much the worse off, because a year to him is just a living. Whether that living comes out of the crop he raises or out of the landlord's pocket matters little or nothing to him. If he has done the best he could under the situation, he can be fairly sure of staying on - at the landlord's risk, of course. If he has not proved reasonably efficient in the judgment of the landlord, he merely lives the next year at the expense of another landlord until another crop tells him the extent of the risk he has been to that landlord during that year. In the end it is all one to the tenant. The landlords, under this system, 984 are fairly philosophical, although it is said they are at times exacting in respect of financial arrangements with, and collections from, their cropper tenants. This system of farming is not without its hazards to the landlord, as the bank reports in the cotton belt in a bad year will show. One who knows something of the cropper tenant system in the cotton belt does not have to2737 tax his credulity to believe that the landlord finds means to credit his outstanding accounts to the capacity of the tenant. He commonly sees to it that there is rendered to Caesar the due that is Caesar's. If aught is left over, and there sometimes may be, that may be rendered to whomsoever it may be rendered. But the landlord is rarely a poor collector. The Commissioner defends on the ground that the writing off of the indebtedness of these tenants constituted a gift or forgiveness of indebtedness. Our judgment tells us that this is not so. We do not incline to the opinion that eleemosynary considerations entered into the petitioner's operation of his plantation, or that it was an impulse of generosity which prompted his charging off these debts. To one who has read the record, it is apparent that the financial picture here can not be drawn with the fine point of a Rembrandt or a Durer, or painted with the nicety of a Botticelli. A broad brush must be used, for the picture is a broad one of the lives of the lowly. It is clear to us that the petitioner knew the financial conditions of his tenants. No one knew better. *2738 In the light of that knowledge, he ascertained these accounts to be worthless and in the taxable year he charged them off. The statute gave him a right to do so and to take a deduction from his tax return accordingly. That he continued to employ these tenants, under the conditions shown here, can not affect the result. . As to the overseer or manager of the plantation, Gayle, we are not so convinced. Gayle had a substantial account with the petitioner, who also held Gayle's note for $300. He continued on thereafter as manager of the petitioner's plantation. The only amount petitioner charged off at the end of the taxable year was Gayle's note of $300. The open account in a substantial amount was not charged off. We are not convinced that the petitioner correctly ascertained the note to be worthless, while at the same time holding the open account to be good. In our opinion the petitioner is entitled to his deduction for bad debts to the extent of $11,194.89. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625124/	William H. Crook and Eleanor B. Crook, Petitioners v. Commissioner of Internal Revenue, RespondentCrook v. CommissionerDocket No. 18704-80United States Tax Court80 T.C. 27; 1983 U.S. Tax Ct. LEXIS 130; 80 T.C. No. 2; January 10, 1983, Filed 130 Decision will be entered under Rule 155. Petitioners paid substantial amounts of "investment interest" subject to the limitation of sec. 163(d), I.R.C. 1954. Petitioners are also shareholders of three subch. S corporations each of which derives all its income from the operation of an automobile dealership. Petitioners were required to include in their individual gross income both actual distributions and undistributed taxable income of each corporation. Held, sec. 163(d)(4)(C), I.R.C. 1954, does not attribute the character of a subch. S corporation's operating income to its shareholders for purposes of the sec. 163(d) limitation. Held, further: Such amounts of the subch. S corporations' operating income which were required to be included in petitioners' gross income are "dividends" within the meaning of sec. 163(d)(1)(B), I.R.C. 1954. Thus, such included amounts constitute investment income, thereby increasing the sec. 163(d) limitation. Gerald W. Ostarch, for the petitioners.Ana G. Cummings, for the respondent. Fay, Judge. FAY27 OPINIONRespondent determined the following deficiencies in petitioners' Federal income tax: 28 YearDeficiency 11972$ 4,163.0019731,316.30197610,594.731977180,567.00After numerous concessions by petitioners, the only issue is whether135 certain income derived by petitioners as shareholders of three subchapter S corporations is "investment income" within the meaning of section 163(d)(3)(B), 2 thereby allowing petitioners a greater investment interest expense deduction.All the facts have been stipulated and are found accordingly.Petitioners William H. Crook and Eleanor B. Crook resided in San Marcos, Tex., at the time they filed their petition herein.During relevant years, petitioners owned stock in three corporations which elected136 to be treated as small business corporations under section 1372. Each corporation derived all its income through the operation of an automobile dealership. None of these corporations held investments; thus, no items of investment interest, investment income, or investment expense as those terms are defined in section 163(d) were paid or accrued by these corporations.During each of their taxable years 1974 through 1977, petitioners paid a substantial amount of investment interest as that term is defined in section 163(d). 3 In addition, petitioners were required to report in their individual gross income both actual distributions treated as dividends under section 316(a) and undistributed taxable income of the subchapter S corporations which is treated as dividend income under section 1373(b).On their 1974 through 1977 Federal income tax returns, petitioners137 deducted amounts of investment interest expense 29 paid in those years. In his notice of deficiency, respondent, pursuant to the limitation on investment interest under section 163(d), disallowed a portion of those deductions.At issue is the proper characterization of the operating income of a subchapter S corporation, which is passed through to its shareholders, for purposes of determining the limitation of investment interest allowable as a deduction under section 163(d). If such income qualifies as "investment income" to the shareholders under section 163(d)(3)(B), then petitioners are allowed a greater investment interest deduction. Respondent contends income at the corporate level retains its character at the shareholder level. Since none of the subchapter S corporations had investment income, respondent concludes petitioners derived no investment income for purposes of the section 163(d) limitation. Petitioners contend such operating income of the corporation does not retain its character at the shareholder level, but rather, constitutes investment income to the shareholder in the form of dividends. For the following reasons, we agree with petitioner.Section 163(a)138 allows a deduction for all interest paid on indebtedness. Section 163(d), enacted as part of the Tax Reform Act of 1969, 4139 limits an individual taxpayer's deduction for interest paid solely for investment purposes. As noted in the House report:Where the interest expense exceeds the taxpayer's investment income, it, in effect, is used to insulate other income from taxation. For example, a taxpayer may borrow substantial amounts to purchase stocks which have growth potential but which return small dividends currently. Despite the fact that the receipt of the income from the investment may be postponed * , the taxpayer will receive a current deduction for the interest expense even though it is substantially in excess of the income from the investment. [H. Rept. 91-413 (1969), 3 C.B. 245">1969-3 C.B. 245.]Thus, it was the mismatching of income and expenses that occurred when a taxpayer was allowed a current deduction for interest paid on funds borrowed solely for investment purposes 30 and which produced little current income that Congress sought to rectify. 5In computing his investment interest deduction, a taxpayer is allowed to increase the limitation by the amount of his net investment income. Sec. 163(d)(1)(B). Such net investment income includes various items of a taxpayer's income from investments, one item of which is gross income from "dividends." Sec. 163(d)(3)(B)(i). 6 There is no question the included amounts at issue which were required to be included in petitioners' income are dividends under sections 316(a) and 1373(b). Nevertheless, respondent contends section 163(d)(4)(C) attributes the business character of the corporations' income to its shareholders and, in doing so, overrides sections 316(a) and 1373(b). Thus, respondent claims such income is not investment income to the shareholders for purposes of the section 163(d) limitation. We disagree.140 Section 163(d)(4)(C) provides:(C) Shareholders of electing small business corporations. -- In the case of an electing small business corporation (as defined in section 1371(b)), the investment interest paid or accrued by such corporation and other items of income and expense which would be taken into account if this subsection applied to such corporation shall, under regulations prescribed by the Secretary, be treated as investment interest paid or accrued by the shareholders of such corporation and as items of such shareholders, and shall be apportioned pro rata among such shareholders in a manner consistent with section 1374(c)(1). 7Thus, any investment interest paid by a subchapter S corporation is attributed to its shareholders. In addition, other items of income and expense of the corporation are attributed to its shareholders. The statute makes it clear that those "other items" are items of investment income and investment expenses (those terms being defined in sections 163(d)(3)(B) and 163(d)(3)(C), respectively) of the subchapter S corporation 31 which would have entered into the computation of the investment interest limitation of section 163(d) had such limitation141 applied to the subchapter S corporation. In other words, any item of income or expense directly connected with an investment of the subchapter S corporation retains its investment character in the hands of the shareholders for purposes of determining the shareholders' section 163(d) limitation. Since the subchapter S corporations at issue herein paid or accrued no items of investment interest, investment income, or investment expense, section 163(d)(4)(C) simply does not apply to these facts. The statute does not purport to attribute the character of the operating income of the corporation to its shareholders; nor does it purport to limit or to provide the exclusive means by which a shareholder may receive investment income from a subchapter S corporation. The section merely attributes the character of such a corporation's investment items to its shareholders. 8142 Our holding that section 163(d)(4)(C) does not attribute the character of all types of a subchapter S corporation's income to its shareholders does not render that section a nullity, as respondent contends. One of the prime reasons for electing subchapter S status is to allow expected losses to pass through to the shareholders. Since items of income, deduction, or credit generally are not separately stated in the shareholders' 32 returns, losses of a subchapter S corporation are passed through as a bottom-line net operating loss deduction to its shareholders. Moreover, this net operating loss deduction is considered a deduction attributable to a trade or business carried on by the shareholders. Sec. 1374(b). Thus, without section 163(d)(4)(C), any investment interest of a subchapter S corporation that was reflected in a net operating loss would lose its investment character in the hands of its shareholders, thereby allowing taxpayers to escape the limitation. The statute requires that the corporation's investment interest, along with other items of investment income and expenses, be carved out and entered into the computation of the shareholder's individual section 163(d)143 limitation. 9 Thus, section 163(d)(4)(C) effectively eliminates the right of a shareholder to convert investment interest of a subchapter S corporation into a net operating loss which is not subject to the limitation.Respondent argues that the limitation easily can be avoided by operating a trade or business in the form of a subchapter S corporation which would generate investment income in the form of "dividends." In essence, respondent urges this Court to import judicial gloss144 on the applicable statutory provisions in order to find that dividends under sections 316(a) and 1373(b) are not dividends for purposes of section 163(d). For the following reasons, we decline to do so.That the included amounts are dividends could not be made more explicit by the Code. Secs. 316(a) and 1373(b). Moreover, when Congress has desired that dividends from a subchapter S corporation (including dividends under sec. 1373(b)) should not be treated as dividends for certain purposes, Congress has expressly provided for such exceptions. See sec. 1375(b). 10145 No similar exception was provided for purposes of the section 33 163(d) limitation. We also note respondent has consistently treated subchapter S corporation dividends under sections 316(a) and 1373(b) as dividends for other purposes. 11146 We recognize that by escaping tax at the corporate level, the income at issue is not dividend income in the traditional sense of being distributions out of income already taxed once at the corporate level. Nevertheless, the Code treats such income as dividends. While we certainly do not subscribe to the inflexible view that a "dividend" is necessarily a "dividend" for all purposes, we are unwilling to ascribe a different meaning to that term for purposes of the section 163(d) limitation. Only upon a showing of clear congressional intent to the contrary or other compelling reasons will we consider deviating from clear statutory language. 12147 The separate existence of corporations is firmly established under the tax law ( Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943)), and this Court has recognized that the business of a subchapter S corporation is separate and distinct from that of its shareholders. Buono v. Commissioner, 74 T.C. 187">74 T.C. 187 (1980); Howell v. Commissioner, 57 T.C. 546">57 T.C. 546 (1972). Our holding that the operating income of a subchapter S corporation is not to be attributed as such to its shareholders is wholly 34 consistent with these decisions. Whatever merit there is to respondent's contention, the applicable statutory law during the years in issue simply does not support his position. 13148 Accordingly, we hold the included amounts are dividends within the meaning of section 163(d)(3)(B)(i); therefore, petitioners are entitled to treat such dividends as investment income for purposes of the limitation on the investment interest deduction under section 163(d). 14To reflect concessions,Decision will be entered under Rule 155. Footnotes1. The deficiencies for 1972 and 1973 relate to respondent's disallowance of net operating losses claimed on petitioners' 1974, 1975, and 1976 Federal income tax returns. Respondent was allowed to amend his answer to assert an increased deficiency in 1976 to reflect petitioners' understatement of $ 11,500 in income in 1976. Petitioners do not contest this adjustment.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the taxable years in issue.↩3. Unless expressly stated as an item of interest, the term "investment interest" as used in this opinion is an item of expense as defined in sec. 163(d)(3)(D)↩.4. Pub. L. 91-172, 83 Stat. 487.↩5. The investment interest limitation under sec. 163(d) is not strictly speaking a disallowance section. Any disallowed interest is merely suspended and allowed to be carried over to future years. See sec. 163(d)(2)↩.6. An individual taxpayer's investment income is limited to the extent such income is "not derived from the conduct of a trade or business." See flush language of sec. 163(d)(3)(B)↩. There is no question petitioners did not conduct the automobile dealership in their individual capacity. Rather, that business was conducted by the subch. S corporation.7. No regulations were ever promulgated pursuant to the statutory authority granted under sec. 163(d)(4)(C)↩.8. The decision in Kocurek v. United States, 628 F.2d 906">628 F.2d 906 (5th Cir. 1980), does not support respondent's position. In Kocurek, it was held that a "capital gain dividend" under sec. 852(b)(3)(C) to shareholders of a regulated investment company (a mutual fund) cannot be treated as a dividend for purposes of increasing the sec. 163(d) limitation. The case is readily distinguishable. Under the law then in effect, either a "capital gain" under sec. 163(d)(1)(C) or a "dividend" under sec. 163(d)(1)(B) had the effect of permitting a taxpayer to increase his investment interest deduction. However, if the income were characterized as a capital gain, such capital gain was taxed at ordinary rates to the extent it increased the sec. 163(d) limitation. Sec. 163(d)(5). The taxpayers argued the "capital gain dividend" should be treated as a dividend under sec. 163(d)(1)(B). Thus, the taxpayers sought to be taxed at capital gain rates and at the same time sought to increase their investment interest. The Fifth Circuit Court of Appeals disagreed with the taxpayers and held such income was not a dividend under sec. 163(d)(1)(B). Thus, since such capital gain was used to increase their investment interest limitation, the taxpayers were taxed at ordinary rates on such capital gain.The decision in Kocurek is based on sec. 852(b)(3)(B) which expressly provides that such capital gain dividends of a regulated investment company are to be treated as capital gains of the shareholders. Thus, in Kocurek↩, there was specific statutory authority which attributed the character of the capital gain to the shareholders whereas in the case before us, there is no similar authority which attributes the operating income of a subch. S corporation to its shareholders.9. In what little legislative history is available under sec. 163(d)(4)(C) (see note 12 infra), reference is made precisely to this situation -- a net operating loss of a subchapter S corporation."[For purposes of applying the limitation to subch. S corporations], the net operating loss deduction allowed to shareholders * * would be considered to consist of interest subject to the limitation to the extent this type of interest was deducted by the corporation. [H. Rept. 91-413 (1969), 3 C.B. 246">1969-3 C.B. 246↩.]"10. Sec. 1375(b) provides that amounts includable in the gross income of a shareholder as dividends from a subch. S corporation shall not be considered dividends for purposes of computing the retirement income credit under sec. 37 or for purposes of the dividend exclusion under sec. 116. It also excluded subch. S corporation dividends from the dividends-received credit of sec. 34. When sec. 34 was repealed for taxable years after 1964, sec. 1375(b) was then amended to delete such reference.↩11. See sec. 1.1348-3(a)(1)(i), Income Tax Regs. (such dividends do not qualify for the 50-percent maximum tax since they constitute passive investment income); Rev. Rul. 76-141, 1 C.B. 381">1976-1 C.B. 381 (such dividends from a wholly owned subch. S corporation engaged exclusively in the business of farming do not constitute income from farming since they are dividends. Thus, the shareholders were denied the extended time in which to file declarations of estimated income tax generally accorded farmers under sec. 6073(b)); Rev. Rul. 66-327, 2 C.B. 357">1966-2 C.B. 357 (such dividends are not income derived from a shareholder's trade or business for purposes of computing a net operating loss under sec. 172(c)); Rev. Rul. 59-221, 1 C.B. 225">1959-1 C.B. 225 (such dividends do not constitute net earnings from self-employment for purposes of the self-employment tax). But compare sec. 1.57-2(b)(4), Proposed Income Tax Regs., 35 Fed. Reg. 19766↩-19768 (Dec. 30, 1970) (such dividends are not investment income except to the extent of the shareholder's proportionate share of the corporation's net investment income in excess of investment interest for purposes of the minimum tax when excess investment interest was an item of tax preference).12. There is very little legislative history concerning the sec. 163(d) limitation as it applies to subch. S corporations. Originally, the House proposed to apply the limitation at both the corporate and shareholder levels. H. Rept. 91-413 (1969), 3 C.B. 246">1969-3 C.B. 246. The Senate report simply did not address the 163(d) limitation. S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423-644. The Conference report rejected the House proposal to apply the limitation at the level of the subch. S corporation. Thus, the limitation applies only at the shareholder level. Conf. Rept. 91-782 (1969), 3 C.B. 658">1969-3 C.B. 658↩.13. Under the Subchapter S Revision Act of 1982 (1982 Act), Pub. L. 97-354, 96 Stat. 1669, signed by the President on Oct. 19, 1982, and generally effective for tax years beginning after Dec. 31, 1982, the tax treatment of subch. S corporations underwent a major overhaul. Under prior law, a subch. S corporation was not treated as a conduit. Generally, the only item that retained its character in the hands of the shareholders was the excess of net long-term capital gain over net short-term capital loss. Under the 1982 Act, an S corporation (officially designated as such by the 1982 Act), is treated as a conduit much like a partnership. Items of income, deduction, or credit, and their character are now passed through to the shareholders. See sec. 2 of the 1982 Act, new sec. 1366 of the Internal Revenue Code of 1954. Thus, under the 1982 Act, operating income of the S corporation would retain its character in the hands of the shareholders and, presumably, would not qualify as investment income for sec. 163(d) purposes. Congressional action, however, taken in 1982 does not change the result of this case.Since a special provision was no longer needed to attribute the character of investment items of a subch. S corporation to its shareholders, sec. 163(d)(4)(C)↩ was repealed by the 1982 Act. See sec. 5(a)(18), 96 Stat. 1693.14. Our holding applies to both actual distributions and undistributed amounts which are treated as dividends. No part of the included amounts at issue constitutes salary or compensation to petitioners.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625126/	ESTHER JACKSON PORTER, AS EXECUTRIX, AND RICHARD L. DAVISSON, AS SURVIVING EXECUTOR OF THE ESTATE OF WILLIAM H. PORTER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Porter v. CommissionerDocket No. 42815.United States Board of Tax Appeals23 B.T.A. 1016; 1931 BTA LEXIS 1798; June 30, 1931, Promulgated 1798 1. Where the settlor of a trust estate reserves to himself alone a power to alter, change or modify the trust, such reservation renders the transfer incomplete until his death. The property is therefor properly included in his gross estate subject to tax under section 302(d) of the Revenue Act of 1926. This is true even though in the trust agreements, the settlor expressly provided that if there was a revocation of the trust he could not designate himself or his estate as beneficiary. 2. Valid claims for balances due on subscriptions made by a father to a hospital and a university for memorials therein to a son killed in the World War are not, under section 303(a)(1) of the Revenue Act of 1926, claims against the decedent father's estate "contracted bona fide and for an adequate and full consideration in money or money's worth" and are, therefore, not allowable as deductions from his gross estate. 3. New York estate tax, amounting to $866,135.98, paid in respect to property included properly in the gross estate of the decedent, held, allowable as a credit to petitioners against the Federal estate tax, to the extent it does not exceed the 80 per cent credit provided1799 by section 301(b) of the Revenue Act of 1926. Richard L. Davisson, Esq., Henry Mannix, Esq., and E. J. Corcoran, Esq., for the petitioners. Lewis S. Pendleton, Esq., for the respondent. BLACK1017 The respondent determined a deficiency of $103,768.22 in estate tax due from the estate of William H. Porter, who died a resident of the State of New York on November 30, 1926. The errors assigned are: (a) The inclusion in the gross estate by respondent of the value of certain property alleged to have been transferred in trust on November 27, 1926, amounting (less the $5,000 exemption) to $211,125; (b) the refusal of the respondent to allow as proper deductions as debts of the decedent certain amounts paid by the executors on account of pledges signed and obligations incurred by the decedent in favor of certain charitable and educational institutions; (c) the refusal of the respondent to allow full credit for taxes actually paid as State inheritance taxes; and (d) the refusal of the respondent to allow as a credit against the Federal estate tax the amount of the New York estate tax, paid and to be paid by said estate, within three years from1800 the date of the filing of the Federal estate-tax return. FINDINGS OF FACT. The petitioners are the duly qualified and acting executors of the estate of William H. Porter, who died a resident of New York, November 30, 1926. William H. Porter did, on or about October 18, 1918, transfer to the Bankers Trust Company, a corporation, as trustee under a trust agreement of that date, $100,000, principal amount, City of New York 4 1/2 per cent bonds. This trust, hereinafter referred to as "Trust No. 1," in part provided for the payment of the trust income to the decedent's daughter, Helen Porter Davisson, until she should reach the age of thirty years and, upon her reaching such age, the principal was to be paid to her. In the event of her death before attaining the age of thirty years, the principal was to be held in trust for the benefit of her son, Richard L. Davisson, Jr., until he reached the age of thirty years, at which time the principal was to be paid to him. Other provisions of this trust, effective on various contingencies, are unimportant in the instant case. On or about February 1, 1919, the decedent transferred to said Bankers Trust Company, as trustee, under an1801 agreement of that date, $100,000, principal amount, City of New York 4 1/2 per cent corporate stock. This trust instrument, hereinafter referred to as "Trust No. 2," provided for the payment of the trust income to decedent's daughter, Helen Porter Davisson, until she should reach the age of forty years, and upon her attaining such age, the principal was to be paid to her. In the event of her death before reaching the age of forty years, the principal was to be held in trust for the benefit of her said child, Richard L. Davisson, Jr., until he should 1018 reach the age of thirty years, at which time the principal was to be paid to him. Other provisions of this trust are not material in the instant case. Both said trusts contained the following provision: TENTH: Notwithstanding anything to the contrary herein contained, the Donor at any time during the continuance of the trust herein provided for may, by instrument in writing executed and acknowledged or proved by him in the manner required for a deed of real estate (so as to enable such deed to be recorded in the State of New York) delivered to the Trustee, or its successor, modify or alter in any manner this indenture, 1802 and any or all of the trusts then existing and the limitations and estates and interest in property hereby created and provided for subsequent to such trusts; and in case of such modification or alteration said instrument shall direct the revised disposition to be made of the trust fund or the income thereof, or that part of the trust fund or the income thereof affected by such modification or alteration, and upon the delivery of such instrument to the Trustee or its successor said instrument shall take effect according to its provisions, and the Trustee or its successors shall make and execute all such instruments, if any, and make such conveyance, transfers or deliveries of property as may be necessary or proper in order to carry the same into effect, and no one, born or unborn, shall have any right, interest, or estate under this indenture except subject to the proper modification or alteration thereof; but this power to modify or alter is not intended and shall not be construed to include the right to the Donor to make such modification or alteration in his own favor or in favor of his estate, but shall apply only so far as the interests of third parties may be concerned. The1803 trusts were not created in contemplation of death. At the time of the creation of both the trusts, the decedent's daughter, Helen Porter Davisson, had only one child, Richard L. Davisson, Jr. Between the dates of the creation of the said trusts and November 27, 1926, two more children, Joan Davisson and William Porter Davisson, were born to said Helen Porter Davisson. In order to provide for the newly born grandchildren, the decedent determined to exercise the power reserved to him in paragraph "Tenth" of the said two trust deeds and, with this purpose in view, he wrote two letters to the Bankers Trust Company the latter part of October, 1926, indicating his desire and determination. On November 27, 1926, three days prior to his death, William H. Porter executed and delivered to the Bankers Trust Company simultaneously three instruments, one of which, addressed to the Bankers Trust Company as trustee, relative to Trust No. 1, provided: Pursuant to the power reserved by me in the Tenth Article of the interests described Deed of Trust, I hereby revoke said Deed and terminate the interests of all persons therein, and I hereby direct you to deliver the principal thereof, all1804 income on such principal accrued but not actually received, and all income thereon received but not yet distributed to the beneficiary, to yourselves as Trustee under a new Deed of Trust dated the same date as this letter and executed by me in favor of said Helen Porter Davisson and other beneficiaries, 1019 such principal to be held by you as principal of the new trust and such income, whether accrued or received, to be treated by you as you would have treated that income under the trust which I now revoke. Very truly yours, (Signed) WM. H. PORTER. (Seal) STATE OF NEW YORKCOUNTY OF NEW YORK, SS: On this 27th day of November, 1926, before me personally came WILLIAM H. PORTER, to me known to be the individual described in and who executed the foregoing Revocation and acknowledged to me that he executed the same. (Signed) JAMES J. MCDERMOTT. Another instrument of the same character, so executed and delivered, related to Trust No. 2. Thereupon the said William H. Porter executed a new trust agreement conveying to the Banker's Trust Company as trustee the same securities as had theretofore been conveyed to the Banker's Trust Company as trustee in Trusts Nos. 1805 1 and 2, already described in our findings of fact. This new trust agreement, executed November 27, 1926, contained similar minute instrutions to the trustee as to the management of the funds entrusted to its care, disposition of income, investing and reinvesting the principal, and other like instructions, as was contained in Trusts Nos. 1 and 2. This trust agreement provided in part that Helen Porter Davisson should receive the income therefrom until she attained the age of forty years, at which time she was to receive the principal. In the event of her death before reaching that age, the principal was to be held in trust for the benefit of her surviving children and the issue of any deceased child per stirpes and not per capita, upon terms and conditions stated in the trust indenture. This new trust agreement contained the same paragraph ten as was contained in Trusts Nos. 1 and 2, which has already been set out in full in these findings of fact. The respondent included in decedent's gross estate the sum of $211,125 as representing the value, on the date of decedent's death, of the securities described in Trust No. 3 of November 27, 1926. It was alleged in the1806 petition and admitted by respondent in his answer that at the date decedent executed Trust No. 3, to wit, November 27, 1926, neither the decedent nor his physicians nor his family had any anticipation or expectation that his death would occur soon thereafter, and there was no reason to believe or anticipate that the decedent did not have many years of life ahead of him. From this we find that the decedent did not execute Trust No. 3 in contemplation of death. On or about October 18, 1918, decedent transferred to Bankers Trust Company, as trustee, under trust indenture of that date, $100,000, principal amount, City of New York 4 1/2 per cent bonds. 1020 Under the terms of the trust, hereinafter referred to as Jamie Porter Trust No. 1, the income was directed to be paid to the decedent's son, James J. Porter, until he reached the age of thirty years, and thereupon to pay over the principal to him. In the event of the death of James J. Porter before attaining the age of thirty years, the trust was to continue for the benefit of his daughter, the decedent's grandchild, Jane Hetherington Porter, also known as Jamie Porter. On or about June 27, 1919, the decedent transferred1807 to the Bankers Trust Company, as trustee, under trust indenture of such date, $100,000, principal amount, City of New York 4 1/2 per cent corporate stock. Under the terms of the trust, hereinafter referred to as Jamie Porter Trust No. 2, the income was to be accumulated during the minority of the decedent's grandchild, Jane Hetherington Porter (Jamie Porter), and thereafter paid to her until she attained the age of thirty-five years, at which time the principal was to be paid to her. In the event of her death before she attained the age of thirty-five years, the trustee was directed to transfer and pay over the principal of the fund in equal shares to the children of said Jane Hetherington Porter and in default of children surviving, then to Helen Porter Davisson, daughter of the donor, and in case of her prior death, in equal shares to the children of said Helen Porter Davisson then living. The same provisions by which the decedent reserved the right and power to modify or alter the Helen Porter Davisson Trusts Nos. 1, 2 and 3 are contained in the Jamie Porter Trusts Nos. 1 and 2. At the date of the decedent's death, November 30, 1926, the value of the securities held under1808 Helen Porter Davisson Trust No. 3 was $211,125 and the value of the securities held under Jamie Porter Trust No. 1 was $105,625, and under the Jamie Porter Trust No. 2 was $106,375. On May 12, 1927, payment was made by the executors of decedent to the treasurer of the New North Country Community Hospital of Glen Cove, Long Island, of the sum of $6,000, being the balance of a written subscription or pledge of $12,000 made by decedent during his lifetime to said hospital. This subscription was made by decedent for the specific purpose of equipping an X-ray room in the hospital as a memorial to his son, who lost his life in the World War. During the decedent's lifetime, the construction of the hospital was undertaken and an X-ray room was provided therein in reliance on said promise of decedent. On May 12, 1927, the executors of decedent's estate paid to Princeton University, Princeton, N.J., the sum of $5,000 as the balance of a subscription of $25,000 made by the decedent during his lifetime for the purpose of erecting in the University Chapel a bay, containing a memorial window in memory of decedent's son who lost 1021 his life in the World War. Princeton University, 1809 relying on decedent's said subscription, had prior to decedent's death contracted for and commenced construction of such bay and window. The respondent disallowed the deductions claimed by petitioners on account of said subscriptions and payments. The petitioners, at the hearing, withdrew their claim for deductions on account of other subscriptions of pledges, aggregating $2,205, made to Boy Scouts of Nassau County, Hampton Tuskegee Endowment Fund, Nassau Hospital Association, and Civic Forum of New York City, claimed in their petition. Respondent's deficiency notice shows he allowed as a credit for State inheritance taxes, paid by petitioners, the sum of $226,815.16. Said notice should have stated the amount to be $226,855.16. Within three years of the filing of petitioners' return they paid and claimed credit for $866,135.98, paid on account of New York estate tax on decedent's estate. On May 26, 1927, $300,000 was paid; on May 25, 1928, $450,000; on October 25, 1930, $83,402.42; and on November 12, 1930, $32,733.56. The total, $866,135.98, respondent has not allowed. Of such total, $833,402.42 was paid with respect to property included by the respondent as part of1810 decedent's gross estate and $32,733.56 with respect to the value of the property included in the Jamie Porter Trusts Nos. 1 and 2, which the respondent alleged in his amended answer should be included as a part of decedent's gross estate, which assertion petitioners deny. OPINION. BLACK: The petitioners contend that the trust herein referred to as Trust No. 3, dated November 27, 1926, did not create any new trust nor revoke trusts designated herein as Trusts Nos. 1 and 2, and that, if it had any legal effect, it was merely to modify Trusts Nos. 1 and 2. They further contend that if a new trust was created on November 27, 1926, by Trust No. 3, section 302(c) is unconstitutional in so far as it provides that transfers made within two years prior to death shall be deemed to have been made in contemplation of death. They insist that the pledges made by the decedent to the New North Country Community Hospital and Princeton University are proper deductions as claims against the estate under section 303(a)(1) of the Revenue Act of 1926, or under section 303(a)(3) of said act, as transfers to or for the use of corporations organized and operated exclusively for charitable and educational1811 purposes, and they claim full credit for the amount paid on account of New York estate tax. 1022 The respondent disputes all the above contentions made by petitioners and insists that the property held by the Bankers Trust Company as trustee under Trust No. 3 was transferred by the decedent to said company after the enactment of the Revenue Act of 1926, without consideration, and within two years of the decedent's death. The respondent further insists that Trust No. 3 falls within the provisions of said section 302(c) and that the transfer of the property held in trust must be deemed and held to have been made in contemplation of death within the meaning of the Act. In view of the fact that all the trust agreements, including the one executed November 27, 1926, referred to as Trust No. 3, contained paragraph "Tenth," which has been set out in full in our findings of fact, and in view of the further fact that we think said paragraph "Tenth" in these trust agreements brings them within the provisions of section 302(d) of the Revenue Act of 1926, we do not find it necessary to decide whether or not respondent correctly included the property described in Trust No. 3 as a1812 part of decedent's estate under section 302(c), nor do we find it necessary to pass upon petitioners' assignment of error that section 302(c) is unconstitutional. The respondent also insists that if the legal effect of Trust No. 3 was merely to modify or amend Trusts Nos. 1 and 2 and did not operate to effect a transfer of any property rights over which the decedent had the power of disposition, the entire value of the property held under Trusts Nos. 1 and 2, as amended by Trust No. 3, constituted a part of decedent's gross estate under the provisions of section 302(d). The respondent further contends that the entire value of the property held under the Jamie Porter Trusts Nos. 1 and 2 should be included as a part of the decedent's gross estate under section 302(d) of the Revenue Act of 1926. Section 302(d) and (h) of the Revenue Act of 1926, read: (d) 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 where1813 the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * * * * (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. By reading paragraph "Tenth," which was a part of each of the trust instruments involved in the instant case, it will be seen that the 1023 settlor reserved the right to himself to modify or alter the indentures. The only restrictions placed on this power was that the donor could not make himself or his estate the beneficiary. Outside of this limitation his power to alter or modify was unlimited. He went so far as to say in said paragraph "Tenth": "No one, born or unborn, shall have any right, interest, or estate under this indenture except subject to the proper modification or alteration thereof."1814 And this power to alter or modify existed right up to the day of his death. It was again reserved by him in the trust agreement No. 3, which he executed three days before his death, November 27, 1926. It was a power outstanding when he died and only death extinguished it. Up until the very day of his death he might have completely changed the beneficiaries of the trusts. Their estates were only made secure when the hand of death extinguished the power. , and the group of cases following it, cited by counsel for petitioner in their brief, it seems to us, have no application. Said cases concern a situation where the grantor of property in a deed or the settlor of a trust has made an irrevocable conveyance of the property or revocable only by and with the consent of adverse interests, subject only to a reservation to himself of a life estate. What the Supreme Court held in , and the group of cases following it, was that where there has been an irrevocable conveyance of the property with a reservation of the life estate to the grantor, nothing passes by his death when the life estate is extinguished. 1815 The title had already passed by the prior conveyance. It was to cure the effect of the decision of , that Congress on May 3, 1931, adopted a Joint Resolution amending section 302(c) of the Act of 1926, but this section 302(c), as amended by the Joint Resolution of May 3, 1931, has nothing whatever to do with section 302(d), as we view it. In the instant case the donor had not made an irrevocable conveyance of the property to the trustee reserving a life estate to himself, but, on the contrary, had expressly reserved to himself the right to alter and amend and modify the trust agreements. We think that even without section 302(d) of the 1926 Act, under the principles of , and , the property conveyed by the trusts in the instant case should be included as a part of decedent's estate. But, if there should be any doubt about that, it seems to us it has been removed by Congress in the enactment of section 302(d) of the Revenue Act of 1926. 1816 , and , construed acts prior to the Revenue Act of 1926, which acts did not contain any section 302(d)(h). It seems to us that the aim of 1024 Congress, in inserting the provisions of subparagraph (d) of section 302, was to prevent an avoidance in whole or in part of the estate tax by a method of disposition which would enable the owner of property so long as he lived to control the future benefits and disposition of property as effectually as by will, and the provision under review is an adjunct of the general scheme of taxation of which it is a part entirely appropriate as a means to that end. It therefore seems clear that under the plain language of section 302(d) of the Revenue Act of 1926, all the property conveyed by the trust instruments involved in the instant case must be included as a part of decedent's estate unless that clause in paragraph "Tenth" of the trust instruments, wherein the donor provided that in any alteration or modification of the trust instruments, he could not designate himself or his estate as the beneficiary, takes it out1817 of the purview of the statute. We have, however, already decided that question adversely to petitioner in and . And if not in those two cases, certainly we have decided it adversely to petitioner in . Counsel for petitioner cite in support of their contention . It must be admitted that that decision does support petitioner's position, but, as we endeavored to point out in ,, is contrary to what we conceive to be the plain language of the statute and the decisions of the Supreme Court in , and It seems to us that the discussion in , about the failure of the donor of the trust to reserve the right to confer upon himself or his estate the economic benefits of the property, is irrelevant. 1818 The estate tax levied by the Federal Government is a transfer tax. In a case where the settlor of a trust has reserved the right to alter, modify or revoke the trust, substantial rights pass by reason of his death. Up to the very moment of his death, he has the right to exercise that power and the beneficiary of the trust may be ousted by the exercise of it. When the settlor dies that power is gone and that which up to that time was an insecure estate ripens into one which is completely vested. It is this transfer completed by death which the statute taxes and we think that the mere fact that the settlor has no power to make himself or his own estate the beneficiary has nothing to do with it. On authority of ;;Loring A. Cover et al., supra;; and , we hold that the value of the property at the time 1025 of decedent's death, included in said trusts, should be included as a part of decedent's gross estate. 1819 The claims for balances due from the decedent on subscriptions to the New North Country Hospital and to Princeton University for memorials therein, as set forth in our findings of fact, were valid and enforceable against decedent's executors. See ; ; ; ; ; ; 25 R.C.L. 1408. In the case of , relied on by petitioners, we held that the consideration for the pledges was the payment by others of large amounts of money to the same institutions and that the consideration for each pledge was adequate and full and in money or money's worth, within the meaning of section 303(a)(1) of the Revenue Act of 1926. In the instant case we have no such situation before us. In the absence of proof of the adequate and full value in money or money's worth of the memorials erected or contracted for, the claims for balance of decedent's subscriptions paid by the executors1820 may not be allowed as a deduction from decedent's gross estate. . Petitioners further contend that, "If for any reason it should be determined that these pledges were not deductible as 'claims against the estate' under Section 303(a)(1), they were proper deductions as 'transfers to charitable and educational corporations' under Section 303(a)(3)." Section 303(a)(3) reads: The amount of all bequests, legacies, devices, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, 1821 or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; * * In order for a transfer which has been made to a charitable or educational corporation to be deductible from the gross estate it must be proved that such institutions are operated exclusively for charitable or educational purposes and that no part of their net earnings inure to the benefit of any private stockholder or individual. 1026 So, even though the amounts claimed by petitioners as a deduction under section 303(a)(3) come within the general provisions of that subparagraph (a matter which we do not now decide), we could not allow these amounts because we have no proof before us showing that the New North Country Community Hospital is operated exclusively for charitable purposes nor that Princeton University is operated exclusively for educational purposes and we have no proof showing that no part of the1822 net earnings of these institutions inures to the benefit of any private stockholder or individual. This being the state of the evidence, petitioners' contention that these amounts be deducted from decedent's gross estate under the provisions of section 303(a)(3) is denied. ; ; . The evidence shows that the petitioners have paid New York estate tax in the amount of $866,135.98 in addition to all other State estate and inheritance taxes which have been allowed as credits by the respondent, and that claims for the credit of such New York estate-tax payments were filed with the respondent within three years after the filing of the Federal estate-tax return. The sum of $833,402.42 of the above amount was paid with respect to property included by the respondent as a part of the decedent's gross estate and $32,733.56 with respect to property which was not so included, but which respondent in his amended answer alleged should be so included. The petitioners having paid the sum of $866,135.981823 on account of the New York estate tax, in respect to property which we hold should be included in the gross estate of the decedent, are entitled, and we so adjudge, to full credit of same against the Federal estate tax determined in accordance with this opinion, to the extent it does not exceed the 80 per cent credit provided by section 301(b) of the Act. Reviewed by the Board. Decision will be entered under Rule 50.SEAWELL, MATTHEWS SEAWELL, dissenting: I feel constrained to dissent from so much of the opinion of the Board as holds that the property embraced in the trusts mentioned should be included in the gross estate of the decedent. The law here being applied provides for an estate tax on transfers of the net property of a decedent at the time of his death. (Section 301 of the Revenue Act of 1926.) The tax is not a succession tax, payable by the beneficiary, but a transfer tax payable at the hands of the personal representative of the deceased. (Sections 305(a) and 314(b).) The deceased did not own the property here sought 1027 to be included in his gross estate at the time of his death. He had conveyed it away by trust deeds without power1824 to revest it in himself or in his estate. In neither Trust No. 1, Trust No. 2, nor Trust No. 3 did the decedent reserve the power to revoke the trusts. The reservations were merely of the power to modify or alter; not to revoke. The power so reserved was limited to modifications or alterations not in favor of himself or his estate, but were to apply only so far as the interests of third parties were concerned. The decedent, in the instruments of November 27, 1926, reciting revocation of the trusts, did not purport to act by virtue of any other right or power except that contained in paragraph "Tenth" set forth in the findings of fact. A new trust was not created; the funds did not change hands; other grandchildren, subsequently born, were merely provided for. Under the New York law, which is here applicable, the donor of a trust alone can not revoke the trust unless the power of revocation is expressly reserved. ; affd., ; ; 1825 ; ; ; ; affd., ; . Where no power of revocation is reserved, attempts by the donor to revoke are void. ; ; ; ; ; . The trusts could not be revoked by the donor, one of the beneficiaries being a minor. . At the time of the execution of the trusts in question, all economic benefits in the trust funds passed from the decedent, without any right or power reserved to revoke such trusts or to repossess any part or interest in the funds. In cases decided by the United States Supreme Court and relied on by the respondent, where property has been included in the gross estate for Federal1826 estate-tax purposes, the decedent had a legal right, direct or contingent, under which he, to the moment of his death, might acquire some economic benefits in the property concerned. In , the decedent shared with his wife the ownership and enjoyment of the property during his life and if the decedent had survived his spouse, he would have acquired the whole property. At his death there was a shifting of economic benefits from him to his wife. 1028 In the case of , the decedent, by virtue of the power to change beneficiaries, could make the insurance policies payable to his estate for estate purposes, secure the cash surrender value of the policies, or borrow against the policies. In , the donor could revest in himself the principal of the trust. The Supreme Court has refused to include in decedent's gross estate property no interest in which passed from the decedent at death. 1827 ; ; and . Upon the hearing and in respondent's brief, only slight contention was or is made that the trust funds should be included in the gross estate by reason of section 302(c) of the statute. Petitioner directly challenged the constitutionality of this section under the decision of the Supreme Court in . The evidence shows clearly that the instruments of November 27, 1926, were not made in contemplation of death. Respondent placed his principal reliance on section 302(d), which provides that there shall be included in the gross estate of every decedent at the time of his death all property: "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 * ." In the trust deeds involved here, power to1828 amend and alter was reserved to the donor - the decedent; but this was not a general power, but a limited power as set out in the facts recited in the main opinion. Under the express limitation of the power, the decedent could not exercise it by deed or will, or otherwise, in favor of himself or his estate. The possessor of a general power of appointment has authority to dispose of the property at his death by will and his position is not unlike that of an owner, for he can make himself during life and his estate thereafter the beneficiary of the trust. An unlimited power to amend, alter or revoke a deed of trust is equivalent to a general power of disposition and a general power of disposition is the practical equivalent of a fee. ; ; Sugden, Powers, 8th ed., 396. The failure to exercise this general power of appointment, in effect, results in a transfer from the donee's own estate (to which he has the power to give it) and a transfer to the estate of others who take because of his death and the failure to exercise the power during 1029 life in his own favor or1829 in the favor of others. Property passing under such general power of appointment may be subject in the hands of the donee of the power to the claims of his creditors (); or to the claims of trustees in bankruptcy (); and may be included in the estate of the decedent for estate-tax purposes ( ). But under a special, naked or limited power of appointment, such as is here under consideration, the decedent could not have sold or assigned the power (). A failure to exercise such limited power can not result in any transfer of anything from the decedent, for there is no beneficial interest or estate in him to be transferred; his creditors have no claim upon his power of appointment nor can they levy execution or distraint against him while he lives, on such account, nor against his estate when he is dead; if he should become a bankrupt, no trustee in bankruptcy would have any claim against the trust funds; his interest in the trust fund being only such limited power of1830 appointment, his estate possesses nothing of value in it to be included in the gross estate. Certainly, "to the extent of his interest therein" would not include the whole value of the property. ;;The Circuit Court of Appeals for the First Circuit, in the case of , had under consideration a trust identical with the trusts here involved, except the power to change and alter the trust and to name any other beneficiaries was limited in that case to beneficiaries other than the maker of the trust; whereas in the case before us the limitation of the power applies not only to the maker of the trusts, but his estate also. In the Brady v. Ham case, the court, by unanimous opinion, said that the decedent had expressly deprived herself of all economic benefits in the trust estate; that those benefits passed at the time of the execution of the declaration of trust, and such estate was not includable in the gross estate of the decedent, and that "To hold that such property was subject1831 to a transfer tax would amount to what the Supreme Court had termed * * * an arbitrary and capricious exercise of legislative power." Moreover, it is suggested that the part of section 302(d) added by the Revenue Acts of 1924 and 1926, and which is italicized in the above quotation, is ambiguous and susceptible of different interpretations and meanings. Do the words "any change" mean (1) a change however slight, or (2) a change without limitation? Webster defines the word "any" to mean: "Unlimited, and indefinite number, quantity or degree," as well as "some." Does the statute mean power to make some slight change, or unlimited power to make 1030 any change? One of the trusts herein provides that when Mrs. Davisson reaches the age of 30 years, the principal fund shall be paid to her. By way of illustration, if the sole power reserved had been to change the 30 years to 40 years, would that sole reserved power subject the trust funds to be included in the gross estate of the decedent at the time of his death? If the power to postpone to the beneficiary the enjoyment of the principal fund for ten years is power sufficient to make such change in the trust as will require1832 the fund to be included in the decedent's gross estate, would not the power to postpone such enjoyment five years or one year or one month have the same effect? If "any change" means any slight change, even a power to cause a day's postponement, under the construction contended for, would seem to comply with the provisions of the statute. Such construction, it appears to me, would contain some of the elements of capriciousness condemned in several adjudicated cases. I prefer to think, as was held by the Circuit Court of Appeals for the First Circuit (), that Congress did not intend by section 302(d), to create a new form of excise tax, that is, a tax on the power in the grantor to alter or amend a trust executed by him when the power so reserved is limited as in this case. Cf. . To hold under the statute that W. H. Porter's estate should be taxed on the value of the property theretofore conveyed in trust, irrevocably, by him, and not owned by him, in whole or in part, and of which no beneficial interest remained in him at the time of his death, is to raise a serious doubt1833 as to the constitutionality of the Act of Congress. To hold that by the power to make "any change" in the trust, Congress in the statute meant an unlimited power, to make "any change," or a power to make a change, such as would leave with the settlor power to revest the property in himself, is to adopt a more reasonable construction and to avoid the doubt as to the constitutionality of the Act. "A statute must be construed, if fairly possible, so as to avoid not only the conclusion that it is unconstitutional, but also grave doubts upon that score." . SMITH agrees with this dissent. MATTHEWS, dissenting: I dissent from the majority opinion in so far as it relates to the trusts. All the trusts in question (except the so-called Trust No. 3) were executed while the Revenue Act of 1918 was in force and none of the trusts was made in contemplation of death. The 1918 Act had no counterpart of subdivisions (d) and 1031 (h) of section 302 of the Revenue Act of 1926. The shifting in the economic interest in the trust property was complete as soon as the trusts were made. The donor parted with the legal title and1834 all beneficial interest. He reserved no power to revoke the trusts, by which he could recall the trust property. The power reserved was to alter or amend in any manner in so far as the interests of third parties were concerned, but not in such manner as to be in his own favor or in favor of his estate. The alteration or amendment of Trusts Nos. 1 and 2 by the instrument designated Trust No. 3 did not have the effect of revesting the property in the donor and the retransfer of such property to the trustees. It was not, therefore, equivalent to the creation of a new trust. It seems to me that these trusts are in all material respects similar to the five trusts which in Reinecke v. Northern Trust Co. were held not to be subject to the tax imposed by reason of the provisions of sections 401 and 402(c) of the Revenue Act of 1921. Section 402(c) of the Revenue Act of 1921 is identical to the same section of the Revenue Act of 1918. The trusts were not made in contemplation of death; the donor had divested himself of all economic interest in the trust property at the time he created the trusts; the power to alter or amend was not broad enough to revest in him or his estate1835 any interest in the property, and there was no provision in the estate-tax act then in force taxing transfers in trust not made in contemplation of death, where the power to alter or amend is reserved. As Mr. Justice Stone said in : * * * The shifting of the economic interest in the trust property which was the subject of the tax was thus complete as soon as the trust was made. His power to recall the property and of control over it for his own benefit then ceased and as the trusts were not made in contemplation of death, the reserved powers do not serve to distinguish them from any other gift inter vivos not subject to the tax. See also . As the transfers were nontaxable when made, they can not be subjected to tax by a later estate-tax act. They are in the same class as trusts made in contemplation of death before the 1916 estate-tax act was passed, by persons who died subsequent thereto, and with gifts made in 1924 before the gift-tax act was enacted. The Supreme Court has held that such trusts and gifts can not be subjected to the tax. See *1836 ; ; ; , and . I think the transfers by the trusts here in question are not subject to the tax imposed by sections 301 and 302(d) and (h) of the Revenue Act of 1926.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625130/	LARRY ALLEN DILLESHAW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDilleshaw v. CommissionerDocket No. 10213-85.United States Tax CourtT.C. Memo 1988-102; 1988 Tax Ct. Memo LEXIS 126; 55 T.C.M. (CCH) 361; T.C.M. (RIA) 88102; March 8, 1988. 126 P filed multiple returns under different names and different Social Security numbers and claimed exemptions to which he was not entitled, thereby claiming larger refunds than he was due for each of the years in issue. Held, R has sustained his burden of proving fraud. Held further, no statute of limitations bars assessment or collection of tax in this case. Section 6501(c)(1), I.R.C.Held further, P is liable for additions to tax under section 6653(b), I.R.C.Michael T. Breen, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: By notice of deficiency dated January 16, 1985, respondent determined deficiencies in petitioner's income tax and additions to tax as follows: Additions to TaxYearDeficiencySection 6653(b)(1) 1Section 66541976$ 766.77$ 383.39--19771,930.00965.00$ 52.001978391.00195.00--FINDINGS OF FACT None of the facts have been stipulated. Petitioner was a resident of Columbus, Georgia, at the time the petition in this case filed. Petitioner was killed in a motorcycle accident on August 30, 1986, approximately eight months before the trial of this case. No probate proceedings have been instituted by any person with respect to petitioner's estate, and there is no legally appointed representative for petitioner's estate. Petitioner's128 closest surviving relatives are his mother and his sister. Both were notified of the litigation in this case. No person appeared on behalf of petitioner at trial. Petitioner filed three Federal income tax returns for the taxable year 1976, each of which contained a different Social Security number and included a claim for a refund: one in the name of Larry Allen Dilleshaw which included claims for eight dependent exemptions, one in the name of James R. Dilleshaw and one in the name of John L. Dilleshaw. Petitioner filed three Federal income tax returns for the taxable year 1977, each of which contained a different Social Security number and included a claim for a refund: one in the name of James R. Dilleshaw, one in the names of John L. and Wanda G. Dilleshaw which included claims for two dependent exemptions and one in the names of William J. and Becky A. Gunter which also included claims for two dependent exemptions. Petitioner filed three Federal income tax returns for the taxable year 1978, two of which contained a different Social Security number than the third, each of which included a claim for a refund: one in the name of James R. Dilleshaw, one in the name of Larry Dilleshaw129 and one in the name of William J. Gunter. Petitioner was convicted after pleading guilty to Count 3 of an indictment by a grand jury for the United States District Court for the Northern District of Texas charging him with violating section 7206(1) by filing a false Federal income tax return for the taxable year 1976 in which he understated his income, included a fraudulent claim for a refund and claimed five dependent exemptions who which he was not entitled. Petitioner worked for two different employers under different names and submitted to his employers different Social Security numbers and filed multiple income tax returns for the taxable years 1976 and 1977 so that he would receive a larger tax refund than he was due. OPINION A petitioner in this Court bears the burden of proving that respondent's deficiency determinations are incorrect. Rule 142(a). Respondent bears the burden of proving fraud. Section 7454(a); Rule 142(b). No proof was presented on petitioner's behalf, and therefore respondent's income tax deficiency determinations are deemed correct. However, respondent's notice of deficiency was mailed to petitioner more than three years after the income130 tax returns for the years in issue were filed. Accordingly, assessment and collection of the deficiency for each of the years in issue are barred by the statute of limitations unless petitioner filed false or fradulent returns for each year. 2Section 6501. Respondent maintains that petitioner filed fraudulent returns for each of the years in issue, and therefore assessment and collection of the deficiencies in this case are not barred by the statute of limitations. If respondent sustains his burden of proving fraud, petitioner is also liable for the additions to tax under 6653(b) for the years in issue. Section 6653(b)3 provides that a taxpayer must pay an addition to tax if any part of the underpayment of tax required to be shown on a return is due to fraud. Respondent has the burden of proving, by clear and convincing evidence, that some part of the underpayment for each year in issue was due to fraud. Section 7454(a); Rule 142(b). Respondent must establish (1) that petitioner has underpaid his taxes for each year and (2) that some part of the underpayment is131 due to fraud. Hebrank v. Commissioner,81 T.C. 640">81 T.C. 640, 642 (1983). In this case respondent has established that petitioner underpaid his taxes for each of the years in issue. Respondent's burden of proving fraud is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of such taxes. Stoltzfus v. United States,398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1123 (1983). The existence of fraud is a question of fact to be resolved from the entire record. Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978).132 Fraud is not to be presumed. Drieborg v. Commissioner,225 F.2d 216">225 F.2d 216, 218 (6th Cir. 1955); Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 92 (1970). Because fraud rarely can be established by direct proof of the taxpayer's intention, fraud may be proved by circumstantial evidence. Rowlee v. Commissioner, supra at 1123. Upon consideration of the entire record, we conclude that respondent has sustained his burden of proving fraud by clear and convincing evidence for each of the years in issue. In this case the evidence establishes that petitioner filed multiple returns under different names and different numerical aliases and he claimed exemptions to which he was not entitled with the intent to evade tax for the taxable years 1976 and 1977. For the taxable year 1978, the evidence establishes that petitioner filed multiple returns under different names to different numerical aliases and that he claimed exemptions to which he was not entitled with the intent of evading tax. Petitioner's pattern of filing multiple returns, claiming ficticious dependent exemptions and claiming refunds to which he was not entitled prove petitioner's willful intent133 to defraud the Government. See Williams v. Commissioner,T.C. Memo 1981-515">T.C. Memo 1981-515. Because respondent has sustained his burden of proving fraud for each of the years in issue, the assessment and collection of tax in this case are not barred by the statute of limitations and respondent's determinations of deficiencies and additions to tax must stand. Accordingly, Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Respondent has not raised the question of whether the putative returns in question are valid returns. ↩3. Section 6653(b) as in effect during the years in issue provided in pertinent part: (b) FRAUD. -- If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. In the case of income taxes and gift taxes, this amount shall be in lieu of any amount determined under subsection (a). * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625132/	Leon S. and Dorothy A. Black, Petitioners v. Commissioner of Internal Revenue, RespondentBlack v. CommissionerDocket No. 5946-66United States Tax Court52 T.C. 147; 1969 U.S. Tax Ct. LEXIS 145; April 23, 1969, Filed 145 Decision will be entered for the respondent. The petitioners sold residential property, a part of the selling price of which was represented by a note secured by a second mortgage upon the property. Later the petitioners relinquished such note for cash and another note which together totaled less than the face amount of the original note. Held, that since the fair market value of the property securing the original note was in excess of the indebtedness secured by both the first and second mortgages, the indebtedness due the petitioners was not worthless in whole or in part, and the petitioners are not entitled to a bad debt deduction under sec. 166, I.R.C. 1954. David R. Frazer, for the petitioners.Edward B. Simpson, for the respondent. Atkins, Judge. ATKINS148 The respondent determined a $ 2,211.21 deficiency in income tax against the petitioners for the taxable year 1963.The only issue for our decision is whether petitioners are entitled to deduct as a bad debt the amount of $ 3,693.61, the difference between a $ 15,031.81 note they received from the purchaser of their home at the time of its sale in 1962 and $ 11,338.20 (cash of $ 5,031.81 and a note for $ 6,306.39) which they received in substitution for such note in 1963.FINDINGS OF FACTSome of the facts have been stipulated and are incorporated herein by this reference.The petitioners, Leon S. and Dorothy A. Black, are husband and wife. At the time they filed their petition herein they resided in Phoenix, Ariz. Their returns for the taxable years 1962 and 1963 were filed with the district director of internal revenue, Phoenix, Ariz.On June 18, 1962, the petitioners purchased, for $ 54,500, a residence147 located on the south side of Camelback Mountain overlooking the cities of Tempe and Phoenix, which will hereinafter be referred to as the Camelback property. They made a net cash payment of $ 21,762.61 and assumed an existing mortgage of $ 32,737.39.At the time they purchased the Camelback property, the petitioners were living in a summer cottage in Pinetop, Ariz. They had transferred a home in Phoenix which they previously occupied to their son Richard and it was their intention to occupy the Camelback property as their personal residence. However, shortly after they purchased the Camelback property, Dorothy suffered a recurrence of a heart ailment as a result of which they decided not to use the Camelback property as their residence, but to sell it. Such decision was made at some time more than a month after the purchase. They did not move into the house, although they did stay there overnight a few times.In November 1962, the petitioners sold the Camelback property to Raymond and Geraldine Roy (hereinafter referred to as the Roys) for $ 54,500, and conveyed legal title to them. At that time the fair market value of the property was not less than $ 54,500. The Roys paid148 petitioner $ 7,000 in cash, assumed the existing mortgage with an unpaid balance of $ 32,468.19, and gave the petitioners a $ 15,031.81 negotiable 149 promissory note secured by a second mortgage upon the property. 1At no time while the petitioners owned the Camelback property did they rent it or offer it149 for rent.At about the same time that petitioners sold the Camelback property to the Roys, they loaned the Roys $ 30,000, evidenced by a negotiable promissory note in that amount and secured by a first mortgage on certain property owned by the Roys on North Seventh Street in Phoenix (hereinafter referred to as the North Seventh Street property). It was agreed that $ 7,000 of the $ 30,000 should be used to make the $ 7,000 downpayment on the Camelback property, and that the remainder should be used to improve both the Camelback property and the North Seventh Street property. Subsequently, the Roys did improve the Camelback property by landscaping the yard and installing air conditioning and extensive plumbing in the guest house attached thereto. They also used some of the $ 30,000 to clear title to the North Seventh Street property.The second mortgage note given by the Roys to petitioners upon their purchase of the Camelback property required a first payment of $ 500, plus interest, on June 1, 1963. The Roys failed to make such payment. At that time the first mortgage was also in default. Also prior to June 1, 1963, the petitioners had had difficulty in obtaining payment of 150 checks given by the Roys to them on the $ 30,000 first mortgage on the North Seventh Street property. Geraldine Roy told petitioners that she was unable to meet the payments under the first and second mortgages on the Camelback property. She told the petitioners that she was ill with cancer and that her husband was chronically ill in Chicago and unemployed and that she had sold the jewelry business which she had operated in Phoenix. She stated that she wished to refinance the first mortgage on the Camelback property to permit her to make smaller payments over a longer term but that in order to do so the holder of the first mortgage would require the removal of the petitioners' second mortgage on the property. She also requested a reduction of her $ 15,031.81 indebtedness to the petitioners.The petitioners came to the conclusion that the Roys were unable to meet all the mortgage payments on the Camelback property. On July 24, 1963, they accepted, in substitution for the $ 15,031.81 promissory 150 note and second mortgage on the Camelback property, cash in the amount of $ 5,031.81 and a promissory note of the Roys in the amount of $ 6,306.39 secured by a second mortgage on151 the North Seventh Street property. The petitioners had considered foreclosing on the Camelback property under their second mortgage, but decided against that course because they thought it would take about 2 years to foreclose and that they would incur expenses, including taxes and attorney fees, amounting to about $ 3,500 to $ 4,000. 2On July 24, 1963, the fair market value of the Camelback property was at least $ 54,500.On their return for the taxable year 1963, petitioners deducted under the heading of "Interest" an amount of $ 3,693.61, which was further described as "Discount for Cash Payment & Substitution of Better Security, etc., on 2nd Mortgage from Geraldine E. and Raymond L. Roy."In the notice of deficiency, the respondent disallowed the deduction152 with the explanation that "said amount does not constitute an allowable deduction under any provision of the Internal Revenue Code and represents a reduction in the selling price of your personal residence."OPINIONThe petitioners contend that the $ 15,031.81 debt became worthless to the extent of $ 3,693.61 in 1963 and to that extent is deductible under section 166 of the Internal Revenue Code of 1954. 3 Such $ 3,693.61 represents the difference between the face amount of the $ 15,031.81 note surrendered by petitioners on July 24, 1963, and the amount accepted in substitution therefor, namely, $ 5,031.81 in cash and another note for $ 6,306.39.153 151 The respondent, on the other hand, contends that the petitioners have failed to establish that the $ 15,031.81 debt was worthless in whole or in part in 1963, and thus are not entitled to any deduction on account thereof.Both parties seem to agree that the debt in question was a nonbusiness debt. In any event, we think it is clear that it was such. A nonbusiness debt is defined in section 166(d)(2) as any debt other than one 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. Here the debt arose out of the sale of the Camelback property which the petitioners had purchased with the intention of use as their personal residence. There has been no showing that the debt had any connection whatever with any trade or business of the taxpayers. Indeed, we are not informed as to what business the taxpayers were engaged in, if any.Section 166(d)(1) provides that in the case of a taxpayer other than a corporation where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered as a loss from the sale154 or exchange of a capital asset held for not more than 6 months. Furthermore, to be so treated, such a debt must become entirely worthless within the taxable year. Section 1.166-5(a) of the Income Tax Regulations provides in part as follows:If, in the case of a taxpayer other than a corporation, a nonbusiness debt becomes wholly worthless within the taxable year, the loss resulting therefrom shall be treated as a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. * * A loss on a nonbusiness debt shall be treated as sustained only if and when the debt has become totally worthless, and no deduction shall be allowed for a nonbusiness debt which is recoverable in part during the taxable year.Such regulation is in conformity with the purpose of the statute. See H. Rept. No. 2333, 77th Cong., 2d Sess., p. 76, explaining the congressional intent when, in the Revenue Act of 1942, provisions were first enacted distinguishing between business and nonbusiness debts. 4 See Rollins v. Commissioner (C.A. 4), 276 F. 2d 368, affirming 32 T.C. 604">32 T.C. 604.155 Apparently the petitioners do not contend that the debt became worthless in whole but only to the extent of $ 3,693.61. We think it clear 152 that such debt did not become worthless either in whole or in part. The fact that the petitioners, for reasons satisfactory to themselves, relinquished their claim against the debtor to the extent of $ 3,693.61 does not of itself establish that the debt was worthless to any extent. See Raffold Process Corp. v. Commissioner, (C.A. 1) 153 F.2d 168">153 F. 2d 168, affirming a Memorandum Opinion of this Court, and O'Bryan Bros. v. Commissioner, (C.A. 6) 127 F.2d 645">127 F. 2d 645, affirming 42 B.T.A. 18">42 B.T.A. 18, certiorari denied 317 U.S. 647">317 U.S. 647. See also sec. 1.166-2(a), Income Tax Regs.5 The $ 15,031.81 note was secured by a second mortgage on the Camelback property. When, on July 24, 1963, the petitioners relinquished such note and accepted cash of $ 5,031.81 and a note for $ 6,306.39 in substitution therefor, the Camelback property had a value of at least $ 54,500. The amount of the first mortgage on such property was originally $ 32,468.19, and156 there is no evidence to show that it was any greater on July 24, 1963. Thus, it would appear that the value of the property exceeded the first mortgage by at least $ 22,031.81, which was more than sufficient to cover the indebtedness secured by the second mortgage. The petitioners contend that had they foreclosed they would have had expenses, including property taxes and attorney fees, of some $ 3,500 to $ 4,000. Even if so, it would appear that the amount which would be realized upon a foreclosure of the property would be sufficient to meet such expenses and still allow for payment of the $ 15,031.81 indebtedness.In view of the foregoing, we hold that the petitioners have not established that the debt became157 worthless, and we accordingly approve the respondent's determination.Decision will be entered for the respondent. Footnotes1. Such second mortgage provided that if the mortgagor should fail to make any required payment, including taxes, when due the whole amount of the debt should become due and be collectible by foreclosure of the mortgage. It also provided that if the mortgagor should fail to pay taxes the mortgagee might pay them, in which case the amount thereof should be a part of the debt secured by the mortgage and a lien upon the premises. It further provided that in the event of foreclosure the mortgagor should pay the mortgagee, in addition to the costs of the foreclosure, a reasonable amount as attorney's fees and a reasonable fee for title search, which should be a lien on the premises and secured by the mortgage.↩2. At some subsequent date not shown by the record, the holder of the first mortgage on the Camelback property foreclosed under his mortgage. In April 1965, the petitioners began foreclosure proceedings under their mortgage on the Seventh Street property.↩3. Sec. 166 provides in part as follows:(a) General Rule. --(1) Wholly worthless debts. -- There shall be allowed as a deduction any debt which becomes worthless within the taxable year.(2) Partially worthless debts. -- When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.* * * (d) Nonbusiness Debts. --(1) General rule. -- In the case of a taxpayer other than a corporation -- (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months.(2) Nonbusiness debt defined. -- For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than --(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩4. Such committee report contains the following:"A new provision is added providing for special treatment of nonbusiness debts, applicable in the case of a taxpayer other than a corporation. If such a debt becomes entirely worthless within the taxable year, the loss resulting therefrom is to be considered a loss from the sale or exchange of a capital asset held for not more than 15 months. The provisions of section 23(k)(1), as amended by this section, with respect to a debt which has become partially worthless, do not apply in the case of a nonbusiness debt; and a loss with respect to such a debt will be treated as sustained only if and when the debt has become totally worthless. * *"↩5. Sec. 1.166-2(a), Income Tax Regs., provides as follows:(a) General rule↩. In determining whether a debt is worthless in whole or in part the district director will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625136/	DON BEAR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentBear v. CommissionerDocket No. 11582-91United States Tax CourtT.C. Memo 1992-690; 1992 Tax Ct. Memo LEXIS 735; 64 T.C.M. (CCH) 1430; December 3, 1992, Filed 735 Decision will be entered under Rule 155. Don Bear, pro se. For Respondent: John M. Altman. SCOTTSCOTTMEMORANDUM OPINION SCOTT, Judge: This case was assigned to Special Trial Judge Joan Seitz Pate pursuant to the provisions of 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 PATE, Special Trial Judge: Respondent determined the following deficiencies in and additions to petitioner's income tax: (1) For 1984, a deficiency of $ 12,304 and additions to tax under section 6651(a)(1) of $ 3,022, section 6653(a)(1) of $ 615, section 6653(a)(2) of 50 percent of the interest on $ 12,089, and section 6654 of $ 756; (2) for 1985, a deficiency of $ 10,468 and additions to tax under section 6651(a)(1) of $ 2,386, section736 6653(a)(1) of $ 523, section 6653(a)(2) of 50 percent of the interest on $ 9,543, and section 6654 of $ 534; (3) for 1986, a deficiency of $ 5,796 and additions to tax under section 6651(a)(1) of $ 868, section 6653(a)(1)(A) of $ 290, section 6653(a)(1)(B) of 50 percent of the interest on $ 3,472, and section 6654 of $ 141; and (4) for 1987, a deficiency of $ 2,249 and additions to tax under section 6651(a)(1) of $ 538, section 6653(a)(1)(A) of $ 112, section 6653(a)(1)(B) of 50 percent of the interest on $ 2,249, and section 6654 of $ 113. Petitioner was a resident of Kennewick, Washington, at the time he filed his petition. Some of the facts have been stipulated and they are so found. The Stipulation of Facts and attached exhibits are incorporated herein by this reference. During all of the years in issue, petitioner was employed as a mechanical designer by Hughes Aircraft in Tucson, Arizona. He received the following amounts of gross income during those years: (1) For 1984, wages of $ 37,072 and interest income of $ 35; (2) For 1985, wages of $ 43,485 and interest income of $ 17; (3) For 1986, wages of $ 36,632; and (4) For 1987, wages of $ 5,711 and other income of $ 737 2,106. Nonetheless, petitioner failed to file Federal income tax returns for 1984, 1985, 1986, and 1987. After concessions by the parties, the only issues for our decision are: (1) Whether petitioner may deduct a capital loss of $ 660 sustained from the sale of a mobile home in 1985; (2) whether the Internal Revenue Service's negotiation of a check dated November 26, 1985, constitutes an accord and satisfaction of petitioner's Federal income tax liabilities for 1984 and 1985; (3) whether petitioner is liable for additions to tax under section 6651(a)(1) for failure to timely file Federal income tax returns for each of the years in issue; (4) whether petitioner is liable for additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987, for negligence or disregard of rules or regulations; (5) whether petitioner is liable for additions to tax under section 6654 for underpayment of estimated tax for each of the years in issue; and (6) whether petitioner is entitled to a credit or refund for an overpayment of tax for 1987. For purposes of clarity, we have combined our findings of fact and conclusions of law as to each738 issue. Loss on Mobile HomeIn 1985, petitioner sold the mobile home in which he lived, thereby sustaining a loss of $ 660. Petitioner claims the loss is deductible, whereas respondent maintains that the loss is personal and, therefore, not deductible. In general, section 262 provides that expenditures for personal, living, or family expenses are not deductible. The regulations under that section specifically provide that losses sustained by the taxpayer upon the sale or other disposition of property for residential purposes are not deductible. Sec. 1.262-1(b)(4), Income Tax Regs.Petitioner admittedly used the mobile home at issue as his residence. Consequently, we hold that he may not deduct the loss he sustained when he sold his mobile home. Accord and SatisfactionIn November 1985, petitioner tendered a check to the Internal Revenue Service (hereinafter the IRS) in the amount of $ 1,177.67, on the back of which he had written "Endorsement of this draft constitutes agreement that all taxes, interest, penalties, or other indebtedness is paid in full through 11/30/85." The IRS negotiated the check. Petitioner contends that the IRS's acceptance of his check constitutes739 an accord and satisfaction of his 1984 and 1985 income tax liabilities and that, therefore, he is not liable for the deficiencies determined by respondent for those years. Sections 7121 and 7122 set forth the exclusive method for settling claims arising under the Internal Revenue laws. Section 7121(a) authorizes the Commissioner to enter into agreements in writing with any person relating to the liability of that person for any taxable period. Set forth in the regulations thereunder are formal procedures for closing agreements and compromises which must be followed to effect a settlement. Laurins v. Commissioner, 889 F.2d 910">889 F.2d 910 (9th Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265. Secs. 301.7121-1 and 301.7122-1, Proced. & Admin. Regs. Petitioner did not follow the procedures set forth in those regulations, nor did respondent agree to conclude any closing agreement or compromise as set forth in the regulations. Consequently, there was no closing agreement or compromise effectuated between the parties and, therefore, respondent is not bound by the payment made by petitioner in November 1985. Nevertheless, 740 petitioner argues that his submission of the check with the endorsement language contained thereon together with the negotiation of the check by the IRS constitutes an accord and satisfaction under the Uniform Commercial Code. However, the United States Government, as the sovereign, is not bound by such State statutes as the Uniform Commercial Code. See Burnet v. Harmel, 287 U.S. 103">287 U.S. 103, 110 (1932); Texas Learning Technology Group v. Commissioner, 96 T.C. 686">96 T.C. 686, 693 (1991), affd. 958 F.2d 122">958 F.2d 122 (5th Cir. 1992). As we noted earlier, the only way income tax liabilities can be settled or compromised is by following the procedures set forth in the Internal Revenue Code and the regulations thereunder. Since the parties' actions do not fulfill these requirements, no settlement was effectuated thereby. Failure To FilePetitioner contends that he is not liable for the additions to tax under section 6651(a)(1) for failing to timely file his income tax returns for each of the years in issue. Section 6651(a)(1) provides: In case of failure -- (1) to file any return * * * unless it is shown that such741 failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month * * not exceeding 25 percent in the aggregate * * * To be absolved of the liability, the taxpayer must show that his failure to file was due to reasonable cause and not due to willful neglect. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Illness or incapacity may constitute reasonable cause if the taxpayer establishes that he was so ill that he was unable to file. See Williams v. Commissioner, 16 T.C. 893">16 T.C. 893 (1951). The taxpayer bears the burden of proving that this addition to tax does not apply. Rule 142(a); BJR Corp. v. Commissioner, 67 T.C. 111">67 T.C. 111, 131 (1976). Petitioner admits that he did not file income tax returns for any of the years in issue, but argues that he had reasonable cause for not doing so. He claims that he was severely depressed during all of those years, and that his mental state was so extreme that he could not cope with742 the negative reaction he had when contemplating such filing. However, the fact that petitioner worked as a mechanical designer for Hughes Aircraft on a full-time basis at a substantial salary during this time period refutes his contention. Consequently, we hold that petitioner has not shown that he had reasonable cause for not filing his income tax returns. Accordingly, we sustain respondent's determination on this issue. NegligenceNext, petitioner contends that he is not liable for the additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987. These sections provide that, if any portion of the underpayment of tax is due to negligence or intentional disregard of rules or regulations, an amount equal to 5 percent of the underpayment and 50 percent of the interest on the portion of the underpayment attributable to negligence is added to the tax. Negligence has been defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Zmuda v. Commissioner, 731 F.2d 1417">731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714">79 T.C. 714 (1982);743 Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967), affg. in part, remanding in part 43 T.C. 168">43 T.C. 168 (1964); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Because an addition to tax under section 6653(a) is presumptively correct, the taxpayer bears the burden of establishing that respondent's determination was erroneous. Betson v. Commissioner, 802 F.2d 365">802 F.2d 365, 372 (9th Cir. 1986), affg. in part, revg. in part T.C. Memo. 1984-264; Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972); Enoch v. Commissioner, 57 T.C. 781">57 T.C. 781, 802-803 (1972). Petitioner again argues that his mental condition precluded him from acting prudently with regard to filing income tax returns and, therefore, we should absolve him of the addition to tax. Again, we disagree. His employment during the years in issue evidences far too much ability on his part to cope with the ordinary requirements of the business world for us to accept his reasoning. Furthermore, there is evidence in this record, such as 744 the small amount of the tax withheld from petitioner's wages and the allegations contained in the petition, that indicates that petitioner was a tax protestor and intentionally did not file his returns. For these reasons, we uphold respondent's determination on this issue. Estatimate TaxNext, petitioner asks this Court to absolve him of the additions to tax under section 6654. Section 6654 imposes an addition to tax in the case of any underpayment of estimated tax by an individual. It is clear on this record that petitioner paid no estimated tax for the years in issue although he was required to do so. The imposition of an addition to tax under section 6654 is mandatory unless the taxpayer can show that one of the computational exceptions applies. Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 20-21 (1980). Petitioner has failed to do so. Accordingly, we hold that petitioner is subject to the addition to tax under section 6654. Refund of OverpaymentFinally, petitioner claims that he is entitled to a refund of $ 100 for 1987. The parties agree that, due to concessions, petitioner's taxable income for 1987 is zero and that he had withholding745 credits of $ 100 for that year. However, respondent maintains that petitioner is not entitled to have his withholding credits refunded to him because the period of limitations on such refund had expired at the time the notice of deficiency was issued. In general, section 6511(a) provides that a claim for refund of tax must be filed by a taxpayer within 3 years from the time the income tax return was filed or 2 years from the time the tax was paid, whichever period expires later. Moreover, if no return is filed, the claim must be filed within 2 years from the time the tax was paid. Sec. 6511(a). Since petitioner did not file any income tax return for 1987, the 2-year period applies in this case. All of the tax paid by petitioner for 1987 was withheld from his wages. Withheld taxes are deemed to have been paid by a taxpayer on the 15th day of the 4th month following the close of the taxable year. Sec. 6513(b); Stokes v. Commissioner, T.C. Memo. 1989-661; sec. 301.6513-1(a), Proced. & Admin. Regs. Therefore, petitioner's withheld taxes are deemed paid on April 15, 1988. Where a taxpayer fails to file a return and a notice of deficiency has been*746 issued, the taxpayer is entitled to a credit or refund of amounts paid within 2 years preceding the mailing of the notice. Secs. 6511(b)(2)(C), 6512(b)(2)(B) (nowsec. 6512(b)(3)(B)). Respondent issued the notice of deficiency with regard to petitioner's 1987 tax year on March 19, 1991, a date almost 3 years from the April 15, 1988 date on which his taxes are deemed paid. Because petitioner did not pay the taxes he is claiming within 2 years of the issuance of the notice of deficiency, he is not entitled to a refund or credit for such taxes. Allen v. Commissioner, 99 T.C. (Oct. 6, 1992); Braman v. Commissioner, T.C. Memo 1992-636">T.C. Memo. 1992-636. Because of concessions by both parties, Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625137/	Kern's Bakery of Virginia, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentKern's Bakery of Virginia, Inc. v. CommissionerDocket Nos. 8428-71, 1297-73United States Tax Court68 T.C. 517; 1977 U.S. Tax Ct. LEXIS 84; July 18, 1977, Filed 84 Decisions will be entered under Rule 155. Two unrelated families each owned 50 percent of the fair market value of corporations X, Y, and Z. Pursuant to the tax-free reorganization, corporations Y and Z were merged into corporation X, which had a substantial premerger loss carryover. The shareholders of corporation X received (as a result of owning stock in corporation X) 10 percent of the fair market value of the stock of the survivor corporation. Held: Corporations X, Y, and Z were not "owned substantially by the same persons in the same proportion" within the meaning of sec. 382(b)(3), and the loss carryover must be reduced pursuant to the formula in sec. 382(b)(2). Commonwealth Container Corp. v. Commissioner, 48 T.C. 483">48 T.C. 483 (1967), affd. 393 F.2d 269">393 F.2d 269 (3d Cir. 1968), followed. Additionally, the attribution rules of sec. 318 may not be indirectly applied to invoke the benefits of sec. 382(b)(3). 87 Perry Shields, for the petitioner.Jack D. Yarbrough and Wesley J. Lynes, for the respondent. Wilbur, Judge. WILBUR518 Respondent has determined deficiencies in petitioner's Federal income tax for the taxable years 1968 to 1970, inclusive, in the amounts of $ 111,995.87, $ 84,692.83, and $ 389.20, respectively. Certain issues having been settled, the sole issue for decision is whether the petitioner's post-reorganization net operating loss carryover is reduced under the provisions of section 382(b), 1 thereby reducing petitioner's allowable net operating loss deductions for 1968 and 1969 by $ 277,623.56 and $ 22,091.23, respectively. The resolution of this question depends on whether the transferor corporations and the acquiring corporation, immediately before the reorganization, were owned substantially by the same persons in the same proportion.OPINION88 All of the facts have been stipulated and are found accordingly.Petitioner Kern's Bakery of Virginia, Inc., is a corporation organized and existing under the laws of Virginia. At the time of filing the petitions herein, petitioner had its principal office and place of business at Lynchburg, Va. Petitioner filed its corporate income tax returns for the taxable years 1968, 1969, and 1970 with the District Director in Richmond, Va.Prior to July 31, 1966, two unrelated families, the Greers and the Browns, owned all the stock in three corporations: Kern's Bakery of Virginia, Inc., a Virginia corporation and petitioner herein; Kern's Bakery, Inc., a Tennessee corporation; and Brown, Greer Co., a North Carolina corporation. Each family owned 50 percent of the fair market value of the stock of each corporation as follows: 519 SharesI. Kern's Bakery of Virginia, Inc. (petitioner):A. Greers5,0001. William C. Greer2,5002. John L. Greer, Jr.2,500B. Browns5,0001. J. Harry Brown1,2002. Roy H. Brown, Jr.1,9003. T.G. Brown III1,900II. Kern's Bakery, Inc.:A. Greers3751. William C. Greer1622. John L. Greer, Jr.1623. John L. Greer, Sr.14. John L. Greer as trustee for grandchildren305. John L. Greer as custodian for granchildren196. Hamilton National Bank as trustee for Greers1B. Browns3751. J. Harry Brown902. Roy H. Brown Trust2843. Hamilton National Bank as trustee for Browns1III. Brown, Greer Co.:A. Greers5001. William C. Greer2502. John L. Greer, Jr.2493. Hamilton National Bank as trustee for Greers1B. Browns5001. J. Harry Brown752. Roy H. Brown Trust4243. Hamilton National Bank as trustee for Browns189 On July 31, 1966, these three corporations were reorganized in a tax-free merger as defined in section 368(a)(1)(A). Immediately prior to the reorganization, petitioner had an unused net operating loss of $ 558,026.58. Kern's Bakery, Inc., and Brown, Greer Co. had no net operating losses.Subsequent to reorganization, the stock of petitioner, the acquiring corporation, was owned by the same two unrelated families, the Greers and the Browns. Each family owned 50 percent of the fair market value of 100,000 shares of stock as follows:SharesI. Greers50,000A. William C. Greer22,858B. John L. Greer, Jr.22,831C. John L. Greer, Sr.84D. John L. Greer, Sr., as trustee for grandchildren2,520E. John L. Greer, as custodian for grandchildren1,596F. Hamilton National Bank as trustee for Greers111II. Browns50,000A. Roy H. Brown, Jr.1,900B. T. G. Brown III1,900C. J. Harry Brown10,785D. Hamilton National Bank et al., trustees under will ofRoy H. Brown, Sr.35,304E. Hamilton National Bank as trustee for Browns111520 The owners of the stock of the pre-reorganization Kern's Bakery of Virginia, 90 Inc., the loss corporation, received as a result of such ownership, 10 percent of the fair market value of the stock of the post-reorganization Kern's Bakery of Virginia, Inc., petitioner.Petitioner, in its 1968 and 1969 income tax returns, claimed net operating loss carryovers of $ 297,280.82 and $ 22,091.23, respectively. These deductions were based on the following computations by the petitioner:Net Operating LossesAmountYear: 1962$ 49,716.671963101,960.221964296,495.09196546,115.68196638,589.38Total532,877.04Less: Carryover claimed for 1967213,504.99Amount available to carryover319,372.05Less: Carryover claimed for 1968297,280.82Amount available to carryover22,091.23Less: Carryover claimed for 196922,091.230 Respondent, in his statutory notice of deficiency for the year 1968, determined that $ 558,026.58 in net operating loss was unused at the time of reorganization of the petitioner on July 31, 1966, and further determined that 50 percent of this net operating loss was available to carryover because of the application of section 382(b)(2). This determination91 resulted in the following computation by the respondent:Net operating loss at July 31, 1966$ 558,026.58Less: 50-percent reduction279,013.29Amount available to carryover279,013.29Less: Amount allowed for 196621,457.78Amount available to carryover257,555.51Less: Amount allowed for 1967237,898.25Amount available to carryover19,657.26Less: Amount allowed for 196819,657.260 521 This computation resulted in the disallowance of net operating loss carryovers to 1968 of $ 277,623.56 and to 1969 of $ 22,091.23.In a reorganization under the circumstances here present, a net operating loss carryover of the transferor or acquiring corporation may be subject to the limitations specified in section 382. Section 382(b)(1), requires a reduction in the loss carryover when the stockholders of the loss corporation, as a result of owning stock in the loss corporation, end up owning less than 20 percent of the fair market value of the outstanding stock of the acquiring corporation.The required reduction, specified in section 382(b)(2), diminishes the net operating loss by 5 percent for each percentage point the required ownership falls below the92 20-percent criteria. 293 Since the stockholders of the pre-reorganization Kern's Bakery of Virginia, Inc., the loss corporation, received only 10 percent of the fair market value of petitioner as a result of 522 owning stock in the loss corporation, respondent has determined that petitioner's net operating loss carryover should be reduced by 50 percent. Petitioner argues it is entitled to the full amount of the carryover, contending it is excepted from the required reduction by the following language of section 382(b)(3):[The reduction] shall not apply if the transferor corporation and the acquiring corporation are owned substantially by the same persons in the same proportion.The principal question before us is whether immediately prior to the reorganization, the acquiring corporation, petitioner, and the transferor corporations, Kern's Bakery, Inc., and Brown, Greer Co., were "owned substantially by the same persons in the same proportion."Section 382(b) was designed to allow the full net operating loss carryover only when the stockholders of the predecessor loss corporation had a substantial continuing interest in the successor corporation. S. Rept. 1622, to accompany H.R. 8300 (Pub. L. 591), 94 83d Cong., 2d Sess. 53 (1954). The benefit of these carryovers, it was thought, should inure to those who actually suffered the loss. The minimum continuity of interest needed for the full carryover was set at 20 percent. 3 The Senate Finance Committee explained:Subsection (b) is designed to prevent the liberalized carryover of net operating losses permitted in section 381 from being used by one corporation to acquire the total net operating loss carryovers of another corporation without giving up at least a 20 percent share to the stockholders of the corporation with the net operating loss carryover. If the stockholders of the loss corporation have a 20 percent or more interest in the successor corporation, it is felt there is a sufficient continuity of interest in the net operating loss carryover to justify permitting the entire net operating loss to carry over. * * * [S. Rept. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. 285 (1954).]523 To the extent the shareholders of the loss corporation received less than a 20-percent interest in the successor corporation the net operating loss carryover was reduced under section 382(b)(2).95 The statutory formula, however, depends largely on the relative asset value of the two corporations. Thus, in a merger between a small loss corporation and a large corporation, the shareholders of the smaller corporation may emerge with only a small percentage of the stock of the reorganized corporation, even where all of the shareholders involved have continued their equity position. Apparently, with a view toward alleviating this problem where both corporations are "owned substantially by the same persons in the same proportion," Congress enacted section 382(b)(3). See Asimow, "Detriment and Benefit of Net Operating Losses: A Unifying Theory," 24 Tax L. Rev. 1">24 Tax L. Rev. 1 (1968). Section 382(b)(3) thus reflects the overall purpose of section 382(b) by recognizing that where these parallel interests are present, the same persons suffer the loss and should receive their proportionate benefit of the carryover. 496 It is clear that, in the instant case, the proportionate interest of the two families remained the same. The focus of section 382(b)(3), however, is on persons, and the transferor corporations and the acquiring corporation herein were not "owned substantially by the same persons" in the same proportions. (Emphasis added.) The disproportionate nature of the individual interests can be illustrated by the following comparison of the stock holding of each person in each of the corporations: 524 SharesPre-reorganizationKern's BakeryKern'sPersonof VirginiaBakeryWilliam C. Greer2,500162John L. Greer, Jr.2,500162John L. Greer, Sr.1John L. Greer, Sr., as trusteefor grandchildren30John L. Greer, Sr., ascustodian forgrandchildren19Hamilton National Bank, astrustee for Greers1Roy H. Brown, Jr.1,900T.G. Brown III1,900J. Harry Brown1,20090Hamilton National Bank, etal., trustees under will ofRoy H. Brown, Sr. (Roy H.Brown Trust)284Hamilton National Bank, astrustee for Browns110,000750SharesPost-reorganizationBrown-GreerKern's BakeryPersonof VirginiaWilliam C. Greer25022,858John L. Greer, Jr.24922,831John L. Greer, Sr.84John L. Greer, Sr., as trusteefor grandchildren2,520John L. Greer, Sr., ascustodian forgrandchildren1,596Hamilton National Bank, astrustee for Greers1111Roy H. Brown, Jr.1,900T.G. Brown III1,900J. Harry Brown7510,785Hamilton National Bank, etal., trustees under will ofRoy H. Brown, Sr. (Roy H.Brown Trust)42435,304Hamilton National Bank, astrustee for Browns11111,000100,00097 Reduced to percentages, the comparison is as follows:Stockholding percentagesPre-reorganizationTransferorsKern's Bakeryof VirginiaKern'sPerson(acquiring)BakeryWilliam C. Greer2521.60John L. Greer, Jr.2521.60John L. Greer, Sr.13John L. Greer, Sr., as trusteefor grandchildren4.00John L. Greer, Sr., ascustodian forgrandchildren2.53Hamilton National Bank, astrustee for Greers.13Roy H. Brown, Jr.19T.G. Brown III19J. Harry Brown1212.00Hamilton National Bank, etal., trustees under will ofRoy H. Brown, Sr. (Roy H.Brown Trust)37.87Hamilton National Bank, astrustee for Browns.1310099.99Stockholding percentagesPost-reorganizationBrown-GreerKern's BakeryPersonof VirginiaWilliam C. Greer25.0022.86John L. Greer, Jr.24.9022.83John L. Greer, Sr..08John L. Greer, Sr., as trusteefor grandchildren2.52John L. Greer, Sr., ascustodian forgrandchildren1.60Hamilton National Bank, astrustee for Greers.10.11Roy H. Brown, Jr.1.90T.G. Brown III1.90J. Harry Brown7.5010.79Hamilton National Bank, etal., trustees under will ofRoy H. Brown, Sr. (Roy H.Brown Trust)42.4035.30Hamilton National Bank, astrustee for Browns.10.11100.00100.0098 525 These figures make it clear that there was great diversity of ownership in the three corporations prior to the reorganization. Of the nine persons who owned Kern's Bakery, Inc. (one of the transferor corporations), six shareholders with 44.79 percent of the stock had no interest at all in petitioner, the acquiring corporation. Similarly, of the six persons who owned stock in Brown, Greer Co., the other transferor, three shareholders with 42.60 percent of the stock, had no interest in petitioner. Finally, of the six persons owning stock in petitioner, two, with 38 percent of the stock, did not own stock in either of the two transferor corporations.This pattern of ownership is far wide of the statutory requirement that the transferor corporation and the acquiring corporation be "owned substantially by the same persons in the same proportion." In fact, the examples in the regulations indicate that a 20-percent difference in the ownership of the transferor and acquiring corporations will fall outside the provisions of section 382(b)(3). 599 526 This Court was also required to interpret the phrase "owned substantially by the same persons in the same proportion" in Commonwealth Container Corp. v. Commissioner, 48 T.C. 483">48 T.C. 483 (1967), affd. 393 F.2d 269">393 F.2d 269 (3d Cir. 1968). In that case, a single family had control of two corporations, Commonwealth Container, a profitable corporation, and Tri City, a loss corporation. These two corporations were subsequently merged, with Commonwealth Container emerging as the survivor. The stock in each corporation was owned as follows:CommonwealthCommonwealthShareholder 1(before merger)Tri City(after merger)Paul Densen29.66%41.94%31.20%Abbot Greene29.66%41.94%31.20%Irwin Densen5.00%5.00%5.00%Elmer Hertzmark25.00%21.74%Trusts for the Densen and Greenechildren10.68%11.02%10.72%In holding that the transferor corporation and the acquiring corporation were not owned substantially by the same persons in the same proportion, we100 emphasized the wide variations in interest held by Elmer Hertzmark. The variations in interest in the instant case are even more pronounced. For example, as noted above, 44.79 percent of the stock of one of the transferor corporations was held by shareholders with no interest at all in petitioner. The present case, therefore, falls well within our holding in Commonwealth Container Corp.Within each of the family groups, the Browns and the Greers, each shareholder is related so that the stock of one would be attributable to each of the others under section 318. While petitioner recognizes that section 318 has no direct application to section 382(b)(3), it argues that "the attribution rules of section 318(a) represent an excellent example of what constitutes ownership by substantially 'the same persons.'" At the same time it would distinguish Commonwealth Container Corp. on the basis that Elmer Hertzmark's stock was not attributable to the remainder of the family there.527 We must reject petitioner's contention. Section 318(a) is simply not applicable, either directly or indirectly. Section 318(a) begins as follows:(a) General Rule. -- For purposes of those provisions101 of this subchapter to which the rules contained in this section are expressly made applicable -- [Emphasis added.]Where Congress has spelled out the limitations on the use of a section with such specificity, courts should be loath to extend that use. 6 Moreover, section 318 is aimed primarily at the question of corporate control, 7 whereas the issue here involves the economic impact of the reorganization on the individual owners of stock.102 Petitioner argues for the use of section 318 because it is helpful in determining who "substantially the same persons" are. But section 382(b)(3) makes the reduction inapplicable "if the transferor corporation and the acquiring corporation are owned substantially by the same persons in the same proportion." (Emphasis added.) It is plain that the word "substantially" modifies the word "owned" and not the term "persons." 8Finally, petitioner argues that even without attribution, the shareholders of the loss corporation owned over 60 percent of the acquiring corporation after the reorganization, and that their substantial continuing interest entitles them to a full loss carryover. 103 We have previously rejected this argument in Commonwealth Container Corp., supra at 491:Petitioner argues first that inasmuch as the stockholders of Tri-City had a controlling interest in petitioner both before and after the merger, there was the requisite continuity of interest in the operating loss carryover which Congress sought to require in order to make the entire operating loss 528 carryover available to the acquiring corporation. We agree that in enacting section 381(c)(1)Congress sought to liberalize the carryover of operating losses in certain corporate reorganizations but we must also recognize that in section 382(b)Congress established an objective test to determine whether all or only a part of the operating loss carryover would be available to the acquiring corporation in such a reorganization; and that the test is based upon the percentage of interest in the acquiring corporation the stockholders of the loss corporation receive as a result of the reorganization. To interpret the statute otherwise would require reading the phrase "as the result of owning stock of the loss corporation" completely out of the statute; and this104 we are not justified in doing. Hanover Bank v. Commissioner, 369 U.S. 672">369 U.S. 672; Frank W. Verito, 43 T.C. 429">43 T.C. 429. [See also n. 5 supra.]Petitioner articulates what is arguably a more equitable rule, but a rule which is inconsistent with the plain meaning of the statute. See Asimow, "Detriment and Benefit of Net Operating Losses: A Unifying Theory," 24 Tax L. Rev. 1">24 Tax L. Rev. 1, 23 (1968). If the rule is to be changed it is the province of the Congress rather than the courts to change it.Decisions will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended and applicable to the years in issue, unless otherwise stated.↩2. SEC. 382. SPECIAL LIMITATIONS ON NET OPERATING LOSS CARRYOVER.(b) Change of Ownership as the Result of a Reorganization. -- (1) In General. -- If, in the case of a reorganization specified in paragraph (2) of section 381(a), the transferor corporation or the acquiring corporation -- (A) has a net operating loss which is a net operating loss carryover to the first taxable year of the acquiring corporation ending after the date of transfer, and(B) the stockholders (immediately before the reorganization) of such corporation (hereinafter in this subsection referred to as the "loss corporation"), as the result of owning stock of the loss corporation, own (immediately after the reorganization) less than 20 percent of the fair market value of the outstanding stock of the acquiring corporation,the total net operating loss carryover from prior taxable years of the loss corporation to the first taxable year of the acquiring corporation ending after the date of transfer shall be reduced by the percentage determined under paragraph (2).(2) Reduction of net operating loss carryover. -- The reduction applicable under paragraph (1) shall be the percentage determined by subtracting from 100 percent -- (A) the percent of the fair market value of the outstanding stock of the acquiring corporation owned (immediately after the reorganization) by the stockholders (immediately before the reorganization) of the loss corporation, as the result of owning stock of the loss corporation, multiplied by(B) five.↩3. However, sec. 382(b) takes into account only that stock of the acquiring corporation which is received by the shareholders of the loss corporation in the reorganization "as the result of owning stock in the loss corporation." It has been suggested that the reason for this limitation was to prevent shareholders of the loss corporation from temporarily buying shares in the acquiring corporation prior to the reorganization and thereby circumventing the 20-percent test. Commonwealth Container Corp. v. Commissioner, 48 T.C. 483">48 T.C. 483, 492 (1967), affd. 393 F.2d 269">393 F.2d 269↩ (3d Cir. 1968).4. As we noted in Commonwealth Container Corp. v. Commissioner, 48 T.C. 483">48 T.C. 483, 493-494 (1967), affd. 393 F.2d 269">393 F.2d 269 (3d Cir. 1968):"We surmise that [sec. 382(b)(3)↩] was inserted to avoid application of the mechanical test provided in paragraph (2) where both corporations involved in a reorganization were for all practical purposes owned by the same persons in the same proportions before the reorganization so that it would make little difference how much stock of the acquiring corporation was issued to the transferor corporation or its stockholders under the plan of reorganization, because the same persons who suffered the losses would be getting the benefit of the carryover in the same proportions as the losses were incurred. * * "5. The examples given in sec. 1.382(b)-1(d)(2), Income Tax Regs., allow only a small differential in shareholder ownership under sec. 382(b)(3).Sec. 1.382(b)-1(d) Exception to application of section 382(b). * *(2) The transferor corporation and the acquiring corporation will be considered as owned substantially by the same persons in the same proportion only if the same persons own substantially all the stock of the corporations in substantially the same proportion. This rule may be illustrated by the following examples:Example (1). A and B each owns 50 percent of the fair market value of the outstanding stock of X Corporation. A owns 52 percent and B owns 48 percent of the fair market value of the outstanding stock of Y Corporation. Y Corporation acquires the assets of X Corporation in a reorganization to which section 381(a) applies. The exception provided in section 382(b)(3) is applicable.Example (2). A and B each owns 50 percent of the fair market value of the outstanding stock of X Corporation. A owns 60 percent and B owns 40 percent of the fair market value of the outstanding stock of Y Corporation. Y Corporation acquires the assets of X Corporation in a reorganization to which section 381(a) applies. The exception provided in section 382(b)(3) is not applicable.Example (3). A and B each owns 48 percent of the fair market value of the outstanding stock of X Corporation and of Y Corporation. C owns the remaining 4 percent of X Corporation and D owns the remaining 4 percent of Y Corporation. Y Corporation acquires the assets of X Corporation in a reorganization to which section 381(a) applies. The exception provided in section 382(b)(3) is applicable.Example (4). A and B each owns 40 percent of the fair market value of the outstanding stock of X Corporation and of Y Corporation. C owns the remaining 20 percent of X Corporation and D owns the remaining 20 percent of Y Corporation. Y Corporation acquires the assets of X Corporation in a reorganization to which section 381(a) applies. The exception provided in section 382(b)(3)↩ is not applicable.1. Paul Densen and Irwin Densen were brothers and Abbot Greene was their brother-in-law. Elmer Hertzmark was a Commonwealth Container employee.↩6. Additionally, Congress specifically applied the attribution rules of sec. 318 in sec. 382(a) (see sec. 382(a)(3)). The specific focus on these rules makes it clear that Congress considered the attribution in connection with sec. 382 and that they were not intended to apply to sec. 382(b). (See also sec. 382(b)(5)↩, dealing with the subject of "attribution of ownership in a different context.")7. See sec. 318(b), Levin v. Commissioner, 385 F.2d 521">385 F.2d 521↩ (2d Cir. 1967); cf. S. Rept. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. 45 (1954).8. Sec. 1.382(b)-1(d)(2), Income Tax Regs., states the sec. 382(b)(3) exception is applicable "only if the same persons own substantially all the stock of the corporations in substantially the same proportion," and examples 3 and 4 provide examples illustrating the point. See also sec. 382(b)(6)↩ as amended by the Tax Reform Act of 1976.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625138/	Nick DeLucia, Jr., and Madeline A. DeLucia, Petitioners v. Commissioner of Internal Revenue, RespondentDe Lucia v. CommissionerDocket No. 22090-83United States Tax Court87 T.C. 804; 1986 U.S. Tax Ct. LEXIS 38; 87 T.C. No. 50; October 20, 1986, Filed 38 An appropriate order will be issued denying respondent's motion to compel deposition. At an earlier stage in the instant case, the Court granted respondent's motion for summary judgment in entirety as to petitioner-husband, and in part as to petitioner-wife. As a result, the only substantive issue remaining is petitioner-wife's claim of "innocent spouse" status under sec. 6013(e), I.R.C. 1954. Respondent moved to compel deposition of petitioner-husband under Rule 75, Tax Court Rules of Practice and Procedure, contending that, because of the summary judgment order, petitioner-husband is no longer a party in the instant case. Held: Rule 75 applies only to nonparty witnesses. Petitioner-husband still is a party in the instant case. Rule 75 does not permit respondent to depose petitioner-husband. Respondent's motion is denied. James K. O'Malley, for the petitioners.Edward F. Peduzzi, Jr., for the respondent. Chabot, Judge. CHABOT805 OPINIONThis matter is before us on respondent's motion to compel deposition of petitioner Nick DeLucia, Jr., under Rule 75. 1Respondent determined deficiencies in Federal individual41 income taxes against petitioners for 1974, 1975, and 1976, in the amounts of $ 1,820.39, $ 35,190.29, and $ 1,635.00, respectively. Respondent also determined that petitioner Nick DeLucia, Jr. (but not petitioner Madeline A. DeLucia), is liable for additions to tax under section 6653(b) 2 (fraud, etc.) in the amounts of $ 910.20, $ 17,595.15, and $ 817.50 for these years. On April 17, 1985, this Court ordered, in response to respondent's motion for summary judgment filed April 3, 1985: (1) That respondent's motion is granted insofar as it relates to petitioner Nick DeLucia, Jr.; (2) that respondent's motion is granted insofar as it relates to petitioner Madeline A. DeLucia, in that it is established that there are deficiencies in income tax for the years and in the amounts set forth in the statutory notice of deficiency, that some part of each of these deficiencies is due to the fraud of petitioner Nick DeLucia, Jr., that the statute of limitations is not a bar to the assessment of any of these deficiencies, and that petitioners failed to report income on their tax returns for the years in the amounts and from the sources referred to in respondent's request for admissions; and 42 (3) that respondent's motion is denied, but only insofar as it seeks to preclude petitioner Madeline A. DeLucia from further contending that she is entitled to relief under section 6013(e) (innocent spouse rule) from liability for any part or all of the deficiency for each of the years in issue.The issues for decision on respondent's motion to compel deposition are as follows:(1) Whether petitioner Nick DeLucia, Jr., is a nonparty witness for purposes of Rule 75, in view of the fact that the order granting partial summary judgment resolves all issues against this petitioner, and806 (2) If petitioner Nick DeLucia, Jr., is a nonparty witness for purposes of Rule 75, then whether respondent's motion to compel deposition should be granted on grounds that the use of this "extraordinary method of discovery" is warranted in the instant case.When the 43 petition was filed in the instant case, petitioner Nick DeLucia, Jr. (hereinafter sometimes referred to as Nick), resided in Montgomery, Pennsylvania, and petitioner Madeline A. DeLucia (hereinafter sometimes referred to as Madeline) resided in Pittsburgh, Pennsylvania. Nick and Madeline were married during the years in issue, but were divorced in 1981.During 1974, 1975, and 1976, Nick derived income from the operation of massage parlors and related activities. During these years, petitioners reported on their joint income tax returns Nick's wages as a fireman, interest, and management fees, but failed to report Nick's income derived from the operation of massage parlors and related activities.In the criminal case of United States v. Nicholas A. DeLucia, Jr., Criminal No. 80-24 (W.D. Pa. 1980), the grand jury charged in Count Two of the indictment that Nick violated section 7201 for 1975 by attempting to evade most of his income tax liability. The grand jury charged that his income tax liability was $ 35,675.46, and that his taxable income was $ 84,233.56. For 1975, petitioners had reported taxable income of $ 3,912.76 and a tax liability of $ 485.17. On February 10, 1981, 44 Nick entered a plea of guilty to Count Two of the indictment. A judgment of conviction was pronounced and a sentence of 5 years incarceration was imposed on Nick on that same day.On April 29, 1983, respondent issued to petitioners a notice of deficiency for 1974, 1975, and 1976 determining the above-described deficiencies and additions to tax. Petitioners filed their petition on July 28, 1983, disputing the asserted deficiencies and additions to tax on grounds that (1) the deficiencies were based on additional income as shown in a sealed grand jury indictment, (2) there is no evidence to support the deficiencies, and (3) the Commissioner has not taken into account any nontaxable sources of income in computing the deficiencies. Respondent filed his answer on September 26, 1983, further alleging the facts upon which 807 his determination of the deficiencies and additions to tax is based.On January 4, 1985, respondent notified petitioners that a conference had been arranged for January 9, 1985, pursuant to which respondent and petitioners were to consult and communicate informally in accordance with the Tax Court's Rules of Practice and Procedure before their trial, which 45 was scheduled for a trial session starting on April 15, 1985. In the "Branerton letter", 3 respondent stated that "if the above conference date or time is unsuitable, please contact me in order to arrange for another date or time." Petitioners failed to attend this conference, failed to contact respondent as to this conference, and failed to furnish respondent with the requested information and documentation.On January 10, 1985, respondent served petitioners with (1) Respondent's First Request for Admissions, (2) Respondent's First Set of Interrogatories, and (3) Respondent's First Request for Production of Documents. Petitioners failed to respond to respondent's request for admissions. On February 27, 1985, respondent filed with this Court a Motion to Compel Production of Documents and Responses to Respondent's Interrogatories. Petitioners failed to file an objection thereto, and on March 26, 1985, this Court granted46 respondent's motion and ordered petitioners to produce documents and answer interrogatories by April 5, 1985. This Court also ordered that, if petitioners failed to comply with the foregoing order, then they were to show cause at the April 15, 1985, Pittsburgh trial session why the Court should not impose sanctions against them pursuant to Rule 104, which may include dismissal of this case and entry of a decision against them.On April 3, 1985, respondent filed respondent's motion for summary judgment, a memorandum brief of respondent in support of respondent's motion for summary judgment, and an affidavit.At a hearing held on April 17, 1985, with respect to respondent's motion for summary judgment, this Court ordered, in pertinent part, as follows:808 ORDERED that respondent's motion for summary judgment, filed April 3, 1985, is granted insofar as it relates to petitioner Nick Delucia. A decision shall be entered in due course. It is furtherORDERED that petitioner's oral motion to relieve Madeline A. Delucia of the effects of Admission No. 11 4 is granted and petitioner Madeline A. Delucia, pursuant to Rule 90(e) * * is hereby relieved of the effects of deemed Admission47 No. 11 of respondent's First Request for Admissions, served upon petitioners January 10, 1985. It is furtherORDERED that respondent's motion for summary judgment, filed April 3, 1985, is granted in part and denied in part insofar as it relates to petitioner Madeline A. Delucia as follows: Respondent's said motion is granted in that it is established that (apart from the possible effect of Section 6013(e) * ) there are deficiencies in income tax for the years and in the amounts set forth in the statutory notice of deficiency, that some part of each of these deficiencies is due to the fraud of petitioner Nick Delucia, that the statute of limitations is not a bar to the assessment of any of these deficiencies, and that petitioners failed to report income on their tax returns for the years in issue in the amounts and from the sources referred to in respondent's request for admissions; Respondent's said motion is denied but only insofar as it seeks to preclude petitioner Madeline A. Delucia from further contending that she is entitled to relief under Section 6013(e) from liability for any part or all of the deficiency for each of the years in issue. * *48 The Court's order to show cause was modified and, in compliance therewith, on May 31, 1985, Madeline served answers to respondent's interrogatories on respondent; she stated therein that she did not possess any documents of the sort that were required to be produced.On August 28, 1986, respondent served on petitioners a notice of deposition under Rule 75, stating respondent's intention to depose Nick on September 11, 1986. 550 Petitioners objected to the deposition on September 10, 1986, on grounds that (1) Nick is a party to this proceeding and (2) 809 the Tax Court rules do not provide for the deposition of a party. 6 As a result of this objection, respondent, on September 12, 1986, filed a motion to compel deposition with this Court. This motion sets forth the following reasons as to why respondent believes his motion should be granted:11. All informal consultations with counsel for Madeline A. DeLucia proved to be unfruitful, inasmuch as counsel for Madeline A. DeLucia reiterated that Madeline DeLucia had no documents, had no records, that all records were in the custody of the United States Attorney who had conducted the Grand Jury, and that Madeline A. DeLucia was49 an innocent spouse.12. Thus, on August 28, 1986, respondent, fully cognizant of the fact that a deposition under Rule 75 is an extraordinary discovery device, but believing that Nicholas A. DeLucia, Jr. is the only source of information available which could shed light on the matter concerning the innocent spouse status of Madeline A. DeLucia in the above-captioned case, issued his Subpoena and Notice of Deposition under Rule 75, directing Nicholas DeLucia, Jr. to appear * * * and there to testify on behalf of the Commissioner of Internal Revenue in the above-entitled case. * * ** * * 16. It is submitted that Nick DeLucia, Jr. is no longer a party to this case, inasmuch as all issues concerning him have been concluded.17. Nick DeLucia, Jr. remains one of the primary sources and probably the best source of information concerning the status of Madeline A. DeLucia in the years 1974 through 1976, concerning her knowledge, participation, awareness and benefits attending the non-reporting of items of income on their respective joint returns for the years 1974 through 1976.This matter is before the Court on respondent's motion to compel deposition pursuant to Rule 75, filed on September 12, 1986. Petitioners oppose this motion.The only substantive issue remaining in the underlying case is the question whether Madeline is entitled to relief from liability for tax under section 6013(e), the "innocent spouse" provision. As previously noted, this Court granted partial summary judgment in favor of respondent with respect to Nick's liability for the deficiencies and the additions to tax under section 6653(b).Rule 75, effective for pending or future cases as of January 4, 1983, permits compulsory discovery depositions 810 of nonparty witnesses to be taken without the consent of the parties. However, the circumstances under which nonconsensual depositions will be ordered are very limited and are carefully set forth in the Rule itself. See 79 T.C. 1135">79 T.C. 1135, 1140. Rule 75 provides in relevant part51 as follows:RULE 75. DEPOSITIONS FOR DISCOVERY PURPOSES -- WITHOUT CONSENT OF PARTIES IN CERTAIN CASES(a) When Depositions May Be Taken: After a notice of trial has been issued or after a case has been assigned to a Judge or Special Trial Judge of the Court, and within the time for completion of discovery under Rule 70(a)(2), any party may, without leave of Court, take a deposition for discovery purposes of a non-party witness in the circumstances described in paragraph (b) of this Rule. * * (b) Availability: The taking of a deposition of a non-party witness under this Rule is an extraordinary method of discovery and may be used only where a non-party witness can give testimony or possesses documents or things which are discoverable within the meaning of Rule 70(b) and where such testimony, documents, or things practicably cannot be obtained through informal consultation or communication (Rule 70(a)(1)) or by a deposition taken with consent of the parties (Rule 74). If such requirements are satisfied, a deposition may be taken under this Rule, for example, where a party is a member of a partnership and an issue in the case involves an adjustment with respect to such partnership, 52 or a party is a shareholder of an electing small business corporation (as defined in Code Section 1371(b)) and an issue in the case involves an adjustment with respect to such corporation.(c) Notice: A party desiring to take a deposition under this Rule shall give notice in writing to every other party to the case and to the non-party witness to be deposed. The notice shall state that the deposition is to be taken under Rule 75 and shall set forth the name of the party seeking the deposition, the name and address of the person to be deposed, the time and place proposed for the deposition, and the officer before whom the deposition is to be taken. * * In order to avail himself of Rule 75, respondent must pass the threshold requirement that the person he wishes to depose is a "non-party witness" within the meaning of Rule 75(a).Respondent contends that Nick "is no longer a party to this case, inasmuch as all issues concerning him have been concluded" by virtue of this Court's order granting partial summary judgment. The logical inference from respondent's contention is that if Nick is no longer a party to this 811 proceeding, he may be a nonparty witness for purposes of 53 Rule 75.Petitioners object to the taking of the deposition under Rule 75 on grounds that Nick remains a party to this proceeding, notwithstanding that all issues as apply to him have been resolved. Thus, argue petitioners, because Nick continues to be a party and Rule 75 does not apply to party deponents, respondent's motion must be denied.We agree with petitioners.When we granted to respondent summary judgment with respect to Nick, thereby concluding that Nick was liable for the deficiencies and additions to tax determined by respondent, we stated that: "A decision shall be entered in due course."There is no dispute that Nick and Madeline filed a joint petition to commence the instant case and that both of them thereby became parties in the instant case. See Rule 61(a); see also Rule 60(a)(1).Nothing has happened to change Nick's status as a party. No severance order has been issued under Rule 61(b) or Rule 62. No decision has been entered as to Nick. 754 Nick is not permitted to appeal the summary judgment order because it is interlocutory and therefore not final. Shapiro v. Commissioner, 632 F.2d 170">632 F.2d 170 (2d Cir. 1980). 8Accordingly, Nick remains a party in the instant case.Rule 75 applies only to nonparty witnesses. Since Nick still is a party in the instant case, the literal language of Rule 75 precludes the application of that Rule to Nick.In Nordstrom v. Commissioner, 50 T.C. 30">50 T.C. 30 (1968), a petition was filed by husband and wife petitioners. Respondent moved to dismiss the case with regard to taxpayer-husband, for lack of prosecution, and to determine the 812 deficiencies and additions to tax due from taxpayer-husband. Respondent argued that his motion should be granted because (1) taxpayer-husband had died, (2) his will would not be probated, (3) no special representative would 55 be appointed to act on his estate's behalf, and (4) a settlement stipulation had been executed by taxpayer-wife and respondent which determined the wife's liability for deficiencies and additions to tax in the same amounts as those asserted against taxpayer-husband. We concluded in Nordstrom as follows (50 T.C. at 32):The foregoing [precedent] makes it clear that the Court's jurisdiction over a case continues unimpaired by the death of a petitioner and even though there is no personal representative appointed to act in the place and stead of the decedent. And if our jurisdiction continues, then there must be a procedural means to bring the case to a close.Such a means, it seems to us, is the device of having the respondent move to dismiss the case for lack of prosecution. Under section 7459(d) * * , if the Court dismisses a case, its decision --dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Secretary or his delegate. An order specifying such amount shall be entered in the records of the Tax Court * .The impact of that statutory provision is, of course, that a dismissal56 for lack of prosecution will bring the case to a close in this Court.[Emphasis added.]Accord Estate of Ming v. Commissioner, 62 T.C. 519">62 T.C. 519, 521 (1974) ("'a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.'")As in Nordstrom, this Court will not lose jurisdiction over Nick merely because all issues surrounding Nick's tax liability were resolved when this Court granted, in part, respondent's motion for summary judgment. Rather, this case involves joint petitioners, and one issue concerning Madeline's tax liability has yet to be resolved. Thus, no decision is to be entered pursuant to section 7459(c) as respects Nick's liability until a determination is made regarding Madeline's liability, as well.There are additional reasons why Nick is to be considered a party to this proceeding. As was already stated above, this Court retains jurisdiction over a party through the time that a decision is entered with regard to that party 813 pursuant to section 7459(c). More importantly, the entry of decision is the event that triggers certain rights of the party57 under the Internal Revenue Code and the Rules of this Court. For example, upon the entry of decision, a party will be able to move to vacate or revise this Court's decision (Rule 162). The entry of decision triggers the 90-day period in which the party may appeal the Tax Court's decision (sec. 7483; Rule 190(a)). The Internal Revenue Service may not make any assessment or levy as to the taxes owed by a party until this Court's decision has become final pursuant to section 7481 (secs. 6213(a), 6331(a)). Nor can any lien arise until the Service is permitted to make the assessment of the taxes owed by the party as determined by this Court in its decision (sec. 6322). Thus, even after this Court enters its decision, a party maintains his or her status as a party for other Internal Revenue Code provisions.Nothing in the policy giving rise to Rule 75 would be served by treating Nick as "a non-party witness" for purposes of Rule 75. Rules 71, 72, and 74 apply to parties. Rule 75 is an extraordinary method of discovery. The Court's purpose in adopting Rule 75 is described as follows in the Rules Committee's notes (79 T.C. at 1141-1142):Under the Rule, 58 a discovery deposition may be taken only of a witness who is not a party to the case; the deposition of a party may be taken only upon consent of all parties under Rule 74. The new Rule 75 provides an extraordinary method of discovery which may be used only where the information sought cannot be obtained by informal consultation or by other discovery methods. For example, if the other requirements of the Rule are satisfied, a deposition might be taken under the Rule in a case involving the tax liability of a limited partner who does not have access to the books and records of the partnership, or where a bank or other person possesses records which are relevant to the tax liability of a party and are otherwise unavailable.It does not appear that any purpose would be served by deposing Nick except to get Nick's testimony before the trial. In the context of the instant case, this is not the sort of purpose for which Rule 75 was adopted. As the above-quoted Rules Committee note indicates, "the deposition of a party may be taken only upon consent of all parties under Rule 74." If we were to ignore the literal language of Rule 75 in order to permit respondent to depose Nick, we would59 merely be assisting respondent in circumventing both the 814 literal language and the carefully limited objectives of our discovery rules. See Estate of Van Loben Sels v. Commissioner, 82 T.C. 64">82 T.C. 64, 68-69 (1984). 9An appropriate order will be issued denying respondent's motion to compel deposition. Footnotes1. Unless indicated otherwise, all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the years in issue. See note 7 infra↩.3. See Branerton Corp. v. Commissioner, 61 T.C. 691">61 T.C. 691↩ (1974).4. Admission No. 11 of respondent's first request for admissions states as follows:11. Petitioner Madeline A. DeLucia, in signing the joint returns for the years 1974, 1975, and 1976, knew or had reason to know of: (a) the income-producing activities of petitioner Nick DeLucia, Jr. in the operation of massage parlors and related activities; (b) that income derived from these sources was not reported on their respective joint returns for the years 1974, 1975, and 1976; (c) that the amounts derived from the operation of massage parlors and related activities were not reported to their return preparer for the years 1974, 1975, and 1976; and (d) the failure to report these amounts resulted in a substantial understatement of the joint tax liability of Nick and Madeline DeLucia for the years 1974, 1975, and 1976.↩5. Rule 75(d)↩ provides that objections to a notice of deposition are to be served within 15 days after service of the notice of deposition. In view of (1) our disposition of respondent's motion to compel deposition, and (2) the fact that no objection has been raised in this proceeding relating to the appropriateness of scheduling a deposition only 14 days after service of the notice of deposition, we leave for another day any ruling as to the possible effects of this shortened time period.6. We assume petitioners are referring to Rule 75, since Rule 74↩ clearly authorizes the taking of a party's deposition if that party so consents.7. Sec. 7459(c) provides, in relevant part, as follows:SEC. 7459. REPORTS AND DECISIONS.(c) Date of Decision. -- A decision of the Tax Court (except a decision dismissing a proceeding for lack of jurisdiction) shall be held to be rendered upon the date that an order specifying the amount of the deficiency is entered in the records of the Tax Court * *The references to sec. 7459(c), and the section references that appear hereinafter, are to sections of the Internal Revenue Code of 1954 as in effect on the date this opinion is filed. See note 2 supra↩.8. Sec. 1558 of H.R. 3838, the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2757, overruling Shapiro v. Commissioner, 632 F.2d 170">632 F.2d 170↩ (2d Cir. 1980), applies to orders entered after the date of enactment of this act. Even then, the new statutory provision would give the Courts of Appeals only a limited discretionary authority to entertain interlocutory appeals.9. See also Howe v. Commissioner, T.C. Memo. 1985-213↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625139/	FIELD & START, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Field & Start v. CommissionerDocket No. 30837.United States Board of Tax Appeals17 B.T.A. 1206; 1929 BTA LEXIS 2169; November 4, 1929, Promulgated 2169 1. Where under contracts a corporation agrees to pay some of its employees a fixed annual salary plus a percentage of its profits for services rendered, it may not deduct from gross income each year, as additional compensation for services rendered, the amount of profits credited to the account of such employees in the absence of proof that the contingencies to which the credits are subject are not present. 2. Respondent's allowance of salary to petitioner's officers not disturbed, because of lack of evidence showing the amounts to be unreasonable. Henry T. Dorrance, Esq., for the petitioner. C. H. Curl, Esq., for the respondent. ARUNDELL1206 This proceeding was instituted to redetermine the following deficiencies in income taxes: 1922$3,690.1319231,514.8619244,128.8919253,757.82The issues are whether certain sums credited to the accounts of the managers of petitioner's business are deductible as compensation for services rendered, and whether the salaries paid to two of petitioner's officers represent reasonable compensation for services rendered. FINDINGS OF FACT. The wholesale grocery business2170 of the petitioner was started in 1884 by E. C. Field and W. H. Start, and was operated by them as partners until 1917, when it was incorporated under the laws of the State of New York. The business prospered and during the taxable years was the largest of its kind in the central part of New York. Since 1917 the petitioner's yearly sales have averaged about $1,750,000; its inventory and accounts receivable have averaged approximately $350,000 and $200,000, respectively, and it has had from 45 to 50 employees. For some time prior to 1921, Field and Start, president and treasurer, respectively, of the petitioner since its incorporation, desired to be relieved of the details of the business. To accomplish that object, on January 1, 1921, they and the petitioner entered into a written agreement with F. O. Jones, A. C. Thomas, and C. H. Roberts, employees of petitioner, hereinafter to be referred to as the 1207 "managers," in which the managers agreed to devote all of their time towards the active management of the business and Field and Start agreed to relinquish in favor of the managers "the active charge and control of the corporation business, retaining, however, general2171 supervision and direction of the affairs of the corporation." Field and Start agreed to leave in the business the capital represented by their respective stockholdings, and the managers agreed to contribute to the petitioner an undisclosed amount in excess of $16,000. Field and Start also agreed to give the managers the benefit of their experience and advice whenever sought but reserved to themselves the right to decide questions of policy and the amount of time they should devote to the affairs of petitioner. The agreement provided for an annual salary of not to exceed $3,000 to each of the managers and a yearly payment of $11,323.52 each to Field and Start for "their investments, responsibilities assumed and services rendered and to be redndered by them," in connection with the petitioner's business. After the payment of these and other expenses of petitioner, and the setting up of a reserve for depreciation at the rate of $1,500 per year until the amount totaled $9,000, 80 per cent of any profits was to be credited to the joint profit accounts of the managers and thereafter held and used in accordance with the following provision of the agreement: Of the remaining profits2172 of the corporation, if any, eighty percent shall be credited upon the corporation's books to the joint profit account of parties of the third part, [managers] until such time as borrowed capital shall no longer be required for corporation business. At that time all future profits to the same amount shall be used for the purchase of shares of the capital stock of the corporation, at its book value as of January 1st, 1921, which stock parties of the second part, [Field and Start] hereby agree to sell at said price for cash to parties of the third part in such proportion as parties of the third part may mutually agree upon, among themselves, until a total of 49 percent of the capital stock is held by parties of the third part. The remaining 20 per cent of petitioner's profits was to be distributed among the employees of petitioner. The managers were to agree among themselves as to the amount of their contributions to petitioner and the ratios in which any net profits should be divided among them, with the provision, however, that the "total amount of the net profits so divided shall be charged against the joint profit account of the parties of the third part and not distributed2173 until said joint account shall be used for the purchase of stock or otherwise distributed." Clause eight of the agreement contained the following provisions: This contract may be terminated in any of the following ways. A. Parties of the third part may terminate this contract at the end of any fiscal year that they may so desire by giving sixty days' notice, in writing, to 1208 the parties of the first and second part of their election so to do, personally or by registered mail, on or before February first of any given year. B. Parties of the first or second part may terminate this contract, at any time, at their option by giving sixty days' notice, in writing, personally or by registered mail to the parties of the third part of their election so to do. In the event that this contract is terminated by either of the parties hereto, an inventory of the company and balance sheet shall be immediately prepared and if any shrinkage in the net worth of the corporation shall appear as compared with the net worth of the corporation on January 1st, 1921, said shrinkage shall be charged against the joint profit account, if any, of the parties of the third part. If the2174 joint profit account is insufficient to meet said shrinkage, resort shall be had to the individual credit accounts of parties of the third part and to the Reserve for Depreciation to make up any deficiency. Party of the first part shall also be permitted to retain for fifteen months, to allow for any possible shrinkage in accounts receivable or otherwise not then forseen or allowed for, such further sums as parties of the third part may have to their credit, not however exceeding $15,000.00. Any funds in excess of the above, standing to the credit of the parties of the third part, shall be returned to them upon termination of this contract and at the end of fifteen months an accounting shall be had of the $15,000.00 retained for further possible shrinkage and the same, less any sums deducted for actual shrinkage and depreciation, shall be returned to parties of the third part by party of the first part. The agreement of January 1, 1921, remained in effect until superseded by a similar contract entered into by the same parties on January 1, 1924. Under the terms of the new contract Field and Start renewed their agreement to permit their investment in petitioner to remain in2175 the business, and the managers agreed to contribute a total of $16,000 to petitioner, of which Jones was to contribute $6,000 and Roberts and Thomas $5,000 each. The contract increased the annual salaries of each of the managers to $3,600. The provision in the first contract for the payment of a specific sum each year to Field and Start was inserted in the new agreement without any change. The provision of the first contract relating to the crediting of 80 per cent of petitioner's profits to the joint account of the manager was revised to read as follows: Of the remaining profits of the corporation, if any, Eighty Percent (80%) shall be used as a bonus to be distributed to the parties of the third part as follows: Six Sixteenths to Fred O. Jones, Five Sixteenths to Charles H. Roberts, Five Sixteenths to Adelbert C. Thomas and shall be credited upon the books of the corporation to be [the] individual bonus account of the parties of the third part until such time as borrowed capital shall no longer be required for corporation business. At that time all future bonuses to the same amount shall be used for the purchase of shares of the capital stock of the corporation, at its book2176 value $323,529.23, which stock parties of the second part hereby agree to sell at said pro rata price for cash to parties of the third part in such proportion as parties of the third part may mutually agree upon, among themselves, until a total of 49 per cent of the capital stock is held by parties of the third part. 1209 The provisions of the old contract relating to the termination thereof were altered in the new agreement to read as follows: In the event that this contract is terminated by either of the parties hereto, an inventory of the company and balance sheet shall be immediately prepared and if any shrinkage in the net worth of the corporation shall appear as compared with the net worth of the corporation on January 1st, 1924, said shrinkage shall be charged against the bonus account of each of the parties of the third part in the same ratio as each has been credited with a bonus out of the eighty percent of the net profits. * * * Any one of the parties of the third part, with the consent of his two associates, may with-draw from this agreement upon the last day of any month by giving thirty days' notice in writing to the parties of the first and second part, 2177 and to his associates of the third part of his election so to do, personally or by registered mail, but not more than one of the parties of the third part may withdraw in any one fiscal year, without the written consent of parties of the second part. In the event that one of the parties of the third part does so withdraw, his rights and interests herein shall be determined as from the last preceding inventory of party of the first part, plus any adjustment of drawing account for the current year. If any shrinkage, in the net worth of the corporation, shall appear as compared with the net worth of the corporation on January 1st, 1924, said shrinkage shall be charged against the Bonus Account of the individual with-drawing and if said Bonus account is insufficient to meet said shrinkage, resort shall be had to his proportinate share of the Reserve for Depreciation and if that is insufficient then to his individual credit and investment accounts. Party of the first part may retain for fifteen months after said withdrawal to allow for any possible shrinkage in accounts receivable or otherwise, not forseen or allowed, such further sum as said with-drawing party may have to his2178 credit, not however exceeding $5,000. Any funds in excess of the above shall be turned over to the withdrawing party, within thirty days after he has duly withdrawn and at the end of fifteen months after making due and proper allowance for any further depreciation and shrinkage, if any, said five thousand dollars retained or such portion thereof as may be due shall likewise to turned over to him. The business of petitioner was operated under the contract of January 1, 1924, until December 31, 1925. From 1922 to 1925, inclusive, the following amounts, representing 80 per cent of petitioner's profits for those years, were credited to the accounts of the managers: 19221 $8,389.33192323,332.92192417,474.98192520,213.01The profits earned in 1922 and 1923 were entered in an account designated "Undivided Profits," and the profits made in 1924 and 1925 were credited to the individual bonus accounts of the managers. 1210 The remaining profits made by petitioner during the taxable years were paid to its employees, in accordance with the terms of the contracts. The managers2179 devoted all of their time to the affairs of petitioner. Jones managed the business under the supervision of Field and Start; Thomas spent two days each week traveling and the remainder of his time in the office, and Roberts devoted four days each week traveling and the remainder in the office in the capacity of an assistant sales manager. Field spent an average of one hour per day at the office attending to corporate affairs. His activities consisted of advising Jones on purchases; conferring with customers regarding complaints, accounts receivable and other corporate business affairs, and executing contracts as president. He also spent many evenings with Jones discussing the business of petitioner. Start spent from 3 to 5 hours every day at petitioner's office looking after financial matters of the corporation, signing contracts, and supervising the activities of the office in general. The amounts specified in the contracts to be paid to Field and Start each year, were paid. The amount of profits placed to the credit of Jones for the years 1922 and 1923 was included in his return for 1923 as income for that year. Thomas withdrew as one of the managers on December 31, 1925. 2180 Such sums as had been credited to his account, representing his share of petitioner's profits, were paid to him in cash. During the taxable years, petitioner kept its books and reported its income on the accrual basis. In its returns for the years 1922 and 1923 the petitioner did not claim any part of the sums credited to the accounts of the managers as a deduction from gross income. The profits credited to the account for the years 1924 and 1925 were deducted from gross income as compensation for services rendered, and disallowed by the Commissioner on the ground that the amounts were not fixed liabilities of the petitioner and subject to the demands of the managers. Of the total of $22,647.04 claimed each taxable year as a deduction for salaries paid to Field and Start, the Commissioner allowed an annual salary of $5,000 to each officer, and disallowed the remainder. OPINION. ARUNDELL: The petitioner is claiming the right to deduct from gross income each taxable year as compensation for services rendered, the amount of profits credited on its books in favor of its managers, on the ground that upon determining the profits at the end of each 1211 year, the amounts2181 payable to its managers under the contracts of employment became fixed liabilities of the corporation for the current year. Since the petitioner kept its books and filed its returns for the taxable years on the accrual basis, to be entitled to the claimed deductions it must show that the liabilities were incurred in the respective years. . The liability to pay must be fixed and definite and not subject to indeterminable future events. ; affd., ; certiorari denied Oct. 21, 1929; and , affd., . In each of the contracts of employment, Jones, Roberts, and Thomas, as compensation for their services in actively managing the petitioner's business, were to receive a stipulated annual salary, plus 80 per cent of the profits, computed as provided for in the agreements, such profits to be credited to the accounts of the managers until such time as the petitioner no longer required borrowed capital to operate its business. When the financial condition of the petitioner became2182 such that it did not have to use borrowed money to conduct its affairs, future profits in an amount equal to the credits already made to the account of the managers were to be used for the purchase of petitioner's stock owned by Field and Start. The first agreement specifically provided that the profits credited to the account were not to be distributed by the managers until used for the purchase of petitioner's stock from Field and Start, "or otherwise distributed." This provision of the agreement was not inserted in the contract entered into on January 1, 1924. Upon the termination of the agreements in the manner provided for therein, the managers were not to receive any distribution of profits unless the credits made in their favor for prior earnings, less losses sustained in the operation of the business, exceeded any reduction in the net assets of the petitioner from the date of the agreement under which the business was being operated at the time, to the date of termination, and then only to the extent of the excess credits. The amount of profit standing to the credit of the managers was, therefore, always subject to be reduced or wiped out entirely by future losses in the2183 business. The loss sustained by the business during the year 1921 was deducted from the profit earned in 1922 before the excess was credited to the undivided profit account set up on the corporate books pursuant to the first agreement. The agreement entered into January 1, 1921, was terminated at the close of the year 1923. The record does not disclose what kind of a settlement, if any, was made with the managers at that time. In his brief counsel for the petitioner admits that no part of its 1212 profits was paid to any of the managers during the taxable years, and the fact that petitioner did not deduct any of the credits made for 1922 and 1923 profits in its return for the latter year or the year 1924, would indicate, if any inference is to be drawn from the fact, that it did not regard itself as being obligated to the managers for any definite amount. A cash settlement was made with Thomas subsequent to his withdrawal as a manager on December 31, 1925, but we have not been informed as to the amount of the payment or the date it was paid. We find nothing in the agreements or other evidence of record contrary to the conclusion reached by the respondent at the time2184 of his determination of the deficiencies in controversy that no part of the profits of petitioner was to become payable to the managers prior to the time when "borrowed capital shall no longer be required for corporation business." The petitioner appears to have been of the same opinion during the life of the first agreement since no part of the profits earned in 1922 and 1923 was claimed as a deduction in income-tax returns for those years. As we have pointed out, the payment of additional salary prior to the termination of the contracts of employment was conditioned upon the need for borrowed money in the business, and the liability of the petitioner on the withdrawal of any one or more of the managers depended upon whether or not there had been any reduction in the net assets of the corporation and whether accounts receivable decreased in value within the next fifteen months. No evidence was submitted in value within the next fifteen months. No evidence was submitted to prove that borrowed capital was not required in the business at all times during the taxable years. We are also without information as to the value of petitioner's net assets at the time the contracts were2185 entered into and at the close of each year, and the amount retained by the petitioner at the close of the year 1925 as a protection against any shrinkage in the value of accounts receivable. Without these facts we can not say that the petitioner was at any time during the taxable years liable to its managers for the payment of any part of the amounts being claimed as deductions. The petitioner has failed to overcome the presumption in favor of the respondent's determination. Accordingly, we must affirm his action. In determining the deficiencies involved here, of the total of $22,647.04 paid each year to Field and Start, one-half to each, and claimed as salary deductions, the respondent allowed a yearly salary of $5,000 to each officer and disallowed the remainder. In his answer filed herein, the respondent claims error in allowing such salaries as deductions and alleges that no salary deductions should be allowed for these officers. At the hearing, the petitioner amended its petition 1213 by alleging error on the part of the respondent in not allowing the full amount paid. The agreements under which the claimed deductions were paid provided for a payment each2186 year to each officer of $11,323.52, which amount was not only to compensate them for services rendered to petitioner but included a return on their investments in the business, represented by their stock. We do not know the amount or value of their investments, or what the parties to the agreements regarded as a fair return on money Field and Start had invested in the business. The testimony of Jones, the only witness at the hearing, that the services of each officer were worth from $10,000 to $15,000 during each taxable year, is too indefinite to accept as the basis for an allowance, in view of the fact that some part of the amount paid each year was regarded as a return on the investment of each officer. The officers did perform some service for petitioner during each of the taxable years before us, and the latter is entitled to deduct a reasonable amount of compensation paid to them for services rendered. The respondent has failed to show that the amounts allowed by him are unreasonable. Under these circumstances, we will not disturb the respondent's action in allowing a deduction of $5,000 as salary each taxable year for each officer. A final order will be entered finding*2187 the deficiencies in the amounts determined by the respondent.Footnotes1. After taking into account a loss of $29,265.53 for 1921. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625140/	James F. Donigan, Petitioner v. Commissioner of Internal Revenue, RespondentDonigan v. CommissionerDocket No. 434-76United States Tax Court68 T.C. 632; 1977 U.S. Tax Ct. LEXIS 74; July 28, 1977, Filed 74 Decision will be entered for the respondent. Petitioner, a resident of New York, was separated from his wife under a written separation agreement executed in 1964, but they were not legally separated under a decree of divorce or separate maintenance. Held: Petitioner is not entitled to compute his tax as an unmarried individual under sec. 1(c), I.R.C. 1954. Neither secs. 71 and 215 of the Internal Revenue Code nor New York law with respect to separation agreements qualifies petitioner as an unmarried individual for filing status under sec. 1(c). Victor Chini, for the petitioner.Louis Zeller, for the respondent. Drennen, Judge. DRENNEN632 OPINIONRespondent determined a deficiency of $ 1,158.16 in petitioner's income tax for the calendar year 1973. One adjustment giving rise to this deficiency has been 633 conceded by petitioner. The sole issue remaining to be decided is whether petitioner was entitled to determine his tax under section 1(c), I.R.C. 1954, 1 as an unmarried individual because he was separated from his wife pursuant to a written separation agreement.77 This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and joint exhibits are incorporated herein by this reference.James F. Donigan resided in Syracuse, N.Y., when he filed the petition in this case. He filed an individual income tax return for the year 1973 with the North-Atlantic Service Center, Andover, Mass.Petitioner and his wife Rita Donigan began living apart on April 11, 1964. In June 1964 they executed a written separation agreement. During 1973, the tax year in question, petitioner and his wife were still separated. Also, as of the end of 1973, neither petitioner nor Rita Donigan had filed an action in the courts to obtain judgment of separation, a judgment of divorce, or a judgment annulling a viodable marriage.On petitioner's 1973 income tax return he claimed the filing status of a single individual. The eligibility of petitioner to file a return as an unmarried individual rather than as a married individual filing a separate return is the matter in dispute.The applicable statutory provisions are sections 1(c) and 143. To qualify for the tax rates imposed under section 1(c) the principal78 requirement is that the taxpayer must not be "a married individual." 2 For the determination of marital status, section 1(c) incorporates the definition in section 143. 379 634 Under section 143(a)(2) an individual "legally separated from his spouse under a decree of divorce or of separate maintenance" shall not be considered as married. Conversely, section 1.143-1(a), Income Tax Regs., provides that "except as provided in paragraph (b) of this section [which corresponds to section 143(b) of the statute], an individual shall be considered as married even though living apart from his spouse unless legally separated under a decree of divorce or separate maintenance." This provision is illustrated by the following example:Taxpayer A and his wife B both make their returns on a calendar year basis. In July 1954, they enter into a separation agreement and thereafter live apart, but no decree of divorce or separate maintenance is issued until March 1955. If A itemizes and claims his actual deductions on his return for the calendar year 1954, B may not elect the standard deduction on her return since B is considered as married to A (although permanently separated by agreement) on the last day of 1954. [Sec. 1.143-1(a), Income Tax Regs., example (1).]The regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue80 statutes," and "should not be overruled except for weighty reasons." Commissioner v. South Texas Co., 333 U.S. 496">333 U.S. 496, 501 (1948); Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 752 (1969). The regulations are reasonable and consistent with sections 1(c) and 143(a)(2) in concluding that a mere separation agreement will not qualify a taxpayer as unmarried unless it is a separation under a decree of divorce or separate maintenance. Indeed, that is the logical inference of section 143(a)(2).Since in 1973 petitioner was not separated under a decree of divorce or separate maintenance (this point is conceded by petitioner on brief) and no evidence or argument has been 635 presented that he could be treated as unmarried under section 143(b), he must be considered as married even though living apart from his spouse.Petitioner acknowledges that under the statute individuals separated only by a separation agreement are still considered married for determining their filing status. He argues nonetheless that under New York law his separation agreement was as binding as a separation under a decree of separate maintenance. On this basis, 81 he contends the separation agreement should be treated as a court decree separation. As support for this contention, petitioner points to the change in the alimony provisions, secs. 71 and 215, from prior law. This change (as part of the enactment of the Internal Revenue Code of 1954) was described by the Senate Committee on Finance as follows:Present law taxes to a recipient and allows the payor a deduction for periodic alimony or separate maintenance payments if the payments are a legal obligation imposed by a court decree or by a written agreement incident to a decree.Attention has been called to the fact that the present treatment discriminates against husbands and wives who have separated although not under a court decree.For this reason both the House bill and your committee's bill extend the tax treatment described above to periodic payments made by a husband to his wife under a written separation agreement even though they are not separated under a court decree if they are living apart and have not filed a joint return for the taxable year. [S. Rept. 1622, 83d Cong., 2d Sess. 10 (1954).]Since Congress changed the alimony provisions to end the discrimination against82 husbands and wives who separated, but not under court decree, petitioner asks this Court to end the similar distinction with respect to filing status.Whether petitioner's premise that under New York law the effect of his separation agreement is the same as a court decree separation is subject to dispute. We recognize petitioner's point that a separation agreement under New York law prevents a judicial separation. Borax v. Borax, 4 N.Y.2d 113">4 N.Y.2d 113, 172 N.Y.S.2d 805">172 N.Y.S.2d 805 (1958). But it merely modifies the customary rights and duties of the spouses in the manner and to the extent provided in the agreements. In re Brown's Will, 153 Misc. 282">153 Misc. 282, 274 N.Y.S. 924">274 N.Y.S. 924 (Westchester County Surr. Ct. 1934). If a husband and wife, after executing a separation 636 agreement, become reconciled and resume cohabitation the agreement is abrogated and all duties under the agreement terminate. Zimtbaum v. Zimtbaum, 246 App. Div. 778, 284 N.Y.S. 101">284 N.Y.S. 101 (2d Dept. 1935), affd. 272 N.Y. 416">272 N.Y. 416 (1936). A judicial separation, on the other hand, will be granted83 only upon the showing of certain statutory grounds. Purvin v. Purvin, 51 N.Y.S.2d 492 (Kings County Sup. Ct. 1944). The duties and responsibilities of the spouses are dictated by a court and are not subject to negotiation. See People v. Jansen, 264 N.Y. 364">264 N.Y. 364, 191 N.E. 17">191 N.E. 17 (1934). And, unlike a written separation agreement, a judgment of separation is not abrogated by a reconciliation of the spouses. Karron v. Karron, 239 App. Div. 180, 267 N.Y.S. 340">267 N.Y.S. 340 (1st Dept. 1933).Even if petitioner's separation agreement had the same effect as a judicial separation, 484 it was not entered into pursuant to a court decree of divorce or separate maintenance as required by the Internal Revenue Code, and this Court has no power to expand the explicit terminology of the statute. It took a statutory amendment to put a contractual separation agreement on an equal footing with a separation agreement pursuant to a court decree for alimony purposes, and it would require legislation to do the same for filing purposes. We must apply the law as written. 5We hold that petitioner was not entitled to determine his tax under section 1(c) since he was a married individual as of the close of 1973. As respondent determined, petitioner was 637 required to use the tax rates applied to married individuals filing separate returns under section 1(d).Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the year at issue, unless otherwise specified.↩2. Sec. 1(c) provides:Unmarried Individuals (Other Than Surviving Spouses and Heads of Households). -- There is hereby imposed on the taxable income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 143↩) a tax determined in accordance with the following table: * *3. SEC. 143. DETERMINATION OF MARITAL STATUS.(a) General Rule. -- For purposes of this part -- (1) The determination of whether an individual is married shall be made as of the close of his taxable year; except that if his spouse dies during his taxable year such determination shall be made as of the time of such death; and(2) An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.(b) Certain Married Individuals Living Apart. -- For purposes of this part, if -- (1) an individual who is married (within the meaning of subsection (a)) and who files a separate return maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a dependent (A) who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the individual, and (B) with respect to whom such individual is entitled to a deduction for the taxable year under section 151,(2) such individual furnishes over half of the cost of maintaining such household during the taxable year, and(3) during the entire taxable year such individual's spouse is not a member of such household,↩such individual shall not be considered as married.4. The separation agreement executed by petitioner and his wife was all encompassing. It provided that each was entitled to live apart from the other without interference, for support payments to be made by petitioner to his wife until she died or remarried, settled all property rights existing as a result of the marriage, and provided for the custody and support of the two minor children. Obviously, it was intended to be a permanent separation.↩5. In accord are Quinn v. Commissioner, T.C.Memo. 1970-8, and Kellner v. Commissioner, T.C.Memo. 1971-103. Both cases dealth with marital status for taxpayers claiming head of household status, but the same reasoning applies for single filing status. See Johnson v. Commissioner, 50 T.C. 723">50 T.C. 723 (1968). See also Shippole v. Commissioner, T.C.Memo. 1976-378 (husband whose wife had deserted him was still married for sec. 1(c)↩ purposes).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625141/	Stanley Turzynski v. Commissioner.Turzynski v. Comm'rDocket Nos. 1607-66 and 618-69.United States Tax CourtT.C. Memo 1972-136; 1972 Tax Ct. Memo LEXIS 121; 31 T.C.M. (CCH) 617; T.C.M. (RIA) 72136; June 26, 1972, Filed Tried Joseph M. Solon, 208 LaSalle St., Chicago, Ill., for the petitioner. William L. Ringuette and Charles B. Wolfe, Jr., for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioner's income taxes for the calendar years 1959, 1960, 1961, and 1962 in the amounts of $11,093.93, $10,389.09, 121 $82,862.48, and $79,435.67, respectively, and 618 additions to tax under section 6653(b), I.R.C. 1954, 1 for these years in the amounts of $5,546.96, $5,194.55, $41,431.24, and $40,162.21 [sic], respectively. The issues for decision are: 122 (1) Whether petitioner understated his income for the years 1959 through 1962, and if so, whether a part of the underpayment resulting from the understatement was due to fraud with intent to evade tax. (2) Whether the use by respondent of increases in petitioner's net worth plus nondeductible expenditures in determining petitioner's income for each of the years here in issue was proper, and if so, whether respondent properly determined the amount of cash petitioner had at the beginning of each of the years here in issue and made a proper adjustment for depreciation on certain buildings owned by petitioner. (3) Whether petitioner is collaterally estopped to deny that a portion of the underpayment of his tax for the calendar years 1959 and 1960 was due to fraud with intent to evade tax by his conviction in the United States District Court for the123 Northern District of Illinois, Eastern Division, of violating the provisions of section 7201, I.R.C. 1954, for each of these years. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner, an individual who resided in Chicago, Illinois at the time of the filing of his petitions in this case, filed Federal income tax returns for the calendar years 1959, 1960, 1961, and 1962 with the district director of internal revenue at Chicago, Illinois. Petitioner was born in Lwow [Lemberg] Poland on January 22, 1919. He attended elementary and high schools at Warsaw, Poland, and from 1936 to 1939 he attended Lemberg University in Lemberg, Poland. In 1939 petitioner was a member of the Polish armed forces. He was captured by the Germans. Later he escaped from the prisoner of war camp. Thereafter, he was apprehended by the Nazis, survived a Nazi firing squad, and later was again arrested and placed in a Nazi Concentration Camp, where he remained until April of 1945 when he obtained his freedom. In April 1945 petitioner went to Cham, Bavaria and worked for the United States Army at an evacuation field hospital for displaced124 persons until September 1945. In September 1945 he became a medical student at the University of Erlangen, Erlangen, Germany and received his medical degree from that university on October 20, 1947. He continued to attend the University of Erlangen thereafter until some time in 1949 and from June 16, 1949, to January 1950, he served as a physician specializing in electrocardiograph diagnosis with the 2951st Polish Labor Service Company, American Graves Registration Command in Paris, France. In January 1950 petitioner returned to the University of Erlangen as a student and he remained at the university until January of 1951. On January 25, 1951, petitioner entered the United States via New York, New York, aboard the U.S.N.S. General W.C. Langfill. The Polish Immigration Committee and the National Catholic Welfare Agency sponsored him as an immigrant to this country. As a prerequisite to obtaining a license to practice medicine in the United States, petitioner was required to serve an internship at an American hospital. During the months of February and March of 1951, petitioner served at St. Vincent's Obstetric Hospital in Philadelphia, Pennsylvania where he received no compensation. 125 In May of 1951 he served at All Souls Hospital, Morristown, New Jersey, for a total compensation of $70, and in June 1951, he served at Swedish Hospital in Brooklyn, New York at a total compensation of $200. For a 2-week period during July 1951 he served at Morristown Memorial Hospital, Morristown, New Jersey, for a total compensation of $75, and for the other 2 weeks in July 1951, he served at Mary Immaculate Hospital in Jamaica, New York for a total compensation of $75. For the period August 1951 through January 1953 petitioner served an internship and residency at Cumberland Hospital (City Hospital) in Brooklyn, New York and received total compensation during this period of $1,374.92. During November and December 1953, he served at Haim Solomon Hospital, New York for total compensation of $654, and during October and November 1954, he served at Rockaway Beach Hospital, Long Island, New York for total compensation of $501.70. 619 In late 1954 petitioner took and successfully passed the Illinois State Board examination for physicians, and on December 10, 1954, he became a licensed physician in the State of Illinois. In January of 1955 petitioner began the practice of medicine126 in Chicago, Illinois. In 1955 petitioner received $1,620 from Cook County for working at Oak Forest Hospital. On his Federal income tax return for the calendar year 1955 petitioner reported this receipt of $1,620 and showed a loss "from business" of $1,235, dividend income of $800 less a $50 exclusion leaving a remainder of $750, and interest income of $130, leaving an adjusted gross income of $1,275. 2During 1956 petitioner was employed by the City of Chicago Municipal Tuberculosis Sanitarium and received a salary from this employment of $5,185. On his Federal income tax return for the calendar year petitioner reported this $5,185 as salary. He reported a loss from business as shown on a separate schedule C of $2,272. On his separate schedule C petitioner showed his principal business activity as physician and his business address as 7550 South Halsted Street, Chicago, Illinois. He showed total receipts of $3,100 and business expenses of $5,372, thus arriving at the loss reported. On this return petitioner reported other income of $1,301, thus arriving at adjusted127 gross income of $4,214. On about July 24, 1957, petitioner purchased premises located at 5625 South Pulaski Road, Chicago, Illinois and in the fall of 1957 set up a private practice of medicine at this location. Petitioner paid $36,000 for this property and made improvements thereto in the amount of $900. On his Federal income tax return for the calendar year 1957 petitioner reported salary of $6,798 from the City of Chicago Municipal Tuberculosis Sanitarium, and a loss of $4,361 from his business as reported on schedule C. On schedule C he showed his principal business activity as physician and his business address as 5625 South Pulaski Road, Chicago, Illinois. He reported total receipts of $4,350, expenses of $8,711 with the resultant loss as reported on his return. He reported other income of $1,639 which was shown to consist of dividends of $1,335 less the $50 exclusion or a net of $1,285, and interest income of $354. Based on these figures, he reported an adjusted gross income of $4,076.01. On his Federal income tax return for the calendar year 1958 petitioner reported a profit from business of $955 and other income of $2,450. On schedule C attached to the return petitioner, 128 in arriving at the $955 profit, showed that his principal business activity was physician and the location of his business was 5625 South Pulaski Road, Chicago, Illinois. He showed total receipts of $13,450, less deductions of $12,495. Included in the deductions claimed were interest on business indebtedness of $1,250, taxes on business and business property of $480, and depreciation of $2,995. The other income reported by petitioner on his 1958 return consisted of net devidends of $1,670, computed by subtracting the $50 exclusion from dividends of $1,720, and interest of $780. For the calendar year 1959 petitioner filed a Federal income tax return reporting a loss of $393.26 from business as shown on schedule C, other income of $3,884 with a resultant adjusted gross income of $3,490.74. On schedule C petitioner showed his business activity as physician and the Pulaski Road address shown on the 1958 return. He reported gross receipts of $11,208 and expenses of $11,601.26. Included in the expenses reported were interest on business indebtedness of $848.53, taxes on business and business property of $455.48, depreciation of $2,710.55 which included depreciation on building of $739.80129 and other business expenses of $7,586.70. The other business expenses as itemized were for cleaning of business property, laundry, office supplies, medication, car maintenance and repair, licenses and insurance, malpractice and public liability insurance, membership dues, Christmas gifts to hospital employees, telephone, gas, and electricity. The other income was not itemized except that under dividends received credit appeared in the amount of $2,322 with a tentative credit at 4 percent of $92.88 shown. On a retained copy of his income tax return for the calendar year 1959 petitioner showed the balance of other income to consist of $1,562 of interest. Attached to the retained copy were four sheets of accounting paper with each day in the year beginning with January 1 and running through to December 31 listed thereon, and a figure amount inserted under the heading of each day. Occasionally there would be two figures instead of one and then a total would be shown. 620 For the calendar year 1960 petitioner reported on his Federal income tax return a business loss of $1,369.80, other income of $2,749.02 and adjusted gross income of $1,379.22. On schedule D, "Gains and Losses from130 Sales or Exchanges of Property," petitioner reported two sales, each of 100 shares of General Dynamics stock, during the year, one at a loss of $957.06, and the other at a loss of $1,004.92, making a total capital loss of $1,961.98. The $2,749.02 of other income reported by petitioner was arrived at by adding $2,817 of net dividends after subtracting the $50 dividend exclusion to $1,894 of interest and subtracting from this total the $1,961.98 loss. On schedule C, petitioner showed total receipts of $9,234 and total expenses of $10,603.80 Included in the expenses were interest on business indebtedness of $691.35, taxes on business and business property of $457.90, depreciation of $2,441.05 which amount included $789.80 depreciation on building, and other expenses of $7,013.50. The other business expenses consisted of the same items as shown for other business expenses on the 1959 return. On August 19, 1961, petitioner purchased a medical practice known as the Garfield Ridge Medical Center at 6165 South Archer Avenue, Chicago, Illinois, from a doctor by the name of Samuel A. Libert (hereinafter referred to as Libert). The purchase was made pursuant to an agreement entered into between131 Libert and petitioner on May 4, 1961. This agreement provided that petitioner would pay to Libert $185,000 for Libert's interest in the real estate located at 6165 South Archer Avenue and medical practice. The agreement specifically provided that the medical practice which was being sold should include all the "medical diagnostic equipment, office and waiting room furniture, equipment and machinery, all of the inventory of drugs, and medical supplies * * together with all accounts receivable standing on the books of the Seller as of the date of the closing of said real estate deal." A list of the equipment, furniture, machinery, drugs and supplies was attached to the agreement as exhibit "A". The agreement also provided that on all medical fees which were received by the buyer under the agreement transferring the accounts receivable for which the seller was obligated to medical consultants, the buyer, upon receipt of the medical payment, would pay the consultant's fee. An exhibit "B" was attached to the agreement listing the names of the consultants which appeared on the seller's records with respect to which the buyer could become obligated to pay the consultant fee upon receipt132 of the medical fee payment. The agreement contained a provision that the seller would use his best efforts to effect a smooth transfer of the medical practice to the buyer and would remain in the employ of the buyer until December 1, 1961, for the purpose of effecting the transfer and of rendering any and all necessary services as a medical doctor and administrator that he ordinarily rendered when he was the owner of the medical practice, and in consideration would receive a weekly salary of $300. The agreement provided that as further consideration of the sale, the seller agreed not to practice his profession as a general practitioner or open a new office for the general practice of medicine directly or indirectly, after the closing date of the sale, within a radius of 15 miles of 6165 South Archer Avenue except that the downtown area of the city of Chicago, River Forest, and Oak Park, Illinois were excluded from the restrictive convenant. The agreement further provided that the buyer should have the exclusive use of the trade name known as Garfield Ridge Medical Center. After August 19, 1961, petitioner conducted to major portion of his medical practice from 6165 South Archer Avenue, 133 although he still retained his office and did some practice at 5625 South Pulaski Road. Shortiy after August 19, 1961, Libert became ill. He worked a number of days for petitioner at the Garfield Ridge Medical Center between the date of the sale of the Center to petitioner on August 19, 1961, and December 1, 1961. On December 1, 1961, a document entitled, "Amendment to the Memorandum of Agreement of May 4, 1961," was signed by petitioner and Libert. This document provided that petitioner and Libert agreed to cancel and set aside the condition of the May 4, 1961 agreement restricting Libert from the practice of medicine within 15 miles of 6165 South Archer Avenue, provided Libert remained employed by petitioner for an additional 3 months beyond December 1, 1961. Libert did continue to work certain days for petitioner, the last date on which he worked for petitioner at the Garfield Ridge Medical Center being in the latter part of April 1962. 621 During the year 1960 Libert had gross receipts from the Garfield Ridge Medical Center of approximately $145,000. From time to time other doctors were employed at the Garfield Ridge Medical Center and there were clerical and assisting134 personnel employed there. Petitioner on his Federal income tax return for the calendar year 1961 reported a business loss, as shown on schedule C, of $937.57 from the Garfield Ridge Medical Center, and on a separate schedule C showed a business loss of $995.55 from the Pulaski Road address. On both of these schedules C, the principal business activity was shown as physician and the principal product or service as medicine. On the schedule C for the Garfield Ridge Medical Center, he showed receipts as $18,050, and total expenses of $18,987.57. The expenses shown consisted of salaries and wages of $7,715.07, depreciation of $687.52, and other business expenses of $10,584.98. The depreciation was shown as being on medical building acquired August 19, 1961, at a cost of $40,000 with a total depreciation of $500 and on equipment acquired August 19, 1961, at a cost of $5,000 with a total depreciation of $187.52. Other expenses listed consisted of insurance, cleaning service, consultant fees, drugs and supplies, general expenses, lab fees, utilities, patient rebates, and telephone. On the schedule C for the South Pulaski Road location petitioner showed total receipts of $5,475 and total135 expenses of $6,470.55, consisting of depreciation of $2,088.55 which included depreciation on building of $739.80 with a notation "90 percent for business - 10 percent for personal use," and depreciation of $1,050 on an automobile stated to have been acquired on March 1, 1959, for $4,200 with a notation "Trades car every three years - 1 year set up as salvage value." The other expenses listed were for laundry, office supplies, drugs and medicines, car license and insurance, malpractice and other insurance, professional dues, and utilities. On schedule D petitioner showed a "Carry Forward Loss from Year 1960" of $961.98 which was carried forward as a loss on the first sheet of the return. Petitioner on this return showed other income of $6,745.54 which consisted of dividend income of $5,495.54 less a $50 dividend credit, leaving reportable dividends of $5,445.54, and interest from General Savings and Loan of $450, Trident Savings and Loan of $425, and Crawford Savings and Loan of $425, making total interest of $1,300. Petitioner on his 1962 Federal income tax return reported income of $1,958.09 from the business of the Garfield Ridge Medical Center as shown on schedule C and a business136 loss of $1,557.50 from his medical practice at the South Pulaski Road office. The income from the Garfield Ridge Medical Center, as reported on schedule C, showed gross receipts of $69,400.25 less patient rebates of $350, leaving total gross receipts of $69,050.25. The expenses deducted from receipts to arrive at gross profit were shown as merchandise purchased of $17,676, cost of labor "consulting fees to doctors" of $8,040, office supplies of $314.73, outside labor of $900, making a total of $26,930.73 from which was subtracted an amount of $1,121.75 designated as "Inventory at the end of this year," leaving an amount of $25,808.98, which was subtracted from gross receipts of $69,050.25 to arrive at the gross profit of $43,241.27. From this gross profit petitioner subtracted $41,283.18 for other business deductions which consisted of depreciation of $5,450, taxes on business and business property of $2,058.57, repairs to typewriter, air conditioning and plumbing of $275, salaries and wages of $15,871.67, insurance of $1,362, laboratory fees of $1,500, professional dues of $210, interest on business indebtedness to Talman Federal Savings and Loan Association of $2,658.41, and other137 business expenses of $11,897.53. The depreciation shown was based on $4,950 depreciation on Medical Center Building listed at a cost of $165,000 and as acquired on August 19, 1961, with allowable depreciation in prior years shown as $500, and depreciation on medical equipment, listed as acquired at a cost of $5,000 on August 19, 1961, with depreciation previously allowable as $187.52, and depreciation in the current year shown as $500. Above the listing of the building was shown land acquired August 19, 1961, at a cost of $15,000 with no depreciation shown. Included in the $11,897.53 of other expenses were social security taxes, unemployment compensation insurance tax, excise taxes, interest on delinquent social security tax, water taxes, real estate taxes, cleaning services of $2,835, light, gas heat, and telephone shown to be $4,400, laundry of $364, advertising of $250, car licenses and insurance of $256.50, gas, oil, and repairs to automobile of $1,580.75, malpractice insurance of $90, parking $485, postage $340, fuel oil $700, and Christmas expenses $780. On the schedule C with respect to the South Pulaski Road address, petitioner showed for the year 1962 gross receipts of 138 622 $1,900 less merchandise purchased of $275.18, leaving a gross profit of $1,624.82. He showed expenses of $3,182.32 consisting of depreciation of $2,192.55, insurance of $80, and other business expenses of $909.77. Included in the depreciation was $739.80 depreciation on the building stated to represent "90 percent for business 10 percent for personal use," and depreciation of $1,260 on an automobile shown to be a Cadillac purchased on April 1, 1961, for $5,600. There was a notation to the claimed depreciation on the automobile, "Trades car every 3 years. 1 year set up as salvage value." The other expenses of $909.77 consisted of laundry, office supplies, water taxes, gas heat, telephone and lights. On this return petitioner showed dividends received of $6,945.68 less the $50 dividend credit with a remainder of $6,895.68 of taxable dividends and interest income of $1,525 consisting of $425 interest from Trident Savings and Loan, $450 from General Savings and Loan Association, $425 from Crawford Savings and Loan Association, and $225 from Talman Federal Savings and Loan Association. Other than the accounting paper attached to his 1959 retained copy of his return and some few139 entries on certain of his patient record cards, petitioner had no record of receipts from his Pulaski Road office medical practice for the years 1959, 1960, 1961, and 1962. Other than certain check stubs and miscellaneous memoranda he had no record of expenses of his medical practice on South Pulaski Road for the years 1959, 1960, 1961, and 1962. The records kept for the years 1961 and 1962 at the Garfield Ridge Medical Center could not be reconciled with the income and expenses reported on petitioner's income tax returns for the years 1961 and 1962. There were from 5,000 to 10,000 patient record cards at the Garfield Ridge Medical Center. Petitioner kept some form of appointment book during 1961 and 1962. Circularizing some of the patients shown on petitioner's patient record cards at the Pulaski Road office disclosed that petitioner's receipts from medical fees in 1959 were in excess of $21,775.30 and his receipts for medical services in 1960 were in excess of $19,757.25, and in 1961 were more than $2,000 over the $5,475 reported by petitioner as medical receipts at the South Pulaski Road office for 1961. Many less patients were circularized with respect to the year 1961 than140 with respect to the years 1959 and 1960. No patients were circularized with respect to the year 1962. No patients listed on the patient cards of the Garfield Ridge Medical Center were circularized with respect to any year. When petitioner purchased the Garfield Ridge Medical Center, there were between 30 and 45 patients a day treated at that office. After Libert left the Center in April 1962, the number of patients treated at the Center declined. When petitioner began operating the Center in 1961, he began to keep on loose leaf sheets of notebook paper, daily records of some of the fees paid by patients at the Center and some of the fees received by mail. Some of the notations on this record were made by petitioner personally and were in his handwriting and others were made by employees at the Garfield Ridge Medical Center. Usually, the number of names and payments listed would run from three to five or six a day. Although there were some days when only one patient's name was listed and some days when there would be a listing of as many as 20 names, on many of the days shown in these papers, only two names were listed. Under date of August 26, 1961, there was a listing of "Santa141 Fe re physical July 1961 Mail $15." The word "mail" was written in red ink. There were other similar listings, not only of Santa Fe, but of other corporate names. These listings apparently referred to medical services rendered to employees of corporations who sent their employees to the Medical Center for treatment. There were notations of names of several different insurance companies followed by "re" with a patient's name. Under date of August 31, 1961, there was listed a patient's name, then in parenthesis "Patient paid" and an amount of $125. Other notations similar to this were shown next to each patient's name. The amounts shown next to each patient's name ran from as little as $3 to a high of $1,250.80. There were a number of listings on these loose leaf sheets during the years 1961 and 1962 designated as "Santa Fe" or "SFFR", one such listing under date of November 11, 1962, read as follows: "SFFR May, June and July 1962 $1,792.75." Throughout the 2 years, there were similar listings of names of other corporations with amounts shown. The total amount shown on these sheets of note paper for the year 1961 was 623 less than the amount reported on petitioner's income tax142 return as received from the Garfield Ridge Medical Center and the total amount shown on these loose leaf sheets for the year 1962 was less than the total amount shown on petitioner's income tax return for the year 1962 as received from the Garfield Ridge Medical Center. During the year 1959 petitioner received total interest income of $2,048.04 from the payers and in the amounts as follows: PayerAmountGeneral Federal$ 400.00Talman Federal350.44Crawford Savings400.00Lawn Savings (Acct. X7586)400.00Republic Savings389.98Trident Savings 107.62Total $2,048.04 During the year 1960, petitioner received interest income in a total amount of $2,883.24 from the payers and in the amounts as follows: PayerAmountNew Park Hospital$ 20.99General Federal (Acct. XXXX)450.00General Federal (Acct. X5556)450.00Talman Federal228.28Crawford Savings450.00Lawn Savings (Acct. X5589)225.00Republic Savings212.50Trident Savings413.64Hemlock Federal 432.83Total $2,883.24 During the year 1961 petitioner received interest income in the total amount of $2,655.02. This amount included the amounts totaling143 $1,300 reported on his income tax return as having been received from General Savings and Loan, Trident Savings and Loan, and Crawford Savings and Loan, plus $25 additional interest received from each Trident Savings and Loan and Crawford Savings and Loan. The remaining $1,305.02 was received from the payers and in the amounts as follows: PayerAmountNew Park Hospital$ 60.00General Federal (Acct. 15556)225.00Talman Federal276.25Lawn Savings (Acct. X5589)292.50Hemlock Federal292.50Lawn Manor (Acct. 22207) 158.77Total $1,305.02 During the year 1962 petitioner received interest income in the total amount of $2,272.25. In addition to the $1,525 3 petitioner reported on his income tax return as having been received from Trident Savings and Loan, General Federal, Crawford Savings, and Talman Federal, he received interest in the following amounts from the payers as indicated: 144 PayerAmountNew Park Hospital$ 60.00Lawn Savings (Acct. 45589)159.38Hemlock Federal256.87Lawn Manor Savings (Acct. 22207)$300.25In 1960 petitioner had a capital gain of $79.50 from the sale on August 11, 1960, of 100 shares of Reynolds Metals stock, and in 1961 he had capital gains in the amounts of $21.36, $16.14, and $2,171.25 from the sale of 100 shares of Schick, Inc. stock on May 23, 1961, 100 shares of Unexcelled Chemical stock on June 6, 1961, and 100 shares of American Viscose stock on June 9, 1961, respectively. During 1961 petitioner received rental income of $1,540 from the rental of office space to an optometrist and a dentist in the Garfield Ridge Medical Center building. In 1962 petitioner received total rental income of $3,870 from the rental of this office space in the Garfield Ridge Medical Center to the same optometrist and dentist. On May 7, 1951, petitioner opened a savings account at the Manufacturers Trust Company in New York with a deposit of $800. Thereafter on May 9, 1951, he withdrew $15. No further withdrawals were made from this account until March 5, 1952, when the account was closed out and at that time, because145 of deposits in varying amounts, one of which was $15, two of which were $100, and the balance in excess of $100 with the largest one amount being $1,350 on March 4, 1952 and the addition of certain amounts of interest, the total amount in the savings account was $4,003.31. On March 6, 1952, petitioner opened a savings account in the Dime Savings Bank in Brooklyn by depositing the $4,003.31 which he had withdrawn in closing his account at the Manufacturers Trust Company. A number of deposits were thereafter made to this account, the largest one deposit being in the amount of $1,000.30 and four other deposits being in an amount in excess of $950. Only two small 624 withdrawals were made from this account, the total of the two being less than $100 until February 3, 1953, when $1,000 was withdrawn. There was another withdrawal of $1,000 on February 11, 1953, and $550 was withdrawn on April 14, 1953. A $300 withdrawal was made on April 30, 1953, a $750 withdrawal on November 17, 1954, and three other withdrawals between July 2, 1953, and July 6, 1954, of $50 or less. On January 7, 1955, this account was closed by the withdrawal therefrom of $7,063.94. From this withdrawal petitioner146 deposited $6,563.94 in savings account No. XXXX which he opened on January 10, 1955, at the General Savings and Loan Association of Chicago. On January 5, 1955, petitioner opened a checking account at the Exchange National Bank of Chicago, Illinois which he maintained from that time throughout the years in issue. On or about April 7, 1961, petitioner opened a checking account under the title, "Stanley Turzynski, M. D." at the Drovers National Bank of Chicago. He maintained this checking account throughout the years here in issue. On or about August 24, 1961, petitioner opened a checking account under the name of Garfield Ridge Medical Center at the Drovers National Bank of Chicago. He maintained this account throughout the years here in issue. Starting with the opening of a savings account on January 10, 1955, at General Savings and Loan Association, petitioner thereafter opened a number of other savings accounts, the ones at Talman Federal Savings and Loan Association of Chicago, Crawford Savings and Loan Association, Republic Federal Savings and Loan Association, and one of the accounts at Lawn Savings and Loan Association having been opened prior to the years here in issue and147 maintained thereafter into or throughout the years here in issue. Other accounts, including additional accounts at Lawn Savings and Loan Association, Trident Savings and Loan Association, Hemlock Federal Savings and Loan Association, two accounts at Lawn Manor Savings and Loan Association, and an account for John W. Weiland as beneficiary, naming petitioner as trustee, at the General Savings and Loan Association, were opened during the years here in issue. 4On July 26, 1960, petitioner loaned $1,000 to the New Park Hospital Corporation (now known as Jackson Park Hospital) and received the corporation's note in that amount. This loan was still outstanding as of December 31, 1962, but was paid in full on July 3, 1963. 148 In 1952 petitioner opened a brokerage account with Oppenheimer, Vanden Broeck and Company (now Oppenheimer, Newborg and Neu). 5 He thereafter made the following purchases through this account in 1953: No. of sharesDateName of stockpurchasedpurchasedCostRobert Gair Co., Inc20Jan. 9$ 398.06U.S. Gypsum Co.10Jan. 91,176.12New England Tel. & Tel20Jan. 202,228.45Flintkote Co.50Feb. 111,547.38American Tel. & Tel10Apr. 101,554.10Pacific Tel. & Tel10June 101,153.50None of these shares was sold by petitioner during the year 1953, the first sale of any of the stock purchased in 1953 being on February 15, 1955, when he sold the 10 shares of United StatesGypsum Company. During 1954 petitioner purchased through this account 25 shares of Bristol Myers Company stock on November 17, 1954, for $697.44. He sold this stock on August 15, 1956. During 1955 petitioner purchased through this account various stocks in the total amount of $5,092.43 and made149 no sales of the stock purchased in that year, the only sale of stock from this account being that 625 noted above of United StatesGypsum Company stock. In 1956 petitioner purchased through this account various shares of stock at a cost of $8,498, and sold none of these stocks during that year, the only sale of stock made during that year through this account being, as above stated, of the Bristol Myers Company stock bought in 1954. During 1957 petitioner made purchases through this account of stock at a total price of $2,250.75 and no sales were made. The last purchase was on June 28, 1957, and after that date there were no purchases or sales through this account through the end of 1962. On or about August 23, 1955, petitioner opened a brokerage account with Cruttenden and Company which in 1957 became Cruttenden, Podesta and Company, Chicago, Illinois. During 1955 petitioner purchased various stocks through this account, the total amount of such purchases being $6,519.28. In 1955 he sold one of the stocks purchased in that year for $1,060.41. During 1956 petitioner purchased various stocks through this account at a cost of $8,310.82 and made three sales of stock from this150 account totaling $2,259.32. In 1957 petitioner made two purchases of stock through this account at a total cost of $3,018.98 and made no sales in that year. In 1956 petitioner made three purchases of stock through this account at a total cost of $4,300 and made no sales. In 1959 petitioner made four purchases of stock through this account at a total cost of $9,956.58 and made no sales through this account. On or about August 1, 1956, petitioner opened brokerage account No. XXX X6805 at Merrill Lynch, Pierce, Fenner and Beane (now Merrill Lynch, Pierce, Fenner and Smith), and on or about February 27, 1961, he opened brokerage account No. XXX X4326 with Merrill Lynch, Pierce, Fenner and Smith. On or about May 31, 1961, petitioner opened brokerage account No. XXX X6468 with this broker. In 1956 he made two stock purchases through account No. XXX X6805 at a total cost of $3,540.23, and he made no sales of stock through that account in that year. In 1957 he made four stock purchases through account No. XXX X6805 at a total cost of $1,378.03 and no sales. Petitioner made no further purchases or sales of stock through his accounts with Merrill Lynch, Pierce, Fenner and Smith until 1961151 when he made the following purchases: AccountDateNo. ofNo.StockpurchasedsharesCostXXX X4326Denver Rio Grande WesternMar. 13, 1961100$1,900.99XXX X6468General MotorsMay 31, 1961502,302.90XXX X6468Tenney Engineers, IncJune 1, 1961100979.28XXX X6468Chemetron CorporationJune 19, 19611002,883.40XXX X6468San Diego Gas & ElectricJune 19, 19611003,235.15XXX X6468Gulf Oil CorpJune 27, 1961963,696.00 On June 9, 1961, petitioner made a sale through account No. XXX X6468 of 100 shares of American Viscose stock which had been previously purchased through other accounts at a total selling price of $6,048.33. On or about December 1, 1959, petitioner opened a brokerage account with Hornblower and Weeks (now Hornblower and Weeks-Hemphill Noyes). During 1959 petitioner made stock purchases through this account in the amount of $3,608.09, and during the year 1960 he made stock purchases through this account in the amount of $10,564.12. In 1961 petitioner made the following purchases through this account: DateNo. ofStockPurchasedSharesCostEl Paso Natural GasFeb. 10100$ 2,782.90B. F. GoodrichFeb. 201005,175.00Denver Rio Grande WesternMar. 71001,913.53Pure Oil Co.Mar. 17501,785.28General Dynamics Corp.Mar. 211004,039.15General Dynamics Corp.Apr. 241003,863.28Union Oil CalifApr. 27251,444.25Paramount PicturesApr. 27251,962.03General ElectricMay 1, 1961503,132.65Champion Paper FiberMay 21003,084.40Parke DavisJune 191003,587.50Paramount PicturesJuly 24251,785.28U.S. Gypsum Co.July 27252,435.43Corn Products Co.Aug. 325 1,333.94Total $38,324.62152 626 Petitioner made no sales through this account. There was no activity in this account during the calendar year 1962. On or about July 12, 1960, petitioner opened a brokerage account with Hayden, Stone and Company, Chicago, Illinois. During the year 1960 petitioner made purchases of stock through this account totaling $10,962.44, and he made sales of stock through this account totaling $11,205.80. There were no purchases or sales made through this account during the calendar years 1961 and 1962. On or about May 4, 1961, Petitioner opened a brokerage account with Goodbody and Company. He made two purcases through this account, one of 25 shares of United StatesGypsum on May 4, 1961, at a cost of $2,638.28 and the other of 100 shares of Parke Davis and Company on June 14, 1961, at a cost of $3,787.90. There were no sales through this account in 1961, and no purchases or sales in 1962. On or about November 8, 1961, petitioner opened a brokerage account with J. R. Williston and Beane, New York, New York. He made one purchase through this account in 1961 which was of 100 shares of General Tel & Electronics on November 8 at a cost of $2,431. There was no other activity in this153 account during the years 1961 and 1962. On February 27, 1961, petitioner opened a brokerage account with McDonnell and Company, New York, New York. During 1961 he made the following purchases and sales through this account: No. ofDateDateStocksharespurchasedCostsoldPriceMartin Co.100Feb. 27$ 3,436.00Gamble Skogmo Inc.100Feb. 282,682.25Denver Rio Grande Western100Mar. 21,963.88Midland Ross Corp50Mar. 162,692.81Martin Co.100Apr. 43,461.13Martin Co.100Apr. 103,247.56National Gypsum100Apr. 245,744.70Midland Ross Corporation50May 42,441.56Unexcelled Chemical100May 121,989.13June 61 $2,005.27Southern Rlty & Util.100May 12979.13Slick Airways100May 121,042.25Jetronic Indust.100May 15941.25Schick Inc.100May 171,168.50May 232 1,189.86Tenney Engineering100May 171,256.88Kaltman D. & Co.200May 17948.26Kayser Roth & Co.100May 192,330.00Totals $36,325.29$3,195.13On or154 about June 26, 1961, petitioner opened a brokerage account with Reynolds and Company, New York, New York. During the balance of the year 1961 he purchased various shares of stock at a total cost of $12,690 through this account and made no sales through this account. There was no activity in this account during the year 1962. As of December 31, 1953 through December 31, 1962, petitioner owned stock and securities with a cost basis as indicated below: Year endedDecember 31Amount1953$ 8,054.1919548,751.54195518,126.72195635,519.76195742,167.52195846,467.52195960,032.13196070,352.891961174,512.831962174,512.83 627 The above totals include five shares of American Telephone and Telegraph Company stock purchased by petitioner directly from the company for $430 on March 13, 1961, and 25 shares of stock of the New England Telephone and Telegraph Company purchased by petitioner directly from the company on May 3, 1961, for $1,050. Also included therein are 31 shares of stock of Pacific Northwest Bell Telephone Company purchased by petitioner directly from the company on October 3, 1961, for $496, and 12 shares of stock of155 the San Diego Gas and Electric Company purchased by petitioner directly from the company on September 30, 1962, for $372. In March of 1955 petitioner purchased a 1955 Oldsmobile 2 door model 88, at a cost of $3,000. Petitioner owned this car until March 20, 1961, when he purchased a 1961 Cadillac convertible for $5,400. He owned the Cadillac throughout the balance of 1961 and throughout the year 1962. On July 27, 1957 petitioner filed an application with Talman Federal Savings and Loan Association of Chicago for a mortgage loan to purchase the property at 5625 South Pulaski Road in Chicago, Illinois. In this application, he showed his annual income as $9,000 plus. He showed his assets to be $20,000, consisting of $2,000 earnest money deposit, $6,000 cash on hand, $2,000 in a checking account at Exchange National Bank, and $10,000 in a savings account at the General Savings and Loan Association. Petitioner signed this statement under the following statement printed in bold type: THAT ALL STATEMENTS MADE IN THIS APPLICATION ARE TRUE TO THE BEST OF MY/OUR KNOWLEDGE AND BELIEF AND HAVE BEEN MADE WITH THE ACTUAL INTENTION THAT THE ASSOCIATION SHOULD RELY THEREON Petitioner received156 a mortgage loan on the basis of this application in the amount of $22,000. There was an escrow account maintained in connection with this mortgage and petitioner's balances in this escrow account as of December 31, 1958, 1959, 1960, 1961, and 1962 were $428.08, $463.60, $198.70, $402.00, and $450.54, respectively. The outstanding balances on the mortgage as of the end of each of the above designated years were $16,383.88, $15,882.41, $15,350.15, $14,895.74, and $14,284.03, respectively. On May 4, 1961, petitioner applied to the Talman Federal Savings and Loan Association of Chicago for a mortgage loan in the amount of $45,000 on the property located at 6165 South Archer Avenue, Chicago, Illinois. On this application petitioner showed estimated value of the property to be $75,000, and under "Annual Income" showed an amount of $50,000 plus with the statement, "est. new office," plus $4,200 of other income making a total of $54,200. Under assets petitioner showed total assets of $105,000 [sic] consisting of earnest money deposit of $5,000, cash on hand of $67,000, savings account at Talman Federal Savings and Loan Association of $10,000, and equity in real estate owned of $25,000. 157 Petitioner signed the application below a statement that the statements made in the application were true to the best of his knowledge and belief and had been made with the intention that the Association rely thereon. The mortgage loan was made to petitioner on or about August 19, 1961. There was an escrow account in connection with this loan in which the balances as of December 31, 1961, and December 31, 1962, were $720 and $640, respectively. The balances due on this mortgage as of December 31, 1961 and December 31, 1962, were $44,529.66 and $42,578.97, respectively. In addition to the above mortgages, petitioner on August 18, 1961, executed a second mortgage in respect to the Garfield Ridge Medical Center property on South Archer Avenue in the amount of $68,000, and on April 7, 1961, borrowed $9,000 from the Drovers National Bank of Chicago on the security of some of his stock, and on May 2, 1961, borrowed $15,000 from this same bank on the security of his stock. On August 14, 1961, petitioner borrowed $10,000 from the Drovers National Bank of Chicago secured by stock, and on August 18, 1961, borrowed $71,000 from this bank secured by stock. On November 16, 1961, petitioner borrowed158 $65,000 from the Drovers National Bank, and on February 19, 1962, borrowed $21,000 from this bank, both of which loans were secured by stock. On April 18, 1962, petitioner again borrowed $55,000 from the Drovers National Bank, and again secured the loan by stock. As of December 31, 1961, there was outstanding on petitioner's loans from the Drovers National Bank $37,500, and as of December 31, 1962, there was outstanding on these loans $10,000. Petitioner on March 20, 1961, borrowed $4,360 from the Exchange National Bank, giving a chattel mortgage on his 1961 Cadillac convertible as security. As of December 31, 1961, there was a balance due 628 on this mortgage of $2,722, and as of December 31, 1962, there was outstanding on this loan $538. In addition to the property on South Pulaski Road, automobiles, and the Garfield Ridge Medical Center property on South Archer Avenue, petitioner owned furniture, fixtures, and equipment. Petitioner's reserve for depreciation on the building on South Pulaski Road as of December 31, 1958 through December 31, 1962 was $986.40, $1,341.12, $1,695.84, $2,050.56, and $2,405.28 respectively. 6159 Of the $185,000 paid by petitioner for the Garfield Ridge Medical Center, $40,000 was properly allocable to land, $79,000 to the building, $24,354 to equipment, furniture and fixtures, and $41,646 to goodwill. As of December 31, 1961 and 1962, petitioner's reserve for depreciation on the furniture and fixtures at the South Archer Avenue property was $811.72 and $3,247.12, respectively. The reserve for depreciation on the building located at 6165 South Archer Avenue as of December 31, 1961 and 1962 was $789.21 and $3,159.21, respectively. The following schedule shows petitioner's net assets other than cash not on deposit in a financial institution and net liabilities as of December 31, 1958, 1959, 1960, 1961, and 1962: Assets19581959196019611962Cash in banks$ 669.67$ 944.44$ 1,076.25$ 6,110.39$ 4,368.35Cash in Federal Savings and Loan Association46,134.1158,752.0970,000.2645,660.1266,106.02Escrow funds428.08463.60198.701,122.001,090.54Notes receivable1,000.001,000.001,000.00Supplies inventory1,121.75Stocks46,465.5160,030.1870,350.94174,209.37174,581.37Automobile (business and personal)3,000.003,000.003,000.005,400.005,400.00Furniture, fixtures and equipment4,155.004,935.004,935.0029,289.0029,702.85Real estate36,900.0036,900.0036,900.00155,900.00155,900.00Goodwill41,646.0041,646.00Total assets$137,752.37$165,025.31$187,461.15$460,336.88$480.916.88LiabilitiesMortgage payable$ 16,383.88$ 15,882.41$ 15,350.15$ 59,425.40$ 56,863.00Loans and note payable108,222.0010,538.00Reserve for depreciation 6,127.157,404.628,372.098,766.4915,526.75Total liabilities$ 22,511.03$ 23,287.03$ 23,722.24$176,413.89$ 82,927.75160 The following schedule shows the amount of petitioner's personal expenditures and dividend exclusions for the years 1959, 1960, 1961, and 1962, nontaxable portion of capital gains, capital loss carryover and proceeds from a personal injury suit during the years 1959, 1960, 1961, and 1962. 1959196019611962ADDITIONS:Food, clothing, etc.$1,000.00$1,000.00$1,000.00$1,000.00Medical insurance130.04130.04130.04130.04Auto expense (personal)168.60155.20183.72House expense115.70126.30116.7290.00Federal income taxes309.841,216.4615.72104.40Interest expense:Residence (personal portion)530.33513.59498.26480.18Auto (personal portion)13.4017.88Real estate taxes:Residence (personal portion)297.80286.19325.36359.66Garfield Ridge Medical Center (por- tion claimed $445.49 less $302.03 per proration in 1961)143.46Loss in disposition of auto300.00Nondeductible portion of capital loss882.48Investment credit31.15TOTAL ADDITIONS $2,552.31$4,310.26$2,399.50$2,540.49DEDUCTIONS:Nontaxable portion of capital gains$ 663.13Capital loss carryover from 1960882.48Net proceeds of personal injury suit2,897.00Dividend exclusions $ 50.00$ 50.0050.00$ 50.00TOTAL DEDUCTIONS $ 50.00$ 50.00$4,492.61$ 50.00161 629 In April 1963 Libert sent a notice to petitioner that he proposed to return to medical and surgical practice on April 24, 1963, temporarily at 6161 South Archer Avenue, Chicago, Illinois, and that he would permanently establish his office at 6167 South Archer Avenue. The address at 6161 South Archer Avenue is located in very close proximity to 6165 South Archer Avenue, the location of the Garfield Ridge Medical Center, and the address at 6167 South Archer Avenue is approximately one block from the Garfield Ridge Medical Center location. After receiving this notice petitioner filed a suit in the Circuit Court of Cook County, Illinois, Chancery Division, to enjoin Libert from opening an office for the practice of medicine at either of the Archer Avenue addresses. Testimony in this suit was taken before a Master in Chancery. In his testimony in connection with this suit petitioner first denied signing the supplemental agreement of sale releasing Libert from his covenant not to compete in return for Libert's agreeing to work at the Garfield Ridge Medical Center for an extra 3 months and later admitted that he signed the document, but stated that Libert obtained his signature162 through fraud and trickery. In his testimony in connection with this suit petitioner stated that he considered of the total payment of $185,000 for the property and medical practice at the Garfield Ridge Medical Center, $110,000 was paid for the medical practice. Petitioner testified that Libert had told him that the practice at the medical center was a "gold mine." The Master in Chancery decided the case against petitioner, and the Master's decision was affirmed by the Circuit Court of Cook County. Petitioner appealed the decision of the Circuit Court of Cook County to the Appellate Court of Illinois, First District, and the Appellate Court affirmed the decision of the Circuit Court. The Supreme Court of Illinois refused to grant certiorari in the case. Investigation of petitioner's Federal income tax returns for the years 1959, 1960, and 1961 was begun by an Internal Revenue Service agent on April 18, 1963. Later this agent was assigned petitioner's Federal income tax return for the year 1962 for investigation. The agent first called on petitioner in connection with this investigation at the Garfield Ridge Medical Center on May 14, 1963. At this first interview the agent inquired163 as to where petitioner obtained the money to purchase the Garfield Ridge Medical Center and the various stocks he bought in 1961. Petitioner told the agent that the money came from cash which he had brought with him from Europe. However, he refused to tell the agent the amount of cash he had brought with him, stating that he had shown passbooks from the Dime Savings Bank of Brooklyn, New York and the Manufacturers Trust Company of New York City to another agent in proof of the fact that he had brought cash money when he came to the United States. The revenue agent also inquired about petitioner's savings and loan accounts, and petitioner informed him only of the accounts at the Trident Savings and Loan, Crawford Savings and Loan, General Savings and Loan, and Talman Federal Savings and Loan. The agent inquired about petitioner's brokerage accounts and was informed that the only brokerage accounts he had were with Cruttenden Podesta and Company, Merrill Lynch, Pierce, Fenner and Smith, Hornblower and Weeks-Hemphill Noyes, Hayden Stone and Company, McDonnell and Company, and J. R. Willston and Beane. Petitioner told the agent that he had checking accounts at the Exchange National164 630 Bank and Drovers National Bank. He also stated that he had had a safe-deposit box at the Exchange National Bank in Chicago, but had transferred it to the Talman Federal Savings and Loan Association and that as of the date of the interview the only safe-deposit box he maintained was at the Talman Federal Savings and Loan Association. Petitioner stated to the agent that he had reported all of his income from his medical practice, dividends, and interest from savings accounts for the years 1959, 1960, and 1961. In further interviews with petitioner, he refused to give the revenue agent any more information regarding the cash he said he brought from Germany. On August 29, 1963, a special agent accompanied the revenue agent to interview petitioner. The special agent asked petitioner how he arrived at the gross receipts for 1961 that were listed on the separate Schedule C of his tax return for the Garfield Ridge Medical Center. Petitioner stated that he kept a receipt book in which he recorded the names of his patients and the amounts he received from those patients, that at the end of every month he totaled these amounts and gave them to his accountant for the accountant to165 add up and put on his income tax returns. The special agent asked petitioner how he arrived at the receipts for the South Pulaski Road practice. Petitioner told him that he kept a book in which he entered at the end of every day the total amount of income he received that day, but that he did not enter the patient's name in this book. Petitioner stated that once a week he transcribed from this book onto a sheet of paper, the daily amounts that he had entered in the book, and at the end of the year, he added up the amounts he had on the sheets of paper for his income tax returns. The agent asked petitioner if all the deductions in his 1961 return were correct and petitioner stated that they were with the exception of depreciation, that the accountant had made a mistake and used the cost basis of the medical center of the previous owner, and that the cost basis should have been higher. Petitioner stated that his deductions with respect to 1959 and 1960 were correct. Petitioner told the special agent that all the checks received from patients were deposited in his checking accounts, either at the Exchange National Bank or the Drovers National Bank, but that sometimes he used cash166 that he received from patients to pay bills and sometimes deposited cash in his checking accounts and sometimes in his savings accounts, and sometimes put some of it in his safe deposit box. Petitioner said he could not remember the names of any attorneys from whom he had received medical fees. Petitioner furnished the special agent with the patient cards from both his Garfield Ridge Medical Center practice and his South Pulaski Road office practice, his monthly bank statements and canceled checks from his Garfield Ridge Medical Center practice, and patient receipt books for the Garfield Ridge Medical Center. The agent made copies of some of the patient record cards in petitioner's office. He took with him some of the other documents which he returned to petitioner on September 19, 1963, when he again met with petitioner and the internal revenue agent. At the meeting with the special agent on August 29, 1963, petitioner told the special agent that the money he used to buy the stock and to purchase the Garfield Ridge Medical Center in 1961 was brought with him from Germany in "D" Marks. Petitioner stated that he exchanged the "D" Marks at banks in New York City and in Philadelphia, 167 and that he probably exchanged some of them for American money at the American Express Company. He stated that he exchanged the money by just walking up to the teller at the bank and asking him to make the exchange, that he was not required to sign any paper in making any exchange. Petitioner said that he had a safe-deposit box in New York and that he put the American dollars he received in exchange for the "D" Marks in that box and drew them out little by little. Petitioner said later when he got a safe-deposit box in Chicago, he made three trips from New York to Chicago to bring the cash from the safedeposit box in New York to place it in the safe-deposit box in Chicago. Petitioner stated that he did not keep any currency in his residence but kept it all in the safe-deposit box. The special agent asked if he and the revenue agent could examine petitioner's safe-deposit box in petitioner's presence, and petitioner refused to permit them to examine it. 631 On September 19, 1963, when the special agent returned the records he had received from petitioner to petitioner, he told petitioner that the receipts shown in the receipt book for the Garfield Ridge Medical Center practice168 did not add up in either 1961 or 1962 to the amounts reported by petitioner on his income tax returns but were less than those amounts. Petitioner said that these differences which were only about $5,000 in 1961 and $20,000 in 1962, represented small currency payments that he received from patients which he did not have the time to record and could not hire people to record. Petitioner stated that these would have been payments in currency of $5 or less, that all payments over $5 were recorded in the book. Petitioner stated that he kept records of small amounts on slips of paper, and that at the end of the month he ran up the amounts on the daily slips of paper on a tape and threw the slips of paper away and that the amount of the tapes was added to the amount shown in his receipt book to determine his receipts. Petitioner was requested to furnish the agents with the tapes but never did. The agent inquired of petitioner as to why the amount of rental income which he received in 1961 and 1962 from rentals of offices at the Garfield Ridge Medical Center were not included in his 1961 and 1962 tax returns. Petitioner stated that he did not know but would check his records. The agent169 asked petitioner which records he would have to check, and petitioner replied that he would have to check with his accountant. No records of the rental receipts were ever furnished to the revenue agent. Petitioner stated to the special agent and the revenue agent that he never extended credit to patients treated at the South Pulaski Road office. When the agent asked petitioner to permit him to see the little book he kept with respect to the Pulaski Road office in which he recorded the daily amounts of receipts and other records relating to the practice at that office, petitioner brought a brown paper sack full of canceled checks and statements, stating that these were all the records he had, and explained that his Pulaski Road office had been burglarized twice and that in cleaning up the office he had probably thrown some of his records away. The special agent asked petitioner if he did not have some records in a drawer underneath his examination table, and petitioner told him there were records there. He opened this drawer and handed the special agent various records from the drawer, one of which was the sheet containing daily receipt notations which was attached to the retained170 copy of petitioner's 1959 income tax return. Petitioner told the agent that was the daily sheet on which he entered the figures from the little book, but he never supplied the agent with the little book. Petitioner produced no records to substantiate the deductions claimed on his tax returns other than some few check stubs. Petitioner stated that the other records had been misplaced. In March of 1964 there was a reassignment of special agents to the investigation of petitioner's income tax returns. The newly assigned special agent interviewed petitioner at the Garfield Ridge Medical Center on July 23, 1964. This special agent again asked petitioner about the funds he brought into the country and was told that petitioner would give no further information about those funds. The agent also inquired as to the amounts shown on patient's cards and why petitioner had borrowed the moneys he had borrowed. Petitioner stated that he borrowed the moneys to establish his credit and gave approximately the same explanation with respect to the absence of records to the second agent as he had to the first. He repeated to the second agent that he had deposited all checks received from his patients171 in one of his checking accounts. Petitioner was asked about receipts from insurance companies, from the State of Illinois for the treatment of persons entitled to public aid, and with respect to other checks. The agent then showed petitioner copies of checks which had been obtained from various banks which were drawn to petitioner's order by various attorneys in connection with medical services, from various insurance companies, and from the State of Illinois with respect to payments for public aid patients. Petitioner was unable to explain where these amounts were recorded in his books or records. When the agents were unable to obtain information from which to determine petitioner's receipts from his medical practice, they circularized various patients whose names appeared on patient's cards at the South Pulaski Road office to develop from third-party sources this information with respect to 1959 and 1960 and to some extent to 1961, but did not circularize with respect to 1962 and did no circularizing with 632 respect to patients of the Garfield Ridge Medical Center. Petitioner in fact deposited in 1959 and 1960 numerous checks from patients, from the State of Illinois for172 public aid payments, and from payments of medical fees of patients by insurance companies to his savings account at Republic Federal Savings and Loan Association, Talman Federal Savings and Loan Association, and Trident Savings and Loan Association. During 1961 petitioner deposited numerous checks received from patients, the State of Illinois for public aid patients, and various insurance companies including the Blue Shield Plan and others in his accounts at Lawn Manor Savings and Loan Association, and Talman Federal Savings and Loan Association. Petitioner also deposited in these savings accounts dividend checks and other checks. During the years 1955, 1956, 1957, 1958, 1959, 1960, and 1961, petitioner made deposits into his checking account at the Exchange National Bank of Chicago in the amounts of $18,993.67, $30,901.81, $36,807.79, $9,236.77, $3,750.18, $5,032.46, and $613.60, respectively. During 1961 petitioner made total deposits of $192,987.89 to this checking account entitled, Stanley Turzynski, M.D." at the Drovers National Bank of Chicago, Illinois. These deposits consisted of $45,750 deposits of cash, $43,487.91 deposits of checks and $103,749.98 deposits from loan173 proceeds. During the year 1962, petitioner made total deposits of $84,900.02 to his checking account in the name of Stanley Turzynski, M.D., at the Drovers National Bank of Chicago, the deposits being comprised of $23,500 in cash $6,400.02 in checks, and $55,000 proceeds of loan. During the year 1961 petitioner made total deposits of $23,674.61 to his checking account under the name of Garfield Ridge Medical Center at the Drovers National Bank. These deposits were composed of cash deposits of $3,500 and check deposits of $20,174.61. During the year 1962, petitioner made total deposits of $180,455.81 to his checking account under the name of Garfield Ridge Medical Center at the Drovers National Bank of Chicago, these deposits being comprised of $48,500 cash deposits, $130,395.20 check deposits, and $1,560.61 of the deposits was unidentified. During the years of World War II, the money in circulation in Germany was increased about ten times over its previous level but prices were controlled and maintained at approximately the level they had been prior to the increase of the money in circulation. After the War when the United States Military Government took control of certain174 parts of Germany, it investigated the situation with respect to the German currency and started in early June of 1945 to plan for some form of currency exchange. At that time and continuing into later years prior to the currency exchange act, many people in Germany had Reichsmarks far in excess of the number they could legally spend for goods and services at the legal price established for such goods and services. Food and certain other items were rationed and available in limited quantities. Only very small quantities of other consumer goods were available. The United States set up a rate of exchange for Reichsmarks which was applicable only for internal purposes of the United States Army in exchanging money for servicemen. The rate set up was 10 Reichsmarks to a dollar and was geared to the relative purchasing power of a mark in Germany and a dollar in the United States at the legal price rates. The United States Military Government, German Supreme Command, shortly after taking over its area of Germany, placed in effect a law entitled, "Foreign Exchange Control Act" which prohibited all persons in Germany from conducting any transactions, unless licensed, with any foreign exchange175 asset including United States currency and any currency other than German currency. This law also required all persons in Germany who had any foreign currency including United States currency to surrender the same to the nearest branch of the Reichsbank and receive a receipt for the assets deposited. However, in spite of this law, there was an active black market during the period following the surrender of Germany in 1945 up to June 20, 1948, for exchange of Reichsmarks for United States dollars. During this period the black market exchange rate fluctuated from a minimum of 175 Reichsmarks to the dollar to a maximum of well over 200 Reichsmarks to a dollar, and the average Reichsmark exchange rate during this period was approximately 200 Reichsmarks to a dollar. The United States Military Government was aware of the 633 activity in the black market exchange of Reichsmarks for dollars and considered this fact in working toward a currency reform act to be put into effect in Germany. There were rumors rampant in Germany from May 1945 until such an Act was actually put into effect on June 20, 1948, that some form of currency reform was imminent. The placing of such an Act in effect176 in the areas subject to the United States Military Government was delayed because of an effort by the Allied Forces to work out a joint reform act with all parties including the Russians participating. The West German Currency Reform Act, put into effect by the United States Military Goverment, was announced shortly before June 20, 1948, and became effective on that date which was a Sunday. This Act established the Deutschemark as the new West German currency and invalidated the Reichsmark as the basic unit of West German currency. Small Reichsmark notes of one Reichsmark or less and small coins were permitted in use for a short time and were to be accorded one-tenth of their face value. Any person living within the West German economy and not in a displaced persons camp could only obtain a maximum of 40 Deutschemarks on June 21, 1948, when the currency reform went into effect. These 40 Deutschemarks were issued to the individual from the same agency that was responsible for issuing food rationing cards. At a subsequent date within a 2-month period, this individual could obtain another 20 Deutschemarks from the ration office. These 60 Deutschemarks were issued to individuals on a177 basis of one Deutschemark for one Reichsmark. The only exception to the rule of a limit of 60 Deutschemarks issued through the ration office at the beginning of the period in which the currency reform was taking place was for business enterprises, professional people, and associations who were granted advances of Deutschemarks for Reichsmarks to meet payrolls for employees in an amount of 60 Deutschemarks for each employee. These advances were applied against the firm's or business' subsequent conversion right of Reichsmarks to Deutschemarks. Any Reichsmarks that an individual had in excess of 60 could be exchanged by such individual by taking the balance of the Reichsmarks he had over 60 to one bank or one exchange agency and surrendering or depositing the Reichsmarks with that agency. Upon deposit of the Reichsmarks with the bank or exchange agency, the individual was required to prepare a detailed form and answer a detailed questionnaire with respect to how his Reichsmarks were acquired. The United States Military Government devised the questionnaire with questions tending to discourage persons who had illicit holdings of Reichsmarks received from black marketeers from bringing178 such Reichsmarks in for exchange. When an individual presented his Reichsmarks for lodgement with a bank and filed the required form including the answers to the questionnaire with that bank, he was required to produce his identity card. An individual could legally obtain only one identity card. When the identity card was produced, the bank or exchange agency punched the first page of the identity card in the upper right hand corner. In order to make an exchange of Reichsmarks at a bank, an individual had to produce an unpunched identity card at that particular bank. A banking institution or exchange agency was prohibited from accepting Reichsmarks except upon the producing of an identity card which had not been punched. In order to obtain the exchange of Reichsmarks for Deutschemarks, all Reichmarks, except small Reichsmarks notes or small Reichsmarks coins, had to be surrendered at a bank or exchange agency by June 26, 1948. Any Reichsmarks not surrendered by that date, other than in the small denominations indicated were invalidated. When an individual deposited his Reichsmarks, the form which he filed was in triplicate. He retained one copy and the bank or exchange office kept179 two copies, one for itself and one which it furnished to the tax office. When an individual deposited his Reichsmarks with the bank or exchange agency, these Reichsmarks were counted and a receipt for the number of Reichsmarks turned in given to the individual. Each individual who timely turned in his Reichsmarks, if on the face of the paper filed he appeared to be entitled to exchange the Reichsmarks for Deutschemarks, would receive a maximum of an additional 250 Deutschemarks during the week of June 27, 1948, at the rate of one Deutschemark for every ten Reichsmarks surrendered or deposited. However, in the initial payout of the 250 Deutschemarks, only one-half of this rate was paid so that in order to receive the 250 Deutschemarks, an individual was required to turn in 5,000 Reichsmarks. The remaining 250 Deutschemarks were held in a blocked account. Any Reichsmarks turned in by an individual to a bank or 634 exchange agency in excess of 5,000 were converted into Deutschemarks only with the approval of the tax office after an investigation was conducted to determine if all taxes had been paid on the Reichsmarks and if all the Reichsmarks had been acquired legally. Violation180 of the provisions of the German Currency Reform Act was a criminal offense and conviction of violation of that Act was punishable by fine and imprisonment. If the tax office authorized conversion of an amount of Reichsmarks in excess of 5,000 for an individual, the rate of exchange was 100 Reichsmarks to 6 1/2 Deutschemarks, and the conversion would take place over a period of several months. Blocked accounts of 250 Deutschemarks resulting from an exchange of 5,000 Reichsmarks during the week of June 27, 1948 were not releasable to the owner until October 4, 1948. Under the currency reform, the bank Deutscher Lander was the exclusive agency for the issuance of Deutschemarks to a maximum of 10 billion Deutschemarks, the limit to be raised only under very limited and exceptional circumstances. The Currency Reform Act also provided for the establishment of a federal reserve form of monetary control of banks. The Currency Reform Act put into effect by the United States Military Government in Germany in June of 1948 was determined by the military government to be successful. It has been viewed, generally and by historians, as one of the most successful currency reforms to have taken181 place. After June 27, 1948, there was some black market activity in Deutschemarks (sometimes referred to as "D" marks) for United States money. However, after that date any Reichsmarks which had not been exchanged for "D" marks were valueless. A 1,000 denomination Reichsmark note was approximately 8 inches by 4 inches or about 1.69 times the size of a United States dollar bill. One hundred and thirty-eight thousand Reichsmarks notes of a denomination of 1,000 Reichsmarks each weighed approximately 480 pounds. Petitioner did not enter safe-deposit box No. B-136 which he maintained at the Exchange National Bank of Chicago, Illinois from October 6, 1960 until April 8, 1961, when he closed out his lease of that box. The only day on which he entered the box after opening it on May 5, 1960 until the date he closed the box was on October 6, 1960. Petitioner entered his safe-deposit box No. 12341 at the Talman Federal Savings and Loan Association, Chicago, Illinois which he opened on January 9, 1961, after closing out box No. 3100 maintained at the Talman Federal Savings and Loan Association, on January 30; February 9 and 27; March 2, 9, 16, 23; and April 3 and 24, 1961. He closed182 this box on April 24, 1961, and rented safe-deposit box No. 1514 at the Talman Federal Savings and Loan Association. Petitioner entered his safe-deposit box No. 1514 at the Talman Federal Savings and Loan Association after opening it, twice on May 15, 1961, once at 9:15 a.m. and again at 9:29 a.m., once on May 29, June 8 and 29, July 31, August 17, 1961, April 5, 1962, and November 16, 1962. 7During the years 1959, 1960, and 1961, petitioner purchased "accommodation checks" at Talman Federal Savings and Loan Association. During the year 1961 petitioner purchased a total of $98,507.33 of "accommodation checks" in amounts ranging from a little less than $2,000 to a maximum of $10,000 at Talman Federal Savings and Loan Association, such checks being purchased on February 9, 20, and 27; March 2, 9, 13 and 17; April 3, 10, and 24; May 2 and 15; June 12, 20, and 29; and July 31. One of the "accommodation checks" 183 purchased on March 16, 1961, in the amount of $3,000 had as a source of funds a withdrawal from petitioner's savings account at Talman Federal Savings and Loan Association, as did an "accommodation check" in the amount of $7,212.50 purchased on June 29, 1961. On March 16, three separate checks were purchased; also on May 2, three checks were purchased. Two checks were purchased on each April 24 and June 12, 1961. On March 10, 1966, a two-count indictment was returned against petitioner in the United States District Court for the Northern District of Illinois, charging him with violation of section 7201, I.R.C. 1954, with respect to his income tax returns for 635 the calendar years 1959 and 1960. On March 21, 1966, petitioner entered a plea of not guilty to the charges set forth in the indictment. After a trial on the merits of the charges in the indictment before a United States District Court Judge, petitioner, on July 31, 1967, was found guilty of violating the provisions of section 7201, I.R.C. 1954, as charged in the indictment, and on that date judgment was entered in accordance with that finding and a sentence imposed against184 petitioner fining him $5,000 plus costs and placing him on probation for 3 years on each count of the indictment, the sentences to run concurrently. A special condition of probation imposed on petitioner was that he keep accurate books and records regarding income and expenses and exhibit his books and records to his counsel for certification to the probation office. On September 2, 1964, petitioner executed a consent agreement, pursuant to section 6501(c)(4), extending the period within which respondent might assess additional income taxes for the calendar year 1961 to December 31, 1965. Respondent on December 30, 1965, mailed to petitioner, by certified mail, a notice of deficiency determining deficiencies in his Federal income taxes for the years 1961 and 1962. Respondent in his notices of deficiency determined on the basis of net worth plus expenditures computations, adjusted for nontaxable income, that petitioner had taxable income of $28,997.25 for 1959, $26,260.89 for 1960, $118,116.09 for 1961, and $114,956.63 for 1962. In making this determination respondent used a cash on hand other than in banks or other institutions in the amount of $105 as of December 31 of each185 of the years 1958 through 1962 and determined petitioner's reserve for depreciation on the basis of the Pulaski Road property being used one-third for business purposes and petitioner's basis in the building on South Archer Avenue being $79,000. Respondent also determined that part of the underpayment in tax for each of the years 1959 through 1962 was due to fraud. Ultimate Findings of Fact . Petitioner is collaterally estopped to deny that part of the underpayment of his income taxes for the calendar years 1959 and 1960 was due to fraud with intent to evade taxes, and that his income tax returns for these years were false and fraudulent. 2. On the date of the mailing of respondent's notice of deficiency to petitioner with respect to the calendar years 1961 and 1962, assessment of deficiencies by respondent for those years was not barred by the statute of limitations. 3. Respondent has shown by clear and convincing evidence that a part of the underpayment in petitioner's income taxes for the calendar years 1961 and 1962 was due to fraud with intent to evade tax. 4. The use by respondent of the net worth plus personal expenditures method for determining petitioner's taxable186 income for each of the years here in issue is proper since petitioner did not maintain books and records adequate for the proper determination of his taxable income. 5. Respondent's determination of petitioner's assets and liabilities and adjustments to net worth for personal expenditures and nontaxable income is correct in all respects, except respondent's determination of cash on hand. Petitioner had cash on hand as of December 31, 1958, of at least $100,105, and had at least this same amount of cash on hand as of December 31, 1959, and December 31, 1960. Of the $100,105 minimum amount of cash on hand which petitioner had as of December 31, 1960, he had as of December 31, 1961, the amount of $40,105 and as of December 31, 1962, the amount of $105. Opinion Petitioner contends that he should not be collaterally estopped with respect to the issue of fraud for the years 1959 and 1960 by reason of his conviction of income tax evasion for these years in the criminal case in the District Court of Illinois for the Northern District, Eastern Division. First, petitioner contends that he should not be collaterally estopped because the agents who investigated his return conspired with187 Libert and others and that "there was a well conspired pattern in aforesaid alleged 'income tax evasion' case to have petitioner convicted as a 'felon', regardless of the means used for said 'conviction', otherwise said agents, for example, wouldn't have acted so unscrupulous as they did act." Next petitioner contends that he prepared his income tax returns for 1959 and 1960 by himself and did not itemize certain medical practice expenses consisting of 636 various items including rebates to patients from payments by insurance companies and payments of consulting fees to other doctors, and that "in said 'income tax evasion case', the Court did not give petitioner credit for medical practice expenses incurred by him during 1959 and 1960 except for a very small fraction thereof." Petitioner contends that had the Court "given full credit for his medical practice expenses for the years in question, there would not have been any conviction of petitioner for tax evasion." All of these contentions were made by petitioner in the criminal trial and the Court still found against him and held that he was guilty as charged in the indictment. Therefore, these arguments in no way support188 petitioner's contention that collateral estoppel is not applicable. Finally, petitioner contends that since in the income tax evasion case the Government presented evidence of specific items of omitted income, he cannot be collaterally estopped in this case where the Government has computed his taxable income on the basis of increases in net worth. Petitioner is apparently under the impression that if respondent's contention that collateral estoppel applies with respect to the fraud issue is sustained, collateral estoppel should also apply to the method of determining the amount of petitioner's taxable income for the years 1959 and 1960 so that petitioner's tax for these years would be based only on the specific items of omitted income proved by respondent in the criminal case. Petitioner is incorrect in this contention. The amount of underpayment of tax was not the issue in the criminal case but whether that underpayment was with fraudulent intent to evade tax was the issue there decided. As we stated in John W. Amos, 43 T.C. 50">43 T.C. 50, 55, 56 (1964), affirmed 360 F. 2d 358 (C.A. 4, 1965), the 189 "imposition of the civil penalty prescribed by section 6653(b) depends upon a determination of the ultimate fact that petitioner's underpayment of tax * * * was due to fraud. This ultimate fact for determination herein is the same ultimate fact which was determined adversely to petitioner in the prior criminal proceeding. It is therefore our decision that petitioner is conclusively bound, under the doctrine of collateral estoppel, by that prior adverse determination. * * " Likewise, the ultimate fact for determination, in order to cause there to be no time limit after which respondent is barred from assessing a tax under section 6501(c), is that the return is "false or fraudulent * * with intent to evade tax; 8The decision of the District190 Court that petitioner was guilty as charged in the indictment of attempting to evade or defeat tax within the meaning of section 7201 was a finding that petitioner willfully attempted to evade or defeat his income tax for the years 1959 and 1960. In John W. Amos, supra, we held that the determination that the taxpayer did, within the meaning of section 7201, willfully attempt to evade or defeat his income tax, was the same ultimate fact as a determination that a part of the underpayment of tax is due to fraud, which, of course, likewise means that it is the same determination of ultimate fact as the determination that the return is a false or fraudulent return filed with intent to evade tax within the meaning of section 6501(c). We therefore hold that petitioner is collaterally estopped to deny that part of the underpayment of his taxes for the years 1959 and 1960 was due to fraud and that his returns for the years 1959 and 1960 were false and fraudulent returns. Therefore, assessment of deficiencies for the years 1959 and 1960 is not barred by the statute of limitations. Petitioner was not convicted, or for that matter indicted, for income tax evasion for the years191 1961 and 1962. Therefore, respondent must show as to these years by clear and convincing evidence that part of the underpayment in petitioner's tax was due to fraud in order to sustain the addition to tax under section 6653(b). Petitioner in his argument confuses respondent's burden with respect to establishing fraud and the burden on petitioner to show error in respondent's determination of the amount of the tax liability. Petitioner does not specifically argue that an assessment of a deficiency for 1961 and 1962 is barred by the statute of limitations absent a showing of fraud. However, some of his arguments border on 637 this, so we have included in our findings the facts to show that there is no bar of the statute of limitations to respondent's assessment of a deficiency for the years 1961 and 1962 and have so found as an ultimate fact. However, respondent is in no way relieved from his burden of showing that for 1961 and 1962 part of the underpayment of tax is due to fraud. In our view the evidence is clear and convincing that part of the underpayment for those years was due to fraud. In the first place there were specific omissions of income from petitioner's returns192 in both of the years. For the year 1961 there were omissions of interest income, capital gains, and rental income, as well as receipts from petitioner's medical practice. These amounts of income were substantial in relation to the income reported by petitioner. Petitioner argues that the failure to report interest should be overlooked since at that time banks did not notify individuals of the interest accumulated on their accounts and added to their accounts. However, where the interest from certain accounts was reported but interest was not reported from other accounts, this contention is not a satisfactory explanation for the failure to include all interest in income. Petitioner on his returns had reported certain capital losses and in the light of this fact and of the fact that no explanation is given of the failure to report capital gains, the failure to report capital gains likewise indicates fraud. Petitioner's only explanation for his failure to report rental income is his contention that this income was included in his medical receipts as reported. However, the facts do not support this contention of petitioner. Petitioner has given no satisfactory explanation as to his failure193 to report all of his receipts from patients. In 1962 petitioner failed to report $3,870 of rentals and $747.25 of interest. No satisfactory explanation of this failure is given. Furthermore petitioner kept no record of medical receipts and the clear indication from the record is that his income from not only his practice on Pulaski Road for this year but also from his practice at Garfield Ridge Medical Center was greatly in excess of the amount he reported. On petitioner's 1962 return he claimed depreciation on the building in which the Garfield Ridge Medical Center was operated based on a value of the building of $165,000, although he had only shown a value of the land and building of not over $75,000 when he purchased it, and later, in effect, in the suit he instituted against Libert made this same contention. Petitioner misrepresented facts to the revenue agents investigating his case. He told them that all checks for medical receipts were deposited in his checking account when in fact numerous such checks were deposited in his savings account. He produced no records for the revenue agents from which they could in any way verify his receipts or expenses. When the omissions from194 income are considered in conjunction with (1) petitioner's representations on his returns which are contrary to his sworn testimony, (2) petitioner's general evasiveness during the examination of his records, and (3) his failure to keep any proper records of the receipts from his medical practice, we conclude that the evidence is clear and convincing that part of the underpayment in petitioner's income taxes for 1961 and 1962 was due to fraud. We therefore sustain respondent for all the years here in issue in his assertion of the addition to tax for fraud. The remaining issue concerns the amount of income received by petitioner in each of the years here involved. Respondent determined the income received by petitioner by use of the net worth plus nondeductible disbursements minus nontaxable receipts method. The assumption behind such a determination is that the resultant amount represents petitioner's earnings during the taxable year. While it is not a method of accounting, but rather an attempt by respondent to reconstruct a taxpayer's income, absent the proper records from which to determine that income, it has been approved as a system of arriving at a taxpayer's income in an195 appropriate case. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954). The facts here show that petitioner's books were totally devoid of accuracy and his income could not be properly computed from such books as he did maintain. Where a taxpayer keeps no books or records or his records are so inadequate as to afford no proper basis for computing his taxable income, respondent is not required to follow any particular method of computing income but may compute it by any method which will, in his opinion, clearly reflect the taxpayer's income. Harold E. Harbin, 40 T.C. 638">40 T.C. 638 373, 377 (1963). In our view respondent was totally justified in the instant case in his use of the net worth method in computing petitioner's taxable income. The only items composing part of the net worth statement which petitioner contests are the cash on hand and the computation of reserve for depreciation. Since the main issue here is petitioner's contention that he had over $500,000 in cash as of December 31, 1958, and that he had remaining at the end of 1962 only $150,000 so that all of his increases in196 net worth during the years here in issue were from conversion of inactive assets of cash which he had in safe-deposit boxes into other assets, we will first deal with the minor issue concerning depreciation. Petitioner raises two questions with respect to respondent's computation of depreciation. First, he contends that respondent should have determined that 90 percent of the use of his Pulaski Road property was for business purposes and allowed depreciation on this basis. Secondly, he contends that respondent substantially undervalued the Garfield Ridge Medical Center Building when he placed a value of $79,000 on the building and therefore the depreciation on this building should be increased. With respect to the Pulaski Road building, petitioner made no showing of error on the part of respondent in considering that only one-third of the building was used for business. There was some testimony to the effect that three rooms were used by petitioner as an office and very little testimony as to the size of the building. Petitioner apparently does not contend that he used any greater portion of the building for office space than respondent determined but rather contends that he only197 used one room of the building for personal purposes. He stated he lived in only one room of the house. This leaves unexplained what use was made of the greater portion of the building, so actually it may have been put to no use. In any event petitioner has failed to show error in respondent's determination. We also conclude that petitioner has failed to show error in respondent's determination of depreciation with respect to the Garfield Ridge Medical Center property. In the first place, if the value of the building were increased by decreasing the amount applicable to medical instruments and equipment which petitioner acquired which is part of petitioner's argument, then the overall depreciation allowed to petitioner would be decreased and not increased. However, there is no evidence to show either that the amount allocated to payment for instruments and equipment should be decreased from that determined by respondent or the amount allocated to the building should be increased. Petitioner placed a $75,000 value on the land and building when he bought it, and in effect, placed this value on the land and building when he testified in his suit against Libert. On his 1961 return he198 showed the value of the building at $65,000 and of the land at $10,000. The evidence shows that the building originally cost somewhere between $70,000 and $90,000 and that approximately $11,000 of this was the cost of an air conditioning system which was between 6 and 7 years old when petitioner acquired the building. On the basis of the evidence in this record we conclude that petitioner has failed to show error in respondent's computation of depreciation. Petitioner, in what apparently is intended to be an additional attack on the net worth computation, claims he sustained a $110,000 loss on his purchase of the Garfield Ridge Medical Center which should be apportioned in some way between 1961 and 1962. Petitioner's support for this is his claim of being defrauded by Libert and a conspiracy against him originated by Libert whereby he paid $110,000 for a medical practice and received nothing for the money. Petitioner has totally failed to show what amount he paid for Libert's medical practice or goodwill as distinguished from a payment for the building and equipment. Respondent allocated a little over $41,000 of petitioner's payment to goodwill. However, petitioner at the end of199 the years here involved and for at least a number of years thereafter, if not until the present, was still carrying on the practice of medicine at the Garfield Ridge Medical Center. Therefore, whatever payment he may have made for that medical practice did not in 1961 and 1962 result in any loss to petitioner. Except for his contending that the reserve for depreciation computed by respondent is incorrect and contending that in 1961 he had a loss of $110,000 in connection with his purchase of the Garfield Ridge Medical Center practice, petitioner does not contest any item in respondent's 639 net worth computation except the item of cash on hand as of the beginning of each of the years here involved. Petitioner testified that when he came into the United States in January 1951, he brought approximately $692,000 with him, $690,000 in $1,000 and $500 bills of United States currency and 10,000 "D" Marks which he converted to $2,000 in American money. He testified that as of December 31, 1958, he had remaining in cash in his safe-deposit box $510,000 of that amount, that as of December 31, 1959, 1960, 1961, and 1962, he had remaining $470,000, $445,000, $275,000, and $150,000, respectively, 200 of this amount. He testified that he still had some of the cash he had brought with him when he came into the United States in $500 and $1,000 bills in his safe-deposit box at the time of the trial of this case. Petitioner gave the following explanation of his acquisition of the $692,000 in Germany before he came to the United States. Petitioner testified that in the early part of April 1945, he was a prisoner in a Nazi concentration camp at Buchenwald, Germany. He stated that he and a number of other prisoners were taken from the camp, transported first by rail, and later were forcibly marched, through parts of Germany, that approximately 10 or 11 days after they had been taken from the camp he and the other prisoners noticed that the Nazis who had been guarding them had disappeared. Petitioner stated he believed that at the time he noticed the disappearance of their Nazi guards that they were on the outskirts of the town of Schweinfurt, Germany which is in Bavaria. He testified that after the guards disappeared he and another Polish prisoner who was a friend of his walked to Schweinfurt and found the town almost deserted and part of it in ruins. Petitioner stated that he and his201 friend walked into some building in this town, that he does not remember the type of building or its location, and that in the corridor of this building they saw four heavy canvass sacks approximately 37 or 38 inches by 17 by 17 inches. He stated that he and his friend looked in the sacks and found them to be filled with Reichsmarks in denominations of 500 and 1,000 Reichsmarks. When they saw the contents of these sacks, he and his friend dragged the sacks about one-half mile from the building and then his friend left him with the sacks and went away and obtained a wagon and horses. They laid the sacks on the wagon and traveled with the wagon and sacks about 30 or 40 miles, stopping to spend the night in a farmhouse. The following day he and his friend proceeded to Cham, Germany. At Cham, petitioner's friend decided to leave and go to Poland. Petitioner in some way obtained a cottage, either by renting or purchasing it, and stayed in Cham. He acquired some suitcases and placed the Reichsmarks he had found in the suitcases covered by some clothing and buried the suitcases in the cottage yard and covered them over with flowers. Prior to burying the Reichsmarks, he took some of them out202 to live on. It is not clear from petitioner's testimony whether he kept all of the Reichsmarks that he and his friend found or whether they were divided with his friend. Petitioner went to work in Cham at a field hospital for displaced persons. He saw a notice of some kind asking for all people with some form of medical training to come and assist at the hospital and since he had a small amount of medical training in Poland before he became a Nazi prisoner, he went to help. Petitioner lived in Cham in the cottage he had acquired and worked at the hospital until September 1945 when he went to Erlangen, Germany, and entered medical school on a full-time basis. He testified that he made several trips between Cham and Erlangen to take the Reichsmarks which he had buried in the yard in Cham. In Erlangen he obtained living quarters in a building in which the local tax office was located and in the quarters he obtained there was a vault. He testified that he placed the Reichsmarks in the vault in his living quarters in Erlangen. In October 1945, he stated that he began to convert his Reichsmarks into American money through black market operations. Petitioner testified that he mostly made203 his exchanges of Reichsmarks in varying transactions for $10 bills, but some of them were exchanged for $20 bills. He testified that he made the conversion at the rate of 50 to 100 Reichsmarks for a United States dollar. He stated that he made his purchases of United States currency for Reichsmarks in various places in Germany including in addition to Erlangen, Nuremburg, Munich, Frankfurt, and Heidelburg, and that he also exchanged some of them in Switzerland and in France. Petitioner testified that on June 20, 1948, when the Currency Reform Act went into effect, he had converted over one-half of the Reichsmarks he had found and brought with him 640 to Erlangen, Germany into American currency. He stated that thereafter he exchanged during the period from June 20 to June 26, 1948, all of his remaining Reichsmarks, except for one package which he had misplaced, for "D" Marks. He stated that he made the exchanges of the Reichsmarks for "D" Marks at various banks and that he did not remember filling out any form to make the exchange and that he did not have his identity card punched at any banks when he made the exchange. He stated that the one misplaced package of Reichsmarks which204 he could not find prior to June 27, 1948, was worthless since he had not converted it prior to that date. After making the exchange of Reichsmarks for "D" Marks, petitioner exchanged "D" Marks for United States currency, mostly $10 and $20 bills. As petitioner would acquire a sizeable amount of $10 and $20 bills, he would exchange those bills mostly for $1,000 bills, but some for $500 bills, and would place these larger bills in his vault along with his unexchanged smaller bills and remaining German currency. Petitioner testified that when he came to the United States he had converted all but 10,000 of his "D" Marks into American currency and that he brought approximately $690,000 in mostly $1,000 bills but some in $500 bills, and 10,000 "D" Marks into the United States with him when he came. Petitioner testified that he kept the currency with him after he came to the United States until he rented a safe-deposit box in New York City where he placed the currency and kept it until he moved to Chicago and rented a safe-deposit box in Chicago. He testified that he rented the safe-deposit box in New York shortly after his arrival in this country. He testified he made several trips between205 Chicago and New York, transferring the currency from New York to Chicago. Petitioner testified that he did not count the number of Reichsmarks he found and that he never counted the amount of American currency he had. He testified that he did not know how many Reichsmarks he had left at the end of 1945, 1946, 1947, or in June of 1948 at the time the Currency Reform Act went into effect. He testified that he did not know how many he had at the end of 1949 or 1950. He testified he did not know how many dollars or how much money in cash he had at December 31, 1951, 1952, 1953, 1954, 1955, 1956, or 1957. He read the amounts of cash on hand he had as of December 31, 1958, 1959, 1960, 1961, and 1962 from a memorandum that he said he had worked up in the few days preceding the trial. The story which petitioner told is so inherently improbable that for this reason alone we would not accept it. The black market rate of exchange was shown by the testimony of an expert who was eminently involved in developing the currency exchange act in Germany, and had investigations of black market rates of exchange made under his supervision, to be from 175 to well over 200 Reichsmarks to the dollar,206 averaging around 200 Reichsmarks to the dollar for the entire period from September 1945 to June 20, 1948. Therefore, we find petitioner's statement that he consistently exchanged his Reichmarks for dollars at the rate of 50 to 100 and never more than 100 Reichsmarks to a dollar to be unbelievable. The evidence shows that the 138,000 of 1,000 Reichsmarks notes which petitioner would have had to find to make the exchange he claims to have made if he exchanged at the going black market rate of 200 Reichsmarks to the dollar, would weigh at least 480 pounds. Petitioner's testimony was, of course, that the sacks included 1,000 and 500 denominations of Reichsmarks, so assuming petitioner took all four sacks, the sacks would have had to weigh over 120 pounds each, and if petitioner took only two of the sacks they would have had to weigh over 240 pounds each, to have contained the number of Reichsmarks for petitioner to make the conversions he said he made. Petitioner's story about carrying these bags of Reichsmarks at this weight for the distances he claims to have carried them and concealing them in the manner he claims to have concealed them after having been on a forced prisoner march207 for over 10 days is again inherently unbelievable. It is equally unbelievable that petitioner made the number of transactions he would have had to make to have obtained $690,000. To have obtained $690,000 in $10 denominations would have required 69,000 transactions. Assuming that a few of the transactions were in $20 bills, there would have had to be at least 60,000 separate transactions. In the approximately 2 years and 9 months in which petitioner stated he made the exchanges prior to converting his Reichsmarks into "D" marks, there would have been less than 1,000 days. If only one-half of the amount had been converted, this would have involved 30 641 transactions a day, exclusive of the exchange of $10 bills for $1,000 bills. Again, it is inherently unbelievable that petitioner could have negotiated 30 separate black market transactions a day while being a full-time medical student, being on trips, or working in full-time employment. Equally unbelievable is petitioner's testimony with respect to converting his Reichsmarks into "D" Marks. Not only was it established through respondent's expert witness that this could not have been accomplished in the manner petitioner testified208 he made the exchange, but petitioner's own expert witness testified to the same effect when he stated that the Currency Reform Act of June 1948 in Germany was extremely successful. When the inherent impobability of petitioner's story is considered along with his inconsistent statement from time to time, either his inability or his refusal to explain how he knew the amount of the cash he had only at the dates important to the result in this case and his testimony in the criminal trial that he did not know how much money he brought into this country from Germany, we do not accept petitioner's testimony. Not only is petitioner's general testimony in this case conflicting as well as vague and at points evasive, but some of his specific testimony demonstrates his total disrespect for laws and regulations. Petitioner at one point stated that he knew it was unlawful to have foreign currency in Germany during the period from September 1945 until after the Currency Reform Act but that he nevertheless kept this foreign currency. When asked to explain how he could make the exchange of Reichsmarks for "D" Marks, petitioner stated: In fact, I was in Germany from 1945 to 1951. Of course, I was209 outside Germany a bit, in Switzerland about five times, in France about nine times, in Italy about five times, in Denmark three times, but it makes no difference. I was in Germany continuously, and I can tell you only that the German people, the German students at my university, at List, I can tell you at my university they ignored orders or regulations given by the Germans because they said the whole order is a puppet order, is an order given by the American puppet government. In fact, and let me tell you one fact which is very - everybody who did live in Nuremburg, for example, when you passed by in the streetcar - at the time there was no - there were buses, too, but usually the streetcar, and when the streetcar passed by the building of the American Military Government, the conductor of the streetcar says by joke, "Who would like to go to the tall building, to a funny building," something like this. In German he said this. In other words, he meant who would like to go to a building which contains something which we ignore or which is fictitious. This is just a laughing when the streetcar passed by this building. This gives you the image how much the orders and laws had been respected210 by the German people. Not only does the evidence show that in fact there were caches of German money and other valuables found abandoned by various people in various parts of Germany in the spring of 1945 just before the collapse of the Third Reich, but it also shows that this fact is mentioned in certain books and other well known published sources. Although the instances were rare in which one particular individual found a large sum, certain individuals who did find these sums are stated in published documents to have reported their find to the proper authorities. It is, of course, possible that petitioner did find some bags of Reichsmarks but since we cannot accept his testimony, we have no way of knowing whether in fact he did or did not. However, we think the evidence as a whole shows that petitioner did bring with him a substantial amount of money to the United States, and it is immaterial to this case how he acquired that money. The evidence shows that at one time he told a revenue agent investigating his returns that he had brought over $50,000 in United States and Germany currency with him when he came to the United States. The net worth statement as prepared by respondent211 was on the assumption that petitioner did have approximately $50,000 in currency when he came into this country and that this was the source of his bank deposits and of the money for the purchases of stocks he made within the first 2 to 4 years after he entered this country. Both respondent and petitioner contend that the only income petitioner had in this country up to 1955 was the small payments he received as an intern or as a resident of the various hospitals and that not only did he pay the major portion of his living expenses during the period January 1951 through January 1955 from the sums he had brought into this country with him, but also established savings accounts in which he accumulated over $7,000 and bought stock at a cost of over $15,000. 642 Petitioner's net worth as of December 31, 1958, as computed by respondent is slightly in excess of $115,000. Respondent argues that the amount of this net worth in excess of the amount which petitioner had in stocks and in his savings accounts as of the beginning of 1955 might well have come from earnings not reported by petitioner during 1955 through 1958. He points out that in 1957 when petitioner was obtaining a mortgage212 on the Pulaski Road property he stated that his income was in excess of $9,000 a year whereas petitioner had not during any of the years 1955 through 1958 reported on his income tax returns adjusted gross income in excess of the $4,214 which was the amount he reported in 1956. In support of this argument respondent points to the bank deposits made by petitioner during the period 1955 through 1958 totaling approximately $96,000. We do not consider it necessary to determine how much cash petitioner brought into this country. The crucial fact to be found in this case is what assets if any during the taxable years here in issue were acquired by petitioner with funds that came from a source other than taxable income of the current year. It would make no difference whether petitioner's cash on hand as of December 31, 1958 were $105 or $500,000, if that same amount of cash was on hand as of December 31, 1959, December 31, 1960, December 31, 1961, and December 31, 1962. Because of the burden to show error in respondent's computation being on petitioner and petitioner's having totally failed to show from any credible evidence the amount of cash he brought into this country and the amount213 of that cash remaining on hand as of December 31, 1958, and as of December 31 of each of the years here in issue, respondent contends that we should sustain his determination on the basis of his net worth computation for failure of proof on the part of petitioner. However, after reviewing in detail all of the voluminous record in this case, we have concluded that there is evidence to indicate that petitioner did not have income in excess of approximately $58,000 in 1961 and $75,000 in 1962. We have therefore concluded that $60,000 of petitioner's increase in net worth in 1961 came from sources other than taxable income earned in that year and that $40,000 of petitioner's increase in net worth for the year 1962 came from sources other than income earned by petitioner in the year 1962. We have therefore found that petitioner had at least $100,105 of cash other than in banks or savings associations on hand as of December 31, 1958, December 31, 1959, and December 31, 1960, and that he had remaining of this cash on hand $40,105 as of December 31, 1961, and only $105 of this cash on hand remaining as of December 31, 1962. We have reached this conclusion based on all the evidence of record214 including the fact that Libert's testimony at the trial in which petitioner sued Libert for an injunction, which testimony was stipulated into this record to be accepted as if the testimony had been taken at this trial; showed the gross receipts potential of the Garfield Ridge Medical Center as operated by Libert to be at least $145,000 a year. Although there is no direct testimony of the expenses of operating this Center, there are indications that the operation was very profitable. If these expenses, including not only medicinals and other supplies purchased but salaries of certain other doctors and assisting personnel, ran in the vicinity of about one-half the gross receipts, an amount suggested by petitioner in his reply brief, the net monthly income from the Garfield Ridge Medical Center as operated by Libert would appear to be about $6,000. While there is an indication from the evidence that the income would run around $6,000 a month from the Center if petitioner operated it as efficiently as did Libert, the indication from the record is that petitioner did not have as much income from the Center as Libert had. The evidence indicates that from the time petitioner took over the215 Center in mid-August until about April 1962, he did operate the Center with approximately the same number of patients and approximately the same income as Libert had been obtaining, but that after April 1962 the number of patients began to decline. Using as a rough estimate $6,000 a month income from the Medical Center, petitioner would have received in 1961 approximately $27,000 of income from the Garfield Ridge Medical Center. In the 2 prior years petitioner's income as computed by respondent on the increase in net worth basis was approximately $29,000 for 1959 and $26,260 for 1960. It is stipulated that in 1960 petitioner had interest income of $2,883.24 and dividend income of $2,867, making a total income aside from earnings of $5,750.24. Therefore, in 1960 petitioner's income from his medical practice at Pulaski Road must have been about 643 $20,500. It would be unlikely that petitioner's income from the Pulaski Road practice in 1961 would run much more than in 1960 since the evidence tends to show that the Pulaski Road practice began to fall off and continued to somewhat decrease after petitioner took over the Garfield Ridge Medical Center. In 1961 petitioner had interest216 income of $2,655.02, dividend income of $5,495.54 and rental income of $1,540. Adding this income to a reasonable amount of likely income of petitioner for the year 1961 from his Pulaski Road and Garfield Medical Center practices, the result is approximately $58,000. Other support for the fact that some of petitioner's assets in 1961 must have been acquired from nontaxable sources is shown by the fact that during the first 2 months of 1961 petitioner purchased stock at a cost of $19,476.03. It is shown by his purchases of accommodation checks that there were no withdrawals from his savings or checking accounts for the purchase of these stocks. It would therefore follow that petitioner either had to purchase these stocks from currently taken-in income or from a source other than income. Since petitioner had not taken over the Garfield Ridge Medical Center during the first part of 1961, on the basis of this record, we see no source of current income during these 2 months in excess of between $4,000 and $5,000. It would therefore follow that between $14,500 and $15,000 of these funds came from a nontaxable source. In the following 2 months, March and April of 1961, petitioner purchased217 $37,416.33 worth of stocks with funds not taken from a checking or savings account. In our analysis of any likely source of income for petitioner, there was no likely source in excess of somewhere between $6,000 and $7,500. It would therefore follow that from $30,000 to $32,000 of the funds with which these stocks were purchased came from nontaxable sources. In the months of May and June petitioner purchased with funds other than amounts taken from his checking or savings accounts $19,778.56 worth of stock. Again, there is no likely source of income of petitioner in these 2 months in excess of $6,000 to $7,500 which means that between $12,000 and $14,000 of the amounts used to purchase this stock came from nontaxable sources. Only one purchase of stock was made by petitioner after June 20, 1961, and that was a purchase on July 31, 1961, of stock at a cost of $1,331.94. This purchase might well have come from petitioner's current earnings. In August 1961, after petitioner acquired the Garfield Ridge Medical Center, he had available a likely source of far higher amounts of income. There is in the record in this case all the details of the dates on which petitioner entered his safe-deposit218 boxes at Talman Federal Savings and Loan Association in Chicago, Illinois. Quite a number of these dates in the first 6 months of 1961 coincide with the dates petitioner purchased accommodation checks which were negotiated by brokerage firms and were in the exact amount of the cost of stock he purchased. Again, this might be some indication that the funds with which these checks were purchased came from money in a safe-deposit box. Considering all of this evidence, we have concluded that $60,000 of petitioner's increase in net worth in 1961 came from a source other than taxable income of that year. In 1962 the evidence would indicate that petitioner would have net income from the Garfield Ridge Medical Center of approximately $24,000 from January through April. There is less indication of the income petitioner might have had from this Center for the following 8 months. However, since it was not until after the year 1962 that Libert opened an office anywhere near the Garfield Ridge Medical Center and the record is clear that petitioner continued to keep as patients the employees of many business and industrial firms that had been using the Garfield Ridge Medical Center for medical219 services, in our view, considering all of the evidence and particularly the testimony stipulated in this record which was taken in connection with petitioner's action to enjoin Libert from practicing medicine from the office on South Archer Avenue, petitioner should have received approximately $55,000 of net income from the practice at the Garfield Ridge Medical Center in 1962. It is stipulated that petitioner received interest income of $2,272.25 in 1962. Petitioner received dividend income in this year of $6,945.68 and rental income of $3,870. Therefore, in addition to the $55,000 from the Garfield Ridge Medical Center, petitioner received approximately $13,000 of interest, dividend and rental income, making a total of $68,000. Both parties agree that in 1962 petitioner's practice at the Pulaski Road address was greatly reduced over what it had been 644 in previous years. Although there is no clear indication of the amount of reduction the indication is that that practice would have been less than one-half what it was prior to petitioner's acquisition of the Garfield Ridge Medical Center. Therefore, if petitioner earned approximately $7,000 net income at the Pulaski Road220 address and approximately $55,000 at the Garfield Ridge Medical Center, and this was added to approximately $13,000 of other income, the result would be approximately $75,000 of total taxable income for the year 1962. This would mean that approximately $40,000 of petitioner's increase in net worth for the year 1962 would of necessity come from funds from a nontaxable source. There is also other evidence in the record to support the fact that some of petitioner's increase in net worth was from a nontaxable source in 1962. On January 3, 1962, petitioner made a payment of $5,000 on his indebtedness to Drovers National Bank and on that same date made a payment to Libert of $2,500 and 5 days later on January 8, 1962, made a cash deposit in the Drovers National Bank of $4,500. None of these amounts is explainable by withdrawals by petitioner from savings or checking accounts or sale of any previously owned assets. Although petitioner may have been taking in over $12,000 a month at the Garfield Ridge Medical Center and additional sums from his practice on Pulaski Road, there seems no available source during the first 8 days of 1962 for total cash receipts by petitioner of $12,000 from taxable221 income sources. The evidence also shows that during the year 1962 petitioner made total deposits in his two checking accounts at the Drovers National Bank of approximately $210,000 other than deposits of proceeds of loans whereas the other testimony of record would show available sources of funds to be deposited from income sources of not over approximately $170,000. While the evidence for the year 1962 is not as strongly indicative that some of petitioner's increase in net worth came from sources other than taxable income as is the evidence in 1961, in our view, considering the evidence as a whole, it does support by a preponderance the conclusion that at least $40,000 of the increase in petitioner's net worth came from sources other than taxable income. Whether petitioner had cash remaining in a safe-deposit box at December 31, 1962, or whether he had cash remaining at that time which had been in the box as of December 31, 1958, we need not decide. In our view, the only manner by which petitioner has established any assets in addition to those determined by respondent is the inference to be drawn from documentary evidence and testimony by Libert and various employees of the Garfield*222 Ridge Medical Center with respect to the potential earning capacity of that operation. This evidence indicates that when petitioner's income from that source and other likely sources are combined, petitioner's total taxable income for 1961 and 1962 could not reasonably have exceeded approximately $58,000 and $75,000, respectively. We therefore sustain respondent's determination of deficiencies and additions to taxes, except to the extent that respondent's determination of petitioner's taxable income for the year 1961 should be reduced by $60,000 and for the year 1962 by $40,000. Decision will be entered under Rule 50. Footnotes1. All references are to the Internal Revenue Coce of 1954.↩2. Apparently, there is a mathematical error of $10 in petitioner's computation of his adjusted gross income.↩3. The $1,525 reported by petitioner included $225 as received from Talman Federal Savings and Loan Association, whereas petitioner's actual receipts from that institution in 1962 were $145.75. Petitioner reported as received from Trident Savings and Loan Association the amount of $425 and the same amount as received from Crawford Savings and Loan, whereas in fact he received $450 from each of those institutions in 1962.↩4. The total of these accounts are stipulated and the balances as of the dates involved in respondent's net worth computation are not in issue. Therefore, from our inclusion of the facts as stipulated, we consider the amounts deposited to these various accounts to be as so stipulated. We will only make specific findings of amounts of deposits or other facts with respect to these accounts where we think it necessary to an understanding of our holding in the case.↩5. The approval date of this account is January 2, 1953. However, the parties stipulated, as stated in this sentence, that the account was opened in 1952.↩1. Gain on the sale of the Unexcelled Chemical stock was $16.14. ↩2. Gain on the sale of the Schick Inc. stock was $21.36.↩6. There is no controversy with respect to depreciation reserves as of the various years on automobiles, turniture and fixtures at 5625 South Pulaski Road and the amounts as determined by respondent will be incorporated in a statement of petitioner's assets and liabilities hereinafter set forth.↩7. All the details of petitioner's entries into his various safe deposit boxes are stipulated and have been found as stipulated. We only include herein those facts with respect to those entries of safe-deposit boxes which have a bearing on our conclusions in this case.↩8. Sec. 6501(c)(1) provides as follows: (1) False return. - In the case of a false or fraudulent return with intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625142/	FRANKLIN S. SPEARS AND REBECCA N. SPEARS, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Spears v. CommissionerDocket Nos. 43264-85, 23315-87, 1178-88United States Tax CourtT.C. Memo 1992-78; 1992 Tax Ct. Memo LEXIS 83; 63 T.C.M. (CCH) 2017; T.C.M. (RIA) 92078; February 6, 1992, Filed 83 Decisions will be entered under Rule 155. Daniel R. Rutherford, for petitioners. Richard J. Wood, for respondent. GERBERGERBERMEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: By statutory notice of deficiency, respondent determined deficiencies in petitioners Dicky Huey and Cynthia Ann Huey's (the Hueys) Federal income tax and additions to tax and increased interest in the following amounts: Additions to Tax Plus Increased InterestSec.Sec.6653Sec.YearDeficiency6653(a)(1)(a)(2)Sec. 66596621(c)1982$ 2,921$ 146.001--219834,287214.351$ 1,286.10219841,95398.001586.00219851,63182.001489.002All section references are to the Internal84 Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. By statutory notices of deficiency, respondent determined deficiencies in petitioners Franklin S. Spears and Rebecca N. Spears' (the Spears) Federal income tax and additions to tax and increased interest in the following amounts: Additions to Tax Plus Increased InterestSec.Sec. 6653(a)/6653YearDeficiencySec. 6653(a)(1)(a)(2)Sec. 6659Sec. 6621(c)1979$ 3,404.00$ 757.25NA$ 1,021.20$ 1,337.1019801,341.53298.44NA402.46526.97198210,301.972,291.781 3,090.594,046.65The issues in this case involve petitioners' 2 lease of energy management devices from O.E.C. Leasing Corp. (OEC or OEC Leasing). 3 After concessions,4 the issues presented for our consideration are: 85 1. Whether petitioners are entitled to a theft loss related to the OEC venture; 2. whether petitioners are liable for the sections 6653(a) and 6653(a)(1) and (2) additions to tax in connection with their investment in OEC Leasing; 3. whether the Spears are liable for the section 6661 addition to tax for substantial understatement of income tax resulting from their OEC Leasing investment; and 4. whether petitioners are liable for the increased interest rate under section 6621(c) on tax-motivated transactions related to the OEC venture. FINDINGS OF FACT The stipulations of facts and attached exhibits are incorporated herein by this reference. Petitioners Franklin and Rebecca SpearsThe Spears filed joint Federal income tax returns for taxable years 1979, 1980, and 1982. At the time their petition in this case was filed, the Spears resided in Austin, Texas. Petitioner Franklin S. Spears is a judge on the Texas Supreme Court. Petitioner Rebecca N. Spears received a master's degree in health administration and was employed as a health administrator during the taxable years in issue. Petitioner Rebecca Spears was primarily responsible for managing the couple's community86 property affairs, including their investments, savings accounts, and retirement plans. Petitioner Franklin Spears' health began deteriorating during 1979. He underwent heart surgery during 1979 and 1981. During 1981, he suffered a stroke, resulting in dyslexia and the inability to read for a period of time. At that time, the Spears became concerned that Franklin Spears' deteriorating health would force him into an early retirement. Therefore, they began looking for additional income-producing investments. They investigated the purchase of property to operate a day care center. Petitioner Rebecca Spears contacted the Texas Department of Human Services, which oversaw the building of day care centers, and was informed about certain rules and guidelines. The Spears also entered into deferred compensation agreements to ensure a source of future income. The OEC investment was brought to petitioner Rebecca Spears' attention by her employers, Dr. Dennis and Mrs. Diane Ela (the Elas). The Elas, investors in OEC Leasing, had been introduced to the investment by Tony Sisk (Sisk), a certified public accountant, licensed securities agent, and owner of an investment company. The Spears87 relied on the Elas' recommendation and met with Sisk in his office to discuss the OEC investment. During this meeting, the Spears also reviewed the prospectus. They sought advice from their attorney, Daniel R. Rutherford (Rutherford), regarding the OEC venture and were informed that it represented a sound investment. Relying on Rutherford's advice, petitioner Rebecca Spears' employers' recommendation, and the tax opinion in the promotional materials concerning the legality of the investment, the Spears decided to lease the 1982 model, Energy Minder System I (EMS I). On April 19, 1983, the Spears received a letter from Control Technology, Inc., stating that the corporation was the service company and would be installing their unit. The letter also stated that Control Technology was searching for a suitable location to install the energy-saving unit. The Spears believed that the service company would market the unit and locate an installation site even though the promotional material stated that the marketing, installation, and maintenance of the unit would be the sole responsibility of the lessee. On July 11, 1983, the Spears received a letter from Control Technology stating88 that Weatherman Energy Management Company (WEM) had located a site for installation of the unit and would become the new service company. The site was purportedly located at Joe's Getty Auto in Philadelphia, Pennsylvania. The Spears paid an installation fee of $ 750 to WEM. They eventually invested approximately $ 6,000 in the OEC venture. During March 1984, the Spears learned there were problems associated with the OEC promotion. They received a letter from WEM indicating installation of the 1982 models was being stopped because of malfunctioning equipment. Shortly thereafter, the Spears learned that their unit had not been installed because it was defective. Sisk informed the Spears that a class action suit against OEC and its affiliates for fraud was being instituted and asked them to join the class. After writing numerous letters to the parties involved seeking information and stressing their dissatisfaction with the OEC Leasing venture, the Spears joined the class action suit and contributed $ 250 to the legal fund. They received $ 750, their pro rata share of the $ 1,700,000 amount recovered. The Spears did not have expertise in energy management equipment or in the89 leasing of the same prior to their investment in OEC Leasing. They did not consult with any independent person not connected with the OEC promotion who had expertise in the energy management field or expertise in energy management equipment. The Spears have never reported any income from their lease of the EMS I unit. At the time petitioners decided to invest in OEC Leasing, they were aware of the effect of the investment tax credits. On their 1982 joint return, the Spears claimed tax credits of $ 13,000 in connection with their lease of the EMS I unit from OEC Leasing. They used $ 8,254.47 of this tax credit amount in the 1982 taxable year and filed a Form 1045 (Application for Tentative Refund) seeking a refund for tax years 1979 and 1980 in the amounts of $ 3,404 and $ 1,341.53, respectively, as a result of carrybacks. In his notice of deficiency, respondent disallowed $ 5,250 in expenses claimed on Schedule C incurred for rent and installation of an EMS I unit. In addition, respondent disallowed all regular investment tax credits and business energy investment credits in connection with the OEC investment. Petitioners Dicky and Cynthia HueyThe Hueys filed joint Federal90 income tax returns for taxable years 1982, 1983, 1984, and 1985. At the time their petition in this case was filed, the Hueys resided in San Antonio, Texas. At the time of trial, the Hueys were divorced. Petitioner Dicky Huey is a self-employed medical doctor. Petitioner Cynthia Ann Huey is a nurse. She has also held employment as a bookkeeper. The OEC Leasing investment was brought to the Hueys' attention by their attorney, Rutherford. The Hueys, along with Sisk, several judges, and other professionals interested in investing in OEC, attended a meeting to learn more about the leasing investment. At this meeting, potential investors were informed that OEC had already made arrangements with an installment and management company. The potential investors were also informed that the investment would be profitable. The legality of the OEC venture was not discussed at the informational meeting. The Hueys read portions of the offering materials from OEC Leasing and relied on them in determining whether OEC represented a sound investment. However, they relied on the legal advice of their attorney and accountant as to whether the investment was legally acceptable. They did not91 have expertise in energy management equipment or the leasing of the same prior to their investment. The Hueys did not consult with any independent person not connected with the OEC promotion who had expertise in the energy management field or expertise in energy management equipment. They have never reported any income from their lease of the EMS I unit. At the time petitioners decided to invest in OEC Leasing, they were aware of the effect of the investment tax credits. The Hueys' experience with OEC Leasing was similar to the Spears'. The Hueys received correspondence from Control Technology and paid the $ 750 installation fee to Control Technology. They were informed that an installation site for the unit had been selected, although they were not informed of the location of the site. However, the Hueys did not know whether the system had been installed with an end user. The Hueys never visited the selected location of their unit. They did not attempt to contact OEC and its affiliates upon learning that the unit had not been installed but met numerous times with Rutherford who in turn wrote letters to OEC Leasing on their behalf. On their 1982 joint return, the Hueys claimed92 $ 39,000 of tax credits in connection with their lease of three EMS I units from OEC Leasing. They used $ 207 of this amount in the 1982 taxable year and carried forward $ 4,287 to tax year 1983, $ 1,953 to tax year 1984, and $ 1,631 to 1985. In his notice of deficiency, respondent disallowed $ 15,000 in expenses claimed on Schedule C incurred for advance rental fees in connection with the Hueys' investment in three EMS I units from OEC Leasing. Respondent also disallowed all regular tax credits and business energy investment tax credits claimed by the Hueys in taxable years 1982 through 1985 in connection with the OEC investment. The OEC Leasing TransactionThe OEC transaction involved the lease by a taxpayer of an energy management device from OEC Leasing, followed by its installation by a service company in the facility of an end user. Any energy savings would be split by the end user, the taxpayer, the service company, and OEC. The mechanics of the OEC transaction are identical in most respects to the transactions described in Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44 (1988); Rogers v. Commissioner, T.C. Memo. 1990-619; Keenan v. Commissioner, T.C. Memo. 1989-300;93 Kaba v. Commissioner, T.C. Memo. 1989-148; Heasley v. Commissioner, T.C. Memo. 1988-408, revd. 902 F.2d 380">902 F.2d 380 (5th Cir. 1990). The transaction involved the purchase by OEC of devices to save energy in industrial and commercial facilities. The promotional materials stated that a lessee of a unit had sole responsibility for marketing, installation, and maintenance of the unit. The promotional materials also outlined the estimated tax writeoff and cash benefits for a 50-percent bracket taxpayer of the EMS I as follows: Cost bases ofenergy control system$ 65,000Advance guaranteedrental payment$ 5,000Tax benefitsinvestment taxcredit - 10% of cost$ 6,500Energy tax credits -10% of cost6,500Total tax credits$ 13,000Tax savings (50%)on advanceguaranteed rentalpayment$ 2,500Total tax benefitsin year ofacquisition$ 15,500Positive cashbenefit for yearof acquisition$ 10,500These projections were prepared by OEC. Each investor was advised to consult with his own professional tax adviser with respect to the projections. Any energy savings would be split by the investor and the end user, 94 with a percentage of savings retained by the service company as service fees and OEC as rental payments. The energy savings would be retained by the participants in the following percentages: End user:50 percent Service company:7.5 percent Lessor (OEC):31.88 percentLessee (petitioners):10.62 percentThe end users were not required to make any payments, other than sharing energy savings, in connection with their use of the units. The investor would pay initial amounts for the first year's rental and the installation charge. The investor/lessee claimed tax deductions for advance rental fees and installation charges, and investment tax credits under section 48(d)(1) based on the purchase price OEC paid for the units. The units themselves are electronic devices designed to regulate oil, gas, steam, and electrical usage thereby conserving energy to the end user. The cost of such a system is based upon its capabilities and the number of functions it can perform. 5 During 1982, a unit comparable to the EMS I could have been purchased for approximately $ 1,500. The 1982 promotional materials contained the statement that the value of the EMS I was $ 65,000.95 The ultimate profitability of the venture to OEC and its lessees was dependent upon a number of factors including the initial advance rental and installation expenditures, annual energy bill, actual cost savings to the end user, the rate of inflation for energy costs, and the useful physical and economic life of the equipment. Respondent's expert's report explains these factors in greater detail. For example, the advance rental fee for an EMS I was $ 5,000 per unit, while installation was $ 1,350. The minimum annual energy bill which would justify use of the EMS I was $ 20,000. Based on a 1982 Department of Energy (DOE) report, energy costs were forecast to increase, on the average, 3.8 percent (electricity -- 2.0 percent, gas -- 9.1 percent, oil -- 4.3 percent). This is a weighted average for the typical industrial/commercial fuel combination. Considering a 7-percent inflation rate, the annual rate of energy cost increase would be 10.8 percent. DOE reports for earlier periods had projected cost increases of some 20 percent. Actual energy savings to a particular end user may vary significantly. Industry reports predicted 5- to 12-percent savings with a maximum of approximately96 20 percent. Actual savings are often less than projected. We agree with respondent's expert that 10 percent is a reasonable assumption. An optimistic estimate of the useful life of energy management system equipment is 25 years. However, several factors reduce the useful life of the units. For example, the units in question were warranted for only 1 year. Electronic equipment is also subject to obsolescence and the outright failure of the units. These units have a useful life of approximately 10 years. Using these assumptions, one can obtain projected cash-flows for the lease of an EMS unit. One method used to measure the economic viability of these transactions is to discount this future cash-flow to present value, to take into account the time value of money. See Soriano v. Commissioner, 90 T.C. 44 (1988); Rogers v. Commissioner, T.C. Memo. 1990-619; Keenan v. Commissioner, T.C. Memo. 1989-300; Kaba v. Commissioner, T.C. Memo. 1989-148. The discount rate reflects the risk of the venture and expected return. The prime rate in 1982 was approximately 15 percent. The OEC venture was risky due97 to the possibility of equipment failure, energy cost variability, and failure to achieve expected savings. Twenty percent would be a minimum rate of return required by investors to compensate for that risk. In this industry, an approximate 30-percent return from these systems was expected to be paid back within 1 to 3 years. Using a 20-percent discount rate, the discounted cash-flow from the lease of an EMS I, consisting of anticipated payments from end users less advance rental and installation fees, is a negative $ 3,366 as computed by respondent's expert. Moreover, under the terms of an OEC lease, an investor would experience negative cash-flow of $ 2,043, negative net present value of cash-flow of $ 3,366 and negative internal rate of return of 7.8 percent. Thus, the lease of a unit is not an economically viable transaction. OPINION Issue 1. Theft LossPetitioners concede that they are not entitled to the claimed deductions and credits relating to the OEC venture. However, petitioners argue that they are entitled to a deduction under section 165(a) for a theft loss for the entire amount of their investment. Petitioners contend that they are entitled to a section98 165(a) deduction because they were defrauded of money by OEC and its affiliates. Section 165(a) provides a deduction for any loss sustained during the taxable year which is not compensated by insurance or otherwise. Petitioners are limited in the amount of their deduction to losses incurred in a trade or business, losses incurred in any transaction entered into for profit, or losses arising from casualty or theft. Sec. 165(c). Any loss arising from theft is considered as sustained during the taxable year in which the taxpayer discovers the loss. Sec. 1.165-1(d)(3), Income Tax Regs. However, where there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery during such year, the loss is not sustained until it can be ascertained with reasonable certainty whether the reimbursement will be received. Sec. 1.165-1(d)(3), Income Tax Regs.Petitioners bear the burden of proving that they are entitled to a theft loss. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). During 1984, petitioners were informed that their energy-saving units had not been installed and that a class action suit was being instituted against99 OEC and its affiliates. Petitioners joined the class action suit 6 and received their pro rata share of the $ 1,700,000 recovered during 1989. Accordingly, petitioners may not deduct losses sustained by them in 1982 because the loss was not discovered until 1984, and during 1984 there existed a claim for reimbursement. We conclude that petitioners are not entitled to a deduction for a theft loss during the taxable years in issue. Issue 2. Additions to Tax for NegligenceRespondent determined additions to tax under sections 6653(a) and 6653(a)(1) and (2) for negligence. Sections 6653(a) and (a)(1) provide for an addition to tax equal to 5 percent of the underpayment100 if any part of the underpayment is due to negligence, and section 6653(a)(2) provides for an addition equal to half of the interest due on the underpayment attributable to such negligence. Negligence is the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances. Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967). Petitioners bear the burden of showing they were not negligent. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). In Heasley v. Commissioner, 902 F.2d 380">902 F.2d 380, 383 (5th Cir. 1990), revg. T.C. Memo. 1988-408, the court defined "negligence" as "any failure to reasonably attempt to comply with the tax code, including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances." The Circuit Court noted in Heasley that moderate-income investors could rely on their financial advisers and accountants and were not required to independently investigate their investments in light of investment costs. Additionally, the Circuit Court stated that investors were not required101 to pore over every word in the promotional material, but they could exercise reasonable care by reading portions of the documents and relying on advisers to explain the rest. The court noted that this was particularly true where the taxpayers were unsophisticated. Finally, the Circuit Court considered the taxpayers' efforts to monitor their investment. Since this case is appealable to the Fifth Circuit, barring a stipulation to the contrary, we are bound by the Fifth Circuit's opinion in Heasley. Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). The facts in this case are distinguishable from those in Heasley. In Heasley, the Fifth Circuit noted that neither taxpayer had graduated from high school, and both held blue collar jobs. We do not believe that petitioners' actions were reasonable in light of the level of their education and professional background. Petitioners were well-educated professionals. Petitioner Franklin S. Spears is a judge on the Texas Supreme Court, and petitioner Dicky Huey is a self-employed medical doctor. Petitioner Rebecca N. Spears received a master's degree, and petitioner102 Cynthia Huey is a nurse. Petitioner Rebecca Spears testified about her professional experience in running several businesses which included hiring and firing staff and completing financial reports. Petitioner Rebecca Spears also testified that when the Spears considered investing in the day care center, they conducted an investigation by contacting the department of human resources to obtain relevant guidelines and rules prior to purchasing any assets. The Hueys attended an informational meeting along with several judges and other professionals interested in investing in OEC Leasing. The legality of the venture was not discussed at this meeting. None of the professionals questioned the legality of the transaction even though it involved an advancement of only $ 5,000 and the promotional materials stated that investors would be entitled to approximately $ 15,500 in tax benefits during the first year. Petitioners failed to show that their advisers were more knowledgeable than petitioners themselves. Petitioners did not meaningfully investigate the OEC Leasing venture. They did not consult with any independent person not connected with the OEC promotion who had an expertise in103 energy management equipment. If petitioners had investigated the units, they would have discovered that they were worth $ 1,500 rather than the $ 65,000 claimed. Petitioners failed to examine the EMS I units before entering into the lease with OEC Leasing. Petitioners failed to adequately monitor their investment. Petitioners paid the initial advance rental fee during July 1983 and did not realize that there were problems with the investment until March 1984. The only action petitioners took during this period of time was to claim the tax benefits of the venture. Petitioners did attempt to investigate and monitor their investment after learning that the units were not installed, but we believe that petitioners were required to do more than idly wait until a problem surfaced. Issue 3. The Substantial Understatement Addition to TaxRespondent determined a section 6661 addition for substantial understatement of income tax regarding the portion of the deficiency not related to the valuation overstatement against the Spears. 7A "substantial understatement" exists where the amount of the understatement of income tax for the year exceeds the greater of 10 percent of the 104 tax required to be shown on the return, or $ 5,000. Sec. 6661(b). The OEC transaction is a tax shelter within the meaning of section 6661(b)(2)(C). The Spears have not shown that there was substantial authority for the position taken regarding the OEC transaction as required by section 6661(b)(2)(B)(i). The Spears also have not shown that "more likely than not" their reporting of the transaction was the "proper treatment". See Sec. 6661(b)(2)(C). Section 6661(c) permits respondent to waive the addition if the taxpayer shows reasonable cause and good faith regarding the understatement. The standard for review is whether respondent abused105 his discretion in refusing to waive the section 6661 addition to tax. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 1083 (1988). Abuse of discretion has been found where the denial of waiver is arbitrary, capricious, or unreasonable. See Estate of Gardner v. Commissioner, 82 T.C. 989">82 T.C. 989 (1984). The advance rental deductions exceeded the $ 1,500 normal purchase price of an EMS I unit by more than three times. Accordingly, we find that there was no reasonable cause for the Spears' substantial understatement of their income tax liability. On these facts, we conclude that respondent did not act arbitrarily, capriciously, or unreasonably in not waiving the section 6661 addition to tax. In Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo 1988-408">T.C. Memo. 1988-408, the court concluded that the Commissioner abused his discretion by failing to waive the addition. As noted earlier, the facts in this case are distinguishable from those in Heasley. See supra for discussion. We also note that there was no showing that respondent was asked to waive this addition to tax. Issue 4. Increased Interest on106 Tax-Motivated TransactionsThe final issue which the Court must address is whether petitioners' entire underpayments are substantial understatements attributable to a tax-motivated transaction under section 6621(c). Section 6621(c) provides for a rate of 120 percent of the underpayment rate established under section 6621. To be subject to the rate, the underpayment for a taxable year attributable to one or more tax-motivated transactions must exceed $ 1,000. Sec. 6621(c)(2). A tax-motivated transaction includes any valuation overstatement within the meaning of section 6659(c). Sec. 6621(c)(3)(A)(i). Because respondent conceded that petitioners were not liable for the addition to tax under section 6659, section 6621(c)(3)(A)(i) is not applicable. Respondent has argued, however, that petitioners' investment in OEC is a tax-motivated transaction under section 6621(c)(3)(B). Under section 6621(c)(3)(B), the Secretary has the authority to specify other types of transactions that will be treated as tax motivated. Deductions and credits disallowed for lack of profit objective under section 183 are considered to be attributable to tax-motivated transactions. Sec. 301.6621-2T107 Q-4, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984). Petitioners conceded that they were not entitled to claimed credits or deductions in connection with their investment in OEC Leasing. In his notice of deficiency, respondent disallowed the credits or deductions in part because petitioners did not have a profit objective, the units were not qualifying property, and the units were not placed in service. Because petitioners as noted conceded that they are not entitled to the deductions or credits relating to the transaction, the increased interest does not apply because it cannot be said that the underpayments were ones attributable to tax-motivated transactions within the meaning of section 6621(c). 8 See McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 857-860 (1989). See also Rogers v. Commissioner, T.C. Memo. 1990-619. 108 To reflect the foregoing, Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Dicky and Cynthia Ann Huey, docket Nos. 23315-87 and 1178-88. In docket No. 1178-88 the Hueys petitioned for redetermination of the deficiency and additions to tax for 1982, 1984, and 1985. In docket No. 23315-87 the Hueys petitioned for redetermination of the deficiency and additions to tax for 1983. These cases are consolidated for purposes of trial, briefing, and opinion.↩1. 50 percent of the interest that is computed on the portion of the underpayment which is attributable to negligence or intentional disregard of rules and regulations. ↩2. 120 percent of the interest due on any substantial underpayment attributable to a tax-motivated transaction.↩1. 50 percent of the interest computed on the underpayment attributable to negligence.↩2. The term "petitioners" when used in this opinion refers to all petitioners collectively, to the extent that they participated in the O.E.C. Leasing Corp. (OEC or OEC Leasing) transaction under consideration.↩3. This case involves the same leases of energy management devices as were at issue in Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44↩ (1988). 4. Petitioners concede that they are not entitled to claimed credits or deductions in connection with their investment in OEC Leasing. Respondent concedes that petitioners are not liable for the addition to tax under sec. 6659↩.5. The report prepared by respondent's expert explains these factors in greater detail, reflecting the complexity of the device. The reports of respondent's expert in this case, Soriano v. Commissioner, 90 T.C. 44 (1988), Kaba v. Commissioner, T.C. Memo. 1989-148, and Keenan v. Commissioner, T.C. Memo. 1989-300↩, are similar, and in many respects are identical.6. To avoid repetition, petitioner Dicky Huey testified that petitioner Rebecca Spears' testimony provided an accurate description of the course of events after learning that there were problems associated with the OEC Leasing venture. Accordingly, based on that testimony, we conclude that the Hueys also participated in the class action suit.↩7. Sec. 8002(a) of the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, 100 Stat. 1874, 1951, increased to 25 percent the addition for substantial understatement, effective for additions assessed after Oct. 21, 1986. Because the addition will be assessed after that date, the 25-percent rate applies. Pallottini v. Commissioner, 90 T.C. 498↩ (1988).8. We sustained respondent's determination that the taxpayers in Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44 (1988), were subject to increased interest under sec. 6621(c). However, in Soriano↩, we expressly found that the taxpayers were not entitled to the claimed credits and deductions because the activity was not engaged in for profit.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625143/	RIO ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rio Elec. Co. v. CommissionerDocket No. 12756.United States Board of Tax Appeals9 B.T.A. 1332; 1928 BTA LEXIS 4250; January 16, 1928, Promulgated 4250 The petitioner, an electric light and power company, entered into a contract with the residents of a rural community which provided for the construction of transmission lines to serve such residents, the cost of construction to be borne by such residents. After the construction of such lines should be completed the contract provided that electric light and power should be furnished such residents at rates to be fixed by a state commission having jurisdiction thereof. Held, that the amount paid to the petitioner by such rural residents for the construction of such lines was not taxable as income to the petitioner. D. V. W. Beckwith, Esq., for the petitioner. W. F. Wattles, Esq., for the respondent. PHILLIPS 1332 The Commissioner determined a deficiency in income tax for the calendar year 1921 of $2,945.09. The petitioner filed its petition with the Board for a redetermination of such deficiency. FINDINGS OF FACT. The taxpayer was incorporated under the laws of the State of Wisconsin in April, 1920, and had its principal place of business in the village of Rio, Columbia County, Wis. It filed its income and excess-profits-tax return4251 for the calendar year 1921 with the collector of internal revenue for the district of Wisconsin. The taxpayer, in the year 1921, was a public utility engaged in the manufacture, transportation, and sale of electric light and power, under the jurisdiction and control of the Railroad Commission of the State of Wisconsin, in the village of Rio and the townships of Hampden and Otsego. The taxpayer was required to furnish all applicants within the territory it supplies to the capacity of its facilities at just and reasonable rates, which rates were supervised and set by the Railroad Commission of the State of Wisconsin. The taxpayer was under no obligation to extend its service into a municipality it had not entered and into which it had assumed no franchise obligations. 1333 In the fall of 1920 certain residents in a rural community adjacent to the village of Rio, the municipality then served by the taxpayer, requested the taxpayer to construct transmission lines for the purpose of transmitting electric light and power to the different residents in their townships of Hampden and Otsego. Following those requests, and on or about the 12th day of October, 1920, the taxpayer4252 entered into a contract with 29 parties residing in the townships of Hampden and Otsego adjacent to the village of Rio, which contract read as follows: The Rio Electric Co. of Rio, Wisconsin, party of the first part, hereby agrees with the undersigned residents of the town State of Wisconsin, party of the second part to construct a primary electrical distribution line at 6600 volts along the public highways of the above mentioned town, and passing residences, farms, or business places of the said parties of the second part. Said party of the first part further agrees to furnish to parties of the second part electrical energy for the purpose of heat, light and power, at its prevailing rural rates, as determined and approved by the Railroad Commission of the State of Wisconsin. * * In consideration of the above, parties of the second part each agree to pay to party of the first part their pro rata share of the total cost of said primary line. Said cost of primary line shall not exceed the sum of $1,250.00 per mile. The payments of the above pro rata shares are to be made by each party of the second part to party of the first part as follows: 75% is to be paid in three equal4253 monthly payments, first payment thirty days after the execution of this agreement, and balance within thirty days after the line is completed. Parties of the second part further agree to pay to party of the first part the actual cost of making the connections from the primary line to the meters including the transformers and their protective equipment. Each of the parties of the second part will make payment for the actual cost of his own connection within ten days after the completition of the connection. Party of the first part further agrees that should any party or parties not parties to this agreement desire service from this primary line at a future date, service shall be given to such new parties only upon payment of the sum equal to that paid by the original subscribers hereto. Such sum is to be equally distributed by party of the first part among the then subscribers along this primary line. It is understood that ownership for all the equipment of this electrical system, up to and including the meters shall be in and remain in the party of the first part. Said party of the first part hereby agrees to use all reasonable care and diligence to maintain said equipment4254 safe and in first class operating condition, to carry adequate insurance for liability arising from this system, and to assume the payment of all taxes levied against this system. * * * The line provided for by the agreement of October 12, 1920, was completed and connections to the different residences and farms of the parties of the second part were completed on or about May 1, 1921, and the taxpayer then commenced rendering service over 1334 such line at the regular rural rates established and approved by the Railroad Commission of Wisconsin. The total cost of the construction of the primary line, connecting lines, transformers and other equipment on the rural extension line provided for by the contract was $14,841.92, all of which was apportioned and charged among the 29 parties who entered into the above contract with the taxpayer. The payments of the 29 parties were made to the taxpayer and by it disbursed. The taxpayer received $4,800 from the 29 contracting parties in the year 1920 and the balance, $10,041.92, during the year 1921. The rural line and all equipment thereon became the property of the taxpayer as provided and set out in the contract. The cost4255 of the same, viz., $14,841.92, was entered as an asset in the taxpayer's balance sheet under the heading of "Property and Plant" and offset by an entry to liabilities entered as "Customers' Line Extension Donations," a method of accounting prescribed by the rules and regulations laid down by the Railroad Commission of Wisconsin for the keeping of accounts of electric utilities. The statutes of the State of Wisconsin provide that public utilities shall keep and render to the Railway Commission information accounts of all business transacted which shall be in the manner and form prescribed by the Commission and further authorizes such Railway Commission to prescribe the manner and form in which books of account and records shall be kept. The Statutes of the State of Wisconsin further provide that the said Railway Commission shall have power to fix and determine rates and make regulations for the government of public utilities. At the close of the year 1921 there was a deficit from the operation of the taxpayer's business for that year in the amount of $1,680.87, if the payments of the customers in the amount of $14,841.92 for the building of the line under the contract of October 12, 1920, are4256 not deemed to be income to the taxpayer. The Commissioner determined that the petitioner received taxable income in 1921 in the amount of $14,841.92 by reason of such payments made to it by such 29 contracting parties and determined the deficiency accordingly. OPINION. PHILLIPS: This proceeding was submitted upon the pleadings and upon a stipulation of facts, the material portions of which have been incorporated in our findings of fact above. The single question involved is whether the amounts received by the petitioner under contract by which it was to construct an extension of its lines, the cost of which was to be paid by the rual residents of the community served, is taxable as income. The decision of this question 1335 is governed by the decisions of the Board in , and , which were in turn based upon the decision and opinion of the court in . See also *4257 . There is no deficiency. Decision will be entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625146/	William K. Edmister and Elizabeth Edmister, Petitioners, v. Commissioner of Internal Revenue, RespondentEdmister v. CommissionerDocket No. 747-65United States Tax Court46 T.C. 651; 1966 U.S. Tax Ct. LEXIS 57; August 22, 1966, Filed 57 Decision will be entered for the respondent. In a series of transactions forming a part of an integrated plan to eliminate the other two stockholders of a corporation, petitioner William surrendered all of his stock to the corporation in exchange for the real estate upon which corporation's plant was located. Petitioners mortgaged the real estate and used the proceeds, plus funds of their own, to buy all the stock of one of the stockholders for less than book value. The corporation redeemed all the stock of the other stockholder at the same price for cash, leaving petitioners as owners of all the capital stock of the corporation. The real estate was leased to the corporation and the rent was applied to payments on the mortgage. Held, the distribution of the real estate to petitioner William was essentially equivalent to a dividend and was taxable to William as a dividend. Robert H. Albert, for the petitioners.John H. Menzel, for the respondent. Drennen, Judge. DRENNEN652 Respondent determined a deficiency in petitioners' income tax for the year 1961 in the amount of $ 18,056.58. The only issue remaining for decision is whether property received by petitioners in 1961 was a distribution 58 essentially equivalent to a dividend.FINDINGS OF FACTSome of the facts have been stipulated, and are found accordingly.Petitioners William K. Edmister (hereinafter referred to as William) and Elizabeth Edmister (hereinafter referred to as Elizabeth) were husband and wife at all times during 1961, and they filed a joint Federal income tax return for the year 1961 with the district director of internal revenue, Cincinnati, Ohio.The Capital Elevator & Manufacturing Co. (hereinafter referred to as Capital) is an Ohio corporation which was incorporated June 20, 1920, and since that time has been engaged in the business of manufacturing passenger and freight elevators. Prior to 1936 Capital operated under the name of the Capital Lift & Manufacturing Co. From March 17, 1959, to October 23, 1961, the outstanding stock of said corporation was owned by the following named individuals:Number ofPercentsharestotal sharesownedowned byby eachstockholdersstockholderGuy R. Blackwood378 28 William K. Edmister513 Elizabeth Edmister18 Total shares owned by the petitioners,William K. and Elizabeth Edmister531 39.3Dorothy B. Edmister76 1/2Dorothy B. Edmister, guardian of Nancy Ann Edmister121 1/2Dorothy B. Edmister, guardian of James Z. Edmister121 1/2Dorothy B. Edmister, guardian of Jane D. Edmister121 1/2Total shares owned by Dorothy B. Edmister,individually and as guardian441 32.7Total shares issued and outstanding1,350 100 Capital 59 had only one class of stock outstanding during its existence, namely, common stock having a par value of $ 100 per share. All of the shares of this corporation had voting rights and there were no preferences between shares. Voting control of this corporation could be effected on all issues by a simple majority of all issued and outstanding shares of this corporation.During the 20 years preceding 1961, all the shares of Capital were owned by William R. Edmister, father of William, by lineal descendants of William R. Edmister and their spouses, and by Guy R. Blackwood (hereinafter referred to as Blackwood).Immediately prior to October 23, 1961, Blackwood was president and William was secretary and treasurer of Capital. Both of these men 653 were active participants in the operation and management of Capital. Immediately prior to October 23, 1961, the board of directors of Capital consisted of Blackwood, William, and Edmund M. Kagay, attorney for the corporation.Dorothy B. Edmister (hereinafter referred to as Dorothy) is the widow of James Edmister, deceased brother of William. Nancy Ann Edmister, James Z. Edmister, and Jane D. Edmister are the three minor children born of the marriage 60 between Dorothy and James Edmister. Dorothy and her three minor children were not, at any time, active in the operation or management of Capital, although immediately prior to October 23, 1961, Dorothy was vice president of the corporation. At all times during 1961, Dorothy was the duly appointed and acting guardian of her three minor children, having been appointed guardian by the Probate Court of Stevens County, Minn. At all times during 1961, and for several years immediately preceding 1961, Dorothy and her three minor children resided at Morris, Minn. The interests of Dorothy and her minor children will hereinafter be referred to collectively as Dorothy's interest.The balance sheet of Capital as of December 31, 1960, indicates the following financial condition of the corporation at that time:AssetsCurrent assetsCash$ 6,227.03Savings fund45,000.00Accounts receivable --Trade$ 65,222.19Officers and employees328.54Others3,528.3169,079.04Interest receivable262.50Inventory of materials -- at lower of cost or market59,053.27Prepayments --General insurance1,751.50Group insurance54.54Subscriptions341.25Life insurance279.67Sales tax stamps62.50Dues and memberships179.172,668.63Total current assets182,290.47AccumulatedProperty, plant, and equipmentCostdepreciationNetBuildings$ 24,410.46$ 14,555.45$ 9,855.01Machinery and equipment13,377.2011,720.331,656.87Tools2,049.12668.171,380.95Office furniture and fixtures5,247.192,981.952,265.24Patterns334.09137.70196.39Auto equipment4,969.322,965.212,004.1150,387.3833,028.8117,358.57Land4,433.32$ 21,791.89Other assetsIndustrial insurance deposit3,300.00Cash value life insurance6,961.62Traveling advances165.00Deposits on plans80.0010,506.62Deferred charges193.84214,782.82LiabilitiesCurrent liabilitiesAccounts payable$ 10,243.46Accruals --Withholding tax$ 3,197.36State unemployment tax10.75Social security tax405.80Federal unemployment tax387.82Payroll2,521.18City income tax -- employees529.79Welfare fund expenses139.87Workmen's compensation2,253.78State sales and use taxes591.13Payroll savings116.36Real estate taxes432.37Other expenses492.1011,078.31 Total current liabilities21,321.77Reserve for replacement of fixed assets3,107.21Shareholders' investment:Common capital stock issued and outstanding 1,350shares135,000.00Earned surplus, accumulated undivided profits55,353.84190,353.84214,782.8261 655 The balance sheet of Capital as of December 31, 1961, indicates the following financial condition of the corporation at that time:AssetsCurrent assetsCash$ 2,037.95Certificates of deposit45,000.00Accounts receivable --Trade$ 103,826.01Officers and employees204.59104,030.60Interest receivable300.00Inventory -- at lower of cost or market69,467.61Prepayments4,454.23Total current assets225,290.39AccumulatedEquipmentCostdepreciationNetMachinery and equipment$ 13,419.34$ 11,735.95$ 1,683.39Tools2,101.89735.911,365.98Furniture and fixtures5,607.193,551.182,056.01Patterns803.00175.01627.99Auto equipment4,969.323,686.891,282.4326,900.7419,884.947,015.80Other assetsCash value -- life insurance7,235.54Deposits3,375.00Traveling advances265.0010,875.54Deferred charges87.79243,269.52LiabilitiesCurrent liabilitiesNote payable$ 60,000.00Accounts payable15,092.01Accruals --Withholding taxes$ 3,468.17Payroll taxes3,583.30Real estate taxes495.49Payroll3,024.13State sales and use taxes788.33Payroll savings53.94Welfare fund expenses185.85Other expenses1,087.6712,686.88 Total current liabilities87,778.89Shareholders' investmentCapital stock --Common -- par value, $ 100; authorized, 1,500 shares; issued, 1,350shares$ 135,000.00Less: 513 shares in treasury, at parvalue51,300.00Outstanding, 837 shares$ 83,700.00Capital surplus37,675.77Retained earnings67,055.37Shareholders' undistributed taxable income162 32,940.51$ 155,490.63243,269.52656 Blackwood was 72 years of age in 1961 and because of his age and state of health he wished to retire and dispose of his interest in Capital. Persons not associated with Capital offered Blackwood a price of $ 110 per share for his stock of the corporation on the condition that they could acquire a controlling interest. Blackwood discussed this offer with William and Kagay.William was 50 years of age in 1961. He wished to remain an active participant in the operation of Capital but felt that it would have been improbable that he could have remained with the corporation if control was obtained by outside interests. Immediately prior to October 23, 1961, petitioners were financially unable to purchase all of the shares of Capital then owned by Blackwood and Dorothy at a price of $ 110 per share; and Blackwood and Dorothy were unwilling to sell petitioners only a portion of the Capital stock owned by them.Dorothy, acting as guardian for her three minor children, obtained an order from the Probate Court of Stevens County, Minn., on September 26, 1961, ordering her to sell the shares of Capital owned by her three minor children.A special meeting of the board of directors of 63 Capital was held on October 5, 1961. The president and secretary of Capital were authorized to execute a deed transferring the real estate then owned by the corporation, upon which its plant was located, at 424 West Town Street, Columbus, Ohio (hereinafter referred to as the Town Street property), from the corporation to petitioners in exchange for the surrender by William to Capital of all of the corporation's stock then owned by him, consisting of 513 shares. The stockholders of Capital executed written consents authorizing and consenting to the foregoing exchange.On October 23, 1961, at a closing held in the office of the attorney representing the City National Bank & Trust Co. of Columbus, Ohio657 (hereinafter referred to as the bank), the following transactions were completed:(a) William surrendered all his shares of stock of Capital to the corporation and in exchange petitioners received title to the Town Street property;(b) Petitioners closed a mortgage loan with the bank as mortgagee, in the amount of $ 45,000. This mortgage was placed on the Town Street property, as well as on the personal residence of petitioners located at 832 Montrose Avenue, Columbus, Ohio;(c) Petitioners 64 leased the Town Street property to Capital and executed an assignment of the rent payable under the lease to the bank as additional security for the mortgage loan. The Town Street property lease provided for a net rental of $ 500 per month, the same amount as the payments required of petitioners under the terms of the mortgage loan agreement. Under the terms of the mortgage loan agreement, the last payment was due on October 23, 1971;(d) Petitioners advanced $ 3,723.85 of their own funds and together with the $ 45,000 proceeds from the mortgage loan purchased the 441 shares of Capital then owned by Dorothy, which was all of the stock of the corporation then owned by Dorothy and the children; and(e) An agreement was entered into between the bank, Capital, and the stockholders of Capital which restricted the issuance of additional shares of stock of Capital without the consent of the bank.On October 23, 1961, a new stock certificate was issued in the name of William for the 441 shares of Capital previously owned by Dorothy. The bank received this reissued certificate as additional security for the $ 45,000 mortgage loan made by the bank to petitioners.The bank acted as escrow agent 65 for the sale of Dorothy's stock. The bank received these shares prior to October 23, 1961, by registered mail, with instructions to deliver the stock to William upon the bank's collecting the $ 48,510 1 purchase price for Dorothy. Checks drawn on the bank totaling this amount were delivered to Dorothy following the closing.On or before October 23, 1961, all of the stock of Capital owned by Blackwood, consisting of 378 shares, was placed in escrow with the bank subject to a purchase agreement whereby the corporation would purchase this stock for cash on January 2, 1962, at a price of $ 110 per share, for a total consideration of $ 41,580.After the closing of the transactions on October 23, 1961, the deed, mortgage, lease, and assignment of rents executed, delivered, or received at the closing were filed by the attorney representing the bank with the Recorder of Franklin County, Ohio. The deed conveying the Town Street property, and the mortgage placed upon that property 658 by petitioners to the bank were filed for record on October 24, 66 1961, with the Recorder of Franklin County, Ohio, and were recorded on October 26, 1961.On January 2, 1962, after all of the arranged transactions had been consummated, ownership of the outstanding shares of Capital was as follows:Numberof sharesWilliam K. Edmister440Elizabeth Edmister18Edmund M. Kagay2 1As of October 23, 1961, the Town Street property had a fair market value of $ 46,500, and as of that date the 513 shares of stock of Capital belonging to William and surrendered by him to the corporation had a tax basis to him of $ 36,500.34.The corporation continued its usual business after October 23, 1961. William's salary from Capital did not change during the period from 1961 to the time of trial, and in 1961 petitioner had no plans to liquidate the corporation. Immediately prior to October 23, 1961, the petitioners' net worth was approximately $ 27,500 exclusive of the stock of Capital which they owned.The sole purpose of the transactions entered into between all the parties was to enable Blackwood and Dorothy to dispose of their stock in Capital in such a manner as to 67 enable William to acquire control of the corporation. The business activities of Capital continued without significant changes after the transactions were completed. No changes in any of the business activities of Capital were planned or contemplated either prior or subsequent to the acquisition of control of the corporation by William.Petitioners reported the transaction under Schedule D of their Federal income tax return for 1961 as the sale or exchange of a capital asset. They reported the value of the Town Street property ($ 46,500) as the sales price of the 513 shares of stock, claimed a basis of $ 47,981.18, 3 and claimed a capital loss of $ 1,481.18 on the transaction. Petitioners also claimed a loss of $ 7,252.24 on their return for 1961 as their distributive share of the 1961 loss of Capital, which had elected in 1958 to be taxed as a small business corporation under subchapter S of the Code. The amount of earned surplus of Capital available for distribution as dividends for the year 1961 was in excess of $ 46,500.659 In the notice of 68 deficiency issued to petitioners respondent determined that "the real estate distributed to you by the Capital Elevator and Manufacturing Company and valued at $ 46,500.00 constitutes a dividend as defined by section 316 of the Internal Revenue Code and is includible in your income under section 61 of the Internal Revenue Code."ULTIMATE FACTThe distribution of the Town Street property to William by Capital in exchange for William's stock in Capital was essentially equivalent to a dividend.OPINIONThe only issue for decision is whether the real estate transferred to William by Capital in exchange for his stock constituted a taxable dividend in 1961. Respondent contends that the transfer was a distribution essentially equivalent to a dividend and that the stipulated value of the real estate, $ 46,500, is taxable to petitioners as a dividend. Petitioners contend that the substance of the overall plan and what took place was the redemption of Blackwood's and Dorothy's stock by the corporation, with William acting as a conduit of funds from the corporation to Dorothy, and that the distribution of the real estate to William was only one step in the entire transaction and was not a dividend 69 to William. 4The details of the transactions are set forth in our Findings of Fact and will not be repeated here. In summary, William surrendered all of his stock in Capital, 513 shares (which together with Elizabeth's 18 shares comprised 39.3 percent of the total outstanding stock of Capital), to Capital in exchange for the Town Street property. The property was then mortgaged by petitioners and the proceeds (plus additional cash furnished by petitioners) were paid to Dorothy and her minor children in exchange for all of their stock in Capital (441 shares or 32.7 percent) at $ 110 per share. Capital then redeemed all of Blackwood's shares (378 shares or 28 percent) for cash at $ 110 per share. When all the transactions were completed, petitioners owned the legal title to the Town Street property and all of the outstanding stock of Capital, the net worth of which had been decreased by the Town Street property conveyed to petitioners and the cash paid to Blackwood. The Town Street property, which was then encumbered with a $ 45,000 mortgage, was leased by petitioners to Capital and the rental was applied to the payments on 70 the mortgage.660 Under section 301 (a) and (c), I.R.C. 1954, 5 a distribution from the corporation is includable in the shareholder's gross income to the extent that it is a "dividend" as defined in section 316. 6 However, section 302(a) 772 provides generally that if any paragraph of section 302(b) applies a redemption of stock shall be treated as a distribution in part or in full payment in exchange for the stock. Petitioners seek to bring themselves within the ambit of this Code provision by contending that the distribution of the Town Street property was "not essentially equivalent to a dividend," and therefore section 302(b)(1) 8 applies. That section provides generally that section 302(a) shall apply if the redemption is not essentially equivalent to a dividend. Respondent argues that the distribution was equivalent to a dividend, therefore section 302(a) does not apply, and consequently the distribution is taxable as ordinary income under section 302(d), 9 which section provides generally that if a corporation redeems its stock, and if section 302(a) does not apply, then such redemption shall be covered by section 301 and included in gross income as a dividend. Neither of the 71 parties argues that any other provisions of the Code are applicable and they agree that the crucial question is whether the distribution was essentially equivalent to a dividend within the meaning of section 302(b)(1).Several reasons are advanced by petitioners in support of their argument that the distribution was not essentially equivalent to a dividend. In essence, their contentions are (1) the transactions were prompted by non-tax-avoidance reasons, (2) they received no financial benefit from the transactions, and (3) they did not secure a benefit they could not have enjoyed by using another method. Respondent 661 argues that the several criteria developed by the courts in determining whether a particular distribution is essentially equivalent to a dividend 73 are present in this case. These criteria, as enumerated in Thomas Kerr, 38 T.C. 723">38 T.C. 723, affd. 326 F. 2d 225; Flanagan v. Helvering, 116 F. 2d 937, and several other cases, may be summarized generally as follows: (1) Was a plan adopted by the corporation for contraction of business activity, (2) did a contraction of corporate business actually occur, (3) was the plan initiated by the corporation or the shareholders, (4) was there a significant change in the proportionate ownership of stock, (5) the previous dividend history of the corporation, (6) whether earned surplus is adequate to cover the distribution, and (7) whether there is a bona fide corporate business purpose for the distribution. Thomas Kerr, supra;Flanagan v. Helvering, supra.While it is clear that this plan was initiated by the stockholders for their own purposes and that there was no intended contraction of the corporate business nor was any other business purpose of the corporation served by the distribution, we do not believe those factors are necessarily controlling here because the question of whether a distribution is essentially equivalent to a dividend is a question of fact to be determined from all the circumstances 74 involved in each particular case. Heman v. Commissioner, 283 F.2d 227">283 F. 2d 227, affirming and modifying on other grounds 32 T.C. 479">32 T.C. 479; Lowenthal v. Commissioner, 169 F. 2d 694, affirming a Memorandum Opinion of this Court. Nevertheless, after carefully considering all of the facts present, in this instance we are of the opinion that the distribution of the Town Street property to petitioners was essentially equivalent to a dividend.We agree with petitioners that all the steps involved in the entire plan must be considered and the substance of the entire transaction must be ascertained. Fox v. Harrison, 145 F. 2d 521; Erickson v. United States, 189 F. Supp. 521">189 F. Supp. 521. The form of the transaction is not necessarily controlling and the essential question for determination is the net effect of the distribution. John A. Decker, 32 T.C. 326">32 T.C. 326, affd. 286 F. 2d 427 (C.A. 6); Flanagan v. Helvering, supra.We have no reason to doubt from the evidence that the principal purpose of the overall plan was to permit Blackwood and Dorothy to dispose of their stock in Capital at a price of $ 110 per share in such a manner as to enable William to acquire control of the corporation. The fact that this was primarily 75 for the benefit of the stockholders rather than the corporation is not fatal, see Erickson v. United States, supra, although it is a factor to be taken into consideration, Thomas Kerr, supra. There is no direct evidence that the plan adopted to achieve this objective was adopted for tax-avoidance purposes (although there is little satisfactory evidence to indicate why 662 Capital itself did not borrow the money on the real estate to buy out Dorothy). Nevertheless, we believe that when the plan was completed petitioners had received substantive benefits which made the distribution essentially equivalent to a dividend. This being the case we do not think petitioners can avoid the resulting tax by arguing that the same result could have been achieved tax free under some other plan, whether or not this is correct.Prior to the transaction petitioners together owned stock representing 39.3-percent ownership of a corporation having a net book value of about $ 190,000, the book value of their interest being about $ 74,670 or $ 141 per share. Immediately after William had surrendered his stock in exchange for the real estate (which had a book value on Capital's books of $ 14,288.33) and had 76 acquired Dorothy's stock, and assuming no other changes in the corporate balance sheet, petitioners together owned 459 out of 837 shares outstanding, or about 55 percent of a corporation having a net book worth of about $ 176,000. This interest represented a book value of about $ 96,800. Carrying this one step further, after the corporation redeemed Blackwood's 378 shares for $ 110 per share in cash, and again assuming no other changes in the corporate balance sheet except elimination of this cash and the real estate, petitioners owned 100 percent of a corporation having a net book worth of about $ 134,400. These facts alone make this case distinguishable from such cases as John A. Decker, supra;Fox v. Harrison, supra;Hargleroad v. United States, 202 F. Supp. 92">202 F. Supp. 92.But in addition to the above-demonstrated increase in the book value of petitioners' interest in Capital, they also acquired legal title to the Town Street property. It is true that in order to carry out the transaction with Dorothy petitioners had to mortgage this property, having a fair market value of $ 46,500, for $ 45,000, and also had to include their residence under the mortgage and pay out $ 3,723.85 of their 77 own funds. But the Town Street property was immediately leased to Capital for $ 500 rent per month which was the amount of the payments petitioners were required to make on the mortgage to pay it off in 10 years. Thus each payment of $ 500 by Capital increased petitioners' equity in the real estate. We recognize that these payments were taxable to petitioners as rent, as would dividend payments have been, but the payments were presumably deductible by Capital as rent, whereas either direct payments of principal by Capital on its own loan or distributions to petitioners of dividends, would not be deductible by Capital.Petitioners argue that they received no financial benefit from the transactions because they surrendered stock having a value of $ 56,430 (at $ 110 per share) in exchange for real estate having a fair market value of $ 46,500, which they immediately mortgaged for $ 45,000 and 663 had to use the mortgage proceeds plus additional cash of their own to acquire Dorothy's 441 shares of stock. Petitioners ignore the fact that as a result of the surrender of their own stock to Capital and their acquisition of Dorothy's stock they gained control of the corporation, and that after 78 Blackwood's stock was redeemed they owned all of the stock of the corporation. We believe our discussion above illustrates the fallacy of petitioners' argument when the entire transaction is taken into consideration. Of course, we recognize that book value is not necessarily indicative of the value of corporate stock, but we think it carries greater weight in determining value when the stock is all owned by one person, who can liquidate the corporation if need be, than where the stock is owned by various stockholders, none of whom have control.Petitioners also express concern over William's basis in the stock he surrendered, if the distribution is taxed to him as an ordinary dividend, see Bittker, Federal Income Taxation of Corporations and Shareholders, sec. 7.82, "The mystery of the disappearing basis." We are not directly concerned with William's basis and make no effort to answer his question in this regard, except to point out that after the transactions were consummated petitioners still owned Elizabeth's and Dorothy's stock, as well as the real estate. Also see sec. 1.302-2(c), Income Tax Regs.We are somewhat indirectly concerned by William's basis in his stock because it 79 points up the difficulty of concluding that petitioners realized an economic benefit in 1961, taxable as a dividend in that year, equal to the fair market value of the real estate distributed to them. However, having concluded that the distribution was essentially equivalent to a dividend, we believe it follows as a matter of course under the law as written that section 302(a) does not apply to this transaction and that section 302(d) does apply; hence the distribution of the Town Street property to William is taxable as a dividend under section 301 (a) and (c) (1) and under section 316(a)(1). Under section 301(b)(1)(A) the amount of the dividend is the fair market value of the property distributed. Neither party suggested any alternative conclusion in the event we hold the distribution essentially equivalent to a dividend.Decision will be entered for the respondent. Footnotes1. Denotes red figure.1. The $ 213.85 difference between the purchase price of the stock and the funds advanced by petitioners was used for payment of the mortgage expenses.↩2. This share is owned by William and was placed in the name of Edmund M. Kagay to qualify him as a director.↩3. Petitioners concede on brief that their basis in the stock was only $ 36,500.34 and that they actually realized a gain on the transaction.↩4. We note that Dorothy's stock was not actually redeemed.↩5. All section references are to the Internal Revenue Code of 1954 unless otherwise indicated.SEC. 301. DISTRIBUTIONS OF PROPERTY.(a) In General. -- Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).* * * (c) Amount Taxable. -- In the case of a distribution to which subsection (a) applies -- (1) Amount constituting dividend. -- That portion of the distribution which is a dividend (as defined in section 316↩) shall be included in gross income.6. SEC. 316. DIVIDEND DEFINED.(a) General Rule. -- For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders -- (1) out of its earnings and profits accumulated after February 28, 1913, * *↩7. SEC. 302(a). General Rule. -- If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.8. SEC. 302(b)(1). Redemptions not equivalent to dividends. -- Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.↩9. SEC. 302(d). Redemptions Treated as Distributions of Property. -- Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625150/	The C. R. Lindback Foundation, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. R. Lindback, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of William B. Griscom, Deceased, William B. Griscom, Jr., Mary L. Griscom, Pennsylvania Company for Insurances on Lives and Granting Annuities, Executors, Petitioner, v. Commissioner of Internal Revenue, RespondentC. R. Lindback Foundation v. CommissionerDocket Nos. 1617, 1618, 1684United States Tax Court4 T.C. 652; 1945 U.S. Tax Ct. LEXIS 240; January 31, 1945, Promulgated 240 In Docket No. 1617 decision will be entered in favor of respondent as to deficiencies in tax but in favor of petitioner as to penalties. In Docket No. 1618 decision will be entered under Rule 50. In Docket No. 1684 decision will be entered for respondent. 1. Petitioner in Docket No. 1617 is an unincorporated association of employees of a corporation. Its purposes and objects are to provide care for the employees of the corporation in sickness, to make provision for their families at time of death, and to assist in assuring material comfort during temporary or permanent disability. The major portion of its receipts is from dues paid by the members, who are all employees of the corporation. During the taxable years 1926 and 1927 it also received contributions from the corporation as provided in article IX of its bylaws and some interest and dividends on investments. Held, petitioner is not exempt from taxation as a charitable institution under either paragraph (6) or (8) of section 231 of the Revenue Act of 1926, Philadelphia & Reading Relief Association, 4 B. T. A. 713, followed; held, further, the payments received from the corporation241 which it deducted as ordinary and necessary business expenses in computing its own net income for taxation were not gifts to petitioner under section 213 (b) (3) of the Revenue Act of 1926 and should be included in petitioner's gross income for the taxable years 1926 and 1927. Petitioner, because of the retroactive provisions of section 137 of the Revenue Act of 1942, is exempt from taxation for years beginning with 1928.2. Upon the advice of counsel and in good faith, believing that it was not subject to taxation, income tax returns were not filed by the C. R. Lindback Foundation for the taxable years 1926 and 1927, but delinquent returns were filed on April 2, 1942, for those years, which was nearly one year prior to the determination of the deficiencies. Held, the Foundation's failure to file returns on time was due to reasonable cause and not to willful neglect, and delinquency penalties should not be imposed. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709, followed.3. Where two individuals made voluntary contributions to the above association, one in 1938, 1939, and 1940, and the other in 1939 only, held, the contributions 242 are not "charitable" contributions and are not deductible from the gross income of the individuals under section 23 (o) (2) of the Revenue Act of 1938 or of the Internal Revenue Code as amended. William C. Ferguson, Jr., Esq., for the petitioners.William D. Harris, Esq., for the respondent. Black, Judge. BLACK 653 These consolidated proceedings involve deficiencies in income tax and penalties determined by respondent against petitioners as follows:DocketCalendarPetitionerNo.yearDeficiencyPenaltyC. R. Lindback Foundation16171926$ 667.93$ 166.9819271,066.97266.74C. R. Lindback161819383,100.0019393,100 0019404,231.98Estate of William B. Griscom16841939620.00Petitioner C. R. Lindback claims an overpayment of tax for the year 1938 of $ 496.In a statement attached to the deficiency notice in Docket No. 1617 the respondent notified the C. R. Lindback Foundation as follows: 244 In view of the fact that your organization is not included in any of the classes of organizations which are exempt under the provisions of section 231 of the Revenue Act of 1926, you are subject to the tax imposed by that Act.Petitioner in Docket No. 1617 by appropriate assignments of error alleges that the respondent erred in not holding that petitioner was exempt from taxation during the calendar years 1926 and 1927 under either paragraph (6), (8), (10), or (11) of section 231 of the Revenue Act of 1926. In its brief petitioner argues only that it is exempt under either paragraph (6) or (8), and it has apparently abandoned that part of its assignments of error relative to paragraphs (10) and (11) of section 231. In the alternative, petitioner alleges that the respondent erred in adjusting a net loss of $ 12,000 reported by petitioner for each year to a net income of $ 6,947.65 for 1926 and to a net income of $ 9,903.50 for 1927 by means of the following adjustments:Adjustment19261927(a) Contributions received$ 12,000.00$ 12,000.00(b) 1925 deficiency699.47(c) Deposits retained6,248.189,903.50In a statement attached to the deficiency notice in Docket245 No. 1617 the respondent explained the above mentioned adjustments as follows:(a) Contributions made by Abbotts Dairies, Inc., have been included in gross income.(b) Deduction for deficiency of prior year eliminated.(c) Deduction for retained deposits eliminated.Petitioner in Docket No. 1617 also alleges that in any event the respondent erred "In imposing penalties against petitioner in the absence of evidence of wilful neglect and in the face of evidence that there was reasonable cause for failure to pay the taxes now in dispute."654 In Docket No. 1618 the respondent made adjustments to net income as disclosed by petitioner's returns, as follows:Adjustment193819391940Rents$ 210.73Contributions5,000.00$ 5,000.00$ 5,000.00Net long term loss2,490.59By appropriate assignments of error petitioner contested all of these adjustments, except rents, and in addition alleged that the respondent erred in not allowing petitioner a credit for two dependents in 1938. At the hearing counsel for respondent conceded that petitioner was entitled to a credit for two dependents in 1938, and counsel for petitioner withdrew the issue relative to the net long246 term loss, thus leaving for our consideration only the adjustment for contributions, which the respondent in a statement attached to the deficiency notice in Docket No. 1618 explained as follows:(b) Contribution made to the C. R. Lindback Foundation, Philadelphia, Pennsylvania, has been disallowed. It has not been shown that the Foundation is an organization within the purview of section 23 (o) of the Revenue Act of 1938. (Internal Revenue Code for the years 1939 and 1940.)In Docket No. 1684, the respondent made only one adjustment to the net income as reported for the year 1939 and that was the disallowance of a contribution of $ 2,000 made to the C. R. Lindback Foundation, which disallowance was appropriately assigned as error, the issue being the same as the sole remaining issue in Docket No. 1618.FINDINGS OF FACT.Many of the facts have been stipulated. The stipulation is incorporated herein by reference.Petitioner in Docket No. 1617 is the C. R. Lindback Foundation, hereinafter sometimes referred to as the Foundation. It was organized on January 10, 1925. The Foundation is and was, in 1925 and at all other times herein mentioned, an unincorporated association of the 247 employees of a corporation now known as Abbotts Dairies, Inc., hereinafter sometimes referred to as Abbotts.Petitioner in Docket No. 1618 is C. R. Lindback, hereinafter sometimes referred to as Lindback, and is an individual and resident of the city of Philadelphia, Pennsylvania. His Federal income tax returns for the calendar years 1938, 1939, and 1940 were duly filed with the collector of internal revenue for the first district of Pennsylvania at Philadelphia. The return for 1938 showed a tax for the year 1938 of $ 64,572.57, with a first payment made on March 13, 1939, of $ 16,143.14. The petition was filed on May 12, 1943.655 Petitioner in Docket No. 1684 is the estate of William B. Griscom, deceased, William B. Griscom, Jr., Mary L. Griscom, and Pennsylvania Co. for Insurance on Lives and Granting Annuities, executors. On February 5, 1940, William B. Griscom, then an individual and resident of the city of Philadelphia, Pennsylvania, filed his Federal income tax return for the calendar year 1939 with the collector of internal revenue for the first district of Pennsylvania at Philadelphia.Abbotts is engaged in the collection and distribution of milk and milk products248 in the city of Philadelphia, Pennsylvania, and its vicinity within a radius of 100 miles. Its main office is in that city. It also operates a creamery in Wisconsin, where less than 10 percent of its personnel are employed.The office of the Foundation has at all times been maintained at the main office of Abbotts and its affairs have been conducted at that place.Bylaws 1 were adopted for the Foundation on March 1, 1925, and active operation thereunder commenced on that date. These bylaws were amended on November 1, 1925, April 1, 1927, August 1, 1929, January 1, 1934, June 30, 1937, and February 19, 1940.The Foundation was created as a result of the efforts and under the direction of Lindback, then and now president of Abbotts, and he suggested the purposes, policies, and principles of organization which should be embodied in the bylaws, but he was never a member, officer, or manager of the Foundation. The intention of Lindback was249 to create an organization that would be ready to help employees who really needed help when they were sick or happened to have an accident or when they reached the age for retirement after a specified number of years of service with the company.Article I of the bylaws dealt with the name of the Foundation and also provided that Abbotts would be referred to in the bylaws as "Company."Article II of the bylaws dealt with the purposes and objects of the Foundation. The original article was divided into two sections and provided as follows:Section 1. The purposes and objects of the Foundation are to provide care for employees in sickness, make provision for their families in time of death, and to assist in assuring material comfort in old age.Sec. 2. Sick benefits shall be payable to members absent from work on account of sickness; death benefits shall be payable at death to the family of the member; and pensions shall be paid to members eligible therefor on account of disability to work or completion of necessary length of service in the employ of the Company.Article II was not substantially changed by the amendments. In the last amendment of February 19, 1940, it provided as follows: 250 656 Section 1. The purposes and objects of the Foundation are to provide care for employees of the Company in sickness, make provision for their families at time of death, and to assist in assuring material comfort during temporary or permanent disability to work.Sec. 2. Sick benefits shall be payable to members absent from work on account of sickness or accident, as per Article XI. Accidents shall be in usual pursuit of duties for Company, in every case where such words appear in these By-Laws.Death benefits shall be payable to the family of the member, as prescribed in Article XII.Permanent Disability benefits shall be paid to members eligible therefor after recommendation of the Medical Director, as per Article XIII.Pensions shall be paid to members eligible therefor on account of disability to work, as per Article XIII.Sec. 3. Benefits for accidents or illness incurred other than in the pursuit of duties for Company, may be awarded only at the discretion of the Board of Managers.Membership in the Foundation has always been open to all employees of Abbotts, subject to certain reasonable regulations in the bylaws regarding length of employment and condition of health. 251 Beginning with the 1934 amendment of the bylaws, membership in the Foundation was known as either "full beneficial" or "limited." The latter was available to employees only after full beneficial membership had been denied for inability to pass satisfactory physical examination, or upon action of the board of managers granting an exception. No documents, certificates, or policies were issued to the members, but each member received a membership card and a copy of the bylaws when he became a member. The average age of members ran from 40 to 45.Articles VI and VII of all editions of the bylaws were headed "Membership" and "Dues," respectively, and provided for weekly dues from members in fixed amounts, dependent either on compensation or class of membership, or both. Membership in the Foundation, whether full beneficial or limited, was also divided into classes of employees of Abbotts according to earnings as follows: Class A -- earnings up to $ 25 per weekClass B -- earnings over $ 25 but not over $ 35 per weekClass C -- earnings over $ 35 per week.The original bylaws provided for dues of 25 cents, 35 cents, and 50 cents per week from class A, B, and C members, 252 respectively. This rate was doubled for each class in the amendments of November 1, 1925, and has remained stationary ever since for both full beneficial and limited members, except for the period from January 1, 1934, to June 30, 1937, when the bylaws provided that the dues from limited class A, B, and C members should be 5 cents, 10 cents, and 15 cents per week, respectively. Beginning January 1, 1934, those members who paid 25 cents per week additional were entitled to an additional $ 1,500 of death benefits.657 Article IX of the bylaws has remained substantially the same in all of the seven editions mentioned above. The original article was headed "Contributions" and provided as follows:The Company agrees that it will pay to the Foundation each month, beginning with the month of March, 1925, the sum of One Thousand Dollars ($ 1,000) which amount shall become part of the general funds of the Foundation and be used for any of its purposes and objects. The Foundation may also receive and use for said purposes and objects any other contributions from any other sources.The receipts of the Foundation constituted the following: (1) Dues paid by members; (2) moneys paid253 voluntarily by Abbotts; (3) moneys paid voluntarily by Lindback and Griscom; and (4) interest and dividends on investments. The amounts received from each of these sources during the years 1925 (ten months only in 1925) to 1940, inclusive, were in aggregate as follows:(1)(2)(3)(4)ContributionsContributionsDues fromfromfromReceipts frommembersAbbottsindividualsinvestmentsAmount$ 970,966.86 $ 200,000$ 27,200$ 74,252.20 Percentage76.30%15.72%2.14%5.84%No salary or other compensation was paid at any time to anyone except to doctors, technicians, or clerical help who were actually needed to carry on the Foundation's activities.The cash disbursements made by the Foundation during the years 1925 (ten months only in 1925) to 1940, inclusive, were in the aggregate as follows:SpecialBenefitsOperatingawards andExcess ofpaidexpensesotherreceiptsexpenditures$ 1,026,010.85$ 99,809.17$ 11,314.46$ 140,353.08Of the above mentioned aggregate benefits paid the following amounts were paid during the years 1926, 1927, 1938, 1939, and 1940 for sickness and accident, death, disability, and pensions, 254 less compensation awards:19261927193819391940Sickness andaccident$ 34,820.37$ 32,111.02$ 71,652.27$ 67,096.18$ 73,228.93Death3,732.611,550.0021,166.5017,435.0017,979.00Disability2,923.002,548.0016,218.3220,937.6819,344.33Pensions1,606.501,638.003,408.753,859.006,581.0043,082.4837,847.02112,445.84109,327.86117,133.26Less compensationawards2,611.231,489.296,291.984,551.704,463.35Total benefitspaid40,471.2536,357.73106,153.86104,776.16112,669.91658 At all times all moneys belonging to the Foundation were held for the purpose of paying the benefits and expenses. Nothing has ever been paid anyone by way of profit.No refunds, cancellations, or surrender values were payable or paid at any time to members who resigned from the Foundation and it was understood that anything such member paid in would go to help the rest of the members who remained, when they were in need.Article III of the bylaws has remained substantially the same in all of the editions. The original article was headed "Management" and provided in part as follows:Section 1. The management of255 the Foundation shall be vested in a Board of Managers consisting of the Chairman and eight members.Sec. 2. The Chairman shall be appointed by the President of the Company and shall serve continuously until a successor is appointed.Sec. 3. At the first meeting of the Board, the Chairman shall appoint four members who shall represent the management of the Company * . At said meeting the Chairman shall also appoint four members who shall represent the employees, none of whom may be heads of departments or hold a higher position.Sec. 4. At the first election of the members they shall elect four members of the Board to represent them and the members so elected shall immediately succeed the four members selected by the Chairman at the first meeting of the Board. * Sec. 5. The Board of Managers shall have general charge of all matters pertaining to the Foundation and shall elect or appoint all officers except the Chairman.Sec. 6. In addition to the Chairman there shall be a Vice Chairman, a Secretary, and a Committee of Management of three or more as may be determined by the Board.Sec. 7. The Chairman shall be the chief executive officer of the organization and shall preside256 at all meetings of the Board.Sec. 8. The Vice Chairman shall act in the event of the disability or the absence of the Chairman.Sec. 9. The Secretary, who need not be a member of the Board, shall keep all of the records for the Foundation and shall record the minutes of all meetings of the Board and shall perform the duties also of a Financial Secretary.Sec. 10. The Committee of Management shall be immediately responsible for the administration of the three main purposes and objects of the Foundation. The members of this Committee may be any of the members of the Foundation but the Chairman shall always be a member of the Board.The 1937 and 1940 editions of the bylaws made provision under article III for a finance committee of three to be appointed by the chairman of the board with the qualification that the chairman of such committee shall be the treasurer of the Foundation.Article IV of the bylaws was headed "Meetings" and provided for regular monthly meetings to be held by the board of managers.Article V of the bylaws was headed "Elections" and provided for an annual election of one-half of the members of the board of managers who represented the employees. Such 257 elected members were to serve for two years. The 1940 edition of section 2 of article V provided as follows:659 Sec. 2. In view of the fact that Foundation membership is geographically scattered so widely as to make personal attendance at a meeting impossible as a practical matter, all balloting, for Directors or otherwise, shall be by mail on signed ballots. The Board of Managers shall determine the form of the ballot, instruct the Secretary as to time of mailing and shall fix the date that balloting shall cease. Ballots will be mailed to last known address of each member, returnable to the Secretary, and results of such balloting shall be announced by the Secretary.Article VIII of the bylaws was headed "Funds" and made provision for such matters as custodian, records, disbursements, and investments. Beginning with the 1934 edition, section 5 of this article provided:Sec. 5. The Foundation may carry its own risks or have the power to re-insure its risks in some form of group insurance if that should be deemed advisable by the Board of Managers.Articles X, XI, XII, and XIII of the original bylaws were headed "Sick Benefits," "Death Benefits," "Pensions," and "258 Award of Benefits," respectively. Beginning with the November 1, 1925, edition these articles were shifted around so that they were thereafter headed as follows: Article X -- Award of BenefitsArticle XI -- Sick BenefitsArticle XII -- Death BenefitsArticle XIII -- PensionsIn the 1937 and 1940 editions article XIII was headed "Permanently Disabled Benefits -- Pensions."The articles of the bylaws dealing with sick benefits provide, among other things, that members shall be eligible after four weeks' (later changed to two weeks) membership in the Foundation; that benefits shall be the regular weekly wage but not in excess of $ 50 per week; that in case of accidents while on duty the amount of compensation awarded under the Workmen's Compensation Act shall be deducted from the amount of the benefits; that benefits shall be payable while the employee is incapacitated by reason of sickness or accident incurred in line of duty; that all cases of sickness or accident must be reported; that no benefits shall be paid to members drawing pensions or for disability due to misconduct; that no benefits shall be paid for time lost on account of operations involving chronic irregularity259 unless passed by the board of managers; and that benefits for accidents or illness incurred other than in the pursuit of duties for Abbotts shall be awarded only at the discretion of the board.The articles of the bylaws dealing with death benefits provide, among other things, that members shall be eligible after six months' membership; that $ 250 shall be payable upon the death of members having less than two years of service with the company; that $ 500 shall be payable upon the death of members having more than two years 660 of service with the company; and that after January 1, 1934, an additional $ 1,500 shall be payable upon the death of those members who paid 25 cents per week additional dues. These articles also provide that where the family of the deceased member is unable to pay the funeral expenses the Foundation shall pay the undertaker's bill up to $ 100 (increased to $ 250 in 1934), and where no relative can be found to take care of the funeral the Foundation shall take charge and provide burial at a cost not to exceed $ 250.The articles of the bylaws dealing with pensions and with "permanently disabled benefits -- pensions" provide, among other things, that 260 all members who shall have been in the service of the company for 20 years shall at the age of 70 become eligible for a pension of one-half of their weekly wage, but not in excess of $ 25 per week; and that the same pension shall apply to all members who become permanently disabled from accidents or sickness incurred while in the line of duty.The articles of the first five editions of the bylaws dealing with the award of benefits are identical and provide as follows:The Board of Managers from time to time may appoint a committee for the purpose of deciding all questions as to benefits and may make such investigations as it finds necessary. In the event of any disagreements relative to the award of benefits final action thereon shall be taken by the Board and a majority vote shall be conclusive.The articles of the last two editions of the bylaws dealing with the award of benefits are identical and provide as follows:Section 1. The Board of Managers from time to time may appoint a committee for the purpose of deciding all questions as to benefits, and may make such investigations as it finds necessary. In the event of any disagreements relative to the award of benefits, final action261 thereon shall be referred to the President of the Company.Sec. 2. All other questions or controversies of whatsoever character arising in any manner as between any parties or persons in connection with the C. R. Lindback Foundation or the operation thereof, whether as to the construction of language or meaning of the By-Laws and Regulations or as to any writing, decision, instruction, payment, or acts, in connection therewith shall be submitted to the Board of Managers whose decision shall be final.Article XIV of all the editions of the bylaws is identical and provides that "The fiscal year shall be January first to December thirty-first, inclusive."Article XV of the first five editions of the bylaws was headed "Amendments" and of the last two editions it was headed "General." All seven editions provided that the board of managers could by an affirmative vote of a majority at any regular or special meeting alter or amend the bylaws and regulations to take effect prospectively. The last two editions of article XV contained a new section reading as follows:661 Sec. 3. The rights, privileges, duties and liabilities of the members, officers, and members of the Board262 of Managers, the interpretation and construction, validity and effect of the provisions of these By-Laws and Regulations and all the actions taken pursuant thereto, shall be governed by the Laws of the Commonwealth of Pennsylvania.Prior to 1934 the practice of the board of managers in respect to applications for sick benefits was to delegate its discretion to a subcommittee. This subcommittee met once each week and acted on each application according to its discretion. In the event of conflict or disagreement within the subcommittee in particular cases, such cases were presented by the subcommittee to the full board for final action. After 1934 the subcommittee continued to function, but in the ordinary run of applications for sick benefits the medical director was empowered to approve the payment of benefits for the subcommittee. All questionable cases were still acted upon finally by the board. At all times during the life of the Foundation the board exercised its own discretion in each case which came before it and frequently overruled the subcommittee and medical director.During the entire period of existence of the Foundation, both under the bylaws and in actual practice263 the ultimate responsibility and authority with respect to benefits and as to whether benefits would or would not be granted was vested in the board of managers.In the administration of their functions the board of managers, pursuant to section 3 of article II (adopted November 1, 1925, and continued without substantial change thereafter), article XIII (effective in the years 1925-1937), and sections 1 and 2 of article X (effective in the years 1937-1940) in some instances acted with liberality.When there was any doubt respecting the payment of benefits, the benefit of the doubt was resolved in favor of the employee, and the board of managers took full advantage of the discretionary opportunities which the board had under the bylaws to do a job in the interest of the human side of the problem.In actual practice benefits were paid in some cases for such period of time as the board of managers approved, without regard to the limitation period of the bylaws in any given case.In actual practice and pursuant to the revision of article X of the bylaws (effective after June 30, 1937), cases in which the board of managers could not agree were referred to Lindback for two reasons: (1) Because264 they were of opinion that since he had set up the policy of the organization he could best determine what action should be taken, and (2) because Lindback's contributions helped to make up the Foundation's deficits.Notwithstanding the fact that the bylaws did not provide therefor, in conjunction with Abbotts the Foundation maintained a dispensary available both to members and Abbotts' other personnel, the expenses 662 of which dispensary were paid for proportionately by the Foundation and Abbotts.Notwithstanding the benefits provided by the Foundation, Abbotts maintained independent workmen's compensation insurance, for which it paid premiums to an insurance company, through which medium its employees were paid compensation in accordance with the provisions of the Workmen's Compensation Laws of the Commonwealth of Pennsylvania.Benefits were paid by the Foundation without regard to the position taken by the workmen's compensation carrier, but if workmen's compensation was paid, the employee reimbursed the Foundation for the amount of the workmen's compensation payment.When the Foundation was organized, the contributions of members and the benefits provided for in the bylaws265 were not based on an actuarial computation, and the Foundation was aware from the start that it might have to rely upon the donations of individuals to meet such deficits as might be sustained.Upon the advice of counsel, income tax returns were not filed by the Foundation for the taxable years 1925, 1926, and 1927, but delinquent returns were filed on April 2, 1942, for those years and subsequent years to and including the taxable year 1941. No request was at any time made to the Commissioner of Internal Revenue for a ruling as to whether or not the Foundation was exempt within the provisions of section 231 of the Revenue Act of 1926 and corresponding provisions of subsequent revenue acts and of the Internal Revenue Code.Attached to the delinquent returns filed for the years 1926 and 1927 was a protest statement, the body of which was as follows:On advice of counsel that The C. R. Lindback Foundation of Abbotts Dairies, Inc., now known as The C. R. Lindback Foundation, as a voluntary employees' beneficiary association was exempted from taxation, no income tax return has heretofore been prepared or filed. The association was organized on a mutual insurance or beneficial basis 266 for purely non-profit purposes. It has always been conducted without benefit of any kind to any private shareholder or individual. It has existed solely for the purpose of paying life, sick, accident or other benefits to its members. It has accomplished this purpose by the collection annually of amounts from members in excess of eighty-five percent (85%) of the association's income. The cost of conducting the association's affairs and carrying on its purposes has been met in part by voluntary contributions of the members' employer. Hence this return is filed under protest.Petitioner, the C. R. Lindback Foundation, believed in good faith that it was exempt from taxation and its failure to file the returns on time was due to a reasonable cause and not to willful neglect.Abbotts in its income tax returns for the years 1925 to 1940, inclusive, claimed and was allowed its contributions made to the Foundation as deductions for ordinary and necessary business expenses.Lindback voluntarily paid the Foundation $ 5,000 in 1938, $ 5,000 in 663 1939, and $ 5,000 in 1940. In his returns for each of said years he claimed the amount so paid as an item of deduction as a charitable contribution. 267 During the year 1939, William B. Griscom, an officer and stockholder of Abbotts, and chairman of the board of managers of the Foundation at that time, voluntarily paid the sum of $ 2,000 to the Foundation, which he claimed as an item of deduction as a charitable contribution in his income tax return for said year.The contributions made by Lindback and Griscom described in the two previous paragraphs were made at the request of the Foundation's officers and after Lindback and Griscom had been advised by them that additional money was needed to meet expenses and benefit expenditures during those years.OPINION.Briefly, the issues which we previously stated in greater detail are:(1) Is the Foundation in Docket No. 1617 exempt from taxation for the years 1926 and 1927 under either paragraph (6) or (8) of section 231 of the Revenue Act of 1926?(2) If not exempt from taxation under (1) above, should the $ 12,000 contributed by Abbotts to the Foundation for each of the years 1926 and 1927 be excluded from the Foundation's gross income for those years as a gift under section 213 (b) (3) of the Revenue Act of 1926?(3) If both (1) and (2) are decided in favor of the respondent, is the 268 Foundation liable for the penalties?(4) Are petitioners in Docket Nos. 1618 and 1684 entitled to deduct the contributions made to the Foundation in 1938, 1939, and 1940 under section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code as amended?We shall consider these issues in the order stated.1. Paragraphs (6) and (8) of section 231 of the Revenue Act of 1926 are in the margin. 2269 At the outset it may be noted, as stated by the respondent's counsel at the hearing, that the Foundation is exempt from taxation for all 664 years after 1927 under section 137 of the Revenue Act of 1942, which was made retroactive to and including the Revenue Act of 1928.Is the Foundation exempt from taxation for the years 1926 and 1927? The parties have stipulated that the Foundation "is and was at all times herein mentioned an unincorporated association" of the employees of Abbotts. It would thus come within the term "corporation" as that term is defined in section 2 (a) (2) of the Revenue Act of 1926. 3 In his brief the respondent has conceded that no part of the net earnings of the Foundation inured to the benefit of any private shareholder or individual. The question under section 231 (6) is therefore narrowed to whether the Foundation was or was not "organized and operated exclusively for * * charitable purposes."270 The respondent contends that because the principal income of petitioner is from dues paid by its members it can not qualify as a charitable institution depending upon gifts or funds from other sources. In support of this contention the respondent cites Philadelphia & Reading Relief Association, 4 B. T. A. 713, as being "on all fours with the instant case." In that case we said (p. 726): * * A society whose principal income is derived from a fixed regular compulsory contribution from its members, which is to constitute a fund to be used exclusively for the benefit of its members is not a charitable society.In that case we also said, p. 728:Here, for definite contributions, paid by its members at regular recurring periods, the Association undertakes to pay its members certain definite sums in the event of sickness, accident, or death. Whatever it may be called, the scheme is that of insurance. The relation of the Association to its members is contractual, rather than charitable. Nor is it a benevolent institution. No aid is furnished from generosity or liberality. None such is pretended. On the contrary, for a pecuniary consideration the Association271 agrees to pay a definite sum in the cases specified. If it fails to perform its contracts with its members, they may be enforced in the courts by suit. Certainly, under circumstances such as we have present in this case, it can not be successfully maintained that petitioner is a corporation or association, organized and operated exclusively for charitable purposes, and, hence, it is not entitled to exemption from tax under the provisions of section 231 (6) of the Revenue Act of 1918.Petitioner contends that its charitable quality is not destroyed by reason of the fact that the beneficiaries themselves make contributions to its fund, and in support of this contention it cites Union Pac. Ry. Co. v. Artist, 60 Fed. 365; Y. M. C. A. Retirement Fund, Inc., 18 B. T. A. 139; and G. C. M. 19028, Internal Revenue Cumulative Bulletin 1937-2, p. 125. In the first case cited a railroad company maintained 665 a hospital for its employees by means of contributions of 25 cents per month from each employee and of from $ 2,000 to $ 4,000 per month contributed by itself. It was sued by one of its272 employees who, while a patient at the hospital, had sustained an injury through the negligence of one of the hospital attendants. The Circuit Court of Appeals, Eighth Circuit, held that the hospital was a charitable institution and that, therefore, the railroad company was not liable for the injuries in question where it exercised ordinary care in selecting the attendant. The case presented no question of taxation and was decided long before Philadelphia & Reading Relief Association, supra.In the second case we held that a corporation which was organized and operated solely for the purpose of providing annuities for superannuated secretaries of the Y. M. C. A. and which derived its funds principally from public contributions was exempt from taxation under the provisions of section 231 (6) of the Revenue Act of 1926. In so holding we specifically distinguished that case from the Philadelphia & Reading Relief Association case upon the ground that in the latter case the principal income was derived from a fixed regular compulsory contribution from its members, whereas in the Y. M. C. A. Retirement Fund, Inc., case the principal income was derived273 from the generosity or liberality of others. In G. C. M. 19028 it was held that an employees' organization engaged in administering a fund contributed partly by the employees, partly by the employer, and partly by others was exempt as a charitable organization, "notwithstanding the employee beneficiaries may be required to make regular contributions to the fund, provided such contributions represent a minor portion" (italics supplied) of the organization's income.In the instant proceeding, the contributions by the members of the Foundation represented a major portion of the Foundation's income, and for this reason we hold that it is controlled by Philadelphia & Reading Relief Association, supra, rather than by the authorities cited above as relied upon by petitioner. See also Employes' Benefit Association of American Steel Foundries, 14 B. T. A. 1166; and Pontiac Employees Mutual Benefit Association, 15 B. T. A. 74; Shell Employees' Benefit Fund, 44 B. T. A. 452.Petitioner also contends that "The most important factor in determining whether or not an 274 employees' organization is a charity is whether the benefits are fixed and contractual, or indefinite and dependent upon the exercise of discretion by the administrators of the fund." It argues that the bylaws of the Foundation gave the board of managers such a wide discretion as to render both the beneficiaries and the benefits uncertain and that this factor should take the instant proceeding out of the class of such cases as Philadelphia & Reading Relief Association, supra. We are not convinced by this argument 666 In the administration of any fund for the benefit of employees who are in need of relief of one kind or another there must by necessity be vested in the administrators of the fund a certain amount of discretion so that all employees will be treated with an approximate degree of fairness. We do not think that the amount of discretion vested in the board of managers of the Foundation by its bylaws or the amount of discretion actually exercised by the board requires us to make a holding here contrary to our holding in Philadelphia & Reading Relief Association, supra.We think the controlling factor is the275 amount of dues actually contributed by the members themselves. Where such contributions constitute the major portion of the income the organization more nearly resembles an insurance institution than a charitable institution. The benefits which the members receive are not charity, but represent something which they are entitled to receive, largely on account of dues which they themselves have paid in to the Foundation. We hold that for the years 1926 and 1927 petitioner is not exempt from taxation under paragraph (6) of section 231 of the Revenue Act of 1926. The same holding is required relative to petitioner's claim for exemption under paragraph (8) of section 231, since one of the factors essential for exemption is that petitioner's net earnings be "devoted exclusively to charitable * * purposes."2. During each of the years 1926 and 1927 Abbotts contributed $ 12,000 as provided by article IX of the bylaws of the Foundation to the general funds of the Foundation to be used for any of its purposes and objects. The respondent has included these contributions in the Foundation's gross income. Petitioner (the Foundation) contends they were gifts to it and should be excluded276 under section 213 (b) (3) of the Revenue Act of 1926, set forth in the margin. 4The respondent relies principally upon our holding in Philadelphia & Reading Relief Association, supra, wherein we held at page 731 that certain amounts contributed to that association, the petitioner there, by the United States Railroad Administration in 1919, and the Philadelphia & Reading Railway Co. and/or the United States Railroad Administration in 1920 were "not donations in any proper meaning of that term," but were "income to the petitioner, and, accordingly, subject to tax."Respondent also cites in support of his contention on277 this point our 667 more recent decision in Shell Employees' Benefit Fund, supra. In that case, among other things, we said: * * The contributions made by the employer were not gifts, and they are none the less income because of the provision of the bylaws that the employer was under no obligation to make them [citing cases]. The corporation did not intend them to be gifts, as is shown by its failure to call them gifts or to express otherwise such intention, and by its treatment of them on its tax returns as ordinary and necessary business expenses. * * On the authority of Philadelphia & Reading Relief Association, supra, and Shell Employees' Benefit Fund, supra, we sustain respondent on this point.3. Is the Foundation liable for the penalties? Section 3176 of the Revised Statutes as amended by section 1103 of the Revenue Act of 1926 provides in part as follows: * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to278 the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * We do not think the penalties should be imposed. The parties have stipulated that "Upon the advice of counsel, income tax returns were not filed by the C. R. Lindback Foundation for the taxable years 1925, 1926 and 1927 but delinquent returns were filed on April 2, 1942 for said years * ." Advice of reputable counsel that a taxpayer was not liable for the tax has been held to constitute reasonable cause for failure to file on time where it was accompanied by other circumstances showing the taxpayer's good faith. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709; Adelaide Park Land, 25 B. T. A. 211; Agricultural Securities Corporation, 39 B. T. A. 1103; affirmed on another point, 116 Fed. (2d) 800.The holding of the court in Dayton Bronze Bearing Co. v. Gilligan, supra, may be summarized279 from the court's opinion as follows: Where a corporation believing in good faith, on reasonable grounds and after taking advice of reputable counsel, that it was not liable for munitions tax, made no return within the time prescribed by statute, but later, on advice of the collector, made a voluntary return without prejudice, the imposition of the penalty for failure to make timely return prescribed by Revised Statutes, section 3176, is not authorized. We think the facts in the instant case bring it within the ambit of the court's opinion in the Dayton Bronze Bearing Co. case and we so hold. Petitioner's assignment of error as to the imposition of penalties is sustained.668 4. Lindback voluntarily contributed $ 5,000 to the Foundation in each of the years 1938, 1939, and 1940. Griscom, now deceased, voluntarily contributed $ 2,000 in 1939. Section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code, as amended, are for the purposes of the question here involved substantially the same. The material provisions of the Revenue Act of 1938 are in the margin. 5 Contrary to what we have held as to the contributions made by Abbotts, there can be no doubt280 in our opinion that the contributions by Lindback and by Griscom were gifts as that term is used in section 213 (b) (3) of the Revenue Act of 1926.281 However, under the first issue we held that for the years 1926 and 1927 the Foundation was not "organized and operated exclusively for * * charitable * * * purposes." There was no substantial change in the organization or operation of the Foundation during the years 1938, 1939, and 1940. It is true that, by reason of section 137 of the Revenue Act of 1942, the Foundation has been rendered exempt from taxation for all years back to and including 1928, but gifts to a corporation or unincorporated association which is exempt from taxation are not necessarily deductible by the donor in computing his net income for taxation. Such contributions in order to be deductible must come within the provisions of section 23 (o) (2) and the contributions here do not come within those provisions. We hold, therefore, that the above mentioned contributions made to the Foundation during the years 1938, 1939, and 1940 are not deductible as "charitable" contributions under section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code, as amended.In Docket No. 1617 decision will be entered in favor of respondent as to deficiencies in tax but in favor of petitioner as to penalties.282 In Docket No. 1618 decision will be entered under Rule 50. In Docket No. 1684 decision will be entered for respondent. Footnotes1. All references to bylaws in this report are to the bylaws of the Foundation.↩2. Sec. 231. The following organizations shall be exempt from taxation under this title -- * * (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes;↩3. Sec. 2. (a) When used in this Act -- * * (2) The term "corporation" includes associations, joint-stock companies, and insurance companies.↩4. Sec. 213. For the purposes of this title, except as otherwise provided in section 233 -- * * (b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title: * * (3) The value of property acquired by gift, bequest, devise or inheritance (but the income from such property shall be included in gross income).↩5. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: * * (o) Charitable and Other Contributions. -- In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of: * * (2) A domestic corporation, or domestic trust, or domestic community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation; * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4476934/	OPINION. Johnson, Judge: The sole issue before us is whether petitioner and her former husband filed joint returns for the years 1943, 1944, 1945, 1947, and 1948. Eespondent determined that joint returns were filed by them, but petitioner maintains that she did not file joint returns with her husband and, further, that she did not intend to file joint returns. The keystone of respondent’s argument is that in Maryland each spouse is entitled to one-half of the income from property held by them as tenants by the entirety. Whitelock v. Whitelock, 156 Md. 115, 143 Atl. 712, 715; Brown v. Brown, 204 Md. 197, 103 A. 2d 856, 863. The question of how that income is reported is a question of fact, and the intention of the parties is to be considered in ascertaining this fact. See Virginia M. Wilkins, 19 T. C. 752; Zabelle Emerzian, 20 T. C. 825; Hyman B. Stone, 22 T. C. 893. If the intention of the parties is not apparent on the face of the return, their intention must be gleaned from other sources. In general, a husband and wife may make a single return jointly; but, if a joint return is made, the tax liability shall be computed on the aggregate income and the liability with, respect to the tax «ba.11 be joint and several. Sec. 51 (b), I. B,. C., 1939. The present case is not like that of W. L. Kann, 18 T. C. 1032, affd. 210 F. 2d 247, where the wife failed to take the stand and where there was no evidence to Overcome the presumptive correctness of respondent’s determination. Here petitioner did testify and there is nothing in the record to support a finding that petitioner intended that the return filed be a joint return. Her name was not included in the caption, nor did she sign any of the returns. See Myrna S. Howell, 10 T. C. 859, affd. 175 F. 2d 240. There were no income, losses, or deductions attributable to petitioner in an individual capacity included in the returns filed by Worth. See Eva M. Manton, 11 T. C. 831. It is noteworthy that petitioner did not prepare the returns, nor did she see them until the time of the hearing. All of the facts support petitioner’s position in that they point out the absence of any affirmative action on petitioner’s part to join with her husband in the filing of tax returns. Petitioner had no intention of filing joint returns. Notwithstanding petitioner’s inactivity or her intention, there remains the fact that under Maryland law petitioner was entitled to one-half the income from property owned as tenants by the entirety, and all income reported and that admittedly not reported by Worth was derived from the services of himself and others than petitioner and from property held by petitioner and Worth as tenants by the entireties. Undoubtedly petitioner should have reported some share of this income, but she had a choice as to how she could report it. She could have filed a separate or a joint return. Since she did not intend to or did not in fact file a joint return, she incurs no joint or several liability based on a joint return. Therefore, the joint and several liability attributed to her in the deficiency notice was improper. Even though our decision is based on a finding of fact, we have considered those cases relied upon by respondent. In particular, respondent relies upon Walter M. Ferguson, Jr., 14 T. C. 846, to support his position. In that case a husband and wife operated a restaurant as a partnership. All income from the partnership was reported by the husband, and no return was filed by the wife. There we held that the return was a joint return. The Ferguson case can be distinguished from the present case on the facts. In the Ferguson case the reported income was family partnership income, and husband and wife knew it to be their income. In the present case the petitioner did not know that she was entitled to the income, by operation of law, from property held as tenants by the entirety, and she had no intention of joining her husband in the returns that he filed. In the Ferguson case there was sufficient evidence to support a finding that husband and wife intended to file a joint return, but in the present case the evidence will not support such a finding. In McCord v. Granger, 201 F. 2d 103, the Court of Appeals pointed out that the single circumstance of a return reporting both husband’s and wife’s income is not sufficient to hold that it was a joint return. Cf. Louis M. Roth, 17 T. C. 1450. Considering the record as a whole we find that petitioner did not file, and did not intend to file, joint returns with Worth in 1943, 1944, 1945, 1947, and 1948. Decision will be entered for the petitioner.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4476935/	opinion. Rige, Judge: This proceeding involves a deficiency in income tax determined against the Waynesboro Knitting Company (hereinafter referred to as petitioner) in the amount of $9,953.05 for the taxable year 1948. The sole issue to be decided is whether petitioner derived taxable income in 1948 from the receipt of the proceeds of certain life insurance policies which, among other assets, were transferred to petitioner in 1931 as restitution for the defalcations of one of its officers. All of the facts were stipulated, are so found, and are incorporated herein by this reference. Petitioner is a Pennsylvania corporation, and filed its income tax return for the year here involved with the collector of internal revenue for the first district of Pennsylvania. Petitioner maintained its books of account and filed its tax returns on the accrual basis. During the years 1926 to 1931, inclusive, petitioner suffered losses arising out of embezzlements by one of its officers (hereinafter referred to as “the officer”), in the aggregate amount of $488,010.60. Upon discovery of these losses in 1931, the officer transferred all of his assets to petitioner. These assets had a fair market value of $258,031.46 at the time of transfer and consisted of the following: Life insurance on the officer’s life_ $455.20 Securities- 4, 020. 00 Real estate- 22,446.23 Notes_231,110. 03 Total_ 258, 031.46 In consideration of this partial restitution, petitioner relinquished any further claims which it had against him, arising out of his defalcations, and required no further payments thereon. Petitioner had dismissed the officer from its employment when the embezzlements were discovered. However, after the aforementioned restitution, he was re-employed as general manager because of his ability and business acumen. He remained in such employment until 1939, when he left due to ill health. Petitioner realized a net loss of $229,979.14 from such defalcations after making allowance for the $258,031.46 fair market value of the assets assigned by him to petitioner in partial restitution. Respondent determined what portion of this net loss should be allocated to each of the years 1926 through 1931, and petitioner filed corporate returns for each of such years in which deductions were claimed for the allocable portions of such loss. The following table discloses that tax benefits of only $66,326.96 were realized from the $229,979.14 net loss: Year 1926. 1927. 1928. 1929. 1930. 1931. Total. Loss as allocated $473.68 9,274.14 6,091.43 50,487.71 129,664.97 33,987.21 229,979.14 Net income or net loss after deduction of loss $63,764.10 112,207.75 165,363.22 231,757.43 (152,939.62) (54,481.32) Portion of loss producing tax benefits $473.68 9,274.14 6,091.43 50,487.71 None None 66,326.96 Among the assets assigned to petitioner in partial restitution of its embezzlement losses were seven life insurance policies on the officer’s life. In conjunction with, the assignment, petitioner was named the beneficiary of these policies. The total face amount of said policies was $65,000, but they had a total net equity, at the date of assignment, of only $455.20. On that date, loans thereon were outstanding in the amount of $5,703.85. Petitioner repaid such loans on October 31, 1936; and, from the date of the assignment until the officer’s death in 1948, petitioner paid $36,340.73 in premiums on the policies. Upon the death of the officer in 1948, petitioner received the $65,000 face amount of such insurance policies. The following table sets forth the total amounts realized by petitioner on the assets which the officer transferred to it in 1931 in partial restitution of his defalcations: Life insurance_$65, 000. 00 Securities_ 6, 845.45 Real estate_ 19,450. 30 Notes- 60,234. 76 $151, 530. 51 The difference between the amounts realized by the petitioner on the aforesaid real estate and notes and the fair market value of such real estate and notes at the time they were transferred to petitioner by the officer was deducted by petitioner on its returns and allowed by respondent. Respondent determined that the proceeds of the insurance policies were includible in petitioner’s gross income for the taxable year 1948 under section 22 (a) of the Internal Revenue Code of 1939; but that, under section 22 (b),1 there should be deducted therefrom the sum of the value of the consideration given for such policies in 1931, the outstanding loans repaid in 1936, and the premiums paid from 1931 to 1948. This determination resulted in the addition of $22,500.22 to petitioner’s gross income for 1948, computed as follows: Total proceeds of policies_■-$65,000. 00 Less: Consideration upon acquisition_ $455.20 Loans repaid_ 5, 703.85 Premiums paid_ 36, 340.73 - 42,499.78 Taxable income_- $22, 500.22 Petitioner contends that this $22,600.22 constitutes a partial recovery of the embezzlement loss which it had previously suffered. Petitioner maintains that the so-called tax benefit rule of Dobson v. Commissioner, 320 U. S. 489 (1943), rehearing denied 321 U. S. 231 (1944), and Birmingham, Terminal Co., 17 T. C. 1011 (1951), precludes the taxation of this sum since the embezzlement loss in an amount in excess of such sum had produced no tax benefit when deducted on its returns in 2 earlier years. However, the tax benefit rule may be invoked only where there is a recovery which is directly attributable to a previous loss which produced no tax benefit. As stated in Merton E. Farr, 11 T. C. 552 (1948), affirmed sub nom. Sloane v. Commissioner, 188 F. 2d 254 (C. A. 6, 1951), -“one certain requirement for invoking it is that there be such an interrelationship between the event which constitutes the loss and the event which constitutes the recovery that they can be considered as parts of one and the same transaction.” The requirement that there be an “integrated transaction” was made clear by the Supreme Court in Dobson v. Commissioner, supra, and followed in Allen v. Trust Co. of Georgia, 180 F. 2d 527 (C. A. 5, 1950), certiorari denied 340 IT. S. 814 (1950), a case whose facts are similar to those here involved. The tax benefit rule is clearly inapplicable here. Petitioner acquired the insurance policies as part of a settlement which completely released its former officer from any liability with respect to his em-bezzlements. Since the assets received from him as partial restitution were worth substantially less than the amounts embezzled, petitioner took deductions for its net losses on its income tax returns for the years in which the losses were incurred. It is clear that the various assets transferred to the petitioner pursuant to the settlement agreement were irrevocably assigned and did not constitute mere collateral for the payment of the obligation. The obligation was completely extinguished and the transaction closed in 1931 by the settlement agreement. Thereafter, these assets were no longer interrelated with such obligation. The transfer of the assets “was the total termination of the debt and the beginning of a new and separate transaction.” The assets “so acquired had their own independent basis for future gain or loss, which was the fair-market value on the date of acquisition.” Allen v. Trust Co. of Georgia, supra. Moreover, petitioner acknowledged that such was the basis of these assets for it correctly used this basis in calculating and deducting further losses on its returns when it sold the real estate and notes at prices less than their fair market value at the date of acquisition. Federal National Bank of Shawnee, 16 T. C. 54 (1951), appeal dismissed per curiam 191 F. 2d 402 (C. A. 10, 1951). When these policies matured upon the death of the insured, petitioner realized gain taxable under section 22 (a) and (b) to the extent of the excess of the proceeds over the sum of the fair market value of the policies upon acquisition, the loans thereon which were repaid, and the premiums paid. The gain on such policies cannot be considered attributable to the embezzlement loss since such gain flowed not from the officer or his estate but from an insurance investment which was entirely separate and distinct from him. The fact that the policies insured the life of the officer is irrelevant since he neither owned them nor controlled the choice of beneficiary. Had he retained ownership of the policies and assigned them merely as collateral for the payment of the obligation, the proceeds would be considered as a payment thereon. St. Louis Refrigerating & Cold Stor. Co. v. United States, 162 F. 2d 394 (C. A. 8, 1947). But these policies became the possession of petitioner as part of a settlement which completely extinguished any obligation of the former officer to make further restitution. Petitioner computed its loss pursuant to this settlement and took deductions therefor on its tax returns for the applicable years. Even though some of such deductions failed to produce tax benefits, this can have no effect on the taxability of the gain from such insurance policies, because such gain arose from a transaction entirely separate from petitioner’s embezzlement loss. The cases relied upon by petitioner with respect to the application of the tax benefit rule, either under section 22 (b) (12) or the doctrine of Dobson v. Commissioner, supra, are not apposite since they relate to situations wherein the subsequent recovery was directly attributable to a bad debt or loss suffered and taken as a deduction in a prior year. Decision will be entered for the respondent. SEC. 22. GROSS INCOME. (b) Exclusions fiíom Ghoss Income. — The following Items shall not be Included In gross Income and shall be exempt from taxation under this chapter: (1) Life insurance. — Amounts received under a life insurance contract paid by reason of the death of the insured, * * * ■(2) Annuities, etc. (A) In General. — * * * In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph. * * »	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625153/	BOSTON SAFE DEPOSIT & TRUST CO. AND EVERETT E. KENT, EXECUTORS, ESTATE OF HERBERT A. WILDER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boston Safe Deposit & Trust Co. v. CommissionerDocket No. 32131.United States Board of Tax Appeals20 B.T.A. 1159; 1930 BTA LEXIS 1963; October 3, 1930, Promulgated 1963 The testator, by will, provided inter alia for annuities of $300 a year, during the life of his three daughters, for every grandchild of his who might be born after his death. A minimum deductible value for a remainder left to charity determined, where it appears that grandchildren can be born with incredible rapidity and in improbable numbers without impairing this value. Harris H. Gilman, Esq., for the petitioners. F. T. Horner, Esq., for the respondent. MURDOCK 1159 The Commissioner determined a deficiency in estate tax of $30,758.24. The petitioners allege that he erred in determining the net estate through failing to deduct from the value of the gross estate the amount of certain bequests, legacies and devises to or for the use of certain corporations "organized and operated exclusively for religious, charitable, scientific, literary or educational purposes," to wit, the amount of $363,775.19, passing by the residuary clause ("Sixty Item") of the will of the decedent. Some facts were admitted while others were contained in a lengthy stipulation. FINDINGS OF FACT. The petitioners are the duly appointed and qualified executors1964 of Herbert A. Wilder, late of Newton, Mass., who died on October 12, 1923. The petitioner Kent is a resident of Newton. The other petitioner is a Massachusetts corporation with its principal place of business in Boston. The value of the gross estate of the decedent at the date of his death for the purpose of Federal estate tax was $1,235,609.49. 1160 The decedent left a will and codicils which were duly proved by the proper probate court. He was survived by the following children and grandchildren only: Children:Age at decedent's deathConstance Perley Wilder, unmarried50Margaret Guild Wilder, unmarried44Mary Clement Kent (wife of Everett E. Kent)46Grandchildren (children of Mary C. Kent):BornFrancis Wilder KentAug. 7, 1909Rachel G. KentApr. 1, 1912Virginia KentSept. 26, 1918The Commissioner allowed certain deductions from the gross estate for debts, administration expenses, funeral expenses, charitable, public, and similar bequests, and the $50,000 specific exemption, in the total amount of $248,907, as to which there is now no dispute between the parties hereto. The parties are in accord as to the1965 amount of the specific bequests and legacies made by the will, the total value of which, including life estates in the real property at Newton and Lebanon, was $57,800.07. Annuities to be paid from trust funds of the residuary estate were as follows: Amount per yearFactorPresen worth as of Oct. 12, 1923To three childrenConstance Perley Wilder$6,0000.48191$79,127.89Margaret Guild Wilder6,000.4185288,809.44Mary Clement Kent7,000.4388699,986.7319,000267,924.06To othersEverett E. Kent2,40030,966.92Frederick P. Campbell5,00047,720.93Mary Gertrude Campbell1,20010,015.42Esther Wilder Stewart and her 3 daughters1,20020,699.84Mary W. Thayer, issue and others8407,010.93Helen Guild Brick1,30022,555.63William H. Lee (died Dec. 28, 1924)90011,308.21Abby G. Rudd100340.72Harriet W. May9008,897.36Mary C. Hastings4004,434.01Pew rent for daughters and families (in perpetuity)2606,500.00Total14,500170,449.97Direction for employment of Edward A. Smith3,60019,562.40To 3 grandchildren living at decedent's death until they reach 21 or until the death of last survivor of 3 daughters, $300 each. Total9006,526.911966 The proper factor for determining the value on October 12, 1923, of a remainder after the bequests and annuities made to cease upon the death of the decedent's last surviving daughter is .318592, while that for determining a similar value for a remainder after the joint lives of the two older daughters is .33711. 1161 The average of total annual expenditures to pay and keep down all taxes, assessments, insurance, repairs and improvements, charges, or expenses of any kind upon or connected with all or any of the real estate of the testators in Newton and Lebanon was $1,771.56 in Newton and $2,066.27 in Lebanon, a total of $3,837.83. All of the institutions among which the residue of the decedent's estate was to be finally divided were organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual within the purview of section 403(a)(3) of the Revenue Act of 1921. The will of the decedent provided that the daughters Constance and Margaret, as long as either lived, should have the Newton property free from all charges for taxes, 1967 insurance, improvements or repairs. After the death of the survivor, this property was to go into the residuary estate under the "Sixth Item." In the same way the will provided that the Lebanon property should go to the decedent's three daughters until the death of the survivor, and then pass into the residuary estate. The "Sixth Item" was in part as follows: I give, bequeath and devise to any trustees hereinafter named, their survivors, survivor, successors or successor, but IN TRUST NEVERTHELESS, all the rest, residue and remainder of my property and estate, personal or real, wherever found or situated, including the reversions or remainders established or contemplated in the foregoing items of this my will, and any income or benefits which may result to my estate from any transactions I may effect in my lifetime, the same to be invested and held by said trustees in safe and suitable securities and properties, save as hereinafter provided, and from the income and so much of the principal of the trust fund as may be needed or required from time to time, (a) to pay and keep down all taxes, assessments, insurance, repairs and improvement charges or expenses of any kind, upon1968 or connected with all or any of my real estate in said Newton and Lebanon, or any other real estate acquired by any daughter in substitution therefor, so long as any of my daughters may occupy, use, rent or have any interest in the same; (b) to pay all charges, taxes and expenses upon or connected with the trust or trust property, so long as the trust continues. * * (c) to pay annuities, or total net sums in every year, to the persons and in the instalments next below named, or stated, giving to each person named so long as he or she may live, save as hereinafter qualified, respectively, a total annual amount as follows, to wit: - * * * (d) to each of my grandchildren, whether born before or after my death, I give an annuity or total net sum of Three hundred dollars annually, until each such grandchild shall attain the age of twenty-one years, the same to be deposited in Savings Banks, in the successive years, and each grandchild to be allowed to withdraw the income upon such deposits for his or her benefit respectively, in each year after the said age of twenty-one years is attained, but the principal not to be withdrawn by the respective grandchild until the age of twenty-eight1969 years be reached. * * 1162 I direct that out of the trust fund created by this item of my will, any portion of a total of twenty-five thousand dollars may be used in the successive years, from time to time, by my trustees, to amplify any of the benefits provided for my daughters or their families, under this item of my will, in cases of sickness or physical distresses of any of them; such awards from such twenty-five thousand dollar fund, however, to be only in cases of such sickness or necessitous circumstance as in the discretion and judgment of my trustees would constitute special occasion for the enhanced assistance; this sickness benefit fund to be applicable to my children and grandchildren as well as to the other family annuitants mentioned in this connection. If there be any insufficiency or shortage of funds, wherewith to meet all the provisions of my will, I direct that the legacies, annuities and other benefits in favor of my daughters, shall be met and paid in full, without any deductions, in any event, the same to have priority over any other benefits in the event of any such deficiency. (e) if at the death of my first daughter who shall decease, it1970 shall appear to my then surviving trustees or trustee, or to the trustees at such times acting under this my will, that there is a sufficient trust fund or estate abundantly to pay and supply all the annuities provided for in this item of my will, then said trustees or trustee, at the death of such first daughter to decease, may pay over to the final or ultimate residuary beneficiaries of my estate, later mentioned in this item of my will, one-third of the then existing trust fund; and upon the death of my daughter who shall be the second to decease, said trustees or trustee, if assured of the sufficiency of my estate, may pay over to said ultimate beneficiaries, another equal portion of the then remaining trust fund, that is to say, substantially one-half of such trust estate as may be in the hands of the trustees or trustee at the death of such second decedent. (f) at the death of my last surviving daughter, all the annuities given or established by this my will, shall terminate and cease, notwithstanding any language, terms or provisions hereinabove connected with any particular annuity; all and every annuity provision hereinbefore made or stated, being subject and subordinated1971 to this limitation, so that after the death of my last surviving daughter, the distribution and settlement of the entire trust may be in a short time accomplished. (g) after the death of my last surviving daughter, I give, bequeath and devise all the trust funds and estate then remaining or existing, to the final beneficiaries hereinbelow named, in the shares or proportions below stated, to be theirs absolutely and in fee. I authorize my then surviving or acting trustees or trustee, to convert into money such portion of the then existing trust estate as they or he may deem expedient, or to pay over and distribute either in money or securities to the said final beneficiaries as at the time may be found expedient and judicious. Such final beneficiaries being the following, to wit: - [Here various institutions and organizations are named and the number of sixtieths each is to receive is stated. There is also a provision for the payment of pew rent up to $260 annually for the daughters and their families.] Up to February 28, 1930, the only children who had been born to any of the daughters of the decedent were the three who were born during his lifetime. The married daughter1972 had been injured in the birth of her last child and as a result, at the date of the testator's death, she had the beginning of a condition which necessitated an hysterectomy several years later. 1163 The value on October 12, 1923, of the bequests to charity here in controversy was at least $345,000. OPINION. MURDOCK: The sole question presented in this case is the amount, if any, which should be deducted in determining the net estate under section 403(a)(3) of the Revenue Act of 1921 to represent the value of the residuary estate which is left to certain charitable organizations. There is no dispute as to the character of the organizations and institutions named as residuary legatees. The provisions of the will do not create a situation where the birth of one child causes a gift over and thereby defeats the gift to charity. Cf. . The respondent contends that the number of grandchildren who may be born can not be determined, the expenses to be paid can not be determined, the corpus of the residue may be invaded, $25,000 may be used in certain cases of necessity and, therefore, it is impossible1973 to determine the present value of the amount, if any, which the charitable organizations will receive. He allows no deduction in this connection. The probable necessary expenditures in connection with the Newton and Lebanon properties are determined accurately enough from the evidence of similar expenditures made in the past and ample allowance is made therefor in the computation suggested by the petitioner. Cf. . The possibility that the corpus might be invaded is too remote to require discussion. The only uncertainty which might defeat the petitioners' claims is that of the number of after-born grandchildren. The petitioners claim that the whole question is one of valuation, because in any event the charities will receive something. They first point out that a fund havinc a value of $140,000 on October 12, 1923, would go to the charities after adequately allowing for all payments mentioned in the will, including annuities to forty grandchildren born immediately after the testator died. It is, they say, ridiculous to assume that forty grandchildren would ever be born to the three daughters, but they point out that if1974 forty were not born at once, even more than forty could be born over a period of time without reducing the value of the $140,000 gift to charities. The computation by which they support this contention is based on figures and facts in evidence and makes a strong appeal to reason. It is set forth in the following paragraph. The petitioners start with $968,702.49, the net estate subject to tax as determined by the Commissioner, which was the gross estate 1164 less debts, administration expenses, funeral expenses, cash bequests to charities, bequests to charity of the remainder of the realty in Newton and Lebanon, the fund necessary to produce annuities given to a church, and also the statutory exemption of $50,000. In this way the gross estate was reduced by $248,907. They then deduct the stipulated value of specific bequests, the stipulated value of annuities to the three daughters, the stipulated value of annuities to others, including pew rent, the stipulated value of a fund to provide a salary for an individual, the stipulated value of annuities to the three living grandchildren, and the stipulated amount of the sickness fund given by paragraph (d) of the "Sixth Item" 1975 of the will. The amount thus deducted they claim will pay all amounts necessary in carrying out all provisions of the will except paying the necessary expenditures for the Newton and Lebanon houses and the annuities which would have to be paid to the grandchildren born after the death of the testator. To meet these two latter requirements of the will, a fund of $439,439.08 would be left. The annual income of such a fund at 4 per cent would amount to $17,577.56. From past experience they determine that the annual amount necessary to meet the requirements of the will in connection with the Newton and Lebanon houses would not exceed $4,000. The remaining income would be sufficient to provide annuities for forty-five grandchildren, even if all of the forty-five grandchildren could by any possibility be born in the year of the death of the testator. If during the first year the full number of forty-five grandchildren were not born, the number of grandchildren who could be provided for by this fund would materially increase in each year thereafter. The remainder value of the fund of $439,439.08 after the lives of the three daughters, computed by use of the stipulated factor, would1976 give a then present value to this remainder of $140,001.77. This remainder is the fund which would be used exclusively for charitable and educational purposes under the "Sixth Item." There is a legal presumption that so long as a woman lives she may always give birth to a child. Cf. . But this exceptional case is materially different from those cases, at least in the effect which the birth of one child has upon the charitable bequest. Of course a child might have been born to any of the three, and if we had to determine just how many might possibly have been born, our problem would be too difficult for human judgment and knowledge. But if we can determine that in all reasonable probability not more than a certain number would be born, the petitioners, on whom rests the burden of proof and on whom we must bear heavily, would be entitled to a minimum deduction. Cf. . There are facts before us from which we may determine, with reasonable certainty, at least a minimum deductible value for1977 the bequests to charity. "There is no uncertainty [in determining such value] appreciably greater than the general uncertainty that attends human affairs." . There is no presumption that these women will be prolific, and the facts indicate the contrary. Therefore, a finding that the bequest to charity had no substantial value because of the remote possibility that the three daughters might bear children so fast that nothing would be left would be arbitrary and unwarranted under the circumstances of this case. Cf. . No undue use of the actuarial art is involved. In fact the respondent has agreed to all of the numerical factors used and they are only used to compute the value of remainders after life estates. It may be argued that the determination of the value of these charitable bequests is a mere guess about something which can not be determined from any known data, and is, therefore, contrary to the rule laid down by the Supreme Court in 1978 But in our opinion a different rule should apply in a case such as this, where before we could determine that the bequest to charity had no value, we would have to accept the possibility that these particular women might, within one year after their father's death, give birth to a total of more than half a hundred children or that they might give birth to a total of more than three score children during their lives. Such a possibility is shocking to the intelligence. Common sense and good judgment urge its rejection because it is too remote and unlikely. In rejecting this possibility we are not going contrary to any rule required by practical necessity or social conditions as, for example, the rule of law which required our decision in the Farrington case. The petitioners having made their first point that at least they are entitled to deduct some value, next contend that they are entitled to deduct the value on October 12, 1923, of the amount which in all reasonable probability the charities would ultimately receive. They offered the testimony of the family physician who had attended the three daughters and was familiar1979 with the physical condition of each before and during 1923. He said that the oldest daughter remained alone much of her time and was not at all likely to marry. In his opinion the birth of a child after October 12, 1923, to either of the two older daughters was extremely improbable. Two of the daughters were unmarried at that time. Unmarried women of their respective ages would not be likely to have a great many children. The married daughter had had three children. Her youngest child was 1166 five years old when the testator died. The condition of this daughter in 1923 was such, due to an injury from the birth of her last child, that the birth of another child was extremely unlikely in the opinion of the physician. No more children had been born to any of the daughters up to February 28, 1930. They, therefore, say that although it was not reasonable to suppose that five children would be born to the three daughters after October 12, 1923, they accept this number as a safe maximum. From the fund of $439,439.08, which remained after the previous deductions, and from which provision would have to be made for the upkeep of the two properties and for after-born grandchildren, 1980 they deduct the present worth of a fund which during the lives of the three daughters would, at 4 per cent, produce income of $4,000 a year, a more than ample amount to take care of the Newton and Lebanon properties. They then deduct the present worth of the fund necessary to pay an annuity of $300 to each of five grandchildren born after the death of the testator, and in this way they determine that $345,745.48 would be the present worth of the fund which must necessarily under these circumstances go to the charities. Throughout this computation, except in two instances, the petitioners have given away the benefit of every doubt and have proceeded by the use of methods and figures which keep the value of the bequest to charity at a safe minimum. In deducting the $50,000 exemption before they began their computation, they have denied themselves unnecessarily. We see no reason why this amount should be deducted inasmuch as there is certainly going to be no duplication of exemptions. Furthermore, it is not necessary to suppose, as they do, that all the after-born grandchildren would be born immediately upon the death of the testator. One instance in which the petitioners have not1981 allowed a sufficient margin is in their assumption that five grandchildren would be a safe maximum, and, second, they have not allowed anything for expenses of administration of the trust. But these deficiencies in their computation are more than made up by generous allowances in other ways, some of which we have mentioned. The possibility that these three women would give birth to sufficient children after October 12, 1923, to reduce the value of the bequests to charity below the amount now claimed by the petitioner is so remote that it need not be given consideration in the decision of this case. Grandchildren could be born with incredible rapidity and in improbable numbers without impairing this value. We hold that the petitioners are entitled to deduct $345,000 in addition to the deductions already allowed by the Commissioner. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537913/	C-Track E-Filing Nevada Appellate Courts Appellate Case Management System C-Track, the browser based CMS for Appellate Courts Case Search Participant Search	01-04-2023	05-30-2020
https://www.courtlistener.com/api/rest/v3/opinions/4476957/	OPINION. Murdock, Judge: The Commissioner determined a deficiency of $1,400.42 in the income tax of the petitioners for 1950. The only issue for decision is whether the Commissioner erred by including in income $8,500 received by Gertrude from the estate of Richard J. Tivnen. The facts have been presented by a stipulation which is adopted as the findings of fact. The petitioners are husband and wife. They filed a joint income tax return for 1950 with the collector of internal revenue for the first district of Illinois. Gertrude C. Davies commenced to work for Dr. Richard J. Tivnen in October 1931 and continued in his employ until his death on August 27, 1946. Her salary during that entire employment was at the rate of $25 per week. She married John Davies during the course of that employment. Dr. Tivnen was an eye, ear, nose, and throat specialist and had his office at 30 North Michigan Avenue, Chicago, Illinois, and lived at the Chicago Athletic Club, which was a few block's from his office. Gertrude served the doctor as secretary, nurse, bookkeeper, and general confidential agent. She regularly worked for 9 hours each day 6 days a week, and very often did additional work in the evenings and on Sundays without additional compensation. She and her husband performed other miscellaneous services for Dr. Tivnen, such as chauffeuring him in their automobile without additional compensation. Gertrude spoke to Dr. Tivnen on several occasions about terminating her employment but each time he put her off by promises that if she stayed he was going to take care of her in his will by an arrangement under which she would never have to work again after he died. Gertrude continued in his employ until his death becausé she relied on those promises. Dr. Tivnen was a bachelor, was 73 years of age at the date of his death, and died intestate. Gertrude was not related in any way to him. Gertrude filed a claim on June 3,1947, in the Probate Court of Cook County, Illinois, for $60,000 against the Estate of Richard J. Tivnen which had been opened in that court. The claim was stated in the alternative and consisted of four counts which may be summarized as follows: Count I. The deceased during his lifetime “in consideration of special services rendered and to be rendered” by Gertrude in handling and managing his professional and business affairs and in nursing and caring for him, agreed with her “that he would make a valid will, giving and bequeathing to claimant one-third of his gross personal estate” which amounted to more than $180,000, but he failed to carry out his agreement and died intestate. Count II. This count is substantially the same as count I except that it alleges that Gertrude was to be given under the will sufficient to support her for the balance of her life, the total gross estate amounted to more than $300,000, and Gertrude:would require at least $60,000 to support her for the balance of her life. Count III. Gertrude, during the life of the deceased “at his special instance and request and on his express promise that he would pay her the reasonable value of said services, rendered divers services in handling and managing his personal, professional, and business affairs, and in nursing and caring for him.” The reasonable value of such services was $60,000. Count IV. Gertrude, during the lifetime of Tivnen, “on his implied promise that he would pay her the reasonable value of said services, rendered divers services in handling and managing his personal, professional, and business affairs and in nursing and caring for him.” The reasonable value of such services was $60,000. Reasonable compensation for Gertrude for the services which she rendered Dr. Tivnen “from the years 1941 to 1946” would have been from $75 to $100 per week. Gertrude’s claim was heard before a judge and a jury in June 1949. The trial lasted approximately a week. The jury was unable to agree upon a verdict and was dismissed. Gertrude settled her claim with the estate out of court for $8,500 before it came up again for trial. The court entered an order to effect the settlement on July 18, 1950, and Gertrude received the $8,500 within that month. She paid in 1950 legal expenses, incurred in connection with the claim, trial, and settlement, in the amount of $3,150.09. The petitioners reported the settlement in their income tax return for 1950 but did not include the proceeds of the settlement in taxable income. The Commissioner in determining the deficiency added the $8,500 to gross income, deducted the legal fees and costs in the amount of $3,150.09, and explained: “It has not been shown that any part of the amount received from the Estate of Dr. Tivnen is in satisfaction of claim as a legatee but on the other hand there was a recognition of services to the decedent in the form of a cash settlement, the sum of which constitutes taxable income in the year received.” The petitioners claim that the $8,500 is “in the nature of a gift, bequest, devise or inheritance and (under Sec. 22 (b) (3) of I. R. C.) not subject to income tax.” They argue that (1) “Money received from the estate of a decedent in compromise of a claim that the decedent failed to make a will, is within the exemption from Federal Income Tax and constitutes ‘an acquisition in the devolution of an estate.’” (2) “Money received in compromise of a claim by virtue of a court order against decedent for failure to make a will is not necessarily compensation for past services, but property acquired by ‘inheritance’ in the comprehensive sense intended by Congress.” (3) “A claimant need not be an heir in order to receive the fruits of a compromise tax free.” (4) “Petitioner, as a successful claimant against the estate of the decedent for failure to make a will, has a status as a legatee under the expression ‘devise or bequest.’ ” The cases which the petitioners cite to support their four points are not authority for the decision of this case. Gertrude was not named in any will of Tivnen so far as this record shows and did not contest any will of his. She was not an heir of Tivnen and did not sue as an heir. She could not and did not rely upon a mere promise of Tivnen, unsupported by any consideration, to leave her property by his will, but in each count of her claim mentioned some valuable consideration moving from her to Tivnen for whatever she was claiming from his estate. The petitioners cite no case in their favor involving facts similar to those here present. Actually, Gertrude did not receive the $8,500 or any part of it by bequest, devise, or inheritance from Tivnen. She did not receive anything by inheritance from him because she was not related to him in any way and claimed no relationship, and she did not receive anything by bequest or devise because he left no will. She received the $8,500 as the result of a settlement of a claim against the estate of an intestate. She alleged that her claim was fully supported by consideration in the form of services performed by her and her agreement at his request to continue those services. The amount received, when added to the $25 per week which she had formerly received, was not in excess of reasonable compensation for the services which she rendered. The petitioners have failed to show that any part'of the $8,500 was received as a gift or that the determination of the Commissioner is incorrect. Cole L. Blease, 16 B. T. A. 972. Decision will be entered for the respondent.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625183/	ALPHONSE MOURAD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMourad v. Comm'rNo. 7873-01 United States Tax Court121 T.C. 1; 2003 U.S. Tax Ct. LEXIS 20; 121 T.C. No. 1; July 2, 2003, Filed 20 Judgment entered for respondent. In 1996, P's wholly owned S corporation filed a petition for bankruptcy reorganization. The U.S. Bankruptcy Court appointed an independent trustee to administer the bankruptcy estate. In 1997, a plan of reorganization was confirmed, and the S corporation sold its principal assets. The bankruptcy trustee filed a Form 1120S for the S corporation's 1997 tax year, which reported a large gain. P failed to file his individual income tax return for 1997. From information disclosed by the S corporation on its 1997 return, R determined P's income and issued a notice of deficiency. Held: The filing of a bankruptcy petition for reorganization neither terminates an S corporation's tax status nor creates a separate taxable entity. P is liable for tax on the income of the S corporation. Held, further, P failed to follow the procedures necessary to claim low-income housing tax credits. Held, further, statements made by R's representative at a bankruptcy plan confirmation hearing did21 not waive R's determination that P owes income taxes for 1997. Alphonse Mourad, pro se.Steven M. Carr, for respondent. Ruwe, Robert P.RUWE1 RUWE, Judge: Respondent determined a $ 189,745 income tax deficiency for petitioner's 1997 tax year. The issues presented to the Court are: (1) Whether petitioner should be taxed on gain from the sale of assets by his S corporation during the corporation's bankruptcy proceeding; (2) whether2 petitioner is entitled to low-income housing tax credits; and (3) whether respondent waived his claims for payment of petitioner's 1997 income tax. FINDINGS OF FACTSome of the facts have been stipulated and are so found. The stipulation of facts, the second stipulation of facts, and the accompanying exhibits are incorporated herein by this reference. 1 At the time the petition was filed, petitioner resided in Massachusetts.22 During the year at issue, petitioner was the sole shareholder of V&M Management, Inc., an S corporation (V&M Management). 2 V&M Management owned and operated a 275-unit apartment complex known as Mandela Apartments in Roxbury, Massachusetts. 3On January 8, 1996, V&M Management filed a petition for reorganization pursuant to chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District of Massachusetts, Boston. The bankruptcy court appointed an independent trustee, Stephen S. Gray (the bankruptcy trustee), to administer the reorganization. In the bankruptcy action, the Commissioner filed proofs of claim for employment23 taxes due and owing by V&M Management.On September 26, 1997, the bankruptcy court confirmed a plan of reorganization (the plan). The cornerstone of the plan was the sale of Mandela Apartments and its related property. Because the plan called for full payment of the employment taxes owed by V&M Management, the Commissioner had no objection to the plan. On or about December 18, 1997, the bankruptcy trustee sold Mandela Apartments and its related property for $ 2,872,351.On behalf of V&M Management, the bankruptcy trustee prepared and filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for tax years 1995 through 1999. 4 The 3 1997 Schedule K-1, Shareholder's Share of Income, Credits, Deduction, etc., reported that petitioner realized a gain of $ 2,088,554 from the sale of the Mandela Apartments' property. 524 Petitioner did not file individual income tax returns for 1996 and 1997. On August 13, 2001, respondent issued a notice of deficiency for the 1997 tax year, which determined that petitioner received income of $ 2,088,554. Respondent's determination was based on information reported on V&M Management's 1997 Schedule K-1. In determining the amount of petitioner's deficiency, respondent allowed deductions of $ 1,402,543. 6 Respondent determined that petitioner owed $ 189,745 in income taxes for 1997.V&M Management has never claimed low-income housing credits on any of its returns. V&M Management never applied for an allocation of low-income housing credits and never received Form 8609, Low-Income Housing Credit Allocation Certification, from the State of Massachusetts. Neither V&M Management nor petitioner ever attached Form 8609 to their25 tax returns. Petitioner never claimed low-income housing credits on his personal returns for the years during which V&M Management owned Mandela Apartments. OPINIONA. Income Imputed From the S CorporationPetitioner does not question respondent's calculation of income. Rather, petitioner argues that he should not be treated as a shareholder of an S corporation after V&M Management filed a petition with the bankruptcy court.One of the benefits of S corporation tax status is that income earned by the entity escapes corporate-level taxation. See sec. 1363. 7 Thus, an S corporation's income passes through the entity and is, generally, taxed only at the shareholder level on a pro rata basis. See secs. 1363, 1366.4 An election to be an S corporation continues until terminated. See sec. 1362(d). An S corporation election terminates in one of three26 ways: (1) Revocation by the shareholder(s); (2) the entity ceases to be a "small business corporation"; or (3) the entity's passive income exceeds 25 percent of its gross receipts for the previous 3 consecutive years. See id. The Code provides only these three ways by which the S corporation election may be terminated. See sec. 1362(d). Petitioner makes no claim that either the first or third method of termination applies. Thus, we must determine whether the filing of the chapter 11 bankruptcy petition terminates V&M Management's status as a "small business corporation". Section 1361(b) provides in part: SEC. 1361(b). Small Business Corporation. -- (1) In general. -- For purposes of this subchapter, the term "small business corporation" means a domestic corporation which is not an ineligible corporation and which does not -- (A) have more than 75 shareholders, (B) have as a shareholder a person (other than an estate and other than a trust described in subsection (c)(2)) who is not an individual, (C) have a nonresident27 alien as a shareholder, and (D) have more than 1 class of stock.Section 1361(b)(2) describes an "ineligible corporation" as: any corporation which is -- (A) a financial institution which uses the reserve method of accounting for bad debts described in section 585, (B) an insurance company subject to tax under subchapter L, (C) a corporation to which an election under section 936 applies, or (D) a DISC or former DISC.The filing of the bankruptcy petition had no impact on V&M Management's qualification as a "small business corporation" under section 1361(b). Petitioner was the only shareholder of V&M Management during the year in issue and remained the only shareholder through 1999.Neither party cites any previous court opinions that have decided whether or not an S corporation's status is terminated by virtue of filing a chapter 11 petition in bankruptcy. This appears to be an issue of first impression.The issue of whether the filing of a bankruptcy petition causes the termination of an S corporation's status was28 addressed in In re Stadler Associates, Inc., 186 Bankr. 762 (Bankr. S. D. Fla. 1995). 5 In that case, the sole shareholder of the debtor corporation contended that the filing of a bankruptcy petition terminates S corporation status since the shareholder lost control of the debtor. Disagreeing, the bankruptcy court held that the filing of a petition in bankruptcy does not cause the corporation to cease to be a "small business corporation" or otherwise terminate the S corporation status. The bankruptcy court held that "rules of statutory construction prohibit this Court from adding a fourth method of terminating an S corporation election where the Internal Revenue Code clearly sets forth the aforementioned three methods". Id. at 764. We agree.In re Stadler Associates, Inc. involved a voluntary petition under chapter 7 of the Bankruptcy Code. In this case, V&M Management filed a voluntary petition under chapter 11 of the Bankruptcy Code. Although the remedies sought in a chapter 7 liquidation proceeding are different from those in a chapter 11 reorganization proceeding, this difference does not affect application of the rationale stated in In re Stadler Associates, 29 Inc. to both types of bankruptcy proceedings.Likewise, no new or separate taxable entity was created by the filing of the bankruptcy petition. Section 1399 provides: "Except in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code." Section 1398 is inapplicable since it applies exclusively to individuals. The legislative history explains: The bill provides that no taxable entity results from commencement of a bankruptcy case involving a partnership or corporation. This rule * * reverses current Internal Revenue Service practice as to partnerships, under which the estate of a partnership in bankruptcy is treated as a taxable entity (Rev. Rul. 68-48, 1 C.B. 301">1968-1 C.B. 301) * * * [H. Rept. 96-833, at 20-21 (1980).] 830 We hold that a bankruptcy petition filed by an S corporation does not cause the corporation to cease being a "small business corporation" or otherwise terminate its status as an6 S corporation. The tax treatment of the S corporation is the same whether or not the entity filed for bankruptcy. 9Petitioner argues that it is unfair to tax him on passthrough income earned by his solely owned S corporation while it was in chapter 11 bankruptcy reorganization because he "received no actual benefit from the use of the property". We disagree. Since electing S corporation status, petitioner has enjoyed passthrough, one-level taxation and corporate liability protection. V&M Management's income tax returns show that over the years petitioner had substantial income31 from V&M Management and that the S corporation's business property was depreciated, thus reducing the amount of petitioner's taxable income. Furthermore, petitioner testified that he was personally liable for the debts of V&M Management. The proceeds from the sale of Mandela Apartments reduced V&M Management's debt liability. See Schindler v. Walker (In re Harbor Village Dev.), 75 AFTR 2d 95-508, 95-1 USTC par. 50,032 (Bankr. D. Mass. 1994) ("the income [while in bankruptcy] will be used to satisfy claims of the Debtor's creditors"). Since no separate taxable entity was created when V&M Management filed for bankruptcy and the S corporation status was not otherwise terminated, the passthrough treatment of V&M Management's income realized during bankruptcy is correctly imputed to petitioner.B. Low-Income Housing CreditPetitioner argues in the alternative that if the S corporation status of V&M Management is not terminated by the filing of a bankruptcy petition, he is entitled to low-income housing credits which offset his income tax liability generated from the sale of Mandela Apartments. Section 38 provides for a general business credit, which includes a low-income32 housing credit. Section 42 describes the method and manner taxpayers must use to compute their low-income housing credit. Petitioner failed to claim the credit while V&M Management owned the property for which he seeks the credit. Only now, after the purported qualifying property has been sold, does petitioner seek a credit.7 Petitioner's failure to comply with any of the procedures and requirements stated in the statutes and regulations granting the low-income housing credit makes him ineligible for it. To be eligible for low-income housing credits, a taxpayer must first obtain permission from the appropriate State or local agency. See sec. 42(h); sec. 1.42-1T(a)(2), Temporary Income Tax Regs., 52 Fed. Reg. 23432(June 22, 1987) ("Generally, the low income housing credit determined under section 42 is allowed and may be claimed for any taxable year if, and to the extent that, the owner of a qualified low income building receives a housing credit allocation from a State or local housing credit agency."). As the regulations explain, the taxpayer is not entitled to a low-income housing credit "in any year in excess of an effective housing credit33 allocation received from a State or local housing credit agency." Sec. 1.42-1T(e)(1), Temporary Income Tax Regs., 52 Fed. Reg. 23437 (June 22, 1987); see sec. 42(h). "Housing credit allocations are deemed made when Part I of IRS Form 8609, Low-Income Housing Credit Allocation Certification, is completed and signed by an authorized officer of the housing credit agency".10Sec. 1.42-1T(d)(8), Temporary Income Tax Regs., 52 Fed. Reg. 23437 (June 22, 1987). Furthermore, the taxpayer must file a completed Form 8609 and a Form 8586, Low-Income Housing Credit, with his tax return for each year the credit is claimed. Sec. 1.42-1T(h)(2), Temporary Income Tax Regs., 52 Fed. Reg. 23439 (June 22, 1987). Neither V&M Management nor petitioner ever applied for an allocation of low-income housing credits, received Form 8609, or attached Form 8609 to its or his tax return. Under these circumstances petitioner is ineligible for low- income housing credits.34 C. Alleged Waiver of Petitioner's Income TaxesLastly, petitioner argues that respondent "waived all claims for payment [of taxes] * * at the September 26, 1997 bankruptcy court confirmation hearing." At the plan confirmation hearing, counsel for the Commissioner withdrew a previous objection because the confirmed plan called for the full payment of employment taxes due and owing by 8 V&M Management. There were no claims against V&M Management for income tax liabilities because an S corporation is not generally liable for income tax.We agree with respondent that petitioner is obviously confusing V&M Management with himself. The record demonstrates that V&M Management, and not petitioner, filed a petition for reorganization in bankruptcy. The Commissioner filed proofs of claim in the bankruptcy case for unpaid employment taxes. It was these taxes, owed by V&M Management, which were at issue in the bankruptcy proceeding. A plan of reorganization was confirmed by the bankruptcy court to which the Commissioner had no objection.In contrast, here, petitioner filed a petition seeking redetermination of a deficiency of income taxes determined against him. V&M Management is not a party35 to these proceedings. Although the amount of the deficiency that respondent determined is directly related to the sale of the Mandela Apartments by V&M Management, the statements respondent's representative made during the bankruptcy confirmation hearing did not refer to, and had no effect on, petitioner's income tax liability for the year at issue. Accordingly, we hold that respondent did not waive his claim that petitioner owes income tax for 1997.D. ConclusionThe filing of a bankruptcy petition does not terminate V&M Management's S corporation election, and the income of V&M Management is taxable to petitioner. Petitioner is not entitled to low-income housing tax credits for 1997, and respondent did not waive any claim that petitioner is liable for income tax for the year 1997.Decision will be entered for respondent. Footnotes1. Respondent objected to many of the exhibits on the basis of relevancy and/or hearsay. Even if we accept those exhibits, they would have no effect on our findings of fact or the outcome of this case.↩2. Petitioner is also listed as owning 100 percent of V&M Management on its 1998 and 1999 Forms 1120S, U.S. Income Tax Return for an S Corporation. V&M Management elected to be taxed as an S corporation on Jan. 1, 1984.↩3. V&M Management d.b.a. Vasquez Development Co., Inc., acquired title to Mandela Apartments from the Secretary of Housing and Urban Development on Dec. 11, 1981.↩4. V&M Management's 1997 return was signed by the bankruptcy trustee on Sept. 1, 1998.↩5. The 1997 Schedule K-1 indicates that $ 1,794,602 was a net sec. 1231↩ gain and $ 293,952 was a net long-term capital gain.6. Respondent carried forward an interest expense deduction of $ 965,226 and a net operating loss of $ 433,167. Additionally, respondent allowed $ 4,150 as a standard deduction.↩7. Except as indicated to the contrary, all section references are to the Internal Revenue Code for the year in issue.↩8. See also 11 U.S.C. sec. 346(c) (2000)↩ ("The commencement of a case under this title concerning a corporation or a partnership does not effect a change in the status of such corporation or partnership for the purpose of any State or local law imposing a tax on or measured by income.").9. Accord Schindler v. Walker (In re Harbor Village Dev.), 75 AFTR 2d 95-508, 95-1 USTC par. 50,032↩ (Bankr. D. Mass. 1994) (partners, and not bankrupt partnership, were liable for taxes from income generated while partnership in ch. 11 bankruptcy).10. The credit-seeking taxpayer must similarly complete Part II of Form 8609. See sec. 1.42-1T(h)(2), Temporary Income Tax Regs., 52 Fed. Reg. 23439↩ (June 22, 1987).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625154/	The Himmel Brothers Company v. Commissioner.Himmel Bros. Co. v. CommissionerDocket No. 40518.United States Tax Court1953 Tax Ct. Memo LEXIS 31; 12 T.C.M. (CCH) 1388; T.C.M. (RIA) 53395; December 8, 195331 George B. Lourie, Esq., 161 Devonshire Street, Boston, Mass., and Arnold R. Cutler, Esq., for the petitioner. John M. Doukas, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $34,435.60 in income taxes of the petitioner for 1948. The only issue is whether the amount of $89,164.78, deducted by the petitioner as an ordinary and necessary expense, representing royalties accrued by the petitioner for 1948 payable to Fred and Isidore Himmel, were not deductible because unreasonably large in amount. Findings of Fact The petitioner, a corporation engaged in the manufacture of metal store fronts, filed its return for 1948 with the collector of internal revenue for the district of Connecticut. The petitioner used in its business valuable patents on machines, materials and designs of articles based upon inventions of Fred and Isidore Himmel. It was permitted to use those patents by reason of an agreement entered into with the inventors under which it was required to pay them as royalties 10 per cent of the gross sales price of all articles manufactured and sold which required the use of one or more32 of the patents. The amount of the royalties incurred for 1948 under the agreement then in effect was $89,164.78. That amount of royalties was reasonable for the necessary use made of the patents in the business of the petitioner during 1948 and represents an ordinary and necessary expense of the petitioner for 1948. The Commissioner erroneously disallowed that amount of $89,164.78 as a deduction in determining the deficiency. All facts stipulated by the parties are incorporated herein by this reference. Opinion MURDOCK, Judge: This case presents only a question of fact. The Commissioner would disallow the entire amount of royalties accrued on the ground that they were unreasonable in amount. The testimony of all witnesses and all of the other evidence has been carefully considered in reaching the conclusion that the deduction of $89,164.78 was reasonable in amount and allowable as an ordinary and necessary expense of the business of the petitioner for 1948. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625156/	Viggo Gruy v. Commissioner. Dagmar Gruy v. Commissioner. Joseph Gruy, Jr. v. Commissioner.Gruy v. CommissionerDocket Nos. 20938-20940.United States Tax Court1950 Tax Ct. Memo LEXIS 243; 9 T.C.M. (CCH) 235; T.C.M. (RIA) 50068; March 21, 1950243 The real estate sold by petitioners in the taxable year 1945 was not sold in the ordinary course of their trade or business, and the resultant gains are not taxable as ordinary income, but constitute capital gains. E. H. Suhr, Esq., 2201 2nd Nat. Bank Bldg., Houston 2, Tex., for the petitioners. John P. Higgins, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: These consolidated proceedings involve income tax deficiencies for the calendar year 1945, as follows: Docket No.PetitionerDeficiency20938Viggo Gruy$655.3520939Dagmar Gruy490.3720940Joseph Gruy, Jr.482.97The sole issue is whether the gains realized by the respective petitioners from the sale of certain lots in 1945 were taxable as ordinary income. The cases were submitted on oral testimony and documentary proof. Findings of Fact The petitioners are individuals residing at Hebbronville, Texas. Their respective income tax returns for the calendar year 1945 were filed with the collector of internal revenue for the first district of Texas. Petitioners, upon the death of their mother, Lucile Gruy, in 1933, each acquired244 by devise a one-third undivided interest in certain lots situate in the towns of Hebbronville and Beeville, Texas. Petitioner Dagmar Gruy became 21 on June 14, 1943. During the taxable year 1945 she was a student at the University of Texas at Austin. Petitioner Viggo Gruy became 21 on October 30, 1944. From March 25, 1943, until February 1946, he was in the service of the United States armed forces. Petitioner Joseph Gruy, Jr. in the taxable year 1945 was a minor. In that year he was a student at A. & M. College, at College Station, near Bryan, Texas. On June 7, 1948, petitioner's disabilities of minority were removed by a judgment in the District Court of Jim Hogg County, Texas, and thereupon his guardian was discharged and the estate in the possession of the guardian was delivered to petitioner. The town of Hebbronville, Texas, was originally laid out by Mr. Hebbron. It was originally 20 blocks in area. In 1902 or 1903, Viggo Kohler, grandfather of petitioners, purchased land adjacent to the original townsite. In 1913 a new county, Jim Hogg County, was formed. Hebbronville is the county seat and only town in that county. Kohler laid out a subdivision on his land adjacent245 to the original townsite. Upon his death the property went to his daughter, the mother of these petitioners, who, on her death in 1933, devised it in equal shares to the petitioners. In 1945, Hebbronville was an unincorporated town of about 3,000 inhabitants. The streets of the town were not paved, there were no sidewalks and no municipal sewage disposal system. Joseph Gruy, father of petitioners, has been engaged in ranching and cattle raising, and was so engaged in the taxable year 1945. During the taxable year 1945 and prior thereto he has sold, on behalf of petitioners, various lots in Hebbronville. The lots were sold singly and not in groups. During the years 1939 to 1945 the number of lots sold and the gross selling price were as follows: NumberGross Sell-Yearof Lotsing Price193914$ 3,3751940246,2501941154,0751942142,53519435419,39519444017,92019452914,630Neither Joseph Gruy nor any of the petitioners has ever installed any water lines, gas lines, electric lines, power lines, sewer lines, sidewalks, curbs, street surfacing, drainage or other improvements, and has never paid for any improvements on or246 to these lots, nor did any of them ever subdivide any real estate. Neither Joseph Gruy nor any of the petitioners has ever advertised in any manner that such lots were for sale, nor solicited purchasers, and such sales as were made were at the request of the purchasers. Neither Joseph Gruy nor any of the petitioners bought any real estate for others, and no one of them ever procured any license to sell real estate. No one of the individual petitioners has purchased or sold any real estate other than the lots in question, except petitioner Viggo Gruy, who purchased the home in which he resides. Joseph Gruy, who sold the lots here involved, received no commission for making the sales of lots on behalf of petitioners. In their income tax returns for 1945, petitioners reported an aggregate joint taxable long-term gain of $6,438.22 as the proceeds of the sale of such 29 lots situated in Hebbronville, Texas. Each petitioner reported a one third of the aggregate gain as his individual taxable gain. The respondent determined the aggregate gain of $12,876.44 constituted ordinary income, and increased each petitioner's taxable income accordingly. Opinion The question here is whether247 the gain realized by petitioners from the sale of lots in 1945 is taxable as ordinary income or as capital gain. The determination is one of fact. Since the ultimate answer turns upon a consideration of all the facts in their relationship to the situation as a whole, we think no useful purpose will be served by analyzing and distinguishing the authorities relied upon by the parties in support of their respective positions. Applying the well-recognized criteria for determining the distinction between dealer and investor sales, we are to ascertain in which category, under the facts and circumstances presented in the instant proceeding, petitioners are to be classified. It is obvious from the facts found that the individual petitioners did not have any status as dealers in real estate, since all the sales of lots were handled by their father. If, however, his activites on behalf of petitioners constituted him a dealer, his acts are imputable to them. Commissioner v. Boeing, 106 Fed. (2d) 305; certiorari denied, 308 U.S. 619">308 U.S. 619; Brown v. Commissioner, 143 Fed. (2d) 468. The lots in question were part of the ranch originally owned by petitioners' 248 grandfather. It was subdivided into small residential plots in about 1913. On the death of the grandfather the real estate became the property of the mother of petitioners and on her death in 1933 it was devised, as her separate property, in equal shares to her children, these petitioners. We think, therefore, there can be no question but that petitioners in 1933 acquired a capital asset, as defined in section 117 (a) (1) of the Internal Revenue Code. The next inquiry is whether the activities of the father of petitioners in the taxable and prior years were of such nature and degree as to change the character of such real estate into a property "held" primarily for sale to customers in the ordinary course of a trade or business so as to bring it within the exclusions contained in the definition of a capital asset. The record discloses that Joseph Gruy, father of petitioners, was primarily engaged in the business of ranching and cattle raising; that he neither bought nor sold real estate other than such sales of lots as he made for petitioners and except an occasional purchase and sale of investment real estate on his own behalf. He did not hold himself out249 as a dealer in real estate, and received no commissions for the sales he made on behalf of petitioners. He held no license as a real estate dealer. No subdivisions were made of the real estate owned by petitioners and no improvements or installation of facilities or utilities were made with respect to such real estate during the ownership of petitioners. There were no advertisements and no"for sale" signs were ever erected upon such real property. There was no solicitation of buyers, and the entire activity consisted of the mere acceptance of offers of purchasers. The single factor present here indicative of a dealer status is the number and continuity of the sale of lots. The evidence discloses that the number of sales between 1939 and the taxable year 1945, inclusive, ranged from a low of 14 to a high of 54. In 1945, 29 sales occurred. To sustain the respondent's contention would require a holding that the mere sale of lots over the years in the limited number of sales here shown was sufficient to constitute the engaging in the real estate business. We are aware of no case where a court has gone that far. Petitioners, relying on Frieda E. J. Farley, 7 T.C. 198">7 T.C. 198,250 contend that the sales of lots were in the nature of a gradual and passive liquidation of a capital asset. We think the Farley case, supra, is controlling, and it will be followed here. We, therefore, conclude upon the basis of this record that the gains realized in the taxable year 1945 from the sale of lots were capital gains and not taxable as ordinary income. Petitioners' contention is sustained. Decisions will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625157/	APPEALS OF A. B. NICKEY & SONS, ESTATE OF A. B. NICKEY, W. E. NICKEY, AND S. M. NICKEY.A. B. Nickey & Sons v. CommissionerDocket Nos. 1235-1239, 1961, 1962, 1967.United States Board of Tax Appeals3 B.T.A. 173; 1925 BTA LEXIS 2020; November 25, 1925, Decided Submitted April 21, 22, 19252020 1. Valuation of timber on March 1, 1913, for depletion purposes determined. 2. Under the evidence, held, that no taxable income was realized in the year 1917 from the liquidation of Nickey & Sons Co.Homer K. Jones, C.P.A., for the taxpayers. Benjamin H. Saunders, Esq., for the Commissioner. TRAMMELL 173 Before STERNHAGEN, TRAMMELL, PHILLIPS, and LOVE. These appeals are from determinations of deficiencies in income and profits taxes for 1917, 1918, and 1919. The deficiencies arise from the disallowance of parts of deductions claimed by the partnership of A. B. Nickey & Sons as allowances for depletion of timber; from clerical errors whereby the taxpayers' incomes were erroneously increased, which errors were conceded at the hearing; and from the action of the Commissioner in adding to the gross incomes of 174 the Estate of A. B. Nickey, W. E. Nickey, and S. M. Nickey amounts received by them as liquidating dividends from Nickey & Sons (Co. The above appeals were heard together and it was agreed that the testimony in each should be applicable to all, in so far as it is pertinent. FINDINGS OF FACT. A. B. Nickey & 2021 Sons is a partnership with its principal office at Memphis, Tenn. It was organized about the year 1894, and, from the date of its organization until August 4, 1917, was composed of A. B. Nickey and his two sons, S. M. Nickey and W. E. Nickey. A. B. Nickey died August 4, 1917. By consent of all the persons concerned, the business was continued as before and it still exists under the name A. B. Nickey & Sons, the Estate of A. B. Nickey taking his place in the distribution of earnings. It is and has been since its organization engaged in buying and selling hardwood timber. The partnership did not own any mills but purchased standing timber and sold it to the Green River Lumber Co., a corporation. Ninety-five per cent of the stock of the Green River Lumber Co. was owned by A. B. Nickey, S. M. Nickey, and W. E. Nickey in equal amounts. A. B. Nickey, S. M. Nickey, and W. E. Nickey were also officers and directors of the corporation. During the year 1917, A. B. Nickey & Sons was the owner of a portion of a tract of land in northern Mississippi, known as the Marks tract. The tract originally contained 2,856 acres, of whicch 2,772 acres were timberland. The price paid for this land, 2022 including timber, was $37,500, or $13.13 per acre. The tract of land was divided into two parts by a railroad, about 600 acres thereof lying east of the railroad, all of which was sold prior to 1917 to the Green River Lumber Co. That part of the tract of timber lying east of the railroad, which was sold as above mentioned, was of greater value per acre than the remainder of the tract, due to the fact that the timber could be cut and marketed at a lower price. It also had a heavier stand of timber than the part lying west of the railroad. The timber upon a portion of the property lying west of the railroad was sold in 1917, 1918, and 1919. The March 1, 1913, value of the timber which was cut in those years from the tract of land in question was $3.75 per 1,000 feet. There is no dispute between the taxpayers and the Commissioner as to the amount of timber cut in the years involved. Nickey & Sons Co. was, during the years 1916 and 1917, a corporation having capital stock of the par value of $100,000, all of which was issued for cash. A. B. Nickey, S. M. Nickey, and W. E. Nickey were three of the incorporators of the company; each of them furnished $18,000 of its capital and2023 each was a stockholder in the years 175 1916 and 1917. On January 10, 1916, the board of directors, by resolution, decided to dissolve the corporation and liquidate its assets. The corporation at that time had a surplus of $144,862.98. During the period January 10, 1916, to June 30, 1916, the corporation made an operating profit of $10,528.51, and distributed $90,000 in dividends, leaving a surplus of $65,391.49 on June 30, 1916. During the period June 30 to December 31, 1916, it showed a loss of $1,876.50, and $90,000 was distributed to the stockholders, leaving at December 31, 1916, no surplus and only $73,614.99 in the capital account. Of the amount remaining in the capital account at December 30, 1916, $5,503.72 was lost in the year 1917 through shrinkage in the value of assets, $68,000 was distributed to the stockholders during that year, and the balance, $111.27, was reserved to pay final expenses. The final expenses were paid and the charter of the corporation was surrendered in the year 1918. The Commissioner determined that each of the taxpayers W. E. Nickey and S. M. Nickey received in the year 1917 from the corporation liquidating dividends in the amount of2024 $6,203.34; that A. B. Nickey received during the period January 1 to August 4, 1917, liquidating dividends in the amount of $4,763.34; and that the Estate of A. B. Nickey received liquidating dividends in the amount of $1,440, during the period August 5 to December 31, 1917, and he increased their respective incomes accordingly. During the year 1919, S. M. Nickey and W. E. Nickey sold their interests in certain real estate known as the Sledge farm. In his return for that year, each of these taxpayers reported his profit from the sale of the Sledge farm as $824.56, which the Commissioner, upon audit of the return, increased to $3,845. At the hearing it was agreed by the taxpayers and the Commissioner that the profit of each taxpayer on this transaction, as computed by the Commissioner, should be reduced by the amount of $845.41. At the hearing the Commissioner conceded that a clerical error was made in computing the net income of the partnership of A. B. Nickey & Sons for the year 1917 and that its income, as set forth in the deficiency letter, should be decreased by $16,375.03. DECISION. The deficiencies should be computed in accordance with the following opinion. Final2025 determination will be settled on 10 days' notice, under Rule 50. OPINION. TRAMMELL: The Commissioner conceded at the hearing that the income of the partnership of A. B. Nickey & Sons for the year 1917, as computed and set forth in the deficiency letter, should be reduced 176 by the amount of $16,375.03, and that the income of the members of the partnership should be reduced pro rata, and, also, that the profit of each of the taxpayers W. E. Nickey and S. M. Nickey from the sale of the Sledge farm in the year 1919, as computed by the Commissioner, should be reduced by the amount of $845.41. These concessions leave for consideration only the question of the allowance to which the partnership of A. B. Nickey & Sons is entitled for depletion of timber sold in the years 1917, 1918, and 1919, and whether or not the taxpayers, W. E. Nickey, S. M. Nickey, A. B. Nickey and the estate of A. B. Nickey, realized any taxable income in the year 1917 from the liquidation of Nickey & Sons Co.The taxpayers insist that the sale made by the partnership prior to the year 1917 to the Green River Lumber Co. established that the Marks tract contained, on March 1, 1913, 27,720,000 feet2026 of timber of the value of $8.20 per 1,000 feet, and that in computing its allowance for depletion of that timber in the year 1917 and subsequent years it is entitled to use the rate of $8.20 per 1,000 feet. The Commissioner contends that the sales to the Green River Lumber Co., prior to the year 1917, were not arm's length transactions, since the members of the partnership were in control of the Green River Lumber Co., and that an allowance for depletion of the timber involved computed at the rate of $3.75 per 1,000 feet of timber cut in 1917 and subsequent years is adequate. We have carefully considered the evidence presented by the taxpayer in this appeal and we do not think that it has sufficient probative value to warrant us in changing the allowance for depletion made by the Commissioner. The burden is upon the taxpayer to establish by competent evidence that the tract of timber in question had a value on March 1, 1913, other than the value determined by the Commissioner, before this Board would be justified in holding that the Commissioner's determination was erroneously made. This the taxpayer has failed to do. The taxpayer relied upon sales of other timber in the territory2027 in which the Marks Tract was located as establishing the value of the timber in question. Testimony was introduced to the effect that early in 1913 the partnership sold to the Green River Lumber Co. the timber on 460 acres included in the 600 acres, which was a part of the Marks Tract as originally acquired, under an oral contract whereby the Green River Lumber Co. was given the right to enter upon the land and cut and remove the timber, the amount of timber removed and the price to be paid therefor the be determined at the end of each six months. The timber so sold was cut and removed during 1913 and it averaged 9,765 feet per acre, for which the corporation paid the partnership at the rate of $7.03 per 1,000 feet. The amount fixed and paid at the end of each six-month period was based upon the 177 average price paid for logs during that period on the Memphis, Tenn., market. The timber on the remaining 160 acres east of the railroad was sold to the Green River Lumber Co. in 1914 on the same terms as the timber on the 460 acres. The sale in the year 1913 to the Green River Lumber Co. did not, in our opinion, reflect the value of the standing timber on the Marks Tract and2028 should not be used as a basis for that purpose. It was a sale of the timber on a part of the tract made by the taxpayer to a corporation controlled and practically owned by its several partners. The corporation did not buy the timber standing en bloc, but merely acquired the right to cut and remove the timber, and to pay for it at the end of each six months at a price then determined. It is obvious that the corporation did not assume the same risks and obligations that a purchaser of standing timber usually incurs or assumes, and that the price actually paid for the timber after it had been cut and removed can not be considered as the fair market value of the timber in place. Furthermore, the timber sold in 1913 to the Green River Lumber Co. was located on the most accessible part of the tract and the most of it was of a heavier stand than the remainder of the tract. Assuming that the sale in 1913 was an arm's length transaction, which we do not hold, it was not such a sale as would fairly reflect the value of the entire tract of standing timber at that time. The taxpayer also introduced evidence of the sale of timber in 1913 to Taylor and Crate by the Fish-Lamb Lumber2029 Co. The timber on a tract of about 2,500 acres of land in the vicinity of the Marks tract was sold for approximaely $93,000. This tract of timber was somewhat inferior to the Marks tract but there was a freight differential of about $2 per 1,000 feet in its favor. The freight differential was offset to some extent by the fact that the timber on the Marks tract could be logged at a lower cost than the timber on the Fish-Lamb tract. The Fish-Lamb tract contained about 19,000,000 feet of timber, making the cost thereof to Taylor and Crate about $4.75 per 1,000 feet. The taxpayer also introduced evidence of the sale, in 1913 or the first part of 1914, of a large tract of timber located in the vicinity of the Marks tract for approximately $40 per acre for the land and timber. The partnership did not at any time have a survey of the timber on the Marks tract made by a timber cruiser in order to determine the fair market value of the tract on March 1, 1913. The value of the Marks tract of timber, as determined by the Commissioner, was arrived at after a careful cruise thereof made by an experienced timber cruiser and graduate forester. He accepted the taxpayer's figures as to2030 the acreage sold in 1913 and 1914 and the amount of timber cut therefrom, and he made a 178 cruise of the uncut part of the tract, which seems to be the approved and accepted method of computing the footage of standing timber and is the basis upon which it is usually bought and sold. The value per acre of the timber involved here, as determined by him and as approved and adopted by the Commissioner, is equal to or possibly a little greater than the price at which other tracts of timber in the vicinity of the Marks tract were sold during the year 1913. We see no reason to disturb the determination of the Commissioner as to the value of the Marks tract of timber on March 1, 1913, or as to the rate at which the taxpayer's allowance for depletion thereof should be computed. With reference to the remaining question presented, the evidence establishes that the directors of Nickey & Sons Co. decided on January 10, 1916, to dissolve the corporation and to liquidate its assets. At that time it had capital stock outstanding of the par value of $100,000, and it had a surplus of $144.862.98. Between January 10, 1916, and December 31, 1916, distributions were made to the stockholders, 2031 and on January 31, 1917, the corporation had no surplus and its capital account was reduced to $73,614.99. The balance remaining in the capital account was distributed to the stockholders during the year 1917. In Appeal of James Dobson,1 B.T.A. 1082">1 B.T.A. 1082, this Board held that distributions made in the year 1917 by a corporation in liquidation are within the provisions of section 31(b) of the Revenue Act of 1916, added by section 1211 of the Revenue Act of 1917, and, to the extent that they are paid out of profits accumulated after March 1, 1913, are taxable as dividends; and that, where all profits were so distributed in 1917, any further distribution in the year 1918 must have been out of capital. In that appeal the Board said: Considerable doubt arose as to the taxability of distributions of surplus accumulated prior to the adoption of the Sixteenth Amendment, both when made as ordinary dividends and when made as part of a general liquidation. The United States District Court, in January, 1916, and the Circuit Court of Appeals for the Eighth Circuit, on September 4, 1916, decided that such distributions, whether as ordinary dividends or in liquidation, were not2032 taxable to the recipient stockholders. Lynch v. Hornby,236 Fed. 661; Lynch v. Turrish,236 Fed. 653. Before these cases reached the Supreme Court, the Revenue Acts of 1916 and 1917 had been passed and definitions of "dividends" were included in them. The Supreme Court, in Lynch v. Hornby,247 U.S. 339">247 U.S. 339, expressed the view that the new provisions were not intended to be declaratory of the intent of the 1913 Act, but rather constituted a concession to the equity of stockholders. Section 2(a) of the 1916 Act defined net income as including dividends, but contained this proviso: "Provided, That the term 'dividends' as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, Joint-stock company, association, or insurance company, out of its earnings or 179 profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value." In the Revenue Act of2033 1917, section 2(a) of the 1916 Act was amended by being repeated without the proviso, while the proviso was inserted as a new section 31(a), and to it was added a new subsection, (b), as follows: "(b) Any distribution made to the shareholders or members of a corporation, joint-stock company, or association, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to2034 any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen." Subsequently, the Supreme Court, on June 3, 1918, affirmed Lynch v. Turrish,247 U.S. 221">247 U.S. 221, and reversed Lynch v. Hornby,247 U.S. 339">247 U.S. 339. Then, in the Revenue Act of 1918, approved February 24, 1919, Congress dropped those provisions of section 31(b), supra, which taxed dividends at the rates in effect for the years in which the distributed profits had been earned, and added the provision of section 201(c), as follows: "(c) A dividend paid in stock of the corporation shall be considered income to the amount of the earnings or profits distributed. Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or pfofit realized thereby shall be taxed to the distributee as other gains or profits." In the circumstances, it would seem that Congress, when it passed the Act of 1916 and 1917, intended to treat ordinary dividends and distributions in liquidation alike, as they had been treated by the District Court2035 and the Circuit Court of Appeals, but in the 1918 Act decided to make a distinction between them as the Supreme Court had done in interpreting the 1913 Act. This being the case, we can hardly regard the provisions of section 201(c) of the Act of 1918 as declaratory of the intent of the 1917 Act. The 1917 Act, treating ordinary dividends and distributions in liquidation alike, provided that "any distribution * * shall be deemed to have been made from the most recently accumulated undivided profits or surplus." And in "any distribution" must be included distributions made in liquidation as well as those made in ordinary course of business. The term distribution, in its commonly accepted meaning, certainly includes payments made to stock-holders in liquidating a corporation. The Supreme Court so used it in its opinion in Lynch v. Turrish, supra.The Revenue Act of 1916 is silent with respect to the assets out of which distributions by corporations should be deemed to have been made. However, we are of the opinion that, in the absence 180 of express statutory provisions directing otherwise, we should give the same effect to distributions made by a corporation2036 during the year 1916 as to those made in the year 1917, namely, that they shall be deemed to have been made out of profits and surplus, rather than out of capital, so long as there were undivided profits and surplus existing. It follows that, in the year 1917, W. E. Nickey, S. M. Nickey, and A. B. Nickey had nothing left in Nickey & Sons Co., except an interest in undistributed capital, and, upon distribution thereof in 1917, they realized no taxable income.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625158/	GEORGIA CEDAR CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGeorgia Cedar Corp. v. CommissionerDocket No. 6791-86.United States Tax CourtT.C. Memo 1988-213; 1988 Tax Ct. Memo LEXIS 241; 55 T.C.M. (CCH) 853; T.C.M. (RIA) 88213; May 12, 1988. David J. Duez and Jeanne S. Boxer, for the petitioner. Teri A. Frank, for the respondent. FAYMEMORANDUM OF FINDINGS OF FACT AND OPINION FAY, Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows: YearDeficiency1981$ 5,784198210,16119839,029242 The sole issue is whether petitioner is entitled to certain interest deductions. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulations and stipulated exhibits are incorporated herein by this reference. At the time the petition in this case was filed, petitioner's principal office was in Chicago, Illinois. Cedarhold, Ltd. ("parent"), a foreign corporation created under the laws of the Cayman Islands, owned all the outstanding stock of petitioner and Georgia Cypress Corporation ("Cypress"). Petitioner and Cypress, both Delaware corporations authorized to operate in Georgia, owned farm properties in Georgia operated by the Northern Trust Company. Prior to January 2, 1980, petitioner had revenues with no debt and Cypress had revenues insufficient to service its debt. On January 2, 1980, parent transferred to Cypress a $ 268,000 demand note made by parent payable to Cypress bearing 8-percent interest from date until paid ("Demand Note"). On the same date, petitioner acquired the Demand Note from Cypress for a $ 268,000 promissory note made by petitioner payable to Cypress requiring 20 annual payments of $ 13,400 plus 8-percent243 interest ("Promissory Note"). 1 The Promissory Note was secured by petitioner's farm having a fair market value at all relevant times of at least $ 600,000. 2On December 31, 1980, petitioner transferred the Demand Note to parent. Petitioner, Cypress, and parent have consistently treated the Demand Note as being the subject of a capital contribution by parent to Cypress, a sale by Cypress to petitioner in consideration of the Promissory Note, and a dividend distribution by petitioner to parent. Petitioner timely made all principal and interest payments with respect to the Promissory Note. Petitioner and Cypress have treated such interest payments for Federal tax purposes ad deduction and income, respectively. Petitioner paid Federal withholding tax on the distribution of the Demand Note to parent for the 1980 taxable year. On December 19, 1985, respondent issued to petitioner two notices of244 deficiency. In the first notice of deficiency, respondent disallowed petitioner's claimed interest deductions with respect to the Promissory Note and determined the above-stated deficiencies. In the second notice of deficiency, respondent recharacterized payments made by petitioner to Cypress as dividends paid to a foreign corporation subject to withholding pursuant to section 1442 3 and determined withholding tax deficiencies for 1981, 1982, and 1983. 4 The petition filed in this matter placed at issue the determination of the first notice of deficiency, but did not place at issue the determinations of the second notice of deficiency. OPINION Petitioner frames two issues for the Court's resolution: (1) whether interest payments made by petitioner to Cypress are deductible and (2) whether interest and principal payments made by petitioner245 to Cypress are dividend distributions by petitioner to parent giving rise to a withholding tax deficiency. Respondent argues that since the petition addressed only the first notice, the second notice of deficiency and the determinations contained therein relating to the withholding tax deficiency are not before the Court. We agree with respondent. See , and . The only issue is whether petitioner may deduct as interest a portion of the payments it made to Cypress. Cypress and petitioner were commonly controlled by parent. Cypress had insufficient cash flow; petitioner had excess cash flow. It was desired that petitioner's excess cash flow be transferred to Cypress to relieve Cypress' cash flow problems. The method chosen to transfer the cash flow was a capital contribution of the Demand Note by parent to Cypress followed by a sale of such Demand Note by Cypress to petitioner in consideration of the Promissory Note. Though not required to effectuate the cash flow transfer, petitioner subsequently made a dividend distribution of the Demand Note to246 parent. Respondent argues that the economic substance doctrine and the step transaction doctrine should be applied to disallow petitioner's claimed interest deduction. We agree with respondent that the form of the transactions does not reflect the true economic substance of the transactions. Cypress and petitioner engaged in no negotiations with respect to the sale of the Demand Note. Cypress and petitioner were represented by the same counsel. The Demand Note, ostensibly the impetus for petitioner's transfer of the Promissory Note to Cypress, vanished into the thin air from which it appeared, suggesting that no legal rights and obligations were intended to be created thereby. See . We further agree with respondent that the step transaction doctrine is here applicable because petitioner has failed to prove that the purchase of the Demand Note by petitioner from Cypress and the distribution of the Demand Note by petitioner to parent were not parts of the preconceived plan put into effect when parent made a capital contribution of the Demand Note to Cypress. See .247 Looking through the various pieces of paper transferred by the corporations, we conclude that there was no indebtedness, 5 there was no payment for the use of money, 6 there was only the transfer of money by petitioner to Cypress to satisfy the business purpose of alleviating Cypress' cash flow problems. The circuitous route engineered by the corporations did not further this business purpose; it served only the tax purpose of garnering for petitioner an interest deduction. The Court disregards this circuitous route and holds that the transactions, effectively cash transfers by petitioner to Cypress, do not give rise to an interest deduction for petitioner. 7To reflect the foregoing, Decision will be entered for the respondent.*248 Footnotes1. With respect to the transfer of the Demand Note, petitioner and Cypress engaged in no negotiations and were represented by the same law firm. ↩2. The indenture securing the Promissory Note was not filed with the County in which the farm was located until November 18, 1980. ↩3. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩4. Respondent also determined additions to tax pursuant to section 6651(a)(1) and section 6651(a)(2). ↩5. See , affg. . ↩6. See . ↩7. As stated earlier we are here concerned only with the deductibility of interest payments made by petitioner to Cypress. We accordingly express no opinion with respect to petitioner's tax withholding obligations. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625159/	Feroleto Steel Company, Inc.; The Estate of Frank Feroleto, Deceased, Helen M. Feroleto, Francis V. Feroleto, Jr., and George J. Feroleto, Executors; Helen Feroleto; Arthur J., Jr., and Anita Croteau; Orville and Ruth Powell; George Evanchick; Chris and Marguerite Kiosse; Lawrence and Charlotte Varholak; Thomas and Lillian Dunn; Francis V., Jr., and Eleanor Feroleto, Petitioners v. Commissioner of Internal Revenue, RespondentFeroleto Steel Co. v. CommissionerDocket No. 8731-74United States Tax Court69 T.C. 97; 1977 U.S. Tax Ct. LEXIS 36; October 25, 1977, Filed 36 Decision will be entered under Rule 155. Feroleto Steel corp. established a qualified employee pension plan and trust. The corpus of the trust consisted of insurance policies on the life of each plan participant. The insurance company from which the trustees of the plan had purchased the insurance policies experienced some financial difficulties. The trustees borrowed from the insurance company, at an annual rate of 4.8-percent interest, the cash surrender value of the largest insurance policy, which covered the majority stockholder of Feroleto Steel corp. The value of this policy was approximately two-thirds of the total value of all policies funding the pension plan. The trustees immediately loaned the loan proceeds to the corporation's majority shareholder, also at an annual interest rate of 4.8 percent. Upon receipt of the loan from the trustees, the majority shareholder lent the loan proceeds to the corporation at 8.5-percent interest. Held: These transactions constitute a diversion of trust assets for a purpose other than the exclusive benefit of employees in violation of sec. 401(a)(2), I.R.C. 1954. As a result thereof, the pension plan is not qualified under37 sec. 401(a) and the trust is not exempt from tax under sec. 501(a). Stanley N. Bergman and David E. Richheimer, for the petitioners.John O. Tannenbaum, for the respondent. Scott, Judge. SCOTT 98 Respondent determined the following deficiencies in petitioners' Federal income taxes:Tax yearPetitionerendedDeficiencyFeroleto Steel Co., Inc.9/30/70$ 2,600.219/30/711,430.88Frank and Helen M. Feroleto12/31/6984,368.0112/31/7011,069.1212/31/714,756.88Francis V., Jr., and Eleanor Feroleto12/31/701,782.9012/31/711,426.10Arthur J., Jr., and Anita Croteau12/31/70226,81Orville and Ruth Powell12/31/70365.5012/31/71390.24George Evanchick12/31/70219.00Chris and Marguerite Kiosse12/31/70347.9912/31/7194.50Lawrence and Charlotte Varholak12/31/70339.3412/31/71363.28Thomas and Lillian Dunn12/31/70264.1612/31/71245.30The following issues are presented for decision:(1) Whether the trust forming part of the employees' 40 pension plan of Feroleto Steel Co., Inc. (hereinafter Feroleto Steel or the corporation), lost its qualified status under section 401(a), I.R.C. 1954, 1 for taxable years 1970 and 1971, as the result of a loan from the pension plan to the majority shareholder of the corporation, Frank V. Feroleto, and a subsequent loan from Mr. Feroleto to the corporation; and(2) Whether under sections 402(b) and 72(e) the full amount of the loan from the pension trust to Mr. Feroleto is taxable to him in 1969 as a distribution from a nonexempt trust.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner Feroleto Steel Co., Inc., is a Connecticut corporation which, at the time it filed the petition in this case, had its principal place of business in Bridgeport, Conn. The corporation, an accrual basis taxpayer with a fiscal year ending September 99 30, filed its Federal 41 corporate income tax returns for the taxable years ended September 30, 1970, and September 30, 1971, with the Director of the Internal Revenue Service Center at Andover, Mass.Petitioners Frank V. Feroleto and Helen M. Feroleto resided in Trumbull, Conn., at the time the petition in this case was filed. On April 2, 1977, after trial of this case, Frank V. Feroleto died. The Estate of Frank V. Feroleto, Helen M. Feroleto, Francis V. Feroleto, Jr., and George J. Feroleto, executors, has been substituted for petitioner Frank V. FeroletoPetitioners Francis V. Feroleto, Jr., and Eleanor M. Feroleto resided in Fairfield, Conn., at the time the petition in this case was filed.Petitioners Arthur J. Croteau, Jr., and Anita L. Croteau resided in Milford, Conn., at the time the petition in this case was filed.Petitioners Orville P. Powell and Ruth L. Powell resided in Easton, Conn., at the time the petition in this case was filed.Petitioners Chris Kiosse and Marguerite Kiosse resided in Trumbull, Conn., at the time the petition in this case was filed.Petitioners Lawrence M. Varholak and Charlotte A. Varholak resided in Bridgeport, Conn., at the time the petition in this case was filed. 42 Petitioners Thomas T. Dunn and Lillian M. Dunn resided in Bridgeport, Conn., at the time the petition in this case was filed.All of the above-mentioned individual petitioners filed joint Federal income tax returns for the years in issue with the Director of Internal Revenue Service Center in Andover, Mass.Petitioner George Evanchick resided in Bridgeport, Conn., at the time the petition in this case was filed. He filed his individual Federal income tax return for 1970 with the Director, Internal Revenue Service Center, Andover, Mass.The Feroleto Steel Co., Inc., was incorporated in 1959. During the taxable years in issue, the corporation's capital stock consisted of 1,000 shares of class A voting common stock and 1,000 shares of class B nonvoting common stock. Frank V. Feroleto owned 700 of the class A shares; his son, Francis V. Feroleto, Jr., owned the remaining 300 shares. Frank V. Feroleto also owned 700 shares of the class B nonvoting common stock; his wife, Helen Feroleto, owned the remaining 300 shares of the class B stock.100 The corporation adopted the Feroleto Steel Co., Inc., Employees Pension Plan on September 27, 1961. By letter dated January 30, 1962, 43 Feroleto Steel was informed by the Internal Revenue Service that its employee pension plan had been found to be qualified under section 401(a) and that the trust forming part of the plan was exempt from tax under section 501(a).The pension plan was designed with the assistance of Ralph Smith. Mr. Smith was an insurance agent who specialized in the field of fully insured pension plans. Among the insurance companies Mr. Smith represented was Seaboard Life Insurance Co. of America (Seaboard).The Feroleto Steel employee pension plan is a defined benefit plan, providing a normal retirement benefit equal to 30 percent of each participant's compensation in the form of a life annuity with 120 certain monthly payments. Section 6.1 of article VI of the plan provides:The Retirement Benefit for each Participant shall be provided by the purchase of suitable endowment income insurance policies or deferred annuity contracts issued by a life insurance company authorized to do business in the State of Connecticut of a type comparable to the Retirement Income Policies and Deferred Income Contracts issued by the Seaboard Life Insurance Company of America.The plan provides that these insurance44 policies or annuity contracts are to be purchased in such amounts as will fund each participant's normal retirement benefit as of his normal retirement date. "Normal retirement date" is defined by the plan as the anniversary of the date of adoption of the plan nearest a participant's 65th birthday or nearest the date of completion of 10 years of service under the plan, whichever comes later.The plan provides for 50-percent vesting after 5 years of participation with an additional 10-percent vesting in each subsequent year, so that each participant's interest would be fully vested after 10 years of participation in the plan.Article IV of the plan provided for administration of the plan by three trustees appointed by the Feroleto Steel board of directors. The original trustees of the plan, serving from the time of its inception through September 30, 1971, were petitioners Frank V. Feroleto and Francis V. Feroleto, Jr., and Arnold Bernstein, C.P.A.Section 4.2 of article IV confers the following powers on the trustees:101 The Trustees shall supervise and control the operation of this Plan in accordance with its terms. They shall have all powers necessary to accomplish that45 purpose including, but not by way of limitation, the following:a. To construe this Plan.b. To determine all questions of eligibility.c. To compute retirement benefits.d. To determine the plan and amount of life insurance or annuity contract to be applied for on the life of an eligible Employee.e. To compute the cost of the plan and to make all disbursements.f. To borrow on the policies to pay premiums in accordance with the provisions of Section 8.3 of Article VIII.g. To determine any question of the rights of a terminated Employee or of a Terminated Participant in the policy or contract on his life, and to make a disposition thereof.h. To determine any question of the amount of benefits payable on retirement and to obtain the type of contract for this purpose and to make a disposition thereof.i. To determine the rights of Participants in event of termination of the Plan and to make a disposition of Trust Assets.Section 8.3 of article VIII sets forth the trustees' powers with respect to borrowing on the insurance policies:If at any time the funds furnished by the Employer together with any amount on deposit in the Suspense Account, are not sufficient to pay the premiums46 and any loan interest less dividends, the Trustees shall apply for policy loans to pay such premiums provided, however, that (a) such loans shall be made on the basis of a uniform percentage of the premiums and loan interest due on all policies having sufficient cash value for that purpose and shall be made to the extent of the value available on all other; (b) any such loan shall be applied exclusively to payment of the premium and loan interest due on the policy on which it was granted; (c) the amount of such loan shall not be in excess of the increase in the available loan value of the policy which results from such premium payment; (d) sufficient funds are furnished by the Employer to pay the balance of the amount due the Insurance Company on all policies and contracts; and (e) that so long as any such loan is outstanding the Employer agrees to supplement the Death Benefit by a payment equal in amount to the loan on policy of the deceased Employee.Pursuant to article XII of the plan, all money received by the trustees was to be maintained in a suspense account:SUSPENSE ACCOUNT12.1 Any funds coming into the hands of the Trustees whether from the Employer, the Insurance Company47 or a Participant shall be held in an account to be known as the Suspense Account.12.2 Any funds on deposit in the Suspense Account shall be used solely for payment of benefits to Terminated Participants and to pay premiums on policies and contracts held under the trust which come due in the year the funds 102 are received or in the next succeeding year, provided, however, that no disbursements shall be made from the account except on the instructions of the Trustees.12.3 Upon termination of the Trust and/or Plan, the Trustees shall subject to the provisions of Article XVI, dispose of any funds on deposit in the Suspense Account by dividing such funds among the remaining Active Participants in the proportion that the annual premium of the policy or contract held on the life of each such Participant entitled to share bears to the total annual premium of the policies or contracts held on the life of all such Participants.Section 17.4 of article XVII provides:It shall be impossible at any time prior to the satisfaction of all liabilities with respect to Participants and their Beneficiaries under its plan, for any of the trust assets to be used for, or diverted to, purposes other48 than for their exclusive benefit and the benefit of their beneficiaries; and the Employer shall not be entitled to receive back any part of its payments.From the plan's inception in 1962 until July of 1969 the trustees purchased endowment life insurance policies on the lives of the participants from Seaboard. The trustees were the owners of these policies. When a participant retired, it was contemplated that the insurance policy on his life would be converted to cash and an annuity providing the stated pension benfits would be purchased.Prior to July 1, 1969, Ralph Smith informed the trustees that Seaboard was experiencing financial difficulties. Through a telephone conversation with the Connecticut Insurance Commissioner, Mr. Smith had learned that there was outstanding against Seaboard a "Cease and Desist" order prohibiting Seaboard from writing new insurance policies in the State. Mr. Smith contacted the trustees of the Feroleto Steel plan and recommended that they take measures to safeguard their investments in Seaboard insurance policies because of Seaboard's questionable financial condition. It was Mr. Smith's understanding that the cash surrender values of the policies49 the plan had taken out with Seaboard would not be protected in the event of the insurance company's insolvency. Specifically, Mr. Smith suggested to the trustees that they borrow from Seaboard the loan value of the largest policy. Mr. Smith continued to represent Seaboard and, other than when restricted by the cease and desist order, wrote insurance for some of his clients with Seaboard. The policy procured under the Feroleto Steel pension plan with the largest cash surrender value was that of Frank V. Feroleto. The loan value of this policy (95 percent of cash surrender value) was 103 $ 114,927.88. The total cash surrender value of all the insurance policies funding the pension plan at that time was $ 173,026.With the assistance of Mr. Smith, the trustees executed a policy loan application and, on July 8, 1969, they borrowed from Seaboard the sum of $ 114,927.88, the loan value of Frank V. Feroleto's policy. The terms of the loan required payment of interest by the pension plan at the rate of 4.8 percent per annum. The trustees and Mr. Smith decided to borrow only on the policy of Frank V. Feroleto rather than on all the policies. The trustees believed that the loan50 value of Frank V. Feroleto's policy was approximately equal to the amount of the vested interests of all participants of the plan.On the same day that it received the loan proceeds from Seaboard, the pension plan loaned these loan proceeds of $ 114,927.88 to Frank V. Feroleto. Francis V. Feroleto, Jr., one of the three trustees, had participated in the decision to borrow on Frank V. Feroleto's policy, but he did not participate in the decision to loan the proceeds of this borrowing to Frank V. Feroleto. Frank V. Feroleto executed a promissory note in the amount of the loan. The note provided for nine semiannual payments of $ 11,493 on January 8 and July 8 of each year, commencing January 8, 1970, with interest at 4.8 percent per annum. 2 In addition, Mr. Feroleto agreed to pledge as collateral all of the corporation's class A stock. Helen Feroleto and Francis V. Feroleto, Jr., cosigned the note.51 As indicated by the August 1969 Federal Reserve Bulletin, the prevailing interest rates during the week ended July 12, 1969, were as follows:Prevailing interestType of obligationrate (percent)Prime commercial paper, 4 to 6 months8.75Finance company paper, placed directly,3 to 6 months7.81Prime bankers' acceptances, 90 days8.50Federal funds rate9.07104 U.S. Government securities3-month bills6-month bills9- to 12-month issuesRate onMarketRate onMarketMarketnew issueyieldnew issueyieldyieldOther7.0696.947.3097.197.087.67The rates of interest in the State of Connecticut at savings banks and commercial banks during July 1969 were 5 percent and 4.5 percent per annum, respectively, compounded quarterly.At some time in July 1969, after receiving the loan from the pension plan, Frank V. Feroleto made an unsecured loan to Feroleto Steel in the amount of $ 125,000 with interest at 8.5 percent per annum.Mr. Feroleto did not adhere to the payment schedule set forth in his promissory note to the pension plan. He did, however, make the following repayments:Date ofRepayments ofPayments ofrepaymentprincipalinterestOct. 9, 1970$ 23,809.07$ 4,117.48Mar. 31, 19710 1,529.60Dec. 28, 197191,118.813,937.50114,927.889,584.5852 Feroleto Steel made the following repayments with respect to the loan to the corporation by Mr. Feroleto:Date ofRepayments ofPayments ofrepaymentprincipalinterestDec. 19690$ 2,656Dec. 1970010,625Dec. 28, 1971$ 125,00010,625125,00023,906Late in 1971 the trustees asked Mr. Smith to ascertain from Seaboard the amount of repayment of the loan and the possibility of repaying the loan over a period of four quarters. Mr. Smith wrote the insurance company regarding a repayment schedule, but he advised the trustees not to repay the loan to Seaboard, as he understood that another "Cease and Desist" order had been issued against the insurance company. On or shortly after December 28, 1971, the trustees drew out the cash surrender value of all the policies of Seaboard which they owned 105 and invested the amount received in policies with Massachusetts Mutual Insurance Co.During its taxable years ended September 30, 1970, and September 30, 1971, Feroleto Steel made contributions to the pension plan of $ 33,874 and $ 18,200, respectively. Of the amount contributed for the taxable year ended September 30, 1970, $ 5,159.89 represents forfeitable, 53 nonvested contributions. Of the amount contributed for the taxable year ended September 30, 1971, $ 2,981 represents forfeitable, nonvested contributions.The following amounts represent the nonforfeitable, vested contributions made on behalf of the plan participants by the corporation for the years indicated:19701971Frank Feroleto$ 15,080.20$ 7,500Helen Feroleto2,693.59735Arthur J. Croteau965.190Orville Powell1,104.151,184George Evanchick988.510Chris Kiosse681.670Marguerite Kiosse675.94400Lawrence Varholak1,174.891,020Thomas Dunn1,169.581,115Francis V. Feroleto, Jr.4,180.393,265Seaboard stayed in business until 1975, when it became bankrupt and ceased to operate.Frank V. Feroleto became 65 years old on September 25, 1969. On September 27, 1971, he completed 10 years of service under the Feroleto Steel pension plan; consequently, his interest became fully vested as of that date.Respondent determined that the loan by the pension plan to Mr. Feroleto was not for the exclusive benefit of employees within the meaning of section 401(a). Alternatively, he determined that the loan from the pension plan to Mr. Feroleto followed54 by the loan from Mr. Feroleto to the corporation was a prohibited transaction within the meaning of section 503(b)(1) and (6). In either case, he determined that as a result of the loan transactions the Feroleto Steel employees' pension plan was no longer qualified under section 401(a) and the trust was no longer exempt from tax under section 501(a). Accordingly, he disallowed Feroleto Steel's deductions for the amounts of the 106 forfeitable contributions to the nonexempt trust and included these amounts in the corporation's taxable income for the taxable years ended September 30, 1970, and September 30, 1971, pursuant to section 404(a)(5). In addition, respondent determined that for calendar years 1970 and 1971 each of the participants' incomes should be increased by the amount of the nonforfeitable, vested contributions on his behalf to the nonqualified pension plan pursuant to sections 402(b) and 83.With respect to taxable year 1969 respondent determined that the $ 114,927.88 in loan proceeds received by petitioner Frank V. Feroleto from the pension plan was a distribution from a nonexempt trust, fully includable in the taxable income of petitioners Frank V. Feroleto55 and Helen M. Feroleto pursuant to sections 402(b) and 72(e). This sum represents more than 25 percent of the gross income shown on the 1969 return of Frank V. Feroleto and Helen M. Feroleto. Consequently, respondent determined that assessment and collection of the deficiency for 1969 were not barred when the notice of deficiency to Frank V. Feroleto and Helen M. Feroleto was mailed, because the 6-year statute of limitations for assessment provided in section 6501(e)(1)(A) was applicable.OPINIONSection 401(a) provides:(a) Requirements for Qualification. -- A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section -- * * * (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries;56 While the statute sets forth the requirements which must be met by the "trust instrument," the regulations are clear that "The law is concerned not only with the form of a plan but also with its effects in operation." Sec. 1.401-1(b)(3), Income Tax Regs. In cases involving whether a plan discriminates in contributions or benefits under section 401(a)(4), this regulation has been cited with approval. Quality Brands, Inc. v. Commissioner, 67 T.C. 167">67 T.C. 167, 174-175 (1976).107 The phrase "purposes other than for the exclusive benefit of his employees or their beneficiaries" as used in section 401(a)(2) is defined by section 1.401-2(a)(3), Income Tax Regs., to include "all objects or aims not solely designed for the proper satisfaction of all liabilities to employees or their beneficiaries covered by the trust."The Code sets forth no specific rules regarding the types of investments which might be considered a use of funds for or diversion of funds to purposes not for the exclusive benefit of employees or their beneficiaries. Section 1.401-1(b)(5)(i), Income Tax Regs., provides that "Generally, the contributions may be used by the trustees to purchase57 any investments permitted by the trust agreement to the extent allowed by local law." The only case to which our attention has been directed or that we have found applying the exclusive benefit rule in the context of trust investments is Central Motor Co. v. United States, F. Supp. ( D. N.M. 1976, 37 AFTR 2d 76-1001, 76-1 USTC par. 9245). 358 In that case the court found that a trust forming part of an employee plan lost its qualified status because the trust's investments in inadequately secured demand notes of another corporation controlled by the employer were not for the exclusive benefit of the employees. The court reasoned that the "primary purpose of benefitting employees or their beneficiaries must be maintained with respect to investments of the trust funds as well as with respect to other activities of the trust." 4 We agree with this reasoning in the Central Motor Co. case.After considering all the facts and circumstances herein we have concluded that the loan to the trustees of the loan value of the policy on Mr. Feroleto's life and the subsequent loan to Mr. Feroleto were a diversion of the trust assets for a purpose other than the exclusive benefit59 of the employees or their beneficiaries in contravention of section 401(a)(2). Admittedly, under section 17.4 of article XVII of the plan, diversion was in fact precluded. 108 Nevertheless, in our view under the provisions of section 1.401-1(b)(3), Income Tax Regs., we must look not only to the provisions of the trust instrument but also to the operation of the trust by the trustees. On this record we find that the Feroleto Steel Employees Pension Plan and Trust were not qualified under section 401(a) for taxable years 1970 and 1971 as a result of the loan transactions.Three factors support our conclusion that the loan transactions were not for the exclusive benefit of the Feroleto Steel employees. First, from this record we find that the trustees' actions are inconsistent with their alleged primary intention of safeguarding the plan's investments in Seaboard insurance policies. Had the trustees really been motivated by the desire to protect their investments, in our view they would have taken measures above and beyond the mere borrowing of the loan value of only one insurance policy. Secondly, the low interest rate charged Mr. Feroleto and the substantial economic benefits60 he reaped as a result thereof indicate that benefiting the coporation's principal shareholder was a major purpose underlying these loan transactions. Thirdly, we find that these loans were prohibited by the terms of the plan itself and so were not for the employees' exclusive benefit within the provisions of the statute and regulations.Petitioners' primary argument in response to respondent's contention that the loans violated the exclusive benefit rule is that the transactions were motivated by the trustees' desire to protect their investments on behalf of Feroleto Steel employees in insurance policies of a company experiencing serious financial difficulties. Two of the trustees testified that Seaboard's financial troubles motivated their decision to borrow the loan value of Mr. Feroleto's policy. Neither of these trustees offered any satisfactory explanation as to why lending the proceeds of this loan to Mr. Feroleto at a low interest rate was for the benefit of the Feroleto Steel employees. Nor did either of the trustees offer any satisfactory explanation of why only the proceeds of one policy were borrowed if there were serious questions as to the financial condition of Seaboard. 61 The two trustees of the plan who testified and Ralph Smith, adviser to the corporation with respect to the plan, all testified that they decided to borrow only the loan value of the policy covering Mr. Feroleto because it constituted the majority of the 109 trust assets. They testified that they did not want to borrow on the policies covering the lives of the other plan participants because they did not want to alarm them about the security of their interests in the pension plan. Aside from the policy covering the life of Frank V. Feroleto, the two insurance policies with the highest cash surrender values were those covering Helen Feroleto and Francis V. Feroleto, Jr. It would have been quite easy for the trustees to borrow from Seaboard the loan values of these policies without alarming the rank and file Feroleto Steel employees. Neither of the trustees who testified offered a reasonable explanation as to why this was not done if the trustees felt the trust funds were endangered if they remained with Seaboard. After the trustees borrowed on Mr. Feroleto's policy, some $ 58,000 in trust assets remained with Seaboard. Had the trustees been as concerned about the security62 of their investments with Seaboard as they purport to have been, in our view they would have maximized their protection by at least borrowing on the policies covering Mrs. Feroleto and Francis V. Feroleto, Jr. Moreover, by the terms of the plan the trustees were the owners of all the policies on the participants' lives. Consequently, if Seaboard's financial situation was so precarious that it was necessary to take immediate measures to temporarily safeguard their investments in Seaboard policies, in all likelihood the trustees could have gone ahead and borrowed the loan value of all the policies without informing the other participants.A second reason advanced by petitioners for having borrowed the loan value on only one policy was that the loan value of that policy was approximately equal to the vested interests of all the plan participants. The amount of the vested interest of all employees as of July 1969 could have been readily proved from the records of the trust and Feroleto Steel. Other than statements by the trustees that this was the case, however, no evidence was presented showing that the loan value of the policy on the life of Frank V. Feroleto approximated the vested63 interests of all the plan participants. Moreover, no reason was given by the trustees as to why they would not want to protect the nonvested portions of their investments in Seaboard policies as well as the vested portions. Certainly, their duty as trustees required that they protect all the trust investments.A second factor that demonstrates that the loan transactions were not for the exclusive benefit of the corporation's employees 110 is the low rate of interest (4.8 percent) on the loan by the trustees to Mr. Feroleto. Given the prevailing rates of interest during the week ended July 12, 1969, we find that 4.8 percent is an unreasonably low rate of interest. The trustees contended that this rate of interest was reasonable because it was the same rate of interest that Seaboard paid on the funds the trustees invested in its policies. The actuary who had determined the proper amount of Feroleto Steel's contributions to the plan had assumed that the policies funding the plan would earn interest at this rate. Investment of the loan proceeds at a higher rate, petitioners allege, would have necessitated a new and expensive actuarial recomputation. We find, however, that64 no new actuarial study would have been necessary with regard to the trust funds temporarily invested at a higher rate of interest. Rather, the excess amount received as interest could have been held by the trustees in the suspense account pursuant to article XII of the plan and used by the trustees for subsequent premium payments. Petitioners argue that to have done this would not have benefited the employees but only the employer. In this contention they overlook the benefit to the employees of the extra security of having funds on hand for the premium payments. Such extra funds might well have at some time avoided the necessity of the trustees having to borrow on the policies to pay premiums in accordance with the provisions of section 8.3 of article VIII of the plan. No witness was able to explain why provision for a suspense account was needed if the plan did not contemplate the deposit of funds into the account.Nor are we willing to overlook the substantial benefits derived by Mr. Feroleto as a result of these loan transactions. The trustees loaned the proceeds of the loan to Mr. Feroleto at an annual interest rate of 4.8 percent. He in turn loaned these funds, together65 with some additional money of his own, to the employer corporation at 8.5-percent interest. On their joint individual income tax returns for 1969, 1970, and 1971 Frank and Helen Feroleto listed the sums of $ 2,656, $ 10,625, and $ 13,625, respectively, as interest income from Mr. Feroleto's loan to the corporation. A substantial part of this interest income resulted from Mr. Feroleto's ability to charge the corporation an interest rate which was reasonable but which was appreciably higher than the interest rate charged by the trustees on their loan to him. Moreover, Frank and Helen Feroleto's returns for 1969, 111 1970, and 1971 reveal no reported dividend income from Feroleto Steel. By loaning funds to his corporation at a higher interest rate than that charged him, Mr. Feroleto was able not only to derive substantial amounts of interest income but also to confer an interest expense deduction on the corporation. Had the corporation paid dividends instead, no deduction would have been allowed.Mr. Feroleto, Sr., was too ill at the time of trial to testify and has since died. We therefore do not have the benefit of his own statements of his considerations in approving the66 borrowing by the trustees of the loan value of his policy and lending the proceeds to him at an interest rate of 4.8 percent. Mr. Feroleto, Jr., testified that while he participated in the decision to borrow the funds from Seaboard, he did not participate in the decision to lend the funds to his father. The other trustee in his testimony did not explain the basis for the decision to lend the funds to Mr. Feroleto, Sr. However, some of his testimony explaining a statement he had made to the respondent's representatives with respect to Mr. Feroleto's inability to meet his repayment schedule is revealing. This witness testified that although Mr. Feroleto was a man of substantial wealth he was at the time extremely short of cash assets. This testimony suggests that the decision to lend the proceeds of the loan from Seaboard to Mr. Feroleto may well have been prompted by his lack of available cash when he desired to make a loan to the corporation. It further suggests that this need for cash by Mr. Feroleto might have influenced the borrowing of the cash surrender value of his policy by the trustees instead of their immediately finding another company with which to place the policies67 as they did in December 1971. From the testimony of Mr. Francis V. Feroleto, Jr., it is clear that the views of Mr. Feroleto, Sr., carried great weight with the other two trustees. From this record we conclude that the possibility of garnering substantial economic benefits for Mr. Feorleto, Sr., was an important factor underlying the trustees' decisions to make these loans.A third basis for our conclusion that these loans were not for the exclusive benefit of the employees is the fact that these transactions were not permitted by the trust agreement as required by section 1.401-1(b)(5)(i), Income Tax Regs. While it is true that the general powers conferred on the trustees by section 4.2 of article IV of the plan were broad, it appears to us that the 112 specific provisions of section 8.3 of article VIII were intended to narrowly limit the trustees' powers with respect to policy loans. That section provides that the trustees may apply for policy loans whenever the funds furnished by the corporation are insufficient to pay premiums and loan interest and that "any such loan shall be used exclusively to [sic] payment of the premium and loan interest due on the policy on68 which it was granted." [Emphasis added.] No provision of the plan sanctions a loan like the one made to Mr. Feroleto. At trial, trustee Arnold Bernstein admitted that the trust instrument did not confer on the trustees the power to engage in a transaction like the one involved herein. He stated that the trustees nevertheless proceeded to borrow on Mr. Feroleto's policy because they did not want to "let Seaboard go down the drain and lose our money." As we have indicated above, while we do not doubt that the trustees were concerned about the financial condition of Seaboard, we do not consider the record as a whole to support a conclusion that their fear of Seaboard's financial collapse was the compelling reason for the loans they made. Had the trustees realistically been in fear of Seaboard's imminent failure, they would have taken further steps to protect their entire investment in Seaboard policies.Citing Time Oil Co. v. Commissioner, 237">258 F.2d 237 (9th Cir. 1958), remanding 26 T.C. 1061">26 T.C. 1061 (1956), petitioners contend that disqualification of an employee plan under the exclusive benefit rule is appropriate only when there 69 is a showing that the benefits to be received by the beneficiaries were somehow prejudiced. Petitioners argue that because the employees' benefits under the plan were not jeopardized by the transactions involved herein, the rule has not been contravened. The court in Time Oil characterized the deviations from the plan involved in that case as "de minimis" specifically pointing out that no interest advantage inured to the employer since the preferred stock substituted for the non-interest-bearing notes was backdated to the date of the notes. Here, by contrast, the deviations were not de minimis and they were specifically prohibited by the terms of the plan. Also, here the major stockholder of the employer did derive substantial benefits from the deviations. Petitioners' argument to the effect that the exclusive benefit rule is not violated unless the ultimate result of the transaction is that employee benefits are adversely affected would leave trustees 113 free to engage in virtually any transaction with trust assets, no matter how insecure or speculative, unless as the result of such transactions there were in fact a dilution of employee benefits. Such a narrow construction70 of the exclusive benefit rule is unwarranted. The intent of that rule is to protect the fund from unauthorized transactions, whether or not those transactions actually result in a loss of benefits to the employee.By our holding here, we do not mean to imply that the exclusive benefit rule is contravened whenever a benefit inures to someone other than the employees or their beneficiaries as the result of an investment of the funds of an employee trust. However, under the facts of this case the benefit to the third party is not merely an incidental side effect of an investment of trust assets, but is rather a major purpose of the investment. In these circumstances, we hold that the exclusive benefit rule has not been followed. Accordingly, we find that for the taxable years 1970 and 1971, the Feroleto Steel Co., Inc., Employees Pension Trust was not qualified under section 401(a) and not exempt from tax under section 501(a). It follows that the participants' taxable incomes must be increased in each of these years by the amount of the corporation's contributions to the trust on their behalves to the extent that these contributions are vested and nonforfeitable, pursuant to sections71 402(b) and 83. Also, pursuant to section 404(a)(5), the corporation's deductions for contributions to the nonexempt trust must be disallowed to the extent they are forfeitable and not includable in the employees' incomes.Having concluded that the loan to the trustees and the subsequent loan to Frank Feroleto were not undertaken for the exclusive benefit of the Feroleto Steel employees, we need not consider respondent's alternative arguments that the loan to Mr. Feroleto was a prohibited transaction under section 503.The basis of respondent's argument that the loan in 1969 by the trustees to Mr. Feroleto was a premature distribution to him by the pension plan, fully taxable in the year of receipt under section 402(b), is unclear. In the notice of deficiency respondent referred to the loan being from a nonexempt trust but on brief argues his contention with respect to a distribution to Mr. Feroleto as an alternative. In any event, although we have found the loan not to have been embarked upon for the benefit of the corporation's employees, the loan was not a sham. Rather, the 114 parties intended to and did create a bona fide debtor-creditor relationship. The loan was, *72 in fact, ultimately repaid. The mere fact that the repayments were not in accordance with the loan schedule does not inexorably lead to the conclusion that no bona fide debtor-creditor relationship ever came into being. We conclude on the basis of this record that Mr. Feroleto borrowed the $ 114,927.88 of trust assets in 1969 and did not receive a distribution in that year of his interest in the pension trust.Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years in issue.↩2. Providing for only nine semiannual payments was apparently a mistake. It would require 10 payments to fully repay the loan. In any event, the loan was subsequently repaid in full.↩3. The case of Time Oil Co. v. Commissioner, 26 T.C. 1061">26 T.C. 1061 (1956), remanded 258 F.2d 237">258 F.2d 237↩ (9th Cir. 1958), involved the exclusive benefit rule in a different context.4. See also Rev. Rul. 73-380, 2 C.B. 124">1973-2 C.B. 124, and Rev. Rul. 73-282, 2 C.B. 123">1973-2 C.B. 123.In the recent case of Jobusch v. Commissioner, 68 T.C. 929">68 T.C. 929 (1977), we held that granting the privilege of borrowing from the trust to highly paid officers who were the principal shareholders and to the corporation, but not to other employees, caused the trust to lose its qualification, since the borrowing privilege was considered a benefit discriminatively granted only to members of the prohibited group in violation of sec. 401(a)(4). The issue involved under sec. 401(a)(4) in the Jobusch case is not identical to the issue of whether a loan to a major shareholder causes the trust to be disqualified under sec. 401(a)(2)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625160/	SAM KELLY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKelly v. CommissionerDocket No. 10936-88United States Tax CourtT.C. Memo 1989-377; 1989 Tax Ct. Memo LEXIS 376; 57 T.C.M. (CCH) 1093; T.C.M. (RIA) 89377; July 26, 1989Sam Kelly, pro se. Steven J. Foster, for the respondent. RUWEMEMORANDUM FINDINGS OF FACT AND OPINION RUWE, Judge: Respondent determined a deficiency in petitioner's 1984 Federal income tax and additions to tax as follows: Additions to TaxDeficiencySec. 6651(a)(1) 1Sec. 6653(a)(1)Sec. 6653(a)(2)Sec. 6661$ 10,732$ 1,097$ 56250 percent of the$ 2,683interest due on$ 10,732After concessions by respondent, the issues for decision are: (1) Whether377 petitioner and his spouse 2 failed to report income from the following: (a) $ 2,438.28 from a pension fund; (b) a prize in the amount of $ 757.25; and (c) non-employee compensation in the amount of $ 2,127.00; (2) whether petitioner is entitled to Schedule C deductions of $ 20,027.00 for 1984; (3) whether petitioner is entitled to charitable contributions in excess of those allowed by respondent; and (4) whether petitioner is liable for the additions to tax under sections 6651(a)(1), 6653(a)(1) and 6653(a)(2). Petitioner resided in Hayward, California when he filed his petition in this case. For sake of convenience, we are combining our findings of fact and opinion. On July 11, 1985, petitioner and his spouse, Rose M. Kelly, filed a joint Federal income tax return for the taxable year 1984. They had received no extensions of time within which to file the return. Petitioner and his spouse attached Forms 1099 to their return which showed that the following amounts had been paid to them during 1984: (1) $ 2,438.28 of pension funds from Northern Trust Company; (2) $ 757.25 of prize money from Dynasty378 Systems; and (3) $ 2,127.00 of non-employee compensation. Petitioner and his spouse failed to include these amounts as income on their 1984 return. Petitioner bears the burden of proof with respect to the unreported income and additions to tax. Rule 142(a). Petitioner offered no evidence regarding the unreported income or additions to tax. Because petitioner has not sustained his burden of proof, respondent's determinations are sustained. Petitioner also bears the burden of establishing his entitlement to the Schedule C deductions and the charitable contribution deductions which are in excess of those allowed by respondent. Rule 142(a). Petitioner offered no evidence concerning the deductions, and respondent's determinations are sustained. 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 year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Petitioner's spouse died prior to the time the petition was filed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625164/	UNION DRAWN STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Union Drawn Steel Co. v. CommissionerDocket Nos. 11103, 11104.United States Board of Tax Appeals15 B.T.A. 761; 1929 BTA LEXIS 2793; March 11, 1929, Promulgated 2793 1. The impossibility of determining the value of assets which cost the corporation nothing, which assets may not be included in invested capital, does not give rise to a condition under which invested capital can not be determined. 2. Special assessment under section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918 was not intended for those taxpayer whose invested capital is small in amount merely because they have not taken the trouble to establish the larger amount to which they are really entitled. Edwin M. Knowles China Co.,9 B.T.A. 1292">9 B.T.A. 1292. 3. Claimed abnormal conditions affecting capital or income are not established by showing that valuable assets have under the statute been excluded from the computation of invested capital. Morris & Co.,1 B.T.A. 704">1 B.T.A. 704. H. Kennedy McCook, Esq., for the petitioner. John A. McCann, Esq., and A. H. Fast, Esq., for the respondent. MURDOCK 761 The two above cases were consolidated for hearing and determination. These are proceedings for the redetermination of excess-profits taxes for the calendar years 1917 and 1918. For the2794 year 1917 the deficiency as determined by the Commissioner amounts to $30,348.12 and for the year 1918 such deficiency amounts to $69,555.79. The petitioner alleges the following errors: 1917 1. Denial by the respondent of petitioner's application for assessment of its profits taxes under the provisions of section 210 of the Revenue Act of 1917. 762 2. Determination by the respondent that the petitioner's invested capital could be determined. 1918 1. Denial by the respondent of its application for assessment of its profits taxes under the provisions of section 328 of the Revenue Act of 1918. 2. Determination by the respondent that the petitioner's invested capital could be determined as provided in section 326 of the Revenue Act of 1918. 3. Determination by the respondent that the petitioner's capital and income for the calendar year 1918 showed no abnormalities. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of Pennsylvania, with its principal office at Beaver Falls, Pa. On February 12, 1924, the Commissioner notified the petitioner of an additional tax liability for the year 1917 amounting to $30,348.12. 2795 Subsequently, an assessment was made without compliance with the provisions of section 250(d) of the Revenue Act of 1921, and accordingly a claim in abatement for the year 1917 was accepted from the taxpayer. On November 20, 1924, the Commissioner notified the petitioner of the rejection of its claim in abatement and on November 24, 1925, a second communication was addressed to the petitioner after receipt of a protest sustaining the conclusions reached in the letter of November 20, 1924. Thereafter, and on January 19, 1926, the petitioner filed its petition with the Board. During the taxable years in question the petitioner was engaged in the manufacture and sale of drawn steel and it has been so engaged since 1889. At the time it commenced operations it acquired a factory site at Beaver Falls, Pa., and, by agreeing to locate its factory there it secured, without other consideration, 30 shares of water-power rights from the Harmony Society, being 30/200 of the total water power of the Beaver Falls Water Power Co. These shares were specifically mentioned in the deed conveying the factory site to the petitioner. During the taxable years in question water power under these rights2796 was used by the corporation. Some saving was effected by the use of water power as against the expense that would have been necessary had the power been derived entirely from steam. The water power rights were represented by shares of stock and in acquiring these rights the petitioner obtained 30 shares of water power stock. No value was set up on the books on account of such shares. 763 In 1916 the patents owned by the petitioner were written down on its books by the amount of $51,000. Some of these patents had expired at that time. This reduction left the patent account at $10,000. During the course of its operations the petitioner developed a number of secret processes used in the manufacture of its products. These processes were applied to the manufacture of the products by specially designed machinery. The ideas as embodied in the machines, however, were not patented with the exception of one which was patented at the time of the organization of the company. Patents were not obtained on the other machines for the reason that the company deemed it more profitable to use such machines as secret processes than to acquaint the general public with their design2797 by patenting them. The expense incidental to the development of the machines was not charged to capital account but to expense. At times some of the employees of the petitioner were engaged in the development of the machines. The machines were not in use by competitors. Some saving in the cost of manufacture resulted from the use of these machines. During a part of the taxable year 1917 the petitioner was able to sell its products at higher prices than its competitors were able to sell theirs. This condition prevailed during years prior to that time but during the balance of 1917 and 1918 the price was regulated by the Government. The petitioner had no cost-plus contracts with the Government during the years covered by the petition. OPINION. MURDOCK: The respondent in his answer raises the point that the letter of November 24, 1925, is not a deficiency notice within the meaning of section 274(a) of the Revenue Act of 1924 and asserts that the Board is without jurisdiction by reason of that fact. We are of the opinion that the letter of November 24, 1925, constituted a final determination of a deficiency from which an appeal could be taken to this Board. 2798 ; ; ; . The sole issue on the merits for determination in this proceeding is whether or not the petitioner has the right to have its excess-profits taxes for the years 1917 and 1918 computed in accordance with the provisions of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918. The petitioner contends, first, that its invested capital can not be determined and, second, that certain abnormal conditions existed during the taxable years in question, both in invested capital and in 764 income. The conditions which the petitioner contends render it impossible to determine the invested capital, or which are abnormal, are: First, the acquisition of water rights for power purposes which rights were never valued upon the books of the corporation and by the use of which a saving was effected; second, the reduction in the year 1916 in the patent account by the sum of $51,000; third, the development over a period of years of2799 certain secret processes embodied in various machines which were used by the petitioner in the manufacture of its products and which effected a substantial saving for each of the years involved in this appeal. The water rights were evidenced by shares of stock. Shares of stock are to be regarded as tangible property for invested capital purposes under both revenue acts applicable to this case. We need not discuss whether or not these shares are inadmissibles. In the deed of conveyance from the trustees of the Harmony Society for the factory site there was particular reference to the water power, it being stated that 30 shares of water power (stock), each share being equal to 1/200 part of all the water power furnished by the Beaver Falls Water Power Co., were included in the conveyance. There is, however, no evidence to show that stock of the petitioner was issued therefor. On the contrary the evidence shows that such water-power shares were acquired without any consideration other than the location of the factory at Beaver Falls. The Revenue Act of 1917, section 207, defining invested capital, provides that it shall include actual cash paid in, actual cash value of tangible2800 property paid in other than cash for stock or shares, paid-in or earned surplus and undivided profits used or employed in the business. It will be observed that tangible property must either have been paid in for stock or shares or come within the category of paid-in or earned surplus. Not having been transferred for shares of the petitioner, the water power shares can not be included in invested capital unless they can be regarded as paid-in surplus. We are satisfied that they can not be so regarded. , and authorities there cited. It is apparent, therefore, that the water rights in question do not constitute such assets as may be included in invested capital, and as a consequence any impossibility of determining their value can not contribute to or give rise to a condition under which invested capital can not be determined. The petitioner calls attention to the write-off from patent account in the year 1916. This write-off consisted of $51,000 and diminished the patents to the sum of $10,000. The petitioner's treasurer testified that the patents were written down because the company was ultraconservative in its methods of2801 bookkeeping and the directors 765 could not see the use of a patent account other than a nominal amount merely to show that patents were held. Some of the patents had expired at the time the patent account was written down. The petitioner has not shown us what took place on the organization of the company in regard to the patents. We do not know whether it was the original patentee or whether it acquired such patents from others. We are unable to find that the patents were paid in for stock or shares. Nor do we know the dates of the patents or whether the petitioner acquired such patents at or after its organization by payment for them in cash or tangible property. We are therefore unable to say whether any amount should be included in invested capital by reason of the value of such patents under the Revenue Act of 1917. The same observation applies to the taxable year 1918 under the provisions of section 326(a)(4). Under these circumstances we can not say that the write-down in the account would form a basis for special assessment. The petitioner next calls attention to certain secret processes embodied in machines built and developed in its plant by its employees. 2802 Only one of the ideas embodied in such machines was patented and that one in 1889 at the time of the corporation's organization. All of the development expense in connection with these secret processes and machines was charged to expense in the years in which such expenses were incurred, no portion of it being capitalized. It is the contention of the petitioner that the amounts expended in developing the secret processes and the design, construction and erection of machinery by which such processes were perfected are capital expenditures. These processes were not acquired upon the organization of the petitioner but were built up over a series of years in the course of its operations. The petitioner would be entitled to include in its invested capital its expenditures made in perfecting its secret processes and the machines embodying such processes upon a showing of the amounts so expended. . It contends that to determine the cost of building up the processes is impossible. We are not convinced, however, that it is impossible to determine this cost. There has been no showing that any attempt has ever been made to go back over the2803 books and charge this cost to capital or to determine whether the amounts could be identified. So far as we know the amounts were capable of accurate determination. This case falls within the principles laid down in the case of , in which we said that the special relief given by the statute was not intended for those taxpayers whose invested capital is small merely because they have not taken the trouble to 766 establish the larger amount to which they might be entitled. See also . We next come to a consideration of the question whether there exists one or more abnormal conditions affecting the capital or income of the corporation, such as to entitle the petitioner to special assessment. the water rights as we have heretofore pointed out are not such assets as might be taken into account in computing invested capital. Their exclusion under the statute from invested capital does not give rise to an abnormal condition affecting invested capital, that is, mere statutory exclusion without a showing of some other condition is not an abnormal condition within the meaning2804 of this section. . See also ; ; . It may be that an asset might be excluded from invested capital and by reason of peculiar circumstances connected with such asset an abnormal condition might exist but we see no such circumstances here. Our previous discussion in regard to the secret processes sufficiently disposed of this question for all purposes of the case, for without a showing that the failure to have the cost of these processes included in invested capital was not due to the petitioner's own indifference and lack of industry in the preparation of the case, we need not concern ourselves with whether or not there was an abnormal condition affecting capital or income in this same connection. However, we will discuss briefly the petitioner's testimony that these secret processes effected considerable savings in its business, which testimony was offered for the purpose of showing an abnormality. *2805 The petitioner's operating manager testified that in his opinion these secret processes effected certain savings per annum and he stated what in his opinion these savings amounted to. However, there are not facts before us from which we could test his opinion and counsel was frank enough to admit that the opinion of the witness was little better than a guess. Another witness gave his opinion as to the cost of these processes. These figures were also admittedly mere estimates. We are not sufficiently convinced of the correctness of the figures to make a definite finding of fact in regard to them. Thus, it does not appear that the effect of the secret processes is so substantial as to create an abnormal condition affecting capital or income. See . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625165/	Maurice L. Killian v. Commissioner.Killian v. CommissionerDocket No. 80861.United States Tax CourtT.C. Memo 1961-83; 1961 Tax Ct. Memo LEXIS 267; 20 T.C.M. (CCH) 376; T.C.M. (RIA) 61083; March 27, 1961267 Kenneth B. Cope, Esq., for the petitioner. James D. Biltz, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined deficiencies and additions to tax against the petitioner for the taxable year 1954, as follows: Additions to the TaxSec. 294Sec. 294(d)(1)(A),(d)(2),TaxableI.R.C.I.R.C.YearDeficiency193919391954$3,738.74$288.46$238.73The sole issue for decision is whether $12,500 received by petitioner in connection with an agreement of sale and dissolution of a partnership engaged in the insurance business should be taxed as capital gain or as ordinary income. Findings of Fact Some of the facts are stipulated. They are found accordingly. Petitioner, Maurice L. Killian, resides in Melbourne Beach, Florida. He filed his income tax return for the year 1954 with the district director of internal revenue in Jacksonville, Florida. He will hereafter sometimes be referred to as petitioner. For many years petitioner was engaged in the insurance business in Canton, Ohio. In about 1939 petitioner employed two agents, Fry and Ryan, to work268 as solicitors. On November 7, 1947, petitioner entered into a partnership agreement with these two men to carry on the insurance business. Ryan and Fry paid petitioner $3,000 cash and received a one-third interest in the business which continued under the name, The M. L. Killian Agency. The agreement provided that the partnership would commence on January 1, 1948 and continue for 10 years. The agreement also provided: ARTICLE 7. It is the intent of the parties and it is understood and agreed by and between them, that Maurice L. Killian is not turning over to the partnership any of his personal business (and, for the purposes of certainty, personal business shall be that business carried on the books of The M. L. Killian Agency as of the 1st day of January, 1948, wherein it is shown that Maurice L. Killian personally was the writing agent of said business), and it is further understood and agreed that Maurice L. Killian will continue to write and renew his personal business through The M. L. Killian Agency, and for such business shall receive the same personal commissions as he has formerly received for such business, the same to be differentiated from the Agency commission which269 arises by virtue of such personal business, which said Agency commission shall at all times inure to the benefit of the partnership; and if Killian shall transfer, give away, or otherwise dispose of said personal business, he agrees that he will bind the transferee or donee thereof to continue to write and renew such business through the Agency; provided, however, the transferee or donee shall receive the standard sub-agent's commission currently being paid by the agency or other insurance agencies in the Canton, Ohio, area for the same type of business. The agreement further provided that petitioner was to receive $6,600 per year out of partnership profits for the duration of the partnership. If the partnership profits were insufficient, Fry and Ryan were to supply the deficit. At the end of the 10-year period, if the agreement was still in effect, and if Fry and Ryan had performed their part, it provided that: then and in such event Ryan and Fry shall become the full and complete owners of said partnership, and said Killian shall voluntarily withdraw from said partnership and shall execute and deliver to Ryan and Fry a bill of sale or other instrument of transfer, conveying said270 Killian's interest in said partnership without further payment; provided, however, that said Killian shall retain full ownership and complete control over his personal business as hereinbefore stipulated. Petitioner's personal business involved principally fire, casualty insurance with a small amount of accident and health insurance, and some life insurance. Petitioner kept records, called "dailies", pertaining to the policies which he had sold. This information consisted of such things as the beginning and expiration dates of the policy, the type of insurance and the coverage. The dailies were used to provide information for renewals and servicing the policies. In writing fire and casualty insurance, as contrasted with life insurance, the producing agent is normally paid a commission only when the policy is sold or when renewed. On January 12, 1954, about four years before the partnership was to end, an agreement of sale of petitioner's personal business and dissolution of the partnership was entered into by the three partners. This agreement recited that: said Killian desires to sell all his right, title and interest in and to the partnership, the partnership assets, insurance271 agency contracts, his right to share in renewal or continuing premiums paid by customers of the partnership, good will and right to use of the name M. L. Killian Agency, and to dissolve the existing partnership; * NOW THEREFORE, in consideration of the several agreements and covenants hereinafter set forth * . * * said Killian agrees to and does hereby sell and transfer to the Purchasers, [Fry and Ryan] all said Killian's right, title and interest in and to the partnership * * * and to the property and assets of said partnership * * * including but not limited to * * * customers and policy holders dailys [dailies] and records, all agency contracts with insurance companies, rights to receive or share in renewal or continuing premiums on policy and insurance contracts of every kind, all good will pertaining to the partnership, all Killian's rights to his so-called personal business and all business shown on the books of the partnership to the credit of said Killian as producing agent * * . The agreement further provided that: As full consideration for all said Killian's rights and interests in said partnership * * the Purchasers agree to pay * * * a total272 aggregate sum of Thirty-six Thousand Five Hundred Dollars ($36,500.00), it being understood and agreed that there is included in said sum the balance of $24,000.00 remaining due from the Purchasers to said Killian under said Agreement of November 7, 1947. * * The 1954 agreement also provided: As an additional consideration for the payment of the purchase price hereinbefore specified, said Killian agrees that he will not engage in the general insurance business or in the solicitation or sale of [enumerated types of insurance] * * * within the Counties of [named] in the State of Ohio for a period of five () years from and after the date of this Agreement * * . Petitioner was in ill health at the time he entered into the 1954 agreement. He planned to, and subsequently did, leave Ohio to take up residence in Florida. Fry and Ryan knew of this intent when the 1954 agreement was entered into. Petitioner received no part of his compensation for the covenant not to compete. On his 1954 income tax return petitioner reported the entire $36,500 received under the 1954 agreement as a long-term capital gain. Sometime thereafter petitioner's 1954 return was subjected to audit. During273 the course of the audit, without advice of counsel, petitioner, on June 19, 1958 submitted an affidavit to respondent in which he stated, in part: In January 1954, I sold my remaining interest in the partnership, and also my personal business, (this is business on which my name appeared as the producing agent). I received $36,500.00. $24,000.00 of this amount was for the balance due me under the partnership agreement, and $12,500.00 was received from the sale of the anticipated renewal commissions on my personal business. In the agreement of January 1954, I did agree to several other things, but I was not paid for doing so. Petitioner also had Fry and Ryan sign an affidavit which he had prepared, dated June 16, 1958, in which they described the partnership and sale agreements and stated, in part: * * * [Under the 1954 agreement] Killian was paid $24,000.00 for the balance to complete the amount which would be due him under the [1947) agreement * * . At the same time [Fry and Ryan] purchased his personal business by paying him an additional sum of $12,500.00. This figure was arrived at by figuring up what we all agreed was a fair value of the anticipated renewal commissions274 on his personal business. * * * However, this is to certify that [petitioner] was not paid any money for any part of the agreement except the $12,500.00 for the anticipated renewal commissions * * . After consulting an attorney petitioner composed a third affidavit which he had Fry and Ryan sign and submit to respondent. This affidavit stated, in part: * * At the [time of the 1954 agreement] we [Fry and Ryan] purchased his personal business by paying him an additional sum of $12,500.00. This figure was arrived at by figuring up what we all agreed was a fair value of the customer list and the exclusive right to write such customers' insurance in the future. * * * this is to certify that [petitioner] was not paid any money for any part of the agreement except the $12,500.00 for his customer list and the exclusive right to write such customers' insurance in the future. No anticipated renewal commissions were involved on policies outstanding at the time of the sale but only the right to write future insurance. In the statutory notice respondent determined: * * * that $12,500.00 of the total consideration received from [Fry and Ryan under the 1954 agreement] constitutes275 ordinary income and not gain from the sale or exchange of a capital asset, inasmuch as said amount was received for anticipated future renewal commissions and/or as a separate item for the covenant not to compete contained in said agreement. Opinion No extended discussion of the arguments put forth by the parties is necessary. Our opinion in George J. Aitken, 35 T.C. 227">35 T.C. 227 (Nov. 8, 1960), decided shortly after the trial of this case, is indistinguishable in principle. We there held for the taxpayer. That portion of petitioner's personal business consisting of commissions on life insurance and some forms of health and accident insurance involving premiums on policies petitioner had written was evidently retained by him under the 1947 contract. The record shows the accident and health insurance commissions had a value of $121, but it is not clear that the rights to any future commissions due petitioner on policies of health and accident insurance were transferred by the 1954 contract. The rights to future commissions on life insurance policies were not transferred. No argument is made in the filed briefs with respect to the transfer of any future commissions on existing276 health, accident or life insurance policies and the parties seem to assume only petitioner's main business of fire and casualty insurance was the subject of the transfer. We will make the same assumption. In this case respondent argues first that the "personal business" (or "dailies") which petitioner sold in 1954 is not a capital asset; second, that the amount in question constituted an advance payment made on anticipated renewal commissions; and third, that the amount was paid, at least in part, for a covenant not to compete. Respondent's first and second points were argued and decided against him in the Aitken case and we have found as a fact that petitioner received no part of the amount paid as consideration for the covenant not to compete. Although the language of petitioner's affidavits would seem to support respondent's position, in response to the question: * * * in the first affidavit, you used the language anticipated renewal commission. What did that mean to you at the time that you used that language? Petitioner answered: At that time, we in the insurance business, that it what we called them * * * anticipated renewals. But I found out that the Internal Revenue277 put some entire different interpretation on that work, like life insurance renewals, a policy that pays commission after the first year without being rewritten in a new policy, that is anticipated renewals. * * But the thing I was talking about was not anticipated renewals, because what I sold [Fry and Ryan] was a list of names and addresses of policies who had paid the premiums on those policies and I had received all of the commission * * *. Neither did [Fry and Ryan] receive any further commission unless they were able to write new policies at the expiration of the policies in force. Fry testified to the same effect; that all the purchasers were buying were dailies, and records; and that they were anticipating they could renew the fire and casualty policies from which they could get commissions. We accept this explanation. Our decision on the main issue disposes of the additions to tax. On the authority of George J. Aitken, supra.Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625151/	Jay Burns, Petitioner, v. Commissioner of Internal Revenue, RespondentBurns v. CommissionerDocket No. 25314United States Tax Court21 T.C. 857; 1954 U.S. Tax Ct. LEXIS 273; March 9, 1954, Promulgated 273 Decision will be entered under Rule 50. 1. In 1944 petitioner sold, at a loss, 40 acres of unimproved land located near Lake Wales, Florida. At the time of the sale the land was held by petitioner primarily for sale to customers in the ordinary course of his business of selling unimproved property. Held, that the loss was an ordinary loss, and not a capital loss.2. In 1945 petitioner sold, at a loss, a residence he had built in 1926 for his personal use. On the evidence, held that the residence was converted from personal use to business use in 1940.3. In 1926 petitioner constructed an office building on lots he had purchased in the business section of Lake Wales. He had thought that the office building would make the property "readily resalable." Upon completion, the building was not sold, but along with other business properties he had acquired in Lake Wales was thereafter and until its sale in 1946 used in his business of owning and renting office and business space to tenants. Held, that such loss as was sustained by him on the sale of buildings was not an operating loss under section 122 of the Internal Revenue Code.4. In 1925 petitioner purchased lots274 in Tampa, Florida, intending to pay them into a corporation for stock. The corporation in turn was to use the lots as the site for a baking plant which was to be erected. Organization of the corporation was not completed and the plans for the baking plant and baking business in the Tampa area were abandoned. Petitioner sold the lots at a loss in 1947. They were not, and had not been, held primarily for sale to customers in the ordinary course of any business carried on by petitioner. Held, that the loss sustained was a capital loss, and not an ordinary loss. Alex P. Gaines, Esq., and John E. Simpson, Esq., for the petitioner.Thomas C. Cravens, Jr., Esq., for the respondent. Turner, Judge. TURNER 858 Respondent determined deficiencies in income tax against petitioner for the calendar years 1944, 1945, and 1947 in the respective amounts of $ 5,479.86, $ 3,616.54, and $ 7,942.28. Petitioner also claims overpayments in income tax for the years 1944 and 1945 in the respective amounts of $ 477.57 and $ 1,277.97, by virtue of an alleged operating loss carry-back from the year 1946.The questions are (1) whether the respondent erred in determining that losses sustained by petitioner from the sale of certain real estate in and near Lake Wales, Florida, were capital losses, and not ordinary losses; (2) whether he erred in disallowing in 276 part the deduction claimed by petitioner as the loss sustained by him on the sale of a residence which had been converted into rental property; (3) whether the petitioner is entitled to a net operating loss carry-over and carry-back from the year 1946; and (4) whether the loss sustained by him in 1947 on the sale of certain lots in Tampa, Florida, was an ordinary or a capital loss.FINDINGS OF FACT.Some of the facts have been stipulated. 1The petitioner is an individual, who resides277 during the greater part of the year in Evanston, Illinois. He rather regularly spends a part of the year at the Walesbilt Hotel in Lake Wales, Florida. 859 He filed his income tax returns for the taxable years involved with the collector of internal revenue for the district of Florida.In 1944, petitioner sold 40 acres of land located near Lake Wales in Polk County, Florida. He had purchased the land in 1924, for either of two purposes. "If the development of the town moved that way, it might be used for subdivision purposes. Otherwise it might be used for grove purposes." Thereafter, petitioner concluded that the residential district would not develop there, and had the land cleared, fenced, and prepared for setting it in citrus. It was not so set because the nursery with which petitioner had a contract was unable to supply the stock. On his income tax return for 1944, he reported the sale as the sale of "Property Other Than Capital Assets," showing a loss of $ 16,004.95. Similarly, he reported the sale of a building shown as having been purchased on November 1, 1942, at a gain of $ 1,789.36. The total net loss of $ 14,215.59 reported for the two properties was deducted278 in full in arriving at taxable net income. In his determination of the deficiency for 1944, the respondent determined that the loss on the sale of the 40 acres was a capital loss and that the gain from the sale of the building was to be treated as a capital gain under section 117 (j) of the Internal Revenue Code, and adjusted net income accordingly. 2In 1945, the petitioner sold a residence located in Highland Park, near Lake Wales, including two lots279 on which it stood. He had purchased the lots in 1924 and had built the residence for his personal occupancy. On his income tax return for 1945, he reported the sale as the sale of "Property Other Than Capital Assets" and a loss on the sale of $ 11,230.35, which amount was deducted in full in arriving at taxable net income. The cost or other basis was shown as $ 35,750, the selling price as $ 16,000, expenses of sale as $ 536.60, and $ 9,056.25 as "depreciation allowed (or allowable)." The house was reported as having been converted into rental property in 1940. The respondent, in his determination of the deficiency, used a basis of $ 1,500 for the land and $ 27,000 3 for the house and determined "depreciation 860 allowed (or allowable)" as $ 9,675. He disallowed $ 8,367.25 of the $ 11,230.35 loss deduction claimed.280 In 1947, the petitioner sold certain lots in Tampa for $ 1,260. He had acquired the lots in 1926, at a cost of $ 25,000, intending to exchange them for stock of a corporation to be organized for the purpose of conducting a baking business. Although some formal steps were taken in setting up the corporation, its organization was never completed and the lots continued to belong to petitioner. On his 1947 income tax return, petitioner reported his loss on the sale of the lots as a loss sustained on "Property Other Than Capital Assets." The loss so reported, plus $ 67.60 as expenses of sale, or a total of $ 23,807.60, was deducted in full in arriving at taxable net income. In his determination of deficiency for 1947, the respondent determined that the loss was a loss from the sale of capital assets and adjusted net income accordingly.Prior to 1925 and for a period of approximately 25 years, the petitioner had been engaged in the baking business in Omaha and Chicago. In 1924, he was chairman of the board of Standard Bakeries Corporation, Chicago. On January 2, 1925, the Continental Baking Company bought Standard Bakeries Corporation and petitioner retired from the business. About281 the middle of January, he went to Lake Wales, Florida. He had first visited Florida in 1921, and had been spending vacations of 1 to 3 months in Lake Wales.During 1923 and 1924, the petitioner had purchased 2 lots in Highland Park, about 3 1/2 miles south of Lake Wales, for the building of a residence, 20 acres for the planting of a citrus grove, a 10-acre grove of citrus to the north of Lake Wales, some acreage adjoining the Highland Park Club, which he thought the club might later need for expanding its golf course, and other acreage, including the 40 acres sold in 1944.In 1925, the petitioner purchased property in the principal business block of Stewart Avenue, which was Lake Wales' main business street. The property had a frontage on Stewart Avenue of 270 feet. On the property were a 3-story building, with a frontage of 60 feet, and a 2-story building, with a frontage of 102 feet. The rest of the property was vacant. At some later date not shown, petitioner erected a 1-story building on a portion of the vacant property and immediately adjoining the 2-story building. These buildings were business buildings and the space therein was rented to tenants.In April of 1925, petitioner282 took a trip abroad. Before leaving, he gave a power of attorney to his son Jay Burns, Jr., and established a credit "of some $ 25,000 for his operations." He returned to America in September and came to Florida for a short visit in October. 861 Early in the winter he came back to Lake Wales and established a residence there.Jay Burns, Jr., had gone to Lake Wales after his graduation from college in 1922 and had become associated with Tolbury Brothers, an organization which took care of citrus groves for absentee owners. Tolbury Brothers was incorporated in 1923, and petitioner acquired some of the stock. In 1925 the common stock was sold to Hunt Brothers, and thereafter the petitioner and Jay Burns, Jr., had no connection with the business, except the stock owned in it. Tolbury Brothers, Inc., for a period or periods not shown, acted as caretaker for one or more of petitioner's citrus groves. It had been intended that the grove on the 40 acres subsequently sold in 1944 would have been so managed if it had been developed.During the petitioner's absence abroad in 1925, Jay Burns, Jr., acquired a number of properties on petitioner's behalf. These properties included a 283 brick garage building at the corner of Stewart Avenue and Scenic Highway, and 160 acres of land northeast of Lake Wales.Upon his return from abroad, petitioner was much concerned as to whether he had been "over extended" by the purchases of property which had been made in his behalf by Jay, Jr. After quite a discussion and an examination of the "great demand" for office space for which "there were no facilities to satisfy in Lake Wales," petitioner decided to construct an office building on the corner of Stewart Avenue and Scenic Highway. He felt that such a course "would create a revenue producing building which would make it readily resalable." His intention as to the sale of the property was to sell when he could sell at a profit. When the building was completed in 1926, petitioner found no market for it and thereafter, until its sale in 1946, operated it as an office building, renting space therein to tenants. The building became known as the Real Estate Exchange Building.Upon its completion, petitioner and his son established an office in the building. They continued such an office until the building was sold in 1946. The inscription on the door was "Jay Burns, Jay Burns, 284 Jr., Real Estate." It was from this office that petitioner's operations were conducted and his properties were managed. Jay, Jr., looked after the rental properties. He rented the space, saw that the properties were repaired and maintained, and collected the rents. In addition to his work in his father's business, Jay, Jr., also entered into numerous real estate transactions on his own account.Over the years, petitioner received some offers for the Real Estate Exchange Building, all of which he rejected. One of these was an offer to lease the property at an annual rental of $ 18,000. The character 862 and terms of the other offers, in respect of which figures of $ 10,000 and $ 25,000 were mentioned, are not shown. At one time the petitioner attempted to interest the Federal Government in the purchase of the building for use as a post office, but without success.The 160-acre tract which had been purchased for petitioner by Jay, Jr., in 1925 was given the name "Fair Acres." It was platted, roads were laid out, and one paved road was built through it. The development was not completed, however, and no lots were ever sold as such. The property was sold as a whole to Mountain285 Lake Corporation, possibly in 1934.In addition to the properties already mentioned, the petitioner, by the end of 1926, had acquired 35 or 40 lots in or near Lake Wales, and an additional 10 acres of land. Most of these properties were conveyed to petitioner by Jay, Jr., by deed dated November 13, 1926. 4 Some, if not most, of the lots were unimproved. One property, however, is referred to as Larratt House, and after acquisition, petitioner built a garage on 2 of the lots in Hecksher's Second Subdivision.286 In 1927, the petitioner, by 5 deeds, received title to 10 additional lots in Lake Wales and vicinity. Four of these lots were in Pinehurst Subdivision, and when purchased, petitioner had in mind building small houses on them and offering them for sale. Activity in the real estate market lessened to such an extent, however, that he abandoned the idea. The only deed of record for 1928 showing petitioner as grantee covered 20 acres of land from Jay, Jr. The reason and occasion therefor are not shown, since he had conveyed the same land to petitioner in 1926. Petitioner was grantee in 3 deeds in 1929. As in the case of the 20 acres just mentioned, petitioner had already received deeds for 2 of these properties in 1926 from Jay, Jr. The third parcel covered a 10-acre orange grove, shown on the sales record as "Old Nanny Grove." Similarly, most titles subsequently received by petitioner up through 1947 were deeds, quitclaim or otherwise, to properties title to which had been conveyed to him on prior dates. Two such deeds were from the City of Lake Wales in 1946, and could have been tax deeds. 863 On some date not shown, except "that it was after the collapse of the Insull287 Enterprise in Chicago," he acquired a 40-acre grove from one of the Insull officials. This may have been the 40 acres deeded to petitioner June 15, 1932, by Wm. V. and Nellie B. Griffin and possibly sold in 1938. 5Insofar as county records show, petitioner made 1 conveyance of property in 1925; 2 in 1926; 6 in 1927; 5 in 1928; none in 1929; and 2 in 1930. The conveyances in 1925 and 1926, as was true of some of the other conveyances, did not indicate disposition of the properties covered. The conveyance in 1925 was to Mountain Lake Corporation and covered 10 acres, the acquisition date of which is not shown. This same property was again deeded to Mountain Lake Corporation in 1934, along with the 160 acres known as Fair Acres. The 2 conveyances in 1926 appear to have been the lots on288 which the Real Estate Exchange Building was located, and which petitioner continued to own until 1946. One was to Jay Burns, Jr., and in the other the grantee was shown as John H. Lee. The purposes of the conveyances are not shown. The 6 conveyances in 1927 covered 7 lots, 5 of which had been deeded to petitioner in 1926 by Jay Burns, Jr. Of the 5 transactions in 1928, 1 was a lease, 1 an option, 2 covered property received from Jay, Jr., and 1 covered acreage acquired in 1924. The nature and reasons for the 2 conveyances in 1930 are not apparent. One covered the lots on which the petitioner's residence stood, and both were matched by deeds on the next succeeding day from the grantee, one to Annie P. and Jay Burns, and the other to Anne P. Burns. 6Through the 1930's and 1940's, petitioner gradually disposed of various289 of the pieces of property he had acquired in Polk County. 7 At the end of 1947, he still owned the 2-story building on Stewart Avenue, purchased in 1925, the 1-story building he had erected, and the adjoining vacant lots. He still had 2 lots on Central Avenue, 3 lots in Hecksher's Second Subdivision, and 9 lots in West Lake Wales.The real estate market in the Lake Wales area was "extremely active" in 1925, and until the fall of 1926. For several years thereafter, most of the trading had to do with property in "distress." During the very active period in 1925 and 1926 much trading was done in 864 options or contracts. Options sometimes changed hands numerous times and a sale of the property290 itself did not necessarily ever occur. Petitioner did some option trading, but "would not attempt to say how" much.Subsequent to the sale of the Standard Bakeries Corporation, in 1925, some of petitioner's associates who desired to continue in the bakery business, had organized the Midland Baking Company. Petitioner was a stockholder and director, but had not otherwise been active in its operations. In 1934 the company experienced financial difficulties, and petitioner returned to Chicago to assist in working them out. He expected to complete this work in 2 or 3 years and then return to his home in Florida, but the business prevented him from doing so.In 1940, petitioner developed a process for milling wheat germ flour, to be used by bakers in producing enriched bread. He organized the Bryo Company to further develop the process. It was first organized as a corporation and petitioner was its president. The corporation was later dissolved and the business was operated as a partnership. In 1940 petitioner brought Jay Burns, Jr., to Chicago, to work with the Bryo Company and make him a partner in the business. During the taxable years petitioner devoted the bulk of his time291 and attention to the Bryo Company and it was the source of the major portion of his income.Although living in Chicago from 1940 until his death in 1948, Jay, Jr., continued to keep the books and records relating to the properties of petitioner, rental, operating, and otherwise, in Florida, and petitioner paid him a small salary for his services. The collection of rents and maintenance of the buildings were entrusted to a man named Seldon from 1940 until 1946. After 1946, they were in the care of a man named Shrigley. Jay, Jr., would make occasional trips to Lake Wales in connection with the properties.From 1926, when it was completed, until it was sold in 1946, the Real Estate Exchange Building was property used in petitioner's business of owning office and business property and renting the space therein to tenants, and was property of a character which is subject to the allowance for depreciation in section 23 (l) of the Internal Revenue Code, which allowance was claimed by petitioner on his income tax returns and allowed by the respondent. It was not held primarily for sale to customers in the ordinary course of petitioner's trade or business.In addition to the business of292 owning and renting of office and business properties, the petitioner over the years owned and operated the citrus groves which he had acquired or developed. One or more of 865 them had been managed for him by Tolbury Brothers, Inc. Whether or not the arrangement continued after the sale of the Tolbury stock to Hunt Brothers is not shown. The groves were income producing properties and were operated for that purpose.The petitioner was also in the business of buying and selling real estate in Polk County, Florida, and various lots and parcels of unimproved land were acquired and held by him primarily for sale in the ordinary course of such trade or business. The 40-acre tract sold by petitioner in 1944 was so held by him at and prior to its sale.The Highland Park area is variously referred to as Highland Park, Highland Park Club, and Highland Park Village. Presumably ownership of residential property in the area carried with it membership in the club. The idea was that winter visitors to that part of Florida would acquire property in the area, build homes, join the club, and become permanent residents of the Highland Park colony. Petitioner built a home in Highland Park293 in 1926 and, except that he spent parts of his summers at his old home in Evanston, Illinois, which he had retained, lived there until 1934. Highland Park Village was organized in 1926, and petitioner was elected chairman of the village board, which position he continued to hold until 1939.Members of the Highland Park Club would entertain prospective members for brief periods, to acquaint them with the purposes of the club. In the fall of 1934, the petitioner, at the request of a club member, rented his home to a prospective member for the first 3 months of 1935, and during the following winter the same party occupied the house under the same arrangement. In 1936, petitioner and his wife were in Florida for a part of the winter and found the condition of the house to be such that they refused thereafter to rent it to prospective members. They occupied the home each winter from 2 to 4 weeks. They had left personal effects, including linens, dishes, silverware, and draperies, in the home when they went to Chicago in 1934. During most of the period from 1934 to 1940, the residence was occupied by a caretaker who paid no rent. Petitioner reported the rentals received in 1935 and294 1936 in his income for those years, but claimed no deductions for depreciation.In 1940, due to the attention required by the business of the Bryo Company, petitioner decided to discontinue his residence in Highland Park as his home. He and his wife went to Lake Wales, packed their personal effects and choice pieces of furniture, some books, and other things and shipped them to Chicago. He had the house, the furnishings, and the land appraised, and a valuation was arrived at, taking into account the estimated life of the depreciable property. 866 The property was then listed with real estate agents for sale or rental. Prior to that time, it had not been so listed. In 1940, petitioner's intention to use the property as his residence ceased and the property became rental property.When petitioner moved to Florida in 1925, he began investigating the possibilities of establishing and operating a wholesale bakery in Tampa. He employed his son Guy Burns, who was experienced in the bakery business, to make a detailed survey of the markets in Tampa, St. Petersburg, and the surrounding country. As a result of the survey, petitioner, in 1926, decided to reenter the baking business295 and purchased some lots in a new industrial section of Tampa for $ 25,000, on which he planned to erect a baking plant. He employed the W. E. Long Company to prepare plans and specifications for the plant and a Tampa attorney to charter a corporation to operate the plant. A corporate charter was acquired in the name of the Florida Bread Company, and petitioner executed a conveyance of the above lots naming the Florida Bread Company as grantee.Petitioner had planned to furnish all of the capital necessary to operate the business, but decided that it would be wise to interest Tampa residents in the enterprise, and, for that reason, solicited some stock subscriptions. In the meantime, however, the Southern Baking Company, now known as the Colonial Baking Company, which owned and operated a chain of bakeries through the South, acquired a site in Tampa and began the erection of a plant. Petitioner felt that if he built his proposed plant the customer market in the Tampa-St. Petersburg area would be overbuilt. He thereupon abandoned his project.No formal action was taken to liquidate or terminate the corporation. No stock had been issued and all advanced payments on stock subscriptions296 were refunded by petitioner personally. A deed of the lots naming petitioner as grantee was executed in the name of the Florida Bread Company. No consideration passed in connection with either conveyance. No meeting had been held by the subscribers, stockholders, or directors. No officers had been selected. No books of record had been set up for the corporation, nor had any bank account been opened in its name.Due to the collapse of the Florida land boom, the development of the new industrial area in Tampa ceased, and petitioner found it difficult to sell his property. He listed the lots with real estate agents in Tampa for sale at a price of $ 5,000. From 1927 through 1946, no offers to purchase were received. "For sale" signs had been maintained on the property during most of that period. In 1947, petitioner received an offer to buy the property for $ 1,250, which offer 867 was rejected. The offer had been made by the owner of corresponding lots across the avenue from petitioner's property and when petitioner rejected the offer, the prospective buyer offered to sell his property to petitioner for the same price. The petitioner then sold his property, receiving 297 approximately $ 1,200 net after the expenses of sale. The sale was made in 1947.The Tampa lots were acquired by petitioner in a transaction entered into for profit. They were not held by petitioner primarily for sale to customers in the ordinary course of his trade or business.OPINION.This is another of those cases involving the sale of real estate by an individual where the question is whether the parcels sold were or were not capital assets, and in which the positions of the parties as to whether the real estate sold was held primarily for sale to customers in the ordinary course of the taxpayer's trade or business shift according to the gain or loss results of the sales.It is the claim of the petitioner that beginning in 1925, up to and including the taxable years, he was engaged in the business of buying and selling Florida real estate; that all of the items of such property acquired by him, except the lots, in Highland Park, on which he built his home and 20 acres acquired at or about the same time for development into a citrus grove, were acquired for resale and were thereafter held by him primarily for sale to customers in the course of his real estate business, and as298 a consequence were not capital assets within the meaning of section 117 (a) of the Internal Revenue Code. 8 It is on that basis that he contends that losses sustained on the sale of the 40 acres of land in 1944, the sale of the Real Estate Exchange Building in 1946, and the sale of the Tampa lots in 1947, were not capital losses but ordinary losses, deductible in full in arriving at his net income for those years, and that the net loss arrived at in 1946, through the deduction in full of a loss on the sale of the Real Estate Exchange Building, was an operating net loss, subject to the carry-over and carry-back provisions of section 122 of the Internal Revenue Code.299 868 With respect to the 40 acres sold in 1944 and the Tampa lots sold in 1947, the respondent takes the position that they were not held by petitioner primarily for sale to customers in the course of his business and that the losses sustained were capital losses, subject to the limitation provisions of section 117 thereon. With respect to the Real Estate Exchange Building, it is his position that that property was used by petitioner in his business of owning and renting office and business property, and the loss 9 sustained upon its sale, even though not a capital loss but deductible in full in the year sustained, was not an operating loss which comes under the carry-over and carry-back provisions of the Code.300 Whether or not the properties sold by petitioner in the taxable years were held by him "primarily for sale to customers in the ordinary course of his trade or business" so as to prevent application of the limitations of section 117 of the Code on the deduction of capital losses, as he contends, is essentially a question of fact, 10 and it is his burden to prove and establish that the properties were in fact so held. The record from which that factual determination must be made is not at all satisfactory. In the main, petitioner's proof consists of his own general statements and conclusions and a statement of comparable conclusions by three witnesses called by him. We do have a statement of his recollections as to some items or parcels of property and the transactions with respect thereto. In that connection, however, he volunteered that his son was his "agent and conducted many properties," so that he himself might not be able to testify about specific details of "those negotiations." He offered none of the books and records which recorded his transactions and operations as they occurred, nor any information or data therefrom, and, as a consequence, we have no way of knowing 301 whether they would tend to sustain or refute his claims made and conclusions stated. Whether the books and records are still in existence, or whether they have been lost or destroyed, we do not know. Just why his proof was so limited is not explained. As to specific conveyances in which the petitioner 869 was the grantee or grantor, we are largely left to depend upon schedules, stipulated at the instance of the respondent, from the deed record books of Polk County and it is not possible to trace petitioner's transactions definitely or accurately from those schedules. They contain patent errors and there are instances of conveyances involving the same pieces of property, without explanation therefor, and at times it is practically impossible to identify the parcels in conveyances in which petitioner was grantor with those in which he was grantee. Petitioner did testify generally that in 1925 and 1926 he indulged in some option trading, which would not appear on the county records, but what they were and the extent thereof, we are not advised. His explanation was that he would not attempt to say how much of such trading he did. In any event, that type of trading was limited, 302 according to our understanding of his testimony, to the years 1925 and 1926, and did not, so far as appears, involve any of the properties here or those covered in the schedules of recorded conveyances.On such state of the record, we have done the best we could to find and determine the facts, and as to the Real Estate Exchange Building and the Tampa lots, we are fully satisfied that the facts as found represent the true situation. The Tampa lots, although acquired in a transaction entered into for profit, within the meaning of section 23 (e) (2) of the Code, were not acquired and were never held primarily for sale to a customer or customers in the course of any trade or business carried on by petitioner, even though his operations in Polk County were such as to constitute a business conducted by him of buying and selling real estate. The Tampa lots were in no way connected with the transactions occurring or303 with the operations which petitioner had in Lake Wales and vicinity. Those lots in his hands were capital assets and the loss sustained upon their sale was a capital loss. The respondent's treatment of that loss is sustained.We are also of the opinion that the respondent's position with respect to such loss as was sustained on the Real Estate Exchange Building is also sound. In his efforts to substantiate his claim that the property was held primarily for sale to customers in the course of his trade or business, the petitioner testified broadly that all of his properties, except his residence and original citrus grove property, were bought with a view to their resale and that they were for sale at all times. His counsel also elicited answers from his witnesses, a lawyer, a real estate operator, and an accountant, that it was their understanding that petitioner's properties were for sale at all times. Other answers, however, and petitioner's actual course of conduct with respect to the Real Estate Exchange Building give a clearer and more revealing view of the situation. Explaining his decision to convert 870 the garage property into an office building, petitioner stated304 that, due to the "great demand" for office space for which there were no facilities in Lake Wales, he would, by such conversion, have a revenue producing building which would be readily resalable. More important, however, than the purpose of acquisition "is the activity of the seller or those acting for him with reference to the property while held." Dunlap v. Oldham Lumber Co., 178 F.2d 781">178 F. 2d 781. And on cross-examination, petitioner's responses indicated that, as in the case of other rental properties he had acquired or constructed, the building would not be for sale when converted into rental property, unless or until he could sell it at a profit. In other words, he was, so to speak, providing a second string for his bow which could be availed of if his first failed him. When the Real Estate Exchange Building was completed, it would not be sold at a profit, and the petitioner added it to the other business buildings which had been bought or erected by him and made up the operating properties in his business of owning and renting business and office space to tenants. In short, it became one of the operating assets used in his rental business and305 was used and availed of for the production of rental income. See and compare John D. Fackler, 45 B. T. A. 708. In fact, petitioner rejected the offers of any and all potential customers for a period of 20 years and until its sale in 1946 in favor of its continued operation as a rental property. In reporting the rents received in the taxable years on the building, petitioner claimed and was allowed depreciation thereon, and there is no indication or suggestion that depreciation allowances were not similarly claimed and allowed for all prior years. We are not advised as to the offer or offers received in 1946, when the building was sold, nor as to petitioner's reasons for terminating the office renting operation by sale of the building even though it be sold at a loss.The Real Estate Exchange Building, being a property used by petitioner in his rental business and of a character which is subject to the allowance for depreciation provided in section 23 (l), the treatment of the loss sustained from its disposition is governed by the provisions of section 117 (j) of the Code, and since the gain on such property in that year did not exceed the losses thereon, 306 the loss was deductible in full, for the purpose of determining petitioner's taxable net income for 1946. That does not, however, make it a loss which may be carried over or carried back to subsequent or preceding years, under the provisions of section 122 of the Code. To qualify for a carry-back or carry-over, not only must the petitioner have had a net loss for 1946, but the net loss must have been a net operating loss, and in determining 871 a net operating loss, it is provided in section 122 (d) (5)11 that deductions otherwise allowable which are not attributable to the operation of the trade or business, are allowable only to the extent of the amount of the gross income not derived from such trade or business. The loss here was not a loss attributable to the operation of the business, but to the sale of one of the operating assets used in the conduct of the business. Such a loss is not an operating loss, and cannot be, or make up, any part of a net operating loss. Joseph Sic, 10 T. C. 1096, affd. 177 F. 2d 469; Lazier v. United States, 170 F. 2d 521; Smith v. United States, 180 F.2d 357">180 F. 2d 357;307 Joseph L. Merrill, 9 T.C. 291">9 T. C. 291, affd. 173 F. 2d 310; Joe B. Luton, 1153">18 T. C. 1153. The respondent's treatment of the loss is accordingly sustained.Citing and relying308 on Walter G. Morley, 8 T.C. 904">8 T. C. 904, the petitioner takes the position that the loss sustained by him in 1946, on the sale of the Real Estate Exchange Building, was not within the provisions of section 122 (d) (5) and was accordingly an operating loss. The evidence here shows, and we have found, as already noted, that from 1926 until it was sold the Real Estate Exchange Building was one of the operating properties used by petitioner in his business of renting office and business space to tenants, and in Charles Weill, 17 T. C. 318, we had occasion to consider the scope of the holding in the Morley case and there held that it did not apply where the loss sustained resulted from the sale of property used in a rental business. The facts being as they are, the same distinction applies in the instant case, and what we said in Walter G. Morley, supra, does not apply here.The facts as to the 40 acres of land sold in 1944 are not so clear. As shown by our findings, petitioner had two thoughts in mind when he purchased the property in 1924. If the development of the residential district of Lake309 Wales moved in that direction, he would use the property for subdivision purposes, and if not, he would plant it and develop it into a grove property. He concluded that the residential district would not move in that direction and cleared and fenced the land for setting it in citrus fruit. If he had carried out that purpose, we would then have had a situation comparable to that of the Real Estate Exchange Building, since the facts show that beginning 872 with the first orange grove, the 10 acres to the north of Lake Wales, he was in the business of owning and operating citrus groves for the production of income, until the business was liquidated by the sale of the groves, his operating properties, in the late 1930's and 1940's. The instant property was never set in citrus, however, due to the inability to get the stock therefor. Presumably such scarcity of stock was in the land boom period of 1925 and 1926, and petitioner has offered no explanation why it was not so set in later years, when stock did become available. Be that as it may, the land remained and continued to be unimproved acreage down the years, until it was sold in 1944. There is justification therefore for310 concluding that it was held for the same purpose as his other bare land and unimproved lots, excluding, of course, those pieces of property heretofore shown as having been improved by him and converted into rental or other operating properties.Placing the instant property in the unimproved or idle land category, we are again confronted, in the main, with generalizations and conclusions as to the primary purpose for which they were held. Petitioner claims that these properties were held primarily for sale to customers at all times and that the only reason they were not sold in normal course was that after the land boom collapsed, in the latter part of 1926, there were no customers and therefore no sales. It is to be noted, however, that his proof does not even show that he actually made sales in 1925 and 1926, when, according to his own testimony, the real estate market in the Lake Wales area was "extremely active." He did state that he did do some option trading in that period, but his testimony falls far short of indicating such trading in any quantities. And besides, the trading here involved was not such trading. It is possible, however, in the light of the testimony that 311 deeds usually followed sales by a considerable lapse of time, that those sales which were covered by the nine deeds executed by petitioner in 1927 and 1928 and apparently did cover vacant and unimproved property, were sales in the period of great real estate activity, and that, as claimed, other sales did not follow because of the almost nonexistence of customers.In spite of the thinness of petitioner's proof and the fact that he had the burden of proving that the acreage sold in 1944 was held primarily for sale to customers in the ordinary course of his trade or business, we are persuaded that as to some of his purchases and sales, he was making a business of it, and as to the unimproved properties purchased by him, excluding those which he himself improved and developed and devoted to other operations, the holding of them was primarily for sale to customers. We accordingly think that the proof does preponderate, even though slightly, in his favor and that 873 the 40 acres held in the unimproved land category were so held after his failure to get it set in citrus and up to the time of its sale in 1944. In our Findings of Fact we have so found. As to that sale, the petitioner312 is sustained.As to the building sold in 1944 and on which he reported a gain of $ 1,789.36, petitioner offered no proof and made no argument on brief. We assume that he has abandoned his claim of error on the part of the respondent with respect thereto.As to the residence in Highland Park, the parties apparently are in agreement that at the time the property was sold it was rental property and for 1945 the loss sustained was deductible in full. They are not in agreement as to the amount of the loss. The petitioner claimed a deductible loss of $ 11,230.35 on his return, of which the respondent disallowed $ 8,367.25 in his determination. The only error alleged by petitioner is that the respondent determined that the residence became rental property in 1935, instead of 1940, as reported and claimed by him. As to that claim, we think the evidence supports the petitioner, and we have so found. It is true that the petitioner did rent the property for periods of 3 months in both 1935 and 1936, receiving rent, which he reported in his income for those years. But, rather obviously, he had no thought or idea of changing the controlling and dominating purpose of holding the property313 from personal to business use. The renting of the residence for the short periods in the years mentioned was as a favor to the Highland Park Club, and more particularly to one of its members, and when petitioner and his wife saw the results of the occupancy, they refused similar requests in the years which followed. Such limited renting of the property in 1935 and 1936 was not, for the purposes here, an appropriation thereof to rental purposes. Lloyd Jones, 39 B. T. A. 531; W. H. Moses, 21 B. T. A. 226; Claudian B. Northrop, 17 B. T. A. 950.On the record here, however, the above conclusion does not require or permit a decision that the respondent was in error in his disallowance of a portion of the loss deduction claimed. Petitioner's concern seems to be over the amount by which his cost or other basis is to be reduced by the depreciation "allowed (or allowable)," which would only date from the appropriation of the property from personal to rental use. If the property had been so converted in 1935, there would have been 10 years of depreciation "allowed (or allowable)," whereas conversion314 in 1940 would have allowed a reduction of basis by only 5 years of depreciation, and yet, the respondent only reduced the cost or other basis of the residence by depreciation allowances totaling $ 9,675, as against a reduction therefor of $ 9,056.25 by petitioner.Actually the difference between the parties as to the amount of the loss sustained seems to be in the starting basis for the property. On his return, petitioner used $ 35,750 as his cost or other basis for the 874 property in 1940, presumably both land and building, whereas the respondent, in his determination, used a basis of $ 27,000 for the building and $ 1,500 for the land at January 1, 1935. It has long been settled that in the case of a residence converted to business use, its basis, for income tax purposes, is its value at the time it was appropriated for incoming producing purposes. Sec. 29.23 (e)-1 of Regs. 111. 12 See Heiner v. Tindle, 276 U.S. 582">276 U.S. 582. Both petitioner and his accountant testified that the property had been appraised in 1940 for that purpose, although no proof was offered as to what the appraised value was. By reason of petitioner's computation of his 315 loss, as shown on his 1945 return, we might assume that the appraised value was $ 35,750 but for the fact that in the depreciation schedule on the same return, as well as in his 1944 return, the cost or other basis for the house at 1940 was shown at $ 27,000, which was the same amount used by the respondent as the basis of the house 5 years earlier. And yet, as noted, the amount by which the petitioner would reduce the basis for depreciation for the 5-year period, 1940 to 1945, was $ 9,056.25, as compared with $ 9,675, the amount by which the respondent would reduce the basis for the 10-year period, 1935 to 1945. Whatever the explanation, it is hardly likely that the value of the house at both 1935 and 1940 would have been appraised at the same figure -- $ 27,000. But if that could be possible, it would be equally difficult to explain the closeness of the depreciation figures, the one being for 5 years and the other for 10. In the respondent's determination, there is matter indicating that the major difference in the loss claimed and the loss allowed had to do with the furniture sold with the house, but, as heretofore noted, the results of the sale of the furniture have not been316 put in issue.Decision will be entered under Rule 50. Footnotes1. The stipulation in the main consists of two schedules generally designed to show the purchases and sales of Polk County, Florida, real estate by petitioner from February 1923 to December 1948. There are many obvious and patent errors in the data shown, however, and as a consequence numerous facts which apparently were intended by the parties to be shown of record are not of record and as to some other facts which may be gleaned from the schedules, but only by tedious and laborious effort, there is not the desired assurance of certainty.↩2. Although the petitioner put these sales in issue, alleging the sales of the properties and the results reported and the respondent in his answer entered a general denial of the facts so alleged, the petitioner did not prove the cost or selling prices of the properties. It does appear, however, that in his determination of the deficiency, the respondent accepted the cost, selling price, and sales expense figures reported by petitioner and beyond the general denial in his answer of the sales and the reported results, he has made no point of the state of the record.↩3. In claiming depreciation on his residence in his 1944 and 1945 income tax returns, petitioner also used $ 27,000, not $ 35,750, as his cost or other basis. He made no segregation of basis between the house and the land. It would appear from the explanation attached to respondent's notice of deficiency that not all of the $ 11,230.35 loss as claimed was attributable to the residence, but in substantial part may have been from the sale of furniture. The petition, however, contains no claim of error as to a loss on the sale of furniture.↩4. The conveyances here and those following are as shown on the aforementioned schedules which purport to show all conveyances of record of real estate in Polk County from February 23 through 1948, in which petitioner was grantee or grantor. Even though stipulated, there is some confusion between the parties as to what the dates shown in the column headed "Date" indicate. There is some argument in petitioner's brief indicating that his counsel regards the dates shown as being the dates the various instruments were recorded. Those dates as such would be of little, if any, significance for the purposes here, and, in the absence of a factual indication to the contrary, we think it reasonable and logical to conclude that the dates shown are the dates of the instruments recorded, and not the dates of the recording thereof. The petitioner's testimony that many purchases of real estate in Florida were on contracts, on which deeds were not executed until a later date, supplies no basis for the conclusion that the dates shown were not the dates of the deeds themselves.↩5. As acquired, the county records show a property as "NW 1/ 4 S.E. 1">4 SE 1/4 17-20-28." Among the recorded conveyances by petitioner was a 1938 deed covering "NW 1/ 4 S.E. 1">4 SE 1↩/4 17-30-28."6. Presumably Anne P. or Annie P. Burns was petitioner's then wife. In some later conveyances Mae Burns is shown and in his return for the years herein Mae Burns is listed as petitioner's wife.↩7. Some, if not all, of his grove properties were deeded to other parties in 1936, 1937, and 1941. Three lots (Nile Bldg.) in Hecksher's Second Subdivision were conveyed in 1942, as was certain acreage. Draper Building, presumably the 3-story business building on Stewart Avenue, and Larratt House were conveyed in 1943.↩8. SEC. 117. CAPITAL GAINS AND LOSSES.(a) Definitions. -- As used in this chapter -- (1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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)↩ * * 9. Although petitioner's allegation that he sustained a loss on the sale of the Real Estate Exchange Building was denied by the respondent, we find no proof either as to the cost or other basis or the selling price beyond some general approximations by petitioner as to its cost when construction was completed in 1926. On his 1946 return, however, he had fixed the amount of the claimed loss at $ 31,313.93, and the respondent, in his notice of determination, in dealing with a claimed net loss carry-back made by petitioner in claims for refund for 1944 and 1945, raised no question as to the sustaining of the loss or the amount thereof, but denied the carry-back claim on the ground that the resulting net loss was not an operating net loss. Such being the circumstances, and the respondent not only having made no point on brief that the claimed loss has not been proven, but, as in his determination, having taken the position only that the loss on the sale of the building was not an operating loss, we regard the sustaining of the loss and the amount thereof as admitted.↩10. Chicago Title & Trust Co. v. United States, (C. A. 7) 209 F. 2d 773↩.11. SEC. 122. NET OPERATING LOSS DEDUCTION.(a) Definition of Net Operating Loss. -- As used in this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d). * * (d) Exceptions, Additions, and Limitations. -- The exceptions, additions, and limitations referred to in subsections (a), (b), and (c) shall be as follows: * * (5) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business. * ↩12. Sec. 29.23 (e)-1. Losses by Individuals. * *A loss on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible. If, however, property so purchased or constructed is prior to its sale rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss from the sale of the property, computed as provided in section 111, is, subject to the limitations provided in section 117↩, an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625152/	WILLIAM H. SIMON, PETITIONER. v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FANCHON SIMON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Simon v. CommissionerDocket Nos. 82173, 82174.United States Board of Tax Appeals36 B.T.A. 184; 1937 BTA LEXIS 759; June 18, 1937, Promulgated 759 A taxpayer, as party to a contract between a debtor and creditor which extended the maturity of the debtor's note and reduced the interest rate, agreed to pay the interest on behalf of the debtor. Held, the amount so paid is not deductible by the taxpayer as interest. Elias J. Aye, Esq., and Gerald Bridges, Esq., for the petitioners. Byron M. Coon, Esq., for the respondent. STERNHAGEN 184 OPINION. STERNHAGEN: The petitioners, husband and wife, residing in California, contest deficiencies determined in respect of their community 185 income for 1933, amounting to $265.81 each. Of three items of adjustment, two have been amicably settled and only one remains to be decided. This is the correctness of a deduction of $1,125 on each return, or $2,250 in all, taken as interest paid, which the Commissioner disallowed: * * for the reason that the obligation on which the interest was paid was the obligation of the Namyl Company. It is held that, as the obligation is not your obligation and was paid in behalf of another, the amount paid is not deductible from your income. [Citing 760 The facts were stipulated and need not be set forth in detail. In April 1932 petitioner was president and a director of the Namyl Co. 1 That corporation had become the owner of realty subject to a deed of trust to secure a note given by the preceding purchaser for $37,500, with interest at 7 percent. The last interest had not been paid. By agreement with the Title Insurance & Trust Co. which held the note, the maturity of the note was extended from September 28, 1932, to September 28, 1935, and the rate of interest reduced to 6 percent. Petitioner was individually a party to this agreement, and the provision relating to him is as follows: 4th. Simon hereby undertakes and agrees with the Trust Co. that he will pay for and on behalf of The Namyl Co., before the same become delinquent, the following designated taxes on said real property, to-wit: (a) the second installment of the taxes for the fiscal year 1931-1932; (b) both installments of the taxes for the fiscal year 1932-1933; and (c) the first installment of the taxes for the fiscal year 1933-1934, and Simon also undertakes and agrees with the Trust Co. to pay to761 the Trust Co. on behalf of The Namyl Co. when due each installment of the interest which accrues on said Thirty-seven Thousand Five Hundred Dollar note during the period of the two years next succeeding the date of this agreement, and Simon pays upon the execution hereof Five Hundred Sixty-two and 50/100 Dollars (562.50), being the quarterly installment of interest on said Thirty-seven Thousand Five Hundred Dollar note which fell due on the 28th day of March, 1932, at, however, the reduced rate of six per cent effected hereby. The Namyl Co. became insolvent in 1933, and petitioner, in 1933, "pursuant to the agreement", paid the interest, amounting to $2,250. In 1934 the Namyl Co. reconveyed the property, its only asset, to the holder of the note in lieu of foreclosure, and the note was canceled. The statutory deduction for interest is in the following language: All interest paid or accrued within the taxable year on indebtedness, * * . [Revenue Act of 1932, sec. 23 (b).] So far as the stipulation shows, the principal indebtedness on the note was solely that of the Namyl Co., and the interest762 which petitioner undertook to pay was interest on his indebtedness, and 186 properly speaking may not as to him be called interest at all. See ; ; . Indeed, the nature of his payment can not, from the facts in evidence, be described except generally as the consideration for the noteholder's extension to the principal obligor of the maturity of the note and the reduction of the rate of interest. Although these considerations operated more directly to the Namyl Co., the obligor on the note, they also were enough to support the petitioner's promise. Still his promise was not one to pay interest on his indebtedness. See . Congress meant to provide a deduction not of any payment that a taxpayer may choose to label interest, but only of such as is interest in truth. . It used the term in its ordinary meaning. 763 ; . 2 The assumption by a third person to pay an obligor's interest directly to the obligee may be a gift or support and maintenance, ; certiorari denied, ; or alimony, ; or rent, ; or the purchase price of assets, , deductible or not, as the case may be. But since the statute expressly classifies the deductions which are allowable, it is important that the classification be kept clear and not be clouded by specious use of its terms. The petitioners argument treats Simon's obligation as one of guaranty of the Namyl Co.'s obligation for interest, and shows that under California law "a guarantor is directly and primarily liable for the payment of the debt guaranteed." Even if this be correct, and the words of the agreement, *764 "on behalf of The Namyl Company", are to be treated as words of guaranty, this still does not demonstrate that Simon's obligation is as to him one for interest. see . The Commissioner correctly disallowed the deduction taken as interest. Whether there are other grounds to support a deduction by petitioner in either 1933 or later years can not be decided upon the present record, since the issue was plainly stated and the stipulation adjusted to it. . Judgment will be entered under Rule 50.Footnotes1. Whether he was a shareholder does not appear from the stipulation. ↩2. Law of Federal Income Taxation, Paul and Mertens, § 24.10. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625167/	RYAN CAR CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ryan Car Co. v. CommissionerDocket No. 7478.United States Board of Tax Appeals15 B.T.A. 439; 1929 BTA LEXIS 2852; February 15, 1929, Promulgated 1929 BTA LEXIS 2852">2852 The petitioner having failed to show that there are any abnormal conditions affecting its capital or income for the year 1920, it is not entitled to have its tax for that year computed under section 328 of the Revenue Act of 1918. W. W. Ross, Esq., and James W. Good, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. SIEFKIN15 B.T.A. 439">439 This is a proceeding for the redetermination of a deficiency in income and excess-profits taxes for the calendar year 1920 in the amount of $19,949.54. The petitioner alleges that the respondent erred in failing to compute the petitioner's excess-profits tax in accordance with sections 327 and 328 of the Revenue Act of 1918. It states that there was an abnormal condition affecting the invested capital of petitioner, caused as follows: (1) By the fact that the petitioner's invested capital and net income for the year 1920 are $1,062,135.22 and $1,980,830.47, respectively, the percentage of net income to invested capital being 186 per cent, and the percentage of excess-profits tax to net income being 37 per cent; (2) By the fact that services of large value in securing business were rendered1929 BTA LEXIS 2852">2853 petitioner by stockholders who were paid no compensation therefor by petitioner and whose expenses in securing said business were not paid by petitioner; 15 B.T.A. 439">440 (3) By the fact that its books and records do not contain information from which authorized allowances for obsolescence, deductible from income during 1920, may be computed; and (4) By the fact that the petitioner made large capital expenditures in 1920, which were charged to capital accounts but useful only for the purpose of handling a temporary peak load of business during the year 1920. The hearing of the case was limited under Rule No. 62, to a trial of the issue whether the petitioner is entitled to have its tax determined as provided in section 328 of the Revenue Act of 1918. FINDINGS OF FACT. The petitioner is an Illinois corporation having its principal office at Chicago. It is engaged in the business of repairing railroad cars, which is an emergency business. The petitioner was organized on December 6, 1905, with a capital of $100,000. On April 1, 1917, a reorganization took place at which time the capitalization was increased to $2,500,000, of which $1,500,000 represented good will. The organizers1929 BTA LEXIS 2852">2854 of petitioner were W. M. Ryan, J. M. Hopkins, W. W. Darrow, and P. M. Elliott. Ryan was a practical executive in the business of building and repairing railroad cars. Hopkins, Darrow, and Elliott had been in the business of furnishing equipment to railroads. They received no pay as officers of petitioner during 1920, nor did they receive reimbursement of expenses. Ryan was president of petitioner and managed the business. Hopkins, Darrow, and Elliott at all times during the years 1918 to 1923, inclusive, owned or controlled at least 70 per cent of the common stock and at least 75 per cent of the preferred stock of petitioner. The gross sales and net earnings of the petitioner as shown by its books for the years 1911 to 1925, inclusive, were as follows: YearSalesNet profits before Federal taxesFederal taxes1911$76,843.771 $20,326.811912557,253.5016,350.26$112.381913740,780.2276,415.37756.5919141,435,497.17257,047.182,570.471915994,692.61145,387.401,439.4819161,820,395.31243,935.044,846.1419172,375,156.48222,227.2455,687.4819182,237,199.94263,034.72157,363.4319192,213,318.50396,083.39118,300.0019207,527,666.181,943,076.90828,994.3119212,493,958.42377,049.7679,885.6219224,679,257.52730,083.7294,168.5719237,585,197.31534,910.9274,524.2219243,752,035.13162,592.7122,388.6719254,024,242.191 94,467.241929 BTA LEXIS 2852">2855 15 B.T.A. 439">441 The number of freight cars repaired by petitioner for various companies from 1916 to 1925, inclusive, was as follows: 1916191719181919192019211922192319241925B. & O.R.R1,885887N.Y.C.R.R.1,1462,2982,4011,6274,7112,0425,9583,418899N.Y.C. & St. L.R.R.500200C.G.W.R.R.24115919I.C.R.R.3006821,5221,036Penn. R.R45555Mather Stock Car Co350C. & A.R.R.262C.B. & Q.R.R500Total3,0313,6852,4012,0725,2662,6336,7995,9021,954None.The number of cars repaired is not an accurate indication of the amount of work done by petitioner, since the average amount of work per car varied considerably with different lots. In 1920 all the cars repaired by petitioner were for the New York Central Railroad and for the Pennsylvania Railroad. Of that number 4,711 were for the New York Central Railroad. There was one contract covering 4,000 cars, obtained about July, 1919, which ran for a year. Petitioner had been doing work for the New York Central1929 BTA LEXIS 2852">2856 Railroad for a number of years. Prior to 1919 petitioner had done no work for the Pennsylvania Railroad. During the World War the railroads of the country were under Federal control and due to the necessities brought about by the war, the rolling stock of the railroads was not kept in an average state of repair so that at the end of the war there was an abnormal condition requiring a large amount of repair work on the railroads' rolling equipment. Federal control of railroads terminated on February 29, 1920. The railroads had anticipated their return to private ownership and many orders for repairs of railroad cars were given in 1919, preceding the return, as well as in 1920. The petitioner secured orders for repairs which resulted in gross sales by the petitioner in 1920 amounting to $7,527,666.18, on which volume of business the petitioner showed a net profit of $1,980,830.47. Hopkins, Darrow, and Elliott assisted in obtaining these orders. There was no arrangement whereby these stockholders would receive any compensation from the petitioner for their services or any reimbursement of expenses incurred by them in this connection. During the year 1921 an agreement was entered1929 BTA LEXIS 2852">2857 into providing for reimbursement of expenses incurred thereafter in the securing of orders. In 1921, 1922, and 1923, these stockholders were reimbursed for expenses incurred as follows: 1921$30,000.00192215,000.00192333,998.7515 B.T.A. 439">442 The petitioner, on its return for 1920, claimed a deduction on account of personal expenses of $25,811.91. Of this amount $20,172.22 was spent by W. K. Ryan and $399.08 by J. M. Hopkins. The amount of dividends paid by petitioner during the years 1919 to 1923, inclusive, as shown by the books of the petitioner, was as follows: 1919$70,0001920190,0001921190,0001922248,1251923235,000In 1919 the petitioner's plant was inadequate to take care of the number of orders for the repair of cars. The officers and directors of petitioner decided to expand the plant because the business that had been secured was sufficiently profitable to justify a large expenditure for additional plant. The petitioner built a new plant. Expenditures therefor were made in the amounts of $219,000 in 1919 and $243,000 in 1920. This total expenditure was charged to capital accounts. The type of work to be1929 BTA LEXIS 2852">2858 done in the new plant made it necessary to build the plant substantially, and it was consequently of a permanent nature. In 1921 fewer orders for repairs were received. In the summer of 1922 a general strike of railroad shopmen occurred and resulted in the railroads again requiring an unusually large amount of repair work to be done outside of their own shops. Petitioner's gross sales increased from about $2,500,000 in 1921 to approximately $4,500,000 in 1922 and to about $7,500,000 in 1923. This work was not as profitable, however, as the work done in 1920, the net profit in 1923 being approximately $534,000, while the net profit in 1920 was nearly $2,000,000. The petitioner required additional facilities to handle its increased business in 1923, and to take care of this situation it leased a plant during this calendar year. Petitioner has secured no orders for the repair of railroad cars since 1924. Due to this fact a large part of the plant and equipment of the petitioner has not been used since the fall of 1924. In addition the petitioner has since 1924 made less use of a large amount of other physical assets due to lack of sufficient business. The petitioner continued1929 BTA LEXIS 2852">2859 to use the new plant. During the year 1922 the petitioner had an appraisal made of its entire plant by an audit company. This appraisal segregates the property items and assigns to each a depreciable value as of that year. The total depreciated value of petitioner's plant as shown by the appraisal is approximately 30 per cent greater than the amount at which it was theretofore carried on the books of petitioner. Prior 15 B.T.A. 439">443 to this appraisal the physical properties of petitioner had never been set up on the books in detail. The following is the value, as shown by the appraisal of 1922, of the property which has been in entire disuse since the fall of 1924. Door fixture shop$17,000.00Car repair shop69,915.00Compressed air piping4,916.00Air compressor equipment32,000.00Miscellaneous rolling equipment75,332.00Wood mill machinery40,395.00Boiler room boilers6,500.00Total$246,058.00The door fixture shop is a large, one-story, frame structure. It was built in 1900 or 1901. The old plant had been equipped to repair both wooden and steel cars. The books and records of petitioner do not contain any information as to the cost1929 BTA LEXIS 2852">2860 or depreciated value of any of its original plant equipment, other than the new plant. The petitioner did not derive 50 per cent or more of its gross income for the taxable year in question from cost plus Government contracts or from Government contracts made between April 6, 1917, and November 11, 1918. In computing the invested capital of petitioner for the year 1920, the respondent excluded the amount of $1,500,000 which petitioner had included for good will. He also denied petitioner's claim for special assessment. OPINION. SIEFKIN: The petitioner contends that it comes within the provisions of section 327 of the Revenue Act of 1918 and is entitled to have its tax determined as provided in section 328 of that Act. Section 327 of the Revenue Act of 1918 provides: That in the following cases the tax shall be determined as provided in section 328: (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; (b) In the case of a foreign corporation; (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine1929 BTA LEXIS 2852">2861 the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the 15 B.T.A. 439">444 tax computed by reference to the respective corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under sections 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both1929 BTA LEXIS 2852">2862 dates inclusive. The petitioner claims that there are four abnormalities affecting its capital or income. These contentions will be considered in order. (1) Petitioner alleges there was an abnormal condition affecting its invested capital caused by failure of respondent to include therein any value for good will. The evidence discloses that the respondent excluded from petitioner's invested capital an amount of $1,500,000 which petitioner had included for good will. No evidence was introduced by petitioner to directly show that there was a good will. We gather from the record that there was some good will but the petitioner does not attempt to show what it cost or that it is impossible to show the cost. The mere showing that the respondent excluded from invested capital the amount claimed for good will does not prove an abnormality entitling petitioner to special assessment. In , in denying the petitioner special assessment, we stated: Petitioner complains of the exclusion of good will from invested capital, but fails to prove either that the good will was paid in for stock or what amount, if any, was expended in1929 BTA LEXIS 2852">2863 its acquisition or accumulation. (See .) (2) Petitioner alleges that there was an abnormal condition affecting its income caused by the fact that services of large value in securing business were rendered petitioner by stockholders who were paid no compensation therefor by petitioner and whose expenses in securing said business were not paid by petitioner. Ryan, president of petitioner, testified that from 80 to 90 per cent of the total orders received by petitioner in 1920 were obtained by three stockholders who owned or controlled about 75 per cent of the stock of petitioner in that year. The total amount of business done by petitioner in 1920 amounted to about $7,500,000, and Ryan testified that the normal cost of obtaining such amount of business would be from $200,000 to $400,000. No salaries were paid the stockholders nor were they reimbursed for any expenses. No evidence was introduced to show the amount of expenses which were incurred by the stockholders in obtaining orders. We are not convinced that the receipt of orders by the petitioner during 1920 was due in a large measure to the activities of the1929 BTA LEXIS 2852">2864 stockholders. 15 B.T.A. 439">445 The evidence shows that there was an enormous amount of repair work on railroad cars to be done in 1920 after the railroads had been returned to private ownership. Apparently the railroads sought out firms which would do the repairs and it was not necessary for such corporations as the petitioner to spend much time or money to secure business. This is evidenced by the testimony of Ryan, which was in part as follows: * * * So the railroads, then, of course, that we had cultivated and had done some work for, commenced calling on us to undertake unusually large assignments of work, and that was the thing that really led up to our extending our facilities. * * * But we always recognized - it was a general understanding in the business that it was not a stable business; it was emergency business, and we all had that feeling when we expanded our plant in 1919 and 1920. We knew that under normal conditions we would never be able to keep it going, but the situation was there, and the people we had done work for said "We have been good customers of yours; we have to have this help, and you must do something to help us out," and there was the prospect of1929 BTA LEXIS 2852">2865 getting a substantial profit in the work and we went to it. It will be noted that the petitioner in 1920 did work for only two companies. Petitioner had done work for both of them before and one of them was a customer of several years standing. We conclude that there was no abnormality in this respect which entitles petitioner to special assessment. (3) The petitioner contends that there was an abnormal condition affecting its income caused by the fact that its books and records do not contain information from which authorized allowances for obsolescence, deductible from income during 1920, may be computed. Petitioner contends that a deduction for obsolescence on the plant would have been allowable for the year 1920 but that the books do not show the cost of the old plant, and, since it is impossible to take this deduction an abnormal condition exists. The evidence discloses that due to the fact that railroads while under Federal control had reached a state of disrepair, after they were returned to private ownership in 1920, there was a large amount of repairing to be done which the railroads could not handle themselves. Due to this condition the petitioner received1929 BTA LEXIS 2852">2866 orders for a large amount of repair work. Its plant was not sufficient to handle the business and a new plant and equipment were installed at a total cost of $462,000. The old plant of the petitioner had been equipped to handle both steel and wooden cars. Since the fall of 1924 a part of the plant and equipment of petitioner has not been used at all and a part of it has been used to a lesser extent than before. However, we are not convinced that the 15 B.T.A. 439">446 petitioner has abandoned the old property. The petitioner in 1922 again had need of all its plant and equipment due to the railroad shopmen's strike and even had to rent an additional plant to take care of the increased business. The fact that a part of the plant has been in disuse does not necessarily mean that it has been abandoned. As far as the record shows, the petitioner has made no effort to dispose of any part of the plant and equipment and title to it has not been abandoned. The property is not obsolete in the sense that it is out of date. Testimony was introduced to show that there is now no condition existing which would indicate that all of the plant and equipment would ever be needed again. However, 1929 BTA LEXIS 2852">2867 the business of the petitioner is an emergency business and an emergency might arise at any time. We believe the plant and equipment of petitioner is in disuse simply by reason of a lack of business, and no deduction for obsolescence would be allowable in 1920. It follows that the impossibility of determining the cost of the assets in disuse does not create such an abnormality as is referred to in section 327. (4) Petitioner contends that there was an abnormal condition affecting its income caused by the fact that the petitioner made large capital expenditures in 1920, which were charged to capital accounts but useful only for the purpose of handling a temporary peak load of business during the year 1920. Our discussion of the previous contention disposes of this one. The usefulness of the capital expenditures was not confined to the year 1920. Even if it were there would be no abnormality entitling petitioner to special assessment. In , the petitioner, in order to be in a position to sell its output and supply the demand of an Army cantonment located at Chillicothe, made expenditures of a capital nature in the sum1929 BTA LEXIS 2852">*2868 of $20,000. The petitioner contended that the expenditures for machinery were made necessary because of the war condition, that this machinery was unproductive to a great extent after the cessation of the war activities, and that the apparent extraordinary profits during the year 1918 represent a realization in one year of the earnings of capital unproductively invested or employed through a period of years. We denied special assessment in that case. The petitioner having failed to show any abnormal condition affecting its invested capital and income for the year 1920, is not entitled to special assessment. Judgment will be entered for the respondent.Footnotes1. Net loss. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625168/	EMORY KEITH CONOVER and JUDY ANN CONOVER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentConover v. CommissionerDocket No. 34096-85.United States Tax CourtT.C. Memo 1987-60; 1987 Tax Ct. Memo LEXIS 56; 52 T.C.M. 1535; T.C.M. (RIA) 87060; January 27, 1987. Emory Keith Conover and Judy Ann Conover, pro se. Phoebe L. Tang, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $3,534 in petitioners' Federal income taxes for 1980 and an addition to tax of $1,767 under section 6653(b). 1 After concession of the addition to tax by petitioners, the issue for determination is whether petitioners1987 Tax Ct. Memo LEXIS 56">57 may deduct losses incurred in a midget auto racing activity. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulation is incorporated in our findings by this reference. Petitioners were residents of Simi Valley, California, at the time they filed their petition. They filed a joint Federal income tax return for 1980. Beginning in about 1978, Emory Keith Conover (petitioner) engaged in midget auto racing. Petitioner reported net losses from his midget racing activity in each year from 1978 through 1984, ranging in amount from $8,492 in 1984 to $24,919 in 1983. The losses reported by petitioner over the years 1978 through 1984 totaled $121,131. During that period, his gross income from racing activities totaled $2,710. In 1980, petitioner reported gross receipts of $565 and net losses of $14,910. From 1977 through 1983, petitioner attempted to obtain a sponsor to bear the costs of his racing activities. A sponsor is necessary in order to make a profit. Petitioner was unsuccessful in his attempts to obtain1987 Tax Ct. Memo LEXIS 56">58 a sponsor. From 1978 through 1984, petitioner won two trophies; the most money he ever won in a race was $140. Petitioner entered between 15 and 24 races a year, and the highest ranking he ever achieved was seventh for an entire year. During the year in issue and approximately 28 years before the date of trial in 1986, petitioner was employed as a full-time mechanic for United Airlines. Petitioner Judy Ann Conover was employed as a grocery checker during 1980. Petitioners' combined wages in 1980 exceeded $43,000. In the statutory notice of deficiency sent to petitioners for 1980, respondent disallowed losses claimed with respect to petitioner's auto racing activities and determined an addition to tax for fraud because petitioners had submitted altered documents to their preparer and to the auditing agent. OPINION Except as to the addition to tax for fraud, which they have now conceded, petitioners have the burden of proving that respondent's determination in the statutory notice is incorrect. Rockwell v. Commissioner,512 F.2d 882">512 F.2d 882 (9th Cir. 1975), affg. a Memorandum Opinion of this Court; Rule 142(a), Tax Court Rules of Practice and Procedure. In this1987 Tax Ct. Memo LEXIS 56">59 case, petitioner must prove that his midget auto activity was entered into with an actual and honest profit objective and was not an activity not engaged in for profit as defined in section 183(c). If the activity is not engaged in for profit, deductions arising therefrom are allowed only to the extent of gross income earned from the activity. Section 183(b)(2). A determination of whether the requisite profit objective exists is to be made on the basis of all the surrounding facts and circumstances of the case. Section 1.183-2(b), Income Tax Regs. Greater weight is to be given to the objective facts than to the taxpayer's mere statement of his intent. Section 1.183-2(a), Income Tax Regs.Section 1.183-2(b), Income Tax Regs., lists some of the factors to be considered in determining whether an activity is engaged in for profit. The factors listed in the regulation are as follows: (1) Manner in which the taxpayer carried on the activity. (2) The expertise of the taxpayer or his advisors. (3) The time and effort expended by the taxpayer in carrying on the activity. (4) Expectation that assets used in activity may appreciate in value. (5) The success of the taxpayer1987 Tax Ct. Memo LEXIS 56">60 in carrying on other similar or dissimilar activities. (6) The taxpayer's history of income or losses with respect to the activity. (7) The amount of occasional profits, if any, which are earned. (8) The financial status of the taxpayer. (9) Elements of personal pleasure or recreation. After careful consideration of the limited amount of evidence produced by petitioners, we conclude that they have not established an actual and honest profit objective with respect to petitioner's racing activities. They have conceded that it was not possible to make a profit unless they were successful in securing a sponsor, but they presented only general testimony about efforts made to secure a sponsor. From the testimony it appears that the average cost of running a race was equal to or exceeded the average first-place purse to be hoped for in a race. Apparently petitioner had no realistic possibility of placing high in any race, inasmuch as his best standing achieved over the years of his racing was seventh for an entire year. Petitioner's testimony supports the inference that the activity was engaged in primarily for personal pleasure or recreation, i.e., as a hobby. He has certainly1987 Tax Ct. Memo LEXIS 56">*61 not persuaded us that his situation is comparable to that in Bolt v. Commissioner,50 T.C. 1007">50 T.C. 1007 (1968), or Demler v. Commissioner,T.C. Memo. 1966-117, on which he relies. In those cases, taxpayers devoted substantial time to the enterprise, kept accurate records of their income and expenditures, and engaged in the undertaking in a businesslike manner so as to establish that they were in the trade or business of auto racing. By contrast, this case is indistinguishable from those in which taxpayers have failed to satisfy the Court that they had the necessary profit objective. See, e.g., Woods v. Commissioner,T.C. Memo. 1985-233; Franz v. Commissioner,T.C. Memo. 1984-506; and Casida v. Commissioner,T.C. Memo. 1979-267. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625169/	MARTIN S. LAVINE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLavine v. CommissionerDocket No. 24538-92United States Tax CourtT.C. Memo 1995-270; 1995 Tax Ct. Memo LEXIS 271; 69 T.C.M. 2938; June 19, 1995, Filed 1995 Tax Ct. Memo LEXIS 271">271 Decision will be entered for respondent. Martin S. Lavine, pro se. For respondent: Robert J. Misey, Jr. FAYFAYMEMORANDUM OPINION FAY, Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows: YearDeficiency1979$ 10,24119803,68219816,444The issues for decision are: (1) Whether respondent timely issued a statutory notice of deficiency. We hold that she did. (2) Whether the interest under section 6404(e) 1 should be abated. We hold that it should not. Some of the facts have been stipulated. The stipulation of facts, together with the attached exhibits, is incorporated herein by this reference. At the time he filed his petition, petitioner resided in Eureka Springs, Arkansas. Petitioner filed joint Federal income tax returns for the taxable year 1979 on June1995 Tax Ct. Memo LEXIS 271">272 16, 1980, for the taxable year 1980 on April 15, 1981, and for the taxable year 1981 on June 15, 1982. Respondent issued a statutory notice on August 7, 1992, for all of the years at issue. On February 10, 1982, petitioner executed a Form 2848, which gave his power of attorney to Neal M. Fischer, his Certified Public Accountant ("C.P.A."), for the taxable years 1979, 1980, and 1981. This was a general power of attorney which was not limited in any respect. On January 14, 1983, Mr. Fischer executed a Form 872-A on behalf of petitioner for the taxable year 1979. On February 17, 1984, Mr. Fischer executed a Form 872-A on behalf of petitioner for the taxable year 1980. On February 7, 1985, Mr. Fischer executed a Form 872 on behalf of petitioner for the taxable year 1981 extending the statute of limitations until December 31, 1986. On September 24, 1986, Mr. Fischer executed a Form 872-A on behalf of petitioner for the taxable year 1981. At the time Mr. Fischer executed the forms 872-A on behalf of petitioner, petitioner had not revoked the power of attorney. Section 6501(a) sets forth the general rule that "the amount of any [income] tax * * * shall be assessed within 3 years1995 Tax Ct. Memo LEXIS 271">273 after the return was filed". An exception is found in section 6501(c)(4), which provides for an extension by agreement. Petitioner asserts that the statute of limitations had expired before the statutory notice was issued. A petitioner pleading the statute of limitations as a bar to the assessment of tax must make a prima facie case by proving the filing date of the return and the expiration of the general 3-year assessment period. Respondent must then go forward with countervailing proof showing that, for some reason, the period of limitation had not expired when the statutory notice was issued. Mecom v. Commissioner, 101 T.C. 374">101 T.C. 374, 101 T.C. 374">382 (1993), affd. without published opinion 40 F.3d 385">40 F.3d 385 (5th Cir. 1994). Respondent's burden is discharged by introducing into evidence a consent, valid on its face, that extends the period of limitation for assessment up to the date of mailing of the statutory notice of deficiency. Schenk v. Commissioner, T.C. Memo. 1976-363. After respondent introduces a consent that is valid on its face and petitioner asserts that such consent was ineffective, then petitioner1995 Tax Ct. Memo LEXIS 271">274 is required to prove the invalidity of the consent. Crown Willamette Paper Co. v. McLaughlin, 81 F.2d 365">81 F.2d 365 (9th Cir. 1936); Rault v. Commissioner, T.C. Memo. 1982-283. The statutory notice was issued on August 7, 1992. Pursuant to the power of attorney, Mr. Fischer duly executed Forms 872-A for all of the years at issue before the statute of limitations had run. Petitioner argues on brief that alleged fraudulent misrepresentation by Mr. Fischer makes the power of attorney voidable, and, therefore, the Forms 872-A that Mr. Fischer signed on petitioner's behalf are voidable as well. An executed Form 2848 gives the person holding the power of attorney the authority to sign a consent agreement extending the period of assessments on behalf of the taxpayer. Scherr v. Commissioner, T.C. Memo. 1991-92. Petitioner testified that he feels that he was misled by his C.P.A. regarding his investment in a tax shelter, which gave rise to the deficiencies in the years at issue. He has not, however filed a civil suit against his C.P.A. for his alleged misconduct. Nor had petitioner, at the times the1995 Tax Ct. Memo LEXIS 271">275 Forms 872-A were signed, revoked the power of attorney granted to the C.P.A. When a taxpayer executes a valid Form 2848, he is normally bound by the acts performed by his agent pursuant to the power of attorney. Lefebvre v. Commissioner, T.C. Memo. 1984-202 (1984), affd. 758 F.2d 1340">758 F.2d 1340 (9th Cir. 1985). Willoughby v. Commissioner, T.C. Memo. 1994-398; Lyon v. Commissioner, T.C. Memo. 1994-351. We find that petitioner executed valid Forms 2848 granting Mr. Fischer his power of attorney. We find no evidence to support the argument that the Forms 872-A were invalid, and, therefore, petitioner has failed to carry his burden as to this issue. Petitioner further contends that the Forms 872-A are invalid because they extended the period of limitations beyond a reasonable time. We disagree. The fact that the extension granted by Form 872-A does not expire on a date certain does not undermine its validity. Estate of Camara v. Commissioner, 91 T.C. 957">91 T.C. 957 (1988). Petitioner's argument that a Form 872-A expires by operation of law after a1995 Tax Ct. Memo LEXIS 271">276 "reasonable" time has been rejected by this Court. Id. Moreover, petitioner put forth no proof to support his contention that an unreasonable amount of time had passed between the filing of the returns at issue and the issuance of the statutory notice. In his brief, petitioner, for the first time, argues that his due process rights under the Fifth Amendment have been violated. Petitioner asserts that he has been deprived of his rights because he did not receive copies of correspondence sent to Mr. Fischer. Petitioner did, however, receive the statutory notice, for he filed a signed petition with this Court. Moreover, since petitioner met with an Appeals Officer even before the statutory notice was issued he must have received at least some correspondence. Petitioner's unsupported and general allegations that he did not receive some unspecified correspondence cannot support his claim of a due process violation. We find that petitioner's due process rights were not violated. Petitioner also contends that we should abate the interest on the deficiencies at issue. The Tax Court is a court of limited jurisdiction. Sec. 7442; Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418, 320 U.S. 418">420-422 (1943).1995 Tax Ct. Memo LEXIS 271">*277 The Tax Court does not have jurisdiction over section 6404(e) abatement of interest on the deficiencies. 508 Clinton St. Corp. v. Commissioner, 89 T.C. 352">89 T.C. 352 (1987). Klein v. Commissioner, 899 F.2d 1149">899 F.2d 1149 (11th Cir. 1990). Because we have no jurisdiction over this issue, we can provide petitioner no relief. We have considered all other of petitioner's arguments and find them to be without merit. Respondent issued a statutory notice of deficiency when the statute of limitations for all years was open as a result of valid Forms 872-A executed by Mr. Fischer acting pursuant to petitioner's power of attorney, and we have no jurisdiction to consider abating the interest pursuant to section 6404(e). Decision will be entered for respondent. Footnotes1. All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625170/	Jack S. James and Carol N. James, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentJames v. CommissionerDocket Nos. 27360-83, 33287-83, 24045-84, 29714-84, 30508-84, 40635-84, 40636-84United States Tax Court87 T.C. 905; 1986 U.S. Tax Ct. LEXIS 27; 87 T.C. No. 60; October 29, 1986, Filed 1986 U.S. Tax Ct. LEXIS 27">27 Decisions will be entered pursuant to Rule 155. Ps are members of a joint venture (JV). JV purported to purchase from one of a group of related companies (the Communications Group) certain computer equipment subject to existing leases. The Communications Group had purchased the computer equipment at issue from the manufacturers, arranged third-party lender financing for the equipment, and leased the equipment. After selling the equipment subject to the leases to JV, the Communications Group managed the leases as JV's "agent" and charged JV implementation, management, and performance fees. By virtue of agreements between JV and the Communications Group, cash-flow during the terms of the leases was negative despite unexplained rental income allocated to JV by the Communications Group that was greater than the amount of rent due under the leases. Under the most optimistic expectations of residual value, JV could not anticipate a profit from the transactions. Held, the transactions between JV and the Communications Group were independent of and unaffected by the underlying lease transactions between the Communications Group and third-party lenders and lessees and were without1986 U.S. Tax Ct. LEXIS 27">28 economic substance; JV acquired no interest in the computer equipment. Held, further, the investment tax credits and business expense deductions claimed by Ps as members of JV were properly disallowed. Tom G. Parrott and Charles N. Woodward, for the petitioners.Osmun R. Latrobe, for the respondent. Williams, Judge. Sterrett, Simpson, Goffe, Chabot, Nims, Parker, Whitaker, Korner, Shields, Hamblen, Cohen, Clapp, Swift, Jacobs, Wright, and Parr, JJ., agree with this opinion. Gerber and Wells, JJ., did not participate in the consideration of this opinion. WILLIAMS87 T.C. 905">906 In these consolidated cases, the Commissioner determined deficiencies in petitioners' Federal income taxes and additions to tax for the taxable years 1979, 1980, and 1981, in the following amounts:Sec. 6653(a)DocketadditionsNo.PetitionerYearDeficiencyto tax27360-83Jack S. and Carol N. James1979$ 349,785.9029714-84Jack S. and Carol N. James1980397,201.901981269,325.9733287-83Glen E. and Sybil H. Michael1979211,680.001980297,691.001981230,108.5024045-84David G. and Kathleen Ownby198012,214.00198110,798.0030508-84A. F. Boudreau, Jr., and1980639,054.27Katherine F. Boudreau40635-84Jeffrey H. and Mary E. Cope1980132,314.00$ 6,615.70198186,069.004,303.4540636-84Robert S. and Phyllis H. Cope1980175,125.008,756.251981148,978.007,448.901986 U.S. Tax Ct. LEXIS 27">29 After concessions by the parties, the issues which this Court must decide are whether petitioners, as members of a joint venture, are entitled (1) to investment tax credits pursuant to section 46(e)(3) 2 on certain computer equipment purportedly acquired by the joint venture; and (2) to deductions for management fees pursuant to section 162.FINDINGS OF FACTSome of the facts have been stipulated and are so found. Petitioners Jack S. and Carol N. James resided in Tulsa, Oklahoma, at the time their petition in docket No. 27360-83 was filed, and in Santa Barbara, California, at the time their petition in docket No. 29714-84 was filed. The remaining 87 T.C. 905">907 petitioners each resided in Tulsa, Oklahoma, at the time their respective petitions were filed.The principal actors in these cases are three related companies, each of which performs substantially the same functions: 1986 U.S. Tax Ct. LEXIS 27">30 Communications Associates, Inc. (CAI), Communications Associates Leasing, Inc. (CALI), and Communications Leasing International, Inc. (CLI). Petitioner claims that these three companies (collectively, the Communications Group) analyzed and configured computer systems for large-scale users, purchased the computer equipment for these systems, then leased the equipment to the users.In the transactions at issue in these cases, the Communications Group purchased and leased computer equipment and initially administered the leases covering the equipment. The Communications Group neither analyzed the needs of the users in the transactions at issue in these cases nor configured the computer equipment chosen by the lessees.Jack James (James) was the president of CAI and CLI in 1979 and 1980. Glen E. Michael (Michael) was senior vice president of CALI in 1979 and president of CALI in 1980. The Communications Group employed an administrative staff of approximately 15 persons and used experienced independent contractors for professional assistance. In 1981 Mentco Corp. (Mentco) took over the administration and management of the portfolios of leases in which the Communications Group had 1986 U.S. Tax Ct. LEXIS 27">31 continuing responsibilities.The record does not reveal what common ownership, if any, there was between Mentco and the Communications Group. James' son is an officer of Mentco. Mentco and the Communications Group have the same address.CLI purchased from the Amdahl Corp. (Amdahl) an Amdahl 470V/7 computer system, serial number 10055 (Amdahl 10055), on June 19, 1979, for $ 3,211,000, which CLI financed by executing an installment note in favor of Amdahl. The first 18 monthly payments due under the note were $ 56,000 each; the remaining 44 payments were $ 69,000 each. A final payment of $ 258,917 was due on March 1, 1985. CAI and Amdahl executed a security agreement covering the equipment to secure CLI's obligation to Amdahl.87 T.C. 905">908 CAI leased the Amdahl 10055 to Massey-Ferguson, Inc. (Massey-Ferguson), for a term of 62 months, commencing January 1, 1980. The rental rate was $ 56,000 per month for the first 18 months of the lease and $ 69,000 per month for the remainder of the lease term. Massey-Ferguson remitted the rent directly to Amdahl which satisfied CLI's monthly payments due Amdahl under CLI's installment note.By letter dated October 24, 1983, Massey-Ferguson canceled1986 U.S. Tax Ct. LEXIS 27">32 the lease as of December 31, 1984. The parties stipulated that on November 1, 1983, Massey-Ferguson subleased the Amdahl 10055 to Major Computer, Inc. The record has only a draft sublease dated November 1, 1983, between Massey-Ferguson and Major Computer, Inc., for the sublease of the Amdahl 10055, for a term of 15 months, at a monthly rate of $ 7,000.Another lease of the Amdahl 10055 was executed between Mentco Corp. (on behalf of CAI) as lessor and Major Computer as lessee on November 1, 1983, for a term of 9 months, at a monthly rate of $ 7,000. Attached to the lease in the record is an undated, unexecuted certificate of acceptance. The commencement date of the lease is not in the record. An addendum to the lease provided that the lessee could purchase the equipment at the conclusion of the lease by paying its then fair market value.Each lease of the Amdahl 10055 was a net-net-net lease, under which the lessee was responsible for all costs relating to the installation, maintenance, taxes, and insurance of the computer equipment. The lease provided that "LESSOR IS NOT A MANUFACTURER OR VENDOR OF THE EQUIPMENT." The Communications Group played no role in the selection or 1986 U.S. Tax Ct. LEXIS 27">33 configuration of computer equipment by the lessees. The lease was negotiated at arm's length and reflected competitive terms and rates. We find, based on the parties' agreement, that the residual value of the computer equipment at the end of the lease term would not exceed 35 percent of the manufacturer's original sales price.CAI purchased from Amdahl a second 470V/7 computer system, serial number 70078 (Amdahl 70078), at a cost of $ 2,550,000 on December 28, 1979, financed by a loan from the State Street Bank. CAI leased the equipment to Amdahl for a term of 3 months, commencing January 1, 1980, then 87 T.C. 905">909 sold it to Northern Illinois University (NIU) pursuant to a "lease" that was, in fact, a conditional sales contract.CAI transferred its interest in the Amdahl lease and the NIU conditional sales contract to CALI, for no consideration, on December 28, 1979. The NIU conditional sales contract was subsequently assigned to the State Street Bank. NIU remitted annual payments due under the NIU contract, in the amount of $ 394,976.76 per year, directly to the State Street Bank. On or about July 1, 1984, NIU exercised its option to pay off any remaining indebtedness encumbering1986 U.S. Tax Ct. LEXIS 27">34 the computer system and to acquire title to the Amdahl 70078, for an additional $ 1.Petitioners in these cases are members of two joint ventures. Although petitioners treated the two joint ventures as one and named it "Petroleum Trading and Transport Joint Venture Number One," in fact the joint ventures had different members and involved different transactions that were separately documented. For convenience, therefore, we will identify them -- as described more fully below -- as JV#1 and JV#2.JV#1 was formed on December 28, 1979, by Petroleum Trading & Transport Co. (PTT), an Oklahoma corporation controlled by A.F. Boudreau, Jr. (Boudreau); Michael Leasing Co. (MLC), a partnership owned equally by Glen E. and Sybil H. Michael; and Jack S. James (James).JV#1 executed a purchase agreement with CALI on December 28, 1979, under which CALI purported to sell to JV#1 the Amdahl 10055 subject to the lease to Massey-Ferguson (the 1979 transaction). 3 The purchase price of JV#1's purported interest in the Amdahl 10055 was $ 2 million. JV#1 financed the purported purchase by executing a promissory note payable on demand in the principal amount of $ 300,000 and a recourse installment1986 U.S. Tax Ct. LEXIS 27">35 note in the principal amount of $ 1,700,000. JV#1 was also obligated to pay CALI an implementation fee of $ 150,000. The record does not indicate how this amount was financed by JV#1. The equipment was 87 T.C. 905">910 subject to Amdahl's priority security interest securing CLI's $ 3,211,000 note.The purchase agreement stated that CALI sold to JV#1 "all of Seller's right, title and interest in and to the Equipment, subject to a security interest therein to the Lending Institution and subject to the assignment of Seller's right to receive rental payments from the Lessee of the Equipment." However, JV#1 acquired1986 U.S. Tax Ct. LEXIS 27">36 only a 52.6-percent interest in the equipment, as interests in the equipment were sold by CAI and CALI to other investors as well. CALI and CAI received proceeds from investors totaling $ 3,801,250 in connection with the purported sale of the Amdahl 10055. The agreement also provided that CALI would have a "nonexclusive right to remarket" the equipment. On remarketing the equipment CALI would be entitled to receive 25 percent of the net proceeds of such remarketing.JV#1 and CALI executed two other agreements on December 28, 1979 -- an agency agreement and an administrative services agreement. The agency agreement stated that CALI was authorized to acquire computer equipment suitable for lease to a user of such equipment and to lease the equipment to such users as the nominee of JV#1. The agency agreement provided that JV#1 was not personally liable in any manner on CALI's obligation to Amdahl incurred to finance CAI/CALI's acquisition of the equipment. The administrative services agreement stated that CALI would perform various administrative functions involved in the leasing of the computer equipment purchased by JV#1. Management fees for these services were due annually 1986 U.S. Tax Ct. LEXIS 27">37 in the following amounts:Dec. 28 --1981$ 72,000198157,600198248,000198339,600198439,600198539,600198639,600A restated administrative services agreement between JV#1 and CALI, dated June 30, 1982, canceled the earlier 87 T.C. 905">911 agreement as of December 28, 1982. The restated agreement pooled rent from equipment covered by CAI's and CALI's administrative service arrangements with JV#1 and other similar investors with rent from leases of equipment owned by CAI or CALI. The record does not identify the equipment or leases owned by CAI or CALI, the rent from which was pooled pursuant to the restated agreement. The restated agreement provided that rental income would be allocated to the participating investors pursuant to a formula. JV#1's share of pooled income was determined by multiplying the gross pool income by a fraction representing the ratio between JV#1's investment and total investment in the pooled equipment. This figure was then multiplied by a "TR Factor," supposedly to adjust for such differences as useful life and maturity in the pooled equipment. The result was JV#1's pro rata share of pooled income (adjusted pool rental income). James, 1986 U.S. Tax Ct. LEXIS 27">38 president of CALI and a member of JV#1, was unable to describe at trial how the TR Factor was determined.Pursuant to the restated agreement, the management fee schedule of the original administrative services agreement was canceled, and management fees were set at a rate of 16 percent of adjusted pool rental income. The restated agreement also provided that the "Normal Rental Rate" of the equipment was 21.619 percent of the investment of JV#1. If gross pool income exceeded the Normal Rental Rate, CALI was entitled to retain the excess as a "performance fee," in addition to its management fees.During the years 1980 through 1984, annual statements to JV#1 reported that JV#1's rental income on the Amdahl 10055 and obligations with respect thereto were as follows:YearRental incomeObligations1980$ 452,008.51$ 452,008.511981437,608.51437,608.511982428,008.51428,008.511983452,380.00452,380.071984452,243.48452,243.55The obligations represented payments of principal and interest due on JV#1's installment note in the principal amount of $ 1,700,000, payments due for management fees, and payments due on a promissory note executed December 87 T.C. 905">912 1986 U.S. Tax Ct. LEXIS 27">39 27, 1979. It is not clear from the record what the December 27, 1979, promissory note was for; the principal amount and term are unknown, but annual payments of $ 30,811.51 were due under it. Lease revenue and management fee calculations for the years 1983 and 1984 were calculated pursuant to the income pooling arrangement described in the restated administrative services agreement of June 30, 1982.JV#1 was initially capitalized with demand promissory notes aggregating $ 300,000 bearing interest at a rate of 10 percent per year which were paid on February 29, 1980. PTT contributed $ 200,000; MLC contributed $ 50,000, and James contributed $ 50,000.The joint venture agreement states that interests of the members in gross income earned by JV#1 through December 28, 1986, are as follows:PTT47.6%MLC26.2James26.2The interests of the members in JV#1 gross income earned after December 28, 1986, including gross proceeds from the sale of the Amdahl 10055, are stated to be as follows:PTT50%MLC25James25As stated in the joint venture agreement, the interests of the members in the obligations and liabilities of JV#1 are as follows:(1) On a promissory note1986 U.S. Tax Ct. LEXIS 27">40 in the principal amount of $ 300,000, with interest at 10% per year, issued to CALI by JV#1 and paid on February 29, 1980:PTT2/3MLC1/6James1/6(2) On an installment note in the principal amount of $ 1,700,000.00 issued to CALI by JV#1:PTT47.06%MLC26.47James26.47(3) On all other obligations and liabilities of JV#1 the interests were stated as follows: 87 T.C. 905">913 PTT50%MLC25James25A second joint venture (JV#2) was formed on January 15, 1980, by amendment to the joint venture agreement governing JV#1. The seven members of JV#2 are PTT, MLC, James, Boudreau, David G. Ownby, Robert S. Cope, who worked for Boudreau, and Jeffrey H. Cope, son of Robert S. Cope. Some of the members of JV#2, viz, Boudreau (as an individual), Robert S. Cope, Jeffrey H. Cope, and David G. Ownby, had no interest in the computer equipment in which JV#1 had its interest. JV#1's 1979 transaction was independent of JV#2's transaction, which were the subject of a separate, unrelated agreement. Separate annual statements of account were provided for JV#1's transaction and for JV#2's transaction.In 1980, JV#2 purported to buy from CALI three computer systems subject 1986 U.S. Tax Ct. LEXIS 27">41 to leases: (1) An Amdahl system leased to Duke Power Co. (Duke Power); (2) an IBM system leased initially to Union Metal Manufacturing Co. (Union Metal); and (3) an IBM system leased to Empire Detroit Steel (Empire Detroit). CAI or CALI purchased the computer equipment from the manufacturers in separate transactions.CAI purchased an Amdahl system on October 31, 1980, CAI paid the full purchase price of $ 2,750,000 by check. CAI executed a short-term promissory note on November 5, 1980, payable to the Fourth National Bank of Tulsa in the amount of $ 1,761,214, secured by the Amdahl equipment. The note was refinanced by a long-term, nonrecourse note to the Philadelphia National Bank in the amount of $ 3,550,465.20, executed on January 19, 1981, and secured by the Amdahl equipment. The first payment under this note was due on February 1, 1981, in the amount of $ 105,100. Monthly payments for the ensuing 44 months were each due in the amount of $ 78,983 and for the remaining 36 months each in the amount of $ 42,686.CAI leased the equipment to Duke Power for a term of 84 months pursuant to a lease dated October 1, 1980. The equipment was installed and accepted by Duke Power on November1986 U.S. Tax Ct. LEXIS 27">42 1, 1980, and CAI permitted Duke Power 30 days without rent for complex system testing. The rental rates 87 T.C. 905">914 were $ 39,800 per month for the first 48 months of the lease and $ 20,666 for the remaining 36 months of the lease term. Pursuant to an operating agreement dated October 1, 1980, Duke Power could elect to terminate the lease after 48 months. Duke Power gave CAI notice of such election on October 1, 1980. On October 2, 1980, Duke Power rescinded this election in accordance with the terms of the operating agreement. On October 31, 1980, CAI assigned to CALI its interest in the equipment under the Duke Power lease, subject to the security interest held by the Philadelphia National Bank. The equipment remained under lease to Duke Power as of December 1985.CAI purchased an IBM system, originally ordered by Union Metal, in two transactions on November 12 and November 18, 1980, for a price of $ 208,174. IBM had assigned to CAI the right to purchase the equipment on October 6, 1980. CAI gave two nonrecourse installment notes in the amounts of $ 81,071.33 and $ 78,921.48, and dated December 1980 and January 1981, respectively, to finance the purchase of the equipment. 1986 U.S. Tax Ct. LEXIS 27">43 The record does not show how the balance of the purchase price was paid. The notes were payable to the Midlantic National Bank (Midlantic), and were secured by the IBM equipment. On October 31, 1980, CAI assigned its interest in the IBM equipment to CALI, subject to Midlantic's security interest.CAI leased the IBM equipment to Union Metal under two separate lease schedules executed September 4, 1980, and November 4, 1980. Each schedule set forth terms of 58 months. The master lease between CAI and Union Metal incorporating these lease schedules was executed September 3, 1980. Rental under the master lease was $ 4,340 per month. CAI assigned all rental payments due under the lease to Midlantic, informing Union Metal of the assignment by letter dated November 6, 1980. Union Metal accepted the assignment on November 13, 1980. The equipment was installed and accepted under the separate lease schedules on December 2, 1980, and December 16, 1980, respectively.Subsequent to entering the lease, Union Metal declared bankruptcy. In June of 1985, the computer equipment subject to the Union Metal lease was repossessed by 87 T.C. 905">915 Midlantic. CALI repurchased the equipment from Midlantic1986 U.S. Tax Ct. LEXIS 27">44 at a price less than the amount remaining due on CAI's nonrecourse notes with the bank dated December 1980 and January 1981, respectively.CALI purchased another IBM system for $ 347,110 on December 15, 1980. CAI had ordered the equipment from IBM and transferred its interest in the equipment to CALI for no consideration on October 31, 1980. CALI paid IBM by check on February 16, 1981. CAI financed the purchase through a promissory note in the amount of $ 347,110 to the Fourth National Bank of Tulsa. CALI refinanced the purchase by executing a nonrecourse installment note payable to the Philadelphia National Bank in the principal amount of $ 347,109.85 on March 16, 1981, secured by the IBM equipment. The first payment under this note was due April 1, 1981, in the amount of $ 6,220.72. The remaining 58 monthly payments were each due in the amount of $ 8,534.79.CALI leased the equipment to Empire Detroit and assigned its right, title, and interest in the Empire Detroit lease to the Philadelphia National Bank. The original term of the lease was 60 months, commencing February 1, 1981, at a rate of $ 9,413 per month. Monthly rental payments were remitted directly to the Philadelphia1986 U.S. Tax Ct. LEXIS 27">45 National Bank by Empire Detroit, commencing March 1, 1981.On July 10, 1981, CALI informed Empire Detroit by letter that the original lease term of 60 months was in error. CALI submitted an amended lease schedule with a term of 58 months, but also stated that "should you determine that you will need this equipment for the 59th and 60th month and even longer, we will allow an extension at no increase in rate." The monthly rental rate of $ 9,413 was not changed. The lease was in effect as of December 1985.The leases in each of the three 1980 transactions were net-net-net leases and provided that "LESSOR IS NOT A MANUFACTURER OR VENDOR OF THE EQUIPMENT." All transactions were negotiated at arm's length, and all contracts reflected competitive terms and rates. The parties have stipulated that the residual value of the equipment, at the end of each lease term, did not exceed 35 percent of the manufacturer's original sales price.87 T.C. 905">916 CALI purported to sell to JV#2 the three computer systems, subject to the leases, pursuant to a purchase agreement executed on October 31, 1980 (the 1980 Agreement). The purchase price of the equipment was $ 3,800,000, financed by a demand note for1986 U.S. Tax Ct. LEXIS 27">46 a downpayment of $ 817,000, which was satisfied on December 31, 1980, and an installment note executed by JV#2 in the principal amount of $ 2,983,000 payable to CALI. JV#2 also incurred an implementation fee of $ 57,000, financed by a recourse demand note executed by JV#2 and payable to CALI. The note was paid December 31, 1980. As with JV#1's 1979 transaction, under the 1980 Agreement, JV#2 gave CALI a "nonexclusive right to remarket" the equipment, for which it would receive a 25-percent commission.JV#2 and CALI executed an administrative services agreement on October 31, 1980, under which CALI agreed to administer the leases purportedly transferred to JV#2 by the 1980 Agreement. The rental income allocated to JV#2 was calculated under terms identical to the pooling arrangement provided by the 1982 restated administrative services agreement between JV#1 and CALI. The management fee due CALI was likewise set at the rate of 16 percent of the adjusted pool rental income received.JV#2's allocation of pooled rental income and obligations pursuant to the 1980 Agreement were stated by Mentco as follows:YearRental income (pooled)Obligations1980$ 125,812.811 $ 125,844.011981744,114.41744,106.421982763,845.41763,837.431983763,083.39763,075.401984762,574.49762,566.521986 U.S. Tax Ct. LEXIS 27">47 Obligations of JV#2 included payment of CALI's management fee and payments of the principal and interest on JV#2's $ 2,983,000 promissory note to CALI.87 T.C. 905">917 In connection with their downpayment under the 1980 Agreement, the members of JV#2 contributed the following amounts to the joint venture:PTT$ 11,362MLC69,046James69,046Boudreau229,862Robert S. Cope298,908Jeffrey H. Cope173,052David G. Ownby22,724Interests of the members in the profits and liabilities of JV#2 arising out of the 1980 Agreement were as follows:PTT1.3%MLC7.9 James7.9 Boudreau26.3 Robert S. Cope34.2 Jeffrey H. Cope19.8 David G. Ownby2.6 JV#1 and JV#2 filed partnership information returns for each of the taxable years at issue in these cases as a single joint venture, Petroleum Trading and Transport Joint Venture1986 U.S. Tax Ct. LEXIS 27">48 No. One (PTTJV).OPINIONPetitioners argue that the members of JV#1 and of JV#2 each entered the ventures with the purpose of realizing a profit from their investment in computer equipment and that the joint ventures were engaged in a trade or business or in an activity for profit. Petitioners argue that their interests in the computer equipment were purchased from the Communications Group and would have a significant residual value at the conclusion of the lease to which the equipment was subject. Therefore, they contend that they are entitled to the investment tax credit and business expense deductions claimed on their returns.Respondent contends that the transactions at issue in these cases lacked economic substance and business purpose, that petitioners in these cases lacked a profit motive, and that the sole purpose of entering into the transactions 87 T.C. 905">918 at issue was tax avoidance. On this basis, respondent urges that the transactions should be disregarded as shams for Federal income tax purposes.A transaction is without its intended effect for Federal income tax purposes if (1) it is a sham, being a mere paper chase or is otherwise fictitious ( ,1986 U.S. Tax Ct. LEXIS 27">49 or (2) the transaction is devoid of economic substance consonant with its intended tax effects ( ; . The substance of the transaction, not its form, determines its tax consequences. The transaction must have economic substance which is "compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax avoidance -- features that have meaningless labels attached." ; ; , affd. per curiam .It must be recognized that the tax laws affect the shape of every business transaction. The parties to a transaction are entitled to take into account and to maximize favorable tax results so long as the transaction is compelled or encouraged by non-tax business reasons. 1986 U.S. Tax Ct. LEXIS 27">50 .The form of the transactions at issue in these cases is that JV#1 and JV#2 purchased computer equipment subject to leases from CALI (type A below). Respondent argues that, in substance, JV#1 and JV#2 acquired no economic interest in the equipment or the leases but merely purchased tax benefits from CALI. Respondent concedes that the transactions involving CAI/CLI, the manufacturer, the lender, and the lessee, are typical purchase and lease transactions having economic substance and business purpose (type B below). A diagram of the transactions in these cases is as follows:87 T.C. 905">919 [SEE ILLUSTRATION IN ORIGINAL]Respondent argues that transaction type (A), involving JV#1/JV#2 and CAI/CALI, has no business or economic relationship to transaction type (B) and is without economic substance or business purpose; in short, that neither JV#1 nor JV#2 owned the equipment bought and leased in transaction (B). Petitioners respond that CAI/CALI acted as agents for the joint ventures, and that the joint ventures were an integral element of the substantive transaction type (B). We agree with respondent's view. 1986 U.S. Tax Ct. LEXIS 27">51 The Communications Group purchased the computer equipment, obtained long-term, nonrecourse financing for the purchases, gave the lending institutions priority security interests in the equipment purchased, leased the equipment to various lessees, and assigned to CALI their respective interests in the equipment and the leases covering the equipment. These purchases were negotiated at arm's length and reflected competitive market prices. Similarly, 87 T.C. 905">920 the leases covering the equipment reflected competitive terms and rental rates.Net-net-net leases are commonly negotiated in equipment leasing transactions. The 1979 and 1980 transactions among the Communication Group as purchasers-lessors, the manufacturers-sellers, the third-party lenders, and the lessee-users (transaction type (B) above) were all valid transactions possessing economic substance and business purpose. See . We reach an opposite conclusion regarding the transactions between CALI and the joint ventures (transaction type (A) above).CALI purported to sell the computer equipment, or an interest in it, to the joint ventures in exchange1986 U.S. Tax Ct. LEXIS 27">52 for cash and recourse notes payable to CALI. JV#1 and JV#2, however, acquired no equity interest in the computer equipment or the leases. Instead, the joint ventures purchased only hoped-for tax benefits from CALI.CALI purchased the proportionate share of the equipment that it purported to sell to JV#1 in the 1979 transaction for $ 1,689,444.21. JV#1 paid $ 2 million for its interest. CALI purchased the equipment that it purported to sell to JV#2 in the 1980 transaction for $ 3,305,284. JV#2 paid $ 3,800,000 for its interest. The joint ventures, therefore, paid CALI an approximate 15-percent markup over manufacturer's price. Petitioners argue that the markup in price compensated CALI for its services in configuring, acquiring, and leasing the equipment, and reflected the enhanced value of the equipment as a result of CALI's services. The record, however, is barren of evidence to support petitioners' contention that the value of the equipment was enhanced subsequent to its acquisition by CALI. Whatever might have been CALI's general business practices in other transactions, in the transactions at issue CALI did nothing to add value to the equipment. Employees of the lessees1986 U.S. Tax Ct. LEXIS 27">53 testified that CALI did not participate in their leasing transactions except to arrange financing.CALI's price markup is inconsistent with the actions of one acting as an agent considering that the joint ventures also paid CALI substantial fees in each transaction, including "implementation fees," "management fees" and "performance 87 T.C. 905">921 fees." CALI was more than fully compensated for its services to the joint ventures by the implementation and management fees it received from JV#1 and JV#2. The net result of the markup and payment of the fees, as discussed below, was that the Communications Group stripped out any cash-flow from the leases, and the joint ventures had no chance of making a profit even under the most optimistic estimate of residual value.The computer equipment remained subject to the priority security interests of third-party lending institutions as security for the CAI/CLI loans. Following the default of Union Metal, the equipment purportedly owned by JV#2 was repossessed by Midlantic, the third-party lender. CALI repurchased the equipment from the lender at a price less than the amount remaining on its nonrecourse obligation with the lender. Although CALI1986 U.S. Tax Ct. LEXIS 27">54 incurred savings in the form of canceled debt, these savings were not passed on to JV#2. This action also belies CALI's purported agency status. We conclude that CALI was a principal acting for its own account. Consequently, the joint ventures' transactions with the Communications Group must stand on their own footing and do not inherit through CALI any of the business substance that exists in the transactions between the Communications Group and the manufacturers, lenders, and lessee-users.Further, we note that the documentation of the 1979 transaction indicates that JV#1 purchased the Amdahl 70078, leased first to Amdahl, and subsequently sold to Northern Illinois University. This documentation includes not only the documents at the time of the purported sale in 1979, but also the restated administrative services agreement in 1982 and the annual statements from Mentco. Petitioners claim that this documentation was in error, which error was discovered in 1984 and corrected as petitioners prepared for trial. This indicates to us that some of the petitioners (who were members of both JV#1 and JV#2) did not exercise normal care in ascertaining which equipment they "owned," where1986 U.S. Tax Ct. LEXIS 27">55 it was located, or which lessee had leased the equipment. This imprudent conduct suggests that the business substance of these leasing transactions was not of primary concern to petitioners.87 T.C. 905">922 Moreover, the arrangement between JV#1 and CALI is imbued with inexplicable anomalies. The rental income allocated to JV#1 was from the 1979 lease of the Amdahl 10055 to Massey-Ferguson which called for a monthly rental of $ 56,000 for the first 18 months of the lease and $ 69,000 for the remainder of the lease term. For 1980 JV#1's rental income should have been its representative share of the rent generated by the lease: namely, $ 353,472 (52.6 percent of $ 672,000). This figure is approximately $ 98,000 less than that which was actually allocated to JV#1. In 1981 and 1982, the rental rates under the Massey-Ferguson lease rose, while actual rental income allocated to JV#1 decreased. We find no evidence in the record to account for these discrepancies. Income "pooling" did not commence until 1983.All the transactions at issue generated zero cash-flow to the joint ventures during each year at issue in these cases. During the years 1980 through 1984, JV#1 received statements 1986 U.S. Tax Ct. LEXIS 27">56 reporting the following net returns with respect to the 1979 transaction:198019811982Rentalincome:$ 452,008.51 $ 437,608.51 $ 428,008.51 Obligations:(452,008.51)(437,608.51)(428,008.51)Net return:0.00 0.00 0.00 19831984Rentalincome:$ 452,380.00 $ 452,243.48 Obligations:(452,380.07)(452,243.55)Net return:(0.07)(0.07)JV#1 received no statement for the year 1979, and CALI allocated no "rental income" for the year 1979 to JV#1. Considering the $ 150,000 implementation fee that JV#1 paid CALI, JV#1's out-of-pocket cash requirements, not counting the downpayment, were $ 150,000.14.The cash-flow to JV#2 also was zero during each of the years 1980 through 1984. Discrepancies between rental income allocated to JV#2 and that due under the leases covering the equipment pursuant to the 1980 Agreement are similar to the discrepancies in the record regarding JV#1's 1979 transaction. Income "pooling" was, however, in effect for JV#2's transaction from its inception.Perhaps most importantly, the administrative services agreements served to assure that cash-flow during the terms of the various leases would be enjoyed only1986 U.S. Tax Ct. LEXIS 27">57 by CALI. 87 T.C. 905">923 Each agreement provided that if rental income allocated to the joint ventures pursuant to the pooling arrangements exceeded the "Normal Rental Rate" the excess would be retained by CALI as a "performance fee." The record again has no evidence of any performance that would justify the fee. We believe that the fee enabled CALI to enhance its own equity interest in the equipment and leases.Since cash-flow during the lease terms was zero, the residual value of the computer equipment is the sole source of potential profit. Petitioners anticipated that the residual value of the equipment would not exceed 35 percent of the manufacturer's original sales price. The parties stipulated a broad range of actual values of between zero and 35 percent of the manufacturer's original price reflecting the significant degree of speculation and uncertainty in the computer leasing market. However, looking to the most optimistic residual values anticipated, we find that petitioners could not generate any net return on their investment in the joint ventures.For these joint ventures to generate a profit, the residual values to be realized on remarketing the equipment must exceed 1986 U.S. Tax Ct. LEXIS 27">58 the sum of the downpayment on the equipment, the implementation fees paid to CALI, and the 25-percent commission 4 due to CALI for remarketing the equipment. The residual value of the equipment is a percentage of the "manufacturer's original sale price" -- the price between the manufacturer and CAI. Consequently, the return to JV#1 on the remarketing of the equipment purchased in the 1979 transaction would be as follows:Manufacturer's original price 1$ 1,689,444.21 Residual valueX.35 Gross proceeds591,305.47 Downpayment(300,000.00)25% Commission to CALI(147,826.36)Cash-flow(.14)Implementation fee($ 150,000.00)Net profit (loss)(6,521.03)1986 U.S. Tax Ct. LEXIS 27">59 87 T.C. 905">924 The return on the remarketing of the equipment purchased in the 1980 transactions would be as follows:Manufacturer's original price 1$ 3,305,284.00 Residual valueX.35 Gross proceeds1,156,849.40 Downpayment(817,000.00)25% Commission to CALI(289,212.35)Cash-flow(.27)Implementation fee(57,000.00)Net profit (loss)(6,363.22)Even assuming realization of the maximum residual values anticipated, the joint ventures would realize a net loss. We conclude that (1) there was no objective possibility that the transactions at issue in these cases would be profitable and (2) that petitioners' transactions were without economic substance.The transactions between the joint ventures and CALI were independent1986 U.S. Tax Ct. LEXIS 27">60 of and unaffected by the transactions that occurred between the Communications Group, the manufacturers, the lenders, and the lessees. The transactions between the joint ventures and CALI were structured so that no prospect of achieving a non-tax profit from the transactions existed at the time the joint ventures entered into them. 5 The joint ventures acquired no interest in the 87 T.C. 905">925 computer equipment or the leases covering that equipment. Instead, the joint ventures merely purchased a package of tax benefits from CALI.Petitioners have failed to establish that the joint ventures owned the equipment on1986 U.S. Tax Ct. LEXIS 27">*61 which they claimed investment tax credits. Because petitioners did not acquire any interest in the computer equipment the investment tax credits at issue in these cases were properly disallowed.Disallowance of the claimed management fee deductions also follows. The management fees established under the administrative services agreements bore no apparent relation to the actual services performed by CALI. Through the annual management fees, including the "performance fee," petitioners attempted to meet the 15-percent test of section 46(e)(3)(B) to qualify each transaction for the investment tax credit but achieved only to strip cash-flow from the leases for CALI's benefit. The joint ventures were not engaged in these transactions for profit.To reflect concessions by the parties,Decisions will be entered pursuant to Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Glen E. and Sybil H. Michael, docket No. 33287-83; David G. and Kathleen Ownby, docket No. 24045-84; Jack S. and Carol N. James, docket No. 29714-84; A.F. Boudreau, Jr., and Katherine F. Boudreau, docket No. 30508-84; Jeffrey H. and Mary E. Cope, docket No. 40635-84; and Robert S. and Phyllis H. Cope, docket No. 40636-84.↩2. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, unless otherwise indicated.↩3. There is some confusion with respect to whether the purchase agreement covered the Amdahl 70078 or the Amdahl 10055. Petitioners argue that the equipment purchased was the Amdahl 10055, leased to Massey-Ferguson, and that the documents which refer to the Amdahl 70078, "leased" to NIU, are in error. Although the record is not entirely clear, we find that the Amdahl 10055 was the subject of the 1979 transaction.↩1. This figure excludes the $ 817,000 downpayment for the equipment, financed in the form of a promissory note to CALI from JV#2 due and payable in one installment on Dec. 29, 1980, and the $ 57,000 implementation fee, financed in the form of a promissory note to CALI from the JV#2 also due and payable in one installment on Dec. 29, 1980.↩4. Petitioners allege that the equipment could be remarketed by someone for less than the 25-percent commission to CALI. The joint ventures played no role in the purchasing, leasing, or servicing of the equipment. CALI knew the location, status, and condition of the equipment, and we believe that petitioners did not. We believe it is a fair inference that the only one likely to have any role in the remarketing of the equipment would be CALI. Anticipating the 25-percent commission as cost associated with petitioners' investment is, therefore, appropriate.↩1. Since JV#1 "purchased" only a portion of the Amdahl 10055, the manufacturer's original price is calculated in the following manner:Sales price to JV#1 (including the lease).1 $ 2,000,000/ Total investment in the Amdahl 10055.2 3,801,250 X Manufacturer's original sales price, paid by CAI to the manufacturer.3 $ 3,211,000 = $ 1,689,444.21(Proportionate share of manufacturer's price to JV#1)↩1. This price represents the sum of those paid for the three systems separately purchased by CAI and leased to Empire Detroit, Duke Power, and Union Metal. The parties aggregate these transactions as do we. A different result is not suggested by examining these transactions separately.↩5. The circumstances of this case do not warrant application of the subjective business purpose test of affd. in part, revd. in part . Petitioners were sophisticated investors who should have known that the transactions at issue could not achieve a non-tax profit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625172/	HANDY & HARMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Handy & Harman v. CommissionerDocket Nos. 19467, 19837.United States Board of Tax Appeals17 B.T.A. 980; 1929 BTA LEXIS 2211; October 16, 1929, Promulgated 1929 BTA LEXIS 2211">2211 1. The Commissioner had authority to reconsider and reverse the determination of his predecessor in office that the petitioner and Hamilton & DeLoss, Inc., were affiliated during the year 1918 and the period January 1 to February 1, 1919. 2. The petitioner and Hamilton & DeLoss, Inc., were not affiliated during the year 1918 and the period January 1 to February 1, 1919, within the meaning of section 240 of the Revenue Act of 1918. Hugh S. Williamson, Esq., for the petitioner. Eugene Meacham, Esq., and C. E. Lowery, Esq., for the respondent. MARQUETTE 17 B.T.A. 980">980 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income and profits taxes, asserted by the respondent in the amounts of $25,800.99 17 B.T.A. 980">981 for the year 1918, and $3,156.90 for the year 1919. The only issue is whether the petitioner and Hamilton & DeLoss, Inc., were affiliated during the year 1918 and the period January 1 to February 1, 1919, and entitled to file consolidated returns of income and invested capital. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of New York1929 BTA LEXIS 2211">2212 in the year 1905, with its principal office at New York City. Its factory is located at Bridgeport, Conn. The petitioner, upon its organization, took over the business of the partnership of Handy & Harman, which for many years had been engaged in dealing in gold and silver bullion and specie, but its charter authorized it also to buy, sell and manufacture other metals. Prior to the year 1906 the petitioner and the partnership of Handy & Harman had been supplying the silversmith trade with silver rolled into sheets and coils at their Bridgeport plant. About that time, however, the petitioner began the practice of cutting the silver into flat circles and rectangles so as to minimize the amount of scrap silver which would have to be returned by the silversmiths, thus saving in investment and in transportation and packing costs, and enabling the corporation to operate on a lesser amount of raw materials than theretofore carried. About 1912 or 1913 the officers of the petitioner conceived the idea of not only stamping out the flat circles and rectangles, but of partially shaping them, thus saving the silversmiths' part of the hand labor required to shape the blanks on lathes, besides1929 BTA LEXIS 2211">2213 further reducing the amount of scrap. This, however, would have required the installation by the petitioner of large double-action presses which in one operation would cut out the flat pieces and stamp them into the preliminary shapes. For a year or two the petitioner's officers discussed whether this additional work should be undertaken and, if so, whether it should be handled by the petitioner or by a separate corporation formed for the purpose. A strong reason for the adoption of the latter course was that because of the limited amount of silver business available it would be necessary, in order to keep the new equipment busy and justify the expense of installing it, to use it on the base metals as well as on silver, and the petitioner's officers desired to limit its operation to the precious metals. Harry H. DeLoss, vice president of the petitioner, discussed the matter at great length with Harold H. Hamilton, a man of many years experience in the silversmithing business, and it was finally decided to organize a new corporation, with Hamilton at its head. Accordingly, on December 23, 1916, the new corporation, Hamilton & DeLoss, Inc., was organized under the laws of Connecticut, 1929 BTA LEXIS 2211">2214 with 17 B.T.A. 980">982 Hamilton as president and DeLoss as vice president. It was the intention at the time Hamilton & DeLoss, Inc., was organized, that the petitioner should continue to mill and roll silver, but that Hamilton & DeLoss, Inc., should take over the stamping operation and should extend the operation to the point of giving preliminary shape to the pieces, and in addition should operate in other metals. The petitioner continued to manufacture flat circles and rectangles after the organization of Hamilton & DeLoss, Inc., but it was the intention of the officers of both corporations that Hamilton & DeLoss, Inc., should take over all of that part of the business. The capital stock of the petitioner and of Hamilton & DeLoss, Inc., was $650,000 and $300,000, respectively, divided into shares of $100 each, and at the beginning and the end of the year 1918 the stock was held as follows: Jan. 1, 1918Dec. 31, 1918Handy & HarmanHamilton & DeLoss (Inc.)Handy & HarmanHamilton & DeLoss (Inc.)Per centPer centPer centPer centParker W. Handy28.2521.2828.2516.67John L. Harman18.4010.6418.408.33Harry H. DeLoss28.2322.1328.2333.34William B. Sewell15,7514.8915.7511.66George C. Gerrish1.543.401.543.33Robert H. Leach1.543.401.543.33Minority - scattered6.296.29H. H. Hamilton20.4320.00John M. Blackburn2.131.67Alfred C. Fones1.701.67100.00100.00100.00100.001929 BTA LEXIS 2211">2215 The minority interest in the petitioner, consisting of 409 shares, was held in small lots by sixteen employees, and 300 of these shares, or 4.61 per cent, were held under an agreement, a notation of which appeared on the certificate, that if the holder should leave the employ of the petitioner, the petitioner would have the right to buy back the stock at par. When Hamilton & DeLoss, Inc., was organized, Hamilton had no money to purchase stock therein. The purchase price of the 20 per cent interest standing in his name was financed by promissory notes endorsed by Harry H. DeLoss, and although the stock was issued to Hamilton, he assigned it to DeLoss, who deposited it as collateral security for the notes. Hamilton never paid anything on the notes. In 1919 he became insolvent and on February 1, 1919, DeLoss paid the notes and took over the stock. During the period of his ownership of the stock Hamilton attended all meetings of the stockholders of Hamilton & DeLoss, Inc., and voted his stock, but never voted in opposition to Handy, Harman, Sewell, and DeLoss. John M. Blackburn 17 B.T.A. 980">983 and Alfred C. Fones took no active part in the business of Hamilton & DeLoss, Inc. They1929 BTA LEXIS 2211">2216 were close friends of DeLoss and their stock was voted for them by proxies given to DeLoss. Hamilton received a salary of about $10,000 a year from Hamilton & DeLoss, Inc., but the other officers and directors, who were also officers, directors or employees of the petitioner, received no compensation from Hamilton & DeLoss, Inc., but were paid entirely by the petitioner. DeLoss, who was vice president of both corporations, devoted about one-third of his time to Hamilton & DeLoss, Inc., and Robert H. Leach, who was technical adviser and administrative assistant of the petitioner, devoted his entire time to Hamilton & DeLoss, Inc., but received his entire salary from the petitioner. George C. Gerrish was manager of the petitioner's Bridgeport plant and secretary of Hamilton & DeLoss, Inc.The plant of Hamilton & DeLoss, Inc., was erected in Bridgeport, Connecticut, about 100 or 150 yards distant from the petitioner's plant, and silver production machinery costing $47,000 was installed. However, on account of war conditions, work was so slow that at the end of January, 1918, the output of the plant had been small, the total sales thereof amounting only to $6,295.35. At the1929 BTA LEXIS 2211">2217 beginning of the year 1918 the petitioner and Hamilton & DeLoss, Inc., were facing a difficult situation. The silver business had declined greatly. The officers were apprehensive that both corporations, they being in the class of nonessential industries, would be commandeered by the Government and disorganized. They were also encountering difficulty in obtaining labor and raw material. After numerous discussions, both at board meetings and among the individuals who controlled the two corporations, it was decided that Hamilton & DeLoss, Inc., should not for the present proceed with the silver-stamping business for which it had been organized and equipped. It therefore became necessary, in order to continue the operation of the plant, to secure work from the Government, and the corporation then went into production as subcontractors on Government work. The petitioner also secured some subcontracts, which were of benefit in placing it among the essential industries of the country. In August, 1918, an officer connected with the gas mask division of the United States Army called on Harry H. DeLoss at the petitioner's Bridgeport plant to ascertain whether that plant could mill brass1929 BTA LEXIS 2211">2218 for making eye pieces for gas masks. On being informed that it could, he inquired whether the plant could also stamp out the eye pieces. DeLoss informed him that the work could not be done by the petitioner's plant alone, but that the petitioner also controlled the plant of Hamilton & DeLoss, Inc., and that the work could be 17 B.T.A. 980">984 done in the two plants. After discussion among the officers and directors of the two corporations, and after several visits had been made to Washington by DeLoss, with reference to the matter, it was decided to take the contract for the manufacture of eye pieces in the name of Hamilton & DeLoss, Inc., principally because the billing work could be more conveniently handled through the offices of that company than through the New York office of the petitioner. However, the petitioner financed the contract, melted the metal, Hamilton & DeLoss not being equipped for that work, rolled the metal and furnished it to Hamilton & DeLoss, Inc., which stamped out the eye pieces and returned the scrap metal to the petitioner for remelting. The entire contract was performed in that manner. The contract called for 1,000,000 eye pieces at 1 1/2 cents each, 1929 BTA LEXIS 2211">2219 and it necessitated the installation by Hamilton & DeLoss, Inc., of machinery and equipment costing $32,000. The machinery that had been installed for silver production was not adapted to use on the eye piece contract, and it stood idle while that contract was being performed. Neither the petitioner nor Hamilton & DeLoss, Inc., made any profit from the eye piece contract. Hamilton & DeLoss, Inc., sustained a net loss in the year 1918 and during January, 1919. The petitioner and Hamilton & DeLoss, Inc., originally filed separate returns for the year 1918, but subsequently filed a consolidated return for that year, and on April 10, 1920, the then Commissioner of Internal Revenue accepted the consolidated return and ruled that the two companies were affiliated during the year 1918 within the meaning of section 240 of the Revenue Act of 1918. On January 19, 1924, Commissioner Blair reversed the ruling made by his predecessor in office and held that the two companies were not affiliated, and he subsequently asserted deficiencies in tax against the petitioner in the amounts of $25,800.99 for the year 1918, and $3,156.90 for the year 1919. OPINION. 1929 BTA LEXIS 2211">2220 MARQUETTE: The first issue raised by the pleadings herein is whether Commissioner Blair had authority to reverse and set aside the finding of his predecessor in office that the petitioner and Hamilton & DeLoss, Inc., were affiliated during the year 1918 and the period January 1 to February 1, 1919, and entitled to file consolidated returns of net income and invested capital. This issue must be resolved in favor of the respondent, on the authority of Yokohama Ki-Ito Kwaisha, Ltd.,5 B.T.A. 1248">5 B.T.A. 1248; Estate of W. S. Tyler,9 B.T.A. 255">9 B.T.A. 255; James Couzens,11 B.T.A. 1040">11 B.T.A. 1040; Rosetta V. Hauss,12 B.T.A. 755">12 B.T.A. 755; Estate of John F. Dodge,13 B.T.A. 201">13 B.T.A. 201; and Anna T. Dodge et al., Executors,13 B.T.A. 223">13 B.T.A. 223. 17 B.T.A. 980">985 Our decision on the first issue makes it necessary for us to determine whether the petitioner and Hamilton & DeLoss, Inc., were affiliated during the year 1918 and the period January 1 to February 1, 1919, and entitled to have their tax liability computed on the basis of consolidated returns, within the meaning and under the authority of section 240 of the Revenue Act of 1918. The petitioner1929 BTA LEXIS 2211">2221 claims affiliation and the right to file consolidated returns, while the position of the respondent is, first, that affiliation did not exist because the necessary conditions relative to ownership or control of the capital stock of the two corporations were not present; second, that even if the two corporations were affiliated, their tax liability should not be computed on the basis of consolidated returns, for the reason that Hamilton & DeLoss, Inc., was a "corporation organized after August 1, 1914, and not a successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918." There is no claim made, nor does the record disclose, that either one of the two corporations owned or controlled directly or indirectly, any of the capital stock of the other. If affiliation existed, it was because substantially all of the capital stock of both corporations was owned or controlled by the same interests. The evidence herein establishes that six men, Handy, Harman, DeLoss, Sewell, Gerrish, and Leach, owned outright 93.711929 BTA LEXIS 2211">2222 per cent of the capital stock of the petitioner and 76.66 per cent of the capital stock of Hamilton & DeLoss, Inc., and it may be assumed for the purpose of this opinion that they controlled 4.61 per cent of the capital stock of the petitioner which was held by employees of the petitioner under an agreement that if they should leave the petitioner's employ the petitioner would have the right to purchase the stock. But did they control the 20 per cent interest in Hamilton & DeLoss, Inc., owned by Hamilton? The evidence shows that when Hamilton & DeLoss, Inc., was organized, Hamilton did not have sufficient money to purchase stock in the corporation. He secured the money from a bank pursuant to arrangements made by DeLoss and DeLoss endorsed his notes. Hamilton assigned his stock to DeLoss, who placed it with the bank as collateral security. On or subsequent to February 1, 1919, DeLoss paid the notes and took over the stock. The evidence also shows that as long as Hamilton owned the stock he attended the stockholders' meetings and voted the stock. It appears that he did not vote in opposition to Handy, Harman, DeLoss, and Sewell, but there is no evidence that he could not have1929 BTA LEXIS 2211">2223 done so if he had desired. So far as we know he voted with them of his own volition and not because they had 17 B.T.A. 980">986 any control over his stock. Handy, Harman, DeLoss, and Sewell undoubtedly controlled Hamilton & DeLoss, Inc., and Hamilton apparently was a satisfied and tractable minority, who was content that the Handy & Harman organization should control and operate Hamilton & DeLoss, Inc. This control, however, is not the control contemplated by the statute, and, where there is a substantial minority, unless there is a control of the stock of such minority, there is no affiliation of the corporation. Ice Service Co. v. Commissioner, 30 Fed.(2d) 230; Commissioner v. Adolph Hirsch & Co., 30 Fed.(2d) 645; and Conley Tin Foil Corporation,17 B.T.A. 65">17 B.T.A. 65. In Ice Service Co., supra, it was stated: Congress has declared that two corporations shall be treated as one for tax purposes when one corporation owns or controls substantially all the stock of the other or when substantially all the stock is owned or controlled by the same interests. Judicial interpretation may perhaps limit the statutory language1929 BTA LEXIS 2211">2224 to voting stock, as was held in In re Temtor Corn etc. Products Co.,299 F. 326 [U.S. Tax Cases, 2nd Supp. 1325] aff'd sub. nom. Schafly v. United States, 4 Fed.(2d) 195 (C.C.A. 8), but we are not to confuse control of the corporation with control of the stock. The test is not declared to be control of the business or the policies of the subsidiary corporation but substantial identity of interest in the enterprise. The theory of affiliation, resulting in a consolidated return for taxes is that the income and invested capital are really the income and capital of a single enterprise though carried on through the instrumentality of several corporations. See Art. 631, Treasury Regulations, 1920 Edition; Holmes, Fed. Taxes 6th Ed. 281; Alameda Inv. Co. v. McLaughlin, 28 Fed.(2d) 81 (N.D. Cal.). Only when the outside interest, that is, the interest of the minority, is so small as to be practically negligible, are the two corporations to be treated as in receipt of a single income requiring a consolidated return. Again, in 1929 BTA LEXIS 2211">2225 Adolph Hirsch & Co., supra, the same court said: The management of the business of the corporation is not the control required by the statute. It refers to stock control. The fact that the minority is acquiescent and permits the majority to manage the business does not prove actual control over the minority interest. Nor does a control based upon friendship or professional relations satisfy the statute. The control of the stock owned by the same interest refers to beneficial interest. This meaning is consistent with the purpose of the statute to extend to those subject to the hazard of the enterprise, when they are substantially one and the same, the benefit of the consolidated reports. We are of opinion that the same interest that owned or controlled the capital stock of the petitioner, did not own or control substantially all of the capital stock of Hamilton & DeLoss, Inc. Therefore, the quantum of ownership or control required by the statute for affiliation of the two corporations does not exist in this case and we must affirm the action of the respondent in refusing to determine the tax liability of the petitioner and Hamilton & DeLoss, Inc., on the basis1929 BTA LEXIS 2211">*2226 of consolidated returns. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625173/	Harry F. Guggenheim and Estate of Alicia P. Guggenheim, Deceased, Harry F. Guggenheim, Dorothy J. Holdsworth, and Morgan Guaranty Trust Company of New York, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentGuggenheim v. CommissionerDocket No. 4416-64United States Tax Court46 T.C. 559; 1966 U.S. Tax Ct. LEXIS 65; August 9, 1966, Filed 1966 U.S. Tax Ct. LEXIS 65">65 Decision will be entered under Rule 50. Petitioner was engaged in the business of breeding and racing thoroughbred horses. He formed a syndicate to share in the ownership of a valuable stallion held by him for breeding purposes. Ownership of the stallion was split into 35 indivisible parts by the syndication, each part being represented by a share. Petitioner retained 20 shares and sold 15 shares. Held, the sale of such shares by petitioner was the sale of livestock held for breeding purposes and therefore the sale of property used in petitioner's trade or business within the meaning of section 1231, I.R.C. 1954. Robert W. Wales, for the petitioner.Paul H. Frankel, for the respondent. Simpson, Judge. SIMPSON46 T.C. 559">560 Respondent determined deficiencies in income tax of $ 78,061.47 for the taxable year 1958 and $ 322,298.91 for the taxable year 1959. The only issue for decision is whether petitioner's sale of shares in a syndicate relating to the stallion "* Turn-To" 1 resulted in his receipt of ordinary income or whether such sale was a sale or exchange of property used in a trade or business as defined in section 1231(b) of the Internal Revenue Code of 1954. 21966 U.S. Tax Ct. LEXIS 65">67 FINDINGS OF FACTSome of the facts were stipulated, and those facts are so found.The petitioners are Harry F. Guggenheim and the Estate of Alicia P. Guggenheim, deceased, Harry F. Guggenheim, Dorothy J. Holdsworth, and Morgan Guaranty Trust Co. of New York, executors. When used in the singular, "petitioner" refers to Harry F. Guggenheim. Harry F. Guggenheim and Alicia P. Guggenheim were husband and wife and filed joint income tax returns, using the cash method of accounting for 1958 and 1959 with the district director of internal revenue, Manhattan, N.Y. Alicia P. Guggenheim died on July 2, 1963.Petitioner is the senior member of the mining firm of Guggenheim Bros., the editor and publisher of Newsday, and is, and has been for a number of years, engaged in the business of breeding and racing thoroughbred horses under the name "Cain Hoy Stable." Turn-To is a thoroughbred stallion that was born in 1951 and purchased by petitioner on July 31, 1952, as a yearling, for $ 20,000. In 1953, * Turn-To won the Garden State Stakes, then the richest race in the world for 2-year-old horses, and his total earnings for the year exceeded $ 175,000. During the first part of 1954, racing as1966 U.S. Tax Ct. LEXIS 65">68 a 3-year-old, Turn-To won over $ 100,000. However, after winning the Flamingo Stakes in Florida during that year, * Turn-To suffered an injury and was thereafter held and used by the petitioner for breeding purposes.On April 12, 1954, * Turn-To was sent by petitioner to stand at stud at Claiborne Farm, Paris, Ky., which is owned and operated by A. B. Hancock, Jr. * Turn-To remained at Claiborne Farm until December 5, 1960, on which date he was sent, by the decision of the petitioner, 46 T.C. 559">561 to Spendthrift Farm, Lexington, Ky., which is owned and operated by Leslie Combs II. Turn-To has since been kept at Spendthrift Farm. Both of these farms are independent establishments unrelated to petitioner, and both farms stand many horses of their own, as well as horses owned by other horse breeders.* Turn-To's stud fee for a "service" or "season" was $ 3,500 for the 1955 breeding season. 3 In his first year at stud, * Turn-To sired the colt First Landing, which was foaled in 1956 and won the Garden State Stakes in 1958. The total winnings of First Landing exceeded $ 750,000. Other successful colts sired by * Turn-To include Waltz, Hail To Reason, Rideabout, Sir Gaylord, Cyane, 1966 U.S. Tax Ct. LEXIS 65">69 Dead Ahead, Hoist Him Aboard, and Lucky Turn.When a horse first goes to stud, its stud fee is predicated in large part on its prior success in racing, and after the horse has been at stud for a sufficient number of years that its offspring are actively engaged in racing, the value of a stud horse and its stud fee are based on the quality and number of its offspring and their success at the race track.Due to the success of Turn-To's offspring in racing, * Turn-To's stud fee was increased to $ 5,000 for a season in 1959. The advertised fee for a season in 1960 was $ 10,000. Since 1960, seasons have been sold for $ 12,000, $ 12,500, and $ 15,000. The value of the stallion also increased. In 1955, petitioner insured * Turn-To for $ 200,000; in 1958, the insurance on his interest in the horse was increased to $ 500,000; 1966 U.S. Tax Ct. LEXIS 65">70 and, in 1960, to $ 850,000.It is customary in the thoroughbred breeding industry to agree to require payment of the fee for a stud service only when the mare is known to be pregnant, and the usual agreement provides that the fee is to be returned if the mare does not bear a live foal as the result of the breeding.The petitioner reported as ordinary income the following amounts from Turn-To's stud fees: $ 59,500 for 1955, $ 63,000 for 1956, $ 63,000 for 1957, and $ 63,000 for 1958. Petitioner also bred several of his own mares to * Turn-To during these years.In January 1958, petitioner entered into five agreements, which were alike except for the name and address of the party of the second part, with five different individuals. Under these agreements, petitioner retained "complete, sole and exclusive right of management and supervision" of * Turn-To. The parties of the second part received the right to breed one thoroughbred mare each year to * Turn-To for the rest of * Turn-To's life. For years when * Turn-To can be bred less than five times, the parties of the second part are to draw lots for the available seasons. The owners of the lifetime seasons have insurable interests1966 U.S. Tax Ct. LEXIS 65">71 46 T.C. 559">562 in their rights under the lifetime seasons agreements. Annual rights to breed with * Turn-To can be sold by the owners of the lifetime seasons, and the lifetime seasons can be sold or assigned to third parties. Petitioner received, during 1958, $ 22,500 under each of these agreements.On October 20, 1958, after First Landing won the Garden State Stakes, petitioner entered into an agreement, captioned "* Turn-To Syndicate Agreement," with 15 persons who executed counterparts thereof. The agreement was the result of arm's-length dealing with persons who were not related by blood or marriage to the petitioner. Pursuant to the agreement, each of the 15 individuals or entities agreed to pay petitioner $ 40,000, $ 10,000 of which was payable in 1958 and the balance payable subsequently. The payments were made as agreed, and petitioner received $ 150,000 during 1958, $ 420,000 during 1959, and $ 30,000 in subsequent years. Petitioner reported the amounts he received under this agreement as being taxable as long-term capital gains. In this connection he included in his net long-term capital gains amounts aggregating $ 148,317.07 for 1958 and $ 415,287.78 for 1959.The * Turn-To1966 U.S. Tax Ct. LEXIS 65">72 Syndicate Agreement purported to sell undivided interests in the stallion. It provides that the ownership of Turn-To shall be in 35 shares, petitioner retaining 20 shares (5 of which were reserved for fulfillment of the lifetime seasons) and the 15 individuals or entities each purchasing 1 share. Each of the 35 shares is on an equal basis with all other shares and is indivisible, with only a full share representing ownership of an undivided one-thirty-fifth interest in * Turn-To.Under the agreement, * Turn-To must stand and be kept and maintained at such farm or breeding establishment in central Kentucky as the petitioner shall select. Petitioner, or his designated representative, has the complete, sole, and exclusive right of management and supervision of * Turn-To. Petitioner paid the prevailing rate for the keep and maintenance of the stallion, and all costs and expenses incident thereto, from the date of the agreement through January 1, 1960. Since January 1, 1960, each shareholder has been obligated to pay his proportionate share of all charges, costs, and expenses incurred for the keep, maintenance, and advertising of the stallion. This proportionate share amounted 1966 U.S. Tax Ct. LEXIS 65">73 to $ 135.34 in 1960, $ 163.32 in 1961, $ 149.74 in 1962, and $ 169.96 in 1963.In the discretion of petitioner, as the "syndicate manager," one free annual service to Turn-To can be given to the owner or operator of the farm or breeding establishment at which the stallion is standing.Under the agreement, petitioner, as syndicate manager, or his designated representative, shall advertise the stallion, select the veterinarian for the stallion, and establish the annual stud fee and terms and conditions of service. Thus far, the farm at which * Turn-To has stood has 46 T.C. 559">563 performed the first two of these duties, and Turn-To's stud fee has not been raised since 1960, although several services have been sold by shareholders at higher amounts.Should petitioner die or resign as syndicate manager during the continuance of the agreement, his successor is to be selected by the shareholders, with each shareholder being entitled to cast one vote for each share owned by him in the stallion. Petitioner, or, if deceased, his personal representative, would be entitled to cast one vote for each share then owned by him or his estate, including five votes for the five reserved shares.The 1966 U.S. Tax Ct. LEXIS 65">74 agreement further provides that the syndicate manager, or his designated representative, shall employ, or cause to be employed, the usual and customary care in standing, keeping, and maintaining Turn-To, but shall not be responsible for any injury to, or disease or death of the stallion, nor for any injury to, disease, or death of any mare resulting from the breeding or attempted breeding to the stallion.The owner of each full share in * Turn-To is entitled, during the breeding season of 1960 and each breeding season thereafter, to breed, without charge, one thoroughbred mare (in sound breeding condition and free from infection and disease) for each share each year.If the veterinarian attending * Turn-To at any time certifies that in his opinion it would be in the best interest of * Turn-To to be bred to less than 35 mares in any season, then the holders of the five lifetime seasons are entitled to the first available seasons. The shareholders in the stallion are then entitled to the remaining reduced number of seasons, to be determined by lot. Each shareholder drawing a blank for a preceding season is entitled to a service, without drawing, before any owner who drew a positive1966 U.S. Tax Ct. LEXIS 65">75 slip in the preceding season is entitled to participate.If the veterinarian attending Turn-To certifies that in his opinion * Turn-To can be bred to more than 35 mares in any year, additional yearly seasons ("excess seasons") may be sold by the syndicate manager, or his designated representative, and the proceeds from any such sales may be credited upon the account for the board, keep, maintenance, advertising, and other expenses of the stallion, or divided proportionately among the shareholders, as the syndicate manager shall elect. Each shareholder received as his proportionate share of the proceeds from the sale of excess seasons $ 571.43 in 1960, $ 571.42 in 1961, $ 1,142.85 in 1962 ($ 285.71 was refunded because a mare serviced was found to be barren), and $ 285.72 in 1963. The expectation by a shareholder of profits from the sale of excess seasons depends on the intentions of the syndicate and the syndicate manager, who may believe that their interests would be best served by limiting the number of excess seasons sold. In 1961, each shareholder of * Turn-To received his proportionate share of an award received by * Turn-To in the 1961 46 T.C. 559">564 National Stallion Stakes, 1966 U.S. Tax Ct. LEXIS 65">76 sponsored by the New York Racing Association. * Turn-To was entered in the Stakes by Claiborne Farm, and the syndicate received a $ 3,300 breeders award because Sir Gaylord, an offspring of * Turn-To, won the colt division of the race.Each shareholder in the syndicate is entitled to sell his share subject to a right of first refusal in the other shareholders. A shareholder who wishes to sell his share must notify the syndicate manager, who must in turn notify the other shareholders that a share is being offered for sale. If none of the shareholders desires to purchase the share at the price being offered by the prospective purchaser, the selling shareholder may go forward with the sale. If more than one shareholder desires to purchase the additional share, the shareholder entitled to purchase is determined by drawing lots.The agreement also provides that a shareholder may sell his annual season to the stallion at a price not less than the advertised stud fee for a season. The shareholder must notify the syndicate manager that he intends to sell a season, and the syndicate manager prepares a standard contract to be used by all shareholders for the sale of seasons. A shareholder1966 U.S. Tax Ct. LEXIS 65">77 in Turn-To may trade a season for a season to another stallion in his discretion, but notice of a trade must be given to the syndicate manager.The syndicate manager is not responsible for insuring * Turn-To, but any shareholder may insure his share or shares in the stallion for his own benefit. Some, if not all, of the shareholders have insured their interests in * Turn-To. The syndicate manager must furnish each shareholder with an annual statement showing the results of the preceding breeding season and the receipts and expenditures of the preceding calendar year.If a syndicated horse stands in Kentucky, a shareholder must pay the Kentucky ad valorem taxes on livestock. In addition, a shareholder bears the risk of the horse dying, being injured, or becoming diseased, as well as the risk that the horse will not prove to be a good breeder. The primary reason that a purchaser of a share in a syndicated stallion held for breeding purposes makes a purchase is to gain access to the stallion, either for his own use or to sell or trade the share or the rights that the share gives him.At the time of the sales of the syndicate shares in * Turn-To, the future income of * Turn-To could1966 U.S. Tax Ct. LEXIS 65">78 not be predicted with reasonable accuracy beyond a period of about a year, and there is no generally accepted rule in the industry for basing an estimate of a horse's value solely on current or estimated future earnings. With a fertile horse and a mare with a good production record, a foal can be expected from a service 2 out of 3 years. Generally, a stallion is presumed to be useful at stud until he is 15 to 17 years old or more.46 T.C. 559">565 Between October 20, 1958, the date of syndication, and December 31, 1964, a number of shareholders in the * Turn-To syndicate transferred their shares at prices ranging from $ 40,000 to $ 60,000. These transfers were accomplished by the payment of the purchase price from the transferee to the transferor, the return of the transferor's counterpart of the syndicate agreement to petitioner, and the entering into a new counterpart between the petitioner and the transferee. The transferees did not participate in the preparation of the new counterpart, which, in all cases, was substantially identical to the original counterparts.After the syndication of * Turn-To, petitioner, on his records, stopped taking depreciation on the entire horse and began1966 U.S. Tax Ct. LEXIS 65">79 taking depreciation on only a four-sevenths interest. Some, if not all, of the shareholders capitalized their interests in the horse after the purchase of the shares and depreciated those interests.OPINIONPetitioner contends that the gain received by him from the sale of shares in the "syndication" of Turn-To should be taxed as long-term capital gain. His reasoning is that the shares represent undivided ownership interests in * Turn-To, and therefore, what was sold was ownership of a horse. A horse is livestock within the meaning of section 1231(b)(3) and, since the horse was held by petitioner for breeding purposes, is property used in the trade or business. Accordingly, petitioner argues that the gain on the sale of the shares should be taxed, as provided in section 1231(a), as gain from the sale of a capital asset held for more than 6 months.Respondent contends that, in substance, what petitioner sold were the mere rights of breeding mares to * Turn-To and that such rights, since petitioner was in the business of selling breeding rights, are excluded from treatment as section 1231 property. Respondent also contends that, regardless of the characterization of what was 1966 U.S. Tax Ct. LEXIS 65">80 sold, the sale transaction does not qualify as a sale of section 1231 property since the consideration petitioner received for the sale was essentially a lump-sum substitute for future stud fees, which would have been ordinary income if received.Section 1231(b), in relevant part, defines "property used in the trade or business" as follows:SEC. 1231. PROPERTY USED IN THE TRADE OR BUSINESS AND INVOLUNTARY CONVERSIONS(b) Definition of Property Used in the Trade or Business. -- For purposes of this section -- (1) General rule. -- The term "property used in the trade or business" means property used in the trade or business, of a character which is subject 46 T.C. 559">566 to the allowance for depreciation provided in section 167, held for more than 6 months, * * * which is not --* * * (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or * * (3) Livestock. -- Such term also includes livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for 12 months or more from the date of acquisition. Such term does not include poultry.The parties agree that something was1966 U.S. Tax Ct. LEXIS 65">81 sold by reason of the syndication of * Turn-To but do not agree on what was sold. The syndication agreement purports to pass undivided ownership interests, and while the form and language of the agreement are not conclusive as to the true character of the transaction, they are of some relevance. See Comtel Corp., 45 T.C. 294">45 T.C. 294 (1965). Moreover, the actions of the parties were consistent with the sale of undivided ownership interests. Petitioner, on his records, stopped taking depreciation on the entire horse and began taking depreciation on only a four-sevenths interest. Some of the shareholders, if not all, capitalized their interests in the horse after the purchase of the shares and depreciated those interests. Petitioner, after the syndication, insured only his interest in the horse. Some of the shareholders, if not all, insured their interests in the horse after the purchase of the shares.However, respondent contends that we should not be guided by the form of the transaction, but that its substance should determine the incidence of taxation; we agree that we should not be guided wholly by the form. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945).1966 U.S. Tax Ct. LEXIS 65">82 Respondent argues that petitioner and his veterinarian decided that Turn-To could be bred to approximately 40 mares a year. Therefore, when the ownership was divided into 35 shares, each shareholder essentially received only the right to breed 1 mare per year to * Turn-To. The few additional seasons were used to give one season to the farm at which * Turn-To was standing and, through selected sales, to offset the expenses of * Turn-To's maintenance. Hence, there was little likelihood that a shareholder would receive any significant amount of income from * Turn-To's breeding activities or incur any significant amount of expense. The shareholders primarily received only the right to breed mares to * Turn-To. In addition, petitioner reserved five shares specifically for the purpose of taking care of the prior sale of five lifetime seasons. 4 Further, petitioner not only retained control of * Turn-To through his retention of a majority of the shares and his 46 T.C. 559">567 self-appointment as syndicate manager, but he also retained possession of Turn-To through his power to name the farm, within geographical limits, at which * Turn-To must stand.1966 U.S. Tax Ct. LEXIS 65">83 Respondent's argument merits serious consideration. The differences between ownership of property having a limited life and the right to the full enjoyment and use of that property for its life are not appreciable. It can be argued that there are no significant economic differences. However, the tax law treats the sale of capital assets or section 1231 assets very differently from the realization of business income, and therefore, we must place this transaction in one category or the other.Petitioner retained effective control and possession of Turn-To. Such retention is consistent with the sale of lifetime rights to use * Turn-To, but it is also consistent with the sale of minority ownership interests in the horse. If, then, we look only at the rights and obligations of petitioner, we see no significant differences between the sale of minority interests in * Turn-To and the sale of lifetime rights to use the horse. In the sale of both, petitioner would relinquish absolute control over the horse in that he could not disregard the interests of the purchasers. Since there are no significant differences in petitioner's rights and obligations between the sale of minority ownership1966 U.S. Tax Ct. LEXIS 65">84 interests and the sale of lifetime rights for the use of Turn-To, the retention of such control does not persuade us to alter the form of the transaction.An examination of the rights and obligations of a purchaser of a minority ownership interest in * Turn-To, as opposed to the rights and obligations of a purchaser of a lifetime season in * Turn-To, does reveal significant differences. Both the purchasers of shares and the purchasers of lifetime seasons receive the right to breed one mare a year to * Turn-To. Both can sell or trade these seasons. Both receive interests that are insurable. But a shareholder shares in the expenses of maintaining * Turn-To; a lifetime season holder does not. A shareholder is entitled to share in any profits earned by the horse, including the proceeds of the sale of excess seasons; a lifetime season holder is not. A shareholder may be subject to liability for damages as a result of his ownership; a lifetime season holder is not. A shareholder must pay the Kentucky ad valorem taxes on livestock; a lifetime season holder does not. Should petitioner resign as syndicate manager, a shareholder is entitled to vote for his successor; a lifetime season1966 U.S. Tax Ct. LEXIS 65">85 holder is not. And, each shareholder has a right of first refusal to purchase the share of any other shareholder who wishes to sell his share; an owner of a lifetime season has no such right.We agree with respondent that, due to the arrangement of the syndicate, the rights and obligations of a shareholder may have no substantial economic value above and beyond the rights and obligations 46 T.C. 559">568 of a lifetime season holder. However, they are substantive indicia of ownership, and, when combined with the form of the transaction, lead us to believe that the property interests transferred by the syndication agreement should be considered undivided ownership interests in * Turn-To.Respondent next argues that even if the sale of shares in * Turn-To was the sale of undivided ownership interests in the stallion, such a sale still cannot be considered a sale or exchange of section 1231 property in view of the construction that the Supreme Court has placed upon that section and section 1221 in the cases of Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260 (1958); Corn Products Co. v. Commissioner, 350 U.S. 46">350 U.S. 46 (1955); and1966 U.S. Tax Ct. LEXIS 65">86 Commissioner v. Gillette Motor Co., 364 U.S. 130">364 U.S. 130 (1960).In the Lake case, the taxpayer corporation had a working interest in two commercial oil and gas leases. In return for cancellation of a debt to its president, the taxpayer assigned him an oil payment right in the amount of $ 600,000 plus an amount equal to interest at 3 percent a year on the unpaid balance. The oil payment right was payable out of 25 percent of the oil attributable to the taxpayer's working interest in the two leases. At the time of the assignment, it could have been estimated with reasonable accuracy that the assigned oil payment right would pay out in 3 or more years, and it did in fact pay out in a little over 3 years. In other words, the taxpayer "carved out" of his property interest a lesser interest, limited in duration and ascertainable with considerable accuracy, so that in time the taxpayer recovered the full interest to the same extent as before the assignment. The Court stated at pages 265-266:We do not see here any conversion of a capital investment. The lump sum consideration seems essentially a substitute for what would otherwise be received at a future1966 U.S. Tax Ct. LEXIS 65">87 time as ordinary income. The pay-out of these particular assigned oil payment rights could be ascertained with considerable accuracy. * * * cash was received which was equal to the amount of the income to accrue during the term of the assignment, the assignee being compensated by interest on his advance. The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.These arrangements seem to us transparent devices. Their forms do not control. Their essence is determined not by subtleties of draftsmanship but by their total effect. * * Respondent places heavy reliance on the phrase in Lake, "essentially a substitute for what would otherwise be received as ordinary income." Respondent argues that petitioner would have received, if he had retained full ownership of Turn-To, stud fees from the sale of annual seasons that would have been taxable as ordinary income. Respondent also argues that petitioner1966 U.S. Tax Ct. LEXIS 65">88 established his price for a share 46 T.C. 559">569 in * Turn-To in large part on the basis of a capitalization of the expected future earnings of * Turn-To. Therefore, respondent argues, petitioner essentially received a lump-sum substitute for what would otherwise have been received as ordinary income.We do not believe that the rationale of Lake is applicable to the present case. Simply because the property transferred will produce ordinary income, and such income is a major factor in determining the value of the property, does not necessarily mean that the amount received for the property is essentially a lump-sum substitute for ordinary income. See, United States v. Dresser Industries, Inc., 324 F.2d 56 (C.A. 5, 1963); Commissioner v. Ferrer, 304 F.2d 125 (C.A. 2, 1962), reversing in part 35 T.C. 617">35 T.C. 617 (1961); Metropolitan Building Co., 31 T.C. 971">31 T.C. 971 (1959), acq. 1959-2 C.B. 6, reversed in part 282 F.2d 592 (C.A. 9, 1960); Surrey, "Definitional Problems in Capital Gains Taxation," 69 Harv. L. Rev. 985 (1956).1966 U.S. Tax Ct. LEXIS 65">89 The Court in Lake was faced with the problem whether a transfer of part of a capital asset is itself the transfer of a capital asset. That part was defined and delineated by the taxpayer in such a manner as to consist essentially of only the rights to income. The transferee assumed few of the risks identified with the holding of a capital asset; he assumed only a nominal risk of his oil payment right decreasing in value and none of the possibility of the oil payment right increasing in value. On the other hand, the taxpayer, after the transfer, retained essentially all of the investment risks involved in his greater interest to the same extent as before the transfer.In other words, since we are attempting to ascertain whether a capital asset is being transferred, it is often easier to see if the investment risks identified with the holding of such an asset are transferred. In Lake, essentially what was transferred was the right to receive ordinary income, and few of the risks involved in holding the property or asset that was the source of the income were transferred. However, in this case, petitioner transferred all investment risks in a three-sevenths interest in 1966 U.S. Tax Ct. LEXIS 65">90 Turn-To. If the value of Turn-To had subsequently increased (and there is evidence that it did), petitioner would not have shared in this increase to the same extent as he would have before the syndication. The shareholders, as to their interests, would have received all of the benefit of an increase in the value of * Turn-To. Likewise, the shareholders, as to their interests, would have received all of the burden of any decrease in the value of * Turn-To.The second case on which respondent relies, 350 U.S. 46">Corn Products Co. v. Commissioner, supra, involved a taxpayer which purchased and sold corn futures as an integral part of its business. The taxpayer entered into these futures transactions to assure an adequate supply of corn and to protect its manufacturing operation against a price increase in this principal raw material. The Court stated that "Congress intended 46 T.C. 559">570 that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss."The corn futures which were bought and sold by Corn Products Co. were property not specifically excluded from the statutory 1966 U.S. Tax Ct. LEXIS 65">91 definition of capital assets. However, the taxpayer had not purchased the corn futures for investment purposes and then sold for the purpose of terminating such investments. Rather, the taxpayer had bought and sold the corn futures as an integral part of its business. The transactions were business operations and not capital transactions.Respondent attempts to use Corn Products by arguing, once again, that petitioner did not sell ownership interests but sold lifetime breeding rights. Respondent then states that selling breeding rights, either year-by-year or for the life of the horse, was an integral part of petitioner's breeding business, and the acquisition of shares by the shareholders was at least partly made to assure them access to * Turn-To for all future years.Corn Products was not concerned with the purposes of the purchasers of the corn futures from the taxpayer. So here, we are not concerned that the shareholders may have purchased shares in * Turn-To to assure themselves seasons furnished by the stallion. Instead, we are concerned with the horse-breeding business of the petitioner and the relationship between the sale of the syndicate shares and that business. 1966 U.S. Tax Ct. LEXIS 65">92 In Corn Products, the Supreme Court concluded that the purchase and sale of the corn futures were not capital transactions because the company engaged in such transactions in order to further its trade or business. However, we find no such purpose on the part of the petitioner in selling the syndicate shares. He purchased a horse, raced the horse as long as it was fit for this purpose, retired the horse to stud, and several years thereafter sold ownership interests in the horse. Thus, in the transaction with which we are concerned, the petitioner was merely liquidating a part interest in livestock held for breeding purposes, and was not selling property for the purpose of furthering his horse-breeding business.The third case on which respondent relies, 364 U.S. 130">Commissioner v. Gillette Motor Co., supra, involved a temporary taking of the taxpayer's property by the Government. During the latter part of the Second World War, the Government took over the control and operation of Gillette's facilities for approximately 10 months. Gillette was awarded compensation for the takeover, based on the fair rental value of the facilities. Gillette argued that1966 U.S. Tax Ct. LEXIS 65">93 the takeover by the Government was a transfer of what is now section 1231 property, but the Court stated that though a property interest was transferred, such interest was merely an incident -- the right to use the facilities -- of the underlying physical property. The Court then stated that this property interest, even 46 T.C. 559">571 though not specifically excluded from the definition of property used in the trade or business, was not the type of property to which Congress had intended to accord capital gain treatment. The Court noted that the taxpayer had no investment in the property interest transferred, and the interest was "manifestly not of the type which gives rise to the hardship of the realization in one year of an advance in value over cost built up in several years."The Gillette case is fully consistent with Lake. In Gillette, there was not a complete termination of even a part of the taxpayer's investment in its facilities with the risks involved in such an investment. No substantial investment risks were transferred to the Government, which indicates that there was no transfer of a capital or income-producing asset. The Court stated that if the Government1966 U.S. Tax Ct. LEXIS 65">94 had taken a fee in the property, the result would have been different. In other words, some investment risks would have been transferred to the Government.In the present case, substantial investment risks involved in the ownership of * Turn-To were transferred to the shareholders. We accordingly believe that petitioner did transfer the type of asset that Congress intended to receive capital gain treatment. The value of * Turn-To increased over a substantial period of time, and the interests transferred were of the type that gives rise to the hardship of the realization in 1 year of an advance in value over cost built up in several years.Respondent makes a further argument as to why petitioner's gain from the sale of the syndicate shares should be denied capital gain treatment. This argument is that where property is purchased to reach underlying assets to be used in a trade or business, or for ordinary business purposes, the property is not, in the hands of such a purchaser, a capital asset. John J. Grier Co. v. United States, 328 F.2d 163 (C.A. 7, 1964); Western Wine & Liquor Co., 18 T.C. 1090">18 T.C. 1090 (1952), acq. 1966 U.S. Tax Ct. LEXIS 65">95 1958-1 C.B. 6, appeal dismissed 205 F.2d 420 (C.A. 8, 1953). Respondent would apply this argument here since the primary purpose of the shareholders in acquiring shares was to obtain access to Turn-To. However, we are not here concerned with whether the syndicate shares would be capital assets in the hands of the shareholders. The cases cited by the respondent dealt with the purpose of the taxpayer in acquiring the property in question. Thus, those cases are only relevant in classifying the interests of the syndicate shareholders; they are not relevant in determining what kind of interests were sold by the petitioner.A further argument is made by respondent that even if the shares in the syndicate do represent ownership of a horse held for breeding purposes, the shares themselves were not held for breeding purposes but were held primarily for sale to customers in the ordinary course of petitioner's business. We believe that we have disposed of this argument by our holding that petitioner did sell undivided ownership 46 T.C. 559">572 interests in a horse held for breeding purposes. We cannot find that an undivided ownership interest1966 U.S. Tax Ct. LEXIS 65">96 is of a different character from a whole ownership interest. In effect, respondent here seems to be arguing that petitioner was not holding * Turn-To for breeding purposes but primarily holding the horse for sale, by way of the sale of shares, in the ordinary course of his business. But we have found as a fact -- a fact to which respondent stipulated -- that * Turn-To was held for breeding purposes.Respondent makes other arguments, regarding section 1231, based on the assumption that what petitioner transferred was in substance not undivided ownership interests in * Turn-To but future breeding rights to the horse. Since we have found that petitioner did, in substance, transfer undivided ownership interests in * Turn-To, it is not necessary to discuss the validity of these arguments. * Turn-To was livestock held by petitioner for breeding purposes and held by him for 12 months or more from the date of acquisition. Since the sale of undivided ownership interests in * Turn-To was the sale of property used in the trade or business, we conclude that it was a sale of a section 1231 asset.In order to reflect the agreement of the parties concerning other adjustments in the notice of1966 U.S. Tax Ct. LEXIS 65">97 deficiency,Decision will be entered under Rule 50. Footnotes1. The asterisk indicates that the horse was foreign bred.↩2. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩3. The words "service" and "season" are used interchangeably throughout this opinion. In the horse breeding industry, these words are used to describe the process of breeding a stallion to a mare.↩4. The tax treatment of the sale by petitioner of lifetime seasons in Turn-To is not before the Court. We are, however, for the purpose of presenting respondent's arguments in their strongest light, assuming, but not deciding, in this opinion that the sale of lifetime seasons would result in the receipt of ordinary income.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625174/	Grant-Jacoby, Inc., et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentGrant-Jacoby, Inc. v. CommissionerDocket Nos. 1159-77, 7236-77, 7237-77, 7238-77, 7239-77United States Tax Court73 T.C. 700; 1980 U.S. Tax Ct. LEXIS 202; January 16, 1980, Filed 1980 U.S. Tax Ct. LEXIS 202">202 Decision will be entered under Rule 155. C, a corporation, adopted an educational benefit plan, which provided for the payment of certain college expenses of the children of its key employees, and it made contributions under the plan during the years in issue. However, payments to the children of an eligible employee would cease upon the termination of his employment with C in most instances. Ps were employees whose children received disbursements under the plan during the years in issue. Held, the distributions from the plan to the children of Ps during the years in issue constituted deferred compensation to Ps and are includable in their income. Armantrout v. Commissioner, 67 T.C. 996">67 T.C. 996 (1977), affd. per curiam 570 F.2d 210">570 F.2d 210 (7th Cir. 1978). Held, further, the educational benefit plan is a deferred compensation plan within the meaning of sec. 404(a), I.R.C. 1954, and C is entitled to deductions for its contributions under the plan when the distributions are includable in the gross income of the employees. Paul A. Teschner, for the petitioners.Steven S. Brown1980 U.S. Tax Ct. LEXIS 202">205 , for the respondent. Simpson, Judge. SIMPSON73 T.C. 700">700 The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:PetitionersTaxable year endingDeficiencyGrant-Jacoby, Inc.8/31/73$ 5,6188/31/748,542Charles A. Norris12/31/7348012/31/741,477Robert Krewer andDolores Krewer12/31/7340512/31/74927Robert Lavender andSharon Lavender12/31/74370Robert L. Flink andDoris Flink12/31/731,76512/31/74873The issues for decision are: (1) Whether distributions under an 73 T.C. 700">701 employer-sponsored plan providing for payment of the educational expenses of children of certain key employees represent income received by such employees as dividends or compensation; and (2) if such distributions represent compensation, whether the deductibility of the employer contributions under the plan is governed by section 162(a) of the Internal Revenue Code of 19542 or by section 404(a)(5). The resolution of the latter issue will determine whether such contributions are deductible when made or when the distributions are received by the children.1980 U.S. Tax Ct. LEXIS 202">206 FINDINGS OF FACTSome of the facts have been stipulated, and those facts are so found.The petitioners, Charles A. Norris and Robert Lavender and Sharon Lavender (husband and wife), all maintained their legal residences in Chicago, Ill., at the time they filed their petitions in this case. The petitioners, Robert Krewer and Dolores Krewer, husband and wife, maintained their legal residence in Mt.Prospect, Ill., at the time they filed their petition in this case. The petitioners, Robert L. Flink and Doris Flink, husband and wife, maintained their legal residence in Lake Forest, Ill., at the time they filed their petition in this case. The petitioner, Grant-Jacoby, Inc. (Grant or the company), is a Delaware corporation which had its principal place of business in Chicago, Ill., at the time it filed its petition in this case. Mr. Norris filed his individual Federal income tax returns for 1973 and 1974 with the Internal Revenue Service Center, Kansas City, Mo. Mr. and Mrs. Krewer and Mr. and Mrs. Flink filed their joint Federal income tax returns for 1973 and 1974 with the Internal Revenue Service Center, Kansas City, Mo. Mr. and Mrs. Lavender filed their joint Federal income tax1980 U.S. Tax Ct. LEXIS 202">207 return for 1974 with the Internal Revenue Service Center, Kansas City, Mo. Grant used a taxable year ending August 31, and we shall identify its taxable year by the calendar year in which it ends. It filed its corporate Federal income tax returns for 1973 and 1974 with the Internal Revenue Service Center, Kansas City, Mo. Messrs. Norris, Krewer, 73 T.C. 700">702 Lavender, and Flink will sometimes be referred to as the petitioners.Throughout the years in issue and up to the time of the trial in this case, Grant was engaged in the advertising business. It emphasized business and corporate communications in the field of annual reporting. The company employed about 50 or 60 people during the years in issue.The petitioners were all executive employees of Grant. During 1973 and 1974, Grant had six officers, who were:Robert L. FlinkPresidentRobert KrewerExecutive vice presidentWilliam HarkinsVice presidentBruce I. CarlsonVice presidentCharles A. NorrisVice presidentRobert LavenderVice presidentThe members of the board of directors of Grant during such years were Robert L. Flink, Robert Krewer, Charles A. Norris, Bruce I. Carlson, Robert Lavender, and Walter O. Grant. 1980 U.S. Tax Ct. LEXIS 202">208 The shareholders of Grant during such years and the number and percentage of shares owned by each of them were as follows:19731974Number ofPercent ofNumber ofPercent ofshares owedissued stockshares ownedissued stockRobert L. Flink1,380291,38027Bruce I. Carlson8501885017Robert Krewer8501885017Charles A. Norris8501885017Robert Lavender7501675015William Harkins003006Hiroki Mizushima001002Total shares4,6805,080As a means of remaining competitive in the advertising business, and of attracting new talent to the company and maintaining its top creative employees, the board of directors of Grant decided to adopt an educational benefit plan for certain employees. The officers of the company had been considering various ways of maintaining the loyalty of its important employees, and its public accounting firm recommended the adoption of such a plan as a means of helping to tie the most valuable employees to the company. On August 27, 1973, Grant entered into an agreement with Educo, Inc. (Educo), whereby Educo would administer an "Educo plan" (the plan) which would 73 T.C. 700">703 1980 U.S. Tax Ct. LEXIS 202">209 provide funds for the college education of the children of certain Grant employees, and the board of directors approved the adoption of the plan on August 30, 1973.Educo, a Delaware corporation organized in 1967, has been engaged since its inception in designing, implementing, and administering college educational benefit plans for corporate employers. In December 1969, Educo entered into a trust agreement with the Continental Illinois National Bank & Trust Co. of Chicago (the trustee) with respect to the funding of Educo plans. Under the terms of the plan adopted by Grant, the company agreed to make payments to the trustee of the plan in accordance with the amounts determined by Grant and Educo. The trustee would hold and disburse the funds pursuant to the plan, and the contributions made by Grant were not refundable to it under any circumstances.The board of directors of Grant designated the employees who were eligible to have their children participate in the plan. Such employees were selected on the basis of their value to the company as determined by the board, and an employee was not included if his services, in the opinion of the board, could be replaced. Those employees1980 U.S. Tax Ct. LEXIS 202">210 who were not eligible were not informed of the plan. There was no limit on the number of children of an eligible employee who could participate in the plan. However, if an eligible employee terminated his employment with Grant by reason other than retirement, death, or disability, then the children of such employee could no longer receive benefits under the plan. The only employees of Grant who were eligible under the plan from the time the company adopted the plan in 1973 through August of 1977 were: Bruce I. Carlson, Robert L. Flink, Robert Krewer, Robert Lavender, and Charles A. Norris.In order to receive benefits under Grant's educational plan, a child of an eligible employee had to be accepted by an accredited school and had to maintain a level of performance sufficient to stay in school. The child did not have to pursue any particular course of study, nor was a child required to show financial need in order to be selected; a child had selected to participate in the plan solely because of the father's employment with Grant. The expenses which were covered under the plan included those for tuition, books, meals, lodging, medical care, and any other expense which Grant deemed1980 U.S. Tax Ct. LEXIS 202">211 necessary, reasonable, and related 73 T.C. 700">704 to the education of the child. To receive reimbursement for educational expenses under the plan, the child submitted a request for payment directly to Educo, and Educo requested the trustee to issue a check either to the child or to the educational institution attended by the child. A child of an eligible employee was required to use some of the educational funds available to him or her before reaching the age of 21 or within 4 years after completing the 12th grade of school. The participation of any child under the plan terminated after he or she attained the age of 30 years.Under the terms of its agreement with Educo, Grant's plan would terminate if the company failed to make payments to the trustee, if there were no longer any child or children to be covered under the plan, or if Grant elected to terminate the agreement upon 30 days written notice to Educo. Any amounts remaining in the trust at the termination of the plan were to be applied to any unpaid educational expenses incurred before such termination, or were to be distributed on a pro rata basis to the children enrolled in the plan at that time, or to a child or children1980 U.S. Tax Ct. LEXIS 202">212 selected by Grant, or to any qualifying school, hospital, or charity.The board of directors of Grant established the maximum benefits payable to a child and the contributions to be made by Grant under the plan. The original agreement executed by Grant provided for total benefits of $ 8,000 per child, with a maximum of $ 2,000 distributable per year. On July 12, 1974, Grant executed a new enrollment schedule which increased the total benefits per child to $ 12,000, with a maximum of $ 3,000 distributable per year. 3 The company increased its contributions to the trust to cover the increased benefits under the plan. Both the original and subsequent enrollment schedules executed by Grant provided that it would make payments of specified amounts to the trustee from 1973 through 1988. The new enrollment schedule provided for payments by Grant in the following amounts: 73 T.C. 700">705 YearAmount1974$ 17,796197519,150197618,900197717,325197817,325197916,800198016,800198116,8001982$ 12,60019839,45019843,15019853,15019863,15019873,15019883,150Grant contributed $ 11,704 to the plan in 1973 and $ 17,796 in 1974.1980 U.S. Tax Ct. LEXIS 202">213 The children of the petitioners who participated in the Grant educational plan received the following amounts during the years in issue:PetitionerChild19731974Charles A. NorrisBruce$ 1,000.00$ 2,953Robert KrewerKathleen0 100Christine1,124.002,225Robert LavenderRobin0 1,027Robert L. FlinkToren1,690.55175Richard1,842.001,570The petitioners did not include the amounts received by their children under the plan as income on their Federal income tax returns during the years in issue. With only two exceptions, each child was over the age of 18 at the time of receiving the first payment under the plan. 4 However, each of the petitioners claimed each child who received such payments as a dependent during the years in issue.Grant has used the plan as part of its recruitment program to obtain talented employees. 1980 U.S. Tax Ct. LEXIS 202">214 In 1977, the company informed Richard W. Scott, whom it was interested in hiring, that his children could participate in the plan if he worked for Grant. Mr. Scott subsequently went to work for the company, and the participation of his children in its educational plan was part of his reason for doing so. Mr. Scott was not a shareholder of Grant as of August 31, 1977, even though, later in that year, his son received disbursements under the plan. Moreover, as of the time 73 T.C. 700">706 of trial, the top employees at Grant, who were eligible under the plan since its adoption, have remained with the company. However, none of the petitioners could have bargained with the company to receive a larger salary in place of his eligibility in the plan, and none of the petitioners received a decrease in salary because of such eligibility. The salaries of the executive employees of Grant, including the petitioners, are established by the president and the board of directors of the company. Grant has never declared a dividend since its incorporation.Grant had taxable income of $ 122,702 in 1973 and $ 151,653 in 1974. For its 10 years ending in 1977, Grant's books and records show that it had1980 U.S. Tax Ct. LEXIS 202">215 net income (or loss) and retained earnings at the end of the year as follows:YearNet income (or loss)Retained earnings1968$ 49,000 $ 127,000196986,000 113,000197094,000 207,000197159,000 47,000197231,000 78,000197362,000 140,000197482,000 222,0001975(97,000)125,0001976(17,000)105,000197712,000 117,000On its corporate Federal income tax returns for the years in issue, Grant deducted as business expenses the amounts it contributed to the trustee under its educational plan. In his statutory notice of deficiency to Grant, the Commissioner disallowed such deductions. In his notices of deficiencies to the petitioners, the Commissioner determined that the amounts received by their children under the plan constituted unreported dividends from Grant. In the alternative, he determined that such amounts were unreported compensation from the company.OPINIONFirst, we shall consider whether the petitioners are taxable on the distributions made to their children under Grant's Educo plan. The Commissioner contends that such distributions are taxable to the petitioners either as dividends or as compensation. The petitioners1980 U.S. Tax Ct. LEXIS 202">216 maintain that such distributions do not represent 73 T.C. 700">707 income received by them in any event and that such distributions are neither dividends nor additional compensation.Armantrout v. Commissioner, 67 T.C. 996">67 T.C. 996 (1977), affd. per curiam 570 F.2d 210">570 F.2d 210 (7th Cir. 1978), involved a similar Educo plan, and we held that the distributions under such plan constituted additional compensation received by the employees who were the fathers of the children receiving the distributions. Our holding was based on the findings that the right to receive the benefits was linked to the continued employment of the father, that the eligibility of an employee to have the benefits paid to his children depended upon the value of the services performed by the employee, that the plan was adopted to provide greater motivation for key employees, and that the availability of the plan was used to recruit desired employees. In part, we said:It is fundamental that anticipatory arrangements designed to deflect income away from the proper taxpayer will not be given effect to avoid tax liability. United States v. Basye, 410 U.S. 441">410 U.S. 441 (1973);1980 U.S. Tax Ct. LEXIS 202">217 Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930). In substance, by commencing or continuing to be employed by Hamlin, petitioners have allowed a portion of their earnings to be paid to their children. Petitioners have acquiesced in an arrangement designed, at least in part, to shift the incidence of tax liability to third parties unconnected in any meaningful way with their performance of services. [67 T.C. 996">67 T.C. 1005.]The petitioners contend that this case is distinguishable from Armantrout because in that case, the Court found that the taxpayers had entered into "anticipatory arrangements" and that the plan was clearly a substitute for salary. They also contend that, unlike the record in Armantrout, the record in this case shows that the petitioners could not have bargained with Grant for the inclusion or exclusion of their children from the plan or for a larger salary or bonus in lieu of their children's participation in the plan. We are not convinced that there is any practical difference between the educational plan in Armantrout and the plan presented in this case.As in Armantrout, it is clear that the opportunity1980 U.S. Tax Ct. LEXIS 202">218 to have their children participate in the Educo plan of Grant was a valuable incident or reward for services rendered to Grant. Only those employees considered most valuable were eligible under the plan, and a child's participation in the benefits under the plan depended upon the father's continued employment by Grant. The existence of the plan was used to recruit and retain 73 T.C. 700">708 valuable employees, the benefits were substantial, and they served to motivate employees to become valuable to Grant. Thus, an eligible employee who began or continued to work for Grant with the knowledge that his children would receive benefits under the plan was in effect making an "anticipatory arrangement."It is true that in Armantrout, the Court found that the plan was a substitute for additional compensation and pointed out that there had been no showing that the employer and the employees could not have bargained for compensation in some different form. Yet, as we read the Armantrout opinion, those considerations were not determinative of the Court's final conclusion. A reading of the Court's entire opinion makes it clear that it would have reached the same conclusion irrespective1980 U.S. Tax Ct. LEXIS 202">219 of the presence of those facts.Similarly, the fact that the petitioners in this case could not bargain for eligibility in the Grant plan does not warrant a conclusion different from that in Armantrout. The opportunity to have the educational expenses of a child paid under the plan was a privilege which the petitioners received by reason of their employment by Grant, and as such, it represents additional compensation ( Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243 (1956)); it merely represents the payment of compensation in a different "form" ( Commissioner v. Smith, 324 U.S. 177">324 U.S. 177 (1945)). The existence of the plan was a part of the total package of compensation offered by Grant to recruit and retain certain key employees; had Grant not offered such plan, it would have been required to provide additional compensation in some other form to remain competitive as an employer. Many employees have no opportunity to bargain for compensation plans designed to their particular wishes: Pension or other benefits may be provided for employees even though a particular employee may not desire the particular benefit; nevertheless, he is taxable1980 U.S. Tax Ct. LEXIS 202">220 on the benefits that he receives as a result of his employment. United States v. Basye, 410 U.S. 441">410 U.S. 441 (1973).Moreover, all four of the petitioners were officers of the company and constituted four of the six members of its board of directors during the years in issue. As members of the board, the petitioners not only effectively controlled their own salaries, but also designated the employees who were eligible under the plan and the amount payable to each participating child. Hence, the 73 T.C. 700">709 petitioners were in a position to allow a portion of their compensation to be paid to their children. It is irrelevant that the petitioners could not have bargained with the company about their exclusion from the plan and the receipt of a larger salary. The fact remains that they controlled their membership in the plan and the benefits paid to their children.The petitioners also argue that they did not receive any income as a result of the distributions under the plan to their children because the petitioners never had any right to receive such distributions themselves and because the payment of the educational expenses of their children did not provide1980 U.S. Tax Ct. LEXIS 202">221 an economic or financial benefit to them. They point to the facts that the petitioners never had a right to receive the educational benefits and that since under Illinois law, they were under no obligation to provide support for their children beyond the age of 18, the payment of the educational expenses of the children did not relieve the petitioners of any parental or other obligation. We reject such contentions since the payment of the educational expenses of the children provided a clear and substantial benefit for the petitioners resulting from their continued employment by Grant. Whether or not the petitioners had a legal obligation to furnish their children with a college education, it is clear that they felt a parental obligation to do so. Indeed, Mr. Krewer testified that one of the reasons why the company adopted the plan was to relieve its most valuable employees of the concern of providing a college education for their children. Also, two of the petitioners who testified, Messrs. Krewer and Flink, stated that they paid their children's college expenses before the adoption of the educational plan by Grant, and that they "possibly" or "probably" would have continued1980 U.S. Tax Ct. LEXIS 202">222 to do so if the company had not adopted the plan. Moreover, all the petitioners claimed as dependents their children who received disbursements under the plan. To conclude that the petitioners did not receive a taxable benefit by reason of the plan because there was no legal obligation for them to support their children would exalt form over substance and would ignore the realities of parental relationships in our times.We also do not accept the petitioners' contention that the Commissioner's determinations in this case deny them due process of law since the determinations seek to tax job-related "benefits" or "enjoyments" when the Commissioner does not 73 T.C. 700">710 seek to tax all taxpayers on similar job-related benefits. For the reasons already given, we are convinced that the benefits under the Educo plan constituted additional compensation received by the petitioners in this case. Whether the Congress and the Commissioner have properly concluded that some other types of job-related benefits should not be subjected to taxation involves questions not now before us. We lack sufficient evidence concerning the other benefits to which the petitioners refer to judge whether those1980 U.S. Tax Ct. LEXIS 202">223 other benefits are comparable and whether there are adequate reasons in fact or in policy for treating them differently under the tax laws. In any event, whether the legislative or administrative treatment of the other benefits is proper does not affect the tax treatment of the benefits received by the petitioners. See, e.g., Davis v. Commissioner, 65 T.C. 1014">65 T.C. 1014, 65 T.C. 1014">1022-1024 (1976). Our conclusion in this case is based solely on the record before us.In Armantrout, there is no indication that the Commissioner took the position that the benefits under the Educo plan represented dividends received by the parents of children. Here, the Commissioner has adopted that position. Yet, we are satisfied that the plan was adopted for business reasons, namely, to improve the morale of the key employees, to retain them, and to recruit other key employees. Accordingly, we hold that the benefits under the Educo plan adopted by Grant do not represent dividends received by the petitioners but that such benefits do constitute additional compensation received by them. As we held in Armantrout, section 83 is applicable to such compensation, and since the petitioners1980 U.S. Tax Ct. LEXIS 202">224 did not have vested rights in the contributions made by Grant to the trust under the plan, they are taxable when the funds are distributed to or on behalf of their children.Next, we must decide what provision of the Internal Revenue Code governs the deductibility of Grant's contributions under the Educo plan. The regulations under section 83 take the position that such section is applicable to the benefits received under an educational benefit plan similar to an Educo plan. Sec. 1.83-3(c)(4), example (2), Income Tax Regs. Section 83(h) relates to the deductibility of compensation subject to such section, but section 1.83-6(a)(3), Income Tax Regs., provides in part:In the case of a transfer to an employee benefit plan described in sec. 1.162-10(a) or a transfer to an employees' trust or annuity plan described in section 73 T.C. 700">711 404(a)(5) and the regulations thereunder, section 83(h) and this section do not apply.Neither party has challenged the validity of such provision of the regulations; nor has either taken the position that the deductibility of Grant's contributions is governed by section 83(h). They both treat the issue as one of deciding whether section 404(a)(5)1980 U.S. Tax Ct. LEXIS 202">225 or section 162 is applicable, and for purposes of deciding this case, we accept that presentation of the issue and express no opinion about the possible application of section 83(h) to educational benefit plans.Section 404(a) provides in part:(a) General Rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income); but, if they satisfy the conditions of either of such sections, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year:* * * * (5) Other plans. -- If the plan is not one included in paragraph (1), (2), or (3), in the taxable year in which an amount attributable to the contribution is includible in the gross income of employees participating in the plan, but, in the case of a plan in which more than one employee participates only1980 U.S. Tax Ct. LEXIS 202">226 if separate accounts are maintained for each employee.On the other hand, section 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Section 1.162-10(a), Income Tax Regs., provides in part:Amounts paid or accrued within the taxable year for dismissal wages, unemployment benefits, guaranteed annual wages, vacations, or a sickness, accident, hospitalization, medical expense, recreational, welfare, or similar benefit plan, are deductible under section 162(a) if they are ordinary and necessary expenses of the trade or business. * To be deductible under either section 404(a)(5) or section 162(a), the contributions to the plan must constitute ordinary and necessary expenses of carrying on the business of Grant; we are satisfied that the contributions meet such test. See W. M. Ritter Lumber Co. v. Commissioner, 30 B.T.A. 231">30 B.T.A. 231 (1934); McCoy-Brandt Machinery Co. v. Commissioner, 8 B.T.A. 909">8 B.T.A. 909 (1927); Elm City Cotton Mills v. Commissioner, 5 B.T.A. 309">5 B.T.A. 309 (1926). 73 T.C. 700">712 Thus, the only issue 1980 U.S. Tax Ct. LEXIS 202">227 is when are the contributions deductible: if Grant's plan is subject to section 1.162-10, Income Tax Regs., the contributions are deductible when made, but if such plan is subject to section 404(a)(5), the contributions are not deductible until the distributions under the plan are includable in the gross income of the employees. 5A similar issue was considered in Latrobe Steel Co. v. Commissioner, 62 T.C. 456">62 T.C. 456 (1974). Latrobe had adopted a union-negotiated plan providing regular and extended vacations for its employees, and the Commissioner argued that the extended vacations under such plan constituted deferred compensation within the meaning of section 404 so that the contributions to the plan were subject to section 404(a)(5). However, we held that the plan1980 U.S. Tax Ct. LEXIS 202">228 was not such a plan of deferred compensation but was a plan subject to section 1.162-10, Income Tax Regs. The Commissioner now urges us to reconsider our decision in Latrobe Steel and to overrule it.In Latrobe Steel, we carefully examined the legislative history surrounding the enactment of the predecessor of section 404(a). Based on such analysis, we concluded that the predecessor of section 404(a) was not intended to "apply to all plans that result in the deferral of compensation." (62 T.C. 456">62 T.C. 464.) The Court stated that "the phrase 'a plan deferring the receipt of compensation' contained in * * * [the predecessor of section 404(a)] should be interpreted to mean a similar plan deferring the receipt of compensation," and that "a plan deferring the receipt of compensation is subject to the rules of section 404(a) only if it is similar to the four types of plans enumerated." (62 T.C. 456">62 T.C. 464.) The Court then determined that the extended vacation plan in issue was not "similar to" a stock bonus, pension, profit-sharing, or annuity plan. The Court observed that such plan was "unlike either a pension or annuity plan since1980 U.S. Tax Ct. LEXIS 202">229 it is not designed to provide benefits to employees upon retirement," and that such plan was "unlike a profit-sharing or stock bonus plan since it is not designed to grant employees a share of the employer's profits and thereby create an incentive to contribute to the success of the employer." (62 T.C. 456">62 T.C. 465.)In asking us to reverse Latrobe Steel, the Commissioner 73 T.C. 700">713 overlooks the fact that section 404(a) and its predecessors have never been applied to all plans of deferred compensation. The plans described in section 1.162-10, Income Tax Regs., are also plans of deferred compensation. The services which earned an employee that right to receive dismissal wages may be performed in one year, but he may not receive the dismissal wages until many years later. Similarly, unemployment benefits and accident and health benefits may be paid years after the performance of the services to which they are attributable. Thus, as we said in Latrobe Steel, not all plans of deferred compensation are subject to section 404(a). In deciding whether a plan of deferred compensation is subject to section 404(a) or section 162, we held that such decision is1980 U.S. Tax Ct. LEXIS 202">230 to be based upon whether the plan is similar to a pension, annuity, profit-sharing, or stock bonus plan; if not, the plan is subject to section 1.162-10, Income Tax Regs. The Commissioner has failed to convince us that we should no longer follow our holding in Latrobe Steel. 61980 U.S. Tax Ct. LEXIS 202">231 In Citrus Orthopedic Medical Group v. Commissioner, 72 T.C. 461">72 T.C. 461 (1979), we considered another plan for the payment of educational benefits. In that case, the petitioner established an educational benefit plan, whereby the qualifying children of its key employees would receive cash benefits while attending a college or university. However, at all relevant times, two doctors, McElwee and Smith, were the corporation's sole shareholders, officers, and key employees. The children of the doctors did not have vested rights in the petitioner's contributions to the plan, and they received no disbursements from the plan during the years in issue. The petitioner claimed that it was entitled to deduct under section 162 its contributions to the trust which funded the plan. This Court rejected the petitioner's contention on two alternative grounds: (1) The Court found that the two doctors had retained absolute control over and responsibility for the investment and distribution of the trust funds; that the doctors could amend and terminate the plan at any time and 73 T.C. 700">714 require that all contributed funds be returned; and that the trustees of the plan, who 1980 U.S. Tax Ct. LEXIS 202">232 were the petitioner's attorneys, had no real power or authority over the plan. Therefore, the Court concluded that the contributions were not paid or incurred within the meaning of section 162(a) during the years in issue. (2) The Court stated that even if the contributions to the plan had economic meaning, the petitioner would not be entitled to a deduction in the years such contributions were made because the plan constituted a nonqualified deferred compensation plan under section 404(a)(5). Therefore, the Court held that under section 404(a)(5), such contributions would be deductible only in the year in which an amount attributable to the contributions was includable in the gross income of the employees participating in the plan. The Court observed that the plan was merely an attempt to defer the receipt and taxation of income until it was later needed to provide funds for the college education of the children of the two doctors. The Court also stated that "In effect, Citrus simply set aside a part of its 1974 and 1975 profits for the later education of the McElwee and Smith children in a manner 'similar' to the operation of a profit-sharing plan." (72 T.C. 461">72 T.C. 468.)1980 U.S. Tax Ct. LEXIS 202">233 The Commissioner argues that even if we continue to follow Latrobe Steel, the Grant plan is subject to section 404(a)(5) because it is in substance a nonqualified profit-sharing plan. In deciding whether a plan is "similar" to a profit-sharing plan, Latrobe Steel held that the test was whether the plan was "designed to grant employees a share of the employer's profits." Latrobe Steel Co. v. Commissioner, 62 T.C. 456">62 T.C. 465; Citrus Orthopedic Medical Group v. Commissioner, 72 T.C. 461">72 T.C. 468. In Latrobe Steel, the plan was negotiated by a union and was for the benefit of employees generally. However, the beneficiaries of the Grant plan were the owners of the corporation. In the years before us, all the beneficiaries were owners. 7 In addition, the beneficiaries in 1973 owned 100 percent of the stock, and in 1974, more than 90 percent of the stock of Grant. Moreover, the owners were also the directors of the company, and as such, they could increase, decrease, or expand the benefits under the plan as they saw fit.1980 U.S. Tax Ct. LEXIS 202">234 73 T.C. 700">715 For a plan to qualify as a profit-sharing plan under section 401, the contributions to the plan must be made out of profits. Sec. 1.401-1(b)(1)(ii), Income Tax Regs. A similar test is applied in determining whether the contributions to a plan are subject to section 404(a)(1), relating to pension plans, or section 404(a)(3), relating to profit-sharing plans. It is true that the board of directors of Grant decided on a schedule of contributions to be made to the Educo plan for a number of years and that such contributions were to be made irrespective of the profits of Grant. It is also true that contributions were in fact made in 1975 and 1976 even though, according to its books and records, Grant had no profits for those years. Yet, Grant had sufficient retained earnings to cover its contributions to the plan, and the board of directors could have terminated the plan if it had wished to do so. Moreover, in applying the "similar to" test of Latrobe Steel, there is no requirement that the contributions to a nonqualified profit-sharing plan be limited in exactly the same manner as the contributions to a qualified profit-sharing plan. For the purpose of determining1980 U.S. Tax Ct. LEXIS 202">235 whether the contributions to a plan should be currently deductible under section 162(a) or whether the deduction should be deferred under section 404(a)(5), it is more significant to look to whether the plan benefits employees generally or whether the plan is for the benefit of the owners; when the benefits are restricted to the owners, there is reason for requiring that the deduction be deferred until the distributions are made from the plan. Citrus Orthopedic Medical Group v. Commissioner, 72 T.C. 461">72 T.C. 468.Grant, of course, has the burden of proving that it is entitled to the deductions claimed by it. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). To carry such burden, it must show that its Educo plan was not a form of profit-sharing plan subject to section 404(a)(5). It made no attempt to show that the plan was not a type or profit-sharing plan. In this respect, its only argument was that the plan was established for and served substantial business purposes. We have found that the plan was adopted to improve the morale of the key employees, to retain them, and to 1980 U.S. Tax Ct. LEXIS 202">236 recruit other key employees. The existence of such conditions serves to establish that the Educo plan constituted a form of additional compensation and that it was not a program for the distribution of dividends. Yet, the existence of such conditions does not help in 73 T.C. 700">716 deciding whether the Educo plan was a type of profit-sharing plan subject to section 404(a)(5) or whether it was a plan described in section 1.162-10 of the regulations. Any employer-sponsored plan to permit its employees to share in its profits may further the employer's business objectives in the same manner as the Educo plan has assisted Grant. In view of the facts suggesting that the Grant plan was a profit-sharing plan, and in view of Grant's failure to show otherwise, we conclude and hold that the Grant plan was similar to a profit-sharing plan and that, therefore, the deductibility of the contributions is governed by section 404(a)(5).In Educo, Inc. v. Alexander, 557 F.2d 617">557 F.2d 617, 557 F.2d 617">622 (1977), the Seventh Circuit, in reference to plans administered by Educo, stated that such plans "are clearly characterizable as deferred-compensation plans." The issue before the Court of 1980 U.S. Tax Ct. LEXIS 202">237 Appeals in that case was whether Educo had sufficient grounds for an injunction to prohibit the Commissioner of Internal Revenue from issuing a revenue ruling in which he determined that educational benefit plans similar to those administered by Educo constituted deferred compensation plans. The court held that Educo's suit for an injunction was barred by section 7421, the Anti-Injunction Act, as a "suit for the purpose of restraining the assessment or collection of any tax." (557 F.2d 617">557 F.2d at 619.) The court stated that the determination of the IRS in the revenue ruling was a reasonable one, and therefore, it held that Educo could not obtain an injunction under the judicially created exception to such act which allows an injunction when "under no circumstances could the Government ultimately prevail" on the substantive merits of the controversy. (557 F.2d 617">557 F.2d at 621.) Although the Court of Appeals did not have to decide whether the Educo plan was a plan of deferred compensation within the meaning of section 404(a), the court's statements are consistent with and support our conclusion in this case.Decision will be entered under Rule1980 U.S. Tax Ct. LEXIS 202">238 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Charles A. Norris, docket No. 7236-77; Robert Krewer and Dolores Krewer, docket No. 7237-77; Robert Lavender and Sharon Lavender, docket No. 7238-77; Robert L. Flink and Doris Flink, docket No. 7239-77.↩2. All statutory references are to the Internal Revenue Code of 1954, as in effect during the years in issue, unless otherwise indicated.↩3. At the time the original agreement was executed, two of the participating children were in the 15th year of school, and one child was in the 14th year of school. Accordingly, such children were provided with maximum benefits of $ 4,000 and $ 6,000, respectively. When Grant executed the new enrollment schedule in 1974, the maximum benefits for such children were prorated accordingly.↩4. Kathleen Krewer was 17 when she received $ 100 from the plan on 11/22/74; Robin Lavender turned 18 years old 2 days after the payment she received on 8/8/74.↩5. The Commissioner concedes that if Grant's plan is subject to sec. 404(a)(5)↩, the requirements of such provision are satisfied and that Grant is entitled to deduct the contributions when the distributions are made under the plan.6. Sec. 404(b) was amended by sec. 133(b) of the Revenue Act of 1978 (92 Stat. 2783) to substitute the words "other plan" for the words "similar plan." In discussing such change, the Conference report states that a method of compensation "having the effect of a plan deferring the receipt of compensation does not have to be similar to a stock bonus, pension, profit-sharing, or annuity plan to be subject to the deferred compensation deduction-timing rules." H. Rept. 95-1800 (1978), 1978-3 C.B. (Vol. 1) 521, 540. However, the amendment is applicable only to taxable years beginning after 1978. Since the amendment is not applicable to the years at issue in this case, it presents no reason for changing our holding in Latrobe Steel↩.7. For the later years for which we have information, the beneficiaries continued to be shareholders. However, Mr. Scott became an employee in 1977, and from the information in the record, it is not clear whether he also became a shareholder.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625176/	Longhorn Portland Cement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. San Antonio Portland Cement Company, Petitioner, v. Commissioner of Internal Revenue, RespondentLonghorn Portland Cement Co. v. CommissionerDocket Nos. 109301, 109491United States Tax Court3 T.C. 310; 1944 U.S. Tax Ct. LEXIS 187; February 21, 1944, Promulgated 1944 U.S. Tax Ct. LEXIS 187">187 Decision will be entered under Rule 50. Petitioners were sued by the State of Texas for alleged violations of the antitrust statutes of that state. Although convinced they had a valid defense, petitioners, for business reasons, consented to the entry of judgment against them in compromise and settlement of the action. The judgment specifically stated that the entry thereof should not constitute or be construed as an admission in any degree of the truth or correctness of the alleged violations in whole or in part. Under the judgment each of the petitioners paid $ 50,000 to the state and paid attorney fees and legal expenses incident thereto. Held, the compromise payments and the attorney fees and legal expenses were ordinary and necessary expenses paid or incurred in carrying on a trade or business. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, followed. James H. Yeatman, Esq., H. I. Wilhelm, C. P. A., and A. N. Moursund, Esq., for the petitioners.Frank B. Appleman, Esq., for the respondent. Arnold, Judge. ARNOLD 3 T.C. 310">310 These consolidated proceedings involve deficiencies in income and excess profits taxes for 1939 as follows: 1944 U.S. Tax Ct. LEXIS 187">188 Docket No.Income taxExcess profitstax109301$ 10,389.43$ 2,023.4310949110,126.74NoneThe issue is whether amounts paid the State of Texas in compromise of a suit brought by the state, and attorneys' fees and expenses paid in connection therewith, are deductible as ordinary and necessary expenses paid or incurred in carrying on a trade or business under section 23 (a) (1) (A) of the Internal Revenue Code, as amended by section 121, Revenue Act of 1942.FINDINGS OF FACT.The petitioners are corporations organized under the laws of Texas. Prior, subsequent to, and during the taxable year they were engaged 3 T.C. 310">311 in the manufacture and sale of cement, each having gross sales for 1939 of approximately $ 2,000,000. Their income and excess profits tax returns for the taxable year were filed with the collector of internal revenue for the first district of Texas at Austin.During the taxable year each of the petitioners paid the State of Texas $ 50,000 in compromise of a suit by the state in which petitioners were defendants. The suit, numbered 62,298 on the docket of the District Court of Travis County, Texas, was captioned State of Texasv. San Antonio1944 U.S. Tax Ct. LEXIS 187">189 Portland Cement Company, et al. In connection with this suit the Longhorn Portland Cement Co. paid attorneys' fees during the taxable year of $ 15,010.40 and the other petitioner paid attorneys fees of $ 3,410.40.The suit referred to was one in which the state alleged that the defendants had violated the antitrust laws of the State of Texas in various respects set out in great detail in the petition filed September 21, 1939. By this suit the state sought to recover statutory penalties provided by articles 7426 to 7447 inclusive, Revised Civil Statutes of Texas, 1925, of from $ 50 to $ 1,500 per day from January 1, 1930, to the date of filing suit, a judgment canceling and forfeiting the charters of the defendants, a judgment establishing and foreclosing the lien given by the above articles against the property of the defendants, and a judgment against each defendant enjoining and restraining each from carrying out alleged agreements, conspiracies, trusts, and combinations, and for other general and special relief.The answer of each of the petitioners herein to said suit consisted of a general demurrer, a general denial, and a special denial that any acts, methods, or practices1944 U.S. Tax Ct. LEXIS 187">190 used in its business were used as a result of, or pursuant to, any agreement or for any unlawful purpose.No evidence was ever taken in said suit numbered 62,298.The officers and directors of the petitioners were advised by their respective counsel that they had a good defense, but they were induced to and did compromise the suit and paid the sum of $ 50,000 each to the state because of the following considerations:(a) From the advice and information given them by their attorneys they became convinced that it would cost less to so settle than the expense of carrying the litigation to its end, even though successful.(b) Disruption of their respective businesses would result from the attendance of officers at hearings for the taking of evidence and a long trial of the case.(c) Unfavorable publicity would result from the newspaper reports of the trial, which would have a damaging effect upon their businesses.(d) The injunctive relief sought by the state would not prevent them from carrying on business according to the prices charged and 3 T.C. 310">312 practices pursued so long as they did not act pursuant to any agreement with one another, or with any other competitor, and they contended1944 U.S. Tax Ct. LEXIS 187">191 that they had not made or joined in any agreement as to the conduct of their businesses.The judgment rendered on December 15, 1939, after specifically reciting in detail the agreement of the parties in compromise of said suit, provided in part as follows:* * * And it appearing to the Court that said agreement is proper and in keeping with the law in such cases made and provided, and that same should be approved, and that final judgment should be entered in keeping therewith, it is:FIRSTTherefore, Ordered, Adjudged and Decreed that the agreement heretofore entered into between the parties to this cause be and the same is hereby in all things approved.SECONDIt Is Further Ordered, Adjudged and Decreed that plaintiff, the State of Texas, have and recover of and from the defendants, San Antonio Portland Cement Company and Longhorn Portland Cement Company, jointly and severally, the sum of One Hundred Thousand ($ 100,000.00) Dollars in full satisfaction of all claims of the State of Texas for penalties for the alleged violations of law set out in Plaintiff's Original Petition, and in full satisfaction of all expenses of the Attorney General in investigating, instituting and preparing1944 U.S. Tax Ct. LEXIS 187">192 this cause for trial; and all costs of suit are hereby adjudged against the defendants, San Antonio Portland Cement Company and Longhorn Portland Cement Company, jointly and severally, but plaintiff shall not recover of and from the Gulf Portland Cement Company any sum of money whatsoever, nor shall any costs of suit be adjudged against defendant Gulf Portland Cement Company.THIRDIt Is Further Ordered, Adjudged and Decreed that the Clerk of this Court shall issue to each of the defendants in this cause, including the Gulf Portland Cement Company, a writ of injunction in full conformity with the provisions of said agreement, and that no bond shall be required of plaintiff.In January 1940, pursuant to said judgment, the District Court of Travis County permanently enjoined these petitioners, and the Gulf Portland Cement Co., defendants in that cause, from creating or becoming a part of any combination of capital, skill, or acts for the purpose of doing any of the things enumerated in the statutes as interdicted (said things being specifically enumerated). Petitioners were further enjoined from following by agreement various acts and practices enumerated in the judgment and writ of1944 U.S. Tax Ct. LEXIS 187">193 injunction, which acts and practices at least in part were alleged in the state's petition to have been committed, it being stipulated, however, that these petitioners were not enjoined from so doing, each acting independently of the other, except that the injunction applied to any acts "(E) Controlling or attempting to control the use of cement after title has passed from the shipper."3 T.C. 310">313 The judgment rendered in suit numbered 62,298 contains no express finding that petitioners and Gulf Portland Cement Co., or any of them, had violated the antitrust laws of the State of Texas or any provision thereof. The judgment embracing the compromise agreement, Exhibit E attached to the stipulation of facts, sets forth the denial of these petitioners that the practices used by them in carrying on their businesses were the result of any agreement, express or implied, or were followed for any unlawful purpose; and section III thereof reads as follows:IIIThis agreement is made by the parties hereto solely and only for the purpose of comprising and settling the matters involved in this suit, by and between the State of Texas, as plaintiff, and the defendants herein named, and it is expressly1944 U.S. Tax Ct. LEXIS 187">194 understood and agreed as a condition hereof, that neither this agreement nor the judgment to be entered thereon, nor any clause or provision of said agreement or judgment, shall constitute or be construed to be an admission or estoppel as against the various defendants herein as evidencing or indicating in any degree an admission of truth or correctness of the allegations in plaintiff's petitions contained in whole or in part.Prior to the filing of suit numbered 62,298, the State of Texas had filed on March 7, 1938, a suit numbered 59,685, captioned State of Texasv. Lone Star Cement Corporation, et al., in which the six cement companies then operating in Texas were made defendants, namely, Lone Star Cement Corporation, Longhorn Portland Cement Co., San Antonio Portland Cement Co., Southwestern Portland Cement Co., Trinity Portland Cement Co., and Universal Atlas Cement Co., alleging violations of the antitrust laws of Texas, seeking recovery of penalties, forfeiture of charters or rights to do business in Texas, as the case might be, establishment and foreclosure of alleged liens, and injunctive relief against alleged conspiracies and agreements.On November 12, 1938, the1944 U.S. Tax Ct. LEXIS 187">195 state filed an amended petition in suit numbered 59,685, continuing the suit against the four major companies but omitting petitioners therefrom.After the filing of such amended petition in suit numbered 59,685, evidence was taken therein at Los Angeles, New York, and Chicago, the record being voluminous, to wit, over 6,000 pages of stenographic record and over 3,000 pages of exhibits.Previous to October 4, 1939, an agreement to compromise suit numbered 59,685 was negotiated between the four major companies and the attorney general, but the major companies insisted that they should not be bound by injunctions unless their competitors were also bound on account of the adverse effect it would have on their business unless this was done. Suit numbered 62,298 was thereupon filed by the state against these petitioners, but they refused to agree to any compromise. Thereupon and on October 4, 1939, an interlocutory decree was entered in suit numbered 59,685 which provided for injunctive 3 T.C. 310">314 relief against the four major companies as well as the payment of $ 400,000 to the state, but said interlocutory decree also provided that no final decree should be entered awarding injunctive1944 U.S. Tax Ct. LEXIS 187">196 relief unless similar relief in part was obtained by the state against petitioners and the Gulf Portland Cement Co.Suit numbered 62,298 was first filed only against these petitioners. Subsequently, the Gulf Portland Cement Co. was made a party defendant and included in the judgment as hereinbefore mentioned.The petition filed in suit numbered 59,685 charged the four major companies, all nonresident corporations, with being members of the Cement Institute for the entire period of time involved, and the injunction granted in such cause contained a provision enjoining them from participating in any activities of the Cement Institute relating to their respective intrastate operations and sales within the State of Texas, and from putting into effect in Texas any agreement, plan, device, or practice adopted, approved, recommended, or promulgated by the Cement Institute.The Texas companies, namely, the petitioners herein and the Gulf Portland Cement Co., were not charged in suit numbered 62,298 with violating the antitrust laws by belonging to or following any code of ethics of the Cement Institute, and the judgment in suit numbered 62,298 did not contain the provisions found in subdivision1944 U.S. Tax Ct. LEXIS 187">197 3 (a) of paragraph II of Exhibit D of the stipulation, which is a part of the compromise agreement and judgment in suit numbered 59,685, or any provisions of like import.The petitioners herein had been members of the Cement Institute during the existence of the National Recovery Administration, but resigned when N. R. A. was declared unconstitutional. A copy of the Code of Fair Competition for the cement industry was duly filed in the office of the Attorney General of Texas on December 27, 1933, after being approved by President Roosevelt on November 27, 1933. The Cement Institute had been designated by the code as the official representative of the cement manufacturers.The omitted portions of the stipulated facts are incorporated herein by reference.The amounts paid the State of Texas in compromise of the suit brought by the state against these petitioners, and the attorney fees and expenses paid in connection therewith, were ordinary and necessary expenses paid or incurred in carrying on a trade or business.OPINION.The question here is whether certain payments in compromise of a suit brought by the State of Texas against these petitioners for alleged violations of its antitrust1944 U.S. Tax Ct. LEXIS 187">198 laws, and attorney 3 T.C. 310">315 fees paid in connection therewith, constitute ordinary and necessary expenses of their business under section 23 (a) (1) (A) of the Internal Revenue Code, as amended by section 121 of the Revenue Act of 1942. 1 Consideration of these proceedings was postponed pending decision by the Supreme Court in Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, certiorari having been granted therein because of an alleged conflict in the decisions of the Circuit Court of Appeals. The question there presented was whether attorney fees and related legal expenses of the taxpayer were deductible as ordinary and necessary expenses. Our question is broader, because petitioners seek to deduct compromise payments and attorney fees.1944 U.S. Tax Ct. LEXIS 187">199 In Kornhauser v. United States, 276 U.S. 145">276 U.S. 145, the taxpayer sought to deduct attorney fees for defending an accounting action brought by a former partner. The Supreme Court allowed the deduction because the suit or action against the taxpayer was directly connected with, or proximately resulted from, his business. Applying this test to the present circumstances, we find that petitioners were charged by the State of Texas with business practices and conduct that violated the antitrust laws of that state. We further find that petitioners denied these charges, generally and specifically, and that the charges were never proven. In our opinion the suit and the expenses in connection therewith were directly connected with the business carried on by each petitioner.The next question is whether the attorney fees and related expenses were both "ordinary" and "necessary" expenses paid or incurred in carrying on the business. In testing the present facts by these statutory requirements we give both words their commonly accepted meaning, as the Court did in the Heininger case, supra. Our findings show that the suit brought by the State of Texas1944 U.S. Tax Ct. LEXIS 187">200 threatened to destroy the business of each of these petitioners because the suit sought to recover statutory penalties, forfeiture of their charters, a statutory lien for the amount of the penalties against their property, an injunction to restrain them from carrying out alleged agreements, conspiracies, trusts, and combinations, and other general and specific relief. The seriousness of the threat becomes more apparent when the penalties are reduced to dollars, i. e., penalties of $ 50 to $ 1,500 per day for a period of 3,549 days would aggregate total penalties of $ 177,450 to $ 5,323,500 each. Serious as the imposition of the penalties would be, the forfeiture of their charter would be even more effective in destroying petitioners and the cement business conducted by each.3 T.C. 310">316 Under these circumstances we think the following language contained in the Heininger case is particularly apt, even though the facts are distinguishable:It is plain that respondent's [taxpayer's] legal expenses were both "ordinary and necessary" if those words be given their commonly accepted meaning. For respondent to employ a lawyer to defend his business from threatened destruction was "normal"; 1944 U.S. Tax Ct. LEXIS 187">201 it was the response ordinarily to be expected. Cf. Deputy v. Du Pont, 308 U.S. 488">308 U.S. 488, 308 U.S. 488">495 * ; Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">114 * ; 276 U.S. 145">Kornhauser v. United States, supra.Since the record contains no suggestion that the defense was in bad faith or that the attorney's fees were unreasonable, the expenses incurred in defending the business can also be assumed appropriate and helpful, and therefore "necessary". Cf. Welch v. Helvering, supra, 290 U.S. 111">290 U.S. at page 113 * ; Kornhauser v. United States, supra, 276 U.S. 145">276 U.S. at page 152 * .Respondent argues against allowance of the deductions because the record fails to show that petitioners' expenditures were normal in their business of manufacturing cement. But this argument ignores the fact that similar litigation expenses and compromise payments were incurred at or about the same time by four other large cement manufacturers operating in Texas because of antitrust suits instituted against them by the State of Texas. Their response to the threatened destruction1944 U.S. Tax Ct. LEXIS 187">202 of their business was the same as that of petitioners and was the response ordinarily to be expected, 320 U.S. 467">Commissioner v. Heininger, supra, namely, they defended themselves by all available legal means In the light of these and the other facts of record, it is our opinion that the attorney fees incurred by petitioners were ordinary and necessary expenses of carrying on a trade or business.Our previous discussion has been directed primarily to the deductibility of the attorney fees and related expenses. The remaining question involves the deductibility of the compromise payments made in settlement of the antitrust suits. Petitioners cite International Shoe Co., 38 B. T. A. 81, and H. M. Howard, 22 B. T. A. 375, as authorizing the deduction of compromise payments. Respondent distinguished these authorities on the ground the payments there were made to individuals to settle damage suits between private parties. He contends that a different rule prevails where the alleged offense is against the Government, and relies upon Helvering v. Hampton (C. C. A., 9th Cir.), 79 Fed. (2d) 358;1944 U.S. Tax Ct. LEXIS 187">203 National Outdoor Advertising Bureau v. Helvering (C. C. A., 2d Cir.), 89 Fed. (2d) 878; General Outdoor Advertising Co. v. Helvering (C. C. A., 2d Cir.), 89 Fed. (2d) 882; Standard Oil Co., 43 B. T. A. 973; affd. (C. C. A., 7th Cir.), 129 Fed. (2d) 363; certiorari denied, 317 U.S. 688">317 U.S. 688.The rule, however, is not as broad as respondent contends. Even before the decision in the Heininger case the deduction of expenses incurred in defending suits brought under Federal and state statutes 3 T.C. 310">317 had been allowed where the taxpayer successfully defended himself against the charges; National Outdoor Advertising Co., supra, which involved alleged violations of the Sherman Act; Commissioner v. People's-Pittsburgh Trust Co. (C. C. A., 3d Cir.), 60 Fed. (2d) 187, which involved charge of fraud in making Federal income and excess profits tax returns for a corporation of which taxpayer was president; Commissioner v. Continental Screen Co. (C. C. A., 6th Cir.), 58 Fed. (2d) 625,1944 U.S. Tax Ct. LEXIS 187">204 which involved alleged violations of the Sherman Act; Hal Price Headley, 37 B. T. A. 738, which involved alleged violations of the Federal narcotic acts; Citron-Byer Co., 21 B. T. A. 308, which involved an indictment for conspiracy to defraud the Federal Government; and H. E. Bullock, 16 B. T. A. 451, which involved a proposed penalty for filing false and fraudulent excess profits tax return. But where the taxpayer was convicted or pleaded guilty to the violations charged, the deductions for fines, penalties, and legal expenses have been denied, Columbus Bread Co., 4 B. T. A. 1126; Bonnie Bros. Inc., 15 B. T. A. 1231; Great Northern Railway Co., 8 B. T. A. 225; affd., 40 Fed. (2d) 372; certiorari denied, 282 U.S. 855">282 U.S. 855; Burroughs Bldg. Material Co. v. Commissioner (C. C. A., 2d Cir.) 47 Fed. (2d) 178; Estate of John W. Thompson, 21 B. T. A. 568; Tunnel R. R. of St. Louis v. Commissioner (C. C. A., 8th Cir.), 61 Fed. (2d) 166;1944 U.S. Tax Ct. LEXIS 187">205 certiorari denied, 288 U.S. 604">288 U.S. 604; Helvering v. Superior Wines & Liquors, Inc. (C. C. A., 8th Cir.), 134 Fed. (2d) 373.The present situation falls between these two lines of authorities. Petitioners were charged with violations of the state antitrust laws. The charges were vigorously denied. No evidence was taken in connection with the charges because the parties settled the suit out of court. The judgment that was entered specifically states that neither the agreement of the parties to settle the suit nor the judgment entered thereon, which embraced and approved the agreement, should constitute or be construed as an admission in any degree of the truth or correctness of the alleged violations in whole or in part. The judgment decreed, however, that the state should recover from petitioners, jointly and severally, $ 100,000 "in full satisfaction of all claims of the State of Texas for penalties for the alleged violations of law set out in Plaintiff's Original Petition, and in full satisfaction of all expenses of the Attorney General in investigating, instituting and preparing this cause for trial."If unexplained this1944 U.S. Tax Ct. LEXIS 187">206 judgment would weigh heavily against petitioners and in favor of respondent. But the proof shows, and we have set forth in our findings, the factors that influenced petitioners to compromise rather than litigate. These factors present the practical aspects that confronted the petitioners, and this background is of importance from a tax standpoint in considering the tax effect 3 T.C. 310">318 of the money judgment entered and the writ of injunction issued. Financially, the petitioners were convinced that it would cost more to litigate the suit than to settle, even though they received a favorable verdict. Economically, the injunction would not prevent them from carrying on their business so long as they did not act under an agreement with competitors as to the conduct thereof. Actually, the disruption of their business because of the absence of their officers and key men in their organizations, plus the unfavorable publicity attendant upon the trial, might be more damaging to each of the petitioners than the amounts of the compromise payment. Since taxation is a practical matter, the practical aspects of a tax problem should be weighed and considered in determining tax liability. 1944 U.S. Tax Ct. LEXIS 187">207 See Margery K. Megargel, 3 T.C. 238, and cases there cited.Respondent's reliance in his brief upon National Outdoor Advertising Bureau and General Outdoor Advertising Co., supra, now appears to be ill-placed in view of the Heininger decision by the Supreme Court. The Board decided the Heininger case, 47 B. T. A. 95, originally in favor of the Government because of the impact of the Second Circuit's opinion in the Outdoor Advertising cases. However, the Seventh Circuit refused to follow the reasoning of the Second Circuit and reversed the Board. It was this alleged conflict between the Circuit Court decisions (and also the Eighth Circuit's decision in 290 U.S. 111">Helvering v. Superior Wines & Liquors, Inc., supra), which resulted in the granting of certiorari in the Heininger case. In affirming the Seventh Circuit, the Supreme Court pointed out that the generally accepted meaning of the language used in section 23 (a) has been narrowed from time to time by the Bureau of Internal Revenue, the Board of Tax Appeals, and the Federal courts "in order that tax deduction consequences1944 U.S. Tax Ct. LEXIS 187">208 might not frustrate sharply defined national or state policies proscribing particular types of conduct." After stating that each case should depend upon its own circumstances and citing some examples to illustrate the principle involved, the Court said:* * * It has never been thought, however, that the mere fact that an expenditure bears a remote relation to an illegal act makes it non-deductible. The language of Section 23 (a) contains no express reference to the lawful or unlawful character of the business expenses which are declared to be deductible. * * We do not believe that the tax consequences of allowing the deductions here will in any way frustrate sharply defined policies of the State of Texas proscribing combinations or agreements in restraint of trade. The state is in no position under the judgment entered to say that petitioners were convicted of any violations of its antitrust statutes. The judgment which the state agreed should be entered 3 T.C. 310">319 specifically refutes conviction or admission of violations in whole or in part. In this view of the compromise payments we are not impressed by respondent's arguments that they are penal in nature and the penalties1944 U.S. Tax Ct. LEXIS 187">209 are nondeductible. Our view is that under all the facts and circumstances the attorney fees, the related expenses, and the compromise payments were ordinary and necessary expenses paid in carrying on petitioners' respective businesses, and we so hold. Since other adjustments were involved in determining the deficiencies,Decision will be entered under Rule 50. Footnotes1. SECTION 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/4625177/	Jefferson T. Ewing, Sr. v. Commissioner.Ewing v. CommissionerDocket No. 38152.United States Tax Court1953 Tax Ct. Memo LEXIS 63; 12 T.C.M. 1299; T.C.M. (RIA) 53360; November 12, 19531953 Tax Ct. Memo LEXIS 63">63 Petitioner was a bookmaker's "commission man" between 1937 and 1947. He failed to file Federal income tax returns for 1940 through 1946, and understated his income in his 1947 return. Respondent computed petitioner's income for 1940 through 1947 by the net worth method, determined deficiencies and fraud penalties for those years, and delinquency penalties for 1940 through 1946. Petitioner only contests the fraud penalties, the deficiencies for 1946 and 1947, and the amount of the delinquency penalty for 1946. Held, the Commissioner's determination of petitioner's net income for 1946 and 1947 was excessive and should be recomputed in accordance with the amounts in our Findings of Fact. Held, further, the Commissioner has sustained his burden of proving fraud and has established that part of the deficiencies in each year was due to fraud with intent to evade the tax. Stephen E. Hamilton, Jr., Esq., for the petitioner. John D. Armstrong, Esq., for the respondent. BLACK Memorandum Findings of Fact and Opinion The Commissioner has determined that the petitioner is liable for the following income tax deficiencies and penalties: 50%25%FraudDelinquencyYearDeficiencyPenaltyPenalty1940$ 44.65$ 22.33$ 11.161941472.55236.28118.141942826.79413.40206.701943828.16414.08207.041944635.50317.75158.881945875.25437.63218.8119467,234.093,617.051,808.5319471,492.97746.49Petitioner contends that the Commissioner erred (1) to the extent of $6,032.59 in his determination of the 1946 deficiency and $1,508.14 in his determination of the 1946 delinquency penalty, (2)to the extent of $494.80 in his determination of the 1947 deficiency, and (3) in his determination1953 Tax Ct. Memo LEXIS 63">65 of fraud penalties for the years 1940 to 1947, inclusive. Petitioner does not contest the deficiency and delinquency penalty determinations for the years 1940 to 1945, inclusive. Findings of Fact Certain facts were stipulated and are so found. Petitioner is an individual and is a resident of Deerhurst, Delaware. He filed an income tax return for the 1947 calendar year with the Collector of Internal Revenue for the District of Delaware but filed no returns for 1940 to 1946, inclusive, the other taxable years in issue. Petitioner was 53 years old at the date of the hearing. He was married in 1921 and has two sons who were born in 1922 and 1923. Between 1917 and 1937, petitioner held a variety of unskilled jobs. His average earnings for that period were low but were counterbalanced by the fact that his living expenses were likewise low. He and his family lived in a semi-detached 6-room frame house which had no inside plumbing or running water and which he rented for what averaged $6 a month. His groceries and sundries were purchased approximately at cost from his uncle's general store. He had a telephone only since 1927, had no car, did not smoke nor drink and his only indulgences1953 Tax Ct. Memo LEXIS 63">66 were fishing and trap shooting. His widowed mother lived in the adjoining house from 1921 to 1937, and he paid her rent of $4 a month and contributed, along with his brother, to the cost of her groceries. By the beginning of 1937, petitioner had saved enough to purchase a 1936 Buick automobile and had a small sum of cash left over, the amount of which cannot be determined from the evidence. He then went to work as a "commission man" for John H. Butler, a local bookmaker. His function was to solicit and collect horse bets on horses, telephone the bets in to the bookmaker, and pay off any winning bettors. The names of the bettors were never revealed to the bookmaker and, in fact, petitioner often placed bets for his own account. This method of earning money is highly speculative and income can fluctuate between broad limits. For his services as "commission man" the arrangement finally reached was that Butler was to pay petitioner five per cent of the amount of the bets telephoned in. Petitioner paid off the winning bettors daily but settled his accounts with Butler at about one- to three-week intervals. It was never necessary for petitioner to have more than $1,500 to $2,000 on hand1953 Tax Ct. Memo LEXIS 63">67 to pay off the winning bettors for a full month, even were he not to settle with Butler for that length of time. Petitioner knew that his activities in association with Butler were illegal, but continued in them until January 31, 1947, when he was arrested by the Delaware State Police. Subsequently, on March 4, 1947, in the Common Pleas Court of New Castle County, Delaware, he was found guilty of receiving and recording bets on horse races, fined $90 and costs, and placed on parole for one year. For the remainder of 1947, the only available evidence regarding his activities indicates that he sold antiques. In addition to the aforementioned activities, petitioner worked as a shipping clerk for the San-nap-pak Mfg. Co. (Now known as the Doeskin Paper Products Corp.) in 1937 and 1938, leaving them thereafter to devote all his time to his illegal operations. His gross earnings from that job were $1,178.69 in 1937 and $1,193.90 in 1938, all of which he received except for social security deductions. Petitioner, at the same time he was working for Butler, also worked as a "commission man" for T. Bayard Wolhar, another bookmaker, for about three months in 1941. As with Butler, he received1953 Tax Ct. Memo LEXIS 63">68 five per cent of all bets telephoned in. The names of the bettors were never revealed to Wolhar. In fact, pursuant to instructions from Butler, petitioner "laid-off" some of Butler's bets with Wolhar. Wolhar paid petitioner about $500 during the short period of their association. After that, petitioner continued to telephone bets into Wolhar even though Wolhar paid him no commission and at least some of those bets were for petitioner's own account. Wolhar finally refused to accept any more bets from petitioner because they were not the kind of bets Wolhar wanted. Apparently they were either "lay-offs" or bets on winning horses. The only time petitioner's wife was employed was during 1940 and 1941, when she earned about $1,000 packing paper for the Rockland Paper Co. Petitioner filed income tax returns with the State of Delaware for the taxable years 1941 to 1946, inclusive, reporting his income as follows: YearIncome Reported1941$1,546.3519421,280.0019431,225.0019441,100.0019451,400.0019461,000.00Prior to 1940, it does not appear that petitioner's earnings were high enough to subject him to Federal income tax liability. However, despite1953 Tax Ct. Memo LEXIS 63">69 subsequent increased earnings petitioner failed to file any Federal income tax returns for the years 1940 through 1946. Consequently, in the latter part of 1947, internal revenue agent John B. Kennedy was assigned to investigate petitioner's affairs. While the investigation was in progress petitioner, on March 11, 1948, filed a Federal tax return reporting his income for 1947 as $1,285, representing alleged receipts from the sale of antiques and interest on securities. He did not include in that return his income from activity as a "commission man" prior to his arrest on January 31, 1947. In May 1948, when Kennedy asked petitioner why he failed to file returns for 1940 through 1946, petitioner answered only that he "just neglected it." Petitioner had no records of his income for the years 1940 to 1947, inclusive, so Kennedy reconstructed it in accordance with the "increase in net worth" method. That method involves arriving at income for a taxable year by finding the difference between the taxpayer's net assets at the beginning and end of the particular year and adding thereto an amount for the taxpayer's living expenses plus any gifts given by the taxpayer during the year. Kennedy's1953 Tax Ct. Memo LEXIS 63">70 computations, upon which respondent relied in determining petitioner's deficiencies, are as follows: As of December 3119391940194119421943ASSETS: Bank Deposits: Farmers Bank Savings Acct.$ 300.66$1,015.37$1,429.79$3,436.87$ 5,677.38Wilmington Trust Savings Acct.500.001,218.261,233.26Wilmington Trust Checking Acct.500.002,430.002,500.002,500.00Property: Automobiles: Buick 19361,000.001,000.00Mercury 19421,300.001,300.001,300.00Total$1,300.66$2,515.37$5,659.79$8,455.13$10,710.64LIABILITIES: NoneTotal00000Net Worth$1,300.66$2,525.37$5,659.79$8,455.13$10,710.64Previous Net Worth1,300.662,515.375,659.798,455.13Increase in Net Worth$1,214.71$3,144.422,795.34$ 2,255.51PLUS: Living Expenses2,500.002,500.002,500.002,500.00Net Income$3,714.71$5,644.42$5,295.34$ 4,755.51As of December 311944194519461947ASSETS: Bank Deposits & Securities: Farmers Bank Savings Acct.$ 7,002.38$ 7,052.38$ 7,102.38$ 7,180.96Industrial Trust Checking Acct.102.00202.00202.00300.00Wilmington Trust Savings Acct.1,248.261,263.261,278.261,278.26Wilmington Trust Checking Acct.2,200.003,636.002,402.805,749.80U.S. Bonds93.7593.75Property: Residence14,778.1314,778.13Furniture2,500.002,500.00Gas Heater250.00250.00Shrubbery75.0075.00Automobiles: Mercury, 19421,300.001,300.00Desoto, 19461,639.25Desoto, 19471,955.90Total$11,852.64$13,453.64$30,321.57$34,161.80LIABILITIES: NoneTotal0000Net Worth$11,852.64$13,453.64$30,321.57$34,161.80Previous Net Worth10,710.6411,852.6413,453.6430,321.57Increase in Net Worth$ 1,142.00$ 1,601.00$16,867.93$ 3,840.23PLUS: Living Expenses2,500.003,000.003,000.003,000.00Gifts: 4/29/47 Plymouth Club Coupe, Jef-ferson Jr., (Son)1,470.204/22/46 Mercury Club Coupe, George(Son)1,765.69Net Income$ 3,642.00$ 4,601.00$21,633.62$ 8,310.431953 Tax Ct. Memo LEXIS 63">71 The bank accounts and automobiles (except those given to petitioner's sons) were in petitioner's name, but the title to the house purchased in 1946 was in the names of petitioner and his wife jointly. Petitioner paid for the house in cash, some of which came from his bank accounts and some of which he had on hand. Petitioner does not contest respondent's determination of his net income, based on the above schedule of computations, for the tax years 1940 to 1945, inclusive. Nor does he contest the 25 per cent delinquency penalties determined for those years under section 291 of the Code. Those matters, consequently, are not in issue here. Petitioner, however, does urge that the income determined for 1946 and 1947 is incorrect and excessive. Petitioner contends that $15,000 worth of the assets purchased in 1946 and $2,000 worth of the assets purchased in 1947 were paid for not from current income but from a sum of $17,000 which he had been saving in a desk drawer in his home since 1937, and half of which belonged to his wife. Petitioner maintains, therefore, that respondent erred to the extent that the computed tax deficiencies were based on the inclusion of $15,000 and $2,0001953 Tax Ct. Memo LEXIS 63">72 in petitioner's reconstructed income for 1946 and 1947, respectively. Petitioner adds that the 25 per cent delinquency penalty determination for 1946 should be reduced to conform with the corrected tax deficiency for that period. After a consideration of the record we find as facts; (1) that petitioner did not have $17,000 saved in a desk drawer of his home in 1937; (2) that petitioner did save approximately $13,000 from income earned between 1937 and 1945, inclusive, which savings were not deposited in any bank nor used to purchase assets during that period and, therefore, were not discovered by internal revenue agent Kennedy nor included in Kennedy's computation of petitioner's net worth and corrected net income; and (3) that $11,000 of those savings was used by petitioner in part payment of the following property which he and his wife purchased in 1946: Residence$14,778.13Furniture2,500.00Gas Heater250.00Shrubbery75.00 Inasmuch as we find that $11,000 of the cash used by petitioner in the purchase of the foregoing items was accumulated by petitioner in yours prior to 1946, and not in 1946, we find that his correct net income for 1946 is $10,633.62, 1953 Tax Ct. Memo LEXIS 63">73 instead of the $21,633.62 which the Commissioner has determined. We also find that $2,000 of the funds used by petitioner in the purchase of assets in 1947 was from savings in years prior to 1946, and we find that petitioner's correct net income for 1947 was $6,310.43, instead of the $8,310.43 as determined by the Commissioner. On February 15, 1950, an Information was filed against petitioner in the United States District Court for the District of Delaware charging him with willful failure to file a return for the taxable year 1946. Petitioner entered a plea of guilty to the Information and was fined $1,000. In 1951, petitioner and his wife entered into a business agreement with the Rupert Construction Co. whereby the latter was to build two houses for them at cost in Sessex County, Delaware. If they were successful in selling the houses they were to be given an agency to sell them in that county. The title to the land on which the houses were built was in the names of petitioner and his wife jointly. The venture was unsuccessful but the houses were eventually sold and the net proceeds deposited with the Government pending determination of petitioner's tax liability. For each1953 Tax Ct. Memo LEXIS 63">74 of the taxable years 1940 to 1947, inclusive, the deficiency was due, in whole or in part, to fraud with intent to evade tax. The forgiveness provisions of the Current Tax Payment Act of 1943 are not applicable with respect to the deficiencies and penalties for the 1942 taxable year because of petitioner's fraud. Opinion BLACK, Judge: The first question to be considered is whether respondent erred in his deficiency determinations for the taxable years 1946 and 1947, and erred in the amount of the delinquency penalty determined for 1946. Respondent's authority to compute petitioner's net income for the years in issue by the increase in net worth method is clear, and no question has been raised in regard thereto. Section 41, Internal Revenue Code; Regulations 111, section 29.41-1; Louis Halle, 7 T.C. 245">7 T.C. 245, affd. 175 Fed. (2d) 500 (C.A. 2), certiorari denied 338 U.S. 949">338 U.S. 949. Nor does petitioner contest that a delinquency penalty should be assessed for his failure to file a return for the 1946 tax year. Section 291(a) of the Code; Regulations 111, section 29.291-1. In that regard petitioner asserts only that the amount of1953 Tax Ct. Memo LEXIS 63">75 the penalty (which is 25 per cent of the deficiency) must be reduced to conform with what he contends is the correct deficiency for 1946. Consequently, the delinquency penalty issue is merely a matter of mathematics and will be controlled by our decision as to petitioner's deficiency. The burden of proving that respondent erred in his deficiency determinations for 1946 and 1947 rests upon petitioner. Joseph V. Moriarty, 18 T.C. 327">18 T.C. 327. Petitioner contends that respondent's computation of petitioner's net income for those years was faulty in that it failed to take into account $17,000 which he and his wife had saved by 1937. Petitioner maintains that $15,000 of that sum was expended on the assets purchased in 1946, and $2,000 was expended on the assets purchased in 1947. It is true, as petitioner argues in his brief, that a correct determination of net worth at the beginning of the taxable period is an essential condition to reconstruction of income by the net worth increase method. United States v. Fenwick, 177 Fed. (2d) 488 (C.A. 7). Whether or not petitioner did save $17,000 by 1937, had it immediately prior to 1946, and expended it on assets in 19461953 Tax Ct. Memo LEXIS 63">76 and 1947, is a question of fact. As mentioned above, the burden of proving that fact rests upon petitioner. A consideration of the record reveals that between 1917 and 1937, the period during which petitioner claims he saved the $17,000, petitioner was neither earning nor expending much money. He lived with his wife and two children in a house that had neither plumbing nor running water and for which he paid an average rent of $6 per month. He bought his groceries and sundries at approximately cost from his uncle's store, and contributed to the support of his widowed mother. Petitioner claims that the $17,000 he accumulated was kept in cash in a desk drawer in his house. No one, not even his wife, knew about the hiding place even though petitioner stated that he and his wife had agreed, when they were first married, to equally share all the money he made. None of the $17,000 was ever deposited in banks, testified the petitioner, because he had no faith in them. However, starting in 1939, after he found out that bank deposits were insured, he did put some of his money into accounts, though not the $17,000. We are not required to, nor do we in this case, give credence to petitioner's1953 Tax Ct. Memo LEXIS 63">77 story that he had accumulated $17,000 prior to the year 1937. As stated in Carmack v. Commissioner, 183 Fed. (2d) 1 (C.A. 5), certiorari denied 340 U.S. 875">340 U.S. 875; "the Tax Court was not bound to believe or to accept the uncontradicted testimony of taxpayer and his wife, where such testimony patently appears highly improbable or manifestly unreasonable." While we are unable to believe petitioner's story that he accumulated $17,000 in cash prior to the year 1937 and that he kept this money until 1946 and 1947 when it was used to pay in part for some of the property which respondent has included in petitioner's net worth statement, we do believe that a considerable amount of the cash which the petitioner used to purchase these properties was accumulated in years prior to 1946. We think it must have been so. By use of the increase in net worth method, respondent has arrived at a figure of $21,633.62 net income for 1946 and $8,310.43 net income for 1947. These figures are beyond all reasonable probability, we think. The evidence shows that petitioner was operating on about a five per cent commission. Respondent's figures, if correct, would mean that petitioner did1953 Tax Ct. Memo LEXIS 63">78 over $400,000 worth of business in 1946 and over $165,000 worth of business in 1947. Petitioner described his method of operation. It was not contradicted. No one worked for him. He was "small time." He devoted a good part of each day to paying off betters. It is unrealistic to assume that one operating on such a small scale as petitioner could have done $400,000 worth of business in 1946. That would also be far out of line with respondent's determination of his net income in prior years. As to 1947, it seems to be uncontested that petitioner was in the bookmaking business for only one month in 1947. That was the month of January. He was arrested at the end of that month for his illegal operations and the uncontradicted evidence is that he never engaged in that business after that date. Since petitioner was operating only for the month of January 1947, it seems altogether improbable that he could have earned the amount of income which the Commissioner has determined for 1947. After a careful review and consideration of all the evidence in the record we have concluded that petitioner's net income for 1946 was $10,633.62, instead of $21,633.62 as determined by the Commissioner and1953 Tax Ct. Memo LEXIS 63">79 $6,310.43 for 1947, instead of the $8,310.43 as determined by the Commissioner. These amounts have been embodied in our Findings of Fact. The delinquency penalty for 1946 must be revised to give effect to our determination of petitioner's net income for 1946. Fraud Penalties The remaining question is whether petitioner is guilty of fraud in failing to file returns for the years 1940 through 1946, and in understating his net income in the return filed for 1947. The provisions of the Internal Revenue Code applicable to this question are printed in the margin.1 Respondent's determination of fraud places upon him, in a civil suit, the burden of proving fraud by clear and convincing evidence. Fraud is not negligence, however gross, but is intentional wrongdoing for the purpose&of evading a tax believed to be owing. Wiseley v. Commissioner, 185 Fed. (2d) 263 (C.A. 6); Mitchell v. Commissioner, 118 Fed. (2d) 308 (C.A. 5); Rogers v. Commissioner, 111 Fed. (2d) 987 (C.A. 6), In William W. Kellett, 5 T.C. 608">5 T.C. 608, we said: "What constitutes fraud is a question of fact which frequently requires a nicely balanced judgment to answer. * * 1953 Tax Ct. Memo LEXIS 63">80 The conclusion must be reached not on isolated bits of testimony, but on the whole record. * * " See also E. S. Iley, 19 T.C. 631">19 T.C. 631; L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419. In Wallace H. Petit, 10 T.C. 1253">10 T.C. 1253, we said at page 1257: "Because direct and clear-cut proof of fraud is seldom available, it must be established by a full consideration of the records and testimony offered, the appearance and manner of the witnesses, conduct of the taxpayer, and all conditions and circumstances surrounding the transactions which produced the disputed income." 1953 Tax Ct. Memo LEXIS 63">81 Careful consideration of the record in the instant case convinces us that petitioner's actions were motivated by a fraudulend intent to evade taxes. His failure to file tax returns for the years 1940 to 1946, inclusive, and his understatement of income for 1947, including therein $32 as interest and $1,253 as income from the sale of antiques and including nothing from his horse betting operations for the month of January, is alone compelling evidence, unless satisfactorily explained, to sustain respondent's burden of proving fraud. Rogers v. Commissioner, supra; Estate of Joseph Nitto, 13 T.C. 858">13 T.C. 858, appeal dismissed (C.A. 7) July 21, 1950. By way of explanation, however, petitioner claims that the only reason he failed to file returns from 1940 through 1946 was because he did not believe it was necessary to do so. Petitioner states that he knew there was a Federal income tax but did not realize he was earning enough money to be required to pay such tax, especially since his income was so low prior to 1940 that he was not subject to the tax. To further indicate that his dereliction was not motivated by fraud, he points to the fact that he filed Delaware1953 Tax Ct. Memo LEXIS 63">82 income tax returns for 1941 through 1946, explaining that he knew Delaware required such returns and maintaining, therefore, that he would have filed Federal returns if he thought it was required by law. We think that a more likely explanation than the one which petitioner gave in his testimony at the hearing was that he knew that he was engaged in an illegal business and did not want to disclose it. Therefore, he refrained from filing any income tax returns. We think that was, at least, one of his purposes as well as his general purpose of evading the payment of income taxes. We find it difficult to give credence to petitioner's explanation as to why he filed no returns from 1940 to 1946, inclusive, especially in view of the fact that when petitioner was questioned by internal revenue agents in May 1948, he stated that he did not file returns because he "just neglected it." The record leads but to one conclusion, we think - respondent has successfully sustained his burden of proving fraud. Petitioner's protestations of innocence are not supported by the evidence and his explanations are not plausible and convincing. Our statement in M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518, 19 B.T.A. 518">533,1953 Tax Ct. Memo LEXIS 63">83 accurately disposes of the fraud question in this case: "A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose." Decision will be entered under Rule 50. Footnotes1. 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). SEC. 1112. BURDEN OF PROOF IN FRAUD CASES. In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect of such issue shall be upon the Commissioner.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625178/	L. W. Seabrook v. Commissioner.L. W. Seabrook v. CommissionerDocket No. 9927.United States Tax Court1951 Tax Ct. Memo LEXIS 361; 10 T.C.M. 53; T.C.M. (RIA) 51026; January 12, 19511951 Tax Ct. Memo LEXIS 361">361 On the facts, held, that petitioner and his two children did not intend to join together in the present conduct of the hardware business either on July 1, 1942, when the partnership was formed, or at any other time during the fiscal years ended June 30, 1943 and 1944, and therefore the partnership was invalid for tax purposes during these two years. Carl F. Bauersfeld, Esq., Robert Ash, Esq., Munsey Bldg., Washington 4, D.C., Charles S. Ausley, Esq., and James D. A. Holley, C.P.A., Tampa Theatre Bldg., Tampa, Fla., for the petitioner. F. L. Van Haaften, Esq., for the respondent. HILL Memorandum Findings of Fact and Opinion We entered a decision in the above entitled case on the 15th day of December 1947 on the basis of our Memorandum Findings of Fact and Opinion, entered December 12, 1947 [. The decision was for respondent. That decision was reviewed by the United States Court of Appeals for the Fifth Circuit. That Court handed down its opinion on August 2, 1949, , reversing and remanding our decision "for further proceedings in conformity with the opinion of the Supreme Court in 1951 Tax Ct. Memo LEXIS 361">362 with the right in either of the parties to offer such additional evidence as would be appropriate in the light of the Supreme Court's decision in the Culbertson case." In compliance with the opinion and mandate of the Circuit Court, a further hearing was had in Jacksonville, Florida, on February 2, 1950. At this hearing additional evidence was submitted by both parties bearing on the question whether petitioner and his two children really and truly intended to join together in the present conduct of the business of Seabrook Hardware Company during the fiscal years ended June 30, 1943 and 1944. No other issue is before us. Findings of Fact Petitioner is an individual residing in Tallahassee, Florida. He has two children, a son, William Whitmarsh Seabrook, born July 8, 1920, and a daughter, Inez Seabrook Davenport, born July 19, 1918. Petitioner has been in the hardware business since 1919. From 1927 until July 1, 1942, petitioner conducted this business as sole proprietor under the name of Seabrook Hardware Company. Not only did this company operate a retail hardware store, but it also handled building supplies and was a distributor of trucks, tractors and electrical machinery. 1951 Tax Ct. Memo LEXIS 361">363 It maintained a repair shop to service the machines it sold. During these years petitioner was in sold control of the business, though he relied upon the assistance of his general manager and office supervisor, C. E. Patterson, for the performance of many of the company's operations. From the fiscal year ended June 30, 1938, through the fiscal year ended June 30, 1942, the net income of the company which was reported by petitioner as part of his taxable income, petitioner's net income and his income tax liability were as follows: IncomeYear endedfromTotal NetTaxJune 30CompanyIncomeLiability1938$ 7,806.33$ 7,806.33$ 220.50193911,336.2911,592.57557.25194016,286.0217,185.091,141.06194116,176.8416,575.801,518.14194224,287.2625,198.346,807.04Whitmarsh Seabrook worked in the hardware store from the time he was a small child. While he was getting an education, he worked at the store after school, on weekends and during vacations. He waited on customers and helped to inventory the stock. He became familiar with all facets of the business and displayed a real aptitude for it. After attending local schools in1951 Tax Ct. Memo LEXIS 361">364 Tallahassee, Whitmarsh attended The Citadel, a military college, in Charleston, South Carolina. He majored in civil engineering because both he and his father thought it would be helpful to him in the hardware business. Petitioner had found that in the sale of building materials and equipment purchasers frequently requested estimates of the kind, quality and strength of such material and equipment. Petitioner's son graduated from The Citadel (Charleston, South Carolina) on May 30, 1942, and was married the same day. After a four or five-day honeymoon Whitmarsh and his bride returned to Tallahassee. During the ensuing five weeks he worked in his father's business, though the exact nature of his services was not disclosed by the evidence. During June and July 1942 Whitmarsh expected any day to receive both his commission in the Army, to which he was entitled on graduation from The Citadel, and assignment to active duty. Petitioner's daughter, Inez, attended local schools in Tallahassee and graduated from Florida State College for Women in 1938. During school and college she frequently helped at her father's store in her spare time. She did mostly office work, such as getting out bills, 1951 Tax Ct. Memo LEXIS 361">365 posting book entries, and preparing payrolls and balance sheets. She also made suggestions concerning household items sold by the store which were of interest to women. In the fall of 1938 she attended the New York University School of Retailing in New York City on a scholarship. The course combined class work with practical experience in a department store. Inez attended this school until December 1938, when she returned to Tallahassee, because it was felt the course was not of great value to her. On returning home she took a typing course at Lively Vocational School a few hours each day and the remainder of her time she did office work in the store. She was paid a salary for this work. She ceased to work regularly at the store after April 1939. Inez married James Davenport in December 1940. Her husband had both a degree from the Georgia School of Technology in electrical engineering, and also practical experience in that field which made him a desirable prospect in his father-in-law's business. In February 1941 Davenport entered the military service and was assigned to Camp Stewart, Georgia, where Inez joined him. He went overseas in February 1942 and after his departure Inez returned1951 Tax Ct. Memo LEXIS 361">366 to her parent's home. In July 1942 she was expecting a child. The balance sheet of the company as of June 30, 1942, showed current assets of $126,066.02, current liabilities of $50,270.12, fixed assets of $30,690.83, fixed liabilities of $9,684.40, or total assets of $156,756.85, as against a total liability of $59,954.52, indicating a total net worth of $96,802.33. By written instrument dated July 1, 1942, petitioner, as vendor, in consideration of love and affection and $1 "sold" his son a one-fourth interest in the company valued at $20,000, which interest was described as: "All goods, wares, stock, merchandise, hardware, iron and steel products, tractors, trucks, grading implements, and all farm implements, all accounts receivable of the said Vendor under the trade name of Seabrook Hardware Company, the store property where Seabrook Hardware Company is now located and the railroad warehouse property." The bill of sale also provided that the business "shall be carried on as a partnership between the vendor and his son, the vendee, under the trade name of Seabrook Hardware Company." By an essentially similar instrument petitioner also "sold" his daughter a one-fourth interest1951 Tax Ct. Memo LEXIS 361">367 in the company's business valued at $24,000. The discrepancy in the value of these two interests is unexplained. Prior to July 1, 1942, Inez and Whitmarsh had no assets of their own. On March 15, 1943, petitioner filed a gift tax return for the calendar year 1942 which disclosed the following: Claimed value of one-fourth inter-est in Seabrook Hardware Com-pany to W. W. Seabrook$24,000.00Claimed value of one-fourth inter-est in Seabrook Hardware Com-pany to Inez Seabrook Davenport24,000.00Total value claimed gifts$48,000.00Loss: Two exclusions $4,000each donee$ 8,000.00Specific exemptionclaimed40,000.0048,000.00Taxable giftsNonePetitioner had led his children to believe from their early youth that when they had completed their education and attained their majority, he would take them into the business with him as partners and give them an interest therein, provided they worked hard, learned the business and desired such a partnership. Due to this promise to his children petitioner on several occasions rejected offers of his employees to buy an interest in the business. By these bills of sale petitioner, his son and1951 Tax Ct. Memo LEXIS 361">368 daughter formed a partnership in the business of Seabrook Hardware Company on July 1, 1942. Petitioner considered July 1, 1942, as an appropriate time to give each of his children an interest in the business for several reasons. Whitmarsh had recently graduated from college and married. Inez had completed her education, was married and was to have a child. Moreover, the primary purpose of petitioner in forming the partnership at this time arose from the fact his son was expecting any day to receive his commission and report for active duty in the Army, while Inez' husband had already gone overseas. Petitioner wanted his son and his son's wife to know that he, the son, would have something to come back to after the war. Similarly petitioner wanted his daughter to know that Davenport would, through her interest in the business, also have something to come back to after the war. It was for these reasons that petitioner timed the instruments as he did. A partnership agreement was not executed at this time because the partners did not think it was necessary. Shortly after July 1, 1942, the books of Seabrook Hardware Company were altered to conform to the partnership arrangement. Capital1951 Tax Ct. Memo LEXIS 361">369 accounts were set up on the books in the names of petitioner, his son and daughter. The principal creditors of the company, its bank, its insurance company and its key employees were notified of the partnership at this time. The bills of sale in July 1942 were subsequently followed by the execution of a written instrument designated as a "partnership agreement", dated August 3, 1943. The Seabrooks learned that a more formal instrument was customary in the formation of a partnership, but the absence of Whitmarsh from home and the sickness of Inez during this period delayed the execution of this partnership agreement. The agreement recited that petitioner had transferred a one-fourth interest in the business to each child on July 1, 1942, that the business had been operated as a partnership thereafter, and that all the parties were desirous of formulating formal articles of partnership as of July 1, 1942, in the name of Seabrook Hardware Company. The agreement stated that the capital of the partnership was to be owned 50 per cent by petitioner and 25 per cent each by Inez and Whitmarsh. Net profits and losses were to be shared on the same percentage basis. Net profits were to be distributed1951 Tax Ct. Memo LEXIS 361">370 each year except for such amounts as the partners mutually agreed to set aside for investment and except for such amounts as the partners elected to leave as credits to their capital accounts. The capital of the partnership was stated to be $96,000, contributed as follows: $48,000 by petitioner and $48,000 equally by the two children. The agreement authorized the three designated partners to draw checks in the firm's name. Petitioner was understood and agreed to be general manager of the business. The firm was to continue until dissolved. Whitmarsh signed the agreement at Fort Belvoir, Virgina, while Inez signed at Tallahassee with her father. During the two weeks Whitmarsh worked at the store following the execution of the bills of sale on July 1, 1942, he frequently discussed various vital business problems created by the war with his father. He also announced his partnership status to various key employees and signed company checks. On July 13, 1942, Whitmarsh received his commission in the Army and he went on active duty the following day, reporting to Fort Belvoir. In anticipation of shipment overseas and in compliance with a routine Army recommendation, Whitmarsh executed a1951 Tax Ct. Memo LEXIS 361">371 power of attorney on August 14, 1942, authorizing his father to act for him. He went overseas in January 1943 with a construction battalion and participated in the North African and Italian campaigns. He was overseas for 20 months before he returned to this country and release from military service did not come until November 1945. During the fiscal years ended June 30, 1943, and June 30, 1944, Whitmarsh performed no services whatsoever in the hardware business after July 13, 1942. He did on occasion correspond with his father concerning the business throughout his service career. On his return to civilian life in 1945 Whitmarsh immediately went to work on a full-time basis at Seabrook Hardware Company as buyer and floor manager. Inez gave birth to a daughter in October 1942 and was predominantly occupied with the duties of mother and housekeeper during the fiscal years at issue. She did help her father at the store occasionally when business was particularly rushed and extra help was needed. Occasionally Inez made cursory visits to the store, at which time she noted the merchandise on display and discussed business matters with the office personnel. Her husband was released from1951 Tax Ct. Memo LEXIS 361">372 the Army in July 1945 and started to work for Seabrook Hardware Company in order to look after his wife's interest in the business. He took over the management of the warehouse, repair shop and the machinery and equipment side of the business. From July 1, 1942, through June 30, 1944, the business of Seabrook Hardware Company was operated by petitioner in the same manner as prior to this period when it was a sole proprietorship. Petitioner continued to exercise complete control over the store with the assistance of his general manager, Patterson. It is true that during these years he discussed business matters of vital significance with his daughter and with his son before the latter went overseas. Among the problems discussed were whether the wholesale hardware business should be expanded, whether the machinery business should be separated from the hardware business, whether to build a plant for the machinery business, the personnel shortage and priority difficulties. On one occasion after he entered the service and before he went overseas Whitmarsh returned to Tallahassee. At that time he discussed machinery contracts with his father. On another occasion after July 14, 1942, petitioner1951 Tax Ct. Memo LEXIS 361">373 met his son in New York to discuss whether the business should be sold. Running the business alone during wartime with all its complications such as shortages of material and personnel seemed just too much of a task for petitioner and he was willing to give up such arduous work. Whitmarsh, however, refused, as had his sister, to give up his interest in the business and urged his father to stick it out and do the best he could. The following schedule shows the income credited to the respective accounts of petitioner and the two children as well as their withdrawals for the years indicated: Fiscal Year Ended June 30, 1943IncomeWith-CrediteddrawalsL. W. Seabrook$57,968.29$46,129.71W. Whitmarsh Seabrook28,984.142,076.13Inez SeabrookDavenport28,984.15974.39Fiscal Year Ended June 30, 1944L. W. Seabrook$38,722.42$46,610.80W. Whitmarsh Seabrook19,361.226,832.10 Inez SeabrookDavenport19,361.2211,719.62 *1951 Tax Ct. Memo LEXIS 361">374 Subsequent to July 1, 1942, Whitmarsh and Inez drew checks on the partnership funds both for expenses of the business and for their personal use. When taxes or other obligations of one of the partners came due, the company wrote checks to cover them and charged the amounts to the partner's account. For the fiscal year ended June 30, 1943, the partnership filed a partnership return reporting ordinary net income in the amount of $115,936.58. The distributive shares of this income were stated to be $57,968.29 to petitioner, $28,984.14 to Whitmarsh, and $28,984.15 to Inez. These amounts were reported by these individuals in their returns. For the fiscal year ended June 30, 1944, the partnership reported ordinary net income in the amount of $77,632.89. The distributive shares of this income were stated to be $38,816.45 to petitioner and $19,408.22 to each of the two children. These amounts were reported by these individuals on their returns. In his notice of deficiency respondent increased petitioner's income for the fiscal years ended June 30, 1943 and 1944, by the amounts reported by petitioner's children from the partnership business in those years. In explanation of his determination, 1951 Tax Ct. Memo LEXIS 361">375 respondent stated: "It is held that the entire net income of the business conducted by you under the name of Seabrook Hardware Company is taxable to you." Petitioner and his two children did not intend, either on July 1, 1942, or any other time during the fiscal years ended June 30, 1943 and 1944, to join together in the present conduct of the business of Seabrook Hardware Company. Whitmarsh Seabrook and Inez Seabrook Davenport were not valid partners, for income tax purposes, in the business of Seabrook Hardware Company during these two years. Opinion HILL, Judge: The sold question for determination in this case is whether a partnership, valid for tax purposes, existed between petitioner and his two children, Whitmarsh and Inez, in the fiscal years ended June 30, 1943 and 1944. Whether such a partnership did exist depends on the intent of the parties regarding the present conduct of the business of Seabrook Hardware Company during these two years. To find their intent we have considered all the evidence surrounding the formation of the partnership on July 1, 1942, the partnership instruments themselves, the conduct of the parties and the operation of the business subsequent1951 Tax Ct. Memo LEXIS 361">376 to the formation of the partnership in the light of the now familiar principles set forth in . It is our conclusion that petitioner and his son and daughter did not intend to join together in the present conduct of the hardware business either on July 1, 1942, when the partnership was formed, or at any subsequent time during the taxable years in question. The personal circumstances of both Inez and Whitmarsh on July 1, 1942, make it plain that neither they nor their father could expect that they would be able to contribute services or capital to the business of Seabrook Hardware Company or participate in its management in the near future. At that time the son and daughter owned no capital originating with themselves which they could have added to the assets of the business, and the possibility of acquiring funds above and beyond what was needed to meet their own wants was remote. Whitmarsh had graduated from a military college the month before and his departure for active duty in the armed forces for the duration of the war was imminent. Inez was expecting a child in a few months which would confine her activities to the family1951 Tax Ct. Memo LEXIS 361">377 hearth for an indefinite period. Petitioner's statements setting forth the primary reason for forming the long-promised family partnership on this particular date also support the conclusion that it was not created for the purpose of obtaining the services and capital of the children in the conduct of the business. Rather these statements show that petitioner actually did not expect that his children would be in a position to make any vital contribution towards producing the income of Seabrook Hardware Company in the near future. When asked at the first hearing when he took his children into the business, petitioner stated: "Well, about the time they were fixing to get into the Army, through with school, fixing to - looked like they were going to have to go to war, and I thought that was about the best time to take them into the business. There was trying times about that time. I was trying to do everything I could to get things fixed up before they did get away. * "I told them that I was going to give them a fourth interest in the business. I wanted them to feel like it was theirs; when they came back, they would come into the business and run it." This language makes1951 Tax Ct. Memo LEXIS 361">378 it obvious that petitioner chose July 1, 1942, to form the partnership to assure his son and son-in-law of a future with Seabrook Hardware Company on their return from the war. Further support for our conclusion lies in the terms of the partnership agreement which provided that petitioner was to be general manager of the business. Thus in view of the personal circumstances of the children at the time the partnership was formed, the reasons given by petitioner for creating the partnership at that time and the partnership agreement itself, we are convinced that no business purpose, but only family consideration lay behind this step. It is true both Whitmarsh and Inez had the educational background and experience to make valuable additions to the hardware business at some future time, but taking them into the business before they were available to perform such services can only be justified on personal grounds. Events subsequent to July 1, 1942, demonstrates that the children in actuality did not contribute to the partnership's income or participate in its business affairs to any significant extent during the two fiscal years in question. It is clear they contributed no original capital1951 Tax Ct. Memo LEXIS 361">379 to the enterprise at any time and petitioner does not claim otherwise. It is equally self-evident that Inez and Whitmarsh were not able to proffer vital services or take a hand in the management of the partnership. During the entire two-year period Whitmarsh was able to work at the store for only two weeks, and we must draw the normal inference concerning the value of these services from the fact that the nature of them is not disclosed outside of the signing of checks. The fact that Whitmarsh intended to provide the partnership with his services at the conclusion of his Army service is not a valid substitute for contributing his efforts to the attainment of partnership income during the tax years under consideration. As was noted by the Supreme Court in the Culbertson case, supra, the vagaries of human experience do not permit us to use a good faith intent as to future conduct to form the basis for the present taxation of income. Petitioner bases his claim that Whitmarsh participated in the management of Seabrook Hardware Company on the fact his son discussed business problems with him during the first two weeks of July 1942 and on two other occasions prior to going overseas, and1951 Tax Ct. Memo LEXIS 361">380 also corresponded with him about partnership affairs. We are not persuaded under the circumstances that such discussion and correspondence between two members of a family concerning a family business is sufficient in itself to constitute active sharing in the management of the business. Rather we think that petitioner was trying to keep his son abreast of vital business matters as a future participant therein and was not relying on his son to shoulder a part of the managerial responsibility for the present conduct of the business. This is especially true in view of the fact Whitmarsh was either in training to go overseas or in combat operations overseas the entire taxable period after July 14, 1942. We are convinced that the vital decisions in running the business still were squarely on the shoulders of petitioner and that his son was no more than an interested by-stander until after the war. It is clear that Inez neither contributed substantially to the control and management of the business nor rendered it vital services during the taxable years. She was married, and expecting a baby on July 1, 1942. As a matter of fact she was troubled by illness prior to the birth of a daughter1951 Tax Ct. Memo LEXIS 361">381 in October 1942. Thereafter she was predominantly occupied with raising the child and with household tasks. By her own admission she only worked at the store on a few occasions when the office force was overloaded. Her chief claim to participation in the management of the business is based on the fact that she discussed vital questions concerning its operations with her father. But again we note that it is normal in any household to discuss the business problems of its members. There is nothing in the evidence concerning these discussions to make us feel that Inez effectively contributed thereby to the control of company affairs. We have largely discounted the self-serving statements of petitioner and Inez at the second hearing that she was in the store almost every day checking the merchandise on display and overseeing the handling of office affairs. We prefer to rely on petitioner's statements against interest at the first hearing regarding her participation in business affairs. When asked if Inez worked in the business during the taxable years, petitioner stated: "A. She worked some; sometimes we got in a tight [spot], she'd come in there and help us, maybe, but her hands were1951 Tax Ct. Memo LEXIS 361">382 full with other things. * * * "Q. So that she was busy with the family, rather than working in the business during those two years? "A. Yes, sir." The best proof that petitioner's children did not play an effective role in the management of Seabrook Hardware Company during the taxable years is petitioner's own frank admission that there was no material change in the management of the store subsequent to the formation of the partnership, but that his supervision over the business remained the same as in prior years when the company was a sole proprietorship. His desire to sell the hardware business because the pressure of operating it alone during the war years was too much for him is a further indication that his children were of no effective aid in operating the store in the war years. Under these circumstances it is evident that the income of Seabrook Hardware Company in the fiscal years July 1, 1942-June 30, 1944, was earned by the capital, services and management skill of petitioner alone, and under familiar principles of income tax law such income consequently must be taxed to him. Two of the cases upon which petitioner placed reliance, ,1951 Tax Ct. Memo LEXIS 361">383 and , are readily distinguishable on the facts. This is not an instance where a taxpayer's children have achieved bona fide partnership status prior to the taxable years by their contributions to the business and then have been prevented from further participation in partnership affairs by entry in the armed services or by retiring temporarily for the purpose of raising a family. While Whitmarsh and Inez were raised in the business, their services in the store were secondary to attaining an education in the years up to July 1, 1942. Whitmarsh did not complete his education until May 30, 1942. Inez was married in December 1940 and stayed with her husband in Camp Stewart, Georgia, until February 1942. She never worked regularly in the hardware business after April 1939. Furthermore, there was never any intent, express or implied, on the part of petitioner and children that they operate the business as partners prior to July 1, 1942. We therefore uphold respondent's determination that Whitmarsh and Inez were not valid partners in the business of Seabrook Hardware Company in the fiscal years ended June 30, 1943 and 1944. Decision will be entered1951 Tax Ct. Memo LEXIS 361">384 for respondent. Footnotes. Of the withdrawals $6,142.98 was for the purchase of United States bonds subsequently used for payment of Federal income taxes. ↩*. Of the withdrawals $11,491.24 was for the payment of Federal income taxes.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625179/	Hugh M. Brand and Elizabeth G. Brand, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentBrand v. CommissionerDocket Nos. 11106-80, 12326-80, 12330-80, 12331-80, 9430-81, 10022-81, 11894-81, 16923-81, 17393-81United States Tax Court81 T.C. 821; 1983 U.S. Tax Ct. LEXIS 15; 81 T.C. No. 50; October 31, 1983, Filed 1983 U.S. Tax Ct. LEXIS 15">15 Decisions will be entered under Rule 155. Petitioners were limited partners in various limited partnerships (the partnerships) which were engaged together in a joint farming venture with another limited partnership. Petitioners guaranteed repayment of certain loans taken out by the partnerships for the benefit of the joint venture. For the years in issue, petitioners deducted losses of the partnerships in excess of their cash contributions to the partnerships. Held, petitioners were not at risk under sec. 465(b), I.R.C. 1954, for the amount of partnerships' loans they guaranteed; thus, they may not deduct losses of the partnership in excess of their cash contributions. James A. Ririe, for the petitioners.Dan A. Lisonbee, for the respondent. Fay, Judge. FAY81 T.C. 821">822 OPINIONRespondent determined deficiencies in petitioners' Federal income tax as follows:YearDeficiencyHugh M. Brand1976$ 439and Elizabeth G. BrandFoster W. Polley19764,513and Reva B. PolleyWilliam B. Simpson19761,883and Katherine SimpsonLouis J. Hendrickson197611,045and Phyllis M. HendricksonKenneth L. Cameron19761,487and Debra C. Cameron1977180197844Michael T. Michelas19761,61019774511978694Raymond Heard19763,730and Sharlene Heard19777141978208Charles M. Ortiz19772,387and Bonita K. OrtizEstate of Wilmer Allen197615,630and Melba Allen19771,94819788351983 U.S. Tax Ct. LEXIS 15">17 81 T.C. 821">823 These cases have been consolidated for trial, briefing, and opinion. After concessions, the only issue is whether petitioners were at risk under section 4652 for certain loans they guaranteed.The facts have been fully stipulated and are so found.Petitioners Hugh M. Brand and Elizabeth G. Brand resided in Palos Verdes, Calif., when they filed their petition herein. Petitioners Charles M. Ortiz and Bonita K. Ortiz resided in Salt Lake City, Utah, when they filed their petition herein. All other petitioners resided in Las Vegas, Nev., when they filed their petitions herein. 31983 U.S. Tax Ct. LEXIS 15">18 In September 1973, David Van Wagoner (Van Wagoner) and five brothers in the Ririe family (herein collectively referred to as the Ririe brothers) commenced their farming venture by organizing Jeffco Farms (Jeffco), an Idaho limited partnership. All of the Ririe brothers had experience and technical training in farming. Throughout 1973, 1974, and 1975, both Jeffco and the Ririe brothers, as individuals, purchased land in the Snake River Plain of Idaho. In order to produce crops on this land, it was necessary to drill irrigation wells, install pumps, and purchase farm machinery. Van Wagoner and the Ririe brothers formed Maxim, Inc. (Maxim), an Idaho corporation, to purchase and/or manufacture the requisite equipment and machinery.In furtherance of their farming venture, Van Wagoner and Wayne Ririe, one of the Ririe brothers, organized 11 limited partnerships (herein the partnerships) during 1973 through 1977. Van Wagoner was the sole general partner and petitioners were some of the limited partners of all the partnerships. Each partnership purchased from Jeffco a portion of its farmland, and each one purchased machinery from Maxim necessary to farm the land which they had acquired. 1983 U.S. Tax Ct. LEXIS 15">19 The partnerships pooled their equipment so that each partnership had access to a complete line of machinery and storage facilities. Beginning in 1975 and continuing through the years 81 T.C. 821">824 in issue, all the partnerships and Jeffco entered into joint venture agreements whereby all their farmland and facilities were jointly operated as the "Jeffco Group" (the Jeffco Group).During the years in issue, the Jeffco Group suffered unexpected losses due to the declining farm economy. In order to help the Jeffco Group's financial situation, Jeffco borrowed $ 1,010,000 from the Federal Land Bank of Spokane, Wash. (herein Jeffco's loan), pursuant to a recourse note dated August 25, 1975. Jeffco's loan was secured by a mortgage on portions of the land Jeffco had retained in Idaho. On December 31, 1976, nine of the partnerships entered into a loan assumption agreement (herein the assumption agreement) with respect to Jeffco's loan. By the terms of the assumption agreement, the nine partnerships assumed a portion of Jeffco's loan in satisfaction of certain debts they owed to Jeffco. 4 As the general partner, Van Wagoner executed the assumption agreement on behalf of each partnership. 1983 U.S. Tax Ct. LEXIS 15">20 In 1976, Jeffco and three of the partnerships also borrowed a certain sum from the First Security Bank of Idaho (herein the 1976 operating loan) to help their production of crops. 5 Pursuant to provisions contained in the assumption agreement and in related agreements (herein the guaranty agreements), the limited partners of the respective partnerships, in their individual capacities, collectively guaranteed repayment of both Jeffco's loan and the 1976 operating loan. The guaranty agreements were executed on behalf of the limited partners by Van Wagoner pursuant to "Power1983 U.S. Tax Ct. LEXIS 15">21 of Attorney" 81 T.C. 821">825 documents (herein the powers of attorney). 6 The powers of attorney authorized Van Wagoner to do the following:To sign as guarantor or surety on certain Promissory Notes, or other instruments evidencing indebtedness, made by said David Van Wagoner as Trustee and General Partner of THIS AUTHORITY IS LIMITED TO INDIVIDUAL (AS DISTINGUISHED FROM JOINT AND SEVERAL) LIABILITY ON SECURED FINANCING FOR PARTNERSHIP PURPOSES ONLY AND SAID ATTORNEY IN FACT IS NOT AUTHORIZED TO SIGN AS GUARANTOR OR SURETY ON ANY UNSECURED FINANCING. 71983 U.S. Tax Ct. LEXIS 15">22 The amount each limited partner guaranteed equaled his percentage ownership in his partnership multiplied by the amount of any loans his partnership had either assumed or borrowed. 8During the years in issue, petitioners did1983 U.S. Tax Ct. LEXIS 15">23 not make any payments in connection with Jeffco's loan, but certain petitioners 81 T.C. 821">826 did make payments in 1979 because their respective partnerships were unable to meet their loan obligations. The record does not indicate whether during the years in issue petitioners made any payments in connection with the 1976 operating loan.On their returns for the years in issue, petitioners deducted losses of their partnerships in excess of their cash contributions to the partnerships. In his notice of deficiency, respondent determined that since petitioners were not at risk under section 465(b) for the amount of partnerships' loans they guaranteed, they were not entitled to deduct losses in excess of their cash contributions.The only issue before us is whether petitioners were at risk under section 465(b) for the amount of their partnerships' loans which they guaranteed. Respondent argues petitioners were not at risk under section 465(b) for any of the loans which they guaranteed because they were not personally liable for the repayment of those loans. Petitioners argue they were at risk under section 465(b) because they were personally liable for the repayment of the loans as a result1983 U.S. Tax Ct. LEXIS 15">24 of the guaranty agreements.Generally, section 465(a)91983 U.S. Tax Ct. LEXIS 15">25 imposes a limitation upon the deductibility of losses arising from an activity specified in section 465(c). 10 This limitation is computed by reference to the amounts a taxpayer is at risk for an activity under section 81 T.C. 821">827 465(b). One of the enumerated activities in section 465(c) is farming. The parties agree petitioners' limited partnerships were engaged in farming activities within the meaning of that section. Thus, resolution of the issue herein depends solely on whether and to what extent petitioners were at risk with respect to their partnerships' farming activities as defined in section 465(b). 11Section 465(b) provides that in order for petitioners to have been at risk with respect to the loans in question, they had to be either personally liable for repayment of the loans or have pledged property, other than property used in the farming venture, as security for the loans. Sec. 465(b)(2). Since petitioners did not pledge "other property" as security, the only question is whether they were personally liable for repayment of the loans.1983 U.S. Tax Ct. LEXIS 15">26 Petitioners first argue they were personally liable because they assumed all of the loans in question. We disagree. Pursuant to the powers of attorney, Van Wagoner was authorized only to sign loans on behalf of petitioners as guarantors or sureties of their partnerships' indebtedness. Van Wagoner was in no way authorized to assume loans on petitioners' behalf. Thus, petitioners' argument that they assumed the loans is totally without merit.Petitioners next argue that pursuant to the guaranty agreements, they became personally liable on the loans within the meaning of section 465(b)(2). Since section 465(b) does not specifically refer to "guarantors," we must turn to the 81 T.C. 821">828 legislative history of section 465 for guidance. Section 465 was enacted in order to combat what Congress perceived to be an increasing incidence of abuses in tax shelters. Congress' intention was to limit a taxpayer's losses in certain activities to the amount he was economically at risk in the activity. S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 85. As is clearly indicated by the Senate report, a taxpayer is not to be considered at risk for any amount borrowed if he1983 U.S. Tax Ct. LEXIS 15">27 is protected against economic loss which he may suffer:Under this concept, an investor is not "at risk" if he arranges to receive insurance or other compensation for an economic loss after the loss is sustained, or if he is entitled to reimbursement for part or all of any loss by reason of a binding agreement between himself and another person. [1976-3 C.B. (Vol. 3) 87. Emphasis added.]A guaranty is an undertaking or promise on the part of the guarantor which is collateral to a primary or principal obligation on the part of another and which binds the guarantor to perform in the event of nonperformance by the primary obligor.121983 U.S. Tax Ct. LEXIS 15">29 Industrial Inv. Corp. v. Rocca, 100 Idaho 228">100 Idaho 228, 596 P.2d 100">596 P.2d 100 (1979); Daly v. Del E. Webb Corp., 96 Nev. 359">96 Nev. 359, 609 P.2d 319">609 P.2d 319 (1980). A guarantor has a remedy against the primary obligor to recover any amounts he has to pay to the creditor. Mack Financial Corp. v. Scott, 100 Idaho 889">100 Idaho 889, 606 P.2d 993">606 P.2d 993 (1980). See also Austad v. United States, 386 F.2d 147">386 F.2d 147, 386 F.2d 147">151 (9th Cir. 1967);1983 U.S. Tax Ct. LEXIS 15">28 Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, 352 U.S. 82">85 (1956). Since a guarantor is entitled to reimbursement from the primary obligor, it is clear that Congress did not intend that a guarantor of a loan is personally liable for repayment of the loan within the meaning of section 465(b)(2)(A). Thus, we conclude petitioners were not personally liable under section 465(b)(2) for the repayment of the loans they guaranteed. 1381 T.C. 821">829 Petitioners' final argument is that they waived any statutory protection they had as limited partners by signing the guaranty agreements. Thus, petitioners contend they were personally liable for repayment of the loans in the same manner as the general partners. For the following reasons, we reject this contention.Whether a limited partner is liable as a general partner is a question which must be analyzed under State law. Generally, under common law, a partnership is governed by the law of the State where it was organized. See Nashville City Bank & Trust Co. v. Massey, 540 F. Supp. 566">540 F. Supp. 566, 540 F. Supp. 566">575 (M.D. Ga. 1982); Gilman Paint & Varnish Co. v. Legum, 197 Md. 665">197 Md. 665, 80 A.2d 906">80 A.2d 906 (1951). Once again, the parties have failed to set forth sufficient facts concerning where the partnerships were organized. Some of the partnerships used an Idaho address and some used a Nevada address on their tax1983 U.S. Tax Ct. LEXIS 15">30 returns for the years in issue. Since there is no indication the partnerships were organized elsewhere, we will look to the law of both of these States. Fortunately, during the years in issue, both States followed the Uniform Limited Partnership Act. 14The distinctive characteristic of a limited partnership is that a limited partner is not liable for the debts of the partnership in excess of his capital contribution. Idaho Code secs. 53-201, 53-207 (1979); Nev. Rev. Stat. secs. 88.020, 88.080 (1979). A limited partner is liable as a general partner if, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. 15Idaho Code sec. 53-207 (1919); 1983 U.S. Tax Ct. LEXIS 15">31 Nev. Rev. Stat. sec. 88.080 (1931). There is no basis for concluding that by signing the guaranty agreements petitioners thereby became involved in the control of their partnerships' businesses. Thus, there is no merit to their argument that they became personally liable for the repayment 81 T.C. 821">830 of the partnerships' loans in the same respect as the general partners.Accordingly, for the above reasons, we sustain respondent's determination that petitioners were not at risk under section 465(b) for the amount of loans which they guaranteed. 161983 U.S. Tax Ct. LEXIS 15">32 To reflect concessions and the foregoing,Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Foster W. Polley and Reva B. Polley, docket No. 12326-80; William B. Simpson and Katherine Simpson, docket No. 12330-80; Louis J. Hendrickson and Phyllis M. Hendrickson, docket No. 12331-80; Kenneth L. Cameron and Debra C. Cameron, docket No. 9430-81; Michael T. Michelas, docket No. 10022-81; Raymond Heard and Sharlene Heard, docket No. 11894-81; Charles M. Ortiz and Bonita K. Ortiz, docket No. 16923-81; and Estate of Wilmer Allen and Melba Allen, docket No. 17393-81.↩2. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue.↩3. The term "petitioners" as used hereafter does not refer to those petitioners who are parties herein solely by virtue of having filed joint returns.↩4. The following nine limited partnerships assumed a portion of the $ 1,010,000 Federal Land Bank loan in the amounts as follows:↩Limited partnershipAmount assumedNevada Farm Irrigation$ 146,555Nevada Farm Equipment146,555Nevada Farm Properties135,500Farm Production Properties116,273Farm Production Equipment117,073Farm Production Irrigation29,847Idaho Farms T-1100,800Idaho Farms T-283,046Idaho Farms 76-A134,3515. The three limited partnerships were Idaho Farms T-1, Idaho Farms T-2, and Idaho Farms 76-A.↩6. Petitioner Hugh M. Brand's "Power of Attorney" is not part of the record, but both parties agree that he executed a similar document granting Van Wagoner the same authority.↩7. All of the powers of attorney signed by petitioners were identical except for one minor and insignificant difference in the "Power of Attorney" signed by petitioner Louis J. Hendrickson.↩8. For example, petitioners guaranteed the following amounts of Jeffco's loan assumed by their partnerships as follows:↩Limited partnershipAmountHugh M. BrandNevada Farm Equipment$ 10,991.63(7.5% X $ 146,555)Foster W. PolleyNevada Farm Irrigation$ 10,991.63(7.5% X $ 146,555)William R. SimpsonNevada Farm Equipment$ 3,668.88(2.5% X $ 146,555)Louis J. HendricksonFarm Production Irrigation$ 5,969.40(20% X $ 29,847)Idaho Farms T-2$ 4,152.30(5% X $ 83,046)Idaho Farms 76-A$ 2,357.04(1/57 X $ 134,351)Hendrickson total=$ 12,478.74Kenneth L. CameronNevada Farm Equipment$ 3,663.88(2.5% X $ 146,555)Michael T. MichelasNevada Farm Equipment$ 3,663.88(2.5% X $ 146,555)Raymond HeardNevada Farm Equipment$ 10,991.63(7.5% X $ 146,555)Charles M. OrtizTeton Farms(not included in agreement)Wilmer AllenNevada Farm Irrigation$ 21,983.25(15% X $ 146,555)Farm Production Properties$ 5,813.65(5% X $ 116,273)Allen Total =$ 27,796.909. Sec. 465↩ was added to the Code by Pub. L. 94-455, 90 Stat. 1531, the Tax Reform Act of 1976, and it is applicable to taxable years beginning after Dec. 31, 1975.10. We note that, although sec. 465(a) makes no reference to partners or partnerships, it is clear that sec. 465 was intended to apply to partners and partnerships. See Peters v. Commissioner, 77 T.C. 1158">77 T.C. 1158, 77 T.C. 1158">1163 (1981). Therefore, petitioners are subject to the limitations of sec. 465↩.11. Sec. 465(b) provides, in relevant part, as follows:SEC. 465 (b). Amounts Considered at Risk. -- (1) In general. -- For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including -- (A) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and(B) amounts borrowed with respect to such activity (as determined under paragraph (2)).(2) Borrowed amounts. -- For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he -- (A) is personally liable for the repayment of such amounts, or(B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property).No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1).↩12. Generally, under common law, a guaranty agreement is governed by the law of the State where it was executed unless performance is intended to take place elsewhere. See Equitable Trust Co. v. Bratwursthaus Management Corp., 514 F.2d 565">514 F.2d 565 (4th Cir. 1975); Leeds v. Whitney National Bank of New Orleans, 374 F.2d 500">374 F.2d 500 (5th Cir. 1967); Hope v. First Nat. Bank & Trust Co. , 198 La. 878">198 La. 878, 5 So. 2d 138">5 So. 2d 138↩ (1941). Petitioners do not dispute respondent's contention that either Idaho or Nevada law applies. Unfortunately, the record does not set forth sufficient facts for us to make this determination. Nevertheless, both Idaho and Nevada, as well as the common law, follow the same general rules of guaranty law.13. On this point, see sec. 1.465-6(d), Proposed Income Tax Regs., 44 Fed. Reg. 32238↩ (June 5, 1979).14. In 1982, Idaho's Uniform Limited Partnership Law, enacted in 1919, was repealed, and Idaho's Limited Partnership Act was enacted. All references herein to the Idaho Code are made in respect to Idaho's Uniform Limited Partnership Law enacted in 1919 and as amended and in effect during the years in issue.↩15. The only other circumstance under which a limited partner may be liable as a general partner is if his surname appears in the partnership name. Idaho Code sec. 53-205 (1919); Nev. Rev. Stat. sec. 88.060↩ (1931).16. Respondent further argues petitioners were not at risk for the loans in question because the lender had an interest in the farming activities, other than an interest as a creditor. Sec. 465(c)(3)(A). It is unnecessary for us to address this issue in light of our holding that petitioners were not at risk under sec. 465(b)↩ for the amount of loans they guaranteed.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625181/	George Y. Erlandson v. Commissioner.Erlandson v. CommissionerDocket No. 65621.United States Tax CourtT.C. Memo 1958-218; 1958 Tax Ct. Memo LEXIS 2; 17 T.C.M. 1077; T.C.M. (RIA) 58218; December 31, 19581958 Tax Ct. Memo LEXIS 2">2 Petitioner received wages for his services aboard a ship owned by the United States and operated by a private shipping firm under a general agency contract. Held, the wages were paid by the United States or an agency thereof and thus they were not tax-exempt under section 911(a), I.R.C. of 1954. Robert W. Teskey, 30 T.C. 456">30 T.C. 456, followed. Ralf H. Erlandson, Esq., 1935 Washington Street, Milwaukee, Ore., for the petitioner. Jack T. Fuller, Esq., for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: The Commissioner has determined a deficiency in the petitioner's income tax in the amount of $1,960.38 for the calendar year 1954. The1958 Tax Ct. Memo LEXIS 2">3 sole issue for determination is whether the petitioner is entitled to a partial exemption for the seaman's wages he earned while serving aboard an American ship operating between ports in Japan and Korea, under section 911(a)(2) of the Internal Revenue Code of 1954. Findings of Fact Most of the facts have been stipulated and are included herein by this reference. The petitioner, a citizen of the United States, filed his income tax return for the calendar year 1954 with the director of internal revenue for the district of Oregon. In January 1952, the petitioner signed shipping articles at Portland, Oregon, to serve as Second Officer aboard the M/V Jumper Hitch. At the trial of this case, respondent contested petitioner's claimed presence in a foreign country as prescribed by section 911(a)(2), Internal Revenue Code of 1954; however, respondent has now conceded this issue. We adopt respondent's language as our finding: "* * * the petitioner, during the 18 consecutive months immediately preceding April 10, 1954, was present in the territorial waters of a 'foreign country or countries during at least 510 full days' in that period1958 Tax Ct. Memo LEXIS 2">4 and received compensation for the services he performed abroad 'from sources without the United States.'" The United States of America owned the Jumper Hitch. Through and by the Director, National Shipping Authority of the Maritime Administration, Department of Commerce, the United States entered into a general agency agreement for the operation of the ship with Pacific Far East Line, Inc. This Service Agreement, dated April 6, 1951, was contract number MA-82-GAA, and in part provided the following: "THIS AGREEMENT, made as of April 6, 1951, between the UNITED STATES OF AMERICA (herein called the 'United States') acting by and through the Director, National Shipping Authority of the Maritime Administration, Department of Commerce, and, PACIFIC FAR EAST LINE, INC., a corporation organized and existing under the laws of Delaware, (herein called the 'General Agent'): "ARTICLE 1. APPOINTMENT OF GENERAL AGENT. The United States appoints the General Agent as its agent and not as an independent contractor, to manage and conduct the business of vessels assigned to it by the United States from time to time and accepted by the General Agent. "ARTICLE 2. ACCEPTANCE OF APPOINTMENT. The1958 Tax Ct. Memo LEXIS 2">5 General Agent accepts the appointment and undertakes and promises so to manage and conduct the business for the United States, in accordance with such directions, orders or regulations not inconsistent with this Agreement as the United States has prescribed, or from time to time may prescribe, and upon the terms and conditions herein provided, of such vessels as have been or may be by the United States assigned to and accepted by the General Agent for that purpose. "ARTICLE 3. DUTIES OF THE GENERAL AGENT. For the account of the United States, in accordance with such directions, orders, regulations, forms and methods of supervision and inspection as the United States may from time to time prescribe (or in the absence of such directions, orders, regulations, forms and methods of supervision and inspection, in accordance with reasonable commercial practices and/or the use of customary commercial forms), in an economical and efficient manner, and exercising due diligence to protect and safeguard the interests of the United States in connection with the duties prescribed in this Agreement and without prejudice to its rights under Article 6 hereof, the General Agent (solely as agent of1958 Tax Ct. Memo LEXIS 2">6 the United States and not in any other capacity) shall: * "(b) Collect, deposit, remit, disburse and account for all monies due the United States arising in connection with activities under or pursuant to this Agreement, and to the extent disbursements made by the General Agent pursuant to this Agreement are recoverable from insurance, the General Agent shall take such steps as may be appropriate to effect such recovery for the account of the United States. * "(d) Procure the Master of the vessels operated hereunder, subject to the approval of the United States. The Master shall be an agent and employee of the United States, and shall have and exercise full control, responsibility and authority with respect to the manning, navigation and management of the vessel. The General Agent shall procure and make available to the Master for engagement by him the officers and men required by him to fill the complement of the vessel. Such officers and men shall be procured by the General Agent through the usual channels and in accordance with the customary practices of commercial operators and upon the terms and conditions of the General Agent's collective bargaining agreements, 1958 Tax Ct. Memo LEXIS 2">7 if any. The officers and members of the crew shall be subject only to the orders of the Master. All such persons shall be paid in the customary manner with funds provided by the United States hereunder. * * "(f) Furnish and maintain during the period that any vessel is assigned and accepted by the General Agent under this Agreement, at its own expense, a bond with sufficient surety in such amount as the United States shall determine such bond to be approved by the United States as to both sufficiency of surety or sureties and form, and to be conditioned upon the due and faithful performance of all and singular the covenants and agreements of the General Agent contained in this Agreement, including without limitation of the foregoing the condition faithfully to account to the United States for all funds collected and disbursed and funds and property received by the General Agent or its sub-agent. The General Agent may, in lieu of furnishing such bond, pledge direct or fully guaranteed obligations of the United States of the cash value of the penalty of the bond under an agreement satisfactory in form to the United States. "No monies or slop chest property of the United States1958 Tax Ct. Memo LEXIS 2">8 shall be advanced or entrusted by the General Agent to a Master, purser or any other member of the ship's personnel unless such person is under a bond indemnifying the United States against loss of such monies or property caused solely or in part by the dishonesty or lack of care of any such person in the performance of the duties of any position covered by the bond. "(g)(1) Keep books, records and accounts (which shall be the property of the United States) relating to the activities, maintenance and business of the vessels covered by this Agreement in such form and under such regulations as may be prescribed by the United States; * * " There is an addendum dated October 5, 1951, to the above agreement providing, in part, the following: "ARTICLE 5. DISBURSEMENTS. " * * The United States shall also advance funds to the General Agent to provide for, and the General Agent shall receive credit for, all crew expenditures accruing during the term hereof in connection with the vessels assigned hereunder, including, without limitation, expenditures on account of wages, extra compensation, overtime, bonuses, penalties, subsistence, repatriation, internment, travel, loss of personal1958 Tax Ct. Memo LEXIS 2">9 effects, maintenance and cure, vacation allowances, damages or compensation for death or personal injury or illness, insurance premiums, Social Security taxes, state unemployment insurance taxes and contributions made by the General Agent to a pension or welfare fund with respect to the period of this Agreement and in accordance with a pension or welfare plan in effect on the effective date of this Agreement or which, pursuant to collective bargaining agreements, may become effective during the period of this Agreement with respect to the officers and members of the crew of said vessels who are or may become entitled to benefits under such plan, or any other payment required by law." It has been orally stipulated that the United States provided the general agent with funds for the wage payments due the officers and crew of the Jumper Hitch from the Civil Operations Revolving Fund created by Congress in 1951. (65 Stat. 59) In April 1954, the petitioner was paid $10,299.97 by the United States Government's general agent, Pacific Far East Line, Inc., for his services performed aboard the Jumper Hitch. The petitioner was so paid by the United States or an agency thereof. Opinion1958 Tax Ct. Memo LEXIS 2">10 The only remaining question for decision is whether the petitioner was paid by the United States or an agency thereof, for, if he was paid by either, he will not receive the exemption benefit of section 911(a)(2). 1The recent case of Robert W. Teskey, 30 T.C. 456">30 T.C. 456, involved the same issue, with facts almost identical to those present here, and we there held that the seaman involved in that case was paid by the United States or an agency thereof. The petitioner1958 Tax Ct. Memo LEXIS 2">11 admits that the Teskey case is in point, but requests that we overrule it. We have again carefully considered the issue and find no reason to depart from our prior position. Thus, the petitioner was paid by the United States or any agency thereof and his wages are not exempt from taxation under section 911(a)(2). Decision will be entered for the respondent. Footnotes1. SEC. 911. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES. (a) General Rule. - The following items shall not be included in gross income and shall be exempt from taxation under this subtitle: * (2) Presence in Foreign Country for 17 Months. - In the case of an individual citizen of the United States, who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States (except amounts paid by the United States or an agency thereof) if such amounts constitute earned income (as defined in subsection (b)) attributable to such period; * * [Italics supplied.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625182/	OFFSHORE OPERATIONS TRUST, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent WALTER S. BAIRD AND MARY D. BAIRD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentOffshore Operations Trust v. CommissionerDocket Nos. 1053-71, 724-72 and 723-72United States Tax CourtT.C. Memo 1973-212; 1973 Tax Ct. Memo LEXIS 76; 32 T.C.M. 985; T.C.M. (RIA) 73212; September 24, 1973, Filed Robert A. Trevisani and Thomas A. Wooters, for the petitioners. F. Patrick Matthews, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINIONDAWSON, Judge: In these consolidated cases respondent determined the following deficiencies in petitioners' Federal income taxes: 2 PetitionersDocket No.Taxable Year Ended October 31$0Offshore Operations Trust1053-711966$13,814.00196727,886.00196825,204.00Offshore Operations Trust724-72196917,047.00Walter S. Baird and Mary D. Baird723-72December 31, 196910,859.951973 Tax Ct. Memo LEXIS 76">77 Certain concessions have been made by the parties and will be given effect in the Rule 50 computations. The issues presented for our decision are as follows: 1. Whether Offshore Operations Trust properly allocated its cost basis between the land and building located at 33 University Road, Cambridge, Massachusetts. 2. Whether Offshore Operations used the correct useful life of its building for purposes of computing depreciation deductions for each of the taxable years ended October 31, 1966, through October 31, 1969. 3. Whether Offshore Operations Trust is entitled to an abandonment loss on the building for the taxable year ended October 31, 1969. 4. Whether certain amounts expended in connection with the operation of a yacht, Crows Nest IV, constitute additional income to Walter S. Baird in the taxable year 1969. 3 FINDINGS OF FACT Some of the facts have been stipulated by the parties. The stipulation and supplemental stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. General Offshore Operations Trust, petitioner in docket numbers 1053-71 and 724-72 (herein called Offshore), is a Massachusetts1973 Tax Ct. Memo LEXIS 76">78 trust with transferable shares taxable as a corporation for Federal income tax purposes. Its principal place of business was in Cambridge, Massachusetts, when it filed its petitions herein. There are three trustees of Offshore although Walter S. Baird was the sole stockholder and beneficiary of Offshore in addition to serving as a trustee. Walter S. Baird and Mary D. Baird, petitioners in docket number 723-72, were husband and wife whose residence was in Lexington, Massachusetts, at the time they filed their petition herein. Offshore filed its Federal income tax returns, using the cash method of accounting, for the four fiscal years at issue with the district director of internal revenue at Boston, Massachusetts. 4 The individual petitioners filed their joint Federal income tax return for 1969 with the district director of internal revenue at Boston, Massachusetts. Dr. Walter S. Baird (herein sometimes called petitioner) started a business in scientific instrumentation in 1936 after receiving his PH.D. degree from Johns Hopkins University. The business, Baird Associates, had grown so much by 1940 that it required further space. Dr. Baird located this space at 331973 Tax Ct. Memo LEXIS 76">79 University Road, found its owner and arranged to rent suitable quarters. In 1956 Baird Associates merged with Atomic Instruments taking the corporate name Baird-Atomic. It is a publicly held company with some 8000 shareholders. Petitioner currently holds approximately 5 percent of the outstanding stock. After serving as president of the company for many years, he is presently the chairman of the board. In 1950, Offshore Operations Trust was formed. It owned a boat that was initially used for various purposes for the United States, such as acting as a target vessel as well as disposing of atomic wastes. The boat was also used for pleasure activities by the petitioners. Thirty-three University Road contains a brick milltype building constructed at the turn of this century. 5 The property contains approximately 51,000 square feet of land. The three story building built thereon contains 84,500 square feet of floor space. The manufacturing operations carried on in the building were done so under a "nonconforming use" zoning exception - the building having predated the zoning laws of Cambridge. The petitioner, an avid sailor, became a close personal friend of Herbert1973 Tax Ct. Memo LEXIS 76">80 H. White, the owner of the 33 University Road building. In 1940, Mr. White was nearly 70 years of age. He desired that the operating decisions respecting his buildings be handled by petitioner. Baird Associates initially rented 7,500 square feet of space in the building. By 1960, Baird Associates, then renamed Baird-Atomic, was occupying the entire building. Baird-Atomic was managing the building, making any renovations or additions necessitated by the exigencies of its business and making needed repairs to the premises. The cost of capital improvements was deducted from the rent due. On May 16, 1955, Mr. White gave the petitioner an option to purchase the 33 University Road property. The option provided for a purchase price of $300,000 and was exercisable upon Mr. White's death. Shortly after Mr. White died the petitioner exercised the option and took title to 6 the property in January 1964 from the Cambridge Trust Company, trustee of the Herbert H. White Estate. The property was transferred to Offshore on November 2, 1964. The transfer was treated as not being a taxable event. 33 University Road Property This piece of property in Cambridge contains somewhat1973 Tax Ct. Memo LEXIS 76">81 more than an acre in area. It lies north of the Charles River being separated from the river by a monastery. The monastery, which is of Gothic architectural design, is two stories in height albeit with some higher elevations. To the west lie residential properties. To the north lies two garage-type structures. To the east are the parking and roundhouse facilities of the Massachusetts Bay Transit Authority. These latter facilities were separated from 33 University Road by a 25-foot high brick wall. The area around 33 University Road was heavily congested. Parking and freight access to the manufacturing facilities were difficult for all parties. Arterial highways to the north and south of the property brought traffic to the vicinity of the property. Passage from the major highways to the manufacturing facilities was difficult but not impossible. 7 At the time the petitioner exercised his option to purchase the property it was leased to Baird-Atomic for a period of 10 years ending May 31, 1966. Baird-Atomic purchased the garage located at 130 Mt. Auburn Street from the High-Voltage Engineering Company on August 27, 1957. In order to make available funds for the1973 Tax Ct. Memo LEXIS 76">82 construction of additional plants Baird-Atomic was interested in selling the Mt. Auburn Street garage throughout the period from 1963 until 1965. Walter Baird thought the Company should relocate because of the zoning variance under which the plant was operated, the inadequate parking facilities for employees and visitors, and the production problems inherent in a multi-story manufacturing operation. Immediately adjacent to 33 University Road, Mr. White owned a garage building - the University Garage. Mr. Gerald Hawkins owned an option to purchase this garage from Mr. White. Following Mr. White's death Hawkins exercised this option. Hawkins simultaneously granted the petitioner a right of first refusal to purchase the garage if Hawkins should desire to sell. In consideration for this option the petitioner provided heat and electrical service to the garage. In 1965 the petitioner assigned this option to Baird-Atomic. On November 13, 1965, Baird-Atomic purchased the University Garage for $250,000 from Hawkins. 8 When Offshore acquired the 33 University Road property Baird-Atomic was the sole tenant. At that time Baird-Atomic occupied the premises under a 10-year lease1973 Tax Ct. Memo LEXIS 76">83 from White. This lease term ended on May 31, 1966. At the time of initial negotiation the lease called for an annual rental of $67,800. The landlord was to pay all real estate taxes, maintenance and insurance costs. On May 31, 1966, Baird-Atomic and Offshore entered into a new lease for the 33 University Road premises for 1 year at an annual rental of $86,508. Baird-Atomic was obliged to pay the real estate taxes. These taxes amount to $17,701.07 in 1966. The maintenance costs estimated to be $12,000 per year and the liability and property insurance of $1,800 per year were also paid by Baird-Atomic. The assessed value of the 33 University Road property in January 1964 was: Land$28,000Building$124,500When Offshore acquired the 33 University Road property in January 1964 it did so at a cost of $300,000 which became its basis in the property. At that time petitioner allocated $50,000 to the land and $250,000 to the building. The building was depreciated on the basis of a 25-year useful life. 9 On January 20, 1966, the board of directors of Baird-Atomic voted to purchase land in Bedford, Massachusetts, as a site for a new plant. The1973 Tax Ct. Memo LEXIS 76">84 estimated time required before a move could take place was at least 18 months. The new plant was occupied September 30, 1969, 3 years and 9 months from the date of the meeting authorizing the purchase. In November 1966, Baird-Atomic and Offshore executed an agreement to sell their adjacent properties as a unit rather than as two or three separate parcels. On October 22, 1968, Baird-Atomic and Offshore entered into separate agreements to sell some of their properties - namely the Mt. Auburn Garage and the University Garage to the Cambridge Plaza Real Estate Trust. Following this sale the 33 University Road property was still held by Offshore. On November 13, 1969, the board of directors of Baird-Atomic voted to sell the 33 University Road property, both land and building, to Cambridge Plaza Trust for $30 per square foot if Baird-Atomic acquired it pursuant to a final decree of the Massachusetts Superior Court within 9 months of such agreement. For 18 months following this, the Cambridge Plaza Trust was to have the right of first refusal on the property. 10 Within its fiscal year ended October 31, 1969, Baird-Atomic vacated the 33 University Road property. After Baird-Atomic's1973 Tax Ct. Memo LEXIS 76">85 departure, Offshore contacted a large Boston real estate broker to explore the possibility of renting the 33 University Road property. It was Offshore's belief that contact with one large real estate firm would, by means of multiple listing interlocks, effectively bring the availability of the property to the notice of possible tenants. No other tenants ever occupied the 33 University Road property prior to its being demolished. In mid-February 1970, Offshore and the Carlson Corporation entered into a Purchase and Sale Agreement. While these negotiations were underway Offshore simultaneously carried on negotiations for the sale with Cambridge Plaza Real Estate Trust. At the same time Offshore held a $75,000 deposit from the RDA Corporation. This deposit was subsequently returned. On April 16, 1970, title to 33 University Road passed from Offshore to the Carlson Corporation. The property was sold for $1,788,164.50. Appraisal of 33 University Road Property Mr. Paul G. Kinsella, an experienced real estate appraiser in the Boston area appraised the property at 33 University 11 Road for the executors of the Herbert White Estate. Mr. Kinsella assumed that the highest1973 Tax Ct. Memo LEXIS 76">86 and best use of the property was as a manufacturing facility. Using an "income approach" to value the building, Kinsella valued it at $300,000. He valued the land at $0.75 per square foot. Mr. Lewis D. Humphrey, an expert in valuation and valuation techniques, made an appraisal of the property for the respondent. This appraisal was made in November 1972 looking at the value as of January 7, 1964, Mr. Humphrey utilized a "market residual" approach to value the property. This involved valuing the land on the basis of sale prices of comparable property. The residual value is then capitalized at a chosen rate. A comparable property chosen for review was located at 110 Mt. Auburn Street in Cambridge, Massachusetts. To reflect changes induced by the passage of time between the date of his examination and the valuation target date, Humphrey made certain percentage adjustments. This amounted to a 25-percent premium. To reflect the fact that the property chosen was approximately one-third the size of the 33 University Road property a 10-percent adjustment was made. A premium of five percent was accorded the 33 University Road property because of 12 its superior frontage. This1973 Tax Ct. Memo LEXIS 76">87 involved valuing the subject property at 30 percent more than the value of the comparable property. Depreciation Allowances Upon acquisition of 33 University Road, Offshore determined that the property had a useful life of 25 years. In its fiscal year ended October 31, 1965, Offshore again utilized a 25-year useful life in computing allowable depreciation. In 1966, Offshore reduced its estimate of the useful life of the building to 6 years. For the fiscal year 1967 the useful life was estimated at 40 months and in the 1968 fiscal year this was further adjusted to 36 months. By 1966 the 10-year lease on the property held by Baird-Atomic expired. Thereafter leases for 1-year terms were entered into. The adjustment in the useful life of the property resulted in corresponding increases in the depreciation deductions claimed by Offshore. Under a 25-year useful life the building had been depreciated by $4,320 per year. The various adjustments in useful life resulted in deductions of $38,611, $57,917 and $45,046 being taken for the fiscal years ended October 31, 1966, 1967 and 1968 respectively. 13 Baird-Atomic had made extensive modifications to the building to adapt1973 Tax Ct. Memo LEXIS 76">88 it to its purposes. When Baird-Atomic terminated its occupancy and moved to another location, Offshore attempted to lease the building. No other tenants were obtained. In other proceedings and for different purposes Offshore had, in 1965 and 1967, pledged the 33 University Road property to third parties as security. In 1969, when Offshore vacated the building, one of these security agreements was still in effect. Crows Nest IV For business purposes Offshore has owned a 52 foot oceangoing yacht since the 1950's. At various times Offshore has, under contract to various agencies of the United States Government acted as a target vessel as well as disposing of nuclear waste materials. The yacht has also been used for personal reasons by the Bairds. 1In the taxable year ended October 31, 1969, Offshore spent $19,288 for purposes related to the operation of the yacht. 14 During the years in question and at other times, the Bairds made extensive use of the yacht. During 1969 Dr. Baird paid to Offshore1973 Tax Ct. Memo LEXIS 76">89 $1,800 for his personal use of the yacht. This was occurred only during weekends. Dr. Baird made known the availability of the yacht for charter. No income from such charters was reported by Offshore. ULTIMATE FINDINGS 1. The value for depreciation purposes of the property located at 33 University Road was properly allocated by Offshore at $50,000 for the land and $250,000 for the building. 2. The useful life of the building decreased as the area surrounding the property evolved and Baird-Atomic made plans to relocate. 3. No abandonment loss for the building has been established by Offshore. 4. Petitioner Walter Baird received a constructive dividend of $1,800 from Offshore in the taxable year 1969, which represents the difference between the fair rental value ($3,600) and the amount ($1,800) he paid for the use of a company yacht. 15 OPINION 1. Valuation and Allocation. We must first determine a proper valuation for the three story mill-type building previously located at 33 University Road, Cambridge, Massachusetts. The building lot was some 51,000 square feet in area. The property was purchased by Dr. Baird for $300,000 in January 1964 pursuant1973 Tax Ct. Memo LEXIS 76">90 to the terms of an option granted him in May of 1955. At the time of the purchase $50,000 was allocated as the share of the purchase price attributable to the land and $250,000 was allocated to the building. A straight-line method of depreciation was then chosen with the useful life of the building estimated to be 25 years. Dr. Baird testified that his allocation was and is consistent with the regulations, specifically section 1.167(a)-5. He based his allocation on two premises: First, that his determination was consistent with the relative values placed on the land and building by the tax assessor of the City of Cambridge and, secondly, that $250,000 was consistent with his estimate of the value of the income the building was capable of generating. 16 Respondent argues that a proper allocation of the purchase price would be to value the land at $234,000 and the building at $66,000. 2Thus we are once again faced with the problem of valuing a piece of property1973 Tax Ct. Memo LEXIS 76">91 remote in point of time from its date of acquisition. There is no serious allegation that the original purchase was not a good faith, arm's-length transaction. Both parties agree that Offshore's basis in the property is $300,000 by virtue of the nature of the transaction in which Offshore acquired the property from Dr. Baird. Valuation and allocation disputes such as this necessarily depend upon their own particular facts and circumstances. The petitioner must overcome the presumption of correctness that attaches to the respondent's determination. We think Offshore has established the proper value and allocation as between the land and the building. Those factors influencing our decision to some extent 17 synergistically include Dr. Baird's familiarity with the area in which he bought the property. He went through this section of Cambridge daily for 25 to 30 years. He was intently interested in the well-being and growth of Baird Associates and then Baird-Atomic. He knew of the space needs of the business and was interested in seeing that they were met. By no means determinative, but nonetheless informative, was the value ascribed the land and the building by the1973 Tax Ct. Memo LEXIS 76">92 tax assessor of the City of Cambridge. In 2554-58 Creston Corp., 40 T.C. 932">40 T.C. 932, 40 T.C. 932">940 (1963), footnote 5, we pointed out that: Although valuations for real estate taxes may often be too low to be relied upon as furnishing the correct value of the particular parcel of real estate as a whole, we have no reason to reject the use of such valuations in determining the relative value of land and buildings.[Emphasis in original.] Offshore admits that the assessed value of the property does not equal the market value. But it points to the proportional allocation to land and building. 3 The laws 18 of the Commonwealth of Massachusetts prohibit variance in the tax rate between land and improvements. Thus, no advantage appears which would cause the City of Cambridge to allocate a proportionately higher or lower value to depreciable versus nondepreciable property. See Mass. Gen. L. Ch. 59 section 1 et seq.1973 Tax Ct. Memo LEXIS 76">93 The utilization of assessed value as at least a guide in valuation is not totally unique in the tax law. Insurance settlements are considered but not treated as conclusive when attempting to determine the amount of an actual loss. 4Mr. Kinsella's appraisal of the property, which was done originally for the seller's estate, is also helpful. He actually viewed the property while it was still in use by petitioners. This does not negate the probative value of an assessment done later in point of time with respect to a certain data in the past. No useful purpose would be served herein by going over each method of appraisal or item of evidence. 5 19 Suffice it to say that we have found as an ultimate fact and so hold that a value of $50,000 for the land and $250,000 for the building was reasonable when made. 1973 Tax Ct. Memo LEXIS 76">94 2. Changes in Useful Life of Building. When originally acquired the building at 33 University Road was judged to have a 25-year useful life. By 1966, Offshore redetermined the building's useful life to be 6 years. It was further reduced to 40 months in 1967 and readjusted to 36 months in 1968. Prior to 1965, Offshore had claimed $18,333 in depreciation deductions for the building. In 1966, $38,611 was deducted. No explanation of the change in useful life was attached to its Federal income tax return. The fiscal year ended October 31, 1967, resulted in $57,917 being deducted as depreciation. At this time the building was said to have a 6-year useful life. The 1967 Federal income tax return states that the building's useful life had been reduced to 3 years "due to complete obsolescence by the end of the period." The 1968 Federal income tax return showed the building to have been abandoned. The statement attached to the return reads: 20 Building at 33 University Road, Cambridge, Mass. 02138, was abandoned in July 1969, because it had become obsolete and had become neither unsable to owner not to any other party. Loss as a result of this abandonment was computed as follows: 1973 Tax Ct. Memo LEXIS 76">95 Cost of Building250,000Accumulated Depreciation159,907Loss-Abandoned Due to Obsolescence90,093Acknowledging that a useful life once chosen is not immutable, the respondent argues that neither is it chameleonlike. Useful life cannot be altered merely to attempt to recoup a decline in market value of a depreciable asset. The term estimated useful life of an asset is defined in section 1.167(a)-1(b), Income Tax Regs. It takes into account both the presently known conditions and reasonably foreseeable future developments. Redetermination of the useful life of an asset is permitted when there is a "clear and convincing basis" for doing so. Respondent urges that when the original useful life of 25 years was chosen Baird-Atomic knew at least two significant items that would affect the reasonableness of the figure chosen: First, that Baird-Atomic was seeking to relocate its plant and, secondly, that by late 1963 it was "obvious" that the property immediately 21 adjacent to 33 University Road was to become the Kennedy Memorial Library. This fact, plus the nonconforming use, should have made it clear to Dr. Baird and Offshore that a 25-year1973 Tax Ct. Memo LEXIS 76">96 useful life was incorrect. Even if the useful life of the building was not accurately gauged initially, there is a remedy available. Massey Motors v. nited States, 364 U.S. 92">364 U.S. 92 (1960), recognizes that "the useful life of the asset [is] related to the period for which it may reasonably be expected to be employed in the taxpayer's business." The regulation provides that: In any case in which the taxpayer shows that the estimated useful life previously used should be shortened by reason of obsolescence greater than had been assumed in computing such estimated useful life, a change to a new and shorter estimated useful life computed in accordance with such showing will be permitted. [Regs. 1.167(a)-9; see also Regs. 1.167(a)-1]. This same regulation does not permit such a change solely on the unsupported opinion of the taxpayer. Relying on this regulation and Coors Porcelain Co., 52 T.C. 682">52 T.C. 682 (1969), affirmed 429 F.2d 1">429 F.2d 1 (C.A. 10, 1970), respondent argues that no adequate support exists for the belief that the building's useful life to Offshore was in any way reduced. Offshore has the burden of proving the incorrectness of respondent's1973 Tax Ct. Memo LEXIS 76">97 determination. Such proof may come from 22 one personally familiar with the asset over a long period of time. The weight to be given any evidence by such a party is a task given to the trier of the facts. See M. Pauline Casey, 38 T.C. 357">38 T.C. 357, 38 T.C. 357">381 (1962); Laura Massaglia, 33 T.C. 379">33 T.C. 379, 33 T.C. 379">388 (1959), affirmed 286 F.2d (C.A. 10, 1961). The proof necessary to show a change in the useful life of an asset should consist of facts known or reasonably anticipated at the end of the year in which the depreciation is claimed. Max Isenbergh, 31 T.C. 1046">31 T.C. 1046 (1959). Knowledge on the part of Offshore, through its operating officer, that Baird-Atomic was seeking larger and better quarters, that the 10-year lease was not to be renewed beyond a year at a time albeit at a higher rent, and the potential location of the Kennedy Memorial Library close to the manufacturing plant, are all factors affecting the useful life of the building. It is the useful economic life to Offshore that concerns us. Offshore knew of the increasingly difficult parking situation, the nonconforming use under the zoning laws, and the changing character of the neighborhood in which1973 Tax Ct. Memo LEXIS 76">98 the plant was located. From these and other factors the economic usefulness of the building to Offshore was redetermined. 23 The depreciation allowable in a given year msut be taken in that year and a depreciation charge may not be increased in a subsequent year so as to offset a failure in a prior year to take the proper amount of depreciation. Section 1.167(a)-10, Income Tax Regs. No "catch-up" is permitted under the regulations. However, adjustments are permitted and encouraged so that at least the actual depreciation is mirrored by the depreciation allowance claimed. Under these circumstances we conclude that the changes made in the estimated useful life of the building were proper. 3. Claimed Abandonment Loss on Building. For the fiscal year ended October 31, 1969, Offshore deducted as a loss its previously unrecovered basis in the building in the amount of $90,093. This claimed abandonment loss, deducted under section 165, is itself subject to the requirements of section 1.167(a)-8, Income Tax Regs. See 52 T.C. 682">Coors Porcelain Co., supra at 692. Section 1.167(a)-8(a) (4), Income Tax Regs., provides: Where an asset is retired by actual physical abandonment1973 Tax Ct. Memo LEXIS 76">99 * * loss will be recognized measured by the amount of the adjusted basis of the asset abandoned at the time of such abandonment. In order to qualify for the recognition of loss from physical abandonment, 24 the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale, exchange, or other disposition. Respondent contends that Offshore is seeking an unallowable deduction for the declining market value of the building. He argues that no abandonment loss is allowable because the building was not abandoned in the sense of the regulation. Primary reliance is placed on United California Bank, 41 T.C. 437">41 T.C. 437 (1964), affirmed per curiam 340 F.2d 320">340 F.2d 320 (C.A. 9, 1965). Offshore sets forth the correct basic rules that for there to be an abandonment loss there must exist an intent to abandon the property as well as an identifiable act of abandonment. Although it is not essential that legal title to the property be lost, mere nonuse of the property does not constitute abandonment. 1973 Tax Ct. Memo LEXIS 76">100 Ford v. United States, 20 A.F.T.R.2d (RIA) 5033 (W.D. Ky. 1967), affirrmed per curiam 402 F.2d 791">402 F.2d 791 ((C.A. 6, 1968), without discussion of the abandonment issue; 41 T.C. 437">United California Bank, supra at 451. Demolition of the abandoned property is not required to justify the deduction. See Hummel v. United States, 227 F. Supp. 30">227 F. Supp. 30 (N.D. Cal. 1963); Minneapolis, St. Paul & Saulte Ste. Marie Ry. Co. v. Commissioner, 34 B.T.A. 177">34 B.T.A. 177, 34 B.T.A. 177">185 (1936). 25 There is no abandonment when property is sold or if compensation is received for the property allegedly abandoned. S.S. White Dental Mfg. Co. v. United States, 55 F. Supp. 117">55 F. Supp. 117 (Ct. Cl. 1944), involved the allowance of an abandonment loss in spite of the fact that within 2 months of such abandonment the property was sold. That case, however, was decided prior to the inclusion of the language in section 1.167(a)-8(a) (4), Income Tax Regs., which expressly denies recognition of an abandonment loss unless the taxpayer abandons property so that it "will neither be used again * * nor retrieved by him for sale, exchange, or other disposition." 1973 Tax Ct. Memo LEXIS 76">101 Tanforan Co. v. United States, 313 F. Supp. 796">313 F. Supp. 796, 313 F. Supp. 796">806 (N.D. Cal. 1970), affirmed per curian 462 F.2d 605">462 F.2d 605 (C.A. 9, 1972). 6The building here involved was in use until at least September 30, 1969. After Baird-Atomic moved to other quarters, Offshore listed the property for rent with a large Boston real estate agent. Efforts to rent the building proved unsuccessful. 26 The property at 33 University Road was subject to two security instruments designed to protect Baird-Atomic from liability in a stockholder derivative suit. On November 13, 1969, the board of directors of Baird-Atomic granted the Cambridge Plaza Trust the right of first refusal to buy the land and building. The building contained a large amount of equipment belonging to Baird-Atomic following the move. From this fact the respondent contends that 41 T.C. 437">United California Bank, supra, where two bank vaults were stored during negotiations for sale of the building, is controlling. In that case we held that no abandonment had occurred. 1973 Tax Ct. Memo LEXIS 76">102 The finding that no redetermination of useful life was made in the United California Bank case does not speak to the point as to whether the building was held for sale while ostensibly abandoned. That both cases resulted ultimately in the buildings being demolished is not determinative of the abandonment issue for the year such loss was taken. Just as obsolescence in a given taxable year cannot be determined on the basis of later events neither may abandonment.See 52 T.C. 682">Coors Porcelain Co., supra at 694. Where the building was sold together with the land it occupied it is not reasonable to assume that the building was abandoned. The building could have been 27 "retrieved" and to a certain extent it was so retrieved when sold. Had the building not been sold along with the land its ownership would have been in doubt. Offshore raised exactly this question in discussing the security interests held against the building. The answer indicates that ownership was not relinquished and that nonuse for the short period between the move by Baird-Atomic and the subsequent sale does not adequately establish abandonment. 1973 Tax Ct. Memo LEXIS 76">103 It is plain that what Offshore seeks is an unallowable deduction for the reclining market value of the building. This Court has stated that "Declining values due to economic conditions will not support a claim for obsolescence." James D. Dunn, 42 T.C. 490">42 T.C. 490, 42 T.C. 490">494 (1964). Moreover, Offshore has failed to show that the building's usefulness suddenly terminated in the fiscal year ended October 31, 1969, and that the building was physically abandoned never to be retrieved for "sale, exchange, or other disposition." Section 1.167(a)-8(a) (4), Income Tax Regs. Accordingly, we hold that Offshore is not entitled to the claimed abandonment loss. 4. Yacht Expenses. During the fiscal year ended October 31, 1969, Offshore deducted $26,902 as business expenses. Of this amount, $19,288 (including an allowance 28 of $4,260 for depreciation) was attributable to the operation of the yacht, Crows Nest IV. During this opening statement counsel for Offshore stated that $13,255 of the disallowed amount ($19,288) was still at issue. Respondent's position is that, regardless of the amount presently contested, the petitioner has failed to overcome the presumption of correctness supporting1973 Tax Ct. Memo LEXIS 76">104 the respondent's determination. Respondent further asserts that the expenses were not ordinary and necessary and were not in fact incurred for the purpose of making a profit, but were incurred solely for the personal benefit of Dr. Baird, the sole shareholder of Offshore, and as such constitute income to him. Petitioner Walter Baird argues that the yacht expenses were the ordinary and necessary expenses of Offshore and as such are fully deductible by Offshore. Furthermore, he claims that he paid the going rate to Offshore for the use of the yacht. It is the measure of the Income to Dr. Baird that is in dispute here, and not the broader principle that a shareholder is considered to have received taxable income when he receives a benefit from his corporation. 29 It is not enough to find that a dividend has been paid or provided and received. The measure of such dividend is the more difficult question. See Nicholls, North, Buse Co., 56 T.C. 1225">56 T.C. 1225, 56 T.C. 1225">1240 (1971), where this Court pointed out that: Two standards have been used on different occasions, the first being the initial cost of the facility and the second, the approximate rental value for the period at1973 Tax Ct. Memo LEXIS 76">105 issue. Where corporate ownership is clear the use of the first standard has not been made. See Louis Greenspon, 23 T.C. 138">23 T.C. 138 (1954), modified 229 F.2d 947">229 F.2d 947 (C.A. 8, 1956). Here it is not alleged that the yacht was not owned by Offshore. Use of the second standard, namely the fair rental value, presents the problem of determining that value. Dr. Baird used the yacht on most weekends during the summer of 1969. He paid Offshore $1,800 computed at $600 per week for such use. The difficulty with this approach is that the yacht was readily available to him at all times during that summer. No other income was received for the use of the yacht. We do not know whether this was because of a weak market during 1969 or the fact that Dr. Baird used the yacht during the 30 weekends, thus limiting the rental period to the weekdays. In 56 T.C. 1225">Nicholls, North, Buse Co., supra at 1241, we decided that rental value "should not be computed only for days of recorded use since we have held that the boat was freely available for personal use * ." The value of this "standby" status should necessarily be added to the benefit received. It is this amount that1973 Tax Ct. Memo LEXIS 76">106 constitutes additional income to Dr. Baird. Where, as here, no other income was received from charters or for any other use of the yacht, the evidence strongly points to preference having been given to Dr. Baird's seafaring instincts rather than a desire by Offshore to make a profit. This being so, we conclude that the "fair" rental for the yacht was $3,600.The difference between $3,600 and the amount paid ($1,800) by Dr. Baird constitutes a constructive dividend to him in 1969. To reflect the concessions made by the parties and our conclusions with respect to the disputed issues, Decisions will be entered under Rule 50. Footnotes1. The disallowance of the yacht expenditures made by Offshore for the taxable years ended October 31, 1966, 1967, 1968 and 1969 have been conceded by the petitioners. ↩2. These figures differ from those contained in the statutory notice of deficiency. At that time respondent determined that the basis allocation should be $192,000 to the land and $108,000 to the building. ↩3. Obviously the assessed value does not equal the fair market value either.Municipal assessments are frequently made at a fraction of the real value with the possible revenue shortfall being covered by adjusting the tax rate. Adjusting the rate while undervaluing the base is at least a superficial palliative. ↩4. See Richard R. Hollington, 15 T.C.M. 668, 671 (1956); Bruce B. Steinmann, T.C. Memo. 1971-295 (county appraisal ratio of values accepted); Jack R. Farber, 57 T.C. 714">57 T.C. 714, 57 T.C. 714">718↩ (1972), pointed out again the usefulness of this type of information in aiding this Court to arrive at a proper figure. 5. The petitioners' brief was, with respect to this issue of the case, very helpful. ↩6. See W E G Dial Telephone inc., T.C. Memo. 1966-41↩, denying an abandonment loss where the property was subsequently sold.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625184/	FILIBERTO H. VERTICELLI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentVerticelli v. CommissionerDocket No. 20606-89United States Tax CourtT.C. Memo 1991-345; 1991 Tax Ct. Memo LEXIS 397; 62 T.C.M. 251; T.C.M. (RIA) 91345; July 29, 1991, Filed 1991 Tax Ct. Memo LEXIS 397">397 Decision will be entered under Rule 155. Terence K. Heaney, for the petitioner. David A. Breen, for the respondent. TANNENWALD, Judge. TANNENWALDMEMORANDUM OPINION Respondent determined a deficiency of $ 34,197 in petitioner's Federal income tax for the year 1983. After concessions, the sole issue for decision is whether, and to what extent, arrearage payments made by petitioner represent deductible alimony payments or nondeductible child support payments. This case has been submitted fully stipulated, and the stipulation of facts and the attached exhibits are incorporated herein by reference. At the time of the filing of the petition herein, petitioner's legal residence was Narberth, Pennsylvania. On November 22, 1969, petitioner married Jean Lombardi Verticelli. On August 25, 1977, petitioner and Jean Lombardi Verticelli entered into a Marriage Settlement Agreement (1977 Agreement). In this agreement, petitioner agreed to pay the sum of $ 350 for the support of each of his two children and to make an adjustment for increases in the cost of living. The 1977 Agreement also provided: V. D. As additional child support for educational purposes, the husband1991 Tax Ct. Memo LEXIS 397">398 agrees to contribute annually one fourth (1/4) of his annual bonus received from his current employer and one fourth of any bonus received in the future from any employer. * * In addition, petitioner agreed to pay to Jean Lombardi Verticelli $ 100 per month from September 1, 1977, to January 1978 and $ 200 per month from February 1, 1978, to December 31, 1979, for educational expenses. The 1977 Agreement also provided: VIII. B. As additional periodic support for the wife, the husband agrees to pay to the wife one fourth (1/4) of his current annual bonus and one fourth of any bonus received in the future from any employer. * On May 31, 1978, the Family Court Division of the Philadelphia Court of Common Pleas issued a divorce decree to petitioner and Jean Lombardi Verticelli. For 1978 through 1983, petitioner received bonuses from his employer. For 1978 through 1981, petitioner paid one-fourth of his net bonus as child support and one-fourth of his net bonus as alimony. 1 Jean Lombardi Verticelli disputed these payments and argued that the "percentage of bonus" payments should have been made in amounts equal to one-fourth of petitioner's gross bonus. 1991 Tax Ct. Memo LEXIS 397">399 On November 15, 1983, petitioner and Jean Lombardi Verticelli entered into an Agreement (1983 Agreement). The pertinent provisions of that agreement are as follows: 1. The parties agree that Father shall pay to Mother unallocated alimony and child support of Forty Thousand ($ 40,000.00) Dollars for the calendar year 1982 and Forty Five Thousand ($ 45,000.00) Dollars for the calendar year beginning January 1, 1983 and extending for each and every year thereafter until and unless reduced as hereinafter provided.2. The parties have calculated the payments heretofore made by Father since January 1, 1982 and agree that there are arrearages due and owing for 1982 of $ 21,820, and for 1983 of $ 30,468.00. Father shall make full and complete payment of those arrearages as follows: twenty-five (25%) percent of the 1982 arrears, i.e., $ 5,455.00, shall be paid by Father to Mother at the signing of this Agreement. A like sum of twenty-five (25%) percent of the 1982 arrears, $ 5,455.00, shall be paid by Father directly to Mother within thirty (30) days following the signing of this Agreement. The remaining fifty (50%) percent of the 1982 arrears, $ 10,910.00, shall be paid by1991 Tax Ct. Memo LEXIS 397">400 Father to Mother on or before December 31, 1983 and the entire balance of arrears for the 1983 payments, $ 30,468.00, shall be paid by Father to Mother completely by the end of this calendar year, i.e., December 31, 1983. * * 4. It is the intent, agreement and understanding of the parties that all of the aforesaid unallocated alimony and child support payments are to be deemed and treated by the parties as deductible alimony payments by Father within the meaning and provisions of Section 215 of the Internal Revenue Code, as amended, and all such payments are to be treated as taxable income to Mother under Section 71 of the Internal Revenue Code, as amended.On December 16, 1983, the Court of Common Pleas of Philadelphia entered an order making the 1983 Agreement an order of that court. Petitioner made all payments of the "fixed" portion of his child support obligation of $ 465.85 per child per month from January 1, 1980, through December 31, 1983. In 1982, he also paid $ 7,000 on account of his bonus obligation in respect of child support and $ 760 for camp expenses of the children. Petitioner made total payments in 1983 in the amount of $ 66,820. Of this amount, $ 1991 Tax Ct. Memo LEXIS 397">401 14,532.00 is represented by the $ 465.85 per child per month payments plus 19 unidentified payments of $ 250.00 each. The balance of $ 52,288, representing arrearages of $ 21,820 for 1982 and $ 30,468 for 1983, represents arrearages for 1982 and 1983 attributable to petitioner's obligations in respect of his bonus. 2Petitioner contends that the $ 52,288 is deductible as alimony on the ground that (1) it constitutes "unallocated alimony and child support payments" within the meaning of paragraph 4 of the 1983 Agreement (see supra page 4) or (2) in any event, such amount is not "fixed" as child support and therefore is taxable to his former wife as alimony under section 713 and deductible by him under section 215 in accordance with the holding of Commissioner v. Lester, 366 U.S. 299">366 U.S. 299, 6 L. Ed. 2d 306">6 L. Ed. 2d 306, 81 S. Ct. 1343">81 S. Ct. 1343 (1961),1991 Tax Ct. Memo LEXIS 397">402 as applied by this Court in Bernard v. Commissioner, 87 T.C. 1029">87 T.C. 1029, 87 T.C. 1029">1038 (1986). Respondent asserts that petitioner's obligation under the 1977 Agreement required payment based upon his gross rather than net bonus with the result that there were arrearages in the child support obligation in excess of the $ 52,288 paid and consequently that amount represented child support nondeductible under section 71(b) (now section 71(c)(3)). 4 For the reasons hereinafter set forth, we disagree with the positions of both parties and adopt a different approach to the issue before us. 1991 Tax Ct. Memo LEXIS 397">403 We disagree with petitioner's position as to the applicability of paragraph 4 of the 1983 Agreement. Paragraph 1 of that agreement provides for "unallocated alimony and child support," paragraph 2 speaks in terms of "arrearages," and paragraph 4 again uses the language "the aforesaid unallocated alimony and child support payments." We think the proper construction of the agreement dictates the conclusion that the provisions of paragraph 4 apply only to the paragraph 1 payments and not to the "arrearages" set forth in paragraph 2. The foregoing analysis makes it unnecessary for us to resolve the issue whether the parties to a divorce or separation can, by way of an agreed lump-sum payment for past-due spousal and child support, recharacterize what that payment represents. Our conclusion does not dispose of the issue before us, however, because the 1983 Agreement is otherwise silent as to how the amount of $ 52,288 should be allocated. In this context, petitioner argues that 87 T.C. 1029">Bernard v. Commissioner, supra, is controlling. In that case, we stated: Where an agreement fails to "fix" the portion of a child and spousal support payment that is attributable1991 Tax Ct. Memo LEXIS 397">404 to child support, the entire payment will be deemed to be for spousal support. Commissioner v. Lester, 366 U.S. 299">366 U.S. 299, 6 L. Ed. 2d 306">6 L. Ed. 2d 306, 81 S. Ct. 1343">81 S. Ct. 1343 (1961). Accordingly, we hold that the portion of the lump-sum payment attributable to [spousal] support arrearages, $ 17,888, is attributable solely to spousal support arrearages. This portion of the lump-sum payment will retain the tax character of spousal support payments timely made. [87 T.C. 1029">87 T.C. 1038]87 T.C. 1029">Bernard v. Commissioner, supra, is distinguishable in that there was nothing in the agreements before the Court in that case upon which an allocation could be based and therefore no way in which we could have concluded that any amount was "fixed" for child support. Such is not the case herein. The 1983 Agreement refers to and attached the 1977 Agreement and specifically provides in paragraph 13 that it "modifies the terms of the marriage settlement agreement of August 25, 1977." The 1977 Agreement specifically and separately provided for additional child support of one-fourth of petitioner's annual bonus and similarly specifically and separately made the same provision for additional support for petitioner's1991 Tax Ct. Memo LEXIS 397">405 former wife. The foregoing analysis of the 1977 and 1983 Agreements clearly indicates that 50 percent of petitioner's annual bonus, whatever the basis for determining its amount, was to be divided between the former wife and the children and that, as a consequence, the share of each was "fixed" under 366 U.S. 299">Commissioner v. Lester, supra. To be sure, the amount in respect of the bonus allocated to the children by the 1977 Agreement was earmarked for "educational purposes" but the record contains no evidence that the education of the children was not involved during 1982 and 1983, a gap which it was incumbent upon petitioner, who has the burden of proof (Rules 142(a) and 122(b)), to supply. On this basis, we conclude that one-half of the $ 52,288 was "fixed" as alimony and one-half as nondeductible child support. Here again, our analysis makes it unnecessary for us to consider the lengthy arguments of the parties as to retroactive application of the 1983 Agreement. We conclude that the amount of the arrearages and their allocation was "fixed" within the scope of 366 U.S. 299">Commissioner v. Lester, supra.5 Given this conclusion, we have no need to 1991 Tax Ct. Memo LEXIS 397">406 go behind the 1983 settlement and interpret the phrase "annual bonus" in the 1977 Agreement as meaning "gross annual bonus," thereby constructively creating an amount in excess of the agreed arrearages and applying section 71(b) so as to conclude, as respondent would have us do, that the total amount paid in 1983 constituted child support. Our conclusion also makes it unnecessary for us to deal with the question whether section 71(b) applies only to current payments and not to arrearages and the subsidiary question whether the $ 30,468 of past due amounts in respect of 1983, and paid in the same year, should be categorized, for purposes of that section, as a current payment or as an arrearage. In this connection, we note that section 71(b) makes no reference to arrearages and that the regulations, section 1.71-1(e), Income Tax Regs., speak only in terms of allocating current payments as does the legislative history of the predecessor of section 71(b), i.e., section 22(k) of the Internal Revenue Code of 1939. See H. Rept. 2333, 77th Cong., 2d Sess. 73-74 (1942), 1942-2 C.B. 372, 429; S. Rept. 1631, 77th Cong., 2d Sess. 85-86 (1942), 1942-2 C.B. 504, 570.1991 Tax Ct. Memo LEXIS 397">407 Compare Bernard v. Commissioner, 87 T.C. 1029">87 T.C. 1038, where, although there were arrearages in child support payments, we held that the payment of those arrearages constituted deductible alimony by virtue of 366 U.S. 299">Commissioner v. Lester, supra, and did not find it necessary, in our discussion, to refer to section 71(b). In sum, we hold that one-half of the $ 52,288 payments of arrearage in 1983 are deductible as alimony under section 215 and that the other half of such payments constitute nondeductible child support. 61991 Tax Ct. Memo LEXIS 397">408 To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. For 1978 through 1981, petitioner calculated his bonus on a net basis by subtracting taxes withheld from his gross bonus. For 1982 and 1983, petitioner calculated his net bonus by subtracting from his gross bonus the amount of a contribution to a deferred compensation plan and income taxes at a 50-percent rate.↩2. Although the period from August 1977 to January 1, 1980, has not been covered by the stipulation of the parties, respondent does not claim that petitioner did not fully pay the "fixed" portion of his child support for that period.↩3. Unless otherwise indicated, all statutory references are to the Internal Revenue Code as amended for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩4. Section 71(b) provided: (b) Payments to Support Minor Children. -- Subsection (a) shall not apply to that part of any payment which the terms of the decree, instrument, or agreement fix, in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband. For purposes of the preceding sentence, if any payment is less than the amount specified in the decree, instrument, or agreement, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support.↩5. Respondent does not contend that the 1977 and/or 1983 Agreements were not the result of arm's-length negotiations nor do we find any reason in the record to conclude that such was not the case.↩6. We have not considered whether the $ 7,000 paid in 1982 on account of the obligation for child support in respect of petitioner's bonus should be deducted from the $ 52,288 and treated as nondeductible child support before making such a division because the payment of that amount was presumably taken into account in the arm's-length settlement (see note 5, supra↩) of the amount of the arrearages for that year.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625186/	John P. McEnery and Margaret McEnery v. Commissioner.McEnery v. CommissionerDocket No. 755-66.United States Tax CourtT.C. Memo 1967-213; 1967 Tax Ct. Memo LEXIS 46; 26 T.C.M. 1060; T.C.M. (RIA) 67213; October 30, 19671967 Tax Ct. Memo LEXIS 46">46 Petitioner in 1963 was the sole owner of a leasehold of property located in San Jose, California. In that year petitioner relinquished the remaining term of that lease for $11,000 to the lessor-corporation, 89.9 percent of the stock of which was at that time owned by petitioner, his spouse, and minor children. Petitioners in their joint income tax return treated the $11,000 as long-term capital gain. Held, the amount paid for the 950-66, 952-66, and 953-66. Decision will be entered for the relinquishment of the lease is ordinary income to petitioners pursuant to section 1239, I.R.C. 1954. James W. Foley, 900 N. First St., San Jose, Calif., for the petitioners. Joseph Nadel, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: Respondent determined a deficiency in the petitioners' income tax for the calendar year 1963 in the amount of $1,189.77. The only issue in the case is whether the payments received by petitioner for the relinquishment of his leasehold constitute capital gain or are to be treated as ordinary income pursuant to section 1239 of the Internal Revenue Code of 1954. 11967 Tax Ct. Memo LEXIS 46">47 Findings of Fact All of the facts having been stipulated they are so found. Petitioners are husband and wife and reside in San Jose, California. They filed their 1963 joint income tax return with the district director of internal revenue at San Francisco, California. Since Margaret McEnery is a party to this proceeding only because she filed a joint income tax return for the year involved, John P. McEnery will hereinafter be referred to as petitioner. On October 19, 1951, a lease was entered into by The Farmers Union, a California corporation, lessor, and The Farmers Union Hardware Company, a copartnership, consisting of Robert F. Benson, Jane D. Sherburne, C. E. Righter, Herbert S. Stark, Alden French, Margaret O. Dean Haworth, and petitioner, lessees. In the course of time petitioner acquired the interest of the other partners in the lease so that during the taxable year 1963 he was the sole owner of this leasehold located at Santa Clara and San Pedro Streets, San Jose, California. Due to a restriction contained in the lease with respect to the assignment of the lease, petitioner was prevented from subletting the subject premises. Petitioner, in 1963, relinquished the remaining 1967 Tax Ct. Memo LEXIS 46">48 term of the leasehold for $11,000 to The Farmers Union, in which petitioner, his spouse, and minor children owned 89.9 percent of the stock. The Farmers Union is presently amortizing the cost of acquiring the leasehold from petitioner. Petitioners, in their 1963 joint income tax return, treated the $11,000 as long-term capital gain. Respondent, however, has included that entire amount as ordinary income under the provisions of section 1239 of the 1954 Code. Opinion The sole issue for decision in this case is whether petitioners may treat the sum paid them by the lessor for the cancellation of their lease as long-term capital gain. This in turn hinges on whether section 123921967 Tax Ct. Memo LEXIS 46">49 applies to this transaction. Petitioners' argument is that section 1241 31967 Tax Ct. Memo LEXIS 46">50 rather than section 1239 applies, and that that section provides for capital gain treatment on the cancellation of a lease. This argument must fail, however, because it is based on an erroneous conception of the scope and effect of section 1241 and of its relationship to section 1239. Section 1241 does not render the proceeds received for the cancellation of a lease taxable as capital gain. This section merely provides that "Amounts received by a lessee for the cancellation of a lease, * * shall be considered as amounts received in exchange for such lease." In order for the amount received by petitioner herein to be treated as a long-term capital gain, it must be shown that the lease was a capital asset; 4 and on this point sec. 1.1241-1(a), Income Tax Regs. , states: "section 1241 has no application in determining whether or not a lease * * * is a capital asset, even though its cancellation qualifies as an exchange under section 1241." It is at this point, i.e., determining whether the lease is a capital asset, that section 1239 becomes relevant. That section provides that in the case of a sale or exchange of certain depreciable property between an individual and a controlled corporation, 5 any gain recognized to the transferor on such sale or exchange shall be considered as gain from the sale or exchange of a noncapital asset, i.e., ordinary income. 1967 Tax Ct. Memo LEXIS 46">51 Since in this case the parties concede that the corporation-lessor was a controlled corporation as defined in section 1239, and since, as petitioners themselves argue, section 1241 renders the cancellation of a lease an exchange of such lease for the amount received therefor, respondent's determination is correct if the cancellation of a lease gives rise to a situation in which there is a sale or exchange of property which in the hands of the recipient is "property of a character which is subject to the allowance for depreciation provided in section 167." 6 Although petitioners in their brief concede this point, the Court feels that some discussion of the question of whether 1967 Tax Ct. Memo LEXIS 46">52 the relinquishment of a leasehold is a sale or exchange of depreciable property within the purview of section 1239(b) is merited. It is well established that the cancellation of a leasehold by a lessor transfers valuable property rights to the lessor. As the Court said in Harriet B. Borland 27 B.T.A. 538">27 B.T.A. 538, 27 B.T.A. 538">542 (1933), An amount paid by a lessor as consideration for the cancellation of a lease represents the cost to the lessor of acquiring a valuable property right, namely, the right to the possession, enjoyment and use of his property for the remaining unexpired term of the lease, * * * It is also well settled that the amount paid for the relinquishment of a leasehold may be amortized under section 162. Trustee Corporation, 42 T.C. 482">42 T.C. 482 (1964). Thus, the resolution of the question at hand turns on whether property subject to amortization pursuant to section 162 comes within the category "property of a character which is subject to the allowance for depreciation provided in section 167" described in section 1239(b). Tom F. Baker III, 38 T.C. 9">38 T.C. 9 (1962), answered this question in the affirmative as follows: As an explanation of this [i.e., respondent's treatment of exhaustion 1967 Tax Ct. Memo LEXIS 46">53 of a leasehold as amortization under section 162 rather than as depreciation under section 167] it may be observed that in reality, from a pure deduction standpoint, it makes no difference in tax liability whether a deduction from gross income is called a business expense and allowed under section 162 or depreciation and allowed under section 167. In fact, the cases show that the term given the allowance has been indiscriminately referred to sometimes as expense or amortization n7 and at other times as exhaustion or depreciation. n8 Nevertheless, we think when Congress enacted section 1239 * * it fully intended to cover situations such as we have here [i.e., sale of a leasehold interest]. * * Therefore, when Congress in section 1239(b), * * referred to "property of a character which is subject to the allowance for depreciation" we think that by using the word "character" it intended to include leasehold property of the kind we have here. * * * [Footnotes omitted.] In the Baker case, supra, a sale of a lessee's interest to a third party rather than relinquishment of a lessee's interest to the original lessor was involved. However, in light of our conclusion that a relinquishment 1967 Tax Ct. Memo LEXIS 46">54 of a lease gives rise to a valuable property right which is subject to amortization, just as does the sale of a lease, we conclude that the relinquishment of a leasehold is a sale or exchange of depreciable property within the purview of section 1239(b). Accordingly, we hold that the $11,000 received by petitioners for cancellation of their lease gives rise to ordinary income pursuant to section 1239, and not to long-term capital gain. Decision will be entered for the respondent. Footnotes1. All references are to the Internal Revenue Code of 1954 unless otherwise indicated.2. SEC. 1239. GAIN FROM SALE OF CERTAIN PROPERTY BETWEEN SPOUSES OR BETWEEN AN INDIVIDUAL AND A CONTROLLED CORPORATION. (a) Treatment of Gain as Ordinary Income. - In the case of a sale or exchange, directly or indirectly, of property described in subsection (b) - (1) between a husband and wife; or (2) between an individual and a corporation more than 80 percent in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren; any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. (b) Section Applicable Only to Sales or Exchanges of Depreciable Property. - This section shall apply only in the case of a sale or Exchanges of Depreciable Property. - This section shall apply only in the case of a sale or exchange by the transferor of property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167.↩3. SEC. 1241. CANCELLATION OF LEASE OR DISTRIBUTOR'S AGREEMENT. Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor's agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement.4. SEC. 1222. OTHER TERMS RELATING TO CAPITAL GAINS AND LOSSES. For purposes of this subtitle - * *(3) Long-Term Capital Gain. - The term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than 6 months, if and to the extent such gain is taken into account in computing gross income. ↩5. Control is defined here as ownership of more than 80 percent of the value of the outstanding stock by the individual, his spouse, and his minor children and minor grandchildren. Sec. 1239(a)↩.6. Sec. 1239(b)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625187/	LUIGI DI RE AND CAROLINE DI RE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDi Re v. CommissionerDocket No. 11222-91United States Tax CourtT.C. Memo 1993-523; 1993 Tax Ct. Memo LEXIS 539; 66 T.C.M. 1279; November 16, 1993, Filed 1993 Tax Ct. Memo LEXIS 539">539 Decision will be entered under Rule 155. For petitioners: A. Jerry Busby. For respondent: Stephen J. McFarlane. WRIGHTWRIGHTMEMORANDUM OPINION WRIGHT, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income tax for taxable years 1986, 1987, 1988, and 1989 as follows: Additions to TaxSec.Sec.Sec.YearDeficiency6653(a)(1)(A)6653(a)(1)(B)66611986$ 102,890$ 5,14550 percent of$ 25,723the interestdue on $ 102,8901987181,0399,05250 percent of45,260the interestdue on $ 181,039Additions To TaxSec.Sec.Sec.YearDeficiency6653(a)(1)666166621988$ 64,365$ 3,218$ 16,004-0- 198997,043-0- -0- $ 19,409After concessions by both parties, which will be given effect in the Rule 155 1 computation, the primary issue for our consideration is whether petitioners failed to report income from gambling winnings for each of the taxable years 1986, 1987, 1988, and 1989. We hold that petitioners did not fail to report taxable income from gambling winnings for the years at issue, and, therefore, we need not consider the additions1993 Tax Ct. Memo LEXIS 539">540 to tax determined by respondent in the notice of deficiency as to this issue. BackgroundSome of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated by this reference. Petitioners resided in Chandler, Arizona, at the time they filed the petition in this case. During the years at issue, petitioners were married and filed joint Federal income tax returns. Petitioners were divorced in 1991. All references to petitioner in the singular refer to petitioner Luigi Di Re. During the years at issue, petitioners owned and operated Di Re Kennels, raising an average of 150 greyhound racing dogs. Petitioners treated their kennel activity as a business, filing a Schedule C for each of the years at issue. Petitioners' kennel activity is not at issue in the instant case. In 1974, 1993 Tax Ct. Memo LEXIS 539">541 petitioner purchased 15 acres of property in Chandler, Arizona, and has purchased no property since that time. Petitioner's property is sectioned into two parcels. Petitioner owns a trailer home on one parcel and an uncompleted house and two dog kennel buildings on the other parcel. In addition to his breeding activities, petitioner was heavily involved in gambling at greyhound dog racing tracks. During the years at issue, petitioner gambled 7 days a week at Phoenix Greyhound Park (Phoenix), a dog racing track. Generally, petitioner started his nightly betting with $ 600 to $ 800 in cash. If petitioner lost that amount, he cashed checks at the track in order to continue gambling. Petitioner parlayed his winnings, if any, into other bets, and this continued all evening through the last race. Petitioner continued to parlay his winnings into new bets up to the last and 13th race of the evening, the twin trifecta, in which he gambled his entire night's winnings, if any. Petitioner had unlimited check writing authority at Phoenix, and in addition to writing checks, petitioner obtained cash using his automated teller machine (ATM) card. Petitioner did not cash checks at the track1993 Tax Ct. Memo LEXIS 539">542 for any reason other than gambling. Petitioner redeposited his winnings into his checking account, less the cash he started with each evening. Ms. Kay Dicks, a check cashier and mutual teller at Phoenix for 13 years, cashed 95 percent of petitioner's checks. Ms. Dicks has known petitioner for 12 years. Ms. Dicks works at Phoenix 7 days a week. Ms. Dicks testified that all cash that petitioner received from cashing checks was used for gambling. Ms. Dicks further testified that petitioner parlayed his winnings into new bets; the winnings of the first race were parlayed into bets on the second race and so on up to the big race. According to Ms. Dicks, petitioner is the biggest gambler at Phoenix, and based upon her observations of petitioner, he is a net loser at the track. Mr. Richard Klimas has worked at Phoenix for 12 years as a mutual teller. Mr. Klimas works at Phoenix 6 days a week, and petitioner ties up Mr. Klimas' window every evening with his betting alone. Petitioner placed nearly all his bets with Mr. Klimas. Mr. Klimas testified that petitioner is an overall loser at the track. Mr. Klimas also testified that petitioner cashed checks with the check cashier and1993 Tax Ct. Memo LEXIS 539">543 sometimes used the ATM for cash used to place his bets. Mr. Klimas further testified that petitioner bets on all 13 races every night, never places a bet under $ 300, and is the biggest gambler at Phoenix. Mr. Klimas stated that petitioner continuously rolls his winnings over, taking a winning ticket and betting it on another race. The teller machine automatically subtracts petitioner's wagers from his previous winnings. After the betting is finished, the mutual teller receives a "hard copy" from the teller machine which indicates the winnings on each ticket. Mr. Klimas was asked if any receipts are given to bettors indicating that they have won a race and are now betting that amount on the next race in order that they can keep adequate records. Mr. Klimas stated that the track keeps what is called the "hard copy", which indicates how much the initial tickets were worth, and the track keeps the tickets themselves for their own records; the bettor receives no paperwork whatsoever on this particular transaction. Mr. Klimas works at what is called a "tax teller window". In addition to taking bets and dispensing tickets, Mr. Klimas issues Forms W-2G. These forms report winnings1993 Tax Ct. Memo LEXIS 539">544 on any ticket which pays $ 600 or more and on which the odds are 300 to 1 or more. The Form W-2G indicates the amount won; it does not indicate the amount wagered. Additionally, if the odds on a particular bet are less than 300 to 1, then a Form W-2G is not issued regardless of the amount of the winnings. For example, if a bet is placed at $ 100 and it pays $ 2,000 at 20 to 1 odds, then no Form W-2G is issued. On any winnings over $ 1,000 from a bet at 300 to 1 odds or more, the track withholds both Federal and State taxes and issues a Form W-2G. Thus, if a bettor places a bet that pays $ 600 at 300 to 1 odds, then he or she will receive a Form W-2G, but taxes will not be withheld from the winnings. On the other hand, if a bettor places a $ 250 winning bet at 30 to 1 odds paying off $ 7,500, the bettor will neither be issued a Form W-2G nor have any tax withheld from his or her winnings. Mr. Walt Collins is a kennel owner of greyhounds and a neighbor of petitioners who has known petitioner for 10 years. Mr. Collins has had business dealings with petitioner. During 1988 through 1990, petitioner borrowed money from Mr. Collins using his greyhounds as collateral. When petitioner1993 Tax Ct. Memo LEXIS 539">545 was unable to repay his debts, Mr. Collins kept petitioners' dogs. Mr. Collins obtained petitioners' greyhounds at values less than what they were worth because, according to Mr. Collins, petitioner's gambling left him short of money and in need of cash. Mr. Collins testified that he observed petitioner gambling at the track every evening. Mr. Collins further testified that petitioner does not lead a lavish lifestyle, and he has never seen petitioner spend his money on anything other than gambling. Ms. Donna Di Re has worked at Phoenix since 1972 and was married to petitioner from 1976 to 1984. Donna Di Re testified that she and petitioner were divorced because of his gambling, that petitioner gambles nearly everything he has, and that his gambling activities continue unchanged to the present. In connection with their divorce, Donna Di Re and petitioner took out a loan for $ 25,000. Donna Di Re received the proceeds as a property settlement and used the money to obtain a mobile home. Donna Di Re testified that she and petitioner had difficulties paying bills during their marriage. Additionally, petitioner gave Donna Di Re no jewelry or expensive gifts during their marriage; 1993 Tax Ct. Memo LEXIS 539">546 they took only one vacation; they belonged to no clubs; they had only one car, which they purchased used; and they lived in a mobile home. Ms. Natalie Scott is employed at Apache Greyhound Park as a mutual manager and is the mother of petitioner Caroline Di Re. Ms. Scott testified that her parents loaned petitioners $ 50,000 in 1989, which was primarily used for petitioner's gambling activities. Ms. Scott accompanied petitioner to the dog track often and observed petitioner's gambling activities on many occasions, concluding that he is a net loser. Ms. Scott testified that she had once been an employee of a bank, and due to her knowledge of banking, petitioner would ask her questions regarding how long it takes checks to clear and what the "float time" is. Ms. Scott testified that petitioner was heavily engaged in check kiting and visited the bank often. Ms. Scott further testified that petitioner Caroline Di Re received only her car in the settlement agreement with respect to petitioners' divorce. Unreported Taxable IncomePetitioners reported gambling winnings and losses on their tax returns for the years at issue in the following amounts: Item1986198719881989Gambling winnings$ 304,896$ 183,176$ 266,854$ 260,910Gambling losses281,696165,850259,670250,910Net winnings23,20017,3267,18410,0001993 Tax Ct. Memo LEXIS 539">547 The race track withheld Federal and State taxes for 1986 through 1989 in the amounts of $ 76,793, $ 43,229, $ 51,440, and $ 41,326, respectively. During the years at issue, petitioner obtained cash at the track for gambling in the following amounts: Item1986198719881989Checks writtenpayable to the track$ 436,550$ 630,300$ 407,700$ 568,500Cash from ATM25,69711,62614,99722,613Total cash obtainedat the track462,247641,926422,697591,113Additionally, petitioner cashed in CD's and his IRA, and obtained loans from other individuals to support his gambling activities in the following amounts: Item1987198819895-yr. CD cashed$ 9,8545-yr. CD cashed9,985IRA withdrawal11,052Loan from Valley Natl. Bank50,000$ 20,000$ 10,000Loan from parents30,000Loan from petitioner CarolineDi Re's grandparents50,000110,89120,00060,000Petitioner produced daily racing programs indicating his evening's losses, some of his losing tickets, canceled checks written to the track, and statements indicating funds taken from an ATM inside the track as substantiation of his gambling losses and expenses for the years1993 Tax Ct. Memo LEXIS 539">548 at issue. For taxable years 1986, 1987, 1988, and 1989, respondent contends that petitioners had unreported income from petitioner's gambling activities in the amounts of $ 217,397, $ 458,694, $ 207,160, and $ 314,966, respectively. Respondent contends that petitioners did not maintain adequate books and records of petitioner's gambling activities during the years at issue in a manner acceptable for determination of their tax liability for those years. Respondent employed the bank deposits method to reconstruction petitioners' taxable income and found the excess deposits in each of the years at issue to be unreported taxable income. Respondent's computations are summarized as follows: Item1986198719881989Total bankdeposits$ 740,419$ 956,707$ 623,977$ 782,547Less: Transfersbetween accounts131,296157,0032,00030,732Less: Sources ofincome perreturn444,720477,369467,799466,762Unreportedincome164,403322,335154,178285,053Mr. Patrick Schindele, a partner in the investigative accounting firm CRS and Associates, was a special agent with the Internal Revenue Service (IRS) for 20 years and petitioners' expert witness in the1993 Tax Ct. Memo LEXIS 539">549 instant case. To determine petitioner's spending habits at the track, his personal living habits, and his overall lifestyle, Mr. Schindele instructed petitioner to prepare a check-spread analysis and a bank deposit analysis, and advised petitioner on how to go about doing so. Mr. Schindele examined petitioner's spreadsheets and determined them to be accurate. Mr. Schindele conducted interviews with a number of people including two Phoenix employees, petitioner's ex-wife, Donna Di Re, petitioner Caroline Di Re and her mother, and petitioner's neighbor, Mr. Collins. In addition, Mr. Schindele examined public records to determine petitioners' ownership in property, amounts they had borrowed, and petitioner's divorce files, including settlement documents. DiscussionThe primary issue for our consideration is whether petitioners had unreported income from gambling winnings in the amounts determined by respondent for the taxable years at issue. A taxpayer is required to maintain records sufficient to show whether or not he or she is liable for Federal income taxes. Sec. 6001. It is well established that where a taxpayer fails to maintain adequate records, the Commissioner1993 Tax Ct. Memo LEXIS 539">550 may prove the existence and amount of unreported income by any method that will clearly reflect the taxpayer's income. Sec. 446(b); ; . For the years at issue, respondent used the bank deposits method to reconstruct petitioners' income. The premise underlying this method of income reconstruction is that, absent some explanation, a taxpayer's bank deposits represent taxable income. The total of all deposits is determined by the Commissioner to arrive at the taxpayer's income. An adjustment is then made to eliminate deposits that reflect nonincome items such as gifts, loans, and transfers between bank accounts. Where the Commissioner has employed the bank deposits method in the determination of the deficiencies, the burden of proof rests with the taxpayer to show that such determinations are erroneous. Rule 142(a); . The Commissioner is not required to prove that all deposits constitute taxable income. .1993 Tax Ct. Memo LEXIS 539">551 The burden of showing duplications is on the taxpayer. . Respondent has allowed petitioners' claimed gambling losses for the years at issue; however, respondent, through the use of the bank deposits method, contends that petitioners failed to report gambling winnings income as reflected in unexplained bank deposits. Respondent further contends that the use of the bank deposits method in the instant case is appropriate because petitioners did not keep adequate records of petitioner's gambling activity as required under section 6001. Petitioner argues that the bank deposits which respondent has determined to be unreported income actually represent redeposits of previously deposited funds into his bank accounts. It is for the Court to decide what effect should be given to a taxpayer's records. This determination depends on the particular facts and circumstances of each case. See . We conclude that the corroborating testimony of several witnesses regarding petitioner's gambling activities together with the documentary evidence, 1993 Tax Ct. Memo LEXIS 539">552 i.e., petitioner's canceled checks written to the track, his ATM activity at the track, and his various loans, provide a sufficient basis for decision in the instant case. See, e.g., . For the reasons set forth below, we find that petitioners have met their burden of proving that they did not have unreported income from gambling winnings in the taxable years at issue. Petitioner testified that in the course of his regular gambling activities, he would withdraw funds from his bank accounts in the form of cash or checks, gamble with those funds in the evening, and then redeposit the funds which he had at the end of his gambling day. In using the bank deposits method in the instant case, respondent did not back out petitioner's wagering expenses; i.e., the checks he wrote to the track and his cash advances from the track ATM. The parties have stipulated that petitioner was a heavy gambler who frequented the race track as often as 7 days a week. It is clear from the record that losses were in fact sustained. Ms. Dicks, Mr. Klimas, and Ms. Scott all testified that they had extensive firsthand knowledge of petitioner's1993 Tax Ct. Memo LEXIS 539">553 gambling activities, and all three testified that petitioner was a net loser with respect to gambling. See, e.g., ; . Petitioners' expert witness, Mr. Schindele, is an investigative accountant and former IRS special agent. We do not question the qualifications of this witness. Mr. Schindele's expert witness report consists of a source and application of funds schedule, a net worth schedule, and a bank account analysis. In his bank account analysis, Mr. Schindele made an extensive review of petitioners' bank statements and concluded that the majority of the deposits into petitioners' checking account represented cash and/or checks from the Phoenix dog track. Furthermore, Mr. Schindele concluded that greater than 99 percent of the deposits and expenditures were identified and accounted for, and nearly 80 percent of the expenditures from petitioners' checking and savings accounts represented checks written to dog tracks. These expenditures were not taken into consideration in respondent's bank deposits analysis. In order to determine1993 Tax Ct. Memo LEXIS 539">554 if petitioner expended more funds than his sources of income per return, a source and application of funds schedule was prepared by Mr. Schindele. Mr. Schindele examined petitioner's returns, his loans from family members, bank account data, and information provided by petitioner verified by third-party interviews and examination of independent records. In this analysis, Mr. Schindele determined the amount of funds available to petitioners from all sources, the amount of petitioners' expenditures, and the amount of excess funds available during the years at issue, and concluded that the excess in each year was used for petitioner's gambling activities. Mr. Schindele also prepared a net worth schedule for the years at issue. From an extensive examination of petitioners' bank account ledger sheets, bank account data, real estate purchases and sales, investment information, depreciation schedules, and the cost of petitioners' personal assets, including purchased vehicles, Mr. Schindele determined petitioners' assets during the years at issue. Mr. Schindele determined petitioners' liabilities for the years at issue by conducting interviews with those individuals who had made loans1993 Tax Ct. Memo LEXIS 539">555 to petitioners as well as examining petitioners' bank loan data. Mr. Schindele concluded that petitioners had neither acquired substantial assets during the years at issue nor had an overall increase in net worth during those years. We find Mr. Schindele's testimony and findings in his expert report to be consistent with the testimony of the other witnesses in this case. The overwhelming evidence in the instant case indicates that petitioners did not have the income attributed to them by respondent. Additionally, we found petitioner's testimony to be credible and sufficient to establish the fact that for the years at issue petitioner was not the winner at the racetrack that respondent's determinations depict him to have been. Petitioner clearly lost more at the racetrack during the years at issue than he won, and his living style supports this fact. During the years at issue in the instant case, petitioner did not have cash reserves; in fact, the contrary seems to have been the case. Petitioner's depiction of his financial status is supported by evidence that he purchased no assets, lost his racing dogs, did not lead a lavish lifestyle, borrowed substantial sums of money, and1993 Tax Ct. Memo LEXIS 539">556 cashed in his CD's and IRA's. Although respondent's determinations are generally entitled to a presumption of correctness, we find that petitioners have met their burden of proof in the instant case. Based upon all the facts and circumstances, we find that petitioners' unexplained bank deposits for the years at issue represented redeposits of previously deposited funds into petitioners' bank accounts. Accordingly, we find that petitioners do not have additional taxable income for the years at issue in the instant case. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625188/	PERRY T. JONES, JR. AND MICHELLE C. JONES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJones v. CommissionerDocket No. 9781-86.United States Tax CourtT.C. Memo 1989-61; 1989 Tax Ct. Memo LEXIS 61; 56 T.C.M. 1228; T.C.M. (RIA) 89061; February 13, 1989Zipporah J. Lewis,1989 Tax Ct. Memo LEXIS 61">62 for the petitioners. Diane L. Berkowitz, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge: On August 23, 1988, we issued an opinion in this case (T.C. Memo. 1988-393). The taxable years involved were 1980 and 1981. On December 13, 1988 and December 15, 1988, respectively, respondent and petitioners filed objections to each other's computations for entry of decision pursuant to Rule 155 1 previously filed with the Court. The issues which were the subject matter of the trial herein, which are now the subject of each party's respective Rule 155 computational objections were (1) whether petitioners are entitled to deduct purported gambling related expenses, and (2) whether petitioners are liable for the section 6651(a)(1) addition to tax. It is well settled that a Rule 155 proceeding cannot be used to raise new issues that were not litigated at the trial of a case or to relitigate those issues that were previously litigated. Molasky v. Commissioner,91 T.C. 683">91 T.C. 683 (1988);1989 Tax Ct. Memo LEXIS 61">63 Cloes v. Commissioner,79 T.C. 933">79 T.C. 933 (1982); Rule 155(c). However, a Rule 155 proceeding can be used to consider issues which "involve pure questions of law [which] are inextricably intertwined with the proper amount to be entered as a decision." Estate of Buchholtz v. Commissioner,70 T.C. 814">70 T.C. 814, 70 T.C. 814">816 (1978). With respect to the dispute over petitioners' entitlement to purported gambling related deductions, in the opinion previously issued in this case, we held that petitioners were not entitled to these deductions on the ground that they failed to establish that petitioner Perry Jones' gambling activities constituted a trade or business within the meaning of section 162. Petitioners assert that our opinion in this case does not preclude them from claiming those same deductions under section 212. Petitioners argue that their entitlement to their disallowed deductions under section 212 is a consequence of the resolution by the Court of an issue raised by the pleadings and is not a "new issue" under Rule 155(c). 2 We disagree. 1989 Tax Ct. Memo LEXIS 61">64 The petition in this case ascribes various errors in respondent's notice of deficiency which disallowed petitioners purported gambling related deductions. In their trial memorandum, petitioners stated the gambling deduction issue as "Are the expenses paid or incurred, during the taxable year of 1980 and 1981, in petitioners' trade or business of gambling deductible as business expenses?" In petitioners' opening brief in this case, petitioners phrased the issue as "Whether the petitioner Perry T. Jones, Jr., was engaged in the trade or business of gambling and thus entitled to deduct all ordinary and necessary expenses incurred in carrying on the trade or business of gambling in the calendar years 1980 and 1981." Petitioners argued at trial and on brief that they were entitled to their gambling deductions pursuant to section 162. Petitioners did not assert in their trial memorandum, at trial, or on brief that they were entitled to gambling deductions pursuant to section 212 or that they otherwise met the requirements of section 212. Respondent has made no concession that petitioners are entitled to gambling deductions under section 212. 31989 Tax Ct. Memo LEXIS 61">65 Petitioners argue that by virtue of our finding that petitioner had gambling income, they are entitled to their purported gambling related deductions under section 212, despite our holding that their claimed deductions were not deductible under section 162. Our prior holding in this case merely resolved the only issue raised by petitioners with respect to petitioner's gambling activities. If petitioners had, in their pleadings, raised the issue of their entitlement to their purported gambling related deductions under section 212, or under any other section, we would have addressed it. Having not raised it, we find that the presentation of this issue in the context of a Rule 155 proceeding is a "new issue" within the meaning of Rule 155, and is not a "pure question of law [which is] inextricably intertwined with the proper amount to be entered as a decision." 70 T.C. 814">Buckholtz v. Commissioner, supra.The next dispute is over the calculation of the section 6651(a)(1) addition to tax. Petitioners argue that their entitlement to gambling deductions under section 212 reduces their tax deficiency which in turn reduces the addition to tax under section 6651(a)(1) to zero. Having found1989 Tax Ct. Memo LEXIS 61">*66 that petitioners are not entitled to claim these expenses pursuant to section 212, we reject this argument. In light of the foregoing, Decision will be entered in accordance with respondent's computations.Footnotes1. All Rule references are to the Tax Court Rules of Practice and Procedure and all section references are to the Internal Revenue Code of 1954, as amended, and in effect during the years at issue.↩2. Rule 155(c) provides as follows: (c) Limit on Argument: Any argument under this Rule will be confined strictly to consideration of the correct computation of the deficiency, liability, or overpayment resulting from the findings and conclusions made by the Court, and no argument will be heard upon or consideration given to the issues or matters disposed of by the Court's findings and conclusions or to any new issues. This Rule is not to be regarded as affording an opportunity for retrial or reconsideration.↩3. In fact respondent argued that petitioners' purported gambling deductions represented personal nondeductible expenditures under section 262 or at best, were only deductible to the extent permitted under section 183. Petitioners did not assert, and we did not address, whether they would be entitled to claim their gambling deductions under section 183.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625190/	Babetta Schmidt, Petitioner, v. Commissioner of Internal Revenue, RespondentSchmidt v. CommissionerDocket No. 54932United States Tax Court28 T.C. 367; 1957 U.S. Tax Ct. LEXIS 191; May 14, 1957, Filed 1957 U.S. Tax Ct. LEXIS 191">191 Decision will be entered under Rule 50. 1. Petitioner's overpayment of 1944 estimated tax taken as credit against 1945 tax liability, held, to afford no occasion for determination by Tax Court as to either 1944 which was not placed in issue, nor as to 1945, as to which deficiency is conceded and no amount in excess of admitted tax liability is shown to have been paid.2. Petitioner's failure to file timely individual income tax returns, held, on the facts, not due to reasonable cause. Tom B. Markley, Esq., for the petitioner. 1957 U.S. Tax Ct. LEXIS 191">192 Edward H. Boyle, Esq., for the respondent. Opper, Judge. OPPER28 T.C. 367">367 Respondent determined deficiencies in income tax and 25 per cent additions to tax under section 291 (a), Internal Revenue Code of 1939, for failure to file timely returns as follows:YearsDeficienciesAdditions to tax1944$ 95.001945255.58$ 682.15194644.141947137.871948125.151949502.3219511,124.15Petitioner claims to have made overpayments for the following additions to tax previously assessed and paid for failure to file timely returns:YearsAdditions to tax1945$ 249.111947444.451948175.031951245.09No deficiencies are in issue. Those for 1944 and 1949 are not contested in the petition. For 1951 respondent concedes that there is no deficiency in income tax and that there is an overpayment of $ 125.85. For 1945 petitioner concedes the deficiency determined, but claims error in respondent's failure to give credit on account of $ 2,378 from unapplied payment of estimated tax for 1944.The remaining issues are (1) what, if any, action should be taken with respect to a claimed credit for 1945, based on unapplied payment of estimated1957 U.S. Tax Ct. LEXIS 191">193 tax for 1944, and (2) whether petitioner is subject to the 25 per cent additions to tax for failure to file timely returns.28 T.C. 367">368 FINDINGS OF FACT.The stipulated facts are hereby found.Petitioner, born in Germany in 1874, came to this country before 1900. Since her husband's death in 1939, she received rents from certain property. Except for the rental property, petitioner carried on no business activities.Petitioner understood her obligation to file income tax returns, but had no personal knowledge or ability to prepare returns. Prior to her husband's death, she took information to the local Internal Revenue Bureau office for assistance. About 1932, on her sons' recommendation, she retained the person who prepared their returns, hereafter referred to as the accountant, to do her income tax work. The sons, who were in business, employed the accountant from 1930 to 1951.Petitioner employed the accountant from 1932 until about 1952 to do her income tax work. The accountant, although never certified or licensed as a public accountant, held himself out to be a tax consultant, auditor, and public accountant through 1953. After 1937 the State of California required licensing1957 U.S. Tax Ct. LEXIS 191">194 of public accountants.Following petitioner's call to him, the accountant would come to her house for income tax information. She or her daughter recorded certain information in an account book. The book adequately reflected receipts and disbursements and the information necessary to prepare income tax returns. The accountant also would request certain oral explanations.The accountant would take petitioner's information and return later with papers for her to sign. Petitioner from time to time paid the accountant his requested fees, averaging about $ 200 per year, for his income tax services.The accountant prepared petitioner's income tax returns through 1943. He left the returns with her and she filed them in time. For each of the years 1944, 1946, and 1948 through 1951, he prepared Forms 1040 ES, declaration of estimated tax, for petitioner, which she signed and which were timely filed. Petitioner made payments with each Form 1040 ES that was filed.Petitioner did not file timely returns, Form 1040, for 1944 through 1949 and 1951. In 1952, the accountant brought returns for 1944 through 1949 and 1951 to her home for her signature. He gave illness as excuse for the delay. 1957 U.S. Tax Ct. LEXIS 191">195 Petitioner's son refused to allow her to pay the accountant a $ 500 invoice for services. The accountant assured them that they need not worry if they paid the tax due on the returns. He obtained an extension of time only for 1950.The accountant prepared an affidavit for petitioner to sign and attach to the returns which stated that the delay in filing --28 T.C. 367">369 was not due to any intent on my [petitioner's] part to hinder, delay, defraud, evade, or avoid taxation, but was due to the prolonged illness of my accountant.The accountant prepared the returns in 1952.On June 30, 1952, petitioner filed delinquent income tax returns for 1944 through 1949 and 1951 with the collector of internal revenue for the first district of California. She timely filed her 1950 return on August 15, 1951, pursuant to an extension of time granted for that year.Upon receiving the delinquent returns, respondent determined deficiencies and additions to tax for failure to file, for certain years for which delinquent returns were filed.Petitioner's declaration of estimated tax for 1944 showed an estimated liability of $ 2,473. She paid $ 618.25 on each of April 15, June 14, and September 11, 1957 U.S. Tax Ct. LEXIS 191">196 1944, and January 4, 1945. Her 1944 income tax return, delinquently filed on June 30, 1952, showed no liability and requested that the $ 2,473 overpayment be credited against her 1945 estimated tax. Neither she nor anyone acting in her behalf filed a declaration of estimated tax for her for 1945.On her 1945 income tax return, delinquently filed on June 30, 1952, petitioner entered the $ 2,473 as a payment on her 1945 declaration of estimated tax, reducing her income tax liability accordingly. Respondent applied part of the $ 2,473 to pay the conceded deficiency determined for 1944. No part of the $ 2,473 has been allowed in satisfaction of petitioner's tax liability for 1945 or any later year.Petitioner's failure to file timely returns for the years in controversy was not due to reasonable cause.OPINION.The record is not as clear as it might be, but as nearly as can be ascertained, the first issue arises against the following background: In 1944 petitioner concededly overpaid her estimated tax for that year by some $ 2,400. No estimate was filed for 1945, and until 1952 no final returns were filed for the years 1944 through 1949. In the 1944 return filed in 1952, petitioner1957 U.S. Tax Ct. LEXIS 191">197 requested that her 1944 overpayment be applied against estimated tax, and in her 1945 return filed at the same time, she requested that the 1944 overpayment be applied against her tax for 1945. Her 1945 return showed as due only the computed tax less the deducted 1944 overpayment. And apparently only the difference was paid with the return in 1952.Respondent has determined deficiencies for 1944 and 1945 as well as for two of the other years but none of these deficiencies are in issue. The first controversy appears accordingly to be whether the Tax Court has any basis for determining that there has been an overpayment for 1945 when, in fact, no amount has been paid beyond that concededly due.28 T.C. 367">370 In her motion to amend her petition, petitioner states the proposition as follows:Since the filing of the petition herein and the respondent's answer thereto, the Director of Internal Revenue has issued his demand for payment against petitioner on Form 21A, for the year 1945 in the amount of $ 2,473.00 plus interest. Despite the fact that the Commissioner of Internal Revenue in his notice of deficiency * * asserted no such deficiency of $ 2,473.00 for said year 1945; and, until1957 U.S. Tax Ct. LEXIS 191">198 the issuance by the District Director of a demand for payment, taxpayer had no notice of any disallowance of said credit or that the same was in issue. Therefore, the dispute by the petitioner and respondent as to whether petitioner, in computing the amount due the government in the year in question, correctly took the aforesaid credit of $ 2,473.00 cannot be resolved in this proceeding, and taxpayer will be forced to seek an injunction against the Director of Internal Revenue restraining him from collecting said tax unless petitioner is allowed to amend her petition herein, thereby framing the issue. [Emphasis added.]No appeal has been taken from the determination with respect to 1944, the year when the payment in question was made. The Tax Court accordingly has no jurisdiction over that year. John R. Thompson Co., 10 B. T. A. 57. The record appears to indicate that there has been no overpayment for 1945, or at least petitioner, on whom lay the burden, has not proved otherwise. As petitioner points out, respondent did not determine any deficiency with respect to the 1945 credit for the 1944 overpayment. See John Moir et al., 3 B. T. A. 21,1957 U.S. Tax Ct. LEXIS 191">199 but see sec. 271 (b) (1), I. R. C. 1939. He has hence not found in any determination over which we have jurisdiction that the credit for the overpayment was improperly taken. There is nothing upon which the Tax Court could properly act. We could not determine that there is no deficiency or that there is a deficiency of a different amount since 1944 is not in issue and 1945 is conceded. Cf. Ribbon Cliff Fruit Co., 12 B. T. A. 13, 17. We could not determine that there has been an overpayment for 1944 because that year is not before us, nor for 1945, since the facts do not show that anything more than the tax due, even on petitioner's own statement, has actually been paid.We intimate no opinion as to whether respondent could now determine a further deficiency in tax for 1945 thereby placing in issue the propriety of the credit taken. But see sec. 272 (f), I. R. C. 1939. It may be that under appropriate circumstances petitioner could prevent the threatened assessment and levy by resorting to the injunctive process. See Repetti v. Jamison, (N. D., Cal.) 131 F. Supp. 626">131 F. Supp. 626, affd. (C. A. 9) 239 F.2d 901.1957 U.S. Tax Ct. LEXIS 191">200 Upon this possibility also we are required to express no opinion. 1 We conclude only that in the present posture of the case there is no determination which the Tax Court can make on the issue as presented except that the deficiency in income tax for 1945 was properly determined and that there is no overpayment of tax for that year.28 T.C. 367">371 On the second issue, we have found it impossible to make the finding requested by petitioner, that she relied upon her accountant to prepare all necessary1957 U.S. Tax Ct. LEXIS 191">201 returns for her and that, therefore, her failure to file any timely final returns whatever for the years in question was due to "reasonable cause." 2 This results not so much from the question of whether the accountant himself was properly qualified, an issue as to which we find it unnecessary to express an opinion, see Walter H. Kaltreider, 28 T.C. 121; Heatbath Corporation, 14 T.C. 332; Hermax Co., 11 T.C. 442, affirmed per curiam (C. A. 3) 175 F.2d 776, as from petitioner's own testimony.According to her statement, it was her practice to take the initiative 1957 U.S. Tax Ct. LEXIS 191">202 in calling upon the accountant for the preparation of any required documents. Her evidence offers no explanation as to the complete absence of any timely returns for the years 1945 and 1947. Even if she might otherwise have thought that a return of estimated tax was sufficient, the record indicates that in those 2 years not even the estimates were filed. And there is no explanation.The accountant testified that for the year 1945 he prepared and delivered to her a declaration of estimated tax. Petitioner was silent as to this point. For whatever reason, the estimate was not filed. 1945 is the earliest of the "penalty" years involved here. The lack of any showing of reasonable cause for the failure to file currently any returns whatever for that year and for 1947 colors petitioner's entire conduct with respect to the whole period. While we need not say that she was guilty of willful neglect, and indeed respondent concedes this portion of the issue, we cannot on the evidence find that in any of the years the failure to file the final return was due to reasonable cause. Petitioner must have known that the accountant could not be relied upon if he failed to prepare her 1945 estimate. 1957 U.S. Tax Ct. LEXIS 191">203 She must have been guilty of indifference to the requirements of the law if she failed to get in touch with him for that purpose, or neglected to file any estimate that was prepared. In either event, her frame of mind indicates a lack of that respect for the legal requirements which would make it possible for us to determine that all of the omissions were due to reasonable cause. See Rene R. Bouche, 18 T.C. 144. The facts alluded to distinguish this from such situations as Herbert Marshall, 41 B. T. A. 1064, and Estate of Frederick C. Kirchner, 46 B. T. A. 578. On this issue respondent is sustained.Decision will be entered under Rule 50. Footnotes1. The parties have stipulated that "no part of the $ 2,473.00 has been allowed in satisfaction of petitioner's tax liability for 1945 or any later year," and we have so found. We construe this as meaning merely that respondent has taken no affirmative factual action to allow any such credit. To the extent that he may, as a matter of law, have so acted as to cause some different result to follow, the matter is not factual and cannot be stipulated by the parties, and this, as we have already emphasized, is not being decided here.↩2. SEC. 291. FAILURE TO FILE RETURN.(a) In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625191/	Cornelius J. Dwyer v. Commissioner.Dwyer v. CommissionerDocket No. 27472.United States Tax Court1951 Tax Ct. Memo LEXIS 165; 10 T.C.M. 620; T.C.M. (RIA) 51206; June 29, 19511951 Tax Ct. Memo LEXIS 165">165 Petitioner was in the hotel and tavern business and the purchase and sale of merchandise was an incomeproducing factor. Held, respondent did not err in requiring petitioner to change from a cash to an accrual basis of reporting income, but that opening as well as closing inventory should be taken into consideration in determining taxable income for the year. Victor G. Mount, Esq., for the petitioner. Oscar L. Tyree, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion The respondent determined a deficiency in income tax for the year 1946 in the amount of $11,397.21. 1951 Tax Ct. Memo LEXIS 165">166 The questions to be decided are whether respondent erred in changing petitioner from a cash to an accrual method of reporting income, and, if he was correct, whether consideration should be given to the opening inventory as of January 1, 1946, in computing income tax liability. Findings of Fact Petitioner is an individual who, since 1932, has been engaged in the operation of a hotel and restaurant business near Geneva, New York. His individual income tax return for 1946 was filed with the collector of internal revenue for the twenty-first district of New York. Prior to 1932, petitioner was in the wholesale liquor business at Lyons, New York. In 1932 petitioner established his present hotel and restaurant business known as the Belhurst Club, which business includes the retail sales of wines, liquors and beers. The purchase and sale of such merchandise has always been an income-producing factor in petitioner's business. Therefore, it is necessary that inventories be used in reporting income for Federal income tax purposes, and that an accrual method of accounting be used. Petitioner reported his income on a cash basis. However, inventories have been taken at the close of each1951 Tax Ct. Memo LEXIS 165">167 year and the records from 1942 on are available. Inventory as of January 1, 1946, was $19,082 and closing inventory for 1946 was $21,870. Petitioner has no accounts receivable or accounts payable to carry from one year to the next since all sales are for cash and all bills are paid shortly after incurred. The respondent, in computing petitioner's income on the accrual basis, did not take into consideration petitioner's opening inventory for the year. Opinion RICE, Judge: Section 22 (c) requires a taxpayer to use inventories whenever in the opinion of the Commissioner they are necessary to clearly determine the income of a taxpayer. Regulations 111, section [29.22] (c)-1 provides that inventories shall be used whenever the purchase or sale of merchandise is an income-producing factor. Under such circumstances the respondent was correct in requiring petitioner to use inventories in computing income. Section 41 of the Internal Revenue Code provides that the Commissioner may require a taxpayer to report income by use of a method which clearly reflects income wherever the method used by a taxpayer does not clearly do so. Regulations 111, section 29.41-21951 Tax Ct. Memo LEXIS 165">168 requires an accrual method to be employed whenever the use of inventories is necessary. Section 41 gives the Commissioner discretion to require such a change and will only be disturbed where an abuse of discretion has been shown. C. L. Carver, 10 T.C. 171">10 T.C. 171, 10 T.C. 171">173 (1948), affd., 173 Fed. (2d) 29 (C.A. 6, 1949). Since no abuse of discretion has been shown here, the respondent's determination that inventories, and hence an accrual method of reporting shall be used, is upheld. The next question is, therefore, whether some consideration should be given to the opening inventory in determining taxable income for 1946. The distinguishing factor in cases such as this has been held to be whether the books of the taxpayer correctly reflect the income. Commissioner v. Mnookin's Estate, 184 Fed. (2d) 89 (C.A. 8, 1950), affirming 12 T.C. 744">12 T.C. 744 (1949); Robert G. Frame, 16 T.C. 600">16 T.C. 600, promulgated March 8, 1951. If the books do clearly reflect the income, no change in the method of accounting is required but merely a change in the method of reporting income. Both petitioner and respondent characterized petitioner's method of keeping his1951 Tax Ct. Memo LEXIS 165">*169 books as a cash method. However, under petitioner's method of doing business he has no accounts payable or receivable, and the only change necessary is the use of inventories. Petitioner has taken inventories for a number of years which were recorded and available. Since this is the only change respondent has required, we hold that petitioner's books do clearly reflect his income. Therefore, respondent erred in failing to take the opening inventory into consideration in computing petitioner's income for 1946. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625192/	MARGARET J. BURNS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBurns v. CommissionerDocket No. 14948-87.United States Tax CourtT.C. Memo 1988-536; 1988 Tax Ct. Memo LEXIS 565; 56 T.C.M. 703; T.C.M. (RIA) 88536; November 21, 1988. 1988 Tax Ct. Memo LEXIS 565">565 Held: P is entitled to a charitable contribution deduction of $ 3,281.69. Held further: Because P's calendar notations substantiate her charitable contributions she is not liable for additions to tax under section 6653(a)(1) and 6653(a)(2). Margaret J. Burns, pro se. Anthony S. Gasaway,1988 Tax Ct. Memo LEXIS 565">566 for the respondent. WHITAKERMEMORANDUM FINDINGS OF FACT AND OPINION WHITAKER, Judge: By statutory notices dated March 2, 1987, respondent determined the following deficiencies in and additions to petitioner's Federal income tax: Additions to TaxSectionSectionSectionYearDeficiency6651(a)(1) n16653(a)(1)6653(a)(2)1981$ 4,805$ 146.50$ 240.251984$ 1,609$ 235.79$ 322.85The parties stipulated that there is no deficiency in the Federal income tax due from, nor overpayment due to, petitioner for 1981. The parties also stipulated that an error existed in the1988 Tax Ct. Memo LEXIS 565">567 statutory notice of deficiency issued to petitioner with respect to the taxable year 1984. Pursuant to that stipulation, respondent has conceded that the deficiency in and additions to petitioner's Federal income tax for 1984 should be reduced as follows: Additions to TaxSectionSectionSectionYearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)1984$ 633--$ 31.65*After concessions, the issues for decision are: (1) Whether petitioner is entitled to a deduction for charitable contributions; 3 and (2) whether petitioner is liable for additions to tax under section 6653(a)(1) and (2). FINDINGS OF FACT Some of the the facts have been stipulated and are found accordingly. The stipulations and exhibits attached thereto are incorporated herein by reference. Petitioner resided in Oklahoma City, Oklahoma, at the time the petition in this case1988 Tax Ct. Memo LEXIS 565">568 was filed. During 1984, petitioner was employed by General Motors Corporation as an automobile assembler. She earned gross wages of $ 32,775.73. Petitioner maintained a household for her daughter and herself. Petitioner managed her personal finances without a checking account. She paid all of her bills in cash except for the bills she paid through the mail with money orders. Petitioner and her daughter attended services at Faith Baptist Church (the Church) throughout 1984. Petitioner regularly made cash contributions to the church. In addition, petitioner loaned the Church $ 1,600 for the purchase of a bus. The Church repaid that amount in installments of $ 150 per month commencing in April or May 1984. Petitioner endorsed the loan repayment checks and presented them to the Church as offerings. She also purchased gas for the Church's bus on several occasions. The Church maintained no formal record of the nature or amount of petitioner's contributions or contributions made by any other members of its small congregation. Consequently, petitioner received no receipts for the cash, checks, or gas purchases she contributed to the Church. Petitioner did, however, maintain a1988 Tax Ct. Memo LEXIS 565">569 kitchen calendar on which she made notations regarding, among other things, charitable contributions. The calendar notations reflect regular Sunday contributions to the Church as well as purchases of gas for the Church's bus, a donation to the OETA Foundation, a donation to the Karen Denton Medical Fund, a "Food Basket" donation, and a single entry denoting "Food Donations." Petitioner also contributed to the Salvation Army during 1984. The contributions to the Salvation Army are not noted on her calendar but petitioner retained the stubs from two money orders totaling $ 17.13 for contributions she made to that organization. Before the due date for her 1984 Federal income tax return petitioner filed a document labeled "THIS IS NOT A RETURN" with the Internal Revenue Service Center at Austin, Texas. This tax protester-type return reported $ 32,775.85 of gross receipts which were offset by a "Cost basis (fair market value) of labor Received as Gift from Creator." It also reported "Charitable contributions allowable" in the amount of $ 315.17 and two "Exemptions" of $ 1,000 each. Based on information reported in the document, petitioner demanded a refund of the sum of the Federal1988 Tax Ct. Memo LEXIS 565">570 income and Social Security taxes withheld from her 1984 wages. On or about April 13, 1986, the same day that petitioner filed her 1985 Federal income tax return, she also filed a Form 1040X purporting to amend her 1984 Federal income tax return. On Schedule A of that return petitioner reported cash contributions of $ 3,116. In October 1986, petitioner filed with the Internal Revenue Service a Form 4744, Questionnaire - Contributions, on which she claimed charitable contributions made during 1984 in the amount of $ 3,462.13. Petitioner did not report any charitable contributions on either her 1982 or 1983 Federal income tax returns. Petitioner reported cash contributions of $ 4,645 and $ 2,869 on her 1985 and 1986 Federal income tax returns, respectively. Petitioner changed churches during 1985 and her new church, Blue Lakes Baptist Church, kept records verifying contributions from her totaling $ 3,075 for 1985 and $ 2,332.25 for 1986. Petitioner made contributions to other charitable organizations during 1985 and 1986. In his notice of deficiency regarding the 1984 taxable year, respondent disallowed the charitable contributions claimed by petitioner for lack of substantiation. 1988 Tax Ct. Memo LEXIS 565">571 OPINION The issues herein are purely factual. Petitioner bears the burden of proving that respondent's determinations are erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Moreover, deductions are a matter of legislative grace and petitioner must establish her entitlement to a charitable contribution deduction in the amount claimed. Deputy v. du Pont,308 U.S. 488">308 U.S. 488, 308 U.S. 488">493 (1940); New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 292 U.S. 435">440 (1934). Under section 170, a taxpayer is entitled to deduct charitable contribution subject to certain limitations. In order to qualify for the deduction claimed, petitioner must show that contributions were actually made and that they were made to qualified charitable organizations. Sec. 170(a) and 170(c). Petitioner contends that the following are deductible contributions: Church (cash$ 3,320.00Church (gas)37.00Harvest Gleaner Hour23.00Karen Denton Medical Fund20.00Salvation Army37.13OETA Foundation25.00Total4 $ 3,462.131988 Tax Ct. Memo LEXIS 565">572 To substantiate the contributions in issue petitioner relies almost exclusively on the kitchen calendar which she maintained as a contemporaneous record of her charitable contributions for 1984. The calendar notations reflect contributions totaling $ 3,378.62 but petitioner failed to reconcile that amount with the amounts she reported as her charitable contributions for the year. Consequently, petitioner never reported the total of the amounts recorded on the calendar to the Internal Revenue Service. She reported $ 315.17 on her initial tax protestor-type return, $ 3,116 on her amended return, and $ 3,462.13 on the most recently filed contributions questionnaire. Petitioner explained to our satisfaction that the lowest reported figure was not intended to reflect the actual amount contribution; rather it resulted from misconceptions advanced by the tax protester group with which she was formerly affiliated. Petitioner, however, offered no explanation for the differences between the two higher reported amounts and the calendar total. On the few occasions that petitioner supplemented her regular Sunday contribution to the Church with a mid-week contribution, she recorded1988 Tax Ct. Memo LEXIS 565">573 the additional amount together with the amount contributed the immediately preceding Sunday. The contributions to the Karen Denton Medical Fund and the OETA Foundation also appear on the calendar on dates different than the dates such contributions were allegedly made. The contributions to the Salvation Army do not appear on the Calendar at all. In spite of these apparent instances of sloppy record keeping, we find that, when considered together with the other evidence in the record, petitioner's calendar notations substantiate her charitable contributions. 5 Accordingly, petitioner is entitled to deduct the amounts she recorded on her calendar except as otherwise noted herein. 1988 Tax Ct. Memo LEXIS 565">574 In addition to being documented on her calendar, petitioner's contributions to the Church are substantiated by her own testimony, the testimony of the Church's pastor, and records from another church verifying contributions of comparable amounts in subsequent years. We find petitioner's testimony to have been candid and credible and we believe that she contributed cash, loan repayment checks, and gas purchases to the Church during 1984. 6 Further, we believe petitioner recorded the amounts contributed on her kitchen calendar. The calendar reflects contributions to the Church of cash and checks totally $ 3,227.56 and gas purchases totaling $ 48.06. The amounts recorded on petitioner's calendar cannot be verified by the Church because it maintained no record of contributions. 7 However, the pastor verified several of petitioner's largest contributions1988 Tax Ct. Memo LEXIS 565">575 by testifying that he observed two or three of the $ 150 loan repayment checks in the Church's offering. He only collected the offering in the treasurer's absence and, therefore, he could not testify about the other repayment checks issued in 1984. Calendar notations reflecting contributions of exactly $ 150 appear in 6 of the last 8 months of 1984 and notations reflecting contributions exceeding $ 150 appear in the other 2 months. We conclude that these calendar entries correspond to contributions of the loan repayment checks to the Church. The pastor's testimony enhances the reliability of the calendar notations not only with respect to the contribution of the loan repayment checks but also with respect to petitioner's other contributions to the Church. The fact that petitioner reported no cash contributions on either her 1982 or 1983 Federal income tax1988 Tax Ct. Memo LEXIS 565">576 returns does not alter our finding that she regularly attended services at and contributed to the Church during 1984. In the two succeeding taxable years, 1985 and 1986, petitioner reported sizeable cash contributions on her Federal income tax returns. The returns are merely a statement of petitioner's claim and do not establish the facts contained therein. Wilkinson v. Commissioner,71 T.C. 633">71 T.C. 633, 71 T.C. 633">639 (1979); Roberts v. Commissioner,62 T.C. 834">62 T.C. 834, 62 T.C. 834">837 (1974); Seaboard Commercial Corp. v. Commissioner,28 T.C. 1034">28 T.C. 1034, 28 T.C. 1034">1051 (1957). However, petitioner changed churches in 1985 and records of the church she then attended verify her contributions in the year of the change and the succeeding year. This evidence falls short of establishing a predictable pattern of contribution but it supports our finding that petitioner contributed the amounts recorded on her calendar to the Church during the year in issue. Petitioner produced no receipts or documentary evidence other than the calendar notations to substantiate her purchases of gas for the Church's bus. We do not doubt that petitioner made such purchases, however, she obviously erred in1988 Tax Ct. Memo LEXIS 565">577 recollecting the amounts thereof because her calendar reflects gas purchases of $ 48.06 while the contributions questionnaire reflects purchases of only $ 37. At trial, petitioner claimed that the lesser amount represents the total gas purchases. We resolve the difference by recognizing her downward adjustment as appropriate even though the calendar appears to justify deducting the greater amount. Based on the foregoing, we hold that petitioner is entitled to a charitable contribution deduction of $ 3,227.56 with respect to her contributions of cash and loan repayment checks to the Church and $ 37 with respect to her gas purchases. As to the contributions to the Harvest Gleaner Hour and the Karen Denton Medical Fund, petitioner produced no receipts or documentary evidence other than the calendar notations to substantiate the amounts claimed. Without more evidence, we cannot determine whether the contributions were made to qualified charitable organizations. Sec. 170(c). Petitioner's alleged contribution to the OETA Foundation presents similar problems. Aside from petitioner's calendar notation the only documentary evidence presented is a copy of a cancelled check payable1988 Tax Ct. Memo LEXIS 565">578 to the OETA Foundation. Petitioner claimed the contribution as a deduction in spite of the fact that the $ 25 check was drawn on her mother's account. Petitioner failed to prove she, rather than her mother, made the contribution. Petitioner also failed to prove that OETA was a qualified charitable organization. Sec. 170(c). She described the foundation as a public television station but we refuse to recognize it as a qualified charitable organization solely on the basis of her testimony. Accordingly, we sustain respondent's disallowance of petitioner's deduction for contributions to the Harvest Gleaner Hour, the Karen Denton Medical Fund, and the OETA Foundation. Petitioner contributed to the Salvation Army during 1984. The Salvation Army is a qualified charitable organization, therefore, only the amount contributed is at issue. Petitioner retained stubs from money orders reflecting contributions of $ 17.13 to the Salvation Army and those stubs adequately substantiate the deduction of a like amount. However, the lack of substantiation forces us to deny petitioner a deduction for the remaining $ 20 which she allegedly contributed. Petitioner failed to produce a receipt or1988 Tax Ct. Memo LEXIS 565">579 other documentary evidence to substantiate the cash contribution; she even failed to make a notation of it on her calendar. Respondent's disallowance of that portion of the contribution; is therefore sustained. Section 6653(a)(1) provides that "if any part of any underpayment * * is due to negligence or intentional disregard of rules or regulations * * , there shall be added to the tax an amount equal to 5% of the underpayment." Negligence is defined as a 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, 85 T.C. 934">947 (19985). Section 6653(a)(2) provides for a further addition to the tax of an amount equal to 50 percent of the interest on the portion of the underpayment attributable to negligence. Petitioner bears the burden of proving that the underpayment was not due to her negligence or intentional disregard of the rules or regulations. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757 (1972). Section 6001 requires a taxpayer to maintain records sufficient to establish the amount of any deduction claimed by her on her tax return. See sec. 1.6001-1(a) and 1.6001-1(e), 1988 Tax Ct. Memo LEXIS 565">580 Income Tax Regs. When a taxpayer fails to maintain or make such records available, the negligence addition may be asserted. See, e.g., Zivnuska v. Commissioner,33 T.C. 226">33 T.C. 226, 33 T.C. 226">240-241 (1959). In this case, however, petitioner neither failed to maintain records nor refused to make them available. Accordingly, the proposed additions to tax cannot be founded on those grounds. The isolated instances of sloppy record keeping identified herein detract from the reliability of petitioner's records but do not warrant additions to tax under section 6653(a)(1) and 6653(a)(2). Decision will be entered under Rule 155.Footnotes. 50% of the interest due on $ 4,805. 50% of the interest due on $ 633.* 50% of the interest due on $ 6,457. n2 n1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and effect during the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. n2 Respondent initially determined the section 6653(a)(2) addition with an "underpayment" based on the tax imposed for the year rather than the deficiency because petitioner's 1984 tax return was not timely filed. Sec. 6653(c)(1).↩3. A derivative issue is whether petitioner has excess itemized deductions. That determination depends entirely upon our decision regarding charitable contributions because none of petitioner's other Schedule A deductions are being challenged.↩4. Although petitioner claimed only $ 3,116 on her 1984 tax return, she testified at trial that she was claiming a deduction for the additional contributions reported on Form 4744, Questionnaire - Contributions.↩5. The record keeping requirements of section 1.170A-13, Income tax Regs., effective for taxable years beginning on or after January 1, 1983, appear to require documentation different than that provided by petitioner's calendar notations. However, respondent never made compliance with section 1.170A-13, Income Tax Regs., an issue for decision in this case. Accordingly, we need not determine whether, in the absence of cancelled checks or receipts from the donee, petitioner's calendar notations constitute "other reliable written records: within the meaning of section 1.170A-13(a)(1), Income Tax Regs.↩6. We deny petitioner a deduction for the amounts corresponding to the "Food Basket" and "Food Donations" notations, $ 25 and $ 10 respectively, because these amounts presumably reflect contributions of something other than cash, checks, or gas purchases and she failed to introduce any evidence substantiating other contributions.↩7. In his notice of deficiency, respondent requested that petitioner obtain a receipt from the Church. Section 1.170A-13(e), Income Tax Regs.↩, authorizes this substantiation requirement with which petitioner could not comply because the Church maintained no records of contributions and, therefore, could issue no receipt.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625195/	Elizabeth Mayer v. Commissioner.Mayer v. CommissionerDocket No. 20627.United States Tax CourtT.C. Memo 1954-14; 1954 Tax Ct. Memo LEXIS 233; 13 T.C.M. 391; T.C.M. (RIA) 54120; April 20, 1954, Filed 1954 Tax Ct. Memo LEXIS 233">233 George L. Weisbard, Esq., for the petitioner. Hugh F. Culverhouse, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: Respondent has determined income tax deficiencies and penalties for petitioner as follows: YearDeficiencyPenalty1942$ 2,517.58$ 1,258.791943282,937.09141,468.55The first and principal issue is whether petitioner was a partner in the operation of three liquor stores. The second, and an issue depending upon the first, is whether petitioner's returns understated her income for 1942 and 1943. Originally there were two other issues, one relating to fraud, which the respondent has abandoned, and one relating to the statute of limitations for 1942, which petitioner has abandoned. Findings of Fact Some of the facts are stipulated and are incorporated herein by this reference. Elizabeth Mayer, a resident of Memphis, Tennessee, was not married. She filed her individual income tax returns for 1942 and 1943 with the collector of internal revenue for the district of Tennessee. After petitioner was graduated from high school she worked as a stenographer. From 1925 to 1943 she worked1954 Tax Ct. Memo LEXIS 233">234 for the Memphis City Assessor. At the time of the hearing and for a number of prior years, she was a homemaker for one of her brothers, Edwin. Edwin was engaged in the wholesale liquor business. In 1941 petitioner advanced $3,375 to the Bottle House Liquor Store; in 1942, $3,000 to the All Brands Liquor Store; and on June 15, 1943, $2,069 to the Broadway Liquor Store. Some time later this money was repaid to petitioner. All three stores were located in Chattanooga, Tennessee, and were operated by H. C. Hines. All were retail liquor stores, but the All Brands Liquor Store also had a wholesale department. Under an oral agreement, and as a result of her advances to the liquor stores, petitioner was to receive one-third of the profits from the All Brands Liquor Store, one-third from the Broadway Liquor Store, and one-half of the profits from the Bottle House Liquor Store. She was not to share in any of the losses. In July 1943 Arnold Jennings, who like petitioner and Hines had advanced $3,000 to open the All Brands Liquor Store, withdrew his interest and accepted $15,864.81 in full settlement for his interest in the store. On petitioner's 1943 tax return she reported under Schedule1954 Tax Ct. Memo LEXIS 233">235 C(3) - "Income From Partnerships, Fiduciaries, and Other Sources": All Brands Liquor Store$38,806.38Bottle House Liquor Store6,967.26 Under a like schedule on her 1944 return she reported $3,158.69 from the Broadway Liquor Store. In her petition she made the following statement: "The petitioner has reported and paid tax on all income from the partnership." Hines, in an attachment to his individual return for 1944, reported the following as part of Schedule 3: BROADWAY LIQUOR STORE(Partnership)SCH 3Elizabeth Mayer$3,158.69Arnold Jennings3,158.69H. C. Hines3,158.68$3,158.68$9,476.06No current records of account or inventories were kept by the Broadway Liquor Store or the Bottle House Liquor Store. However, at some unknown time, but after the revenue agents had begun an investigation of petitioner's tax returns, a certified public accountant in Chattanooga prepared certain accounting records for the operation of the stores for the years before us. Among these records was a March 5, 1944, balance sheet for the Broadway Liquor Store, and in the analysis of the capital account petitioner is described as a partner. Her1954 Tax Ct. Memo LEXIS 233">236 capital account was debited with one-third ($4,100) of the aggregate withdrawals ($12,300) for the year. Hines and Jennings were debited with the other two-thirds. On September 17, 1948, H. C. Hines executed the following affidavit which petitioner incorporated in her petition: "I, H. C. Hines, do declare and solemnly affirm on this 17th day of September, 1948, that: "First - Partnership tax returns signed and filed by me for the All Brands Liquor Store, Bottle House Liquor Store, Broadway Liquor Store were, to the best of my knowledge and belief, true and complete returns and showed the entire net income of these stores. "Second - That, as manager for these stores, I made settlements with all persons entitled to share in the profits in accordance with the division of profits shown on the tax returns, and particularly with regard to Miss Elizabeth Mayer that settlements were so made and she was not paid any additional amounts from, or on account of these organizations, or as a result of their operations in any way whatsoever. "Third - That Miss Elizabeth Mayer did not at any time participate in the operation of these stores, nor did she have knowledge of their operation beyond1954 Tax Ct. Memo LEXIS 233">237 information given her by me and that any and all information given her by me was consistent with the information shown on the tax returns above mentioned. "Signed - H. C. Hines, Chattanooga, Tenn." Notwithstanding Hines' affidavit, petitioner and respondent stipulated that partnership returns, Form 1065, have never been filed by the All Brands Liquor Store, Bottle House Liquor Store, or Broadway Liquor Store. On November 15, 1945, H. C. Hines and and an employee of All Brands Liquor Store pleaded guilty to an indictment charging them and three others with selling whiskey in 1943 from the All Brands Liquor Store at prices exceeding those permitted by the Office of Price Administration. Fines totaling $15,000 were assessed. Petitioner was not included in the indictment, nor was she a party to any litigation involving these O.P.A. proceedings. The stores went out of business early in 1944 as a result of the O.P.A. proceedings. In the statement for 1943 which was attached to the deficiency notice respondent's adjustment is explained as follows: "(b) In the absence of records thereof, distributive net income of partnerships has been determined to be as follows: "All Brands Liquor Store671,038.53Bottle House Liquor Store43,115.03Broadway Liquor Store17,713.861954 Tax Ct. Memo LEXIS 233">238 and the share of such distributive net income includable in your return to be: "All Brands Liquor Store328,265.78Bottle House Liquor Store21,557.51Broadway Liquor Store5,904.62Total355,727.91Amounts reported from: All Brands LiquorStore36,806.38Bottle HouseLiquor St.6,967.2642,773.64Income not reported312,954.27"A similar adjustment was made for 1942 and 1944. Opinion The first issue we shall consider is whether petitioner was a partner in the operation of three liquor stores within the meaning of section 3797(a)-2, I.R.C.1 Respondent's position is that the petitioner was a partner, while petitioner contends that she was a creditor and not a partner. It is interesting to note that the contentions urged upon us are contrary to the ones generally urged by a taxpayer and respondent in partnership cases. Generally, respondent denies the existence of a claimed partnership; here the deficiencies were based upon the existence of a partnership, and computed upon petitioner's share of the distributive income of the alleged partnership. 1954 Tax Ct. Memo LEXIS 233">239 We have found the essential facts as supported by the evidence but the absence of certain evidence is more enlightening on the partnership issue than the facts as found. Petitioner denies the existence of a partnership agreement - written or parol; respondent did not prove one. Petitioner's name did not appear on any of the Federal, state, or city liquor permits for any of the three stores. Furthermore, petitioner testified that she had not applied for any permits, and there was no showing that she did. Petitioner denies that she had authority to sign checks on any bank account for the stores; there is no proof to the contrary. Petitioner's name or a pseudonym for her did not appear on any lease or utility contract. All of these things disprove the existence of a partnership with petitioner as a partner. When we examine the managerial activities or the services rendered to the businesses by petitioner we again find nothing to support the claimed partnership. Petitioner denied that she had any voice in the management or control of the stores. She denied that she had any authority to act for them. There was no showing that she worked in the stores or had anything to to do with their1954 Tax Ct. Memo LEXIS 233">240 operation. In fact, she denied that she had ever been in any of the stores which were located more than 300 miles away from her home. She also denied that she had anything to do with the books or records of the stores. We believe that the lack of petitioner's services or management activities refutes the existence of a partnership with her as a partner. And finally, there is other evidence that no partnership existed. Hines' testimony supported petitioner's contention. Petitioner was not made a party to any of the O.P.A. proceedings involving the stores. No Federal partnership returns were filed for any of the stores. She did not claim, as a deduction in 1942, any part of the business loss sustained by one of the stores in that year. There is no showing that petitioner received any of the proceeds from the liquidation of the stores in 1944. The fact that petitioner reported income from the business on the schedules designated as "Income From Partnerships, Fiduciaries, and Other Sources" in 1943 and "Income From Partnerships, Estates and Trusts, and Other Sources" in 1944 is to be weighed, but this hardly proves that petitioner was a partner. In presenting his case respondent argues1954 Tax Ct. Memo LEXIS 233">241 that certain sums, admittedly paid by petitioner, were capital contributions to the partnership and entitled petitioner to a share of the profits as a partner. Petitioner denies that these sums were capital contributions, but testified that they were loans and as such were repaid. She further testified that because of these loans she was entitled to a share of the profits. Her testimony in this respect is weakened because there was no written evidence of her indebtedness. There was, however, evidence that she received a share of the profits. This sharing of profits is evidence of a partnership, but in itself it is not sufficient to prove a partnership, particularly where there was no sharing of the losses. Roland P. Place, 17 T.C. 199">17 T.C. 199, 17 T.C. 199">206, affd., 199 Fed. (2d) 373. Here petitioner had no liability for losses. On the record before us we can not sustain respondent's argument that the money given to Hines for each of the stores was a capital contribution for a partnership. Cf. John A. Morris, 13 T.C. 1020">13 T.C. 1020. Nor can we find, as respondent contends, that petitioner's brother contributed services to the partnership so that it would be tantamount1954 Tax Ct. Memo LEXIS 233">242 to the contribution of services by petitioner herself. The record does not show what services he contributed. Petitioner has not explained the fact that Hines on his individual return for 1944 called the Broadway Liquor Store a partnership, nor has she explained her statement in the petition that, "The petitioner has reported and paid tax on all income from the partnership." Without a satisfactory explanation, this evidence must be weighed against petitioner in resolving the partnership issue. Certain books and records were prepared after the revenue agents began investigating petitioner and Hines, and a balance sheet and statement of income were submitted at the hearing. We have considered this evidence. But how accurate is a balance sheet or a statement of income prepared, without business papers and records, two or three years subsequent to the year reported on? Even under ordinary conditions the correctness of a balance sheet and statement of income under such circumstances would be open to question but more so when they were prepared under the coercion of a revenue agent's investigation. It is regrettable that neither petitioner nor respondent would call the accountant as1954 Tax Ct. Memo LEXIS 233">243 a witness. From a circumspect examination of the entire record we can not find that petitioner, in good faith and with a business purpose, intended to be a partner in the operation of any one of the three liquor stores, and therefore was not in fact a partner. On this first issue petitioner's contention is sustained. Because the deficiencies were based on a distributive share of partnership income and since we have found that petitioner was not a partner, it is unnecessary to consider the second issue. Decision will be entered under Rule 50. Footnotes1. SEC. 3797. DEFINITIONS. (a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof - * (2) Partnership and partner. - The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625197/	GEORGE A. J. JOEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJoel v. CommissionerDocket Nos. 7015-73 and 2708-74.United States Tax CourtT.C. Memo 1976-319; 1976 Tax Ct. Memo LEXIS 84; 35 T.C.M. 1447; T.C.M. (RIA) 760319; October 13, 1976, Filed George A. J. Joel, pro se. Alan R. Herson, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes: Docket No.YearDeficiency7015-731971$570.062708-741972659.85 The sole issue presented for our decision is whether petitioner is liable for the tax imposed on self-employment income under the provisions of sections 1401 and 1402. 11976 Tax Ct. Memo LEXIS 84">85 FINDINGS OF FACT. Some of the facts have been stipulated and are so found. George A. J. Joel (hereafter referred to as petitioner) was a resident of Los Angeles County, Calif., at the time the petitions in this case were filed. Petitioner and his spouse 2 filed joint income tax returns for the years 1971 and 1972 with the Western Service Center located in Ogden, Utah. In the years 1971 and 1972 petitioner had net earnings from self-employment in the respective amounts of $7,600.79 and $8,798. Petitioner failed to include the tax on self-employment income on the returns filed for 1971 and 1972.Petitioner is not a member of a religious organization and has never applied for an exemption from the self-employment tax, under section 1402(h), on the basis of his religious beliefs. OPINION Although petitioner couches his arguments in constitutional terms, it is clear that his primary objection to the self-employment tax is based upon his sincere conviction that the Social Security system is both outdated and financially unsound. In this regard petitioner represents that he is "petitioning the Court * * to press the1976 Tax Ct. Memo LEXIS 84">86 button initiating changes in the Social Security system so that a meaningful system can survive." Unfortunately for petitioner, we are not in a position to assess the vitality of the Social Security system and we are powerless to initiate any changes therein. These are obviously the functions of the legislative branch of Government, and we must defer to its judgment in these regards. Petitioner has rather broadly asserted that the self-employment tax constitutes an infringement upon rights secured to him by the First, Fourth, Fifth, Ninth and Tenth Amendments to the United States Constitution, but he has completely failed to demonstrate the manner in which any of these rights would be affected by payment of the tax. The tax imposed by the Social Security Act upon both employees and the self-employed has been held constitutional, Helvering v. Davis,301 U.S. 619">301 U.S. 619 (1937); Cain v. United States,211 F.2d 375 (5th Cir. 1954); Julia C. Henson, 66 T.C. (August 5, 1976); William E. Palmer,52 T.C. 310">52 T.C. 310 (1969), 3 and in light of petitioner's failure to assert reasons for ruling to the contrary here, we decline to do so. 1976 Tax Ct. Memo LEXIS 84">87 Decisions will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. Petitioner's spouse is not a party herein.↩3. Alan Lerner,T.C. Memo. 1975-60, affd. 527 F.2d 645 (3d Cir. 1976); Ronald E. Randolph,T.C. Memo. 1969-289; see Leonard H. Church,T.C. Memo. 1970-146↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625198/	ELOIS H. WOMACK AND DORIS S. WOMACK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWomack v. CommissionerDocket No. 14202-80.United States Tax CourtT.C. Memo 1986-546; 1986 Tax Ct. Memo LEXIS 64; 52 T.C.M. 1012; T.C.M. (RIA) 86546; November 12, 1986. 1986 Tax Ct. Memo LEXIS 64">64 Held, Ps' consistent failure to report over a three-year period substantial amounts of income derived from an embezzlement scheme involving forgery, document alteration, a fictitious entity and a special bank account constituted sufficient evidence to support fraud within the meaning of section 6653(b), I.R.C. 1954. Marshall R. Bentzman, for the petitioners. James S. Daubney, for the respondent. NIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined deficiencies in tax and additions to tax for each of the following petitioners for the following taxable years: 1Additions to TaxPetitionerYearDeficiencySec. 6653(b) 2Sec. 6654Elois Womack1975$26,264$13,132197622,50711,25483819771,312656Doris Womack197526,35213,176197625,48812,74419771,3126561986 Tax Ct. Memo LEXIS 64">65 The parties have stipulated that the amounts of deficiency and additions to tax are correct for each of the years in issue if this Court determines that a portion of the underpayment of tax in each year is due to fraud. Accordingly, the only issue for decision is whether a portion of the underpayment of tax in each of the years 1975, 1976 and 1977 is due to fraud on the part of each of the petitioners. FINDINGS OF FACTS Some of the facts have been stipulated. The stipulation of facts and exhibits are incorporated herein by reference. Petitioners resided at South Lake Tahoe, California, at the time they filed their amended petition in this case. Hereinafter petitioner Elois H. Womack will be separately referred to as Elois and petitioner Doris S. Womack will be separately referred to as Doris. Elois and Doris were unmarried individuals1986 Tax Ct. Memo LEXIS 64">66 in the taxable years 1975 and 1976. They were married on July 10, 1977. For 1975, Elois timely filed an individual income tax return. For 1976, Elois filed no income tax return. For 1975 and 1976, Doris timely filed unmarried, head of household, individual income tax returns. Petitioners filed a joint return for 1977. From July, 1973, until May, 1977, Doris was employed as a loan disbursement officer for Transamerica Mortgage Advisors, Inc. (hereinafter referred to as TMA). Doris had authority to initiate check requests to pay contractors for work on mortgaged properties. During the course of her employment, Doris embezzled from her employer $59,690.83, $57,926.83 and $5,303.49 in the tax years 1975, 1976 and 1977, respectively. Petitioners' embezzlement was discovered in October, 1977, during the course of a regular annual audit by TMA. On March 20, 1979, petitioners pleaded guilty to a five-count charge of felony grand theft for their embezzlement activities. One of the contractors that performed jobs for TMA was Design for Living. In 1975, Elois filed a fictitious name statement with the County of El Dorado, California, in the name of "Design for Living" and opened1986 Tax Ct. Memo LEXIS 64">67 a checking account in the name of "Design for Living" for which he had sole signatory authority. During the years 1975 through 1977, Doris initiated fictitious check requests from TMA to Design for Living and to other vendors that rendered goods and services to petitioners. During the years in issue, Doris gave Elois a total of $65,143.18 in TMA checks made payable to Design for Living. Elois endorsed and deposited these checks into the account he had opened in the name of that entity. Petitioners used the funds to build a house and to obtain goods and services. Doris attempted to conceal the embezzlement during the years in issue by pulling cancelled checks out of TMA's files, altering business records that documented the embezzlement and forging supervisorial initials on disbursement authorizations. Petitioners did not report any of the embezzled funds as income on their tax returns for the 1975, 1976 or 1977 tax years. In 1979, the Internal Revenue Service began an investigation of petitioners' tax liabilities for the years in issue. A revenue agent attempted to schedule a conference to meet with petitioners, but they failed to answer the agent's correspondence. Later1986 Tax Ct. Memo LEXIS 64">68 Doris telephoned the agent and said that the funds omitted from the returns were not income because they were borrowed sums of money. OPINION Section 6653(b) provides that if any underpayment of tax required to be shown on a return is due to fraud, there shall be an addition to tax. Respondent has the burden of proving, by clear and convincing evidence, that some part of an underpayment of tax in each year is due to fraud. Section 7454(a); Rule 142(b); Doncaster v. Commissioner,77 T.C. 334">77 T.C. 334 (1981). To establish fraud, respondent must show that petitioners acted with intent to evade a tax believed to be owing. Marcus v. Commissioner,70 T.C. 562">70 T.C. 562, 70 T.C. 562">577 (1978), affd. without published opinion 621 F.2d 439">621 F.2d 439 (5th Cir. 1980). Because it is seldom possible to prove fraud by direct proof of intention, the required intent may be shown by circumstantial evidence and reasonable inferences drawn from the facts. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 56 T.C. 213">222-224 (1971). The evidence of fraud is a question of fact to be determined upon consideration of the entire record. Stratton v. Commissioner,54 T.C. 255">54 T.C. 255, 54 T.C. 255">284 (1970),1986 Tax Ct. Memo LEXIS 64">69 modified on other grounds 54 T.C. 1351">54 T.C. 1351 (1970). Upon consideration of the entire record, we conclude that respondent has sustained his burden of proof by clear and convincing evidence for each of the years in issue. Petitioners devised an embezzlement scheme involving forgery, document alteration, a fictitious entity and a special bank account. They jointly engaged in the scheme for three consecutive years producing substantial income that they failed to report on their Federal income tax returns for each of the years in issue. Gains from embezzlement constitute gross income. James v. United States,366 U.S. 213">366 U.S. 213 (1961); section 1.61-14(a), Income Tax Regs.Although the mere failure to report income, standing alone, may not support a finding of fraud, the consistent failure to report substantial amounts of income over a period of years has been found to constitute evidence of fraudulent intent. Holland v. United States,348 U.S. 121">348 U.S. 121, 348 U.S. 121">139 (1954); Estate of Upshaw v. Commissioner,416 F.2d 737">416 F.2d 737, 416 F.2d 737">741 (7th Cir. 1969), affg. T.C. Memo. 1968-123, cert. denied 397 U.S. 962">397 U.S. 962 (1970). Petitioners' consistent1986 Tax Ct. Memo LEXIS 64">70 omissions of substantial amounts of income over a three-year period is strong evidence of intent to evade a tax believed to be owing. Doris testified that she did not report the embezzled income because "it just never crossed my mind" and "[i]t didn't dawn on me to report it." Elois testified that he didn't know that he had to report the embezzled income. This testimony lacks credibility. The magnitude of the amounts embezzled and the method of embezzlement preclude the inference that the embezzled income was omitted due to oversight. See Estate of Nitto v. Commissioner,13 T.C. 858">13 T.C. 858, 13 T.C. 858">868 (1949). Doris embezzled from her employer and attempted to conceal her embezzlement by pulling cancelled checks out of TMA files, altering business records and forging supervisorial initials on disbursement authorizations. Elois attempted to conceal the embezzlement by using a fictitious business name, opening and maintaining a bank account under false pretenses and fraudulently endorsing checks payable to another business entity. Petitioners' misrepresentation and concealment of their misappropriations contradict at innocent intent. McGee v. Commissioner,61 T.C. 249">61 T.C. 249, 61 T.C. 249">260 (1973),1986 Tax Ct. Memo LEXIS 64">71 affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975). Decision will be entered for the respondent.Footnotes1. Respondent determined petitioners' deficiencies in tax separately for the 1975 and 1976 tax years and jointly for the 1977 year. ↩2. Except as otherwise noted, all section references are to the Internal Revenue Code of 1954 in effect for the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625203/	John E. Egizii and Helen Egizii, Petitioners v. Commissioner of Internal Revenue, RespondentEgizii v. CommissionerDocket No. 30018-83United States Tax Court86 T.C. 450; 1986 U.S. Tax Ct. LEXIS 136; 86 T.C. No. 29; March 25, 1986, Filed 1986 U.S. Tax Ct. LEXIS 136">136 Decision will be entered for the respondent. Petitioners sought investment credits for portions of a warehouse they leased to their controlled corporation. Held, property required to have been manufactured or produced by lessors to qualify them as noncorporate lessors eligible for the credit is sec. 38, I.R.C. 1954, property subject to the lease, not entire property subject to the lease. Held, further, petitioners did not manufacture or produce the sec. 38 property subject to the lease. T. Kent1986 U.S. Tax Ct. LEXIS 136">137 Cochran, for the petitioners.Michael W. Bitner, for the respondent. Parr, Judge. PARR86 T.C. 450">451 OPINIONRespondent determined a deficiency in petitioners' Federal income tax for the calendar year 1978 in the amount of $ 27,757.60. The sole issue for decision is whether John E. Egizii (petitioner) or his wife, Helen Egizii, (collectively petitioners) manufactured or produced certain personal property so as to allow them to claim an investment credit under section 46(e)(3)(A), 1 governing noncorporate lessors.FINDINGS OF FACTThis case was submitted for decision without trial pursuant to Rule 122. All of the facts have been stipulated and are so found. The stipulation of1986 U.S. Tax Ct. LEXIS 136">138 facts, together with the exhibits attached thereto, is incorporated herein by this reference.Petitioners are husband and wife. They resided in Springfield, Illinois, at the time they filed the petition in this case. Petitioners timely filed their joint Federal income tax return for the taxable year 1978 with the Kansas City Service Center.Petitioner John E. Egizii has been involved in the wholesale marketing of alcoholic beverages since 1945. His initial involvement in this regard was in a partnership known as E & F Distributing, which partnership was succeeded by a sole proprietorship (of which petitioner was the owner) which operated under the name of John E. Egizii d.b.a. E & F Distributing. In 1960, this sole proprietorship was incorporated as E & F Distributing Co. (E & F), which corporation remains in operation.During the year 1977, and for some time prior thereto, E & F operated as a distributor for Miller Brewing Co. (Miller) out of an office and warehouse facility located at 412-26 North Fifth Street, Springfield, Illinois. During the year 1977, petitioners were contacted by officials of Miller and informed that in order for E & F to retain its Miller 86 T.C. 450">452 distributorship, 1986 U.S. Tax Ct. LEXIS 136">139 E & F would have to construct a new warehouse facility subject to specifications approved by Miller.Because E & F did not have the necessary funds to construct the warehouse, John and Helen personally undertook the financial obligations necessary for such project. On November 16, 1977, they entered into a contract with Evans Construction Co., d.b.a. DBC, (Evans) for the construction of a new office and warehouse facility to be located at 1030 North Grand Avenue West, Springfield, Illinois (the warehouse).At no time during the construction of the warehouse and its component parts were either of the petitioners involved in the actual physical labor necessary for such construction, nor were either of the petitioners present on a day-to-day basis at the construction site. Neither of the petitioners had any control over the hiring by Evans, or any subcontractors, of the individuals employed to construct the warehouse or its component parts. Petitioners were involved in the construction of the warehouse in the following ways:A. weekly contacts with the supervisory personnel of Evans in regard to the status of such construction;B. weekly on-site inspections with the supervisory personnel1986 U.S. Tax Ct. LEXIS 136">140 of Evans and representatives of Miller in regard to the progress of such construction, and any difficulties which were being met by Evans or any of its subcontractors in complying with the contract specifications; andC. upon petitioners' receipt of a progress report from Evans, wherein a demand was made for payment for that portion of the construction which had been completed, petitioners would consult with an employee of the architect, The Design Build Collaborative, Inc., to ascertain that the construction was being completed pursuant to the contract specifications and that payment was warranted.Included in the construction of the warehouse were the following items of tangible personal property, at the indicated cost to petitioner:ItemCost to petitionersRefrigeration unit38,774Extra cooler equipment12,673Office carpet2,576The refrigeration unit and extra cooler equipment were installed in the warehouse pursuant to the specifications of Miller and were designed for E & F's storage of kegs of beer. 86 T.C. 450">453 The materials used by Evans in the construction of this equipment, along with the office carpet, were obtained by Evans from third-party manufacturers1986 U.S. Tax Ct. LEXIS 136">141 in which petitioners held no economic interest.The construction of the warehouse was completed during August 1978. On October 1, 1978, petitioners leased the warehouse to E & F for 1 year, subject to automatic extensions, for $ 79,200.00 per year, to be paid in monthly installments of $ 6,600.On their income tax return for the taxable year 1978, petitioners claimed an investment tax credit (ITC) in the amount of $ 27,757.60, based upon the following items:Reported costItemto petitionersInvestment creditRefrigeration equipment$ 275,000$ 27,500.00Office carpet2,576257.60On August 2, 1983, respondent timely mailed a notice of deficiency to petitioners at their last known address, determining a deficiency in income taxes for the taxable year 1978 in the amount of $ 27,757.60.Petitioners now concede that the figures above reflect a computational error, and that the refrigeration unit and extra cooler equipment had costs to petitioners of $ 38,774 and $ 12,673, respectively, triggering a potential ITC of $ 5,144.70. With the credit attributable to the carpet, petitioners now claim a total potential ITC of $ 5,402.30. But see note 2 below.Petitioners1986 U.S. Tax Ct. LEXIS 136">142 concede that the lease arrangement between themselves and E & F does not meet the "noncorporate lessor" provisions of section 46(e)(3)(B), but contend they fall within the provisions of section 46(e)(3)(A). Also, they have conceded certain adjustments in the notice of deficiency. Respondent concedes that all of the property is section 38 property, as defined in section 48.OPINIONSections 38 and 46, among other things, allow Federal income tax credits for investments in certain tangible personal property, referred to as "section 38 property" and defined in section 48(a). Respondent agrees that the refrigeration unit, extra cooler equipment, and office carpet are 86 T.C. 450">454 "section 38 property." Section 46(e)(3), however, limits the availability of the credit with the following pertinent language:(3) Noncorporate lessors. -- A credit shall be allowed by section 38 to a person which is not a corporation with respect to property of which such person is the lessor only if -- (A) the property subject to the lease has been manufactured or produced by the lessor * * Section 1.46-4(d)(1)(i), Income Tax Regs., has amplified the above by providing that the section 38 credit is 1986 U.S. Tax Ct. LEXIS 136">143 available to a noncorporate lessor of property only if --(i) Such property has been manufactured or produced by the lessor in the ordinary course of his business * * In enacting section 46(e)(3), Congress was concerned that individuals might be tempted to use investment credits to finance the acquisition and leasing of depreciable property as tax shelters. S. Rept. 92-437 (1971), 1972-1 C.B. 559, 583; H. Rept. 92-533 (1971), 1972-1 C.B. 498, 513. Thus, Congress tried to make investment credits available only to those noncorporate lessors actually using the property in question in an active business. These were determined to be lessors who had themselves manufactured or produced the property, and short-term lessors. Conversely, Congress wanted to deny investment credits to purchaser-lessors involved in mere financing arrangements without the risks and obligations associated with an ongoing trade or business. Carlson v. Commissioner, 79 T.C. 215">79 T.C. 215, 79 T.C. 215">221 (1982), affd. 712 F.2d 1314">712 F.2d 1314 (9th Cir. 1983); Ridder v. Commissioner, 76 T.C. 867">76 T.C. 867, 76 T.C. 867">872 (1981).1986 U.S. Tax Ct. LEXIS 136">144 Our task is to determine whether petitioner manufactured or produced the property for which a credit is sought.Petitioner contends that he fits within section 46(e)(3)(A). He does not claim to have personally manufactured or produced the cooling equipment or carpeting. He argues instead that by virtue of his control over the construction of the warehouse, he shouldbe deemed to have manufactured or produced the component parts of the warehouse for which a credit is sought. 2 Petitioner argues further that 86 T.C. 450">455 because his ordinary business is the marketing of alcoholic beverages, and the warehouse is an integral part of that business, the cooling equipment and carpeting were manufactured or produced in the ordinary course of petitioner's business.1986 U.S. Tax Ct. LEXIS 136">145 Respondent contends that petitioners cannot claim the credit because they did not participate physically in the labor necessary for the construction/manufacture of either the section 38 property or of the warehouse as a whole. Respondent argues alternatively that if petitioners need not have constructed the section 38 property themselves, their control over its manufacture was too attenuated to bring them within the statute. Respondent further argues that if petitioners did manufacture or produce the property, it was not in the ordinary course of business. 31986 U.S. Tax Ct. LEXIS 136">146 Section 46(e)(3)(A) requires that "the property subject to the lease" be manufactured or produced by the noncorporate lessor for the credit to be allowed to him. Petitioner's argument that his limited supervision of the construction of the warehouse meets this test would require a reading of these words to include all the property subject to the lease. We decline to adopt such a reading of the statute. We construe these words instead to refer only to the property for which a credit is sought, i.e., the section 38 property.Petitioners have cited no precedent and we have found none, for looking to the entire property subject to the lease (i.e., the warehouse) for the "manufactured or produced" requirement. Section 46(e)(3), by its own terms, sets out the requirements for noncorporate lessors to take a credit "allowed by section 38." Further, our interpretation is borne out by the language of section 1.46-4(d), Income Tax Regs.:86 T.C. 450">456 (d) Noncorporate lessors. (1) In the case of a lease entered into after September 22, 1971, a credit is allowed under section 38 to a noncorporate lessor of property with respect to the leased property only if --(i) 1986 U.S. Tax Ct. LEXIS 136">147 Such property has been manufactured or produced by the lessor in the ordinary course of his business * [Emphasis supplied.]It seems indisputable that in each instance the word "property" is intended to refer to the property for which the section 38 credit is allowed. We decline to enlarge the scope of the "manufactured or produced" inquiry beyond examining the property for which a credit is sought. This is especially appropriate where, as here, the larger "property subject to the lease" is a building, a type of property specifically excluded from the credit by section 48(a).We turn now to an examination of whether petitioners manufactured or produced the section 38 property subject to the lease. We are persuaded that they did not.In Carlson v. Commissioner, 79 T.C. 215">79 T.C. 215 (1982), affd. 712 F.2d 1314">712 F.2d 1314 (9th Cir. 1983), we stated that in determining whether property was manufactured or produced by the taxpayer under section 46(e)(3)(A): 4[taxpayer] would have to be either the one who actually manufactured the [property] or the one who at least controlled the details of manufacture of the [property] to satisfy section1986 U.S. Tax Ct. LEXIS 136">148 46(e)(3)(A) * * * [Carlson v. Commissioner, 79 T.C. 215">79 T.C. 215, 79 T.C. 215">222(1982), affd. 712 F.2d 1314">712 F.2d 1314 (9th Cir. 1983).]Clearly, petitioners did not actually manufacture the section 38 property in the ordinary sense of the word. The materials used by the contractor, Evans, in construction of the refrigeration unit and the extra cooler equipment, along with the office carpet, were obtained from third parties in which petitioners held no economic interest. A further inquiry, however, is whether petitioners controlled the details of manufacture of the subject property.Of the factors considered in 79 T.C. 215">Carlson v. Commissioner, supra at 224,1986 U.S. Tax Ct. LEXIS 136">149 the most significant (i.e., provision of the specifications, and selection, instruction, and supervision of workers) are absent here.86 T.C. 450">457 The parties disagree over the first of these four, i.e., who provided the specifications of construction. It is stipulated that warehouse specifications were to be approved by Miller, the refrigeration unit and extra cooler equipment were installed pursuant to the specifications of Miller, and Miller representatives conducted weekly on-site inspections. The record contains only one listing of specifications, however, and apparently that list was compiled by the builder, Evans, with some references to Miller's specifications.Petitioners cite Lykes Bros. Steamship Co. v. United States, 206 Ct. Cl. 354">206 Ct. Cl. 354, 513 F.2d 1342">513 F.2d 1342 (1975), as relevant to this important factor. We are prevented from meaningful analysis under that case, however, by an insufficient record. This record does not allow us to compare how different the specifications of the finished section 38 property were from the specifications as proposed by both Miller and E & F. Nor are we apprised of the extent to which the suggestions, if 1986 U.S. Tax Ct. LEXIS 136">150 any, made by the Miller representatives at weekly meetings were adopted or rejected.Petitioners have the burden of proof on this factor. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rules 142(a), 122(b). In light of the stipulated facts, they have not established that they, and not Miller, provided the specifications of construction.None of the three other most important Carlson factors (taxpayer selection, instruction and supervision of workers) are present in this case. Article 10 of the construction contract between petitioners and Evans stipulates that Evans shall provide and pay for all labor, shall supervise and direct the work, and shall be solely responsible for all construction means, methods, techniques, sequences, and procedures and for coordinating all portions of the work under the contract. No evidence was presented to show petitioners' involvement in these functions, other than their weekly site visits. These visits, however, do not help petitioners here because they were for inspection purposes, not supervision.In these circumstances, we are persuaded that petitioners did not control the details of manufacture of the section 381986 U.S. Tax Ct. LEXIS 136">151 property sufficiently to come within section 46(e)(3)(A). See 86 T.C. 450">458 79 T.C. 215">Carlson v. Commissioner, supra. We need not say that either Miller or Evans had the control. Suffice it to say that petitioners lacked that degree of control required under the statute. 5On the basis of this record, we find that petitioners did not manufacture or produce the property for which a credit is sought, and therefore,Decision will be entered for the respondent. Footnotes. By his order, this case was reassigned from Chief Judge Samuel B. Sterrett to Judge Carolyn Miller Parr.↩1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. On brief, petitioner defines the property for which he seeks a credit as "certain 'refrigeration unit' and 'extra cooler equipment.'" Whether or not we understand him to abandon his contention that the "office carpet" is eligible for the credit is immaterial in light of the disposition of this case.↩3. Respondent does not argue that petitioner entered into the lease for tax reasons bereft of independent business reasons. Indeed, such an argument standing alone would have little force where Congress has laid down statutory standards, by which we must determine whether tax or business motives predominate. If we find neither of the standards met, however, the presence or absence of valid business reasons of petitioner for entering into the leasing transaction in question is wholly irrelevant. Carlson v. Commissioner, 79 T.C. 215">79 T.C. 215, 79 T.C. 215">225 (1982), affd. 712 F.2d 1314">712 F.2d 1314 (9th Cir. 1983); see also Miller v. Commissioner, 85 T.C. 1055">85 T.C. 1055↩ (1985).4. In Carlson, our analysis was applied to the question of the "ordinary course of business" test in the regulation. The Carlson↩ factors, however, are equally appropriate to the "manufactured or produced, language of the statute. In light of our holding today, we need not reach the "ordinary course of business" issue.5. Even if the test were applied to the manufacture or production of the warehouse as a whole, rather than limited to the sec. 38 property, petitioners would not prevail under the Carlson↩ analysis for the reasons cited above.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625205/	Louis Bloch v. Commissioner. Amelia Davis Bloch v. Commissioner.Bloch v. CommissionerDocket Nos. 112224, 112225.United States Tax Court1943 Tax Ct. Memo LEXIS 152; 2 T.C.M. 634; T.C.M. (RIA) 43386; August 14, 19431943 Tax Ct. Memo LEXIS 152">152 W. H. Orrick, Esq., and Charles L. Barnard, Esq., for the petitioners. Harry R. Horrow, Esq., for the respondent. SMITH Memorandum Opinion SMITH, Judge: These proceedings, consolidated for hearing, are for the redetermination of income tax deficiencies for the calendar year 1940 in the amounts of $451.13 and $1,035.53, respectively. The issue presented is whether the respondent erred in determining the basis of certain shares of stock of the Dow Chemical Co. sold by the petitioners during the taxable year by averaging the cost of shares of Great Western Electro-Chemical Co. which were exchanged by petitioners therefor in a nontaxable reorganization. The parties have stipulated that the petitioners are entitled to additional deductions under section 121 of the Revenue Act of 1942, the final amounts to be computed after a determination of the taxable income resulting from the transactions here in question. All of the facts have been stipulated. [The Facts] The petitioners are residents of California and filed their income tax returns for 1940 with the collector of internal revenue for the first district of California. In 1940 the petitioner Louis Bloch sold 215 common shares1943 Tax Ct. Memo LEXIS 152">153 of Dow Chemical Co., hereinafter called Dow, for a total selling price of $33,525.02 and petitioner Amelia Davis Bloch sold 212 like shares for a total selling price of $33,264.24. These certificates were received by the petitioners in 1939 under a statutory merger of Great Western Electro-Chemical Co., hereinafter called Great Western, a California corporation, and Dow, a Michigan corporation. The shares of Dow sold by the petitioners in 1940 are traceable through stock certificate numbers to specific shares of Great Western which were turned in in exchange. The cost to petitioner Louis Bloch of the Great Western shares later represented by the Dow shares sold was $5,685.86 and the cost of the 212 shares of such stock sold by petitioner Amelia Davis Bloch was $13,900.17. They used such cost bases in determining the capital gains attributable to the sales made by them. In this determination of the deficiencies the respondent has held that the petitioners may not use such cost bases but must use in lieu thereof the cost of each Dow share determined by dividing the total cost of the Great Western shares acquired by each at different times and different prices by the total number of1943 Tax Ct. Memo LEXIS 152">154 Dow shares received and then multiplying that amount by the number of Dow shares sold by each. [Opinion] The only question presented for decision relates to the basis. No contention is made that the petitioners' bases used are not correct provided they may trace the Dow shares sold by specific certificate numbers to the Great Western shares purchased. There is no question but that the Dow shares were received by the petitioners in 1939 upon a reorganization under section 112 (g) (I) I.R.C. Neither is there any question but that the following portion of section 113 I.R.C. is applicable in the determination of the basis of the shares: 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 - * * * (6) Tax-free exchanges generally. - If the property was acquired, after February 28, 1913, upon an exchange described in section 112 (b) to (e), inclusive, the basis (except as provided in paragraphs (15), (17), or (18) of this subsection) shall be the same as in the case of the property exchanged, decreased in the amount of money received by the taxpayer and increased1943 Tax Ct. Memo LEXIS 152">155 in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. * * * The respondent contends that no identification of the shares of Dow stock received in exchange for Great Western shares is permissible and that the basis of the Dow shares should be computed by dividing the total cost of the Great Western shares by the total number of Dow shares received. In support of such proposition the respondent cites Commissioner v. Oliver (C.C.A., 3rd Cir.), 78 Fed. (2d) 561; Helvering v. Stifel (C.C.A., 4th Cir.), 75 Fed. (2d) 583; Commissioner v. Von Gunten (C.C.A., 6th Cir.), 76 Fed. (2d) 670, and Commissioner v. Bolender (C.C.A., 7th Cir.), 82 Fed. (2d) 591. Respondent submits that in those cases: * * * the courts rejected the "first in first out" rule which the Commissioner had contended was applicable in the absence of identification. But under the rationale of those cases it is clear that attempts to establish the cost basis of the shares 1943 Tax Ct. Memo LEXIS 152">156 received by identification would be equally futile. Identification is permissible only when there is identity between the shares of stock sought to be identified. * * In Raoul H. Fleischmann, 40 B.T.A. 672">40 B.T.A. 672, 40 B.T.A. 672">688, we said: * * * It is now well established that where stock of one corporation is exchanged for stock of another, in pursuance of a plan of reorganization, the basis of the shares surrendered (after adjustment for any recognized gain or loss) must be allocated equally to the shares acquired, and the cost of some particular lot of the old shares may not be allocated to some particular lot of the new shares. * * * Under the rule identification of the shares of a reorganized corporation with those of another corporation is immaterial. As said by the Circuit Court of Appeals for the Third Circuit in Arrott v. Commissioner, 136 Fed. (2d) 449: We think it is the only sound rule. The old shares all have the same exchange value for the new ones no matter what they cost the taxpayer. He gets as much new stock for the shares for which he paid $80 as he does for the share for which he paid $120. The old shares lose1943 Tax Ct. Memo LEXIS 152">*157 their identity when traded for the new, just as the money with which one buys a war bond loses its identity in the certificate, though to the purchaser some of it may have been a gift, some won on a horse race and the remainder earned by the sweat of his brow. The old shares are gone; the new shares in what is at least nominally a new company take their place. Each new share costs the taxpayer the quotient of the sum of the cost of the old shares divided by the number of new shares he receives. The respondent's determination of basis is approved. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625206/	VAIL BLYDENBURGH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Blydenburgh v. CommissionerDocket No. 9921.United States Board of Tax Appeals5 B.T.A. 834; 1926 BTA LEXIS 2754; December 17, 1926, Promulgated 1926 BTA LEXIS 2754">2754 Horace N. Taylor, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. LITTLETON5 B.T.A. 834">835 LITTLETON: The Commissioner determined a deficiency of $119.31 for the calendar year 1923, and the petitioner contests the correctness of this deficiency in so far as it results from the disallowance as a deduction of $1,015 contributed by him to the Smithtown Village Green Corporation, organized and operated exclusively for charitable, educational and recreational purposes. The Commissioner held that this corporation did not come within the purview of section 214(a)(11) of the Revenue Act of 1921. FINDINGS OF FACT. Petitioner is a resident of New York City, N.Y. In 1923 he donated the sum of $1,015 to the Smithtown Village Green Corporation, a corporation organized in October, 1923, by petitioner and others under article 7 of the General Municipal Law of the State of New York, which provides as follows: § 140. Trusts for public parks and libraries. It shall be lawful to grant and devise real estate, and to give and bequeath personal property to trustees and their successors in trust, for the purpose of creating, continuing and maintaining, 1926 BTA LEXIS 2754">2755 according to the terms, conditions and provisions of such grant, gift, devise or bequest, one or more public parks, or a public library, or for the purpose of aiding and instructing children, or for any one or more of such purposes, in any city, village or town of this state. The number of such trustees shall not be less than three nor more than nine. § 141. Trustees a corporation. Whenever any grant, gift, devise or bequest shall have been made, under the provisions of this article, such trustees shall thereupon become and be a body politic and corporate with the name which shall have been specified by the donor in making the donation, and with the number of trustees, within the foregoing limits, named by the donor; and such corporation shall have full power to take and hold all property which shall have been and also which shall thereafter be granted, given, devised or bequeathed to it as aforesaid for said uses and purposes, and shall possess the powers and be subject to the provisions and restrictions contained in general corporation law. If no name shall have been specified by the donor as aforesaid, the name of the corporation shall be such as the said trustees shall1926 BTA LEXIS 2754">2756 adopt, certify and file in the county clerk's office of the county in which the interested city, village or town is located. § 142. Eligibility of trustees. In case of the death of a trustee or of his resignation, removal from office, or inability to discharge the duties of his office, his place shall be deemed to be vacant, and may be filled by the remaining trustees; and, in default of their so making an appointment within three months, the appointment to fill the vacancy shall be made by the supreme court, on the petition of any inhabitant of the interested city, village or town, and after due notice to the other trustees and to the mayor of the city, president of the village or supervisor of the town. Said trustees shall be subject to removal by said court for malfeasance or misfeasance in office, upon such notice and after trial in such manner as said court shall direct. § 143. Management and appropriation of property. Trustees created under the provisions of this article shall have the custody and management of all the property of such corporation, and shall appropriate the same, so far as the 5 B.T.A. 834">836 terms, provisions and conditions of the donations will1926 BTA LEXIS 2754">2757 permit, for the purpose of aiding and instructing children, or for providing suitable grounds for such a public park or parks and properly preparing, beautifying, embellishing and keeping up and maintaining the same, or for furnishing and supplying such library with a suitable and proper edifice, rooms, furniture, books, maps, magazines and whatever may be necessary to make, keep up and maintain a good and complete library, or for one or more of such purposes, and paying the expenses of the trust. Demising lands donated to the corporation and investing and keeping money invested at interest, and using the rents and interest therefrom for aiding and instructing children or for park purposes or library purposes, shall be deemed to be an appropriation of such property for said purpose. § 144. Parks and libraries to be free. All parks and libraries existing under this article shall be free and open to the public for use and enjoyment, subject only to such reasonable rules and regulations as the trustees from time to time shall adopt and promulgate. § 145. Subject to visitation of supreme court. All corporations existing under this article, together with their books and1926 BTA LEXIS 2754">2758 vouchers, shall be subject to the visitation and inspection of the justices of the supreme court, or of any person or persons who shall be appointed by the supreme court for that purpose; and it shall be the duty of the trustees or a majority of them, in the month of December in each year, to make and file in the office of the county clerk of the county in which the interested city, village or town is situate, a certificate under their hands, stating the names of the trustees and officers of such corporation, with an inventory of the property, effects and liabilities thereof, with an affidavit of the truth of such inventory and certificate. Said trustees shall be entitled to such compensation as said court shall fix. Said court shall also have power to control the discretion of said trustees in determining what property may be demised and for how long; also how much money may be invested and kept invested on interest to produce an income for the purpose of aiding and instructing children or to keep up and maintain the parks or libraties, or either of such purposes; and also in a summary way to determine the reasonableness of any rules and regulations, upon complaint of any inhabitant1926 BTA LEXIS 2754">2759 of the interested city, village or town, and upon notice to said trustees. Certain real and personal property situated in the Village of Smithtown Branch, Town of Smithtown, Suffolk County, New York, was donated by the petitioner and others, as donors, to the petitioner and other residents of the Town of Smithtown, as trustees, under a certain indenture in October, 1923, the said trustees to have and to hold the said real estate and personal property to themselves, their successors and assigns forever, in trust exclusively for charitable, educational and recreational purposes as set forth in the said indenture, which provided: FIRST: Such Trustees and their successors shall be a corporation under the names of Smithtown Village Green Corporation, and they shall take and hold the said real and personal property as a corporation under and pursuant to Article 7 of the "General Municipal Law" aforesaid, for the charitable, educational and recreational purposes hereinafter set forth. 5 B.T.A. 834">837 The indenture further provided: FOURTH: The purposes of this trust and of the said corporation shall be to hold and manage the real and personal property hereby conveyed and any other real1926 BTA LEXIS 2754">2760 and personal property acquired by said corporation exclusively for charitable, educational and recreational purposes in the form of a park or playground for the use and benefit of the public and especially of the school children of the said Town of Smithtown, and to prepare, beautify, embellish, keep up and maintain the same for said charitable, educational and recreational purposes. And the said Board is authorized to provide occasional music for the pleasure and instruction of the people; to allow the use of the park for community pageants, celebrations, fetes, memorial services, public meetings and other gatherings and to contribute to the expense thereof in its discretion, to erect such buildings thereon as may conduce to the greater enjoyment or beautifying of the park, and to erect and maintain a museum; to provide benches, electric lighting, band stands, swings, refreshment booths, athletic apparatus, games and general furniture and paraphernalia in any [sic] conducive, in its judgment, to the health, enjoyment and instruction of the school children and of the public and of the residents of Smithtown. The Board may, for educational purposes, permit or authorize the1926 BTA LEXIS 2754">2761 erection of an historical museum or other educational buildings on said premises, and it may permit or authorize the erection of monuments or any edifices or structures of any character suitable and appropriate for the commemoration of the memory of residents of Smithtown; provided, however, that they, or any of them, shall be erected pursuant to plans to be approved by the Board, and provided the Board shall retain control of everything connected therewith. The park shall be called "Smithtown Village Green." FIFTH: Any money, securities or personal property of any kind now or hereafter assigned to said Trustees or their successors shall be held by them and by said corporation as a trust fund for the charitable, educational and recreational purposes herein mentioned, with full power to sell such securities and other personal property, and to invest and re-invest the proceeds in any investments that other trustees are permitted to invest in by the Laws of the State of New York. The said Board is, however, expressly authorized to continue to hold any investments which shall come into its hands for such time as in its judgment it shall seem [sic] for the best interest of1926 BTA LEXIS 2754">2762 the Corporation. The Board shall collect income arising from the investments and apply it to the purposes enumerated in this deed. The corporation shall have power to accept other gifts of lands, money, securities or personal property, provided the same be not subject to conditions inconsistent with the provisions of this deed. The power of acceptance or rejection of a gift offered to the Corporation shall be absolute with the Board. SIXTH. The Board and the Corporation shall have all the powers enjoyed by other eleemosynary corporations of a similar class, and necessary or convenient to carry out the purposes for which this trust is established, subject to the express limitations herein contained and to the laws applicable thereto. Such purposes shall be liberally construed, it being the intention hereof that said park and fund shall be so managed as to contribute, to the greatest extent possible, to the health, education and recreation of the people of Smithtown. No trustee shall be held responsible for the acts of his cotrustees, in which he shall not have affirmatively participated; nor shall said trustees be held liable for loss through unfortunate investments, 1926 BTA LEXIS 2754">2763 provided they exercise their best judgment. 5 B.T.A. 834">838 The Board shall organize itself as it shall deem convenient, elect its own officers, and make its by-laws. The custodian, or custodians, of the corporate funds and securities shall give a bond or bonds in such amount as the Board may require. He or they shall collect all monies due the corporation, and his or either of their receipts shall be a sufficient voucher therefor. The Board shall have authority to employ such agents, servants, and employees as may be necessary, including a secretary and treasurer and a manager, superintendent, or engineer, legal counsel whenever necessary, and shall pay them such compensation as may be proper, subject to the provisions of the Second Article hereof. It shall make rules and regulations governing the use of the Park, and may exclude any persons from the park for breach of the rules, or for any conduct deemed by it improper; and it may employ one or more peace officers whenever necessary. While the intention of this deed is that the park shall be free to all, nothing herein contained shall restrain the Board from charging moderate fees of admission to such concerts, pageants, 1926 BTA LEXIS 2754">2764 theatricals, or other amusements or spectacles as the regular income shall be insufficient to pay for, as to which said Board shall be the judge. It is, however, the intention hereof that the park and all the activities carried on therein shall be popular to the greatest degree possible, and no function or spectacles of an exclusive nature shall be held in said park. The Board in its discretion may take out any policies of insurance and pay the premiums thereon. The recital of powers herein contained shall not operate to exclude others, not expressly withheld under the rule ejusdem generis, or otherwise. Further provision was made for the sale of any or all of the said real property of the Smithtown Village Green Corporation in the event that the board of trustees should at any future time determine that the best interests of the trust and of the people of Smithtown should thereby be served, and for the application of the proceeds of the sale to the purchase of other real property to be devoted to the same purposes, or, in the event such other purchase be impracticable, to invest the proceeds as provided with regard to the trust fund specified in article 5 of the indenture, 1926 BTA LEXIS 2754">2765 and to apply the income therefrom to the general educational, charitable and recreational purposes of the corporation. Said Smithtown Village Green Corporation created and is continuing and maintaining a public park for the benefit of the public in the manner and for the purposes set forth in the said indenture of October, 1923. Judgment will be entered for the petitioner on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625207/	Southwestern Oil & Gas Company, Petitioner, v. Commissioner of Internal Revenue, RespondentSouthwestern Oil & Gas Co. v. CommissionerDocket No. 1244United States Tax Court6 T.C. 1124; 1946 U.S. Tax Ct. LEXIS 185; May 23, 1946, Promulgated 1946 U.S. Tax Ct. LEXIS 185">185 Decision will be entered under Rule 50. 1. Excess Profits Tax -- Net Abnormal Income Attributable to Prior Years. -- In determining the amount of net abnormal income of the petitioner attributable to prior years under section 721 (b), Internal Revenue Code, all of it which resulted from sales of crude oil at higher prices in the taxable year than in prior years should be allocated to the taxable year.2. Id. -- In determining the amount of the net abnormal income attributable to prior years no diminution thereof is necessitated by the fact that the unit cost per barrel of crude oil produced was lower in the taxable year than in prior years, where such reduction in cost, as here, was due solely to increased production from newly discovered wells and not to any reduction in wages or cost of materials, supplies, etc. Robert A. Rundle, Esq., and J. Stanton Carson, Esq., for the petitioner.Richard L. Shook, Esq., for the respondent. Smith, Judge. SMITH 6 T.C. 1124">1125 This proceeding is for the redetermination of a deficiency in excess profits tax for the calendar year 1940 in the amount of $ 29,707.82. The question in issue is the measure of relief to which petitioner is entitled under section 721, Internal Revenue Code, on account of the realization in 1940 of net abnormal income attributable to other taxable years.Most of the essential facts are contained in a stipulation filed by the parties, which is incorporated in our findings by reference. The following numbered paragraphs1946 U.S. Tax Ct. LEXIS 185">187 of our findings of fact are substantially as set forth in the stipulation. The stipulation authorizes two minor adjustments in petitioner's 1940 tax liability which are not related to the matter in controversy.FINDINGS OF FACT.1. The petitioner is a corporation, organized in 1909 under the laws of the State of Delaware. Its principal office is located in Pittsburgh, Pennsylvania. Its business is that of producing crude petroleum, with its oil fields located in the State of Illinois. At all times pertinent hereto its operations were confined to leases on properties located in or near Sandoval, Illinois.2. The amount of the deficiency asserted in the deficiency notice is $ 29,707.82.3. Petitioner filed its corporation income, declared value excess profits, and defense tax return (Form 1120) and its corporation excess profits tax return (Form 1121) for the calendar year 1940 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh. Such returns, as well as petitioner's Federal income tax returns for the years 1936 to 1939, inclusive, were filed on the accrual basis.4. In its excess profits tax return so filed for the calendar year 1946 U.S. Tax Ct. LEXIS 185">188 1940 petitioner claimed a deduction of $ 98,080.50 abnormal income attributable to other years and, as a result, the return showed no income subject to excess profits tax. A statement was attached to the return showing that the item of $ 98,080.50 was computed on the basis of 6 T.C. 1124">1126 production from prior years' development. In the Commissioner's notice of deficiency the deduction of the $ 98,080.50 was disallowed as abnormal income attributable to other years.5. During the years 1936, 1937, and 1938 petitioner's entire income was derived from the sale of crude petroleum produced by wells that had been drilled many years prior to 1936. The wells were drilled by petitioner upon leases designated as the Benoist, Warfield, and Stein leases, all located in Marion County, Illinois. The last of these wells was drilled in 1926. Each of the three leases was obtained from a different lessor, but they covered contiguous land. The petitioner's income from the operation of the wells for the years 1936, 1937, and 1938 was as follows:YearGross incomeNet income1936$ 17,371.09$ 851.77 193716,371.151,726.17 193812,352.29(-1,928.57)6. In 1938 petitioner decided1946 U.S. Tax Ct. LEXIS 185">189 to drill a well to a greater depth than any well on the Benoist, Warfield, and Stein leases in the hope of finding a hitherto unknown oil-bearing stratum. Such drilling operations were started on the Benoist lease in September 1938, and late in December 1938 oil was found in large quantities in what is known as the Devonian lime. Expenses of the drilling operation of this well were not billed until 1939. In 1939 four additional wells were completed to the Devonian lime on the Benoist lease and one on the Warfield lease. In 1940 one additional well to the Devonian lime was completed on the Benoist lease, two on the Stein lease, and one on the Warfield lease. In the income tax returns filed by petitioner the drilling costs of these wells for the appropriate years were claimed and allowed as deductions from gross income.7. In 1939 the first crude petroleum produced by these new wells drilled to the Devonian lime was sold and sales continued throughout 1939 and 1940. Over 98 percent of the income received by petitioner in 1940 resulted from the sale of crude petroleum produced by these wells drilled to the Devonian lime.8. In 1939 the gross income received by petitioner from wells1946 U.S. Tax Ct. LEXIS 185">190 drilled in the Benoist, Warfield, and Stein leases, segregated as to old and new wells, was as follows:LeasesOld wellsNew wellsTotalBenoist$ 9,532.10$ 145,754.28$ 155,286.38Warfield729.0018,832.7819,561.78Stein3,721.433,721.43Total13,982.53164,587.06178,569.596 T.C. 1124">1127 9. In 1940 the gross income received by petitioner from wells drilled in the Benoist, Warfield, and Stein leases, segregated as to old and new wells, was as follows:LeasesOld wellsNew wellsTotalBenoist$ 2,597.95$ 266,855.53$ 269,453.48Warfield328.6577,246.7477,575.39Stein3,117.4017,526.5420,643.94Total6,044.00361,628.81367,672.8110. The income and expenses of petitioner for the years 1936 to 1940, as taken from the income tax returns filed by the petitioner for those years, were as follows:YearsIncomeExpensesNet incomeper return1936$ 17,371.09$ 16,519.32$ 851.77 193716,371.1514,644.981,726.17 193812,352.2914,280.86(-1,928.57)1939178,921.61134,137.7344,783.88 1940368,258.61205,997.07162,261.54 The expenses of petitioner for the year 1939, in the amount1946 U.S. Tax Ct. LEXIS 185">191 of $ 134,137.73, as shown on the income tax return filed, were properly adjusted to $ 137,913.11. No new well to the Devonian lime had been completed on the Stein lease in 1939 and there was no production from such a well on the Stein lease for a period of twelve months prior to December 31, 1940.12. The development costs, both tangible and intangible, incurred during the respective years 1939 and 1940, of the new wells to the Devonian lime drilled on the Benoist and Warfield leases and the percentages of the total allocable to the two years are as follows:BenoistWarfieldYearPercentagePercentageAmountof totalAmountof total1939$ 98,070.5181.80663854$ 20,254.0957.9523462194021,810.3618.1933614614,695.4742.0476538Total119,880.87100.0000000034,949.36100.000000013. The net income for declared value excess profits computation of petitioner for the year 1940 was $ 162,472.79.14. The base period excess profits credit of petitioner for the year 1940, based on income, is $ 21,054.15. The following table sets forth a complete computation of petitioner's net abnormal income for the year 1940, computed in accordance1946 U.S. Tax Ct. LEXIS 185">192 with section 721 of the Internal Revenue Code: 6 T.C. 1124">1128 TotalBenoistIncome resulting from exploration, discovery, and development of tangible property$ 368,258.61$ 270,039.28Less portion thereof not extending over a period of more than 12 months19,996.42Balance extending over a period of morethan 12 months348,262.19270,039.28Less 125% of average for the 4 previous years70,317.5556,846.48Gross abnormal income277,944.64213,192.80Less applicable expense140,373.98104,669.91Net abnormal income137,570.66108,522.89WarfieldOtherIncome resulting from exploration, discovery, and development of tangible property$ 77,575.39$ 20,643.94 Less portion thereof not extending over a period of more than 12 months19,996.42 Balance extending over a period of morethan 12 months77,575.39647.52 Less 125% of average for the 4 previous years6,946.576,524.50 Gross abnormal income70,628.82(-5,876.98)Less applicable expense41,581.05(-5,876.98)Net abnormal income29,047.77None16. The average price per barrel for crude petroleum sold by petitioner during the year 19401946 U.S. Tax Ct. LEXIS 185">193 was $ 0.068990659 higher than the average price per barrel for crude petroleum sold by petitioner during the years 1936 to 1939, inclusive.17. The gross income of petitioner in 1940 attributable to the higher price was $ 17,809.86 and $ 5,015.12 for the Benoist and Warfield leases, respectively.18. The total wages paid by petitioner to its employees for the years 1936 to 1940, inclusive, were as follows:1936$ 5,83919375,53819386,294193912,326194027,893The rates of wages paid by petitioner for the years 1936 to 1940, inclusive, computed on the basis of the average monthly wage per man for those years, were as follows:1936$ 92.65193792.30193893.94193996.291940115.2619. There was no decrease in petitioner's material and supply prices in 1940 from similar prices for the 4 preceding years. A comparison between the weighted averages of prices of 34 representative items used by petitioner for the years 1936 to 1940 showed that in 1940 such weighted average price had increased 3.89 percent over the similar average price for the years 1936 to 1939, inclusive.20. The comparative operating costs of petitioner per well, exclusive of percentage1946 U.S. Tax Ct. LEXIS 185">194 depletion and drilling costs, for the years 1936 to 1939 and for the year 1940, were as follows:YearOperatingOperatingCost percostswellswell1936$ 15,367.5713$ 1,182.12193712,918.8213993.75193814,280.86131,098.52193932,217.69191,695.66194069,653.39233,024.066 T.C. 1124">1129 21. The petitioner's gross income and expenses for the years 1936 to 1939, inclusive, and for the year 1940, with respect to the Benoist and Warfield leases, were:BenoistWarfieldYearGross incomeExpensesGross incomeExpenses1936$ 10,486.03$ 9,873.76$ 884.20$ 783.3519379,144.938,107.72993.73833.5419386,639.357,792.41789.32807.001939155,638.40116,109.2919,561.7819,752.66181,908.71141,883.1822,229.0322,176.551940270,039.28129,868.7477,575.3945,041.52Percentage of Expenses to Gross IncomeYearBenoistWarfield1936-193977.996913999.7639123194048.092536758.0616094The following facts are based on evidence other than that contained in the stipulation.There was a rapid development in the field in which petitioner's leases were located after the discovery1946 U.S. Tax Ct. LEXIS 185">195 in 1938 of large quantities of oil in the Devonian lime. Many new wells were drilled in that vicinity by other producers and new pipe lines and storage facilities were installed.Crude oil was the only product sold by petitioner. It did no refining or processing. The oil from its wells was delivered to the tanks of the purchasers located on its premises. The quality and quantity of the oil produced by the petitioner depended upon the location and depth of each of the producing wells.There was no substantial change in petitioner's methods of operation in 1940 from those of prior years. The increase in its production and its gross income in 1940 was due to the discovery of rich deposits of oil in the deeper stratum and the resulting development on its leases. There was a ready market for all the oil produced by petitioner both in 1940 and in all prior years with which we are here concerned.OPINION.The general purpose of section 721, Internal Revenue Code, added by section 201 of the Second Revenue Act of 1940, as amended in 1941 and 1942, is to relieve the burden of the excess profits tax in certain hardship cases by permitting the reallocation of certain portions of its income, 1946 U.S. Tax Ct. LEXIS 185">196 described as net abnormal income, from the year of its actual realization to other years. The tax for the current year is not to exceed the sum of the tax for such year computed without 6 T.C. 1124">1130 the inclusion of the income attributable to prior years and the resulting increase in the tax for such prior years (sec. 721 (c)).Section 721 (a) defines the terms "abnormal income" and "net abnormal income." We are not so much concerned with those definitions in this proceeding because the parties have stipulated that a certain portion of petitioner's income for the taxable year 1940, to wit, $ 137,570.66, was "net abnormal income," being income "resulting from exploration, discovery, prospecting, research, or development of tangible property * * extending over a period of more than 12 months." (Sec. 721 (a) (2) (C).)Section 721 (b) provides that:(b) Amount Attributable to Other Years. -- The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. * * The parties here are in disagreement only as to the portions of the stipulated1946 U.S. Tax Ct. LEXIS 185">197 net abnormal income which are attributable to prior taxable years. The respondent determined in his deficiency notice that none of it was. He now concedes, however, that $ 15,586.59 of the net abnormal income from the Benoist lease is attributable to 1939.Pursuant to the authority specifically granted in section 721 (b) above, the Commissioner promulgated regulations covering the determination of the amount of net abnormal income attributable to other taxable years. Regulations 103 provides in part as follows:Sec. 30.721-3. Amount attributable to other years. -- The mere fact that an item includible in gross income is of a class abnormal either in kind or in amount does not result in the exclusion of any part of such item from excess profits net income. It is necessary that the item be found attributable under these regulations in whole or in part to other taxable years. Only that portion of the item which is found to be attributable to other years may be excluded from the gross income of the taxpayer for the year for which the excess profits tax is being computed.Items of net abnormal income are to be attributed to other years in the light of the events in which such1946 U.S. Tax Ct. LEXIS 185">198 items had their origin, and only in such amounts as are reasonable in the light of such events. To the extent that any items of net abnormal income in the taxable year are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer, such items shall not be attributed to other taxable years. Thus, no portion of an item is to be attributed to other years if such item is of a class of income which is in excess of 125 percent of the average income of the same class for the four previous taxable years solely because of an improvement in business conditions. In attributing items of net abnormal income to other years, particular attention must be paid to changes in those years in the factors which determined the amount of such income, such as changes in prices, amount of production, and demand for the product. No portion of an item of net abnormal income is to be attributed to any previous year solely by reason of an investment by the 6 T.C. 1124">1131 taxpayer in assets, tangible or intangible, employed in or contributing to the production of such income.* * * Sec. 1946 U.S. Tax Ct. LEXIS 185">199 30.721-8. Exploration, discovery, prospecting, research, or development. -- The third class of potentially abnormal income specifically set forth in section 721 (a) (2) is income resulting from exploration, discovery, prospecting, research, or development of tangible property (such as mines, oil producing property, and timber tracts), patents, formulae, or processes, or any combination thereof, extending over a period of more than 12 months. The exploration, discovery, prospecting, research, or development must be that of the taxpayer. Income resulting from activities of such a character carried on by a predecessor is not entitled to the treatment provided in section 721.An item of income resulting from exploration, discovery, prospecting, research, or development is all such income for the taxable year arising out of a unit of property such as an oil lease or other mineral property defined in section 19.23 (m)-1 (i), a patent, or a formula. If the taxpayer engages in manufacturing, marketing, mining, oil production, or similar activities, only such portion of the resulting income as is attributable to exploration, discovery, prospecting, research, or development is within1946 U.S. Tax Ct. LEXIS 185">200 the class of income described in this section. * In general, an item of net abnormal income of the class described in this section is to be attributed to the taxable years during which expenditures were made for the particular exploration, discovery, prospecting, research, or development which resulted in such item being realized and in the proportion which the amount of such expenditures made during each such year bears to the total of such expenditures. Allocation of items of net abnormal income of the class described in this section must be made according to the principles set forth in section 30.721-3.It will be noted that the last paragraph of the foregoing regulations directs that "Allocations of items of net abnormal income of the class described in this section must be made according to the principles set forth in section 30.721-3." That section of the regulations reads in part: * * To the extent that any items of net abnormal income in the taxable year are the result of high prices, low operating costs, or increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer, such items shall not be attributed1946 U.S. Tax Ct. LEXIS 185">201 to other taxable years. * Thus, to bring in harmony the various provisions of the regulations and the statute, we must compute the amount of the net abnormal income attributable to prior years by eliminating from the net abnormal income the portions thereof which resulted from (1) high prices, (2) low operating costs, or (3) increased physical volume of sales due to increased demand for or decreased competition in the type of product sold by the taxpayer.In computing the amount of the net abnormal income which he now concedes is attributable to prior years, viz., $ 15,586.59, the respondent reduced the stipulated net abnormal income of $ 108,522.89 from the 6 T.C. 1124">1132 Benoist lease by $ 14,042.29 as the amount due to higher prices and $ 75,427.64 representing the amount due to lower operating costs, leaving a balance of $ 19,052.96, a portion of which, or $ 15,586.59, he allocated to the production and sale of oil from the new wells.It is stipulated that the gross income for 1940 attributable to higher prices was $ 17,809.86 for the Benoist lease and $ 5,015.12 for the Warfield lease. In other words, petitioner realized $ 22,824.98 more income in 1940 than it would have realized1946 U.S. Tax Ct. LEXIS 185">202 had it received the same prices for its crude oil in that year that it received during the base period. We think that all of such income was due to higher prices in 1940, which we take the stipulation to mean, and, therefore, should not be allocated to prior years. Since petitioner's operating costs would have been the same whether the oil was sold for a higher or lower price, we see no reason for taking them into account in determining the amount of income attributable to the higher prices.There is no agreement between the parties as to the amount of the current year's income, if any, which is attributable to "low operating costs." However, the parties have stipulated the comparative operating costs, exclusive of drilling costs and depletion, the gross income and expenses, and the percentage of expenses to gross income, for both the current year 1940 and the prior four years of the base period. From those figures the respondent has computed the amount due to lower operating costs at $ 75,427.64 for the Benoist lease and $ 30,259.30 for the Warfield lease. As to the Warfield lease, the amounts which the respondent found to be due to high prices and low operating costs exceeded1946 U.S. Tax Ct. LEXIS 185">203 the amount of the net abnormal income from that lease, so that nothing remained for allocation to prior years. The respondent's computation is based upon a comparison of the percentages of operating costs to gross sales in 1940 and in the prior years of the base period. Petitioner contends that this method of computing the amount of net abnormal income attributable to low operating costs is erroneous in that it is based upon a comparison of the percentage of operating costs to gross sales. It argues that the expenses were not dependent upon, and were only remotely related to, the volume of production and sales; that they remained more or less constant for each producing well, regardless of the amount of oil which it produced.According to the stipulated facts the monthly wages per man paid in 1940 were approximately $ 20 higher than during the base period. Likewise, the cost of materials was $ 8,176.24 in 1940 against an average cost of $ 7,869.56 for the base period. The total per well operating costs, exclusive of drilling costs and percentage depletion, were $ 3,024.06 in 1940 against an average of $ 1,289.39 for the base period.6 T.C. 1124">1133 While it is true that the per barrel1946 U.S. Tax Ct. LEXIS 185">204 operating costs declined as the volume of production increased, and was therefore considerably less in 1940 than during the base period, this decline was due to the increased volume of production resulting from discovery rather than to other factors associated with cost of production, such as wages, cost of materials, overhead, etc.We agree with the petitioner's conclusion that none of its net abnormal income for 1940 may be attributable to low operating costs not directly related to discovery.The respondent makes the further contention in his brief that certain undetermined portions of the stipulated net abnormal income for 1940 resulted from factors not considered in his determination, viz., "increased demand" for the crude oil and "improved business conditions."There is no merit in this contention, even if we consider those questions timely raised in the respondent's brief. The evidence is that during the base period, as well as in 1940, there was a ready demand for every barrel of oil that could be produced from the field. So far as it affected the petitioner, there was no increased demand for oil in 1940.As to the alleged improved business conditions, the respondent points1946 U.S. Tax Ct. LEXIS 185">205 out that (1) gross sales were greater, (2) the number of employees was increased, (3) sale prices were higher, and (4) the profit per unit (barrel of oil) was higher.We have already determined that none of the $ 22,824.98 resulting from the higher prices which prevailed in 1940 can be attributed to other years under the regulations. None of the other factors mentioned above necessarily indicated improved business conditions.As the basis for the stipulation that petitioner had net abnormal income of $ 137,570.66 in 1940, the respondent has admitted that that portion of petitioner's income resulted from "exploration, discovery, and development." After the necessary adjustment for the portion thereof attributable to higher prices in accordance with our above ruling, the remainder should be "attributed to the taxable years during which expenditures were made for the particular exploration, discovery, prospecting, research, or development which resulted in such item being realized and in the proportion which the amount of such expenditures made during each such year bears to the total of such expenditures," as contemplated by the regulations quoted above. Cf. W. B. Knight Machinery Co., 6 T.C. 519.1946 U.S. Tax Ct. LEXIS 185">206 Reviewed by the Special Division.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625209/	Fletcher A. Burton and Selma J. Burton, Husband and Wife v. Commissioner. Fletcher A. Burton v. Commissioner.Burton v. CommissionerDocket Nos. 54994, 54995.United States Tax CourtT.C. Memo 1957-42; 1957 Tax Ct. Memo LEXIS 210; 16 T.C.M. 182; T.C.M. (RIA) 57042; March 14, 19571957 Tax Ct. Memo LEXIS 210">210 Petitioner, Fletcher A. Burton, derived income from a variety of sources during the years 1944 to 1950, inclusive. He owned a great many pieces of depreciable income-producing property. His books and records were inadequate to correctly determine the amount of his taxable income during such years. Held, respondent was justified in using the net worth method to determine petitioner's taxable income for such years. Held, further, no part of the deficiencies was due to fraud with intent to evade tax. Held, further, respondent properly imposed an addition to tax for substantial underestimate of estimated tax for the year 1950. Held, further, since the returns were not false or fraudulent, the years 1944 to 1948, inclusive, are barred by the statute of limitation. James W. Blanks, Esq., for the petitioners. Charles R. Hembree, Esq., for the respondent. RICEMemorandum Findings of Fact and Opinion This proceeding involves the following deficiencies in income tax and additions thereto: Additions to TaxDocketIncomeSec.Sec.No.YearTax293(b)294(d)(2)549941944$2,246.28$1,123.145499419452,415.901,525.79549941946932.11677.315499519472,657.751,417.215499419481,174.00628.66549941949492.46246.235499419502,194.541,097.27$144.00The 1957 Tax Ct. Memo LEXIS 210">211 issues to be decided are: (1) Whether respondent's use of the net worth method in determining petitioners' taxable income for the years in issue was proper; if so, (2) whether the amounts of unreported income so determined by such method were correct; (3) whether any part of the deficiencies was due to fraud with intent to evade tax; and (4) whether the respondent erred in imposing an addition to tax for substantial underestimate of estimated tax for the year 1950. The years 1944 to 1948, inclusive, are barred by the statute of limitation absent a showing that the returns were false or fraudulent with intent to evade tax. Concessions were made with respect to certain items included in the net worth statement which will be taken into account in a Rule 50 computation. Some of the facts were stipulated. Findings of Fact The stipulated facts are so found and are incorporated herein by this reference. Fletcher A. Burton, hereinafter referred to as the petitioner, and his wife, Selma J. Burton, were residents of Clarksville, Virginia, during the years in issue. They filed joint income tax returns for all such years except for the year 1947 when petitioner filed an individual return. All 1957 Tax Ct. Memo LEXIS 210">212 returns were filed with the former collector of internal revenue for the district of Virginia. During the years in issue, petitioner derived substantial amounts of income from a variety of business activities, including the renting of business property, farming, and the operation of a tobacco sales warehouse. He was also a director of a local bank and a member of the Clarksville town council. He assisted others in the preparation of their income tax returns and charged a fee for such service. Petitioner reported the following amounts of gross and net income on his original returns: YearGross IncomeNet Income1944$20,203.84$ 1,983.64194531,235.074,751.77194628,444.194,196.52194724,489.834,450.55 194832,082.487,934.19194929,712.449,361.47195046,644.8822,451.10Because of the inadequacy of petitioner's books and records, respondent computed petitioner's net taxable income during each of the years in issue by the net worth method. In addition to uncontested nondeductible living expenses, he added $1,500 each year to the total annual increase in net worth which was an estimate of other living expenses paid in cash. Petitioner maintained a cash receipts and disbursements 1957 Tax Ct. Memo LEXIS 210">213 journal and a property ledger. The property ledger contained many figures which were only estimates of the value of properties or additions thereto rather than actual cost. Many improvements to certain parcels of petitioner's farm property on which he claimed depreciation were not listed in the property ledger. The only record of depreciation which petitioner maintained on the mlay properties which he owned was contained in his retained copies of his income tax returns. His returns for 1944, 1945, 1946, and 1947 did not contain an itemized list of the real estate or other items on which he claimed depreciation, but showed only large total amounts as the depreciable value of "brick rentals," "frame rentals," etc. The returns for 1948, 1949, and 1950 did not specifically identify the many properties on which depreciation was claimed but contained only a listing of the individual items designated, for example, as "frame farm building" or "team and equipment." The depreciation claimed by petitioner on his returns during each of the years in issue represented substantial deductions. The amounts so claimed were as follows: 1944$6,461.5019457,997.2619466,088.9519476,782.1719487,815.6219497,250.7719506,643.37In 1957 Tax Ct. Memo LEXIS 210">214 1933, petitioner organized the Burton Manufacturing Company, a corporation, which was thereafter engaged in the manufacture of barrel staves. Certain real estate and machinery were transferred by him to the corporation for its stock, having a par value of $12,500. The corporation also assumed notes on such property which petitioner had made payable to himself in the total amount of $17,288.31. Such notes were secured by a deed of trust. On July 30, 1943, the deed of trust was released. In 1944, the corporation reconveyed the property to petitioner in exchange for his stock. In reconstructing petitioner's income by the net worth method, the respondent included the stock of the Burton Manufacturing Company in the opening net worth statement at a value of $12,500. Because the property was exchanged for the stock in 1944, the net worth statement in subsequent years reflects such property among petitioner's assets at a total value of $12,500. The "liabilities" shown on the net worth statement included reserves for depreciation on petitioner's depreciable property. Adjustments were also made for long-term capital gains realized during the years in issue. For the year 1950, petitioner reported 1957 Tax Ct. Memo LEXIS 210">215 total taxable income of $22,451.10 and tax due thereon of $5,205.44. He paid $5,0 0 on his declaration of estimated tax for such year. The respondent determined that petitioner received the following amounts of net income during the years in issue: 1944$ 9,925.73194513,640.2819469,556.31194713,731.14194813,716.51194911,581.34195028,379.10Respondent was justified in using the net worth method to determine the amount of petitioner's taxable income during the years in issue. No part of the deficiencies was due to fraud with intent to evade tax and none of the returns were false or fraudulent with intent to exade tax. Opinion RICE, Judge: This case turns largely on the failure of the parties to carry their respective burdens of proof. It was incumbent upon the respondent to prove by clear and convincing evidence that the deficiencies determined by him, which were presumptively correct, were due to fraud with intent to evade tax, and that the returns were false or fraudulent. He failed to carry that burden. It was petitioner's burden to overturn the respondent's determination of deficiencies in his income. He likewise failed to offer sufficient evidence to do so. The petitioner argues 1957 Tax Ct. Memo LEXIS 210">216 at some length on brief that the respondent, first of all, was not justified in using the net worth method in determining deficiencies in his income. This he says is so because an accountant, whom he employed to assist the revenue agents, testified that his books and records substantially agreed with his returns as filed. That argument is bottomed on a fallacious premise. The Supreme Court, as well as this Court on several occasions, has held that even though the books maintained by a taxpayer reflect the income reported by him, a net worth computation which indicates income received in excess of that reported discredits the books and records as false or inaccurate. ; , on appeal C.A. 6, May 15, 1956; ; , affd. (C.A. 4, 1955), certiorari denied . It appears to us that the principal point of contention in this case is the amount of depreciation which petitioner was entitled to claim on a great number of income-producing properties which he owned. His records were woefully inadequate to 1957 Tax Ct. Memo LEXIS 210">217 determine the correct amount of depreciation to which he was entitled, and we think the respondent was fully justified in resorting to the net worth method in computing his income. At the same time, we think it may well be that petitioner made improvements to various pieces of his farm properties prior to the years in issue, as he claims to have done, and that no allowance was made by the respondent in his net worth computation for such improvements. But petitioner failed to offer convincing evidence that such improvements were, in fact, made. We cannot accept his wholly uncorroborated testimony as to the time when such improvements were made, the cost thereof, or their normal life expectancy. He testified that prior to 1944 he had made improvements totaling $11,400 to four of the farms and a cotton gin which he owned. If that were true, it would have a material effect on the net worth computation of his income. The amount of allowed or allowable depreciation on petitioner's property, of course, also affects the amount of gain realized by him on the sale of certain of his income-producing properties during the years in issue. So also with the property received by him from the Burton 1957 Tax Ct. Memo LEXIS 210">218 Manufacturing Company in 1944. Some of the machinery was sold in subsequent years and he claimed a loss on such sales which the respondent disallowed. The petitioner claimed that the basis of the property received was far in excess of the $12,500 allowed. Presumably, the respondent determined the basis of this property pursuant to section 113(a)(6) which provides that the basis of property received in a tax free exchange shall have the same basis as the property transferred. Petitioner first transferred the property to the company in consideration for its stock, which, presumably, was worth $12,500 at the time, and notes. The notes may have been paid sometime prior to July 30, 1943, for the deed of trust securing them was released at that time, which would have left petitioner's cost basis of the stock at $12,500. In any event, the petitioner has not demonstrated that the respondent's determination of the basis of the property received by him from the Burton Manufacturing Company was in error and we therefore conclude that such determination was correct. Nevertheless, we think petitioner may have sincerely believed that the property had a higher basis in his hands and that the loss 1957 Tax Ct. Memo LEXIS 210">219 claimed on the sale of the machinery, as well as the depreciation claimed on other property, which was in excess of that allowed by the respondent, was due to honest mistake rather than to any willful intent to defraud. Petitioner also testified that he sustained losses because of tobacco barns which had burned on several farms during the years in issue and because of the death of livestock used on the farms. Such casualty losses were also claimed by him on his returns. But, other than his own testimony, he offered no evidence whatsoever as to those losses. He did not attempt to specifically identify the barns which burned or the animals which died. We do not know, in fact, if such items of property were even included by respondent in the net worth computation, and we are therefore unable to make any adjustment for those alleged losses. Other than the apparently incorrect and excessive amounts of depreciation claimed, the respondent can point only to the successive understatements of income in each of the years in issue to prove his allegation of fraud. He does not suggest, nor do we find, any evidence of some undisclosed source of income. We think those understatements, standing alone 1957 Tax Ct. Memo LEXIS 210">220 in this record, are insufficient to show a clear intent to defraud. We particularly observed the petitioner's demeanor on the stand during the course of the hearing and we have carefully re-examined his testimony and that of the revenue agents. While we think it was both possible and necessary for petitioner to have offered corroborating evidence to his testimony, we cannot say that he testified falsely. Rather, his testimony was more a matter of vague recollection which he may have supposed the Court could accept at face value. Thus, although we uphold the respondent's determination, we do not find that the deficiencies were due to a fraudulent intent to evade tax. Since none of the returns were false or fraudulent with intent to evade tax, section 276(a) bars the assessment and collection of the deficiencies determined for the years 1944 to 1948, inclusive. In addition to his arguments with reference to the basis of the property received from the Burton Manufacturing Company, the amounts of allowable depreciation, and casualty losses, petitioner, on brief, points out two other specific points of disagreement with the respondent's net worth computation. The parties agree that $1,000 1957 Tax Ct. Memo LEXIS 210">221 was deposited by petitioner in his bank account on April 19, 1944. Petitioner claimed that $925.93 of such sum represented a collection of notes owed to him. In the net worth computation, the respondent determined that petitioner had an unidentified note or notes in the amount of $500 due and owing to him at the beginning of 1944, and that such note or notes were paid in full during the year. The petitioner argues that that figure should be increased by $425.93. We cannot allow petitioner's claim for the reason that he failed to prove that any more than the $500 included by the respondent among his notes receivable was, in fact, owed him by some unidentified person or persons on December 31, 1943, and was paid on or before April 19, 1944. The respondent added $1,500 each year to petitioner's annual increase in net worth to cover the amount of his estimated living expenses paid in cash. Petitioner claimed that such amounts should not have been added. However, he offered no proof that such amounts were wrong, and we therefore conclude that the respondent correctly determined that the amount of $1,500 during each of the years in issue was a reasonable approximation of the additional amount 1957 Tax Ct. Memo LEXIS 210">222 of petitioner's non-deductible personal living expenses paid in cash. Since petitioners underestimated the amount of tax due by them for 1950 by more than 20 per cent, the respondent properly imposed an addition to tax for that year as provided in section 294(d)(2). Decisions will be entered under Rule 50. Footnotes*. Adjusted gross income.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625211/	RICHARD A YANCY AND IRENE YANCY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentYancy v. CommissionerDocket No. 8927-83.United States Tax CourtT.C. Memo 1984-431; 1984 Tax Ct. Memo LEXIS 241; 48 T.C.M. 872; T.C.M. (RIA) 84431; August 13, 1984. 1984 Tax Ct. Memo LEXIS 241">241 From 1971 through 1983, petitioners engaged in horse-racing and horse-breeding activities. They lost money from these activities every year, generally in amounts equal to 30 to 50 percent of their income. During 1979 and 1980 (the years in issue), all of petitioners' income was wages from petitioner-husband's jobs as a truck driver and a steelworker, and petitionerwife's part-time job. On the facts, held: petitioners engaged in the horse-racing and horse-breeding activities during 1979 and 1980 with the actual and honest objective of making a profit. Richard A. Yancy and Irene Yancy, pro se. Robert S. Scarbrough, for the respondent. CHABOTMEMORANDUM FINDINGS OF FACT AND OPINION CHABOT, Judge: Respondent determined deficiencies in Febderal individual income tax against petitioners for 1979 and 1980 in the amounts of $4,170 and $5,968, respectively. The issue for decision is whether petitioners' horse-racing and horse-breeding activities constitute a trade or business, or an "activity * * not engaged in for profit", within the meaning of section 183(a). 1FINDINGS OF FACT Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference. When the petition was filed in the instant case, petitioners, Richard A. Yancy (hereinafter sometimes referred to as "Richard") and Irene Yancy (hereinafter sometimes referred to as "Irene"), husband and wife, resided in East Cleveland, Ohio. In 1971, petitioners bought their1984 Tax Ct. Memo LEXIS 241">243 first horse, with a view to breeding horses and selling the foals. Richard had ridden horses in his childhood days is South Carolina, but Irene had never ridden a horse. Between 1971 and 1980, petitioners bought 15 horses (4 in 1971, 2 in 1972, 1 in 1973 or 1974, 5 others in 1974, 2 in 1977, and 1 in 1980), for a total cost of $5,031. One of these horses (the one bought in 1980) cost $1,000; the others cost from $150 to $470 each. Petitioners had no previous experience with horse racing or horse breeding. They bought books and periodicals about profitable horse breeding; the attended a seminar on the subject at Ohio State University; they associated with people who were somewhat successful at this activity. Petitioners did not have any formal training with respect to racing or breeding horses. Petitioners bought undernourished animals with what appeared to be good blood lines. They did so because such animals could be acquired for little money and, petitioners reasoned, when such animals were restored to proper condition the animals should be able to produce profitable foals. Petitioners encountered a series of misfortunes. One horse slipped in mud, broke its shoulder, and1984 Tax Ct. Memo LEXIS 241">244 had to be destroyed. Another horse went blind; it was sold cheaply. A mare which was bred turned out to be barren. Another mare's foal was aborted. None of the 15 horses petitioners bought was sold for a profit, nor did any appreciate in value. Petitioners never sold a foal. Petitioners oversaw and controlled all facets of their horseracing and horse-breeding activities. Petitioners hired and fired the trainers of their horses. Petitioners paid their own bills and maintained the records of income and expense for their activities without using professional assistance. 2Petitioners' receipts from their horse-racing and horsebreeding activities were little in amount. In several of the years (including 1979 and 1980), petitioners had no gross receipts from these activities at all. In each year from 1971 through 1983, petitioners suffered substantial losses; generally these losses amounted to 30 to 50 percent of1984 Tax Ct. Memo LEXIS 241">245 their total income. For 1979 and 1980, petitioners' losses from their horse-racing and horse-breeding activities amounted to $13,748 and $19,730, respectively. In 1983, they finally gave up these activities. Richard had two simultaneous full-time jobs from 1974 to 1980, being employed as a truck driver by the City of East Cleveland and as a steelworker by Republic Steel Corporation. Irene was employed part-time by Servomation Corporation in 1979 and 1980. Petitioners' only other business activity was renting property bought in 1978. This property produced losses in 1978, 1979, and 1980. Petitioners financed their horse-racing and horse-breeding activities from their wages. The horses petitioners bought were ridden by Richard an average of about twice a year.Irene never rode these horses. When their child wanted to ride a horse, petitioners bought a pony. Petitioners did not deduct the expenses of the pony. Petitioners were never involved in a "show horse" activity. Petitioners' horses were kept on rented premises. Petitioners did not own any grazing land or other facilities for the care and maintenance of horses. Petitioners' depreciation deductions were only for the1984 Tax Ct. Memo LEXIS 241">246 purchase prices of their horses, bridles, and saddles. * * * Petitioners engaged in their horse-racing and horse-breeding activities in order to make profits so as to enable them to raise their economic standard of living. OPINION Respondent contends "that, well before the years in issue (1979 and 1980), the petitioners knew full will that, whatever its purpose, their horse 'business' was not 'for profit'." Respondent asserts that "petitioners have not produced a scintilla of evidence" to show that they satisfied the objective criteria mandated by the statute and regulations. Petitioners maintain that they entered into their horse-racing and horse-breeding activities with the honest and genuine objective of making a profit, and that this objective continued through the years in issue. We agree with petitioners. In the context of the instant case, the effect of section 183(a)3 is that petitioners' disputed deductions are allowable but only if their horse-racing and horse-breeding activities were engaged in for profit. 1984 Tax Ct. Memo LEXIS 241">247 Whether an activity is engaged in for profit turns on whether the taxpayer has an actual and honest objective of making a profit. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 78 T.C. 642">645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (CADC 1983); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659, 72 T.C. 659">666 (1979); Golanty v. Commissioner,72 T.C. 411">72 T.C. 411, 72 T.C. 411">425-426 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (CA9 1981). Petitioners' objective is a question of fact to be determined from all the facts and circumstances. Allen v. Commissioner,72 T.C. 28">72 T.C. 28, 72 T.C. 28">34 (1979); Dunn v. Commissioner,70 T.C. 715">70 T.C. 715, 70 T.C. 715">720 (1978), affd. without published opinion 607 F.2d 995">607 F.2d 995 (CA2 1979), affd. on another issue 615 F.2d 578">615 F.2d 578 (CA2 1980). Mere statements of intent are not determinative. Engdahl v. Commissioner,72 T.C. 659">72 T.C. 666; Churchman v. Commissioner,68 T.C. 696">68 T.C. 696, 68 T.C. 696">701 (1977). The burden of proof is on petitioners. Golanty v. Commissioner,72 T.C. 411">72 T.C. 426;1984 Tax Ct. Memo LEXIS 241">248 Boyer v. Commissioner,69 T.C. 521">69 T.C. 521, 69 T.C. 521">537 (1977). The regulations under section 183 list nine relevant factors which should normally be taken into account in determining whether an activity is engaged in for profit. No one factor is conclusive and thus we do not reach our decision herein by merely counting the factors enumerated in section 1.183-2(b), Income Tax Regs., which support each party's position. Dunn v. Commissioner,70 T.C. 715">70 T.C. 720. We observed both petitioners and we conclude that they are honest and believable witnesses. We believe that they started, and continued, their horse-racing and horse-breeding activities in order to make a profit so as to enable them to raise their economic standard of living. They proceeded foolishly. It may be that others took them for a ride. By the years in issue, they should have cut their losses and quit, or else changed their operations drastically.Instead, they continued for several more years, draining themselves and their pocketbooks. Their losses were real, out-of-pocket losses, 1984 Tax Ct. Memo LEXIS 241">*249 and not merely tax losses. Petitioners did not have other wealth to fall back on; their horse activities were financed from current wages. Horatio Alger's formula did not seem to work for petitioners in their endeavor. Petitioners did not engage in their horse-racing and horse-breeding activities as a lark; it was not a hobby; the household did not use the horses for personal pleasure in riding or at horse shows. On the one hand, we have noted that "a business will not be turned into a hobby merely because the owner finds it pleasurable" ( Jackson v. Commissioner,59 T.C. 312">59 T.C. 312, 59 T.C. 312">317 (1972)). On the other hand, it seems highly likely that if a person expends substantial funds on an activity year after year, deriving no obvious pleasure from the activity, then the activity is engaged in with the objective of making a profit, and not engaged in as a hobby. We conclude that, in 1979 and 1980, petitioners engaged in their horse-racing and horse-breeding activities with an actual and honest (albeit misguided) objective of making a profit. We hold for petitioners. Decision will be entered for petitioners.Footnotes1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the years in issue.↩2. Respondent concedes the correctness of the amounts of petitioners' claimed deductions for 1979 and 1980; he has not disputed the correctness of the amounts of petitioners' claimed deductions for any of the other years as to which evidence was introduced.↩3. SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) General Rule.--In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. [The subsequent amendment of this provision by section 5(a)(23) of the Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669, 1694, does not affect the instant case.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625254/	S. Jacob Sens v. Commissioner. S. Jacob Sens and Celia W. Sens v. Commissioner.Sens v. CommissionerDocket Nos. 51210, 51211.United States Tax CourtT.C. Memo 1956-279; 1956 Tax Ct. Memo LEXIS 15; 15 T.C.M. (CCH) 1449; T.C.M. (RIA) 56279; December 26, 1956Joseph F. Lawless, Jr., Esq., for the respondent. KERN Memorandum Findings of Fact and Opinion In these cases, consolidated for trial and opinion, the respondent determined deficiencies in Federal income taxes and additions to taxes as follows: Additions totax under I.R.C.DocketSectionSectionNo.YearDeficiency293(b)291(a)512101944$176,260.38$88,130.19None194568,957.8434,478.92$17,239.46512111946$ 87,238.06$43,619.03$22,702.14At the trial of these cases, regularly scheduled pursuant to proper notices served on the parties, petitioners did not appear either in person or by counsel. Upon motion of respondent the petitions were dismissed for failure16 properly to prosecute in so far as they related to the deficiencies and additions to tax under section 291(a) of the Internal Revenue Code of 1939. The cases were submitted for trial on the issue of whether all or any parts of the deficiencies are due to fraud with intent to evade tax, as alleged in respondent's answers and denied in the replies filed, and whether petitioners are, therefore, liable for the 50 per cent additional tax provided by section 293(b) of the Internal Revenue Code of 1939. On this issue respondent, who had the burden of proof, adduced oral and documentary testimony at the trial herein. Findings of Fact During the taxable years petitioner S. Jacob Sens, as sole proprietor, carried on the business of buying and selling sugar and syrup food products and jellies in Cleveland and Lorain, Ohio, and in New York, New York. For the taxable year 1944, he filed a Form W-2 return with the collector of internal revenue for the 18th district of Ohio, reporting the receipt of wages during that year of $2,673.33, and the withholding of Federal income taxes in the amount of $252.12, which latter sum was refunded to him by respondent in 1945. On March 15, 1949, petitioners17 filed a joint income tax return for the year 1946 with the collector of internal revenue for the 3rd district of New York, reporting a total income for that year of $15,833.49. No return of any kind was filed by either petitioner for the year 1945. No extension of time was obtained from respondent within which to file the return for 1946. S. Jacob Sens will be referred to hereafter as petitioner. In 1944 petitioner had gross receipts of $288,047.06 and net taxable business income of $214,516.12. In 1945 petitioner had gross receipts of $333,130.43 and taxable net business income of $101,419.83. In 1946 petitioner had gross receipts of $227,400.35 and net taxable business income of $118,928.34 in addition to the income reported for that year. Petitioner carried on business during all of the taxable years under the names of S. J. Sens, S. J. Sens and Company, and Lorain Foods, and during 1944 also carried on business under the name of Erie Trading Company which was registered as a trade name for a non-existent fictitious person (William Goldberg) impersonated by petitioner. Petitioner kept no books or records for any of his businesses other than certain bank statements and18 cancelled checks which were incomplete. In 1944 petitioner maintained four bank accounts, as follows: Account NameDepositaryErie Trading CompanyCleveland Trust Co.Lorain FoodCentral National Bank ofClevelandS. J. SensNational Bank of LorainC. W. SensNational Bank of LorainIn 1945 petitioner maintained six bank accounts, as follows: Account NameDepositaryLorain FoodCentral National Bank ofClevelandS. J. SensNational Bank of LorainC. W. SensNational Bank of LorainS. J. SensManufacturers Trust Co.(N. Y.)S. J. SensCentral National Bank ofClevelandJ. MillerMorris Plan BankThe name of J. Miller was a fictitious name used by petitioner to conceal his income and his business activities. In 1946 petitioner maintained four bank accounts, as follows: Account NameDepositaryS. J. SensNational Bank of LorainC. W. SensNational Bank of LorainS. J. SensManufacturers Trust Co.(N. Y.)S. J. Sens & CompanyLorainBanking Co.During the year 1945 petitioner purchased for cash United States Treasury Coupon Bonds in the face amount of $15,000. Petitioner made this purchase19 in the name, but without the knowledge or consent, or Clarence Behrendt. In 1953 petitioner was convicted in the Federal District Court for the Northern District of Ohio, Eastern Division, on an indictment charging that he "did wilfully and knowingly attempt to defeat and evade payment of the income tax due and owing by him to the United States of America for the calendar year 1945 * * *." A part of the deficiencies determined herein by respondent for the taxable years 1944, 1945, and 1946 is due to fraud with intent to evade tax. Opinion KERN, Judge: The sole issue before us for decision herein is whether all or any parts of the deficiencies determined in these cases by respondent are due to fraud with intent to evade tax within the purview of section 293(b) of the Internal Revenue Code of 1939. This is a factual issue upon which respondent has the burden of proof. After consideration of the testimony adduced by respondent at the trial herein, we are satisfied that respondent has successfully borne the burden of proof on this issue. Accordingly, Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4476974/	SUPPLEMENTAL OPINION. Harron, Judge: The original report in these proceedings is found in 22 T. C. 612. The Commissioner has determined, in the deficiency notices and by his pleadings, that there are deficiencies in income tax as follows: Docket No. Petitioner Year Original deficiency Increased deficiency 43366_ Beulah Weil. 1947 $1,762.59 $2,584.16 43858_ Charles Weil.... 1947 2,126.92 1 (Increase claimed) 50411. Charles Weil and Adreana Weil-1948 731.10 794.98 In our original Opinion in these proceedings, we construed the settlement agreement which was incident to the divorce of Charles and Beulah, under Issue 2, as fixing 50 per cent of the periodic payments as the amount payable for the support of the two children of Charles and Beulah, both of whom were minors in 1948. This conclusion was reached upon considering the agreement as a whole. Robert W. Budd, 7 T. C. 413, affirmed per curiam 177 F. 2d 198. In view of the conclusions and holdings under Issue 2 in our original Opinion, the respondent has made the contention (in a motion for further consideration which has been granted) that a further question remains for decision, namely, what amount of the total sum paid by Charles in 1947 was for the support of the children. The answer to this additional question will determine what amount (out of the total sum paid by Charles in 1947) is includible in Beulah’s income for 1947 (under section 22 (k)), which is the only year before us in her case, and what amounts are deductible by Charles, under section 23 (u), in 1947 and 1948. Charles was obligated to pay Beulah $12,000 in periodic payments in in 1947 under the agreement. However, his payments totaled only $10,500. He paid Beulah the unpaid amount, $1,500, in 1948, in addition to $6,820.80, which was the total sum of the periodic payments which he was, under the agreement, required to make in 1948. We have already expressed the view (22 T. C. 612, 621) that the agreement fixed 50 per cent of the periodic payments as the portion for the support of the two children. Since Charles paid less than the required total sum of the periodic payments in 1947, the respondent now contends that under the second and third sentences of section 22 (k), which are set forth in the margin,2 it must be held that $6,090 (50 per cent of $12,000, the total of the required payments for 1947) is the portion of $10,500 (the sum paid in 1947) which was for the support of the children. If our construction of the provisions of the agreement relating to the support of the children is correct, it follows, we believe, that respondent’s present position must be sustained because of the second and third sentences of section 22 (k). The respondent’s position is in line with section 29.22 (k)-l (d) of Regulations 111, pages 85, 86, which provides, in part, as follows: For example, if the husband is by the terms of the decree required to pay $200 a month to his divorced wife, $100 of which is designated by the decree to be for the support of their minor children, and the husband pays only $150 to his wife, $100 is nevertheless considered to be a payment by the husband for the support of the children. * * * See, also, H. Rept. No. 2333, 77th Cong., 1st Sess., sec. 117, 1942-2 C. B. 427, 429; and 1942-2 C. B. 568, 570, sec. 120, S. Rept. No. 1631, 77th Cong., 2d Sess. Accordingly, it is held that $6,000 of the $10,500 paid by Charles in 1947 is the portion which was for the support of the children, and, therefore, that amount is neither includible in Beulah’s taxable income for 1947 under section 22 (k), nor deductible by Charles under section 23 (u). It follows that $4,500, out of $10,500 paid in 1947, was for Beulah’s support; that such amount is includible in her income for 1947 under the first sentence of section 22 (k), and is deductible by Charles under section 23 (u). It also follows that the deduction allowed Charles for 1947 ($5,200) was excessive to the extent of $700. Another aspect of the question now before us relates to the payments Charles made in 1948. The total sum which he paid in 1948, $8,600, included $1,500, the arrearage in the 1947 payments. From our holding above, it follows that the payment of $1,500 represented support payments due Beulah. It is held that $1,500, the arrearage for 1947, is includible in Beulah’s income for 1948, the year of receipt, under section 22 (k), Lily R. Reighley, 17 T. C. 344, 355, 356, and therefore, that amount is deductible in 1948, by Charles, under section-23 (u). The total amount deductible in 1948, by Charles, under section 23 (u), is $4,910.40, the total of $1,500, supra, and $3,410.40, which is 50 per cent of the required payments for 1948 (all of which was paid), 50 per cent being the portion for Beulah’s support. Charles is not entitled to deduct the portion of the 1948 payments, $3,410.40, which was for the support of the children. There is a small item which must be disposed of. In 1948, Charles also paid Beulah $279.20 in excess of what he was obligated to pay her under the support agreement. This was a gratuitous payment to Beulah for which no deduction is allowable under section 23 (u). An order will be issued amending our original report, in certain respects to tibe extent required by this Supplemental Opinion.3 Under our holdings in this Supplemental Opinion and in our original Findings of Fact and Opinion, as amended, recomputations under Rule 50 are necessary. Decisions will loe entered under Bule 50. By amendment to lis answer, respondent las made claim for increase in tie deficiency for 1947 in Docket No. 43858. Tie respondent allowed Claries Weil a deduction in 1947 under section 23 (u) in tie amount of $5,200 for alimony payments to Beulal Weil. In tie event tie Court lolds tlat Claries is entitled to deduct only $4,500 in 1947, it follows tlat tie deduction allowed' is excessive to tie extent of $700. Accordingly, respondent las made claim for increase in tie deficiency for 1947. Tle pertinent part of section 22 (k) of tie 1939 Code provides as follows: ... Tils'subsection slall not apply to tlat part of any sucl periodic payment wlicl tie terms of tie decree or written instrument fix, in terms of an amount of money or a portion of tie payment, as a sum which is payable for the support of minor children of sucl husband. In case any such periodic payment is less than tie amount specified in the decree or written instrument, for the purpose of applying the preceding sentence, such payment, to the extent of sucl sum payable for such support, shall be considered a payment for such support. * * * The original report is amended by this supplemental report as follows : (1) In the last paragraph of the Findings of Fact relating to Issue 2, there is substituted “or $6,000 in 1947, and $3,410.40 in 1948,” for “$5,250, in 1947, and $4,160.40 in 1948.” (2) In, the Opinion, Issue 2, fifth paragraph, the second sentence is amended to read as follows: * * * It is held, therefore, that in 1947, Charles cannot deduct under section 23 (u), $6,000 out of the $10,500 which he-paid Beulah pursuant to the requirements of the agreement because Beulah, under section 22 (k), does not have to include $6,000 of the total sum she received in her taxable income; and that in 1948, Charles can deduct $4,910.40, which is includible under section 22 (k) in Beulah’s income, but he cannot deduct $3,410.40, one-half of the required 1948 payments, because Beulah will not have to include that amount in her income under section 22 (k).	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625256/	DARIUS SCHOTT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSchott v. CommissionerDocket No. 27400-88United States Tax CourtT.C. Memo 1991-457; 1991 Tax Ct. Memo LEXIS 506; 62 T.C.M. (CCH) 766; T.C.M. (RIA) 91457; September 19, 1991, Filed 506 Darius Schott, pro se. J. Michal Nathan, for the respondent. SWIFT, Judge. SWIFTMEMORANDUM OPINION This matter is before us on cross-motions for summary judgment under Rule 121. 1In notices of deficiency and in an amended answer, respondent determined deficiencies in petitioner's 1983, 1984, and 1985 Federal income tax liabilities and additions to tax as follows: Additions to Tax, Secs.YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)6654(a)1983$ 716$ 179$ 36--19843,864966194$ 24319856,4121,603321368507 Respondent also moves for the imposition of a penalty under section 6673(a)(1)(A) and (B). Petitioner raises only various tax protester-type issues. During the years in issue, and at the time he filed his petition, petitioner resided in Las Vegas, Nevada. During 1983, 1984, and 1985, petitioner worked as a craps dealer at Binion's Horseshoe Hotel and Casino (Horseshoe) in Las Vegas. Petitioner received a salary from the Horseshoe and tips from gamblers. Petitioner received additional compensatory payments from several other sources (namely, Massachusetts Indemnity and Life Insurance Co., Inc. (Mass), Bob Stupak, Inc. (Stupak), and Vegas World). Petitioner also received unemployment compensation. The record does not reflect further specifics about the nature of the compensation petitioner received from Mass, Stupak, and Vegas World. Petitioner did not maintain any records of the amount of tips he received during 1983, 1984, or 1985, nor did petitioner or his wife file Federal income tax returns for the years in issue. Respondent treated the salary, the tips, the compensatory payments, and the unemployment compensation mentioned above as income to petitioner. Respondent508 estimated the amount of tips petitioner received each year using statistical data on average tips received by casino dealers. The following schedule reflects the amount of salary, tips, compensatory payments, and unemployment compensation that respondent determined petitioner received during the years in issue: YearSourceAmountTotal1983Horseshoe$ 1,026Mass1,377Unemployment4,636Tips1,104$ 8,1431984Horseshoe$ 9,231Mass52Stupak931Tips10,623$ 20,8371985Horseshoe$ 13,070Vegas World150Tips15,155$ 28,375Respondent determined that petitioner had total taxable income as follows: $ 4,932 for 1983, $ 9,214 for 1984, and $ 12,180 for 1985. Petitioner does not challenge under any traditional legal theory the taxable nature or amount of the income charged to him by respondent. As indicated, petitioner raises only various tax protester-type arguments. Petitioner claims that he should not be required to file Federal income tax returns because he was not the object of a "government granted privilege." Petitioner's claim is meritless. Olson v. United States, 760 F.2d 1003">760 F.2d 1003, 1005 (9th Cir. 1985).509 Petitioner claims that respondent has no authority to determine deficiencies using "dummy returns." When taxpayers fail to file tax returns, however, respondent has authority to prepare returns for them. Sec. 6020(b)(1). Moreover, respondent is not required to prepare returns in order to assess tax deficiencies for taxpayers who have not filed returns. Roat v. Commissioner, 847 F.2d 1379">847 F.2d 1379, 1381 (9th Cir. 1988); Hartman v. Commissioner, 65 T.C. 542">65 T.C. 542, 545-546 (1975). See Laing v. United States, 423 U.S. 161">423 U.S. 161, 174, 46 L. Ed. 2d 416">46 L. Ed. 2d 416, 96 S. Ct. 473">96 S. Ct. 473 (1976). Petitioner claims that the U.S. Treasury Department has not issued required Treasury Department Orders (TDO's) delegating to respondent authority to issue notices of deficiency and therefore that respondent has no authority to issue notices of deficiency to petitioner. Under section 6212 and sections 301.6212-1, 301.6861-1, and 301.7701-9, Proced. & Admin. Regs., however, respondent's service center directors and district directors are authorized to issue notices of deficiency to taxpayers. Stamos v. Commissioner, 95 T.C. 624">95 T.C. 624, 629 (1990); Estate of Brimm v. Commissioner, 70 T.C. 15">70 T.C. 15, 19-20 (1978);510 Urban v. Commissioner, T.C. Memo 1991-220">T.C. Memo 1991-220. Petitioner claims that the delegation of authority to issue notices of deficiency must be published in the Federal Register. In Stamos v. Commissioner, supra at 634, we concluded that section 4 of the Administrative Procedure Act, 5 U.S.C. sec. 553 (1988), requires only "substantive" rules to meet the notice, comment, and publication requirements of that statute, adding that "'Interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice' are excepted from this provision." The delegation of authority to respondent's service center directors and district directors to issue notices of deficiency is not substantive and therefore is not covered by the publication requirements of the Administrative Procedure Act. Stamos v. Commissioner, supra at 635; Wolf v. Commissioner, T.C. Memo 1991-212">T.C. Memo 1991-212; Powers v. Commissioner, T.C. Memo 1990-623">T.C. Memo 1990-623. Petitioner claims that respondent's notices of deficiency issued to him were invalid under the Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. secs. 3501-3520511 (1988). In general, the PRA requires the U.S. Office of Management and Budget (OMB) to approve information collection requests made by Federal agencies, and requires information collection requests to display current OMB control numbers. 44 U.S.C. sec. 3507(f) (1988). The PRA defines information collection requests as -- a written report form, application form, schedule, questionnaire, reporting or recordkeeping requirement, collection of information requirement, or other similar method calling for the collection of information. [44 U.S.C. sec. 3502(11) (1988).]Before 1990, courts generally held that tax forms were exempt from the provisions of the PRA under 44 U.S.C. section 3518(c)(1)(B)(ii) (1988), which exempts administrative actions against or investigations of specific individuals or entities. Cameron v. Commissioner, 593 F. Supp. 1540">593 F. Supp. 1540, 1556 (N.D. Ind. 1984), affd. 773 F.2d 126">773 F.2d 126 (7th Cir. 1985). See also United States v. Tedder, 787 F.2d 540">787 F.2d 540, 542 (10th Cir. 1986); Cauvel v. Commissioner, T.C. Memo 1989-547">T.C. Memo 1989-547; Snyder v. Internal Revenue Service, 596 F. Supp. 240">596 F. Supp. 240, 250 (N.D. Ind. 1984).512 Petitioner, however, relies on Dole v. United Steelworkers of America, 494 U.S. 26">494 U.S. 26, 108 L. Ed. 2d 23">108 L. Ed. 2d 23, 110 S. Ct. 929">110 S. Ct. 929, (1990), in which the Supreme Court, in dicta, made a general statement that some tax forms may fall under the requirements of the PRA. Relying on Dole v. United Steelworkers of America, supra, petitioner contends that respondent's Federal income tax returns and the regulations regarding filing requirements are invalid under the PRA because they lacked OMB control numbers and expiration dates. Since 1981, however, Federal income tax returns have contained OMB control numbers. Also, in United States v. Collins, 920 F.2d 619">920 F.2d 619, 631 (10th Cir. 1990), the Tenth Circuit held that the failure to list expiration dates does not exempt taxpayers from complying with Government regulatory requirements. Further, in United States v. Wunder, 919 F.2d 34 (6th Cir. 1990), the Sixth Circuit rejected a taxpayer's contention that the regulations requiring taxpayers to file returns were invalid under the PRA. Respondent's issuance of notices of deficiency does not call for the collection of information from taxpayers. 44 U.S.C. sec. 513 3502(11) (1988). Such notices merely give taxpayers notice that respondent has determined deficiencies regarding their Federal income tax liabilities. The courts have consistently held that Federal tax forms that do not request information from taxpayers are not subject to the requirements of the PRA. For example, courts have held that Federal income tax instruction booklets are not subject to the requirements of the PRA. Currier v. Commissioner, T.C. Memo 1991-194">T.C. Memo 1991-194; United States v. Crocker, 753 F. Supp. 1209">753 F. Supp. 1209, 1214-1216 (D. Del. 1991). We reject petitioner's arguments relying on the requirements of the PRA. Dole v. United Steelworkers of America, supra, does not require a contrary result. We hold that the notices of deficiency respondent issued to petitioner for 1983, 1984, and 1985 were valid, and we sustain the tax deficiencies and additions to tax determined therein. Lastly, we address whether we should impose against petitioner a penalty under section 6673. Section 6673(a)(1)(A) and (B) allows the Court to impose a penalty of up to $ 25,000 when it appears that a taxpayer instituted the proceeding primarily514 for delay or if the taxpayer's position is frivolous or groundless. On the record before us and in our discretion, we decline to impose a penalty under section 6673. For the reasons stated, petitioner's motion for summary judgment will be denied, and respondent's motion for summary judgment will be granted. An appropriate order will be entered. Footnotes1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code of 1954 as in effect for the years in issue.↩*. 50 percent of the interest due on the portion of the underpayment attributable to negligence.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625257/	CHARLES H. STODDARD AND CLARA L. STODDARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSTODDARD v. COMMISSIONERDocket No. 25278-92United States Tax CourtT.C. Memo 1993-400; 1993 Tax Ct. Memo LEXIS 412; 66 T.C.M. (CCH) 585; August 31, 1993, Filed 412 Decision will be entered under Rule 155. Charles H. Stoddard and Clara L. Stoddard, pro sese. For respondent: Josh Ungerman. PATEPATEMEMORANDUM OPINION PATE, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency in petitioners' 1989 Federal income tax of $ 5,968 and an addition to tax pursuant to section 6662 of $ 1,194. After concessions by respondent (including the addition to tax pursuant to section 6662), the issues for out decision are: (1) Whether petitioner Charles H. Stoddard must include in gross income the value of common stock of his employer that was distributed to him from an employee stock ownership plan; (2) whether petitioners may exclude from income annuity payments that they elected to receive from a life insurance policy; 413 (3) whether petitioners are entitled to a foreign tax credit; and (4) whether the Internal Revenue Code is valid. Some of the facts have been stipulated and are so found. Petitioners are husband and wife and filed a joint income tax return for 1989. They resided in Mesquite, Texas, at the time they filed their petition in this case. Distribution from TRASOPCharles H. Stoddard (hereinafter petitioner) was employed by Consolidated Edison Company of New York, Inc. (hereinafter Con Ed or the company). In connection with his employment, petitioner participated in Con Ed's Tax Reduction Act Stock Ownership Plan (hereinafter TRASOP or the plan), from 1975 through 1989. The plan was designed to provide its employees with an equity interest in the company that, after retirement, could be used to supplement their pension income. It was a qualified stock bonus plan so that Con Ed's contributions, dividends, and other income allocated to petitioner's plan account were not includable in petitioner's income in the year in which they were received by the trustee of the plan. Initially, Con Ed made all contributions to the plan; all contributions were made in cash. Beginning in414 1977, however, employees were also permitted to make cash contributions and thereby receive a matching contribution from Con Ed. Petitioner made cash contributions under this option. The trustee, Banker's Trust Co., then invested the cash contributed in common stock of the company. The trustee also purchased additional shares with the dividends it received. Petitioner withdrew a portion of his plan account in 1986 and 1988. When he retired in 1989, the trustee distributed the balance of the assets allocated to his plan account to him in a lump sum. The following table shows the assets distributed to petitioner, the amount the trustee reported on the Form 1099R issued to petitioner, and the amount petitioner reported on his joint income tax return for 1989. Asset AmountAmount onAmount onDistributedForm 1099RTax Return820 Shares Con Edstock at fair mkt. value$ 20,398 $ 20,398 $ -0-Less unrealizedappreciation(8,990)(8,990)Net (cost of sharesto trustee)11,408 11,408 -0-Cash dividend356 356 1 356Cash in lieu offractional share15 15 15$ 11,779 $ 11,779 $ 371415 Petitioner contends that he need not include the value of the Con Ed stock distributed to him in his gross income until he sells the stock. He argues that the distribution was simply a name change from the trustee to petitioner because the stock had previously been allocated to his plan account. Respondent maintains that petitioner received a distribution from a qualified stock bonus plan and, therefore, must report the distribution as income. She further maintains that the amount that must be reported is equal to the fair market value of the Con Ed stock received less the net unrealized appreciation on that stock. We agree with respondent. Section 401(a) sets out the requirements a trust must meet to be part of a qualified stock bonus, pension, or profit sharing plan established by an employer for the exclusive benefit of its employees or their beneficiaries. In general, distributions to an employee or beneficiary from such a plan are taxable in the year distributed as provided by section 72. Sec. 402(a)(1). However, section 402(e) sets out separate rules for lump-sum distributions. A lump-sum distribution is a distribution within 1 taxable year of the balance to the credit416 of an employee that becomes payable on account of the employee's separation from the service. Sec. 402(e)(4)(A); Samonds v. Commissioner, T.C. Memo 1993-329">T.C. Memo. 1993-329. When a lump sum distribution includes securities of the employer, they are includable in the employee's gross income at their fair market value less the net unrealized appreciation in the employer securities. Sec. 402(e)(4)(J). A stock's net unrealized appreciation is the excess of the fair market value of the stock on the date it is distributed over the stock's cost or other basis to the plan's trustee. Sec. 1.402(a)-1(b)(2)(i), Income Tax Regs. Such appreciation in the value of the stock is not taxable until the employee disposes of the stock. The remainder of the fair market value of the securities distributed is included in the employee's gross income to the extent it exceeds his contributions. Sec. 72(e); sec 1.72-11(d), Income Tax Regs. These provisions are applicable to the instant case. First, we note that the parties do not dispute that Con Ed's TRASOP is a qualified stock bonus plan as defined in section 401(a). Moreover, because petitioner received the entire balance credited417 to him under the plan in the year he retired, the distribution he received constitutes a lump-sum distribution. Therefore, the entire amount of such distribution is fully reportable upon receipt except for that portion of the lump-sum distribution that represents the net unrealized appreciation of the Con Ed securities. See Szilagyi v. Commissioner, T.C. Memo 1982-656">T.C. Memo. 1982-656. Since it is also undisputed that the fair market value of the Con Ed stock petitioner received was $ 20,398, and that value reflected $ 8,990 of net unrealized appreciation, we hold that petitioner must include in gross income the difference of $ 11,408. Petitioner's contention that the stock distribution was simply a name change from the trustee to petitioner simply ignores the facts. The Con Ed stock received by petitioner was held in a trust that was qualified as an employee stock bonus plan. When the name was changed from the trustee's to petitioner's, it constituted a distribution from that qualified employee stock bonus plan. Such distributions are taxed under specific provisions of the Code, mainly sections 72 and 402, and we apply them accordingly. Further, petitioner 418 contends that he should be able to reduce the amount he must report by his after-tax contributions to the plan. Respondent maintains that petitioner recouped his basis when he made partial withdrawals from the plan in 1986 and 1988. The record simply does not contain enough information about petitioner's prior withdrawals from the plan (and the basis he applied against such withdrawals) for us to evaluate his contention. It is petitioner's burden to show that respondent's determination is wrong. Rule 142. Because he failed to do so, we hold that petitioner may not reduce the $ 11,408 of income by any of his contributions to the plan. Petitioner also contends that Con Ed's computation of net unrealized appreciation is incorrect because the trustee's cost of stock purchased with reinvested dividends is zero and that, therefore, only the cost of shares purchased with Con Ed's contributions should be included when computing net unrealized appreciation of the securities. However, petitioner did not submit sufficient evidence for us to determine how the net unrealized appreciation was calculated, nor did he direct our attention to any authority (nor can we find any) to support this419 contention. In addition, petitioner argues that his plan distribution is excluded from income under a myriad of sections of the Internal Revenue Code. First, he argues that the stock distributed should be excluded from his gross income because it qualifies as a fringe benefit. Specifically, he contends that it qualifies as a qualified employee discount (as defined in section 132(c)) and therefore is excludable under section 132(a)(2). However, a "qualified employee discount" means any employee discount with respect to "qualified property or services". Sec. 132(c)(1). The term "qualified property or services" is defined as "any property * * * or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services." Sec. 132(c)(4). Since the stock distributed to petitioner is not property offered for sale to customers in the ordinary course of Con Ed's business and, therefore, does not constitute "qualified property or services", petitioner may not exclude the Con Ed stock he received as a qualified employee discount. Second, petitioner argues that the plan distribution constitutes an employee420 achievement award that is excludable from his gross income under section 74(c)(1). The term "employee achievement award" is defined in section 274(j). That section limits the award to "an item of tangible personal property". The Con Ed stock distributed to petitioner simply is not tangible personal property. Therefore, the plan distribution does not constitute an employee achievement award as defined in section 274(j). Third, petitioner argues that stock distributed to him constitutes a nontaxable gift specifically excluded from his gross income by section 102(a). However, section 102(c) specifically eliminates (from the exclusion provided for gifts in section 102(a)) amounts transferred by or for an employer to an employee. Accordingly, his plan distribution is not a gift. Fourth, petitioner argues that the stock distributed to him is excludable from his gross income by virtue of section 305(e). Section 305(a) excludes from gross income "the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock" (emphasis added), and section 305(e) applies the exclusion to qualified reinvestment of dividends in421 stock of public utilities. However, petitioner did not receive his Con Ed stock from the company, nor was such distribution with respect to stock he held in the company. Rather, he received the stock from the trustee of Con Ed's TRASOP by virtue of his participation, as an employee, in a qualified stock bonus plan that had been established by Con Ed for the benefit of its employees. Therefore, section 305 is not applicable to petitioner's situation. Fifth, petitioner argues that he is entitled to deduct the total taxable amount of the plan distribution from his gross income pursuant to section 402(e)(3). However, that section allows a deduction when the taxpayer has elected to be taxed based on the 5-year averaging accorded lump-sum distributions. When 5-year averaging is elected, section 402(e) prevents the taxpayer from having to include the distribution in income twice. Since the deduction is not available to a taxpayer who has not elected to be taxed under section 402(e), and petitioner has not elected to be so taxed, section 402(e) is not applicable in his case. See sec. 1.402(e)(4)(B)-1, Income Tax Regs.Annuity PaymentsIn 1959, petitioner purchased a $ 50,000422 life insurance policy from the Prudential Insurance Co. of America (hereinafter Prudential). Over the years, petitioner paid a total of $ 39,126 in premiums and received dividends of $ 20,610. In 1989, petitioner elected, as provided in the policy, to receive an annuity over a 9-year period. The parties have stipulated that the expected return on the contract is $ 27,661. Pursuant to his election, petitioner received payments of $ 1,696 and $ 1,020 during 1989. He did not report any portion of these payments as gross income on his 1989 joint income tax return. Petitioner contends that he is not required to include any of the payments he received in gross income until he has fully recovered his basis in the life insurance policy. Respondent maintains that petitioner may only exclude a portion of each payment as provided by section 72(b). We agree with respondent. Section 72(a) includes in gross income amounts received as an annuity. However, section 72(b) excludes that portion of each payment that bears the same ratio as the investment in the contract bears to the expected return under the contract. This ratio results in the exclusion of the taxpayer's investment in the 423 contract, pro rata, over the entire proceeds of the annuity. Under section 72(b), petitioner may exclude a portion of each payment he receives. Since petitioner's basis in the contract was $ 18,516 ($ 39,126 less $ 20,610) and the expected return is $ 27,661, we hold that petitioner may exclude 66.94% of the amounts he received from Prudential under this contract. 2Petitioner's argument that he may exclude all of his payments until such time as he has recovered his investment is not well taken. When the questioned payments are received after the annuity starting date, this method is applicable only when an annuity contract424 is completely redeemed in 1 taxable year. See sec. 72(e); sec 1.72-11(d), Income Tax Regs. Finally, petitioner contends that, to compute the exclusion ratio under section 72(b), we must include the cash surrender value of the life insurance contract in determining his "investment in the contract". As stated previously, the "investment in the contract" is the aggregate amount of premiums or other consideration paid for the contract, less the aggregate amount received under the contract, to the extent such amount was excluded from gross income. Sec. 72(c)(1). We find nothing in the Code that would allow petitioner to include or substitute "cash surrender value" for his "investment in the contract". Sec. 72(b). Foreign Tax CreditPetitioner contends that he is entitled to a foreign tax credit for alleged "federal" taxes withheld by New York State. Section 901 allows a credit for certain taxes paid to foreign countries or possessions of the United States. Petitioner has not presented any evidence that he actually paid taxes to any foreign country or possession. Accordingly, petitioner is not entitled to a foreign tax credit. Validity of the Internal Revenue Code425 Finally, petitioner challenges the validity of the Internal Revenue Code. However, the constitutionality of the income tax laws under the 16th Amendment was sustained in Brushaber v. Union Pac. R.R. Co., 240 U.S. 1">240 U.S. 1 (1916); see McCoy v. Commissioner, 76 T.C. 1027">76 T.C. 1027, 1029-1030 (1981), affd. 696 F.2d 1234">696 F.2d 1234 (9th Cir. 1983). Based on the foregoing, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩1. Petitioner reported this amount as $ 353 of dividends and $ 3 of interest.↩2. Prudential issued a Form W-2P showing that the taxable portion of each payment was $ 899 and $ 541, respectively. The record does not contain an explanation of how these amounts were computed. In any event, our holding is based upon the amounts stipulated by the parties. The taxable amount computed from the use of this ratio is less than the amount reported to respondent by Prudential.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625259/	TOM (FAYETTE T.) MOORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moore v. CommissionerDocket No. 18273.United States Board of Tax Appeals19 B.T.A. 140; 1930 BTA LEXIS 2457; February 28, 1930, Promulgated 2457 1. An amount paid by the petitioner for services of an architect in preparing plans for a project which was not carried out held to be deductible as a loss in the year in which the project was abandoned. 2. The respondent's action in refusing to allow deductions from gross income on account of alleged losses, sustained. 3. The petitioner executed under seal an instrument giving to his wife, his mother and his sister, 85 per cent of certain shares of corporate stock then owned by him, but reserved to himself the right to act as the agent of his wife, his mother and his sister in the management or subsequent sale of said stock. The instrument was executed in quadruplicate and was delivered to the persons named. The stock mentioned in the instrument could not be delivered to the donees at that time because of certain voting-trust agreements. The stock was subsequently sold. Held that the instrument operated to convey to the petitioner's wife, his mother, and his sister an 85 per cent interest in said stock and that upon the subsequent sale thereof only 15 per cent of the proceeds of the sale belonged to, and constituted income to the petitioner. W. T. Peake,2458 Esq., and W. C. Sullivan, Esq., for the petitioner. Eugene Meacham, Esq., and C. E. Lowery, Esq., for the respondent. MARQUETTE 141 This is a proceeding for the redetermination of deficiencies in income taxes asserted by the respondent in the following amounts: For the year 1919$3,272.01For the year 1920108,501.33For the year 19214,505.34The errors alleged in the petition are that the respondent: (1) Increased the income and tax of the petitioner for the years 1919 and 1921 although the petitioner's returns disclosed not less than his true net income for each of said years. (2) Included, in gross income for 1920, $150,000, representing alleged profit on sale of certain stocks, only 15 per cent of which, it is alleged, was owned by the petitioner at the time of sale. (3) Disallowed as a deduction from gross income in 1920, $162,500 representing loss incurred in the sale of certain capital assets. At the hearing the pleadings were amended and raised additional issues, namely: (4) Whether profit to the petitioner in 1920 from sale of stock of a theatre company should be reduced by the amount of advances2459 by the petitioner to the company in prior years. (5) Whether the petitioner, for the year 1920, may deduct $4,000 architect's fees paid by him in 1920 for plans for a project which was abandoned later in that year. (6) Whether the petitioner, for the year 1921, may deduct $4,800 architect's fees paid by him in 1919 for plans for a project which was abandoned in 1921. FINDINGS OF FACT. The petitioner is an individual residing in the District of Columbia. In 1906 he and his father started a moving picture film business. At first the petitioner gave only his time to the business, his father furnishing the capital. Later, the petitioner and his wife each contributed some money to the enterprise. The petitioner's father died in 1918, leaving no will. Most of the decedent's estate consisted of his interest in the business. In 1916 the petitioner acquired 1,350 shares of the capital stock of the First National Exhibitors Circuit, Inc., of New York. In 1917 the Rialto Theatre Co. was incorporated by the petitioner, who transferred to that company his 1,350 shares of First National Exhibitors stock. Shares of stock of the Rialto Theatre Co. were issued to the petitioner's2460 wife, to his mother, and to his sister. These shares were subsequently surrendered to the petitioner, who also reacquired the 1,350 shares of First National Exhibitors stock. 142 On November 7, 1917, the petitioner entered into an agreement, under seal, with J. A. Muehleisen, Tucker K. Sands, and Fred S. Swindell, the pertinent provisions of which are as follows: WHEREAS the parties hereto have agreed upon matters and things hereunto set forth: Now, THEREFORE, in consideration of the mutual covenants hereinafter contained, and the sum of One Dollar (1.00) each to the other in hand paid, it is hereby covenanted and agreed as follows: I. The said Tom Moore, party of the first part, will assign, transfer and convey unto the Metropolitan Theatres Corporation of Washington, D.C., a corporation incorporated under the laws of the State of Delaware, the following described property: (a) Certain real estate located in Square numbered 405 in the City of Washington being all of the real estate title to which now is held by the Rialto Theatre Corporation; (b) The entire capital stock of the Casino Theatre Company, a corporation organized under the laws of the State of Virginia, 2461 said company being the company now operating a theatre known as the Garden Theatre, Washington, D.C.; and (c) The entire capital stock of the Orpheum Theatre Company, a corporation organized under the laws of the District of Columbia, said company being the company now operating the theatre known as the Strand Theatre in Washington, D.C. * * II. The party of the first part shall by such conveyances as are essential or necessary assign, transfer, and convey all of the right, title, and interest in and to the stock and franchise in the First National Exhibitors Exchange, Incorporated, held and owned by him, to the sole use and benefit of the said Metropolitan Theatres Corporation of Washington, D.C. III. The said parties of the second part hereby agree that there shall be issued to the said party of the first part in consideration for the transfer of said property, fully paid and nonassessable, the entire capital stock of the aforesaid Metropolitan Theatres Corporation of Washington, D.C., said capital stock amounting to the sum of One Million Dollars ($1,000,000) preferred and One Million Dollars ($1,000,000) common. IV. The said parties of the second part hereby agree2462 to refund to the said Tom Moore a part of the moneys heretofore advanced by him in the purchase of the Rialto Theatre site, to the extent of the sum of One Hundred Thirty-seven Thousand Five Hundred ($137,500) dollars, as follows: The sum of Fifty Thousand ($50,000) Dollars in cash upon the execution and delivery of this agreement; and the sum of Fifty Thousand ($50,000) Dollars within forty-five days thereafter; and the balance of Thirty-seven Thousand Five Hundred ($37,500) Dollars within sixty days thereafter; and in consideration thereof and of other good and valuable considerations as more particularly set forth in the covenants and agreements on the part of the parties of the second part to be performed as specified herein; the said party of the first part hereby covenants and agrees to immediately assign, transfer, and deliver to the said parties of the second part forty-nine per cent (49%) of the aforesaid preferred and common capital stock of the Metropolitan Theatres Corporation, of Washington, D.C. * * X. The parties of the second part further agree to refund to the party of the first part the amount advanced by him on account of the first National Exhibitors 143 2463 Exchange, a note of the said Metropolitan Theatre Corporation to be delivered to said party of the first part therefor. At that time the stock which the petitioner agreed to sell had a fair value of $300,000, and its acquisition had cost the petitioner $300,000. This agreement was carried out only in part. The land on which the Rialto Theatre was built and the Orpheum Theatre Co. stock were transferred to the Metropolitan Theatres Corporation, the entire capital stock of which was issued to the petitioner. He also received in cash the $137,500 mentioned in the agreement, but never received from the Metropolitan Corporation its promissory note, the amount of which was to have been $162,500. This amount has never been paid to the petitioner and he did not turn over the capital stock of the Casino Theatre Co. However, the operation of the Strand Theatre (which was owned by the Orpheum Co.) and of the Garden Theatre (which was owned by the Casino Co.) was turned over to the Metropolitan Corporation. The name of the latter company was later changed to Moore's Theatres Corporation. In May, 1919, Moore's Theatres Corporation transferred to the petitioner all of its interest in2464 and to the Garden and Strand Theatres, the stock of the Orpheum Theatre Co., and the stock of the First National Exhibitors Circuit. Early in 1920 the First National Exhibitors Circuit, Inc., was reorganized, the name was changed to Associated First National Pictures, Inc., and the stockholders of the old company became stockholders in the new company. In accordance with a uniform plan, the petitioner organized the "Associated First National Pictures of Washington, D.C." and received all of its capital stock, 1,350 shares, in exchange for his 1,350 shares of stock in the Associated First National Pictures, Inc. On or about the 27th day of July, 1920, the petitioner executed the following: ASSIGNMENT OF INTEREST WHEREAS, I, Tom Moore, of the City of Washington, District of Columbia, am about to organize a corporation known as the Associated First National Pictures, of Washington, D.C., Incorporated, in which corporation, according to the proposed plan of formation, all of the capital stock will be issued to me and deposited by me with the Corporation Trust Company of New York as trustee, I will retain only the equitable interest therein represented by trust certificates and2465 will be required to deposit said trust certificates with the Associated First National Pictures, Incorporated, of New York as collateral security for certain agreements I am about to sign; and WHEREAS, I have promised and agreed in consideration of my natural love and, affection toward certain of my immediate family that I would give them certain portions of my stock in said corporation, which, however, it is impossible 144 for me to deliver to them because of the arrangement made for the depositing of the stock and trust certificates as aforesaid; and WHEREAS, I desire to carry out and perform fully the spirit of my undertaking; NOW, THEREFORE, THIS AGREEMENT WITNESSETH that for and in consideration of the natural love and affection toward those hereinafter named and the further sum of One Dollar ( $1) to me in hand paid, I do hereby give, assign, transfer and convey to my wife, Nettie Irene Moore, 50 per cent shares of stock in aforesaid Associated First National Pictures of Washington, D.C., Incorporated, and to my Mother, Ida B. Moore, 25 per cent shares of stock of said corporation, and to my sister, Ida B. O'Neill, 10 per cent shares of stock of said Corporation; 2466 BEING COVENANTED AND AGREED that proportionate share of any dividends received or proceeds realized from the sale of said stock shall as to the proportion thereof hereby given and granted to the above-named persons shall be and remain the sole and exclusive property of the said persons absolutely, reserving to myself only the right and authority to act as their agent in the management or sale of said stock and receiving for their benefit any dividends therefrom or proceeds derived from the sale thereof. IN WITNESS WHEREOF I have hereunto set my hand and seal and acknowledged the foregoing instrument as my act and deed. (Signed) TOM MOORE (Seal). The foregoing instrument was executed in quadruplicate and was delivered to each of the persons named therein. Because all of said stock was to be deposited in trust, none of it was delivered to the petitioner's mother, wife, or sister. On or about August 3, 1920, the petitioner sold all of the said 1,350 shares of First National Pictures stock to one Williams for a consideration of $150,000. The petitioner has not yet made any final settlement with his mother, wife, or sister of their proportionate shares under the above2467 assignment of interest. Beginning on August 7, 1920, the petitioner sent his personal checks to his mother weekly for about four years. The aggregate amount of those checks is $7,035. He has also paid $1,897.58 for a new roof for his mother's house. To his sister mentioned in the assignment of interest he sent his personal checks for about two years, beginning August 7, 1920, in the aggregate amount of $3,135. In addition he paid some rentals for her. On December 21, 1920, a bill in equity was filed in the Supreme Court of the District of Columbia by Charles Selden, Jr., and Milton Baer, against Moore's Theatres Corporation and Fayette T. Moore, the latter defendant being the present petitioner. The allegations of the bill which are material to this proceeding are as follows: The plaintiffs respectfully represent as follows: 1. That they are citizens of the United States residing in the District of Columbia and file this suit in their own behalf and for the benefit of other persons or stockholders similarly situated. 145 2. That the plaintiff, Moore's Theatres Corporation, is a corporation organized under the laws of the State of Delaware but conducting business2468 solely within the District of Columbia, and having its principal office and place of business therein as hereinafter more particularly set forth; the defendant, Fayette T. Moore, otherwise known as Tom Moore, is a citizen of the United States and a resident of the District of Columbia and is sued in his own individual right as will more fully appear hereafter. 3. That the plaintiff, Charles Selden, Jr., is the owner of Certificate No. 103 for 100 shares of the common stock of the Defendant, Moore's Theatres Corporation, of the par value of $10,000, the said certificate having been duly issued fully paid to one Tucker K. Sands, by the said corporation on the day of November, 1917, and Thereafter, to-wit; on the 15th day of March, 1918, duly assigned and delivered by said Tucker K. Sands for value received to one B. Frank Fuller and thereafter, to-wit, on or about the 10th day of November, 1919, assigned and delivered by said B. Frank Fuller to the plaintiff, Charles Selden, Jr., for a valuable consideration; a photographic copy of said certificate with the assignments endorsed thereon is hereto attached, marked "Plaintiff's Exhibit A" and made a part of this bill of complaint. 2469 4. That the plaintiff, Milton Baer, is the owner of Certificate No. 102 for one hundred shares of the common stock of the defendant corporation, Moore's Theatres Corporation, of the par value of $10,000.00, the said certificate having been duly issued, fully paid, to the said Tucker K. Sands by the said corporation on the day of November, 1917, and thereafter, to-wit, one the 15th day of March, 1918, assigned and delivered by the said Tucker K. Sands to the said B. Frank Fuller for valuable consideration, and thereafter, to-wit, on or about the 11th day of February, 1919, assigned and delivered by the said B. Frank Fuller to the plaintiff, Milton Baer, for a valuable consideration; a photographic copy of said certificate with the assignments endorsed thereon, is hereto attached marked "Plaintiff's Exhibit B", and made a part of this bill of complaint. Plaintiff's Exhibits A and B are prayed to be read and taken as a part hereof. 5. That your plaintiffs heretofore presented said certificates as assigned to the president and other proper officers of defendant corporation requesting and demanding that the same be transferred to their respective names on the books of the said corporation, 2470 but the president and other proper officers of said corporation have failed, refused and still refuse to transfer the same. * * 14. In or about the month of July, 1920, the First National Exhibitors Circuit, Inc., having been theretofore reorganized as to the Associated First National Pictures, Inc., and the defendant Moore having surrendered his stock and franchise in the former company for an equal proportionate amount of stock and similar franchise in the latter company, said defendant Moore sold and transferred his entire interest in said stock and franchise and completely divested himself of the power to control the exhibition of First National Pictures for a sum of money which plaintiffs are informed and believe and therefore aver was $150,000.00, with the result that said pictures are now controlled by persons who are competitors of the defendant corporation and are no longer available to the Rialto Theatre, as provided in the agreement and contract mentioned above. 15. Said defendant Moore has converted to his own use moneys of the defendant corporation by paying bills and expenses which were properly chargeable to himself personally or to other corporations in2471 which he was interested, and by other means which can only be ascertained by an examination and audit of the defendant corporation's books; that he has loaned moneys to the defendant corporation for which he has charged and received large bonuses, and he has 146 otherwise conducted the business of said corporation in such manner as to divert its legitimate profits and its assets to his personal use and benefit. 16. But after receiving the said $150,000, from the sale of the Association First National Pictures, Inc., as aforesaid, and after having received large sums of money from the various manipulations of the funds of the defendant corporations, as hereinabove set forth, the defendant Moore used approximately $75,000 of the funds so received by him for the purchase of an overdue mortgage upon the real estate hereinabove described, upon which the said Rialto Theatre is located, that said second mortgage was recorded in Liber 4267 folio 347, of the land records of the District of Columbia and is a trust nominally to American Security and Trust Company, a corporation trustees to secure Will I. Lanning, a note of $75,000 dated on or about the 10th day of November, 1919, 2472 and maturing November 9, 1920, that at the maturity of said note the said Moore used $75,000 of the funds which rightfully belonged to the defendant corporation for the purpose of nominally purchasing the said mortgage which has been transferred to him personally or to some other person acting for him, and is now held by him or by such other person for him. The plaintiffs aver that the payment of the said sum of $75,000 is substantially a satisfaction of said mortgage and that the said Moore rightfully holds the same for the benefit of said corporation, and that the same should be delivered up and cancelled. * * Thereafter, on May 11, 1922, the court entered a decree in the above-mentioned suit, the material portion of which is as follows: 2. It appearing to the Court that the deed of trust note for Seventy-five Thousand dollars ($75,000) dated November 10, 1919, executed by Moore's Theatres Corporation to the order of William L. Lanning, has, since the trial and submission of this cause, been cancelled and the deed of trust securing same recorded among the Land Records of the District of Columbia in Liber No. 4267 at folio 347, has been released by the American Security2473 & Trust Company, Trustee, the division made by the defendant, Fayette T. Moore, of the One Hundred Fifty Thousand dollars ($150,000) received from the First National Exhibitor Circuit, Inc., as referred to in the evidence herein is hereby approved. It is further ordered that said defendants be and they are hereby required to enter upon the books of account of the said corporation the receipt by the said corporation of the sum of Seventy-five Thousand dollars ($75,000), said entry to be made as of November 9, 1920, and that a further entry be made upon the books of account of the said corporation showing that the said deed of trust note was paid with said sum on that date and subsequently cancelled. * * The court also gave judgment against the said Fayette T. Moore in favor of the plaintiffs for the use of Moore's Theatres Corporation in the amount of $12,346.15. In April, 1920, an agreement was executed, the pertinent portions of which read as follows: WASHINGTON, D.C., Apr. 13, 1920.Received of Walter W. Hall, the sum of Five Thousand ($5,000) Dollars in cash, in part payment of the hereinafter described property at the price and upon the terms hereinafter stated, 2474 to-wit; 147 The business known as the Strand Theatre, situated on the east side of Ninth Street, N.W. and north of D Street, including the good-will, interest, leases, signs, scenery, curtains, draperies, ticket machines, licenses, screens, projection machines, lights, electric sign, furniture, movable fixtures, and all other personal property not hereinabove specifically mentioned now in and upon the said Strand Theatre property, or which may be in anywise belonging to the seller and forming part of its Strand Theatre business and assets. Terms of Sale: Price Fifty four thousand, Five hundred ($54,500) Dollars cash now paid, receipt of which is hereby acknowledged by the seller; Five thousand ($5,000) Dollars within thirty (30) days from the date of this receipt, and Forty four thousand, Five hundred ($44,500) Dollars on or before June 26, 1920, possession to be given June 26, 1920, and any and all lease or leases of said premises to be then assigned to the named, or to a corporation to be formed by the purchaser. The present lease on the property at $16,000 per annum rent expiring February 15, 1924, shall be legally transferred to the purchaser, or to the corporation2475 he shall have formed, or to assign, or cause to be assigned, to the purchaser and such parties as he may name, all of the stock of the Moore's Orpheum Theatre Company, a corporation formed under the laws of the District of Columbia, and the lessee of said property, which stock is now either owned or controlled by Fayette T. Moore; and in such case the said Fayette T. Moore, in consideration of the premises, and the further sum of one dollar, agrees with the purchaser to hold him harmless, and any corporation he may form as his assignee, against any and all debts and claims against said Moore's Orpheum Theatre Company that may be in force or effect against it up to the 27th day of June, 1920. * * The seller guarantees and warrants that he has the right to convey the property hereby sold and that there are no debts, claims, liens, or other incumbrances against the property sold. This agreement binds the heirs, executors, administrators, successors and assigns of both the seller and the purchaser. This agreement is an agreement of purchase and not an option, and each party agrees to carry out the agreements on his part made in duplicate. (Signed) MOORE'S ORPHEUM THEATRE2476 CO. BY TOM MOORE, President, Seller.I hereby approve and ratify the above sale upon the terms stated and agree to carry it out. (Signed) WALTER W. HALL, Purchaser.This agreement was carried out and the purchase price of $54,500 was placed by the petitioner in his personal account. In 1914 the petitioner personally paid bills incurred by or on account of the Strand Theatre in the aggregate amount of $23,000. Some years later, but prior to the time of the sale of Hall, the petitioner personally paid out $25,000 more on account of alterations and remodeling of the theatre. 148 In 1919 the petitioner paid $4,800 to an architect for the preparation of plans for a theatre to be known as the Parkway, but the project was abandoned in 1921, and the building was not erected. In June of 1920 the petitioner paid $4,000 to an architect for preparing plans for another theatre, but this project was abandoned in the fall of 1920. Following an audit, the respondent determined that the petitioner had realized a profit amounting to $205,000 in 1920 from the sale of his stock of First National Pictures, Inc., and of the Orpheum Theatre Co. No deduction2477 was allowed for the $4,000 paid to the architect in that year. For the year 1921, no deduction was allowed for the $4,800 paid to the architect in 1919 in connection with the project which was abandoned in 1921. Thereafter, the petitioner filed a protest against the deficiencies asserted by the respondent. In that protest the petitioner claimed, for the first time, a deduction of $162,500 as a loss sustained in 1920. This loss was claimed on the ground that the Metropolitan Theatres Corporation had failed to give to the petitioner a note for that amount, as called for by the agreement of November 7, 1917. This was disallowed by the respondent, following a conference in the respondent's office. OPINION. MARQUETTE: With reference to the deficiency asserted by the respondent against the petitioner for the year 1919, no evidence was offered. The presumption that the deficiency was correctly asserted places upon the petitioner the burden of overcoming that presumption by competent evidence. That burden has not been sustained in this instance, and we therefore approve the respondent's determination as to the year 1919. The same is true as to the deficiency asserted for2478 the year 1921, with this exception: At the hearing the pleadings were so amended as to raise an issue respecting the petitioner's right to a deduction, from gross income, of $4,800 paid out in 1919 on a project which was abandoned in 1921. This amount was paid to an architect for his services in preparing plans for a new theatre which the petitioner then intended to build. The building was not erected and in 1921 the petitioner abandoned the project. Section 214(a)(4) of the Revenue Act of 1921 provides that in computing net income there shall be allowed as deductions: (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business. The amount thus expended for architect's services was an investment in a business enterprise, and became lost to the petitioner 149 when that enterprise was abandoned. This Board has held that amounts so invested are allowable as deductions for losses in the year in which the enterprise is finally abandoned. See, ; 2479 . In our opinion the petitioner should be allowed the deduction of $4,800 for loss sustained in 1921. For the year 1920 a like condition appears. The petitioner expended $4,000 for architect's services in preparing plans for a new theatre which was not built, and the entire project was abandoned during the same year. The amount so expended should be allowed to the petitioner as a deduction for loss sustained in 1920. Three more questions are presented respecting the petitioner's income for 1920. The first is whether the total amount of $150,000 paid to the petitioner for 1,350 shares of First National Pictures stock should be included in petitioner's gross income. The petitioner contends that, by reason of the decree of the Supreme Court of the District of Columbia as set forth in our findings of fact, only $75,000 of the sale price of the First National Pictures stock is chargeable to him; and he further contends that by reason of his assignment of interest in and to 85 per cent of the same corporate stock he can be taxed only on 15 per cent of such $75,000. We are of opinion that the petitioner's contention on this2480 point should be sustained. It appears from the pleadings in the case above mentioned that the plaintiffs, minority stockholders of Moore's Theatres Corporation, claimed that the defendant, Fayette T. Moore, the petitioner herein, had wrongfully secured from the Moore's Theatres Corporation the shares of stock in question and had converted to his own use money of the corporation; that he had sold said shares of stock for $150,000 and from such money, and the money of the corporation he had wrongfully converted to his own use, had expended $75,000 in purchasing a note and deed of trust that had been executed by Moore's Theatres Corporation to one Lanning, and that he held said note and deed of trust for the benefit of the corporation. The plaintiffs prayed that the defendant Fayette T. Moore be enjoined from foreclosing, or causing to be foreclosed, the said deed of trust securing said note and for an accounting between Fayette T. Moore and Moore's Theatres Corporation. The court decree recites that during the pendency of the case the defendant Fayette T. Moore canceled said note and deed of trust and the court approved "the division made by the defendant Fayette T. Moore of the One2481 Hundred and Fifty Thousand ($150,000) Dollars received from the First National Exhibitor Circuit, Inc.," and ordered that entries be made on the corporation's books to show that the amount of $75,000 had been paid to it as of November 9, 1920, 150 and that said amount had been used for the payment of the trust note. The court also gave judgment against the defendant Fayette T. Moore for the additional amount of $12,346.15. We are constrained to hold that the effect of said judgment was that as between Fayette T. Moore and Moore's Theatres Corporation, Moore was entitled to only one-half of the proceeds of the sale of the stock mentioned, and that he should be required to account only for that amount. With reference to the effect to be given to the "Assignment of Interest" in and to 85 per cent of the First National Pictures stock owned by the petitioner, we are of opinion that the petitioner intended to convey, and that by the instrument did convey, to his wife, his mother, and his sister, 85 per cent of his interest in and to the stock mentioned herein, reserving to himself, however, the right to act as the agent for his wife, his mother and his sister in the management2482 or subsequent sale of the stock. We are of opinion that the instrument effected the result for which it was intended and that the petitioner thereby divested himself of ownership of 85 per cent of his interest in the stock in question, and that upon the subsequent sale of the stock only 15 per cent of the proceeds, that is, 15 per cent of $75,000, belonged to him. The next question is whether the petitioner sustained a loss amounting to $162,500 in 1920. In November, 1917, this petitioner executed an agreement whereby he was to transfer to the Metropolitan Theatres Corporation certain real estate, and certain corporate stocks in three separate companies. In return he was to receive all the capital stock of the Metropolitan Corporation, $137,500 in cash, and the Metropolitan Corporation's promissory note for an amount not specified in dollars but which other evidence shows to have been $162,500. The corporate stocks which the petitioner thus agreed to sell were worth $300,000 and had cost him that amount. The agreement was signed and sealed both by the petitioner and the other parties thereto. The petitioner transferred the land and part of the corporate stock, and received2483 $137,500 in cash and all the capital stock of the Metropolitan Theatres Corporation. He did not receive the latter company's note for $162,500 and for that reason he did not transfer some of the corporate stock called for by the agreement. He has never received either the note or the money which it was to represent. It is now claimed that the petitioner's right to collect the $162,500 became barred by the statute of limitations in 1920 and that he therefore suffered a deductible loss in that year. The instrument relied upon by the petitioner was executed in the District of Columbia and was there to be carried out. Section 1265 of the Code of Laws of the District of Columbia provides, among 151 other things, that: "No action shall be brought * * * on any * * * bond or single bill, covenant, or other instrument under seal after twelve years after the accruing of the cause of action thereon." It would seem apparent, therefore, that the petitioner's right of action against the Metropolitan Corporation did not become barred in 1920, three years after the earliest date when such right of action could possibly have accrued. In addition to that, it appears that in 1919 the2484 Metropolitan Corporation returned to this petitioner the corporate stocks which he had transferred to it in November, 1917. The evidence gives no indication that the petitioner returned to the Metropolitan Corporation any part of the $137,500 which it had paid him in 1917 as part consideration for the corporate stocks. The petitioner thus possessed, in 1919, all the corporate stocks which he testifies were worth $300,000 and he also had $137,500 received in partial payment for those stocks. We fail to see wherein he suffered any loss in 1920; and his claim for allowance of a deduction of $162,500 from his gross income for that year on account of such alleged loss should be denied. As to the final question for our consideration, it appears that in 1920 the business, leases, furniture, etc., of the Strand Theatre were sold by the Orpheum Theatre Co. for $54,500, and the petitioner also transferred to the buyer all the Orpheum Co.'s stock. It alsp appears that he had in prior years advanced monies in behalf of the Orpheum Theatre Co. in the aggregate amount of $48,000. The petitioner testified at the hearing that of this total only $5,700 had been repaid to him, leaving $42,3002485 still unpaid at the time he sold his stock in the company. He contends that he is entitled to deduct this $42,300 from the amount he received, $54,500, and that he is properly taxable only upon the difference, amounting to $12,200. The respondent has determined that the entire amount of $54,500 should be taxed as profit. The cost of the stock, to the petitioner, is not shown. Neither is there any evidence as to the cost of the furnishings, etc., of the Strand Theatre. The evidence respecting a debt due the petitioner from the Orpheum Theatre Co. consists entirely of statements made by the petitioner himself, and those statements are conflicting. In 1920, at or about the time of the sale, the petitioner, as president of the Orpheum Co., made a writeen guaranty that "there are no debts, claims, liens, or other incumbrances, against the property sold," and that the Orpheum Co. had the right to convey the property sold. At the hearing of this proceeding he testified that when the property was sold in 1920 the company owed him $42,300. The petitioner did not ask any deduction from his gross income on account of this 152 alleged debt in his tax return for 1920. In our2486 opinion the evidence produced is not sufficient to overcome the determination of the respondent that the entire amount of $54,500 should be treated as profit. Reviewed by the Board. Judgment will be entered under Rule 50.SMITH, STERNHAGEN, VAN, FOSSAN, and BLACK dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625260/	WILLIAMSON & RAUERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Williamson & Rauers Co. v. CommissionerDocket No. 11292.United States Board of Tax Appeals12 B.T.A. 476; 1928 BTA LEXIS 3521; June 8, 1928, Promulgated 3521 The petitioner held to be a personal service corporation for the fiscal year ended August 31, 1920. T. J. O'Brien, Jr., Esq., for the petitioner. Harold Allen, Esq., for the respondent. SMITH 476 This is a proceeding for the redetermination of a deficiency in income tax for the year ended August 31, 1920, in the amount of 477 $2,128.15. The question in issue is whether the petitioner was a personal service corporation for the fiscal year in question. FINDINGS OF FACT. The petitioner is a Georgia corporation, in process of liquidation, with its principal office in Savannah. It was incorporated in 1915 and was the continuation under corporate form of a partnership composed of W. W. Williamson and J. J. Rauers which existed from 1901 to 1915. When the petitioner was incorporated in 1915 an agreement was entered into by the stockholders, Williamson and Reuers, that an equal division of the profits of the corporation would be made notwithstanding the unequal holdings of stock, which were Williamson 150 shares (30 per cent) and Rauers 350 shares (70 per cent). This agreement provided that the equal division of profits would3522 cease upon the discontinuance of the active service to the corporation of either of the stockholders. The negotiation, sale or pledge of their stock by either stockholder was restricted. For the capital stock of $50,000, Williamson and Rauers turned over to the corporation the following: 71 shares Propeller Tow Boat Co., at 90$6,3904 bonds Chattahoochee & Gulf Railroad Co., at 10004,00025 shares Southwestern R.R. Co., at 1032,57518 shares American Woolen Co., at 901,620100 shares Bibb Mfg. Co. common, at 10010,000Stevedore tools1,000Office furniture600Cash in banks23,815Total50,000The stock ownership of the petitioner did not change until June 7, 1920, when each of the stockholders sold to Robert Perrin 20 per cent of their holdings; Williamson sold to Perrin 30 shares and Rauers sold to Perrin 70 shares. When the sale of stock was made to Perrin a supplemental agreement was entered into modifying the original agreement to the extent that Perrin was to receive 20 per cent of the profits and the balance of the profits were to be divided equally between Williamson and Rauers. The business of petitioner consisted in acting3523 as agent for steamship companies and owners in the solicitation of freights and in the management of vessels. The compensation for these services consisted of commissions received from the owners for services in furnishing cargo; brokerage on freights secured and placed with other 478 agents; and fees paid by the United States Shipping Board for the management of vessels. The management of Shipping Board vessels consisted, in addition to supplying cargo, in the paying off of the crews, provisioning, repairs and other duties of agency. The compensation of the petitioner was received by making deductions from freights collected for the accounts of the owners of the vessels. The net amount of freights after deduction of petitioner's commission was remitted to the owner, except in the case of Shipping Board vessels, where in some instances the petitioner's compensation was paid direct to the petitioner by special voucher from the Shipping Board officers in Washington, D.C.The petitioner did not assume or accept any responsibility for the collection of freights due owners except in so far as properly to account to owners for such amounts as were collected; and petitioner3524 was not responsible in any way for losses on uncollectible accounts. The income of petitioner for the fiscal year 1920 was as follows: Commissions, brokerage, and management fees$103,934.97Tarpaulin hire35.00103,969.97Commissions paid5,116.82Net commissions, etc98,853.15Interest received833.93Dividends4,686.86Profit on sale 71 shares stock, Propeller Tow Boat Co710.00Total income105,083.94Of petitioner's total income almost 95 per cent represented commissions, brokerage and management fees. All but $35 of the balance of the income represented interest, dividends, and profits on stocks and bonds, the ownership of which was merely incidental to petitioner's business. The petitioner did not require the use of any capital in its business. It did not buy or sell any commodities for its own account and did not carry inventories of any nature. It did not charter any vessels during the fiscal year 1920. The Chatham Stevedoring Co. was incorporated under the laws of the State of Georgia in October, 1919. The capital stock was owned individually by Williamson, Rauers, and Perrin. The petitioner owned no stock in this corporation. 3525 Acting as agent for the steamship owners the petitioner employed the Chatham Stevedoring Co. to attend to the stevedoring of vessels for which it was agent and for these services paid them the full tariff rate as fixed by the Savannah Maritime Association. Petitioner received no commissions, 479 income or profits of any nature from the Chatham Stevedoring Co. during its fiscal year 1920. The petitioner's capital stock was $50,000 and its surplus and undivided profits $5,855.47. This entire amount was invested in stocks and bonds, the ownership of which was not in any way necessary to petitioner's business but was merely incident thereto. All of petitioner's stockholders were regularly engaged in the active conduct of the affairs of the corporation. Petitioner's income consisted principally of commissions on freights on cargoes obtained by direct solicitation by petitioner's stockholders at the Savannah Cotton Exchange and by personal connections and to a smaller extent to management fees on Shipping Board vessels for which it also obtained cargoes and received commissions on the amount of freights. The petitioner employed seven persons for a part of the year ended3526 August 31, 1920, in connection with the management of Shipping Board vessels. The total salaries and wages paid to these individuals for the fiscal year was $5,560.83. Petitioner also employed six other individuals in clerical capacities and paid them a total for the year of $10,166.42. It also employed J. T. Reid and furnished him desk room in London and paid for his desk room, cables, and general business expenses. His duties consisted of interviewing owners of vessels in connection with the consigning of them to the petitioner. It paid as "London Office Expense" for the fiscal year $7,513.34. It paid to its stockholding officers as salaries the following amounts: Robert Perrin$12,050.20J. J. Rauers15,000.00W. W. Williamson15,000.00Total42,050.20Its net profit for the year, after the deduction of all expenses including salaries to stockholding officers, as shown by its books of account was $27,860.97. Its balance sheet at September 1, 1919, showed as follows: ASSETSAccounts receivable$15,537.99Cash and in bank6,483.01Investments:Third Liberty loan$3,000.00Other bonds2,000.00Stock - Domestic corporations45,855.0050,855.00Loans to officers6,000.00Office furniture928.2779,804.273527 LIABILITIESAccounts payable:Miscellaneous$2,517.08To officers21,431.7223,948.80Capital stock - Common50,000.00Surplus and undivided profits5,855.4779,804.27480 Its books showed investments in stocks and bonds at September 1, 1919, and August 31, 1920, as follows: Sept. 1, 1919Aug. 31, 1920Bonds:2 bonds Chatta. & Gulf R.R$2,000.00$2,000.003 bonds 4th Liberty loan3,000.003,000.00$5,000.00$5,000.0071 shs. Propeller Tow Boat Co6,390.00Sold.25 shs. Sou. Western R.R2,575.002,575.0018 shs. Amer. Woolen Mills1,620.001,620.00149 shs. Bibb Mfg. Co. common19,370.0019,370.00149 shs. Bibb Mfg. Co. common (stock div.)14,900.0014,900.005 shs. Sou. Atl. Maritime Corp500.00500.005 shs. Maritime Corp500.00500.0010 shs. S.A.M.C. common1.00200 shs. Atlantic Towing Co. (pchd. July 29, 1920)20,000.0045,855.0059,466.0050,855.0064,466.00The cost of the above stocks and bonds was $24,035 at August 31, 1919, and $37,646 at August 31, 1920. OPINION. SMITH: Petitioner claims that3528 it was a personal service corporation for the fiscal year ended August 31, 1920. Section 200 of the Revenue Act of 1918 provides in part: The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. The record of this action shows that the petitioner meets all the requirements of the above definition of a personal service corporation, unless it be that capital was a material income-producing factor. The total income for the year from commissions, brokerage, and management fees, including $35 for tarpaulin hire, was $103,969.97 and3529 the commissions paid in earning such income were $5,116.82. The 481 gross income for the year was $105,083.94. Only $6,230.79 of this amount is ascribable to the use of capital. Four thousand six hundred and eighty-six dollars and eighty-six cents of the amount was received as dividends on the stock of domestic corporations, which is deductible from gross income in ascertaining the net taxable income of the petitioner. It is furthermore to be noted that investments of a corporation in the shares of stock of domestic corporations constitute inadmissible assets only a portion of which can be included in invested capital. See section 326(c) of the Revenue act of 1918. The only part of the net income of the corporation liable to income tax ascribable to the use of capital is the item of interest received, $833.93, and profit on the sale of 71 shares Propeller Tow Boat Co. stock, $710. The sum of these two amounts constitutes only a negligible part of the total income of the corporation. We are therefore of the opinion that capital was not a material income-producing factor of the petitioner for the taxable year. Cf. 3530 . Judgment of no deficiency will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625262/	APPEAL OF GUYTON & CUMFER MANUFACTURING CO.Guyton & Cumfer Mfg. Co. v. CommissionerDocket No. 2853.United States Board of Tax Appeals2 B.T.A. 312; 1925 BTA LEXIS 2456; July 11, 1925, Decided Submitted May 13, 1925. 2456 Jonathan B. Cook, C.P.A., for the taxpayer. J. Harry Byrne, Esq., for the Commissioner. 312 Before JAMES, LITTLETON, SMITH, and TRUSSELL. This is an appeal from a determination of a deficiency in income and profits taxes for the year 1920 in the amount of $3,566.83. The petition alleges errors, as follows: 1. Reduction of invested capital by amount of prorated portion of 1919 income taxes. 2. Reduction of invested capital by the elimination of an item of $15,241.58. 3. Addition to taxable income of alleged excessive depreciation in the amount of $2,965.56. 4. Disallowance of a deduction growing out of the demolition of part of a building in connection with the construction of new building in the amount of $5,050. At the hearing the matter of adjustment of invested capital by deduction of Federal taxes was waived. FINDINGS OF FACT. Prior to April 11, 1919, the paid-in capital of the taxpayer company, for which stock had been issued, was $30,000, and there had accumulated upon the company's books an amount of earnings and profits which had been credited as accounts due to officers in the total of $15,241.58. This amount had not2457 been withdrawn by the officers and was used in the business of the company as a part of its working capital. 313 On April 11, 1919, the board of directors of the taxpayer corporation held a meeting, the record of which is as follows: At a special meeting of the Board of Directors of the Guyton and Cumfer Manufacturing Company, held at their offices 4451 Filmore Street, under date of April 11, 1919, all directors being present and all officers of the company being directors, it was unanimously decided that the amount herein and after mentioned shall be set up as permanent working capital of the company and shall be withdrawn only in the form of stock dividends which are to be declared when the stock of the company is increased to take care of the earnings and surplus which have accrued since its organization. C. E. Guyton, $7,351.22; H. A. Cumfer, $4,758.00; O. D. McFarland, $2,132.36. The directors also place themselves on record as trying to maintain a dividend rate of 16 per cent on their present $30,000 capital and to that end declare their 8 per cent dividend to cover the extra 8 per cent for the year 1919 and to be paid at the discretion of the secretary, the2458 directors desiring to make the salaries of all officers as herein and after stated to apply for the year 1919, H. A. Cumfer, president, $95.00 per week; O. D. McFarland, vice-president, $70.00 per week; C. E. Guyton, secretary and treasurer, $95.00 per week. After a general discussion of business the meeting was adjourned. (Signed) H. A. Cumfer, O. D. McFarland and C. E. Guyton. Thereafter, and on or about February 19, 1920, the capital stock of the company was increased to the amount of $75,000 by the proper issuance of a stock dividend in the amount of the above-mentioned $15,241.58, and such other undivided earnings as then existed, together with additional cash paid in, sufficient to make up the total increase of capital stock from $30,000 to $75,000. During the year 1920 the taxpayer made certain alterations in its buildings, by demolishing a part of the buildings theretofore occupied and used, and building in place thereof larger buildings better adapted to the uses of the taxpayer's business. The new construction cost between $65,000 and $70,000, and the cost of the labor for wrecking the portion of the older building demolished, as then estimated by the architect, 2459 was $5,050. In making his computation of the deficiency in tax the Commissioner allowed as a deduction for exhaustion, wear and tear of properties, depreciation as follows: Three per cent on buildings, valued at $31,672.57, for 12 months. Three per cent on buildings, valued at $79,887.16, for one-fifth of a year. Ten per cent on machinery and equipment, valued at $56,037.02, for 12 months. Ten per cent on additions to machinery and equipment, valued at $20,436.25, for two-fifths of a year. Ten per cent on office furniture and fixtures, valued at $10,021.68, for 12 months. *314 The total amount of depreciation thus computed by the Commissioner was $2,965.56, less than the depreciation deduction claimed by the taxpayer in its returen. The Commissioner found that the taxpayer's capital stock and surplus as of January 1, 1920, was $89,110.98, and that the average invested capital for the year was $89,461.55. DECISION. The determination of the Commissioner is approved.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625252/	BUENA VISTA LAND & DEVELOPMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Buena Vista Land & Dev. Co. v. CommissionerDocket No. 2025.United States Board of Tax Appeals13 B.T.A. 895; 1928 BTA LEXIS 3156; October 10, 1928, Promulgated 1928 BTA LEXIS 3156">3156 In the absence of evidence from which the value on March 1, 1913, of petitioner's "right, title and interest, if any" in and to certain selections of land could be determined, respondent is affirmed. Shirley C. Ward, Esq., and Chandler P. Ward, Esq., for the petitioner. LeRoy Hight, Esq., and John D. Foley, Esq., for the respondent. VAN FOSSAN 13 B.T.A. 895">895 This proceeding is for a redetermination of a deficiency in income and profits tax for the year 1921 asserted by the Commissioner in the amount of $76,019.64. The petitioner alleges that the respondent erred in holding that the right, title and interest, termed an "equitable title," of the petitioner 13 B.T.A. 895">896 to certain lands in township 32 south, range 24 east, Mount Diablo Meridian, in the State of California, had no fair market value on March 1, 1913, and, consequently, in assessing an income and profits tax on $174,259.43, the net amount received in stock by the petitioner in 1921 from the sale of its title. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of California, with its principal office at 138 South Main Street, Los Angeles. 1928 BTA LEXIS 3156">3157 By an Act of Congress of March 3, 1953 (10 Stat. 248) every sixteenth and thirty-sixth section of public lands, with immaterial exceptions, in the State of California, was granted to the State in aid of the common schools. In order to secure exclusive control of all lands within the boundaries of its National Forest Reserves, by Act of Congress of February 28, 1891, chapter 348 (20 Stat. 796; Comp. Stats., secs. 4860, 4861, amending secs. 2275 and 2276, Rev. Stats.), the United States made to the several States an offer of exchange, under which it granted to the State certain lands to be selected by it in lieu or exchange for school lands, known as "base lands," which had been granted to the State under the said Act of Congress of March 3, 1853, but which theretofore had been, or thereafter might be, included in Forest Reserves. In January, 1900, the lands in township 32 south, range 24 east, Mount Diablo Meridian, in the State of California, were alleged to be mineral in character and valuable for production of petroleum and were, in effect, withdrawn from agricultural appropriation. On April 5, 1904, the said lands were restored to agricultural entry. In 1905 the Stanislaus, 1928 BTA LEXIS 3156">3158 Inyo, and Shasta National Forest Reserves were created in California by the United States Government. Within those reserves were some of the sixteenth and thirty-sixth sections covered by the Act of Congress of 1853. In October and November, 1906, the State of California made application to select 23 other parcels of land in lieu of certain sixteenth and thirty-sixth sections granted to it and did so select the north half and southeast quarter of section 2; sections 4 and 12; the south half of section 14; and section 20, township 32 south, range 24 east, Mount Diablo Base Meridian, in Kern County, California. In June and August, 1907, the State made four additional selections relating to sections 6 and 8 from public lands. All selections, 27 in number, aggregating 4,020 acres, so made were unappropriated surveyed public lands of the United States, listed as agricultural in character and comprised the lands under consideration in this proceeding. 13 B.T.A. 895">897 The State of California complied with all the requirements established by the United States governing the selection of such lieu lands and the perfecting of its equitable title thereto. On various dates from October 13, 1906, to1928 BTA LEXIS 3156">3159 August 19, 1907, inclusive, the State filed in the United States Land Office at Visalia, Calif., the 27 selections above mentioned. Twenty-three of them (Visalia serial numbers 01917, 01918, 01919, 01920, 01921, 01922, 01910, 01911, 01912, 01913, 01914, 01915, 01916, 01596, 01597, 01598, 01599, 01923, 01924, 0402, 0403, 0404, 0405) made in October and November, 1906, and covering the north half and southeast quarter of section 2, the south half of section 14, and all of sections 4, 12, and 20, followed a uniform course of procedure, chronologically as follows: 1. The State paid to the United States the required fees. 2. The State filed its selection lists. 3. It filed an appointment of its Land Agent to examine the selections made and to execute an affidavit as to their mineral or non-mineral character. 4. The Land Agent filed his affidavit stating that "the land is essentially non-mineral in character." 5. The Register and Receiver of the United States Land Office at Visalia, California, posted the notices of the State's selection in his own office and filed proof thereof. 6. The State filed the appointment of another Land Agent to post notices upon the land1928 BTA LEXIS 3156">3160 selected and to make proof of continuous posting. 7. Such posting was made and proof thereof filed. 8. The required publication in a local newspaper was made and proof thereof filed. 9. A Special Agent of the General Land Office was appointed to visit and inspect each separate subdivision of the lands selected. 10. Such Special Agent of the General Land Office filed his report that the land was non-mineral in character. 11. The State filed certificates of the County Recorders of the several Counties in which the base lands were situated showing that such base lands were unencumbered and had not been transferred by the State. 12. In each of these twenty-three selections, after the period of posting and publication had elapsed without any adverse claim having been filed or any objection to the non-mineral character having been made, the Register and Receiver forwarded to the Commissioner of the General Land Office the records and papers therein, stating that according to the records of the Register and Receiver the lands selected were "subject to disposition thereby." 13. In April, May and June, 1907, the Commissioner of the General Land Office adjudicated1928 BTA LEXIS 3156">3161 the facts contained in the records as outlined above and returned the papers to the Register and Receiver "for allowance." 14. The Register and Receiver accepted the selections, endorsed his acceptance on the selection lists and notified the State of his action, as well as of the "allowance" thereof by the Commissioner of the General Land Office. 15. Within a month after such notification and in all cases prior to July, 1907, the State sold and conveyed its title to the selected lands to the predecessors in interest of the petitioner and received the purchase price thereof from them. The regulations of the General Land Office governing the selection and disposition of lieu lands as above set forth were adopted in 13 B.T.A. 895">898 March, 1903, but modified in April, 1907. Under the modified regulations the State of California made four selections in sections 6 and 8 of the said township (Visalia serial numbers 01907, 01908, 01909, and 01602) in June and August, 1907. The modified procedure was identical with the original, except that after the completion of steps 1 to 11, inclusive, mentioned in the preceding paragraph, the Register and Receiver did not forward the record to1928 BTA LEXIS 3156">3162 the Commissioner of the General Land Office, but certified on the selection list that it was "allowed and approved." The above four selections made in sections 6 and 8 were thus allowed and approved by the Register and Receiver in August and September, 1907. He then transmitted the record to the Commissioner of the General Land Office and notified the State accordingly. In all of the 27 selections the State accurately and carefully complied with all the requirements of the Government relating thereto and only the formal "approval" of the Secretary of the Interior remained to be entered in order to accomplish the vesting of the legal title to the lands in question in the State of California. This written approval of the Secretary, known as the "clear-list" constitutes the muniment of the complete legal title in state lieu selections cases. In the stipulation of facts entered into between the petitioner and the respondent appears the following: * * It is stipulated by the respondent that the State of California fully complied with any and all statutes, and any and all rules and regulations of the Land Office then existing with respect to relinquishments of base lands, so far1928 BTA LEXIS 3156">3163 as, if at all, such relinquishment was authorized by said statutes, rules or regulations. The first discovery of oil, gas or other hydrocarbons in township 32 south, range 24 east, Mount Diablo Meridian in the State of California, was made on June 16, 1909, when gas was discovered on section 10 in the said township. On February 1, 1910, oil was discovered on the said section 10 and later other discoveries of oil and gas on the said section 10 and also on the lands in question resulted in there being at least 17 producing wells on the lands involved in this proceeding at March 1, 1913. On September 8, 1908, the Commissioner of the General Land Office recommended to the Secretary of the Interior the temporary withdrawal from agricultural entry of a large acreage of public lands, including all of township 32 south, range 24 east, Mount Diablo Meridian, pending their examination and classification by the United States Geological Survey as to their oil-bearing character. On September 21, 1908, the General Land Office notified the Register and Receiver at Visalia of such temporary withdrawal. On June 22, 1909, the Commissioner of the General Land Office reaffirmed the temporary1928 BTA LEXIS 3156">3164 withdrawal, except where it was shown that lands in 13 B.T.A. 895">899 fact did not contain oil. Upon the recommendation of the United States Geological Survey a large acreage, including the said township 32, was withdrawn by the President of the United States from all forms of entry and made to constitute Petroleum Reserve No. 2, subject to valid existing rights. The Secretary of the Interior retained the selection records relating to the lands under consideration and took no action thereon from 1907 to February 27, 1913. On October 17, 1911, the attorney for the State of California filed a petition praying that the Secretary proceed to exercise his supervisory powers in order to complete the formal steps required to convert the equitable title of the State - and hence of its transferee, the petitioner - into a legal title. On February 27, 1913, the Secretary of the Interior, by Samuel Adams, his first assistant, completed the review of the record, found it regular but held that the selections mentioned therein were subject to rejection unless the lands covered thereby were specifically shown to be nonmineral in character and that, in effect, the Executive withdrawal of and the discovery1928 BTA LEXIS 3156">3165 of oil in the selected land constituted ground for rejection and that the selections should be canceled. On April 23, 1913, a motion for rehearing was denied by the Assistant Secretary of the Interior. During October, November, and December, 1908, placer mineral claims were filed by one Fox, B. M. Howe, and O. O. McReynolds upon the lands selected by the petitioner's transferors and such claims were transferred later to the Honolulu Consolidated Oil Co. That company had acquired the legal title to section 10 and the southwest quarter of section 2 in the said township 32 and discovered gas thereon on June 16, 1909, and oil on February 1, 1910. Later it drilled for and obtained oil and gas from the lands involved in this proceeding. On November 20, 1917, the United States brought suit against the Honolulu Consolidated Oil Co. in the District Court of the United States for the Southern District of California, Northern Division, to quiet title to certain lands, including those involved in this proceeding, upon which the Honolulu Company had filed mineral claims and from which large amounts of oil and gas were being produced. A receiver was appointed on November 23, 1918, and continued1928 BTA LEXIS 3156">3166 in control of the property until about December 1, 1921, during which period he accumulated over $5,500,000 from the sale of oil and gas derived therefrom. In September, 1920, the petitioner intervened in that action and prayed that a decision therein be withheld until the Supreme Court of the United States should render its decision in the case of State of Wyoming & Ridgely v.United States (Docket No. 763), then pending before it and involving quite similar, if not parallel, facts. Previously, on July 11, 1919, the petitioner 13 B.T.A. 895">900 and the State of California had applied to the Secretary of the Interior to reinstate the selections canceled by him under his above mentioned order of February 27, 1913. On February 27, 1920, the Secretary refused to reinstate such selections and on that date the petitioner brought suit in the Supreme Court of the District of Columbia to compel him to do so. This action in the Supreme Court of the District of Columbia also was held in abeyance pending the decision of the United States Supreme Court in the case of State of Wyoming & Ridgely v.United States. That decision was rendered on 1928 BTA LEXIS 3156">3167 March 28, 1921 (; ), and held, in effect, that the condition at the time of perfecting lieu selections and not the conditions at the time the Secretary was called upon to approve the selections, determined the validity of and the right to the selections made by the State, and that the State's rights under such selections were to be determined without regard to any withdrawal subsequent to such selections so perfected. On April 7, 1921, Secretary of the Interior Fall wrote to Mr. F. W. Clements, attorney for the petitioners, as follows: Mr. F. W. CLEMENTS, Wilkins Building, Washington, D.C.DEAR MR. CLEMENTS: In the matter of California and Buena Vista Land and Development Co. v. The Secretary, Supreme Court, D.C. Eq. 37,626, involving certain State lieu selection lists heretofore rejected for reasons set forth in ), and in which injunction is sought to restrain cancellation or rejection of the selections as well as disposition of the lands to other parties, you are advised that the same has been considered in connection with the recent decision of the Supreme1928 BTA LEXIS 3156">3168 Court in Wyoming et al. v.United States, commonly known as the Ridgely case. I am, of course, convinced that the action of the Department in rejecting the selections on the ground that the withdrawal intervening between selection and presentation for approval bars favorable consideration is no longer tenable under the Ridgely decision, and that the selections must now be considered or their merits. Consequently, if pursuant to the usual practice in these matters you will discontinue the proceeding in the court and so notify counsel for the Department, the selections will be reinstated and readjudicated without unnecessary delay, in the light of the Ridgely decision. This, perhaps I need not add, will necessarily suspend consideration of or action on any pending application for a lease under the provisions of the act of February 25, 1920. Respectfully, (Signed) ALBERT B. FALL, Secretary.On April 30, 1921, the Secretary of the Interior ordered that the selections be reinstated and that the hearing be held before the Register and Receiver of the United States Land Office at Visalia, California, as ordered on March 31, 1910. In his order appears this statement: 1928 BTA LEXIS 3156">3169 "The issue of fact being the character of land as known or13 B.T.A. 895">901 believed to be mineral or non-mineral as of the time of the perfection of the several selections therein." (Italics ours.) On June 28, 1921, the petitioner entered into a contract with the Honolulu Consolidated Oil Co., whereby petitioner relinquished its right, title and interest in and to the lands in controversy to the State of California, and that State in turn relinquished to the United States, in consideration of the fransfer to the petitioner of 50,000 shares of the capital stock of the Honolulu Consolidated Oil Co., with the provision that 50,000 additional shares would be transferred if the Honolulu Company should secure patents to the said lands or 25,000 additional shares if the Honolulu Company should secure leases thereto. The leases were obtained and consequently the entire amount received by the petitioner was 75,000 shares of the Honolulu Company at the market value of $5 per share, or $375,000, of which amount, after settling with various interests, petitioner retained in its own right stock valued at $180,000. From this amount there were expenses stipulated to be deductible of $5,740.57, 1928 BTA LEXIS 3156">3170 leaving a net amount of $174,259.43. On November 18, 1921, in a lengthy decision () Secretary of the Interior Fall disposed of the claims of the Honolulu Consolidated Oil Co. upon its request that the Secretary vacate a former order dated June 17, 1920, denying patents to the said company. The decision contained the following important statements: At the time of the filing of this petition, there were three claimants to the lands above described, viz: The Buena Vista Land and Development Company, the United States, and this petitioner. The Buena Vista Company was pressing claims here, and in the United States District Court for the Southern District of California, and in the Supreme Court of the District of Columbia, based on certain selections of the lands in question made by the state of California in October, 1906, and June and August, 1907, under sections 2275 and 2276, Revised Statutes, and the act of February 28, 1891 (26 Stats. 796), and in each of the three forums mentioned was asserting that, by virtue of the said state selections, the lands in question belonged to it as by complete equitable title and had ceased to be public lands of the United1928 BTA LEXIS 3156">3171 States as early as September, 1909. This Department had held against this contention February 27, 1913, in State of California et al. (), in a ruling to the effect that conditions existing at the time when the Secretary of the Interior was called upon to approve the selections controlled the right to the selections and that inasmuch as it appeared on that date that the lands were mineral in character (oil having been discovered thereon and the lands having been withdrawn on September 27, 1906, and December 13, 1912,) for that reason the Secretary had no authority to approve the selections. This decision stood until March 28, 1921, when the Supreme Court of the United States in deciding the Ridgely case () held that conditions at the time of perfecting lieu selections, not conditions at the time of approval determine the right to the selections, and that the state's rights under such selections are to be determined without regard to any withdrawal subsequent to such perfected selections. Thus the Buena Vista decision of February 27, 1913, was nullified, and that 13 B.T.A. 895">902 company1928 BTA LEXIS 3156">3172 immediately became entitled, at the least, to have its claims considered on their merits. Accordingly, on April 30, 1921, the cases embracing these selections were remanded to the local land officers at Visalia with instructions to hold a hearing on the question of the character of the land as known or believed to be mineral or non-mineral as of the time of the perfecting of the several selections. But, relying upon the authority of the Ridgely case, and upon its suit then pending against the Secretary of the Interior and the Commissioner of the General Land Office in the Supreme Court of the District of Columbia (In Equity, No. 37,620), the Buena Vista Company, through its attorneys, effectually blocked the Visalia hearing until such time as a court decision could be had determining the jurisdiction of this Department under the Ridgely case. (Italics are the Secretary's.) After a review of the history of the Honolulu Company's efforts to acquire title to the lands and of the status of its case in the United States Court for the Southern District of California prior to its settlement agreement with the petitioner, the Secretary concluded as follows: Such, in brief, and with1928 BTA LEXIS 3156">3173 one exception to be presently noticed, is the history of this case prior to the date of the filing of the instant petition, and such also was substantially the posture of it on June 15 and 16, when the petition was argued and submitted. Recently, however, the Honolulu Company procured from the State of California and the Buena Vista Company waivers of their claims to all the lands involved herein, thus clearing the records in this Department and in the California and District of Columbia courts of litigation that threatened to be not only protracted but serious, and which, if the Buena Vista Company had prevailed in this Department on the facts or had brought itself within the decision of the Ridgely case in either the California or District of Columbia Court, would not only have resulted in depriving the Honolulu Company of its claims, but, as well, in conclusively divesting the United States of all its right, title and interest in and to the lands in question and in and to the oil and gas therein. But these dangers and delays having been averted and obviated by the procuring of the waivers aforesaid, the main case upon the petition of the Honolulu Company may now be considered1928 BTA LEXIS 3156">3174 and decided. OPINION. VAN FOSSAN: On June 28, 1921, petitioner, in consideration of the transfer to it by Honolulu Consolidated Oil Co. of 75,000 shares of its capital stock of a then fair market value of $375,000, relinquished to the State of California its "right, title and interest, if any," to certain oil-bearing lands located in that State. Petitioner's ultimate share in this sum was $180,000. The respondent taxed this entire sum as income. Petitioner contends that its "right, title and interest, if any," was worth at least as much on March 1, 1913, as at the date of relinquishment, and that accordingly, there was no gain. The problem thus confronting us is the fair market value as of March 1, 1913, of whatever right, title and interest, if any, petitioner had on said date. We do not conceive it necessary in solving this 13 B.T.A. 895">903 problem to determine the precise character and legal attributes of this interest. The claim or right that was relinquished in 1921 was not defined or described other than in the most general terms it was possible to employ. It was not then asserted unquivocally that the petitioner had any real right, title or interest. The words "if1928 BTA LEXIS 3156">3175 any" were used to obviate the necessity of such assertion. Nor do we deem it necessary to determine the motives that led the Honolulu Consolidated Oil Co. to pay $375,000 for the relinquishment of petitioner's claims. Whether this payment represented merely the nuisance value of the claims or evidenced a belief that they were acquiring some tangible interest is not considered germane to this decision. The evidence does not establish the actuating reasons and to speculate is idle. Whatever it was that was relinquished was deemed by the parties then to be worth $375,000. Was it worth the same, or more, or less on March 1, 1913? On February 27, 1913 (two days before the basic valuation date), the Secretary of the Interior rendered a decision bearing directly on the rights of petitioner. In this decision the Secretary, after a full review of the petitioner's attempt to perfect the selections in question and the pertinent facts and court decisions, held: The Department is accordingly of opinion that the school indemnity selections here involved are subject to rejection unless the lands covered thereby are specifically shown to be nonmineral in character. The Buena Vista Company's1928 BTA LEXIS 3156">3176 contention that the Commissioner's letter of June 1, 1907, returning certain State indemnity school land lists "for allowance," constituted an approval of such selection is without merit. This contention is inconsistent with the present plea of the selectors for an immediate hearing with respect to these lands. * * In view of all the circumstances and by reason of the later executive withdrawals, the Department is of opinion that the orders for hearing issued in March, 1910, should not be revived or further pursued in regard to these proffered selections. Moreover, since the President has, on account of their mineral character, withdrawn these lands from disposition, it is evident that the Secretary has no authority to approve the selections and they must therefore be rejected. If the withdrawal shall be canceled the State May apply anew for the lands if it is so advised. However, counsel seem to admit that the lands are in fact mineral. The State selections involved will be canceled. This is without prejudice to the right in the State to submit such showing as to nonmineral character of the lands involved as a fact, as may warrant further investigation to the end that1928 BTA LEXIS 3156">3177 the existing classification may be set aside and recommendation, based thereon, made to the President to relieve the lands from the existing withdrawal. Such was the situation facing petitioner on March 1, 1913. The decision in , rendered in 1921 could not then be anticipated. There was scant 13 B.T.A. 895">904 basis for hope that the Secretary of the Interior, whose approval was necessary to perfect title to the selections, would reverse himself and reinstate the claims so disallowed. Indeed, on the basic date it would seem that petitioner's affairs were at extreme low tide. The chance of success, tested by all reasonable measures, had been reduced to a point where it appeared to be little if anything more than a gamble against very heavy odds. This is not to say that in law petitioner's claims were any less valid than in 1921. But that is not the test of fair market value. Market value and intrinsic value may or may not coincide. Many of the factors that affect market value may have little relation to intrinsic value. In forming a judgment of the 1913 market value we must limit our consideration to those1928 BTA LEXIS 3156">3178 facts then known or reasonably to be predicted. Subsequent facts are useful as confirmatory of the reasonableness of judgments previously formed but should not be used in making an original determination. Turning to 1921 we find a very different picture. The Supreme Court in the Ridgely case had held the Secretary to be in error; that the mineral or nonmineral character of the lands was to be determined as of the dates of the making of the selections, not the date of their approval; and that a State's rights are to be determined without regard to any subsequent withdrawals. Furthermore, the Secretary of the Interior had written a letter bowing to the mandate of the Supreme Court and offering, on condition of discontinuance by petitioner of a court action for injunction, to reinstate the selections and readjudicate the same in the light of the Ridgely case. On April 30, 1921, by order of the Secretary the selections were reinstated. Though petitioner complains that in order for hearing the Secretary laid down an impossible proposition, namely, that petitioner must show that at the time of the selections the lands were not known or believed to be mineral in character, 1928 BTA LEXIS 3156">3179 we can not escape the conviction that petitioner's chances of success in perfection of its selections would have appealed much more strongly to the average man on this date than on March 1, 1913. Nor do we believe it a fair assumption that in meeting the test so laid down it would have been impossible to have obtained honest opinions and judgments of qualified experts, a point on which petitioner places great stress. It was under these conditions that the sale in 1921 was made. Though petitioner contends that the price received was unfairly depressed by the "artificial test" imposed on petitioner by the Secretary, the record does not establish this contention as a fact and the sale for $375,000 furnishes us with our best measure of the fair market value in 1921. The strong logic of facts and surrounding circumstances demonstrates conclusively that the market value was 13 B.T.A. 895">905 much less in 1913. The Secretary's decision of February 27, 1913, must inevitably have depressed the market value at that date, while the decision in the Ridgely case and the subsequent reinstatement of the claims, however circumscribed, must have stimulated interest and increased their attractiveness1928 BTA LEXIS 3156">3180 to possible purchasers in 1921. For these and other reasons appearing in the testimony itself we can give little weight to the opinion of petitioner's witness, who placed a value of $450,000 on the claims as of March 1, 1913. This witness, failing to qualify as an expert, was permitted to express his opinion as an officer and stockholder of petitioner, but the facts and circumstances on the respective dates are so strongly to the contrary that they overcome any advantage that might accure to petitioner from this expression of opinion. If $375,000 represented the market value of petitioner's right, title and interest, if any, in 1921, and we have no evidence to the contrary, then their market value in 1913 must have been much less. This brings us to the crux of the matter. The record is insufficient to enable us to determine with any assurance of correctness the fair market value of petitioner's claims on March 1, 1913. The logic of fact and circumstance forbids us to adopt the value suggested by petitioner's witness. By the same process of reasoning we are convinced that the value in 1913 was much less than in 1921. The evidence is insufficient to indicate the amount of1928 BTA LEXIS 3156">*3181 this lesser value. We can not speculate; our conclusion must be based on facts to be found in the record. Where the record fails to furnish the facts from which we can construct a judgment as to the value we have no alternative but to hold that petitioner has failed in proof of his case. He has not proved the respondent to be in error. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625264/	Millard H. Hall and Mettie Burma Hall, Petitioners v. Commissioner of Internal Revenue, RespondentHall v. CommissionerDocket Nos. 1942-66, 1528-67United States Tax Court50 T.C. 186; 1968 U.S. Tax Ct. LEXIS 136; April 30, 1968, Filed 1968 U.S. Tax Ct. LEXIS 136">136 Decisions will be entered under Rule 50. 1. Held, a contract as manager of a Texas mutual assessment insurance company assigned to petitioner has no reasonably ascertainable useful life and therefore the amount paid for the assignment is not subject to depreciation or amortization.2. Held, further: The notice of deficiency issued by respondent is a valid notice. Respondent did not make a second inspection of petitioner's books of account for the year 1963 as a result of a telephone conversation between the office auditor who previously having made an office audit of petitioner's 1963 income tax return was handling a claim for refund for that year filed by petitioner and the appellate conferee in respondent's Dallas office who was handling a case involving petitioner's income tax liability for the year 1964. Claude R. Wilson, for the petitioners.Harold L. Cook, for the respondent. Scott, Judge. SCOTT 50 T.C. 186">186 Respondent determined deficiencies in petitioners' income tax for the years 1963 and 1964 in the amounts of $ 10,906.50 and $ 12,683.27, respectively.The issues for decision are:(1) Whether the cost to one of petitioners of acquiring a management contract with a mutual assessment life insurance 1968 U.S. Tax Ct. LEXIS 136">138 company is subject to depreciation or amortization and, if so, the period over which it may be amortized, and(2) Whether respondent made a second inspection of petitioners' books for the year 1963 and, if so, does that fact cause his determination of deficiency for that year to be invalid.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioners, husband and wife, resided at the time of filing the petitions herein, in Dallas, Tex. They filed their joint Federal income tax returns for the calendar years 1963 and 1964 with the district director of internal revenue at Dallas using the cash receipts and disbursements method of reporting income.Millard H. Hall (hereinafter referred to as petitioner) has been in the insurance business since 1930. Since 1943 or 1944 he has worked for Bankers Life and Loan Co. (hereinafter referred to as Bankers Life), a statewide mutual assessment life, health, and accident insurance company, organized and existing under the laws of the State of Texas and subject to the rules and regulations of the State Board of Insurance of the State of Texas.Bankers Life (formerly known as Bankers Life and Loan Association) is1968 U.S. Tax Ct. LEXIS 136">139 the successor of Aviators Benevolent Association, which was 50 T.C. 186">187 chartered in Texas on June 21, 1929, for a stated term of existence of 50 years, with the right to renew and extend the charter vested in the board of directors. The State of Texas has not chartered any mutual assessment insurance companies for over 20 years and the number of such charters outstanding has decreased during the years no new charters have been granted. There are about 30 statewide mutual assessment insurance companies now in existence in Texas. However, under the present laws of Texas and policies of the State Board of Insurance the charter of Bankers Life will be renewed if such renewal is sought by the directors.A mutual assessment insurance company is a nonprofit organization. Its members are the policyholders. The policyholders elect the board of directors which board is charged with the general supervision of the company. The constitution and bylaws of Bankers Life provide that the members may vote by proxy and that "Said proxy may designate the President or Secretary * * as proxy." Petitioner has been president of Bankers Life at least since 1963. The directors elect officers of the1968 U.S. Tax Ct. LEXIS 136">140 company and also select a manager of the company who directly manages the operations of the company. The manager may employ general agents for the sale of insurance.A mutual assessment insurance company divides its premium payments received into two funds, a mortuary fund and a general expense fund. Bankers Life operated during the years in issue under "Plan III," of the plans of premium division approved by the State Board of Insurance of the State of Texas. This plan requires that 60 percent of premium income be put into the mortuary fund and that 40 percent may be put into the general fund, except that 100 percent of first-year premiums may be put into the general fund. All claims, except first-year claims, are paid from the mortuary fund. All expenses and first-year claims are paid from the expense fund. The policyholders may, with the approval of the State Board of Insurance, be assessed to meet claims if the mortuary fund is insufficient.Petitioner entered into a general agency contract with D. C. Tabor and Bankers Life on August 14, 1945. D. C. Tabor was then president of Bankers Life and had a management contract with Bankers Life. Petitioner received the exclusive1968 U.S. Tax Ct. LEXIS 136">141 right to sell certain specified insurance policies and to hire and supervise agents for that purpose. The policies which petitioner was entitled to sell were listed by identifying numbers in the agency contract, but were not otherwise described. Petitioner agreed to maintain an office and equipment for the business of selling the specified policies of insurance for Bankers Life and to bear all expenses of such sales including agents' commissions. This contract provided in part with respect to commissions payable to petitioner:On all policies sold on either the annual, quarterly or monthly plan, through the Agency, Second Party [petitioner] shall be entitled to and shall receive Fifty 50 T.C. 186">188 (50%) per cent of that portion of premium or premiums not required by law to be put into the Mortuary Fund of First Party (2).The contract also contains a provision that in the event insurance was withdrawn by Bankers Life from the market "such shall not in any wise effect the amount or amounts due Second Party [petitioner] on renewals of outstanding policies." The last two paragraphs of this contract provided:XVII.It is agreed and understood that this contract is not an exclusive1968 U.S. Tax Ct. LEXIS 136">142 right for all life, health and accident and hospitalization policies but pertains to the aforementioned policies only, or, policies that are mutually agreed on by First Party (1) and Second Party.XVIII.It is further agreed by the parties hereto that this contract shall in nowise transfer or encumber the Charter of the Bankers Life & Loan Company, or any interest therein.Bankers Life entered into a management contract with D. E. Tabor on October 14, 1947. The contract contained the following provisions:(1) It is hereby agreed by and between all parties hereto that the said D. E. Tabor shall be the sole managing head and director of all the affairs of the Bankers Life & Loan Company for a period of years equal to the life of the Charter of the said Bankers Life & Loan Company. That the compensation for the said management of the said Company shall be all monies directed to the Expense Fund under the laws and regulations of the Department of Insurance of Texas.(2) It is further agreed that out of the said monies so collected by said Company and turned over to the said D. E. Tabor as his compensation, that the said D. E. Tabor is to pay all operating expenses of the said Company, 1968 U.S. Tax Ct. LEXIS 136">143 such as office rent, typists, stenographers, printing material, telephones, telephone bills and all other incidental bills and expenses in connection with said Company.On February 7, 1950, an agreement was entered into "between Mrs. D. C. Tabor, Bankers Life & Loan Company" and petitioner which provided in part:The BANKERS LIFE & LOAN COMPANY, herein referred to as Company, is a mutual assessment company licensed under Articles 4879-f and 5068-1, Revised Statutes of the State of Texas. MRS. D. C. TABOR, a widow, herein called TABOR, is President of said Company and has a General Agency or Manager's Contract with the Company which is referred to and made a part hereof. M. H. HALL, herein referred to as HALL, is an experienced insurance man and now has a General Agency Contract, dated August 14, 1945, with Tabor and the Company for the writing of specified types of insurance contracts, which said contract is here referred to for a description of the type of insurance included therein and excluded from this contract. Under the law and Insurance Regulations applicable to the Company, a certain portion of the premiums received by the Company are required to be placed in a Mortuary1968 U.S. Tax Ct. LEXIS 136">144 Fund, and the balance, herein referred to as the General Expense Fund, is allowed for expenses. This General Expense Fund differs from the first year's premium, according to the plans permitted by the Insurance Department to be selected by the Company. Thereafter, the amount of renewal premiums required to be placed in the 50 T.C. 186">189 Mortuary Fund is 60%, leaving 40% for expenses. Under Hall's Agency Contract, above referred to, he is entitled to a portion of the Expense Fund on policies written under the terms of said Agency Contract. All other General Expense Funds belong to Tabor and are herein referred to as Tabor's General Expense Fund. In the event of a change in the law, or regulations applicable, the General Expense Fund as herein used, shall be deemed to be that portion of the total premiums, which, under any applicable law, may be used for the payment of expenses. Renewal premiums as herein referred to, means all premiums received on any policy subsequent to the first policy year.TABOR and the COMPANY on the one hand, and HALL, on the other, have this day entered into the following contract and agreement, to wit:1. Tabor and the Company hereby employ Hall, and Hall1968 U.S. Tax Ct. LEXIS 136">145 hereby agrees to act, as Manager of the Company's business, including office management, the production of business, the inspection and underwriting of risks, the adjustment and settlement of claims, and the furnishing of all services necessary in the conduct of the business of the Company, except such as Hall is now obligated to perform under his Agency Contract aforesaid, and except such as must be personally performed by officers of the Company, and Tabor as the managing head and director of the affairs of the Company.2. This agreement, with respect to Hall's Compensation and the expenses the parties shall respectively bear, is divided into two parts: (A) With respect to the balance of the calendar year 1950, and (B) With respect to subsequent years:* * * (B) With respect to subsequent years:(1) Beginning January 1, 1951, Hall agrees to perform all of the services enumerated in Paragraph 1, and 2(A) (2) above, and to pay all expenses of every nature incident to the conduct of the Company's business, including all Home Office Expense, such as, but not limited to, office rental, equipment and furnishings, all necessary stationery, literature, postage, supplies of every nature1968 U.S. Tax Ct. LEXIS 136">146 whatsoever, all taxes of every nature, fees of examination by the Insurance Department, cost of all statutory bonds required, etc.(2) Beginning January 1, 1951, Hall shall be entitled to receive for all services to be rendered by him, and all expenses to be incurred in that connection, the amount remaining of Tabor's General Expense money after:(a) Paying to Tabor the first $ 1000.00 per month thereof, beginning February 1, 1951, and continuing thereafter on the first day of each month during the life of this contract;(b) Paying to Tabor an amount equal to 3% of the gross annual renewal premiums received from all business of the Company in excess of $ 150,000.00 and not in excess of $ 200,000.00, and 5% of the gross annual renewal premiums in excess of $ 200,000.00. The amounts payable under this Subdivision (b) shall be paid as soon as the amount payable can be determined.* * * 6. This contract may be terminated by Tabor or the Company, at any time after February 1, 1951, in the event the $ 1000.00 per month, herein agreed to be paid, is not paid to her within ten (10) days after the expiration of the month for which same is due, or for failure upon the part of Hall to faithfully1968 U.S. Tax Ct. LEXIS 136">147 perform the duties herein agreed to be performed in accordance with the statutes, regulations and rules of the Insurance Department applicable to said Company. In the event of such termination, Hall shall, nevertheless, be entitled to renewal commissions equal to one-half the expense portion of premiums on all insurance produced by him under the provision of this contract. 50 T.C. 186">190 If Hall quits the employment under this contract, or accepts employment in any capacity with another insurance company, he shall forfeit all rights to compensation under the provisions of this contract; but his right under his Agency Contract of August 14, 1945, shall be governed solely by the provisions thereof.7. This contract in nowise encumbers the Charter of the Company, impairs Tabor's rights in respect thereto, or gives Hall any proprietory interest of any nature in the Company, its Charter or assets. Hall shall do nothing to interfer [sic] with Tabor's succession in office as President of the Company, and any and all proxies mailed out by Hall or his assistants shall run in favor of Tabor or her nominees, and no other person. Hall's rights under the existing Agency Contract hereinabove referred1968 U.S. Tax Ct. LEXIS 136">148 to shall not be affected hereby.8. This Contract is personal to Hall, shall not be assigned by him, and shall terminate at his death. If it is terminated by Hall's death, his representatives shall be entitled to renewal commissions equal to one-half the expense portion of premiums on all insurance produced by him under the provisions of this Contract. This contract shall be binding upon, and inure to the benefit of, the parties, their heirs and legal representatives, and the successors and assigns of Tabor and the Company.On June 30, 1959, petitioner purchased the management contract. The agreement provided:That MRS. D. C. TABOR, herein called Tabor, agrees to sell and M. H. HALL, herein called HALL, agrees to purchase Tabor's Management Contract dated October 14, 1947 with BANKERS LIFE & LOAN COMPANY, a state-wide mutual life insurance company, for the price and on the terms and conditions following, to-wit:1. The price shall be $ 180,000, payable $ 5,000.00 cash, and the balance by one promissory note for the sum of $ 175,000.00, payable at the rate of $ 1,500.00 per month for 116 months and a final monthly installment of $ 1,000.00, with interest payable monthly on the unpaid1968 U.S. Tax Ct. LEXIS 136">149 balances at the rate of 2% per annum, the first installment being due and payable on August 1, 1959, and a like installment on the first day of each and every month thereafter until the full amount of principal and interest is paid. * * 3. Hall covenants and agrees that he will not within three (3) years from the effective date of completion of the sale, transfer or surrender said Management Contract to Bankers Life & Loan Company for cancellation, except as such cancellation may be a necessary step in the substitution of Hall for Tabor as Manager of the Company. * * 5. It is the intention of the parties that neither this agreement nor any instrument executed in performance hereof shall effect or be construed to effect any change in or invalidation of the said Hall's general agency contract dated August 14, 1945, except as heretofore amended by agreements in writing by the parties thereto.On June 30, 1959, petitioner executed a promissory note for $ 175,000 payable to Tabor in 116 monthly installments bearing 2-percent interest on the unpaid balance and Tabor assigned the management contract to petitioner by a document reading as follows:50 T.C. 186">191 That Mrs. D. C. Tabor, 1968 U.S. Tax Ct. LEXIS 136">150 for and in consideration of the sum of Ten and No/100 -- ($ 10.00) -- Dollars and other valuable consideration, the receipt of all of which is hereby acknowledged, has this day transferred and assigned, and does hereby transfer and assign to M. H. Hall that certain Management Contract between her and Bankers Life & Loan Company dated October 14, 1947, together with all rights, title and interest which she has by reason thereof, together with all rights, title and interest she has in and to the Charter of the said Bankers Life & Loan Company and everything pertaining to said Bankers Life & Loan Company now owned by her.Rule VIII of the rules governing statewide mutual assessment companies adopted by the State Board of Insurance of the State of Texas on November 19, 1960, provides in part as follows:A. The Board finds and declares that Mutual Assessment Companies, Local Mutual Aid Associations and Burial Associations shall operate in the following manner and under the following conditions: * * 3. The Board of Directors of the company shall maintain its control over the operations of such company and shall not divest itself of its duties and responsibilities to manage the affairs1968 U.S. Tax Ct. LEXIS 136">151 of such company for the benefit of the policyholders or members thereof.4. The Board of Directors of the company shall determine the amount of compensation to be paid to officers, directors, employees, agents, and managers, which compensation shall be reasonable and shall be only for personal services rendered and reimbursement for actual and necessary expenses incurred, and the Board of Directors shall also fix and determine the length of time such officers, directors, employees, agents and managers shall be so engaged and compensated.5. Any employment, general agency or general manager contract with the company shall have a reasonable cancellation provision whereby either the company or the employee, general agent, or general manager may cancel such contract for good cause.* * * B. A copy of every management contract, amendment thereto, or assignment thereof shall be filed with the Commissioner of Insurance. Copies of such contracts, amendments, or assignments as are now outstanding shall be filed by January 3, 1961, and all others shall be filed within ten days from the dates of their execution; or in the case of an assignment, within ten days from the date on which notice1968 U.S. Tax Ct. LEXIS 136">152 of assignment was received by the association or company.1. The term "management contract" refers to any agreement for the rendition of services to the company or association, except such contracts as are to be performed within one year from the making thereof.2. The Commissioner will neither approve nor disapprove such filed contracts, amendments, or assignments; but if he finds them to be contrary to law, he will take such action as he deems appropriate under the law.The State Board of Insurance of the State of Texas conducts examinations of each year's operations of each insurance company which operates in the State of Texas. The report of the examination of Bankers Life for the period from January 1, 1963, to December 31, 50 T.C. 186">192 1964, showed that the company had the following premium income for the years indicated:19631964Membership fees$ 8,456.06$ 4,435.10Other first-year premiums or assessments3,722.794,639.05Regular dues, premiums, or assessments, life3,636.153,827.10Regular dues, premiums, or assessments -- health andaccident318,018.73292,214.91Additional premiums collected as a result of rateincrease29,880.9739,646.63The 1968 U.S. Tax Ct. LEXIS 136">153 report contained the following comments:The business affairs of the Company are under the direct supervision of M. H. Hall in accordance with a management contract, dated October 27, [sic] 1947, between the Company and Mrs. D. C. Tabor which was subsequently assigned and transferred to M. H. Hall, under an assignment dated June 30, 1959. The contract provided that Mrs. Tabor was to be the sole managing head and director of all the affairs of the Company for a period of years equal to the life of the Company's charter. It was further provided under the contract that the management of the Company was to receive compensation for the management of all moneys directed to the Expense Fund, under the laws and regulations of the Department of Insurance of Texas, and that the management was to pay all operating expenses of the Company out of such compensation. The contract does not contain a cancellation provision.The assignment of the above-described contract to M. H. Hall covered all rights, title, and interest Mrs. Tabor had in and to the charter of the company and everything pertaining to said Company that was owned by her as of June 30, 1959.Under date of February 7, 1950, the Company1968 U.S. Tax Ct. LEXIS 136">154 entered into a general agency contract with M. H. Hall under which he was employed as manager of the Company's business, including office management, the production of business, the inspection and underwriting of risks, the settlement of claims, and all services necessary in the conduct of the business of the Company.The existing manager's contract and the general agency contract between the Company and M. H. Hall are approved and ratified by the members each year at the regular annual membership meetings.The following shows the amount of annual premium income on the books and records of Bankers Life on July 1, 1959, together with the amounts of this same business remaining on the books on the dates indicated and the percentages such amounts are of the July 1, 1959, amount:Annual premiumPercentageincomeremainingAs of --$ 360,000.00July 1, 1959$ 335,433.1593Dec. 31, 1959$ 289,323.7080Dec. 31, 1960$ 239,338.2066Dec. 31, 1961$ 209,692.2058Dec. 31, 1962$ 179,717.3050Dec. 31, 1963155,008.1543Dec. 31, 1964Bankers Life on its Federal income tax return for the calendar year 1963 reported total income of $ 364,590, which included premiums, 1968 U.S. Tax Ct. LEXIS 136">155 50 T.C. 186">193 other than first-year premiums and membership fees, of $ 321,655. On this return it reported expenses of $ 139,216, in addition to claims paid, and an operating loss of $ 26,380.23. Included in the expenses reported were commissions of $ 60,456.06, of which $ 52,000 was paid to petitioner.Bankers Life reported on its Federal income tax return for the calendar year 1964 total income of $ 345,638, which included premiums, other than first-year premiums and membership fees, of $ 296,042. On this return it reported expenses totaling $ 130,934, in addition to claims paid, and an operating loss of $ 9,361.76. The reported expenses included commissions totaling $ 43,685, of which $ 39,250 was paid to petitioner.Petitioner has been amortizing the $ 180,000, which he agreed on June 30, 1959, to pay to Tabor for assignment of the management contract on a 10-year useful life beginning with his income tax return for the calendar year 1960. In each of the years 1960, 1961, 1962, 1963, and 1964, petitioner deducted on his Federal income tax return $ 18,000 as amortization of this cost.In a statutory notice of deficiency dated April 5, 1966, respondent disallowed the $ 18,000 deduction1968 U.S. Tax Ct. LEXIS 136">156 for amortization claimed by petitioner on his Federal income tax return for the calendar year 1964. In the same notice of deficiency, respondent increased petitioner's income by an additional $ 10,792.41 to represent an increase in the general fund of Bankers Life, as reflected on the tax return of Bankers Life for 1964. Petitioner filed his petition in this Court on April 20, 1966, alleging that both of the adjustments made by respondent in the notice of deficiency mailed to him on April 5, 1966, were erroneous.Petitioner's tax return for the calendar year 1963 had been the subject of an office audit by the district director of internal revenue at Dallas and petitioner had received a notice dated September 16, 1965, that such return would be accepted as filed.Petitioner filed a claim for refund of Federal income tax for the calendar year 1963 on November 16, 1966, in the amount of $ 3,923.41, giving as the basis of the claim that the reserve for expenses (general fund) of Bankers Life had decreased $ 7,078.61 during 1963.Petitioner's attorney received a letter dated October 25, 1966, from an appellate conferee in respondent's Dallas office inviting him to a conference on November1968 U.S. Tax Ct. LEXIS 136">157 17, 1966, concerning petitioner's tax liability for the calendar year 1964. The letter requested him to bring information regarding petitioner's management contract with Bankers Life and the placement of funds in the general fund of Bankers Life. The conference was not held on November 17, 1966.By form letter dated February 2, 1967, respondent's representative requested petitioner to execute a consent to the extension of the statute 50 T.C. 186">194 of limitations for assessment of a deficiency in income tax for the calendar year 1963. By form letter dated February 23, 1967, respondent's representative requested petitioner to appear for a conference on March 1, 1967, with an office auditor regarding his income tax for the calendar year 1963 and to bring with him information relating to the "reserve for expenses ($ 7078.61)" and "Amortization Insurance franchise ($ 18,000)."Prior to petitioner's receipt of respondent's form letter dated February 23, 1967, a conference had been arranged for petitioner with an appellate conferee in the Dallas regional office of the Internal Revenue Service for March 8, 1967, regarding petitioner's income tax liability for the year 1964. The appellate 1968 U.S. Tax Ct. LEXIS 136">158 conferee with whom the conference of March 8, 1967, was to be held mailed a letter dated February 27, 1967, to petitioner's attorney in regard to petitioner's income tax liability for the year 1964 in which he stated:As you requested today, a conference has been scheduled in this case for 2 p.m. Wednesday, March 8, 1967.Appellate Conferee J. W. Wellington (RIverside 9-3109) has the other case you referred to and will be present at the conference. Arrangements have been made for Special Attorney Harold L. Cook to be present and, if possible, arrangements will be made for Special Attorney John Dierker's attendance.While you have shown some reluctance to submit the certified copy of the management contract involved in this case (and Appellate Conferee Joe Wellington is going to request the contract in his case), it seems that in the end it would be virtually impossible to recommend any acceptable disposition of this case without such document being a part of the record. So again I request that you present the management contracts involved in these cases at this conference.At the March 1, 1967, conference with the respondent's office auditor regarding petitioner's income tax liability1968 U.S. Tax Ct. LEXIS 136">159 for the year 1963, petitioner's attorney raised the question of a second examination of petitioner's return for the year 1963. The auditor informed petitioner's attorney that he had performed the original audit of petitioner's income tax return for 1963 for a specific item only and that the filing of petitioner's claim for refund resulted in that return being reassigned to him. The auditor further informed petitioner's attorney that in verifying the claim he saw the amortization item on the return and decided that this claimed deduction required an explanation. Petitioner's attorney informed the auditor of the case which was pending for the year 1964 and asked the auditor to do whatever processing was necessary to permit petitioner's income tax liability for the year 1963 to be considered with the case involving petitioner's income tax liability for the year 1964. The auditor did not receive nor examine any records or other information belonging to petitioner at the March 1, 1967, conference or at any later time.Either at the conference held March 8, 1967, or at some later conference, petitioner's attorney presented certain documents to respondent's 50 T.C. 186">195 appellate conferee1968 U.S. Tax Ct. LEXIS 136">160 assigned to the case involving petitioner's income tax liability for the year 1964 for his examination.After the March 1 meeting concerning petitioner's tax liability for the year 1963, the office auditor called respondent's appellate conferee who was handling the 1964 case and this conferee advised the office auditor to take a position on the amortization issue consistent with the treatment it had received for the year 1964 and to take an inconsistent position on the constructive income issue, that is, to disallow the claim for refund.On March 17, 1967, respondent issued a statutory notice of deficiency to petitioner for the calendar year 1963 disallowing petitioner's claimed amortization deduction of $ 18,000. A statement attached to this statutory notice informed petitioner that if he filed a petition with this Court, his claim for refund should be made a part of his petition but if he did not file a petition with this Court an official notice of disallowance of his claim for refund for the year 1963 would be issued.In his petition filed for the taxable year 1963 with this Court petitioner alleged that respondent's disallowance of his claimed amortization deduction of $ 18,0001968 U.S. Tax Ct. LEXIS 136">161 was in error and claimed a refund because of the failure to deduct in the year 1963 the decrease in the reserve for expenses of Bankers Life. The parties by agreement have now disposed of the issue with respect to the reserve for expenses for both the year 1963 and the year 1964. Petitioner still contends that the notice of deficiency sent to him by respondent for the year 1963 is not valid because respondent did not comply with the requirements of section 7605 (b) of the Internal Revenue Code of 1954 relating to second examinations of a taxpayer's records.OPINIONPetitioner takes the position that he purchased a business when he purchased the Bankers Life management contract from Tabor, relying on certain statements made by this Court, including statements made in R. B. Cowden, 34 T.C. 819">34 T.C. 819 (1960). Petitioner then states that when a composite price has been paid for all of the assets of a business, that price must be allocated among the assets of the purchased business. Petitioner contends that the only asset of the business which he purchased when he acquired the management contract of Bankers Life was the right to all the portion of the premiums1968 U.S. Tax Ct. LEXIS 136">162 paid on insurance previously sold which was retained in the expense fund by the manager. Petitioner contends that the portion of the premiums which he purchased is comparable to and should be considered as "insurance renewal commissions."Petitioner takes the further position that premium income from insurance on the books of Bankers Life on June 30, 1959, when he 50 T.C. 186">196 was assigned the management contract of Bankers Life by Tabor, will no longer be on the books after a 10-year period, and, therefore, the payment he has made for the "insurance renewal commissions" should be amortized over a 10-year useful life.If we accept petitioner's premise that when he was assigned the management contract of Bankers Life he acquired an insurance business distinct from his prior business as a general agent for Bankers Life, we do not agree that it follows that the amount petitioner paid for the assignment of this management contract was paid for "insurance renewal commissions" or that the rights which petitioner obtained upon the assignment to him of the management contract had any reasonably ascertainable useful life. None of the cases which have come to our attention involving the basis1968 U.S. Tax Ct. LEXIS 136">163 to a taxpayer of purchased "insurance renewal commissions" has involved the assignment of a contract comparable to the management contract of Bankers Life which petitioner in the instant case was assigned. The insurance renewal commissions cases such as H. B. Hill, 3 B.T.A. 761">3 B.T.A. 761 (1926); Lewis N. Cotlow, 22 T.C. 1019">22 T.C. 1019 (1954), affd. 228 F.2d 186 (C.A. 2, 1955); and Frances E. Latendresse, 26 T.C. 318">26 T.C. 318 (1956), affd. 243 F.2d 577 (C.A. 7, 1957), involved the assignment by a life insurance agent of his right to receive as a commission for a definite number of years a certain percentage of the renewal premiums paid by life insurance policyholders. In each of those cases the right to receive the renewal commissions would cease upon the expiration of the period of time over which the agent was entitled to receive such commissions. The problem in those cases was not whether the right to receive the renewal commissions had a reasonably ascertainable useful life, but the manner of the proration of the total purchase price over the known period of1968 U.S. Tax Ct. LEXIS 136">164 time during which the commissions on renewal premiums would be received.In 22 T.C. 1019">Lewis N. Cotlow, supra, there was also involved the question of whether the amount of commissions on renewal premiums in excess of the amount paid by the taxpayer there involved for the right to receive such commissions was capital gain or ordinary income. The taxpayer there was arguing that since his assignor received ordinary income and not capital gain on the amount paid him for the assignment of the renewal commissions the amount he received as renewal commission in excess of the allocable portion of the total payment for the assignment of the right to receive such commissions constituted capital gain. We held to the contrary.In the instant case, the rights petitioner obtained upon the assignment to him by Tabor of the management contract with Bankers Life were not rights to "insurance renewal commissions." The contract which was assigned to petitioner provided that Tabor should be the 50 T.C. 186">197 sole managing head and director of the affairs of Bankers Life for a period of years equal to the life of the charter of the company and that her compensation should be all money1968 U.S. Tax Ct. LEXIS 136">165 directed to the expense fund under the laws and regulations of the Department of Insurance of Texas and that she was to pay all expenses of Bankers Life. The expenses which Tabor was required to pay included amounts to be paid to petitioner in accordance with his agency contracts with Tabor and Bankers Life. Since Tabor's compensation was stated to be for managing the company, the logical interpretation of the contract is that at any time she or her assignee ceased the management of the company all rights under the contract to any portion of the receipts of the company ceased. In Parrish v. Washington National Insurance Co., 421 S.W.2d 117, 122 (Tex. 1967) the court stated with respect to commissions on renewal premiums:It is quite clear that the weight of authority is to the effect that an agent cannot recover commissions on renewal premiums (absent an agreement to that effect) following the termination of his agency. Appelman, Insurance Law and Practice, Vol. 16, p. 495, § 9005; Couch on Insurance 2d Vol. 4, p. 371, § 26:400, p. 376, § 26:403: Cunningham v. Cunningham, 183 S.W.2d 985 (Tex. Civ. App., 1944, no writ1968 U.S. Tax Ct. LEXIS 136">166 hist.); Allied Mutual Insurance Co. v. Roberson, 306 F.2d 130 (4th Cir., 1962); Christensen v. Prudential Insurance Company of America, 204 S.W.2d 459 (St. LouisCt. of App., Mo., 1947)."An insurance agent's right to renewal commissions must be derived from the contract itself; it is not a vested right." (Emphasis added.) Couch on Insurance 2d, Vol. 4, p. 372, § 26:400.There were provisions in the contracts of August 14, 1945, and February 7, 1950, which petitioner had with Tabor and Bankers Life for payment of commissions on renewal premiums to petitioner. These rights, however, petitioner had separate and apart from the purchase of the management contract from Tabor and were not acquired by him in connection with the purchase of that contract. United States v. Woolsey, 326 F.2d 287 (C.A. 5, 1963), involved the question of whether an amount received by a partnership upon the sale of its business resulted in ordinary income or capital gain. The court in that case concluded that the primary asset sold was the partnership's management contract with a mutual insurance company and that the1968 U.S. Tax Ct. LEXIS 136">167 consideration applicable to that asset should be treated as ordinary income. The small portion of the amount paid applicable to the operating records and goodwill and statewide charter of the mutual insurance company was held to constitute capital gain. The court described the management contract which was owned by the partnership, which contract was substantially the same as the contract which Tabor had with Bankers Life except that the term of the management contract there involved was for a period of 25 years. After setting forth the terms of the contract, the court stated that, "The partnership owned no right to any renewal commissions on any insurance, but both of 50 T.C. 186">198 the brothers owned rights to renewal commissions for insurance written by them individually. Such rights to renewal commissions were not sold."In United States v. Eidson, 310 F.2d 111 (C.A. 5, 1962), the court held that the sale of a management contract which was comparable to the contract assigned by Tabor to petitioner in the instant case resulted in ordinary income to the assignor. The court in so holding stated at page 114:It is, of course, not disputed here by1968 U.S. Tax Ct. LEXIS 136">168 the taxpayers that whatever net amount their contract would yield to them during the remaining life of the contract would be taxable to them as ordinary income. Therefore, if it be deemed, as we think it must, that the sum of $ 170,000, which they received for a transfer or assignment of their rights under the contract, represented their agreed amount as to the value of the contract to them, then the $ 170,000, in a very true sense, represented the present cash value of what would have otherwise been to them income received during the balance of the life of the contract. The fact that, as pointed out by the taxpayers, this income would not be received by the taxpayer unless they performed the services which the contract required of them, that is, actively managed the affairs of the insurance company in a manner that would produce a profit after all of the necessary expenditures, does not, it seems clear, affect the nature of this payment. It affects only the amount. That is, the fact that the taxpayers would have to spend their time and energies in performing services for which the compensation would be received merely affects the price at which they would be willing to assign1968 U.S. Tax Ct. LEXIS 136">169 or transfer the contract.Here Tabor had entered into agreements with petitioner under which petitioner was to perform most of the management services she was required to perform and to be compensated for performing under her management contract. This, however, was merely her method of performing her services. She was nevertheless under her management contract receiving compensation for her services as manager.Since what petitioner purchased was not renewal commissions, there is no basis in the record for amortizing the payment he made to Tabor for the management contract on any estimated period of time that premium income which was on the books at the date the management contract was assigned to petitioner might be expected to remain on the books.We included in our facts the figures with respect to renewal premiums on which petitioner relied to support his estimate that he would no longer receive income from such renewal premiums after 10 years. In our opinion these figures do not support petitioner's contention that renewal premiums on insurance on the books of Bankers Life on the date of the assignment to petitioner of the management contract would have ceased after a 10-year1968 U.S. Tax Ct. LEXIS 136">170 period. The amount received from such renewal premiums shows a definite leveling off in decline after the first 2 years. However, as we have explained, in our view, petitioner purchased the total rights and privileges that went with the management of Bankers Life over such period of time as the management contract 50 T.C. 186">199 which he had would remain in force and not merely a right to "renewal commissions." For this reason we do not consider it necessary to attempt to estimate how long renewal premiums might be received by Bankers Life from insurance on its books as of July 1, 1959.Petitioner makes the point that even though the management contract stated that Tabor should be the managing head and director of all of the affairs of Bankers Life "for a period of years equal to the life of the Charter of the said Bankers Life & Loan Company," it was necessary for him to obtain ratification of this contract by the board of directors or the members of Bankers Life on a yearly basis since the State Board of Insurance of the State of Texas was unwilling to recognize perpetual management contracts without reasonable cancellation provisions. In Mercury Life & Health Co. v. Hughes, 271 S.W.2d 842, 8451968 U.S. Tax Ct. LEXIS 136">171 (Tex., 1954), the court had under consideration a claim by Hughes for breach of his contract to be manager of a statewide mutual assessment insurance company organized and existing under the laws of Texas. The court reached the conclusion that Hughes' contract was void for reason other than the fact that it had no cancellation provisions or specified term but stated as follows with respect to the lack of any such provisions in the contract:We are much impressed with appellants' contention that the contract herein sued upon was void because it took from future directors and future policyholders of Mercury all right to have a voice in the management of the company, but inasmuch as we have held that it was void because passed by directors, all of whom had a direct personal financial interest in the contract, we deem it unnecessary to discuss this contention. * If we accept petitioner's position that the provision for the continuation of the contract over the life of the charter of Bankers Life would not be enforced in Texas, it follows that petitioner acquired the rights of manager under this contract for as long as he or any assignee of his performed satisfactorily the management1968 U.S. Tax Ct. LEXIS 136">172 services of the company so as to have the members or board of directors of the company renew the contract. Viewed in this manner the contract takes on many of the aspects of a license which is renewable on a yearly basis. Such licenses have been held to have no reasonably ascertainable useful life. In Morris Nachman, 12 T.C. 1204">12 T.C. 1204 (1949), affd. 191 F.2d 934 (C.A. 5, 1951), we held that a payment made by the taxpayer for a retail liquor vendor's license which was for 1 year but was renewable was an asset having an indeterminate useful life beyond the taxable year in which it was purchased since the issuing authorities of the license had for a number of years followed the practice of renewing the license of the previous holder.In Westinghouse Broadcasting Co., 36 T.C. 912">36 T.C. 912 (1961), affd. 309 F.2d 279 (C.A. 3, 1962), certiorari denied 372 U.S. 935">372 U.S. 935, we held that a television network affiliation contract for a term of 2 years which was purchased by the taxpayer had an indeterminable useful life since the 50 T.C. 186">200 network policy was to renew 1968 U.S. Tax Ct. LEXIS 136">173 such contracts for an indeterminate period of time.Therefore, if we accept petitioner's position that the contract which he acquired from Tabor was not in fact for the term of the charter, we have the situation of petitioner's acquiring a contract renewable for an indefinite and indeterminable period of time where he, through the obtaining of proxies, would substantially have control of its renewal absent failing to perform adequately under the contract.Petitioner makes no point of the fact that by its terms the charter of Bankers Life would expire in 1979, 20 years after the date the management contract was assigned to him. The charter itself provided that the board of directors in the exercise of their discretion should have the right to renew and extend the charter from time to time for such length of time as is permitted or may be permitted by law. Petitioner testified that there was every reason to expect that the charter would be extended if the directors requested such an extension. The laws of the State of Texas allow the charter of a statewide mutual assessment insurance company to be extended. Article 14.14(a), Tex. Civ. Stat. (Vernon), added to the laws of Texas in1968 U.S. Tax Ct. LEXIS 136">174 1963, specifically provides that any mutual assessment insurance company shall have the right to amend its charter for the purpose of extending its period of duration which may be perpetual by filing an amendment for such purpose within 6 months after the effective date of the provision. The act adding this provision to the Texas Code provided that the provisions of the added section should be deemed to be in addition to all other rights, authorities, and procedures existing under the laws of Texas.Section 13.02 of Vernon Texas Civil Statutes provides that any mutual assessment insurance company may amend or extend its charter by compliance with the requirements in the General Corporation laws of Texas.Not only from the provisions in Bankers Life's charter and the testimony of petitioner but also from the laws of Texas, we conclude that in substance Bankers Life's existence is not limited to the year 1979 since its charter may be extended by action of the board of directors. Since the management contract by its terms is for the life of the charter, which we interpret to mean the life of the charter as extended, the rights acquired by petitioner under the management contract are1968 U.S. Tax Ct. LEXIS 136">175 of indefinite duration if this provision of the contract is considered to govern. As previously stated, if the contract is considered to be one which is renewable yearly by the members and directors of Bankers Life, since by custom it is renewable yearly, the contract is likewise of indefinite and indeterminable duration.We therefore conclude that the rights petitioner acquired under the contract have an indefinite and indeterminable useful life and therefore are not subject to amortization or depreciation under the 50 T.C. 186">201 provisions of section 167, I.R.C. 1954, and section 1.167(a)(3), Income Tax Regs. Since petitioner has claimed no deduction with respect to the payments made for the management contract except deductions for amortization under section 167, we sustain respondent in his disallowance of the claimed deduction.Petitioner contends that even if we conclude that he is not entitled to amortize the amount paid to Tabor for the management contract, we should find that there is no deficiency for the year 1963 because of the invalidity of respondent's notice of deficiency for that year. Petitioner contends that respondent made a second examination of his books for the1968 U.S. Tax Ct. LEXIS 136">176 year 1963 and because of such second examination any determination of a deficiency is invalid.Section 7605(b) provides that taxpayers shall not be subjected to "unnecessary" examinations and that, "only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary."Respondent takes the position that he did not make a second examination of petitioner's books and records for the taxable year 1963.Petitioner argues that respondent made a "surreptitious" second inspection of his records for the taxable year 1963 because of the information which the office auditor who was handling petitioner's claim for refund for the taxable year 1963 received in a telephone conference with respondent's appellate conferee, who was handling petitioner's tax liability for the year 1964.We do not agree that the advice of respondent's appellate conferee who was handling petitioner's income tax liability for the year 1964 to the office auditor who was handling petitioner's income tax liability for the year 1968 U.S. Tax Ct. LEXIS 136">177 1963 to issue a notice of deficiency for the year 1963 disallowing the claimed amortization deduction of $ 18,000 constituted an examination of petitioner's books and records for the taxable year 1963.The record does not show that petitioner turned over any records to the appellate conferee prior to the telephone conversation between the conferee and the office auditor. However, even if the action of the conferee and office auditor could be considered an examination of petitioner's books and records for the year 1963, that examination was not a second examination.The evidence shows that there was no examination of petitioner's books and records for the year 1963 prior to the filing of petitioner's claim for refund for the year 1963. Prior to the filing by petitioner of his claim for refund, his income tax return for the year 1963 had been subject to an office audit. Such audit was not an examination of 50 T.C. 186">202 petitioner's books and records. Geurkink v. United States, 354 F.2d 629 (C.A. 7, 1965).Petitioner relies on Reineman v. United States, 301 F.2d 267 (C.A. 7, 1962), and Pacific Mills v. Kenefick, 99 F.2d 1881968 U.S. Tax Ct. LEXIS 136">178 (C.A. 1, 1938), in support of his contention. Both of these cases are distinguishable on their facts from the instant case.In Reineman v. United States, supra, the court found as a fact, contrary to the testimony of respondent's agent, that there had been a second examination of records for a particular year. The court noted that the deficiency could not have been determined from the face of the return, from subsequent returns, or from records relating to the year 1964. The basis for the court's holding in Reineman v. United States, supra, supports respondent's position in the instant case.Pacific Mills v. Kenefick, supra, involved an action by representatives of the Commissioner of Internal Revenue to enforce a summons requiring the taxpayer to produce books and records with respect to years which had previously been examined.The appellate court held that a reexamination of the taxpayer's books and records was not "necessary" because it was not to be made "for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been1968 U.S. Tax Ct. LEXIS 136">179 made," which were the only statutory purposes for a reexamination. The court stated that the evidence desired by the collector to defend against the suit for refund which had been instituted against him was obtainable by traditional means. 1Respondent in the instant case did not attempt to force petitioner to produce the books and records which he requested to pass upon petitioner's claim for refund for the year 1963 even though such records would have been necessary to verify petitioner's claimed decrease in expense fund in the year 1963 if respondent considered petitioner's claim, if factually correct, to be allowable. Pacific Mills v. Kenefick, supra, in no way supports petitioner's position in the instant case.Since we hold 1968 U.S. Tax Ct. LEXIS 136">*180 that respondent did not make a second inspection of petitioner's books and records for the year 1963, it is unnecessary to discuss respondent's other contentions even though as respondent points out, the filing of certain types of claims for refund has been considered to be in the nature of a request for or consent to a second investigation. See M. O. Rife, Jr., 41 T.C. 732">41 T.C. 732 (1964), affirmed on this issue 356 F.2d 883 (C.A. 5, 1966).Because of the issues disposed of by agreement of the parties,Decisions will be entered under Rule 50. Footnotes1. The name of the collector was Nichols. In Pacific Mills v. Nichols, 31 F. Supp. 43">31 F. Supp. 43↩ (D. Mass. 1939), the District Court granted discovery of the same records under the Rules of Civil Procedure for District Courts.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625268/	STEVE AND ANN T. SIKET, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSiket v. CommissionerDocket No. 2690-77.United States Tax CourtT.C. Memo 1978-124; 1978 Tax Ct. Memo LEXIS 392; 37 T.C.M. 548; T.C.M. (RIA) 780124; March 29, 1978, Filed 1978 Tax Ct. Memo LEXIS 392">392 Steve Siket, pro se. Jack E. Prestrud, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined a $621 deficiency in petitioners' Federal income tax for 1974. The sole issue is whether petitioners are entitled to a $2,840 deduction for legal expenses. FINDINGS OF FACT Some of the facts have been stipulated by the parties and are found accordingly. At the time they filed their petition, Steve Siket and his wife Ann Siket lived in Brooklyn, Ohio. Ann Siket is a party only by virtue of having filed a joint return with her husband. When we hereafter refer to petitioner, we will be referring to Steve Siket. Petitioner is a retired officer of the Cleveland, Ohio, police department. In January 1974, when he was an active lieutenant in that department, he was assaulted in his home by several members of the Brooklyn, Ohio, police department. 1 He hadjust gotten home from work at the time of the altercation. There is no evidence that the altercation arose out of or was connected in any way with petitioner's work as a police lieutenant. After the altercation, petitioner was arrested for assaulting the Brooklyn1978 Tax Ct. Memo LEXIS 392">393 police officers. He was later acquitted of this criminal offense. Subsequently, petitioner sued in Federal court for damages caused by the false arrest. A settlement favorable to petitioner was reached. In 1974 petitioner paid $2,320 to attorney James S. Carnes for legal services rendered in connection with his criminal trial. Petitioner also paid attorney Alan I. Goodman legal fees of $500, again in connection with the criminal trial. These payments, totalling $2,820, were the only legal fees he paid in 1974. Petitioner deducted these legal fees on his 1974 return. 2 In the statutory notice, respondent determined that petitioner was not entitled to a deduction for legal expenses. OPINION The sole issue in this case is whether petitioner is entitled to deduct legal fees paid in 1974. In that year petitioner was charged with assaulting police officers;1978 Tax Ct. Memo LEXIS 392">394 he was later acquitted of that charge. Subsequently petitioner collected, through settlement, damages arising from his false arrest. In 1974 petitioner paid legal fees of $2,820 in connection with his criminal trial, which he claims are deductible. Respondent, on the other hand, contends that these legal fees were a nondeductible personal expense. We agree with respondent. In , the Supreme Court held that the deductibility of legal expenses is determined by the "origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer." In this case, the origin of the claim from which the legal costs arose--the criminal charges for assault--was clearly personal, even if a conviction might have been detrimental to petitioner's business of being a police officer. Petitioner cannot argue that his arrest occurred within the performance of his duties, since he was off-duty, at home, and in a different municipality at the time he was arrested by the Brooklyn police. The only connection between his arrest and his occupation was tangential. 1978 Tax Ct. Memo LEXIS 392">395 Cf. . We think the instant case is indistinguishable from , affg. a Memorandum Opinion of this Court. 3 In Nadiak the taxpayer, an airlines pilot, was arrested for (and subsequently acquitted of) assault and battery. Nadiak would have lost his pilot's license had he been convicted. The Court of Appeals held that the origin of Nadiak's legal expense was personal since "only the potential consequences of the criminal proceedings posed a threat to the petitioner's fortunes." . Accordingly, the Court of Appeals concluded that , mandated that the legal expenses incurred were nondeductible personal expenditures. We reach the same conclusion in this case. Decision will be entered for the respondent. Footnotes1. Brooklyn, Ohio, is an independent municipality, separate and apart from Cleveland, Ohio. Brooklyn has its own police department, with which petitioner was not associated.↩2. Petitioner erroneously deducted $2,840, $20 more than he paid in legal fees, in 1974.The additional amount may have been court costs.↩3. See also P-H Memo T.C. par. 73,065 (1973).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625270/	WIRT FRANKLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Franklin v. CommissionerDocket No. 9267.United States Board of Tax Appeals8 B.T.A. 977; 1927 BTA LEXIS 2765; October 24, 1927, Promulgated 1927 BTA LEXIS 2765">2765 The deficiency asserted for 1916 is under the facts barred by the statute of limitations. F. H. Bryan, Esq., for the petitioner. Orris Bennett, Esq., for the respondent. TRAMMELL8 B.T.A. 977">977 This proceeding involves a deficiency in incom tax in the amount of $21,459.08 for the year 1916 and came on for hearing upon the issue as to whether the statute of limitations was a bar to the assessment and collection of the tax in controversy. FINDINGS OF FACT. The petitioner is a resident of Ardmore, Okla.He filed his income-tax return for the year 1916 with the collector for the district of Oklahoma on March 1, 1917. The return showed a tax liability of $7,117.73, which was duly assessed and paid. Thereafter, in April, 1920, the respondent assessed an additional tax against the petitioner in the amount of $32,137.34 and on June 19, 1920, the petitioner filed with the collector of internal revenue a claim for abatement covering the additional tax. The claim was allowed in part and rejected in part, and the deficiency notice was mailed to the petitioner on September 23, 1925, and the petitioner filed his appeal with the Board on November 20, 1925. 1927 BTA LEXIS 2765">2766 Thereafter, the petitioner gave his bond with sureties to the collector of internal revenue in the amount of $45,000, the condition of which was that if upon the hearing of the appeal by the Board a decision should be rendered disallowing or setting aside the determination of the said deficiency in tax in full the obligation should be null and void, otherwise to remain in full force and effect for the payment of so much of the said deficiency in tax as the Board might determine to be lawfully due. Under date of October 31, 1925, the collector of internal revenue for the district of Oklahoma made demand upon the petitioner for the payment of the tax, with interest. Thereafter under date of November 10, 1925, the collector made the second demand upon the petitioner for the payment of the tax together with a penalty of 5 per cent and interest. On November 11, 1925, the collector filed notice of tax lien with the county clerk, Oklahoma County, State of Oklahoma, covering the alleged deficiency in tax for 1916. The petitioner and Commissioner did not consent in writing to the determination, assessment and collection of the tax for the year 1916 8 B.T.A. 977">978 after the expiration1927 BTA LEXIS 2765">2767 of five years from the date of the filing of the return for that year. Under date of December 22, 1926, petitioner wrote the chief clerk in the office of the collector of internal revenue, district of Oklahoma, that he refused to sign any waiver covering his tax for 1916. No distraint proceedings have been instituted against the petitioner for the collection of the alleged deficiency nor has any suit been instituted in the United States District Court for the Eastern District of Oklahoma, in which judicial district Ardmore is located, by either the United States or the collector of internal revenue, against the petitioner for the collection of the tax involved. OPINION. TRAMMELL: The question presented for determination is whether the collection of the alleged deficiency of $21,459.08 is barred by the statute of limitations. The assessment of the alleged deficiency herein was made in April, 1920. Thereafter, the Revenue Act of 1921 was passed, November 23, 1921, which contains in section 250(d) the following provisions: * * The amount of any such taxes due under any return made under * * * prior income, excess-profits or war-profits tax Acts * * * shall be determined1927 BTA LEXIS 2765">2768 and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment and collection of the tax; and no suit or proceeding for the collection of any such taxes due * * under 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 * * . The above section was construed by the United States Supreme Court in the case of . The question in that case was whether the distraint was a proceeding within the purview of that section. The court held that distraint was a proceeding within the meaning of the Act and was barred by the section five years after the date the return was filed, even though the taxes were duly assessed within the five-year period provided by that section. The court in that case said: The purpose of the enactment was to fix a time beyond which steps to enforce collection might not be initiated. The repose intended would not be attained if suits only were barred, leaving the collector free at any time to1927 BTA LEXIS 2765">2769 proceed by distraint. In fact, distraint is much more frequently resorted to than is suit for the collection of taxes. The mischiefs to be remedied by setting a time limit against distraint are the same as those eliminated by bar against suit. * * * * * * That it was the intention of Congress by the clause here in question to protect taxpayers against any proceeding whatsoever for the collection of tax claims not made and pressed within five years. 8 B.T.A. 977">979 The only exceptions to the running of the statute of limitations provided in the above quoted section of the statute are (1) when both the Commissioner and the taxpayer consent in writing to a later determination, assessment and collection of the tax, (2) in the case of false or fraudulent returns with intent to evade taxes, (3) failure to file the required return, (4) cases coming within the scope of paragraph (9) of subdivision (a) of section 214 or paragraph (8) of subdivision (a) of section 234, or (5) cases of final settlement of losses contingently allowed by the Commissioner pending a determination of the exact amount deductible. None of the exceptions are applicable to this case. There was no consent in1927 BTA LEXIS 2765">2770 writing to a later determination, assessment or collection, nor is there any question presented as to a false or fraudulent return, nor does the case come within the scope of the other exceptions. The respondent contended that the statute of limitations in this case was suspended or started to run anew by the filing of the claim for abatement, by the giving of the bond and the letter of the petitioner to the chief clerk in the office of the collector of internal revenue. That is, to our minds not sufficient to suspend the operation of the statute of limitations. They do not come within any of the exceptions to the statute. We see nothing in any of the instruments referred to or the procedure followed, which would be a basis for the application of the doctrine of estoppel. The letter of December 22, 1926, clearly set forth the position of the petitioner that he refused to sign the waiver. The bond that was given was in connection with the appeal to the Board of Tax Appeals and by its terms was conditioned upon a decision of the Board that the tax was lawfully due. Otherwise, it was to become null and void. In view of the foregoing, it is our opinion that the collection of1927 BTA LEXIS 2765">*2771 the tax involved is barred by the statute of limitations. There is therefore no deficiency in respect of the tax involved. Judgment will be entered for the petitioner.Considered by MORRIS, MURDOCK, and SIEFKIN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625212/	SAPPHIRE LANDS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent GARNET LANDS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSapphire Lands, Inc. v. CommissionerDocket Nos. 1587-70, 1588-70.United States Tax CourtT.C. Memo 1973-23; 1973 Tax Ct. Memo LEXIS 264; 32 T.C.M. 82; T.C.M. (RIA) 73023; February 1, 1973, Filed 1973 Tax Ct. Memo LEXIS 264">264 The petitioners were organized to subdivide and develop land, and from 1958 to 1965, they held certain land for the purpose of subdividing it and selling lots at retail. In 1966, such land was rezoned, and plans for subdividing the land were adopted. In 1967, four parcels of the land were sold, and in 1968, eight parcels were sold. Held, the petitioners have failed to show that during 1967 they were not holding the land primarily for sale to customers in the ordinary course of business. deQuincy V. Sutton, for the petitioners. Wm. O. Lynch, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The respondent determined a deficiency of $21,333.83 in the Federal income tax of Sapphire Lands, Inc., for the year ended November 30, 1967, and a deficiency of $584.35 in the Federal income tax of Garnet Lands, Inc., for the year ended November 30, 1967. The only issue for decision is whether during 1967 the petitioners held certain land primarily for sale to customers in the ordinary course of business. FINDINGS OF FACT Some of the facts were stipulated, and those facts are so found. The petitioners, Sapphire Lands, Inc. (Sapphire), 1973 Tax Ct. Memo LEXIS 264">265 and Garnet Lands, Inc. (Garnet), each had its principal place of business in Metairie, Louisiana, at the time its petition was filed in this case. Each filed its Federal corporate income tax return for the year ended November 30, 1967, with the district director of internal revenue, New Orleans, Louisiana. A taxable or fiscal year of the petitioners will be identified by the calendar year in which it ends. Joseph Marcello, Sr., died in 1952, and on or after July 1, 1955, a State court ordered that his widow be 3 recognized as the owner of one-half of his property and as the holder of a life estate in the other half of such property. The court also ordered that each of the nine children of Joseph Marcello, Sr., be recognized as the owner of an undivided one-ninth interest in the property which was subject to their mother's life estate. Included in such property was a tract of approximately 183 acres of land located in Jefferson Parish, Louisiana. In late 1958, such land was surveyed and divided into 9 parcels of approximately 20.333 acres each. Nine new corporations were organized, including (in addition to Sapphire and Garnet) corporations named Gems, Inc., Topaz Lands, 1973 Tax Ct. Memo LEXIS 264">266 Inc., Amethyst Lands, Inc. (Amethyst), Emerald Lands, Inc. (Emerald), Pearl Lands, Inc. (Pearl), Ruby Lands, Inc., and Moonlight, Inc. Such corporations will sometimes be referred to as the Gem corporations. Each of such corporations purchased from Mrs. Marcello, Sr., and her children one of such parcels of land on December 26, 1958. The consideration for the transfer of each parcel was a promissory note for $111,111.11, payable in 10 annual installments and bearing interest at a rate of 6 percent per year. Each note was secured by a first mortgage and a vendor's lien against the particular parcel of land involved, and each was personally endorsed 4 by James J. Culotta, a general contractor and president of the 9 corporations. According to their charters, the Gem corporations were formed for the purpose of subdividing and developing land, and each purchased its parcel of land with the intent of developing it into a residential subdivision. Development was to proceed from the parcels in the back of the 183-acre tract to those in the front. Since their inception, the corporations have been under common ownership, and from shortly after December 23, 1958, to February 26, 1965, Mr. 1973 Tax Ct. Memo LEXIS 264">267 Culotta and Mr. Joseph Connolly each owned 50 percent of the stock of each of the 9 corporations. During Mr. Culotta's tenure as president, many proposals for the development of the land held by the corporations were considered. However, due to financial reverses which Mr. Culotta incurred in other developments, he never completed any development of the land. A 16-inch natural gas line and a main water line were located with-in the boundaries of the land, and discussions were held with local authorities about the possibilities of utilities service being extended to the land by the parish (a Louisiana parish is comparable to a county elsewhere). Subdivision plans and zoning changes were also considered by the corporations, and in 1959, the corporations granted 5 a right-of-way servitude through their land to the local water district. Sometime prior to October 16, 1961, Mr. Culotta acquired land adjacent to that owned by the Gem corporations and extended Claire Avenue, which ran through the acquired land, for the purpose of affording ingress to the land of the Gem corporations. On July 11, 1961, the land owned by Gems, Inc., was subdivided, and on October 16, 1961, 12.251973 Tax Ct. Memo LEXIS 264">268 acres of its land were sold to the Roman Catholic Church of the Diocese of New Orleans for $110,000 in cash. The use of this land for church purposes was contemplated in a plan of subdivision for the entire 183 acres prepared in 1958, and Mr. Culotta believed the presence of a church would be of value in developing the remaining land owned by the corporations. Some of the proceeds of the sale were used to pay the debt owed by the corporations on the 1958 notes to the Marcello heirs. At the beginning of 1965, the Gem corporation were in default on their debt to the Marcello heirs, and on February 25, 1965, Mr. Culotta resigned as president of the corporations and pledged his stock to Carlos Marcello (Mr. Marcello), the legal representative of the Marcello heirs, as further security for the debt. At this time, Mr. Culotta believed that the corporations were about to 6 sell the remaining approximately 171 acres of land for $1,630,000. Also on February 25, 1965, Mr. Connolly formally surrendered his stock to the corporations and such stock was reissued, in equal portions, to Jefferson D. Hampton II, a son-in-law of Mr. Marcello; Joseph C. Marcello, a son of Mr. Marcello; William1973 Tax Ct. Memo LEXIS 264">269 J. Robards, a son-in-law of Mr. Marcello; and Michel A. Maroun, a lawyer for the Marcello family. According to the corporate minutes, the consideration for the reissuance of the stock was services performed or to be performed, but apparently no such services were ever performed. Since February 25, 1965, Mr. Hampton has been president of the Gem corporations, but during such time, he generally acted as a representative of the Marcello heirs. During June 1965, plans for the development of the approximately 171 acres were proceeding, and engineering work preliminary to the submission of an overall subdivision plan was being completed. By this time, arrangements had been made for title insurance in connection with the development of the land, and all necessary title examination work had been done. On July 8, 1965, the Gem corporations borrowed $300,000 from Guaranty Bank and Trust Company (the bank). The loan was secured by collateral mortgages against their land, which were signed 7 by the president of the corporations and by Mr. Marcello as representative of the heirs. The heirs also guaranteed the loan and subordinated their claims against the corporations. The mortgages1973 Tax Ct. Memo LEXIS 264">270 provided for the release of specific lots, into which the land might be subdivided, upon payment of a designated portion of the mortgage debt. Part of the loan proceeds was intended to be used to pay Federal income tax deficiencies of the Marcello heirs, and at the time that application was being made for the loan, the attorney for the Gem corporations informed the bank that the corporations intended to subdivide and develop the land. During 1965, the corporations conveyed to the parish the necessary rights-of-way through their land for the extention of Lapalco Boulevard, a major street, and during that year or 1966, the parish authorities raised the funds necessary for the extension of the street and accompanying water and sewer lines. In April or May of 1966, a request for a change in zoning with respect to the land fronting on the north side of Lapalco Boulevard was filed with the office of the planning director of the parish, and on July 5, 1966, the zoning for such land was changed from single-family residential to neighborhood commercial. This rezoning enhanced the value of the petitioners' land, 8 as it encompassed most of the land held by Sapphire and some land held1973 Tax Ct. Memo LEXIS 264">271 by Garnet. In June 1967, a plan for resubdivision of the land held by the Gem corporations was completed, and on June 29, 1967, it was approved by the Jefferson Parish Council. Pursuant to such plan, the petitioners dedicated streets in 1967. During 1967, the parish commenced construction of Lapalco Boulevard and a sewerage treatment plant which would serve the land of the corporations. Also during that year, Mr. Marcello, as representative of the heirs, retained the services of a realtor to find a buyer or buyers for the corporations' property. Except as to price, the realtor was given complete discretion in selling the property, and he had the power to sell all or only part of it. Four sales were arranged by the realtor during 1967. Each sale involved a parcel of land which fronted on the proposed extension of Lapalco Boulevard, and which was not less than 1.5 nor more than 1.9 acres in size, and each was conditioned on the seller's obtaining authority for a resubdivision of the involved parcel. Such resubdivision authority was granted, subject to the condition that the resubdivision was for purposes of sale only and that no development would be permitted unless offsite1973 Tax Ct. Memo LEXIS 264">272 9 improvements were made. Two of the sales were made by Sapphire for a total cash consideration of approximately $107,000. The contracts for these sales stated that the utilities to be installed along Lapalco Boulevard would be paid for by the State and that those along another proposed street in the subdivision would be paid for by the purchasers. The other two sales were made jointly by Sapphire and Garnet for a total consideration of approximately $135,000 consisting of approximately $73,700 in cash and the remainder payable in 3 years. One such sale was for $81,900 which included a downpayment of $20,475. Nearly $94,000 of the proceeds from the 4 sales was used to reduce the principal of the $300,000 debt owed to the bank. The bank was not demanding payment of the debt but it had raised the rate of interest on the note. On January 4, 1968, another portion of the land held by Gem corporations was zoned commercial and multi-family residential, and on January 10, 1968, another plan for the resubdivision of a portion of the land belonging to the corporations was completed. Such plan was approved by the Jefferson Parish Council on March 7, 1968. During March 1968, Garnet1973 Tax Ct. Memo LEXIS 264">273 dedicated a portion of its land as a right-of-way for the purpose of widening a street. 10 In March 1968, the corporations made 8 sales. On March 1, Garnet and Emerald made 2 sales. The first was of a parcel of approximately 2.5 acres for $57,746.00 in cash, and the second was of a parcel of similar size for $72,746.00, consisting of $30,000.00 cash, $20,000.00 as cancellation of debt owed, in part, by Mr. Marcello, and $22,746.00 payable in 3 annual installments. On March 8, Garnet, Sapphire, and Emerald sold a parcel of approximately 4.9 acres to a partnership, a member of which was a son of Mr. Marcello. The consideration was $120,000.00, to be payable in 3 annual installments beginning in 1969. On March 14, Garnet and Emerald sold a parcel of approximately 4.5 acres to one of the Marcello heirs for a consideration of $131,536.00, consisting of $1,000.00 in cash and a $130,536.00 note payable on or before 3 years after the sale. On March 19, the same 2 corporations sold a parcel of approximately 2.3 acres for a consideration of $75,662.25, including a downpayment of $65,662.25, and on March 21, they sold a parcel of approximately 2.4 acres for $79,395.00 payable in 3 equal1973 Tax Ct. Memo LEXIS 264">274 annual installments beginning in 1969. On March 27, Sapphire sold a parcel of approximately 1.6 acres for a consideration of $37,800.00, consisting of a downpayment of $3,000.00 and $34,800.00 to be paid in 60 monthly installments. On the 11 next day, it sold a parcel of approximately 1.5 acres to a corporation, the president of which was a son of Mr. Marcello, for a consideration of $34,829.00, consisting of a $7,500.00 downpayment and $27,329.00 payable in 60 monthly installments. In each of the years 1966, 1967, and 1968, the board of directors of the Gem corporations adopted the following joint resolution: WHEREAS, these corporations intend to develop said property [the property acquired by the corporations in 1958] for residential and commercial use by subdividing the same and installing streets and off site improvements, and WHEREAS, in connection therewith it is necessary that application be made for certain zoning changes and for approval of subdivision plans, NOW, THEREFORE, BE IT RESOLVED, that these corporations do jointly undertake to develop the hereinabove described property, and that Mr. Jefferson D. Hampton, II, President of each of these corporations, 1973 Tax Ct. Memo LEXIS 264">275 be and he is hereby authorized and directed, on behalf of these corporations, to do all and whatsoever may, in his sole and uncontrolled discretion, be necessary and proper in order to accomplish such purpose * * * BE IT FURTHER RESOLVED, that all acts and things which the said President may lawfully do hereunder be and the same are hereby ratified and confirmed, and declared to be the lawful acts and deeds of these corporations. On December 4, 1968, Mr. Culotta transferred his 50 percent of the stock of the Gem corporations to Mr. 12 Marcello, as representative of the Marcello heirs, in consideration for his release by the heirs of all personal liability on the 1958 notes of the corporations. In April 1969, the Marcello heirs formed the Louisa Corporation and 1 share of stock in such corporation was issued to each of the children of Mr. Marcello, Sr., and 9 shares to his widow. There was then transferred to the Louisa Corporation the outstanding shares of stock of the Gem corporations. On August 25, 1969, Garnet, Emerald, and Pearl sold a parcel of approximately 20 acres to one of the Marcello heirs for a consideration of $310,000.00, consisting of a $10,000.00 downpayment1973 Tax Ct. Memo LEXIS 264">276 and $300,000.00 payable on or before 5 years after the sale. During either 1968 or 1969, the extension of Lapalco Boulevard through the land of the Gem corporations was completed. On March 8, 1971, a plan for the resubdivision of portions of the land belonging to Sapphire and Amethyst was completed, and it was approved on March 11, 1971, by the Jefferson Parish Council. On March 24, 1971, Sapphire and Amethyst sold 2 parcels of land consisting of approximately 17 acres to the S-C Development Company, a partnership, for $517,754.16 in cash. Prior to 1968, the Gem Corporations had no bank accounts and they used the account of Mrs. Marcello, Sr., 13 for their transactions. Prior to 1967, they had no records other than their Federal income tax returns. At the time of trial, Mrs. Marcello, Sr., was dead, and $100,000 was still owing to the bank on the 1965 loan. The petitioners, on their 1967 Federal corporate income tax returns, treated the sale proceeds which they received in 1967 as long-term capital gain, and the respondent in his notice of deficiency took the position that the proceeds were taxable as ordinary income because the property which was sold was held primarily1973 Tax Ct. Memo LEXIS 264">277 for sale to customers in the ordinary course of business. In the notice of deficiency, the respondent also made certain adjustments in the bases used for computing the gains on the sales of property, but those adjustments have been accepted by the petitioners. OPINION The issue for decision is whether during 1967 the petitioners held the lands that they sold in that year primarily for sale to customers in the ordinary course of business. In their reply brief, the petitioners state: There has never been a dispute between the parties respecting the fact that these corporations were formed and maintained from 1958 to at least 1965 for the purpose of selling 14 subdivided land in retail lots. The entire gravamen of this cause centers around the purpose for which the land was primarily held by the corporation during the taxable year 1967 at issue. That purpose, according to petitioners, was solely the purpose of holding for increase in value after the heirs received control of the land and the corporations in 1965. * * * That the petitioners were in the business of selling land to customers until at least 1965 is supported by the uncontradicted testimony of Mr. Culotta to1973 Tax Ct. Memo LEXIS 264">278 the effect that while he was president of the corporations, they held the 183-acre tract of land for sale to customers in the ordinary course of business. The resolution of the issue in this case, thus, depends on whether the petitioners have proved that their purpose for holding the property changed between the time that the heirs gained control and the 1967 sales, so that they were no longer holding the property for sale to customers in the ordinary course of business. Herzog Building Corp., 44 T.C. 694">44 T.C. 694, 44 T.C. 694">704 (1965); see Maddux Construction Co., 54 T.C. 1278">54 T.C. 1278 (1970); Eline Realty Co., 35 T.C. 1">35 T.C. 1, 35 T.C. 1">6 (1960). We hold that the petitioners have not demonstrated such a change of purpose. Section 1221(1) of the Internal Revenue Code of 1954 excludes from the definition of a capital asset "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business," and in 15 Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 383 U.S. 569">572 (1966), the Supreme Court held that "as used in § 1221(1), "primarily" means "of first importance" or "principally."" The question of whether property is being held "primarily" 1973 Tax Ct. Memo LEXIS 264">279 for sale to customers in the ordinary course of business is a factual one and many factors have been considered by the courts in resolving such question. These factors include: (1) The purpose for which the property was initially acquired; (2) the purpose for which the property was subsequently held; (3) the extent to which improvements, if any, were made to the property by the taxpayer; (4) the frequency, number, and continuity of sales; (5) the extent and nature of the transactions involved; (6) the ordinary business of the taxpayer; (7) the extent of advertising, promotion, or other active efforts used in soliciting buyers for the sale of the property; (8) the listing of property with brokers; and (9) the purpose for which the property was held at the time of sale. See James G. Hoover, 32 T.C. 618">32 T.C. 618 (1959); Ralph J. Oace, 39 T.C. 743">39 T.C. 743 (1963). * * * [54 T.C. 1278">Maddux Construction Co., supra at 54 T.C. 1284">54 T.C. 1284.]None of these factors by itself is determinative, but rather all the factors in a particular case must be considered. 54 T.C. 1278">Maddux Construction Co., supra; W. T. Thrift, Sr., 15 T.C. 366">15 T.C. 366 (1950). After February1973 Tax Ct. Memo LEXIS 264">280 1965, when the heirs gained control of the petitioners, there was no change in the corporate charters which stated that the corporations were organized to subdivide and develop land. Indeed, in June 1965, the attorney for the corporations represented to 16 the bank that the corporations intended to develop the land, and this intent was reaffirmed by corporate resolutions in 1966, 1967, and 1968, which provided that "these corporations intend to develop said property * * by subdividing the same and installing streets and off site improvements * * ." Other corporate actions also fail to show that the corporate purpose had changed. In June 1965, the corporations were working on plans to develop the land. Title insurance had been obtained, and engineering work preliminary to a resubdivision was being completed. In 1966, a portion of the corporations' land was rezoned for commercial development, and in 1967, the corporations took such rezoning into account and adopted a plan for resubdivision, which included the dedication of streets. A realtor was retained to sell part or all of the land, and 4 sales were made in 1967. In the following year, the corporations secured rezoning1973 Tax Ct. Memo LEXIS 264">281 of another portion of the land for commercial and multi-family development, dedicated an additional street, requested an additional resubdivision, and made 8 sales for a total consideration of over $600,000. The petitioners, however, contend that the corporations held the land for appreciation in value during 1967, and as evidence of such intent, they rely on the testimony 17 of Mr. Marcello. In essence, Mr. Marcello testified that after February 25, 1965, he, as representative of the heirs, was in complete control of the corporations; that the shareholders, directors, and officers of the corporations were mere nominees of the heirs; that the sales in 1967 and 1968 were made only to pay debts; that the corporations did not develop the land; and that, as the controlling force of the corporations, he considered the land to be held solely for appreciation in value. Although he claimed to be in control of the corporations and the directors were allegedly mere nominees, Mr. Marcello could not explain the corporate resolutions passed by the directors which stated that the corporations intended to develop land. The explanation offered by the petitioners in their briefs for these1973 Tax Ct. Memo LEXIS 264">282 resolutions is that they were required to give Mr. Hampton the necessary authority to fulfill the obligations incurred by the corporations in the sales required to secure funds to pay the debts of the heirs. Yet, the authority granted to Mr. Hampton was much broader than that needed to carry out the obligations of the sales contracts, and if that were the reason for the resolutions, it was surely not necessary to grant Mr. Hampton authority to perform acts which were inconsistent with the purposes of the corporations in holding the lands. 18 Thus, we are not convinced by such explanation of the reasons for the resolutions. Nor do we believe that the sales in 1967 were required to be made to pay debts. Although a large portion of the cash proceeds from the 1967 sales was used to pay a portion of a $300,000 debt owed to the bank, the bank was not demanding payment of such debt, and after land was sold for approximately $1,700,000, $100,000 of the debt was still outstanding at the time of trial. Furthermore, the real estate agent was authorized to sell all or part of the lands, not just enough to make payment on the debt to the bank, and he was given broad discretion in arranging1973 Tax Ct. Memo LEXIS 264">283 the terms of the sales. In fact, one of the sales in 1967 was made for a cash payment of only $20,475 and deferred payments of $61,425 plus interest. Moreover, if property is held primarily for sale to customers in the ordinary course of business, the nature of such holding is not changed because the actual sale was forced by the necessity to pay a debt. 1 Cf. Donald J. Lawrie, 36 T.C. 1117">36 T.C. 1117 (1961). 1973 Tax Ct. Memo LEXIS 264">*284 Footnotes1. See L. P. Barney, 26 T.C.M. 109, 36 P.-H. Memo. T.C. par. 67,017 (1967); William S. Grimaldi, 22 T.C.M. 739, 32 P.-H. Memo. T.C. par. 63,156 (1963). 19 The petitioners repeatedly and vigorously objected to the admission of evidence concerning the sales and other activities of the corporations in 1968 and subsequent years on the basis that such years were not before us. However, it has been held that the Court may consider activities in a subsequent year when such information tends to establish a pattern that began in the year in issue. See Thompson v. Commissioner, 322 F.2d 122 (C.A. 5, 1963), affg. on this issue 38 T.C. 153">38 T.C. 153 (1962). In this case, the events in 1968 and later years are consistent with and reinforce the indications in 1967 that the lands were being held for sale at retail. Although the first sales occurred in 1967, the subsequent events make clear that these sales were merely the first ones to be made in the overall plan of subdividing and selling the lands. The rezoning and resubdividing in the later years support the conclusions which we drew from the statement of the attorney in 1965 and the corporate resolutions adopted in 1966 and 1967, as well as in 1968. We also disagree with the petitioners' contentions that they did nothing more than subdivide the land and dedicate streets and that accordingly they were not in the business of holding the property primarily for sale. The failure to develop property extensively does not require that such property be treated as a capital asset. 20 C. E. Mauldin, 16 T.C. 698">16 T.C. 698, 16 T.C. 698">710, 16 T.C. 698">711 (1951), affd. 195 F.2d 714 (C.A. 10, 1952); see Fritz Thompson, 38 T.C. 153">38 T.C. 153(1962), affd. on this issue 322 F.2d 122 (C.A. 5, 1963); O'Donnell Patrick, 31 T.C. 1175">31 T.C. 1175 (1959), affd. 275 F.2d 437 (C.A. 7, 1960); August Engasser, 28 T.C. 1174">28 T.C. 1174 (1957). We realize that it has been held that under some circumstances, the subdivision of land and dedication of streets may be indicative of nothing more than an attempt by an investor to liquidate a portion of his holdings in accordance with local or State resubdivision regulations. See Wellesley A. Ayling, 32 T.C. 704">32 T.C. 704 (1959); Allen Moore, 30 T.C. 1306">30 T.C. 1306 (1958); 15 T.C. 366">W. T. Thrift, Sr., supra.However, those cases are distinguishable. In the present case, the Gem corporations were formed for the purpose of subdividing and developing property, the tract of land purchased from the Marcello heirs was the only land the petitioners ever held, all of the petitioners' income in 1967 arose from the sales of land in that year, corporate resolutions in 1966, 1967, and 1968 stated that the corporations intended to develop the property by subdivision, and necessary improvements to the land were being made by the public authorities. Moreover, the petitioners have admitted that from 1958 to February 1965, they held the property primarily for sale to customers in the ordinary course of business, and they have not shown that such 21 purpose for holding the property changed prior to the sales in 1967. Furthermore, we cannot accept the petitioners' argument that the corporations had nothing to do with rezoning the portion of land in which most of the 1967 sales occurred. Prior to 1965, the corporations had considered such rezoning, and an application for rezoning the petitioners' land was filed in 1966. In 1967, at least 3 of the sales were conditioned on such rezoning, and in 1966, 1967, and 1968, the board of directors stated that it was necessary to apply for rezoning and authorized Mr. Hampton to do so. Obviously, the rezoning did enhance the value of the land. The petitioners argue that there has been no showing that they sought the rezoning, but since they had the burden of proving that they were not in the business of holding the property primarily for sale, they had, under the circumstances of this case, the burden of proving that they did not seek the rezoning - they cannot rely on the respondent's failure to show that they did seek the rezoning. Mr. Marcello's statement that the land was not being held for sale to customers in the ordinary course of business is entitled to little weight in light of his subsequent statement that the land was always available for 22 sale if the buyer met the asking price, and in view of the other evidence in this case, including Mr. Marcello's failure to explain the corporate resolutions regarding development, and his hiring a realtor to sell the land. Finally, the fact that only slightly less than 70 acres of the 183-acre tract had been sold by 1971 does not show that the land was held for investment. It appears that the Gem corporations were not in a hurry to sell the lands, and the failure to make more sales may be due to the fact that they did not wish to "flood" the market and wished to hold the lands for propitious sales. Decisions will be entered for the respondent. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625214/	ANSON EVANS, PHILIP J. NOONAN, AND WALTER T. NOONAN, TRUSTEES, F. R. NOONAN ESTATE TRUST, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Evans v. CommissionerDocket No. 62664.United States Board of Tax Appeals29 B.T.A. 710; 1934 BTA LEXIS 1491; January 10, 1934, Promulgated 1934 BTA LEXIS 1491">1491 1. Fair market value of certain shares of stock determined as of the date of acquisition thereof by the petitioners. 2. Appraisals of value for estate tax purposes and values reported for capital stock purposes are not conclusive evidence of fair market value and do no more than establish a prima facie value that may be overcome by convincing evidence. Thomas Gallagher, Esq., for the petitioner. Arthur H. Fast, Esq., for the respondent. LANSDON 29 B.T.A. 710">711 The respondent has determined a deficiency in income tax for the year 1929 in the amount of $62,453.75. As its cause of action the petitioner alleges that respondent erred in determining the value of certain shares of stock as of September 25, 1920, which was the date of its acquisition thereof. Many of the material facts have been stipulated, but each party adduced the oral testimony of witnesses. FINDINGS OF FACT. The petitioners are trustees of a testamentary trust created by the will of F. R. Noonan, a resident of Alexandria, Minnesota, who died on September 10, 1919. All reside at Paynesville, Minnesota. On September 25, 1920, by virtue of a decree of distribution made by the1934 BTA LEXIS 1491">1492 probate court of Douglas County, Minnesota, they acquired 4,250 shares of the common capital stock of the North American Creamery Co., hereinafter called the corporation. Thereafter, and on June 21, 1921, they received, as a stock dividend, 4,250 additional shares of such company. On April 1, 1929, they sold the entire 8,500 shares so acquired for $1,239,000 and in their income tax return for that year reported a loss from such transaction in the amount of $229,075. Upon audit of the return the respondent reduced the cost basis upon which the petitioners computed the alleged loss to $743,750, made other minor adjustments not in controversy, and determined the deficiency under review. At the time the stock was acquired by the petitioner the corporation had been in active operation for many years. It had established a substantial business and a reputation for the quality of its merchandise which resulted in the sale of its products at a premium over the regular market prices of such commodities manufactured by other concerns. Its sales were effected without advertising or special sales forces. Its output was purchased by many large corporations dealing in food supplies such1934 BTA LEXIS 1491">1493 as Swift & Co. and the A. & P. Co. It never had outstanding any bonds, debentures, notes, or other evidence of indebtedness. Its authorized common stock was 5,000 shares of the par value of $100 each, closely held and not listed on any exchange. There were no sales of such stock immediately prior or subsequent to the acquisition of 4,250 shares thereof by the petitioners. 29 B.T.A. 710">712 At the date of his death, F. R. Noonan, one of the founders of the corporation, owned 4,250 of the 5,000 shares of common capital stock then outstanding. For several years prior thereto he had been ill and incapacitated for business activities and the actual management of the corporation was in the hands of Philip J. Noonan, a son of the founder, who had been connected with it for 19 years and who personally made sales contracts with large concerns purchasing the products of the corporation. Walter T. Noonan, another son, and Anson Evans, who had been with the business for many years, were also active in its affairs. After the death of the elder Noonan the sales and profits of the corporation continued to increase in volume and amount. Under the will of F. R. Noonan the 4,250 shares of stock1934 BTA LEXIS 1491">1494 of the corporation which he owned at the date of his death, together with other property were left in trust until sale by the trustees or ultimate distribution to the four children of the decedent. The petitioners were appointed trustees of such trust by the district court of Douglas County on September 25, 1920, and on that date the estate trust of F. R. Noonan came into existence. The parties agree that on December 31, 1919, the tangible properties of the corporation had a value of $1,347,971.24, subject to liabilities of $93,016.98, or a net worth of $1,254,954.26. They further agree that between September 20, 1919, and September 25, 1920, and some time subsequent thereto, the net value of the tangible assets was in the amount above set forth, except that during the year 1920, up to September 20, the net earnings of the corporation, after deducting Federal income taxes, amounted to $91,814.06, and that on June 30, 1920, a dividend in the amount of $100,000 was declared and paid. The parties agree that for the five-year period prior to the acquisition of the stock in question by the petitioners, the invested capital and net earnings of the corporation were as follows: Invested Net income capitalafter deduct-ing Federalincome taxes1915 (one third)$259,287.03$16,808.581916778,286.82217,663.831917975,950.65120,827.3119181,021,777.96278,483.3119191,278,908.9646,045.301920 (two thirds)823,688.3691,814.06Total5,137,899.78771,642.391934 BTA LEXIS 1491">1495 For the five-year period above indicated the average invested capital was $1,027,579.96, and the average yearly earnings were $154,328.48. 29 B.T.A. 710">713 The parties agree that in the five years prior to September 20, 1920, the corporation paid dividends as follows: 1916$20,000191775,000191850,000191975,0001930 (June)100,000Total320,000The parties agree that the net earnings of the corporation, after the payment of Federal taxes, for the five-year period after the stock was acquired by the petitioner were as follows: 1/3 of 1920$45,907.031921176,058.711922304,331.481923136,940.601924110,564.232/3 of 1925255,232.70Total1,029,034.75The parties agree that in arriving at the valuation of the stock in controversy at the time of its acquisition by the estate trust, for the purpose of the 1929 fiduciary return, the petitioners followed the formula adopted by the Government in Appeals and Review Memorandum 34, Cumulative Bulletin, June 1920, p. 31, and computed the same as follows: The sum of $82,206.40, which sum was 8% of the average capital investment for the 5 years previous to the date of acquisition, 1934 BTA LEXIS 1491">1496 was allocated to earnings from tangible capital. This sum was then subtracted from the average annual earnings above indicated for said period in the sum of $154,328.48 and the resulting sum of $72,122.08 was allocated to earnings from intangibles for the purpose of arriving at the valuation of good will. Accordingly, the basis for arriving at value of the aforesaid stock, pursuant to the above formula, was as follows: Value of tangible assets above liabilities or total net worth as above indicated$1,254,954.26Less dividend paid in June 30, 1920100,000.00$1,154,954.26Plus net income after federal taxes and all other expenses from Dec. 31, 1919 to Sept. 25, 192091,814.06Value of tangible assets above liabilities or total net worth on Sept. 25th, 1920$1,246,758.32Earnings from intangibles capitalized on the basis of 15% in accordance with government formula to arrive at good will value: $72,122.08 X 6 2/3 =480,813.87Total value assets of said corporation$1,727,582.19Value per share on basis of 5,000 shares, $345.50 per share. 4,250 shares acquired by Estate Trust at $345.50 per share -Fair Market Value - equal$1,468,375.001934 BTA LEXIS 1491">1497 29 B.T.A. 710">714 The general sales of the corporation, not including receipts from small items, for the years indicated below were as follows: YearCreameryGeneralTotal1916$2,548,168.52$892,721.82$3,440,890.3419173,028,955.761,205,389.084,234,344.8419184,034,747.491,492,360.085,527,107.5719195,040,246.172,099,796.877,140,043.0419204,953,983.871,988,808.136,952,792.0019214,303,252.251,348,947.755,652,200.0019225,081,330.171,218,119.846,299,450.0119237,113,823.881,505,629.638,619,453.5119247,863,827.061,729,759.359,593,586.4119259,684,464.602,276,508.1911,960,972.79In its capital stock tax return for the fiscal years ended at June 30, 1916, 1917, 1918, 1919, and 1920, the corporation reported the per share value of its stock in the following respective amounts: $90, $96, $125, $143, and $188. On April 23, 1920, the shares in question were appraised under the direction of the probate court of Douglas County, Minnesota, at $160 per share, or a total of $680,000. On September 7, 1920, Anson Evans, Philip J. Noonan, and Walter T. Noonan, as representatives of the estate of F. R. Noonan, 1934 BTA LEXIS 1491">1498 filed an estate tax return in which such shares were valued at $160 per share, of a total of $680,000. This valuation was later increased by the Commissioner to $175 per share, or a total of $743,750, for estate tax purposes and was also used by the respondent as the basis for computing gain or loss on the sale by the trust in the taxable year. OPINION. LANSDON: The Board is asked to settle only one issue; viz., What was the fair market value of the block of North American Creamery stock in question when it was acquired by the petitioners? The record discloses a slight confusion as to the date of such acquisition and counsel for petitioners attaches some importance to the fact that it did not physically pass to them until September 25, 1920, although the date of the decedent's death was September 10, 1919. In contemplation of law the corpus of a testamentary trust passes to the trustees on the date of the death of the testator. ; ; affd., 1934 BTA LEXIS 1491">1499 . It follows that gain or loss from the subsequent disposition of the stock must be computed on the basis of its fair market value at September 10, 1919, as provided in section 113(a)(5) of the Revenue Act of 1928. The respondent has determined that the fair market value of the 4,250 shares of the stock of the corporation at date of acquisition was $743,750. The petitioners allege that such value was at least $1,468,375. The fact that petitioners received a 100 percent 29 B.T.A. 710">715 stock dividend is not material, since they sold the original and dividend shares in a single block, and we shall therefore discuss the share value on the basis of 4,250 shares. The stock in question was closely held by a family corporation and there were no sales at any time sufficiently near the basic date to establish a fair market value thereof, nor was it listed on any stock exchange. It is necessary, therefore, to consider the value of the underlying assets, the opinions of witnesses, and any other competent evidence offered by the parties. It is stipulated that the net worth of the corporation at December 31, 1919, exclusive of good will, was $1,254,954.26, as represented1934 BTA LEXIS 1491">1500 by tangible assets owned at that time, and that this figure applies to September 10, 1919, the date of acquisition by the petitioners. As there were 5,000 shares of stock outstanding at that date, the value of each share, measured by the net worth of the corporation, was almost exactly $250 per share. The respondent's determination is $175 per share and the petitioners contend for a value of $435. The evidence discloses that in its capital stock tax returns for the fiscal years ending at June 30, 1916, 1917, 1918, 1919, and 1920, the corporation reported the value per share of its stock for such years in the respective amounts of $90, $96, $125, $143, and $188. On April 23, 1920, appraisers appointed by the probate court determined a value per share of $160, and such valuation was used in the settlement of estate taxes due to the State of Minnesota and in the Federal estate tax return which the executors filed within one year of the date of the decedent's death. Upon audit of such return the respondent increased the reported valuation to $175 per share. In addition to the stipulation the petitioners introduced witnesses who gave their opinions as to the fair market value1934 BTA LEXIS 1491">1501 of the stock in question at the basic date. P. J. Noonan, who succeeded his father in the management of the corporation, was an executor of the estate, and is a trustee and one of the petitioners here, was of the opinion that at such date the stock was worth $400 per share. Thomas A. Roden, long connected with the firm of Wells, Dickey & Co., which deals in securities of private corporations, opined that the stock was worth 15 times its average earning capacity over a period of years, or about $450 per share. His opinion is based on his general knowledge of the values of stock and on the financial condition of the corporation, but he has no special information about the creamery business. Marcus P. Angland, a member of a firm of stock brokers, was of the opinion that the stock was worth from $425 to $450 per share on the basic date. He based his conclusion on the earnings and assets of the corporation and was influenced by the fact that the stock in question was a controlling interest. 29 B.T.A. 710">716 On behalf of the respondent each of the two appraisers who fixed the value of the stock at $160 per share in 1919 testified that his original estimate was based on facts considered1934 BTA LEXIS 1491">1502 at the time of the appraisal and that he knew of no changes in the corporation or the market that would require him to make any different estimate. Each considered the figure arrived at by the appraisal as a fair valuation as of that date. One of such appraisers is the first vice president and the trust officer of the First National Bank & Trust Co. of Minneapolis. The other is connected with the Farmers & Mechanics Bank of that city and is a practicing attorney in Minneapolis. On the basis of the testimony summarized above and of the stipulated facts, the petitioners ask the Board to find that at September 10, 1919, the stock in question had a fair market value of at least $435 per share. It is obvious that they rely largely on the concededly strong financial condition of the corporation, together with its history and undisputed success as factors in creating good will as an asset, in addition to the tangible properties. It must be borne in mind, however, that what we are concerned with is the fair market value of the stock at the basic date, rather than actual net worth of the corporation as represented by its tangible and intangible assets, less liabilities. It is clear1934 BTA LEXIS 1491">1503 that until after the sale thereof no one connected with the corporation regarded the stock as worth anything like the value now claimed. Nor does the sale on April 1, 1929, corroborate the value as of September 10, 1919, which is now claimed. Such sale was made in a period of great commercial activity, at least six months before the now historical decline in the value of corporate stocks began. On December 31, 1919, the book value of the stock, which did not include any good will, was $250 per share. After several years of additional prosperous operation it was sold for approximately $290 per share, a price that indicates that the willing purchaser thereof paid little or nothing for the good will which petitioners contend was worth $480,813.87 at September 10, 1919. Upon due consideration of all the facts and estimates of value, we are of the opinion and find as a fact that at September 12, 1919, the stock in question had a fair market value of $250 per share. On brief counsel for the petitioners argues strenuously that the valuations placed on the stock for capital stock and estate tax purposes are inadmissible as evidence. The Board has never considered such valuations to1934 BTA LEXIS 1491">1504 be conclusive, but they are evidence that must be overcome by the taxpayer claiming higher values for tax purposes in subsequent years. ; affirming . Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625215/	E. J. LORIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PHILIP GOLDENBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lorie v. CommissionerDocket Nos. 27526, 27527.United States Board of Tax Appeals21 B.T.A. 612; 1930 BTA LEXIS 1825; December 10, 1930, Promulgated 1930 BTA LEXIS 1825">1825 1. The constitutionality of section 280, Revenue Act of 1926, will not be considered in a proceeding brought by one against whom a liability as a transferee has been assessed. 2. Where an assessment for 1920 was made before the passage of the Revenue Act of 1924 and the statutory period for collection expired after its passage and before the enactment of the Revenue Act of 1926, the provision of the 1924 Act extending the period for collection to six years after assessment is inapplicable and the right to collection is not revived by the 1926 Act. 3. A transferee seeking to prove freedom from liability, on the ground that the liability of his transferor is barred by limitation, must establish a prima facie case, which ordinarily means proof of the filing of the statutory return and the expiration of the statutory period. 4. The evidence in this case is too indefinite to support a finding that the return, upon the date of filing which the petitioner relies to start that statutory period, is substantially the return required by the effective statute. Joseph R. Little, Esq., for the petitioners. B. U. Steele, Esq., for the respondent. STERNHAGEN1930 BTA LEXIS 1825">1826 21 B.T.A. 612">612 These proceedings involve petitioners' liabilities as transferees for deficiencies of $487.59 and $585 for the fiscal years ending April 30, 1920, and 1921, respectively, in income and profits taxes of Goldenberg & Lorie, Inc. Petitioners claim that the statute of limitations has barred collection. 21 B.T.A. 612">613 FINDINGS OF FACT. Petitioners are individuals residing in New York City. Upon the dissolution of Goldenberg & Lorie Inc., a corporation, each of the petitioners received in liquidation of his stock in the corporation certain assets which had a value in excess of $1,072.59. The income and profits-tax return of the corporation for the fiscal year ended April 30, 1920, showing a tax of $12,442.28, was filed July 15, 1920. Additional assessments for 1920 against the corporation were made, $253.60 in September, 1921, and $250.40 in April, 1923. An income and profits-tax return of the corporation for the fiscal year ended April 30, 1921, was filed on or about July 15, 1921. A duplicate return for the same fiscal year showing a net income of $31,264.77 and tax of $7,931.27 was executed May 16, 1925, and filed on July 10, 1925, or later. An additional1930 BTA LEXIS 1825">1827 assessment of $585 for the fiscal year ended April 30, 1921, was made July 5, 1926. The respondent, on February 25, 1927, mailed to petitioners notice of transferee liability for said assessments. OPINION. STERNHAGEN: 1. The petitioners attack the constitutionality of section 280 of the Revenue Act of 1926 under which the Commissioner acted in determining their liability as transferees. But we may not entertain the issue thus presented, ; cf. , now pending in the Supreme Court on certiorari; and , certiorari denied, . 2. As to 1920, the additional assessments were made before the enactment of the Revenue Act of 1924; the five-year period for their collection expired July 15, 1925, Revenue Act of 1918 and Revenue Act of 1921, section 250; the extension to six years after assessment of the period of collection did not apply, ; and the subsequently enacted Revenue Act of 1926 did not purport to revive the right to collection, which had1930 BTA LEXIS 1825">1828 lapsed before the Revenue Act of 1926 was passed. There is therefore no liability of these petitioners in respect of the alleged deficiency of the corporation for the year ended April 30, 1920. 3. As to 1921, the evidence is unsatisfactory. Counsel for petitioner stated at the hearing that the only contention relied upon was that the liability of the taxpayer corporation, the transferor, was barred by limitation. He treated the stipulation that each petitioner had received $1,072.59 in liquidation as an admission of the liability of each as transferee. The burden to prove freedom from liability of the taxpayer is on the petitioner, Revenue Act of 1928, 21 B.T.A. 612">614 section 602. He must make a prima facie case, which ordinarily means proof of the filing of the statutory return and the expiration of the statutory period; whereupon the respondent must go forward with countervailing proof. ; ; . But the return, upon the date of filing which the petitioner relies to start the statutory period, must be substantially the return1930 BTA LEXIS 1825">1829 required by the effective statute. For the year ended April 30, 1921, the Revenue Act of 1921 provided factors of income different from those of the Revenue Act of 1918 and, although a return under the former act was filed July 15, 1921, there is nothing from which it can be inferred that it showed facts and figures substantially in accord with the requirements of the Revenue Act of 1921. The so-called "duplicate return" in evidence which was filed July 10, probably in 1925, is entirely unexplained. If, as its designation as a duplicate might imply, it is a new copy of the first return filed nunc pro tunc, it indicates that the net income was over $25,000 and that $2,000 credit was taken. This was not a return under the Revenue Act of 1921. If it was a new return filed in an attempt to comply with the Revenue Act of 1921, the date of its filing in 1925 or later began the statutory period. ; cf. ; . Since the evidence as to this is so indefinite, it can not be said to establish prima facie that the statutory period has expired. 1930 BTA LEXIS 1825">*1830 As to 1921, the determination by respondent of the transferee liability of petitioners is sustained. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625217/	Esther Melnick Teitelbaum, Petitioner, v. Commissioner of Internal Revenue, RespondentTeitelbaum v. CommissionerDocket No. 75381United States Tax Court40 T.C. 223; 1963 U.S. Tax Ct. LEXIS 135; May 3, 1963, Filed 1963 U.S. Tax Ct. LEXIS 135">135 Decision will be entered for the respondent. Where after making a jeopardy assessment respondent fails to mail his deficiency notice to the taxpayer within 60 days of such assessment but does mail his deficiency notice within the time permitted by the general limitation sections of the Code, a petition filed in the Tax Court within 90 days following the mailing of such deficiency notice establishes jurisdiction in the Court to determine the issues raised by the petition. Jackson L. Boughner, for the petitioner.George G. Young, for the respondent. Withey, Judge. WITHEY40 T.C. 223">224 Deficiencies in income tax and additions to tax have been determined by respondent as follows:DEFICIENCIESSec. 293(b)Sec. 294(d)(1)(A)Sec. 294(d)(2)YearIncome taxI.R.C. 1939I.R.C. 1939I.R.C. 19391949$ 30,172.46195060,318.66$ 30,159.33$ 3,374.381951139,544.9969,772.50$ 12,559.048,372.70The only issue presented for decision is whether this Court is deprived of jurisdiction where respondent's service of a deficiency notice upon petitioner was subsequent to 60 days from and after a jeopardy assessment by respondent, but otherwise within the limits fixed by law. The parties have agreed to the amount and nature of the deficiencies and additions to tax should the above issue be decided in favor of the respondent.FINDINGS OF FACTSince all of the facts have been stipulated, we adopt the stipulation1963 U.S. Tax Ct. LEXIS 135">137 of the parties as our findings of fact as follows:Petitioner Esther Melnick Teitelbaum and Abraham Teitelbaum were husband and wife during the taxable years 1949, 1950, and 1951. Joint Federal income tax returns for the years 1949 and 1950 were filed by them with the collector of internal revenue for the first district of Illinois, Chicago, Ill., and a joint Federal income tax return for the year 1951 was filed by them with the director of internal revenue, Chicago, Ill. The home address of petitioner Esther Melnick Teitelbaum and Abraham Teitelbaum, as shown on page 1 of the 1949, 1950, and 1951 joint returns, was 20 East Jackson Blvd., Chicago 4, Ill. Petitioner moved to California in November 1946 with intent to establish her permanent residence there. Petitioner has continuously been living in California since November 1946.On August 23, 1957, the Commissioner assessed, under the provisions of section 273 of the Internal Revenue Code of 1939, certain deficiencies in tax, additions to tax, and interest against Abraham and Esther Teitelbaum for the years 1949, 1950, and 1951. The deficiencies in tax and additions thereto so assessed were as follows: 40 T.C. 223">225 DEFICIENCIESYearIncome taxSec. 293(b)Sec. 294(d)(1)(A)Sec. 294(d)(2)I.R.C. 1939I.R.C. 1939I.R.C. 19391949$ 30,172.46195060,318.66$ 30,159.33$ 3,374.381951139,544.9969,772.50$ 12,559.048,372.70Total230,036.1199,931.8312,559.0411,747.081963 U.S. Tax Ct. LEXIS 135">138 On September 4, 1957, statements of income tax due (Forms 17A) for the years 1949, 1950, and 1951 were personally served on the petitioner at her home in Indio, Calif. At that time petitioner advised the server that the 6911 Euclid Avenue, Chicago, Ill., address shown on the statements was in error and that she had established her separate residence at 46-861 Madison Street, Indio, Calif.The Commissioner mailed a single statutory notice of deficiency to Abraham Teitelbaum and Esther Teitelbaum, husband and wife, 6911 South Euclid Avenue, Chicago 49, Ill., by registered mail on October 11, 1957. The correct address of Abraham Teitelbaum on October 11, 1957, was 6911 South Euclid Avenue, Chicago 49, Ill. During the taxable years 1949, 1950, and 1951 petitioner Esther Melnick Teitelbaum was not residing at 6911 South Euclid Avenue, Chicago 49, Ill., nor did she reside at that address on October 11, 1957.On June 25, 1957, and again on June 27, 1957, petitioner's authorized agent executed and delivered to agents of respondent certain consent agreements, said consent agreements listing the address of petitioner as 46-861 Madison Street, Indio, Calif.On September 17, 1957, two of respondent's1963 U.S. Tax Ct. LEXIS 135">139 agents interviewed petitioner at Riverside, Calif. During said interview petitioner stated that she was residing at 46-861 Madison Street, Indio, Calif. Both of respondent's agents were from the Chicago Office of the Internal Revenue Service.On January 8, 1958, Abraham Teitelbaum petitioned the Tax Court (Docket No. 71483) for a redetermination of the deficiencies set forth by the Commissioner in his statutory notice of deficiency issued on October 11, 1957. Esther Melnick Teitelbaum did not petition the Tax Court with respect to the statutory notice of deficiency issued on October 11, 1957.On May 1, 1958, the Commissioner mailed a duplicate original statutory notice of deficiency to petitioner Esther Melnick Teitelbaum at 46-861 Madison Street, Indio, Calif., by registered mail. Said duplicate original statutory notice of deficiency was mailed to the correct address of petitioner and was received by her. Attached to the stipulation and made a part thereof as joint Exhibit 1-A is a true and correct copy of said duplicate original statutory notice of 40 T.C. 223">226 deficiency together with attached statement. Also attached to the stipulation and made a part thereof as joint Exhibit1963 U.S. Tax Ct. LEXIS 135">140 2-B is a true and correct copy of a letter dated May 1, 1958, addressed to Esther Teitelbaum, 46-861 Madison Street, Indio, Calif., which letter transmitted the duplicate original statutory notice.Petitioner Esther Melnick Teitelbaum, on August 4, 1958, petitioned the Tax Court seeking relief from the Commissioner's determination as set forth in the duplicate original statutory notice mailed to her on May 1, 1958. The petition is before the Court in the instant proceeding.The case of Abraham Teitelbaum (Docket No. 71483) was tried at the Chicago, Ill., session of the Tax Court beginning October 6, 1958. On May 20, 1960, the Court entered its decision in the case, a copy of which is attached to the stipulation and made a part thereof as joint Exhibit 3-C. The Court's decision was affirmed by the United States Court of Appeals, Seventh Circuit, 294 F.2d 541 (C.A. 7, 1961). Petition to the Supreme Court for writ of certiorari was denied on February 19, 1962, 368 U.S. 987">368 U.S. 987, 82 Sup. Ct. 603. Rehearing was denied by the Supreme Court on April 2, 1962, 369 U.S. 842">369 U.S. 842, 82 Sup. Ct. 866.1963 U.S. Tax Ct. LEXIS 135">141 It is stipulated and agreed by and between the parties that if the Court should find the duplicate original statutory notice of deficiency mailed to petitioner on May 1, 1958, was not rendered invalid because of the failure of respondent to mail it within 60 days after making the jeopardy assessment, then the deficiencies in tax and additions to the tax ordered and decided in the case of Abraham Teitelbaum (Docket No. 71483), as set forth in joint Exhibit 3-C attached to the stipulation and made a part thereof, shall be the deficiencies in tax and additions to the tax to be ordered, decided, and entered in the instant case.OPINIONThe notice of deficiency referred to by the parties in their stipulation as a "duplicate original" is, by whatever appellation used, a notice of deficiency within the meaning of section 272 of the Internal Revenue Code of 1939. It is stipulated to have been served upon petitioner within the time limits fixed by section 275. The general statutory limitations upon the issuance of a notice of deficiency are therefore not applicable to the issue before us. The controversy arises only with respect to the narrow question whether section 273(b)1 (which is1963 U.S. Tax Ct. LEXIS 135">142 virtually identical with section 6861(b), I.R.C. 1954) makes invalid a notice of deficiency issued subsequent to the special 60-day period following a jeopardy assessment there provided.40 T.C. 223">227 The involved statute is by legislative history, H. Rept. No. 356, 69th Cong., 1st Sess. (1926), 1939-1 C.B. (Part 2) 370, intended to be, not a limitation upon the allowable period for respondent's issuance of a deficiency notice, but is rather, as contended by respondent, a limitation upon the conditions under which respondent may maintain and keep in force a jeopardy assessment made prior to his issuance of a deficiency notice. See W. Cleve Stokes, 22 T.C. 415">22 T.C. 415 (1954),1963 U.S. Tax Ct. LEXIS 135">143 and J. H. Reese, 15 B.T.A. 1261">15 B.T.A. 1261 (1929). The mere fact that a jeopardy assessment may be illegal has no bearing upon the jurisdiction of this Court to adjudicate liability for the correct tax.Cases relied on by petitioner are not applicable to the present issue for the reason that in each the issue decided related to the general limitation provisions of the Code. The case of Berry v. Westover, 70 F. Supp. 537">70 F. Supp. 537 (S.D. Cal. 1947), is clearly not support for petitioner's position here, for there the injunction sought by the taxpayer against further assessment or collection proceedings based upon the Commissioner's failure to serve a deficiency notice within 60 days following a jeopardy assessment was denied. It was there further held that failure of the Commissioner to follow lawful procedures in his original jeopardy assessment, while such assessment may for that reason be void, does not prevent his second such assessment upon abatement of the first. Certainly, by necessary implication, the Commissioner being then possessed of the right to proceed to collect the tax it follows that he has the authority to issue and timely1963 U.S. Tax Ct. LEXIS 135">*144 serve his deficiency notice within the general limitation provisions.Decision will be entered for the respondent. Footnotes1. SEC. 273. JEOPARDY ASSESSMENTS.(b) Deficiency Letters. -- If the jeopardy assessment is made before any notice in respect to the tax to which the jeopardy assessment relates has been mailed under section 272(a)↩, then the Commissioner shall mail a notice under such subsection within sixty days after the making of the assessment.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625220/	THE TRAVELERS BANK & TRUST COMPANY, EXECUTOR UNDER THE WILL OF JOHN H. NOLAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Travelers Bank & Trust Co. v. CommissionerDocket No. 46686.United States Board of Tax Appeals29 B.T.A. 88; 1933 BTA LEXIS 999; October 10, 1933, Promulgated 1933 BTA LEXIS 999">999 Transfers of stock by the decedent to his children five months prior to his death held to have been made in contemplation of death. George H. Day, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. SEAWELL29 B.T.A. 88">88 The petitioner seeks a redetermination of a deficiency of $25,736.26 in estate tax. The sole issue is whether gifts of 200 shares of capital stock of the Travelers Insurance Co. made by the decedent in May 1926 to each of his three children were made in contemplation of death. FINDINGS OF FACT. The petitioner is the executor under the will of John H. Nolan, who died testate October 31, 1926, at the age of 85 years, 5 months, and 21 days, from a heart attack lasting a few hours. The cause of his death was given in the death certificate as cardiovascular renal disease, arteriosclerosis, and myocarditis. The immediate cause of his death was probably acute dilation of the heart. He left surviving him two married daughters, Alice St. J. Hunt and Emily N. Prieth, a son, Julian St. J. Nolan, and one granddaughter, Helen Nolan, a child of Harry E. Nolan, who died December 15, 1925. The decedent's wife died June 25, 1923. 1933 BTA LEXIS 999">1000 For about 50 years prior to August 30, 1921, the decedent had been connected with the Travelers Insurance Co., a corporation writing life and other forms of insurance. For a large portion of that period he was general agent of the corporation's affairs in Chicag0, Illinois. He retired from business on or about August 30, 1921, 0n which date the Travelers Insurance Co. and Travelers Indemnity Co. paid him $25,000 cash and agreed to pay him an annuity for life of $600 per month, commencing January 1, 1921, in consideration of the surrender of his agency contracts with the corporations. The decedent had ulcers on the cornea of one of his eyes in and after 1894, and in about 1906 an operation was performed on the eye. Thereafter cataracts developed on both eyes. A successful operation was performed in 1918 or 1919 for the cataract on the eye operated on in about 1906, and in January 1921 an unsuccessful operation was performed for the cataract on the other eye. This latter eye was removed in June 1921, at the Knapp Memorial Hospital, New York City. Thereafter the decedent's eyesight was very 29 B.T.A. 88">89 much impaired. The socket of the eye removed in 1921 and the remaining eye1933 BTA LEXIS 999">1001 required home treatment several times daily and the services of an oculist frequently. The cataracts had no effect on the general health of the decedent. The decedent joined his wife and son in California in September 1921, and after living there for about three months they traveled abroad until the spring of 1923. During the latter part of June 1923, Dr. L. A. Conner, a heart specialist, was consulted respecting a chronic disease of the decedent's heart. The physician ascertained that the decedent was suffering from arteriosclerosis, myocarditis, and cardiovascular renal disease, general medical terms describing the existing condition of the decedent's heart, circulatory system and kidneys. The condition had existed for two or three years, and was in an advanced stage. Arteriosclerosis represents a thickening and hardening of the arteries and interferes with the normal flow of blood. As the disease progresses, the arteries become more brittle. The condition requires the heart to pump faster to force blood through the smaller openings of the arteries. It is practically a universal ailment of people 0f advanced years and its danger depends upon the organ it involves. 1933 BTA LEXIS 999">1002 In the case of the decedent, involvement was largely of the heart. Myocarditis is arteriosclerosis of the arteries of the heart, and causes a general weakening of the heart and its muscles. Dr. Conner also ascertained at the same time that the decedent had an enlarged heart and auricular fibrillation, a condition which disturbs the rhythm of the heart and represents a stage in the progress of heart disease. The condition had existed one or two years and, being permanently established, it could not be cured. The decedent's condition was not regarded by Dr. Conner as immediately dangerous. Persons suffering from auricular fibrillation may, with proper treatment, survive it for 10 or 12 years. The decedent had irregular beating of the heart and shortness of breath. He knew at the time that he had had heart trouble for a year or two and was aware that the digitalis he had been taking was prescribed for the condition of his heart. Dr. Conner prescribed a maintenance dose of digitalis (a drug to strengthen the heart and decrease heart beats), diet, rest, and limitation of activities. On or about July 1, 1923, the decedent went to Avon, New Jersey, to live with Mrs. Prieth and1933 BTA LEXIS 999">1003 his son Harry. On July 2, 1923, Dr. Conner wrote the following letter to Dr. James F. Ackerman, Asbury Park, New Jersey: I have seen twice during the past week Mr. Nolan, the father-in-law of Doctor James Ramsay Hunt of this city, who is spending the summer, I think, at Avon and whom I think you have seen once or twice. Mr. Nolan's wife has Just died and he has been pretty badly shaken by it. 29 B.T.A. 88">90 He has, as you know, a somewhat dilated heart with auricular fibrillation which has been kept under fairly good control for a year or two by the continuous use of digitalis. At present he is taking 45 drops of the tincture of digitalis every day except Sunday. This seems to control his heart very well and is apparently not more than he can tolerate well, so that I have told his nurse to continue that amount, unless there seemed some reason either for decreasing it or increasing it. His heart rate, I think, will be the best guide to the amount of digitalis he requires and, so long as it is in the neighborhood of 75 or 80 and there is no pulse deficit, the digitalis will be doing all that can be expected of it I think. I feel that for some time Mr. Nolan should be under the1933 BTA LEXIS 999">1004 supervision of a trained nurse and Miss Swan, who is to go back with him, will notify you if things are not going satisfactorily. In September 1923 the decedent removed to California, where he remained until about December 15, 1925, when his daughter Alice brought him to New York City. Upon his arrival in New York he went directly to the Knapp Memorial Hospital, where he remained for a month or six weeks, receiving treatments for serious ulcers on his eye. At that time the condition of decedent's eye was such that he could only distinguish light from dark. He was, however, very cheerful and jovially remarked that he expected to live to be 100 years old. Dr. Conner examined the condition of decedent's heart on December 15, 1925, and found no material change in its condition since June 1923. Aside from his heart and the condition of his eye, the decedent was then in a good physical condition for a man of his age, but he could not walk far or climb stairs freely. He had been living a quiet life and taking maintenance doses of digitalis for his heart once or twice daily. For about a month Dr. Conner visited the decedent professionally every few days, and thereafter, until about1933 BTA LEXIS 999">1005 the end of May 1926, he called upon him at intervals of two or three weeks. During this period Dr. Conner changed the dosage of digitalis from time to time when necessary to keep the condition of the decedent's heart under control. The decedent lived with Alice St. J. Hunt, at 46 West 55th Street, New York City, from about February 1 until about May 30, 1926. He was confined to his room practically all of the winter of 1925-1926, 1926, during which he easily tired, had shortness of breath and his exercise consisted of moving about on the floor on which his room was located. During the spring of 1926, the decedent, at his own expense, constructed a one-story wing to Mrs. Hunt's summer home at Katonah, New York, for his own accommodation. The addition consisted of one long narrow room, a bedroom and bath, with a separate heating plant so that the quarters could be heated to suit the occupant. From the time of his removal to Katonah until his death the decedent was under the care of Dr. Jas. A. G. McPhail of Katonah. 29 B.T.A. 88">91 He prescribed digitalis and occasionally catharsis, with as much rest as possible. The decedent's exercise after May 1926 consisted principally of1933 BTA LEXIS 999">1006 kicking his legs while lying on his back and moving his arms up and down while standing against a wall supported by his nurse. During the last three years of the decedent's life he was cheerful and optimistic, but at times impatient due to the limitation placed upon his activities. The decedent on April 12, 1923, executed a will leaving $1,000 to a nephew, his personal belongings to his children and the residue of his estate to the Travelers Bank & Trust Co. in trust, with directions to pay from the income of the trusteed property $500 per month to his wife for life, together with such further sums from the net income as might be agreed upon by the testator's children. Upon the death of his wife the income from the property in trust was to be paid to the testator's four children in equal amounts for life, and upon the death of any child, one fourth of the principal was to go to such person or persons as the deceased child designated in his or her will. On August 5, 1925, the decedent modified his will so as to provide for the equal distribution of the net income of the trusteed property between the testator's two daughters, son Julian, and Helen Nolan, for life. The codicil1933 BTA LEXIS 999">1007 provided that upon the death of either of his daughters or his son Julian, one fourth of the principal of the trust should pass to the person or persons named in the beneficiary's will. As to Helen Nolan, it provided that should she predecease her father without issue the one fourth share of the trust held for her benefit should be held for Harry E. Nolan for life, and at his death, to the surviving children of the testator or distributed to those designated by them at their decease. In case she died without issue after her father, the share of the trusteed property was to pass to the other beneficiaries or the person or persons named by them in their wills, and if she died, leaving legal issue, before or after her father, the trust was to terminate as to her share and pass absolutely to her legal issue. The instrument also recited that the testator had already made adequate provision for his son Harry by a separate trust agreement. Under another codicil to his will, executed May 7, 1926, the testator made the distribution of the net income to his granddaughter contingent upon the happenings of certain specified events. In other respects the terms of the will as modified by the1933 BTA LEXIS 999">1008 first codicil were not materially changed. On April 12, 1923, the decedent gave his daughter Alice and son Julian each 150 shares of stock of the Travelers Insurance Co. and transferred 300 shares of the same stock to the Travelers Bank & Trust Co., in trust, one half for his daughter Emily and the other half for his son Harry. In each of the years 1923, 1925, and 1926 29 B.T.A. 88">92 he made gifts of $5,000, $4,000 and $6,000, respectively, to each of these four persons, a total of $60,000, to cover subscriptions to additional stock of the Travelers Insurance Co.During the winter of 1925-1926, the decedent considered making a substantial gift of stock of the Travelers Insurance Co. to each of his then three surviving children on May 10, 1926, his eighty-fifth birthday. He first proposed gifts of 85 shares, then 185 shares, and finally decided to give each child 200 shares. Due, however, to the fact that the decedent did not have 600 shares of the stock until the completion of a then pending increase in the capital stock of the Travelers Insurance Co., the gifts were delayed the major part of a month. On or about May 27, 1926, the decedent, in contemplation of death, transferred1933 BTA LEXIS 999">1009 200 shares of stock of the Travelers Insurance Co. to each of his three living children. The value of the stock 0n May 25, 1926, was $705,000. When the gifts were made the decedent addressed a letter to each child, reading as follows: I am now in my 86th year. This is a long time to live. Few men live so long and are so free from aches and pains of all sorts as I am. And all my life I have been free from aches and pains and accidents of every sort. Few men live to be as successful as I have been. But then I had great aims and purposes and I kept steadily and everlastingly after them. And my success shows what can be accomplished by getting on the right track and going steadily ahead. I intend to make you a present now that will open your eyes and decide that you and your children will follow in my footsteps and arrive when you are 85 where you can give away to your children such sums. This applies to you Bobbie and Dick and Julian; and you Ben and Richie. Few men have worked harder, early and late, than I have. Harry, I am sorry to say, was my worst enemy and his daughter's worst enemy. He could have protected her from her maternal progenitor and all her tribe, 1933 BTA LEXIS 999">1010 but he didn't. I have had a mighty problem all the days of his life and now even after his death I find myself having to overcome his had schemes to frustrate me and my wishes. I am, therefore, going to give you, to trust you and to bank on you by giving you each outright 200 shares of the stock I now hold. Mind you are worthy of it. During the later years of the decedent's life the annuity of $600 per month he received from the Travelers Insurance Co. was sufficient for all of his personal needs. In the estate tax return filed for the decedent's estate the petitioner reported a gross estate of $88,048.67 and deductions of $124,119.52, including $100,000 as a specific exemption. The 600 shares of stock transferred on or about May 27, 1926, were not included in the gross estate. In his audit of the return, the respondent included the stock in the gross estate at the value of $705,000, less an exemption of $5,000 for each of the three gifts. 29 B.T.A. 88">93 OPINION. SEAWELL: The issue relates only to the question of whether the gifts of stock made by the decedent on or about May 27, 1926, were made in contemplation of death within the meaning of section 302(c) 1933 BTA LEXIS 999">1011 of the Revenue Act of 1926, set forth in the margin. 1 We are not concerned with the gifts made prior thereto, but the respondent points out in his brief that they are of the same class. 1933 BTA LEXIS 999">1012 It does not appear of record that the respondent ever determined from an investigation of the circumstances surrounding the transfers that the gifts were, in fact, made in contemplation of death. From the fact that he allowed an exemption of $5,000 for each gift it seems that he relied altogether on the conclusive presumption provision of section 302(c). The petitioner points to this condition of the record and argues that, by showing that the clause seemingly followed by the respondent is unconstitutional (), its burden of proof has been met. It argues further that under the circumstances the respondent's determination is not prima facie correct. In the case of , we held, on the basis of similar facts, that the burden of proof did not shift from the petitioner to the respondent. In the case of (reversing in part ), the court, based upon a lack of showing that the Commissioner had, in fact, determined that the transfers in question were made in contemplation1933 BTA LEXIS 999">1013 of death, held that the action of the Commissioner did not make out a prima facie case. This holding of that court, to which an appeal lies from our decision in this proceeding, would doubtless be followed if it were called upon to consider the question raised here. We need not pause, however, to attempt to reconcile the two decisions or pass upon the preliminary question raised by the petitioner, for we are convinced that there is affirmative proof in the record that the transfers made by decedent in this proceeding were in contemplation of death. 29 B.T.A. 88">94 The intent and meaning of the phrase "contemplation of death" is set forth in in which the court said: * * * Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. 1933 BTA LEXIS 999">1014 Death must be "contemplated," that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * The dominant motive of the decedent for the transfers in question here could not have been the carrying out of a policy of long standing to make substantial gifts to his children during his lifetime, for the record discloses no gifts of any kind prior to April 1923, when he gave to or for the benefit of each child 150 shares of stock of the Travelers Insurance Co. These were followed by like gifts of cash, aggregating $60,000, over a period of about two and one half years, and the large gift in question a little over three years later. It does not appear that any of the donees required the last gift to meet their individual needs. The gifts made prior thereto were substantial in amount and doubtless made the donees financially independent of the decedent if they were not already in that position. All of the gifts were made after the decedent retired from business and at a time when the annuity of $600 per month he was receiving was adequate to meet his personal needs. He was then past 80 years of age and had for several years been1933 BTA LEXIS 999">1015 suffering from a heart disease from which there was no hope of recovery. While he might not have known that the disease would cause his death, he must have fully realized its seriousness because it had confined him to one floor the winter preceding the gift in question and was otherwise brought home to him in a forceful way. The first gifts were made on the day the decedent executed his will and were in the same proportions as the donees were to receive the decedent's residuary property under the will. The 1926 gifts were under consideration prior to and at the time the second codicil was written and indicate in a forceful way that the decedent regarded the two acts as part of one plan to dispose of his entire estate in contemplation of death. The net estate of the decedent five months after the completion of the gifts was about $88,000, an amount less than the specific exemption allowed by the statute. This indicates that the gifts left the decedent with a small estate in comparison with what it had been. On similar facts present in the case of 1933 BTA LEXIS 999">1016 , the court said "the fact that the transfers here involved were practically contemporaneous and closely connected 29 B.T.A. 88">95 with the execution of Mr. Anneke's will, makes it difficult, if not impossible, to reach any other conclusion than that, taken together, they were all of a testamentary character." See . The frame of mind of the decedent at the time the gifts in controversy were made is also shown by the contents of the letter of May 27, 1926, to his children notifying them of the transfers. In his letter the decedent acknowledged his extreme old age and endeavored to impress upon the donees the fullness and success of his life and the real value of his gifts. The petitioner points to the decedent's correspondence and expressions during the later years of his life, together with an expenditure of about $10,000 in the spring of 1926 for an addition to his daughter's summer home for his own convenience, as negativing any idea that he contemplated death. Answering a similar contention made in 1933 BTA LEXIS 999">1017 ; affd., , we said: "* * * but we do not regard them as conclusive of the issue before us, since man sometimes exudes optimism and courage when pessimism and fear exist within." From a consideration of all of the facts we are of the opinion that the gifts in question were made in contemplation of death. Decision will be entered for the respondent.Footnotes1. SEC. 302. (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. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625221/	ROGERS, BROWN & CROCKER BROS., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rogers, Brown & Crocker Bros., Inc. v. CommissionerDocket No. 67581.United States Board of Tax Appeals32 B.T.A. 307; 1935 BTA LEXIS 967; March 29, 1935, Promulgated 1935 BTA LEXIS 967">967 1. Petitioner, organized in 1925 and doing a jobbing business in a large group of unrelated commodities, took inventories for 1927, 1928, and 1929 at cost. As to inventory practice in 1925 and 1926 the record is silent. The 1928 return stated that inventories were valued at the lower of cost or market, while the 1929 return stated that inventories were valued at cost. Held, that the statement in the 1928 return, which is contrary to fact, was not the exercise of an election of basis for valuing inventories that is binding as to the taxable year 1929; and that petitioner, having consistently valued inventories, at least since 1927, at cost, may not change that practice for 1929, so as to value at the lower of cost or market, no permission to make the change having been sought or obtained from the Commissioner. 2. Whatever may be the best accounting practice as to valuing inventories in the business of dealing in a single one of the commodities dealt in by petitioner, it is no criterion of the best accounting practice in the jobbing business of dealing in a large group of unrelated commodities. The inventory practice adopted must be applied consistently to all goods in1935 BTA LEXIS 967">968 the inventory. 3. During the taxable year petitioner incurred liability for additional compensation for personal services actually rendered. Since petitioner keeps its books on an accrual basis, and there is no dispute as to the reasonableness thereof, the entire amount of such additional compensation is deductible for the taxable year, notwithstanding that said amount was improperly denominated a reserve on the books. Adrian C. Humphreys, Esq., and Newton K. Fox, Esq., for the petitioner. S. B. Anderson, Esq., for the respondent. ARUNDELL32 B.T.A. 307">307 OPINION. ARUNDELL: Respondent determined a deficiency of $7,345.21 in petitioner's 1929 income tax. Petitioner alleges that the determination is erroneous, in that respondent (1) overstated gross profit from trading, and (2) disallowed a deduction of $41,744.63 for salaries incurred within the year. Petitioner, a Delaware corporation, was organized on June 8, 1925, succeeding to the businesses of two partnerships. At first its principal business was selling pig iron and other metals on a commission basis. In 1929 its commission sales amounted to $3,447,051.80 and its sales for its own1935 BTA LEXIS 967">969 account amounted to $17,254,791.81. Petitioner keeps its books on an accrual basis. In its 1929 return petitioner reported gross income from "commissions earned" in the sum of $872,548.01, of which $69,449.76 represented commissions earned on sales of pig iron and other metals, 32 B.T.A. 307">308 $139,748.51 represented profits from dealings on the rubber exchange, and $663,348.74 represented gross profit from sales for its own account of pig iron and other metals ($400,457.22), crude rubber ($215,727.58), and export merchandise ($47,164.94). The only one of those items now in dispute is the gross profit of $215,727.58 from sales of crude rubber, and the controversy as to that item arises out of petitioner's challenge of the accuracy of its own return. The return included deductions, among others, of $41,774.63 for "Reserve for additional compensation" and $98,558.95 for 1928 net loss, and showed a net income of $209,488.88. Petitioner sustained a statutory net loss of $73,558.95 in 1928. Respondent disallowed the deduction taken for reserve for additional compensation, reduced the deduction for 1928 net loss to the amount now agreed to be the correct figure, and, accepting the1935 BTA LEXIS 967">970 return as otherwise correct, determined a net income of $276,263.51. The petitioner asserts that the result of its trading in crude rubber was a loss of $176,360.93 and not a gross profit of $215,727.58, as reported in the return. The reported gross profit was computed by deducting from the total of crude rubber sales ($7,788,415.24) the total actual invoice cost ($7,572,687.66) to petitioner of the crude rubber sold. The petitioner contends that cost should be represented not by actual invoice cost, but by a figure that reflects the sum of the opening inventory at cost or market, whichever is lower ($178,668.77), plus total cost of purchases during the year ($9,685,359.38), less closing inventory at cost or market, whichever is lower ($1,899,251.98), or $7,964,776.17. Taking the latter figure as cost, a loss from crude rubber sales in the amount asserted by the petitioner would be refiected. The parties agree that this $7,964,776.17 is the correct cost of goods sold figure if petitioner is entitled to use inventories valued on the basis of cost or market, whichever is lower, in computing net income. The respondent concedes petitioner's right to use inventories for that purpose, 1935 BTA LEXIS 967">971 but contends that a previous election by petitioner, to value inventories on the basis of cost, is binding upon the petitioner for the taxable year. If that be the case, the result of the year's trading in crude rubber has been correctly reported in the return; for the arithmetical result of a computation of cost, when based upon cost of purchases and inventories valued at cost - there being no evidence of actual loss, through shrinkage, spoilage, or other cause, of otherwise inventoriable crude rubber - would be the same figure as that representing actual invoice cost. Thus the question resolves itself into one of whether petitioner is entitled to value its current inventories of crude rubber on the basis of cost or market, whichever is lower, or is limited to a valuation at cost. By section 22(c) of the Revenue Act of 1928 taxpayers are required, whenever in the opinion of the Commissioner inventories are 32 B.T.A. 307">309 necessary in order clearly to determine the income, "to take inventories upon such basis as the Commissioner * * * may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. 1935 BTA LEXIS 967">972 " Article 102 of Regulations 74, promulgated under that act, provides in respect of the valuation of inventories, as follows: Section 22(c) provides two tests to which each inventory must conform: (1) It must conform as nearly as may be to the best accounting practice in the trade or business, and (2) It must clearly reflect the income. It follows, therefore, that inventory rules can not be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any particular method of inventorying or basis of valuation so long as the method or basis used is substantially in accord with these regulations. An inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer can, as a general rule, be regarded as clearly reflecting his income. The bases of valuation most commonly used by business concerns and which meet the requirements of section 22(c) are (a) cost and (b) 1935 BTA LEXIS 967">973 cost or market, whichever is lower. * * * * * * Taxpayers were given an option to adopt the basis of either (a) cost or (b) cost or market, whichever is lower, for their 1920 inventories. The basis adopted for that year is controlling, and a change can now be made only after permission is secured from the Commissioner. Application for permission to change the basis of valuing inventories shall be made at least 30 days prior to the close of the taxable year for which the change is to be effective. * * * Also, article 101 of Regulations 74 provides that "In order to reflect the net income correctly, inventories at the beginning and end of each year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor." The foregoing provisions of the 1928 Act and Regulations 74 have their counterpart in section 205 of the Revenue Act of 1926 and articles 1611 and 1612 of Regulations 69, which governed the years 1925 (petitioner's first taxable year) to 1927, inclusive. By these statutory and regulatory provisions, it was mandatory upon the petitioner to elect an acceptable basis for valuing the inventory of the year in which purchases1935 BTA LEXIS 967">974 and sales became income-producing factors, and such election was thereafter binding upon it unless and until it secured the permission of the respondent to change to another basis. While the stipulated facts and other evidence are not entirely clear about the matter, we gather from those sources that purchases and sales of crude rubber and other commodities have been income-producing factors in petitioner's business from the beginning of its corporate existence and that inventoriable commodities, though perhaps not in large quantities in the first two years, have been carried 32 B.T.A. 307">310 forward from year to year. The petitioner's 1928 return shows an opening (1927 closing) inventory of $568,700.48, so that it is clear that as early as 1927 petitioner was carrying a substantial inventory. What the petitioner's election may have been in the matter of valuing its earliest inventory does not specifically appear. Its claim of right to value its inventories at cost or market, whichever is lower, is based on a statement in the 1928 return that the opening and closing inventories were valued on that basis, which statement, petitioner contends, was an exercise of an election that is1935 BTA LEXIS 967">975 binding for the taxable year in question. But the petitioner must have filed returns for 1925, 1926, and 1927, and, as already indicated, it was carrying a substantial inventory as early, at least, as 1927; and it is clear, as will hereinafter more fully appear, that the 1927 closing (1928 opening) inventory was valued at cost. The burden of showing an election to value its inventories at cost or market, whichever is lower, that is binding as to the taxable year in question is upon the petitioner, and that burden is not met by merely proving what was said in the 1928 return about valuing the inventories of that year, especially when the petitioner is known to have carried an inventory in an earlier year and the statement in the 1928 return can be shown to be without factual basis. In the 1928 return petitioner, in answer to a specific interrogation about the matter, stated that its opening inventory of $568,700.48 and its closing inventory of $203,290.93 were valued "At cost or market whichever is lower." In the 1929 return petitioner answered that its opening (1928 closing) inventory of $203,290.93 and its closing inventory of $2,526,019.69 were valued at "Cost." Now it is obvious1935 BTA LEXIS 967">976 that both of these statements as to the 1928 closing (1929 opening) inventory cannot be correct; for the inventory valuation could not be the same on both bases, unless cost was lower than market at the close of 1928, and that clearly was not the case, because the parties have agreed that the cost of crude rubber (but not of the other commodities) then on hand was higher than its then market value, and that the value of the 1928 closing (1929 opening) inventory at cost or market, whichever is lower, was $189,635.15. That that inventory was actually valued at cost, and not the lower of cost or market, not only in the 1929 return but in the 1928 return as well, is clear from the following computation: Invoice cost of goods in 1929 closing inventory as shown in 1929 return$2,526,019.69Add: Invoice cost of goods sold in 192916,593,442.07Total19,119,461.76Deduct: Invoice cost of all purchases in 192918,916,170.83Invoice cost of goods sold in 1929 opening (1928 closing) inventory as shown in the 1928 and 1929 returns203,290.9332 B.T.A. 307">311 That the 1928 opening inventory was also valued at cost is deducible from the following: The record1935 BTA LEXIS 967">977 shows that the gross profit from commodity sales included in the 1928 return was computed in the same manner as in the 1929 return, that is, on the basis of selling price less actual invoice cost; and since that gross profit is reflected in the year's net loss that exactly fits in in a reconciliation of the year's net change in surplus, the unmistakable inference is that the opening inventory reflected in surplus at the beginning of the year and the closing inventory reflected in surplus at the end of the year are, in both instances, valued at cost. In view of the foregoing, we hold that the record does not show an election by the petitioner in 1928, or at any previous time, to value its inventories on the basis of cost or market, whichever is lower, but that, notwithstanding the statement in the 1928 return, it has consistently valued its inventories, at least from and including 1927, at cost. The petitioner argues, however, that the best accounting practice in "the rubber business" is to use inventories valued at cost or market, whichever is lower; and that income is distorted by the use of inventories otherwise valued, because of daily price fluctuations in the rubber market1935 BTA LEXIS 967">978 and the narrow margin of profit in dealings in that commodity. The argument is supported, to some extent, by the opinions of petitioner's witnesses. But petitioner's inventories were made up, not only of crude rubber, but of many other commodities - pig iron, mica, shellac, coke, fluorspar, alloys, etc., and so-called "export merchandise." True, crude rubber was the principal single item in and made up the greatest part of the 1929 inventories, but that commodity represented no such an important part of previous inventories. Whatever the best accounting practice as to inventories in "the rubber business" may be, it is no more a criterion of the best accounting practice in a jobbing business dealing in a large group of unrelated commodities than would be the practice in a business dealing exclusively in pig iron, or mica, or fluorspar, or any one of the other commodities which made up petitioner's gross sales. This is not a case where dealings in each separate commodity constituted a separate business, but rather where the business was made up of several departments, each engaged in dealing in a different commodity. In general, the business may be likened to departmental merchandising. 1935 BTA LEXIS 967">979 In a business of that character the inventory method must be uniformly applied throughout all departments and to all commodities or merchandise, irrespective of what the best accounting practice may be in a trade or business of dealing in any one of the separate commodities represented in the inventory. Moreover, it is inconceivable that petitioner's income is distorted by the use of inventories 32 B.T.A. 307">312 valued at cost. Certainly there is nothing in the record, apart from the opinions of petitioner's witnesses, that would justify a conclusion to that effect; and the basic facts upon which the witnesses formed their opinions are not a matter of record. Cost, as a basis of inventory valuation, has been consistently recognized since the first income tax law as generally applicable to all businesses. It may be that, because of the narrow margin of profit, in dealings in crude rubber, the price fluctuations of a day might result in the disposition of some part or all of the crude rubber inventory in the following year at less than inventory value; but that might happen whether inventory value be cost or market. And that possibility is not peculiar to crude rubber alone; it might1935 BTA LEXIS 967">980 happen in the case of any of the staple commodities that are dealt in on commodity exchanges on narrow profit margins. Certainly the possibility is no sound reason for holding that the cost method of valuing inventories is not a proper method in this case. We would not pass unnoticed petitioner's argument on the brief that it is not seeking a change in inventory method, because it "never took physical inventories or used inventories in computing the income shown on the returns filed." The inference is, of course, that, never having taken or used inventories to determine income, the cost method of valuing inventories has not heretofore been adopted or used. But the premise is only a half truth born of sheer expediency. In the first place, a physical count of goods in the 1928 and 1929 inventories must have been available to the petitioner and the respondent, otherwise they would not have been able to agree upon and stipulate, as they have done, the value of the goods in those inventories, at cost or market, whichever is lower. Secondly, while petitioner has not in the taxable year or previously computed cost of goods sold by the formula of "opening inventory, plus purchase, 1935 BTA LEXIS 967">981 less closing inventory", such a procedure was wholly unnecessary; for, as already pointed out, the arithmetical result of that formula, when the inventories are valued at cost, assuming that there have been no inventory losses through shrinkage, spoilage, or other similar causes, is the same figure as the actual invoice cost of the goods sold, which petitioner used for computing gross profit from sales. That there were no inventory losses is evident from the same reasoning and computations by which we determined that the inventories shown in the 1928 and 1929 returns were valued at cost; for had there been such inventory losses, the computations and reasoning would have yielded entirely different results. The parties have stipulated that: "The result of the method employed by the petitioner in computing taxable net income on the income tax return filed for the years 1929 and prior years was to disregard all purchases of goods 32 B.T.A. 307">313 in each year which were still on hand at the end of each of such years." We understand this stipulation to mean that petitioner did not use the formula of "opening investory, plus purchases, less closing inventory." The important thing is, however, 1935 BTA LEXIS 967">982 not that petitioner did not use that formula for determining cost of goods sold and income, but that as shown by the balance sheets, which are a part of the returns and intended to support and substantiate the reported net income, or net loss, as the case may be, inventories were valued at cost. Again, had those inventories been used in the suggested formula, the resulting cost figure would have been the same as the figure used by the petitioner for computing gross profit from sales. It did then, both in fact and in theory, use inventories valued at cost in computing income. In view of the foregoing, we hold there is no error in the amount of gross profit from sales of crude rubber reported in the return for the taxable year in question. The final question for consideration is whether respondent erred in disallowing the deduction of $41,774.63 representing a so-called "Reserve for additional compensation." The facts in respect of this matter have all been stipulated and, being brief, we quote that part of the stipulation below: As a liability under an officers and employees bonus and profit sharing plan based on a percentage of the annual net earnings of the petitioner, an1935 BTA LEXIS 967">983 account was accrued and set up on the books of the petitioner during the year 1929 styled "Reserve for Additional Compensation" in the sum of $57,000. This represented the estimated amount of additional compensation due under the Bonus Plan. During the year 1929 advances had been made and paid out under the Bonus Plan in the sum of $15,225.37, leaving an estimated balance due as of December 31, 1929 of $41,774.63 for the year 1929. When the final computation of the amount due officers and employees under the Bonus Plan was determined for the year 1929, the so-called Reserve for Additional Compensation was found to be underestimated in the sum of $851.18. In addition to the advances made during the year 1929, payment of the additional compensation for the year 1929 was made under the plan in the total sum of $42,625.81 - $36,532.82 being paid in January, 1930 and $6,092.22 in February, 1930. The petitioner now claims not only the $41,774.63 disallowed by the respondent, but an additional $851.18 representing the amount by which its liability for additional compensation was understated in the return, a total of $42,625.81. There is no dispute as to the reasonableness of the1935 BTA LEXIS 967">984 deduction claimed. The respondent disallowed $41,774.63 of the deduction on the ground that the applicable statute does not provide for the deduction of amounts credited to a "reserve for salaries." His position in the matter is further stated on the brief as follows: "In closing the books for 1929 the petitioner could have accrued as a definite ascertained liability the amount of $57,851.18 as of December 32 B.T.A. 307">314 31, 1929. Being on the accrual basis it is obvious that the deduction would then be allowable. But the fact is that this was not done." Thus it appears that while respondent concedes that the amount in question was an actual liability at the close of the taxable year, as well he may under the stipulated facts, he has made the disallowance because the petitioner chose to designate its liability a "reserve" rather than by some other name that might have better indicated its true character. But such is not the test of deductibility. True reserves representing mere appropriations of surplus are not proper deductions from income, unless specifically provided for by statute; but when an item is without question within the realm of ordinary and necessary business expenses, 1935 BTA LEXIS 967">*985 it may be deducted, in the case of a taxpayer on an accrual basis, in the year in which incurred, regardless of the style or accounting nomenclature by which it may be called. The statute specifically includes within the category of ordinary and necessary business expenses "a reasonable allowance for salaries or other compensation for personal services actually rendered." That petitioner incurred liability for additional compensation of $42,625.81 during the taxable year not only appears from the stipulated facts, but is conceded; and since petitioner computed net income on an accrual basis, and there is no question as to the reasonableness of the deduction claimed, the whole amount is properly deductible for the taxable year in controversy. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625222/	J. Ray Cook v. Commissioner.Cook v. CommissionerDocket No. 32037.United States Tax Court1952 Tax Ct. Memo LEXIS 151; 11 T.C.M. 707; T.C.M. (RIA) 52211; June 30, 19521952 Tax Ct. Memo LEXIS 151">151 Donald B. Clark, Esq., for the petitioner. Everett E. Smith, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The respondent has determined deficiencies in income tax and penalties as follows: Failure toSubstantialFile Decl.Underesti-Sec. 293(b)Estim. Taxmate of Tax,FraudPenalty UnderPenalty UnderYearTaxPenaltySec. 294(d)(1)(A)Sec. 294(d)(2)1942$ 2,417.12$ 1,208.5619437,711.433,855.71$ 462.6919443,306.221,653.11$ 297.56198.37194520,940.4710,470.231,884.631,256.43194614,804.697,402.351,419.99691.06$49,179.93$24,589.96$3,602.18$2,608.55Findings of Fact The petitioner lived at Maryville, Missouri, during the years 1942 to 1946, inclusive. He filed individual income tax returns for each of the taxable years with the collector for the sixth district of Missouri at Kansas City, Missouri. The petitioner and his father, James F. Cook, operated the Missouri Theatre in Maryville, Missouri, in partnership during the years 1942 through 1946, each owning a one-half interest in the partnership. The petitioner1952 Tax Ct. Memo LEXIS 151">152 received income from farms during the taxable years, and he owned stocks and bonds. He also, dealt in commodities on exchange in Kansas City and Missouri. The petitioner did not prepare his income tax returns for any of the taxable years, but employed different accountants to prepare his returns. The petitioner graduated from the normal school at Maryville, and he received some business college or commercial college training. The petitioner's net income and income tax liability for the years in question as shown by his filed returns were as follows: ReportedReportedYearNet IncomeLiability1942Loss($ 438.55)None1943Loss( 4,937.03)None1944Loss( 10,475.60)None1945Loss( 207.00)None19465,208.44$972.98The petitioner's correct net income for each of the taxable years was a follows: Adj. Gross perStandard or otherExs. MM, QQ,deduction perYearUU, YYnotice of def.Net Income1942$ 9,981.13$ 24.89$ 9,956.24194320,158.20None20,158.20194411,893.21500.0011,393.21194541,000.65500.0040,500.65194636,304.73500.0035,804.73The petitioner's1952 Tax Ct. Memo LEXIS 151">153 income for each of the taxable years was understated in the amounts set forth below: YearUnderstatement1942$10,394.79194325,095.23194421,868.81194540,707.65194630,956.29The correct tax liability on the aforesaid correct net income of petitioner, exclusive of penalties and disregarding any payments made, was substantial in each of the years 1942 through 1945 and greatly exceeded the petitioner's reported liability for 1946. The respondent computed the petitioner's net income for the years 1942-1945 by verifying an audit made by a public accountant engaged by the petitioner with all available records of the petitioner. From all available records of the petitioner the respondent computed petitioner's income for 1946. The petitioner's accountant concurred in the methods and results of respondent's audit for 1946. The petitioner's income for the taxable years was reconstructed by an accountant employed by the petitioner, and by an agent of the respondent, from bank deposits, deposit slips, bank statements, and checks paid by the bank. Cancelled checks of the petitioner showed his cash expenditures for personal expenses to the extent set forth1952 Tax Ct. Memo LEXIS 151">154 in the following schedule. The respondent's agent determined that some personal living expenses of the petitioner were paid with cash which was not reflected in any of petitioner's records, to the extent of $1,200 each year, in addition to the known expenditures for personal expenses evidenced by checks, and he added, therefore, $1,200 to petitioner's taxable income for each year. He determined, accordingly, that the total amounts of personal expenditures for the taxable years were as follows: PersonalAdditionalExpensesCashShownPersonalYearby ChecksExp. Det'dTotal1942$2,691.83$1,200.00$3,891.8319431,766.631,200.002,966.6319442,360.211,200.003,560.2119451,531.201,200.002,731.2019463,315.651,200.004,515.65In 1944 the Missouri Theatre was destroyed by fire. The accounting records of the theatre were destroyed in the fire. The partnership which operated the theatre received insurance in the amount of $29,946. In the partnership return net loss after recovery of insurance proceeds was reported in the amount of $16,015.43. Included in the theatre property and equipment destroyed in 1944 by fire was an1952 Tax Ct. Memo LEXIS 151">155 air conditioning system having a depreciated, book value of $3,000 in 1944. The air conditioning system was sold in 1943, and the cost thereof, adjusted for the depreciation reserve, was improperly included in the value of the theatre and equipment just prior to the fire in 1944, in the computation of the amount of the net loss sustained from the destruction by fire. In 1936, O. M. Watkins and his wife, Margaret K. Watkins, owed the petitioner for loans, plus interest, which were evidenced by a note dated December 14, 1936, for $5,884.72, signed by O. M. Watkins and Mildred Margaret K. Watkins. The note was secured by an "assignment upon the New York Life Insurance Company," by a chattel mortgage upon an automobile, by a deed of trust upon real estate in Maryville, and by other collateral. The note was due December 14, 1941. Watkins disappeared in 1938 without any trace of his whereabouts. Petitioner sued Margaret K. Watkins on the note in 1946 or 1947. Judgment was against the petitioner. No deduction for a bad debt loss was claimed in petitioner's return for 1946. In 1945, the petitioner had some dealings with the Shenandoah Popcorn Company. He raised popcorn and sold and shipped1952 Tax Ct. Memo LEXIS 151">156 it to Shenandoah. He received payment for the shipment in a substantial amount, over $10,000, in 1946, which was not included in gross income in petitioner's income tax return for 1946. Such income was not reported in his return for 1945, either. On August 24, 1950, the petitioner was convicted by the United State District Court, St. Joseph Division, Western District of Missouri, upon his plea of guilty to the offenses of wilfully and knowingly attempting to defeat and evade a large part of income tax due and owing by him to the United States for the calendar years 1945 and 1946 by filing and causing to be filed false and fraudulent income tax returns, and he was fined and sentenced to imprisonment for 90 days. The respondent's computations of the petitioner's net income for 1942 through 1946, are correct. There is no evidence that the respondent included in income items which were not properly includible; nor that the respondent failed to give proper effect to any deductible loss, bad debt, or other item. The differences between the petitioner's reported net income in each of the taxable years, 1942 through 1946, and his correct net income as above stated were due to the petitioner's1952 Tax Ct. Memo LEXIS 151">157 fraud with intent to evade tax by such fraudulent understatements of net income. Parts of the deficiencies in tax in each of the years 1942 through 1946 are due to petitioner's fraud with intent to evade tax. The failure of the petitioner to file proper declarations of estimated tax within the time prescribed for each of the years in question was due to willful neglect and was not due to reasonable cause. The failure of the petitioner to file the required declarations of estimated tax for the years in question resulted in substantial understatements of income for the years 1943 through 1946. Opinion Issue 1: The 50 per cent fraud penalty. The respondent has the burden of proving that parts of the deficiencies for each of years 1942 through 1946 were due to fraud with intent to evade tax. He introduced evidence relating to each of the five years involved which establishes that the petitioner's understatements of his gross income for each of the five years in his returns for those years were substantial. The petitioner did not introduce evidence to refute and overcome the respondent's determinations as to the amounts of gross and net income realized by the petitioner for each of1952 Tax Ct. Memo LEXIS 151">158 the five years. If it is established by the respondent that part of the deficiency for each year was due to fraud with intent to evade tax, his addition of 50 per cent of each deficiency as the fraud penalty must be sustained. Consideration has been given to the effort of the petitioner to justify his treatment of some items reported in his returns, particularly his return for 1944, but the petitioner did no more than make bare assertions which are not supported by proof. Also, it is noted that the petitioner in his amended petition challenged the respondent's determination of the 50 per cent fraud penalties for the years 1942, 1943, and 1944, only; and on brief, he has argued, only, that the fraud penalty for the year 1944 should not be sustained. Therefore, the petitioner has adandoned his pleading in his original petition that the respondent erred in adding the 50 per cent fraud penalty to the deficiency for each of the years 1942, 1943, 1945, and 1946, and the issue now relates only to the year 1944. With respect to the year 1944, the petitioner has not introduced evidence to overcome the respondent's determination that part of the deficiency for 1944 was due to fraud with1952 Tax Ct. Memo LEXIS 151">159 intent to evade tax. In his return for 1944, the petitioner reported loss for the year in the amount of $10,475.60. The respondent has established that the petitioner's gross income for 1944 amounted to $29,958.59; that deductible expenses amounted to $16,729.79; that other allowable deductions amounted to $2,535.59; and that net income without adjustment for cash receipts of $1,200 (representing unrecorded cash disbursements for personal expenses), amounted to $10,693.21. The petitioner understated his net income for 1944 in his return by a substantial amount. His assertion at the trial of this proceeding that such understatements of gross income and net income were due to an innocent belief that a casualty loss from the destruction of the Missouri Theatre in 1944 was larger than even the loss reported on the return is entitled to no weight because it is a bald assertion unsupported by evidence. Furthermore, the petitioner has, otherwise, failed to establish that his understatement of gross receipts in 1944 was not intentional and was not due to fraud. The rule that large understatements of income, when repeated over several years, constitute strong evidence of fraud applies here, 1952 Tax Ct. Memo LEXIS 151">160 and under that rule the respondent's determination of fraud penalties for 1942, 1943, 1944, 1945 and 1946 are sustained. ; , certiorari denied, ; . See, also . Issue 2: The amounts of gross income as affected by cash payments of personal expenses. The amounts of the deficiencies in income tax for each year, 1942 through 1946, are in dispute because the petitioner contends that his gross income in each of the years involved was $1,200 less than the respondent has determined. The petitioner has the burden of proving that this contention is true. He has not met this burden of proof. Therefore, his contention is rejected. The petitioner did not introduce any evidence relating to the total amounts of his personal expenses in each of the taxable years. He has admitted that he had personal expenses, in addition to those paid by checks, which were paid by cash, which was withdrawn from the earnings of the Missouri Theatre, but1952 Tax Ct. Memo LEXIS 151">161 he has not established that in each year the amount of his personal expenses paid in cash, in addition to those paid by check, amounted to less than $1,200. It is held that the respondent did not err in adding $1,200 to gross income in each year for cash payments of personal expenses in addition to the personal expenses which were paid by check. Issue 3: Bad debt of Watkins. A bad debt loss deduction has been claimed for the first time in the petition for the year 1946. The petitioner has failed to prove that the Watkins debt became worthless in 1946. The facts strongly indicate that the debt became worthless prior to 1946. The claimed deduction under section 23 (k) (4) is denied. For failure of proof, the deduction would be disallowed, also, under section 23 (k) (1) of the Code. Therefore, it is unnecessary to consider whether the Watkins debt was a business or a nonbusiness bad debt. The petitioner in his pleadings raised other questions relating to deductions, but on brief, they have been abandoned. Therefore, we do not consider them. We observe, however, that there was failure of proof which, apparently is the reason for the abandonment of the issues on brief. Issue 4: Penalties1952 Tax Ct. Memo LEXIS 151">162 under sections 294 (d) (1) (A) and 294 (d) (2). The respondent has properly added both penalties under sections 294 (d) (1) (A) and 294 (d) (2). It has not been shown that the failure of the petitioner to file declarations of estimated tax for 1944 through 1946 within the time prescribed was due to reasonable cause and was not due to willful neglect. Therefore, the respondent's determination of penalties under section 294 (d) (1) (A) is sustained. The failure of the petitioner to file declarations of estimated tax within the time prescribed for 1944, 1945, and 1946 resulted in a substantial understatement of estimated tax. Also, the petitioner made substantial understatement of income and of tax for 1943. "* * * In the event of a failure to file the required declaration, the amount of the estimated tax for the purposes of this provision [section 294 (d) (2)] is zero. [Supplement to Regulations 111, sec. 29.294-1 (b) (3) (A), p. 438; Conference Rep., H.R. Rep. No. 510, 78th Cong., 1st Sess., p. 56.]" Under this regulation and since no evidence was offered by the petitioner with respect to the understatement of estimated tax for any of the years 1943 through 1946, we sustain1952 Tax Ct. Memo LEXIS 151">*163 the respondent's determination that the petitioner is liable for penalties under section 294 (d) (2) for the years 1943, 1944, 1945, and 1946. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625224/	A. AND J., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.A. & J., Inc. v. CommissionerDocket No. 80815.United States Board of Tax Appeals38 B.T.A. 1248; 1938 BTA LEXIS 764; November 29, 1938, Promulgated 1938 BTA LEXIS 764">764 1. Upon the evidence it is found as a fact that petitioner during the taxable year permitted its gains or profits to accumulate beyond the reasonable needs of its business. Held, this fact, under section 104(b) of the Revenue Act of 1928, is prima facie evidence of a purpose to escape the surtax upon petitioner's shareholders; held, further, the evidence offered by petitioner is insufficient to overcome the presumption specified under section 104(b) and the existing presumption of correctness attaching to the respondent's determination that petitioner was subject to the additional tax of 50 percent provided for in section 104(a). 2. During the taxable year petitioner was the sole stockholder of the Saranac Investment Corporation. Prior to the taxable year petitioner had borrowed considerable funds from Saranac. During the taxable year Saranac declared a dividend in favor of petitioner which petitioner used to liquidate its debt to Saranac. Held, the dividend is "income" to petitioner under section 22(a), Revenue Act of 1928, and as such is also subject to the provisions of sections 23(p) and 104(c) of the same act. S. L. Herold, Esq., for the petitioner. 1938 BTA LEXIS 764">765 R. P. Hertzog, Esq., for the respondent. BLACK 38 B.T.A. 1248">1248 Petitioner prays for the redetermination of a deficiency in its income tax for the taxable year 1931 in the amount of $161,346.17. There are two issues: (1) Whether the respondent erred in holding petitioner subject to taxation under the provisions of section 104 of the Revenue Act of 1928 and (2), in the alternative, whether the respondent erred in determining petitioner's net income to be the amount of $322,692.33. The record of evidence in the case of ; affd., ; certiorari denied, , was by agreement of counsel incorporated in the present proceeding. FINDINGS OF FACT. Petitioner, on March 1, 1927, was organized as a corporation under the laws of the State of Louisiana, with its legal domicile in the city of Shreveport. On August 16, 1932, by formal act of consolidation under Act 250 of 1928 of the Louisiana Legislature, petitioner was consolidated with several other Louisiana corporations into Saenger Corporation, a Louisiana corporation, but under the provisions of the statute authorizing1938 BTA LEXIS 764">766 such consolidation petitioner still retains the right to prosecute this proceeding in its own name as if such consolidation had not taken place. 38 B.T.A. 1248">1249 Prior to the incorporation of petitioner, two brothers, A. D. Saenger and J. H. Saenger, were associated together as a universal part nership under the name and style of Saenger Bros., and as such conducted many different and varied lines of business, including a drug business which they had incorporated under the name of Saenger Drug Co., and a motion picture business which they and one E. V. Richards had incorporated under the name of Saenger Theatres, Inc. The partnership owned real and personal property in the States of Louisiana, Texas, and California, stocks and bonds of various corporations, bills and accounts receivable of various kinds, and in general all the property of every character owned by the two brothers, who gave it all of their time and services. J. H. Saenger devoted his time and attention exclusively to the affairs of Saenger Theatres, Inc., and A. D. Saenger conducted the other affairs of the partnership. Each of the brothers owned an equal number of shares of stock in Saenger Theatres, Inc., and Richards1938 BTA LEXIS 764">767 owned the remaining shares therein. On February 28, 1927, the two brothers executed a written agreement concerning their partnership, the concluding paragraph of which is as follows: The affairs of the said partnership being so diversified, and its assets having grown to such large proportions, the partners have agreed that they will form a corporation, into which they will transfer all of the assets of the partnership except the common stock of the Saenger Theatres, Inc.; that is to say, that they will form this corporation, to which will be conveyed every asset of every kind owned by the partnership, including real estate, stocks, bonds and other securities of every character, except the said common stock of the Saenger Theatres, Inc., but including all individual earnings of the said A. D. Saenger and the said J. H. Saenger in every capacity, the said partners each agreeing to give to the said corporation his entire time and all of his services, and agreeing that for any service rendered by him for any other concern he will account to the said corporation, for its account, for salary, remuneration, fee or compensation whatsoever which he may receive. Upon incorporation of1938 BTA LEXIS 764">768 petitioner, it acquired all of the assets of the partnership of Saenger Bros., except the common stock of Saenger Theatres, Inc., in exchange for the entire issue of its capital stock of the par value of $1,500,000, and the assumption by petitioner of liabilities of the partnership in the amount of $192,013.10. Petitioner issued 7,499 shares of its capital stock to A. D. Saenger, 7,499 shares to J. H. Saenger, and 2 shares to Harry K. Oliphint as qualifying shares. The fair market value of the net assets acquired by petitioner at the time of its incorporation was $1,500,000. On March 3, 1927, the board of directors of petitioner adopted a resolution reading in part as follows: The purpose of this resolution is that this corporation does hereby become, except as to the common stock in Saenger Theatres, Inc., the universal successor 38 B.T.A. 1248">1250 to the firm of Saenger Brothers, acquiring hereby all of its assets, except the common stock of Saenger Theatres, Inc., and assuming all of its liabilities of every character, the net worth of the said partnership being fixed at One Million Five Hundred Thousand ($1,500,000.00) Dollars, the consideration here authorized. Early in the1938 BTA LEXIS 764">769 year 1929 the stockholders of Saenger Theatres, Inc., commenced negotiations with the Paramount Famous Lasky Corporation with a view of making a disposition of their stock in Saenger Theatres, Inc. On or about July 22, 1929, the Paramount Famous Lasky Corporation organized under the laws of the State of Delaware two new corporations called Saranac Investment Corporation and Rochelle Investment Corporation. It exchanged 51,000 shares of its capital stock for the entire capital stock of the Saranac Investment Corporation, consisting of 2,500 shares. It also exchanged 20,233 shares of its capital stock for the entire capital stock of the Rochelle Investment Corporation. It then, prior to August 7, 1929, acquired from the two Saenger brothers all of their stock in Saenger Theatres, Inc., in exchange for the entire capital stock of the Saranac Investment Corporation, and at about the same time acquired either from Richards or from R. & L. Inc., a corporation organized by Richards on March 3, 1927, all of the remaining stock in Saenger Theatres, Inc., in exchange for the entire capital stock of the Rochelle Investment Corporation. Paramount's name was later changed to Paramount-Publix1938 BTA LEXIS 764">770 Corporation. Upon receipt of the 2,500 shares of stock of the Sarance Investment Corporation the two Saenger brothers transferred the 2,500 shares to petitioner, which shares were entered on petitioner's books at a cost of $3,069,000. The principal asset owned by petitioner on and after August 7, 1929, was the 2,500 shares of Saranac Investment Corporation, which in turn owned 51,000 shares of the Paramount-Publix Corporation. The fair market value of the Paramount-Publix Corporation stock on August 7, 1929, was $68 a share; on December 31, 1929, it was $48 a share; and during the taxable year 1931 it sold at from $17 to $2 a share. On January 1, 1933, 10,000 shares were sold at one dollar a share. On August 7, 1929, A. D. Saenger caused to be organized under the laws of the State of Louisiana a new corporation called A. D. Saenger, Inc. He acquired the entire capital stock of the new corporation in exchange for his 7,499 shares of petitioner's stock. On August 7, 1929, J. H. Saenger caused to be organized under the laws of the State of Louisiana a new corporation called J. H. Saenger, Inc. He acquired the entire capital stock of the new corporation in exchange for his1938 BTA LEXIS 764">771 7,499 shares of petitioner's stock. During the 38 B.T.A. 1248">1251 taxable year 1931 all of petitioner's capital stock, with the exception of two qualifying shares, was owned by A. D. Saenger, Inc., and J. H. Saenger, Inc.Petitioner duly filed an income tax return for the taxable year 1931 and reported gross income and deductions as follows: Gross income:Interest$6,439.66Rents18,089.14Dividends on stock of domestic corporations371,175.00Miscellaneous income415.45Total gross income396,119.25Deductions:Interest$32,231.06Taxes973.86Dividends371,175.00Salary of H. K. Oliphint13,000.00Net loss for 193031,854.77Insurance and miscellaneous expenses4,998.55Total deductions454,233.24Net loss for 193158,113.99In a schedule attached to its return petitioner further itemized the above item of rents. This schedule shows that the amount of $18,089.14 is the net income from rents received rather than the gross. It shows a gross income from rents received from 17 different sources in the total amount of $38,946.38, and deductions for repairs, insurance, taxes, depreciation, and miscellaneous expenses with respect to each1938 BTA LEXIS 764">772 particular piece of rental property in the total amount of $20,857.24, thus leaving a net income from rents received in the amount of $18,089.14. The item of dividends reported both as gross income and deductions on the fact of the return was itemized in schedule H thereof as follows: Saranac Investment Corporation$370,000Southwestern Gas & Elec. Co8First National Bank330City Savings Bank & Trust Co220Hibernia Bank & Trust Co500National Cash Register Co117371,175During the taxable year 1931 petitioner loaned $5,600 to the R. & D. Shoe Corporation, the stock of which was owned by one Rosenburg and one Dryer. Prior to the taxable year petitioner had endorsed 38 B.T.A. 1248">1252 paper for the R. & D. Corporation in an amount of about $105,000. The respondent attached a statement to his deficiency notice which read in part as follows: After careful consideration of your Federal income tax return and of all other available information, the Bureau holds that your corporation is subject to taxation under the provisions of section 104 of the Revenue Act of 1928. In this statement the respondent disallowed $8,877.66 of the $31,854.77 net loss1938 BTA LEXIS 764">773 for 1930 deducted by petitioner and also $753.66 of the depreciation deducted by petitioner from gross rentals, and thus determined that under section 21 of the Revenue Act of 1928 petitioner had a net loss for the taxable year 1931 of $48,482.67 instead of the $58,113.99 reported by petitioner. Having determined that petitioner was subject to taxation under the provisions of section 104, the respondent, under section 104(c), then increased petitioner's net income as defined in section 21 (here a net loss of $48,482.67) by the amount of $371,175, the dividend deduction allowed under section 23(p), and thus determined petitioner's net income subject to the 50 percent tax under section 104(a) to be the difference between $371,175 and $48,482.67 or $322,692.33. The Saranac Investment Corporation at no time carried an account with any bank. Its only asset was capital stock ($51,000 shares) of the Paramount-Publix Corporation. All dividends declared and paid by the Paramount-Publix Corporation on the 51,000 shares owned by the Saranac Investment Corporation were paid direct to petitioner, which would deposit them in its bank account and give the Saranac Investment Corporation credit1938 BTA LEXIS 764">774 for the amount thus received and deposited. At the beginning of the taxable year 1931 the credit in favor of the Saranac Investment Corporation for dividends paid direct to petitioner by the Paramount-Publix Corporation and treated by petitioner as money borrowed from the Saranac Investment Corporation amounted to over $300,000. During the taxable year 1931 the Saranac Investment Corporation declared a dividend in favor of petitioner, its sole stockholder, in the amount of $370,000, for the purpose of absorbing the liability which petitioner then owed the Saranac Investment Corporation. During the year 1929 petitioner declared dividends in the total amount of $412,500. These dividends exhausted all of petitioner's earnings or profits at that time. It did not declare any dividends during the year 1930 or the taxable year 1931. Petitioner's balance sheets as of the beginning and end of the taxable year as reported in schedule K of its income tax return are as follows: Beginning of 1931End of 1931ASSETSCash$253,162.66$6,250.80Notes receivable5,820.00Accounts receivable21,798.1412,743.64Stocks of domestic corporations3,475,886.343,177,622.09Land326,633.81326,633.81Buildings197,439.05197,439.05Life insurance value19,717.604,294,637.603,726,509.39Less: Reserve for depreciation40,700.0053,300.00Total assets4,253,937.603,673,209.39LIABILITIESNotes payable$445,000.00$160,000.00Accounts payable313,783.78301,995.19Mortgages77,500.0072,500.00Common stock1,500,000.00900,000.00Surplus and undivided profits1,917,653.822,238,714.20Total liabilities4,253,937.603,673,209.391938 BTA LEXIS 764">775 38 B.T.A. 1248">1253 The assets listed in the above balance sheets are stated at cost to the petitioner. Both at the beginning and end of the taxable year the fair market value of petitioner's stocks of domestic corporations, land, and buildings, due to the depression which began in the year 1929, was very much less than the cost of such assets as recorded on petitioner's books and reflected in the above balance sheets. In schedule L of its return petitioner explained the $321,060.38 net increase in its surplus and undivided profits during 1931 as being due to four items, as follows: 1. Dividends on Stocks of Domestic Corporations$371,175.002. Net loss for 1930, deducted on return but not from surplus during 193131,854.77$403,029.77Less: 3. Net loss for 1931$58,113.994. Unallowable deductions23,855.4081,969.39Net increase in surplus & undivided profits$321,060.38During December 1931 petitioner bought in and retired $600,000 of its outstanding capital stock at par. The officers and directors of petitioner from the time of its incorporation to and throughout the taxable year 1931 were A. D. Saenger, J. H. Saenger, and Harry1938 BTA LEXIS 764">776 K. Oliphint. These individuals were also the officers and directors of A. D. Saenger, Inc., J. H. Saenger, Inc., and the Saranac Investment Corporation. A. D. Saenger, Inc., J. H. Saenger, Inc., and petitioner were consolidated during 1932 into the Saenger Corporation, a newly organized 38 B.T.A. 1248">1254 Louisiana corporation, at which time the net value of the assets of all three corporations that went into the Saenger Corporation was the amount of $334,000. During the taxable year petitioner permitted its gains or profits to accumulate beyond the reasonable needs of its business. Petitioner during the taxable year 1931 was availed of for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. As stated above, A. D. Saenger was the sole stockholder of A. D. Saenger, Inc., and J. H. Saenger was the sole stockholder of J. H. Saenger, Inc., and the two corporations above named were the sole stockholders of A. and J., Inc., the petitioner, except two qualifying shares. OPINION. BLACK: The principal question involved in this proceeding1938 BTA LEXIS 764">777 is whether the respondent erred in determining that petitioner should be taxed under the provisions of section 104 of the Revenue Act of 1928, subsections (a), (b), and (c) of which are set out in the margin. 1 Subsection (d) of section 104 is not involved in this proceeding. 1938 BTA LEXIS 764">778 Whether petitioner is subject to the application of section 104 depends upon whether it was "formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed." The determination of this question is one of fact. ; ; . Cf. ; ; . The respondent in his deficiency notice has not indicated whether his determination is based upon a finding by respondent that petitioner was "formed" for the purpose mentioned in the statute or 38 B.T.A. 1248">1255 whether it was "availed of" for that purpose, or whether it was both formed and availed of for the condemned purpose. He has simply determined that section 104 applies and that determination "is presumed to be correct until the contrary appears from1938 BTA LEXIS 764">779 the evidence." Section 104(b) mentions certain facts, which, if any one is present, shall be prima facie evidence of a purpose to escape the surtax. The presumption thus arising under subsection (b) is in addition to the presumption of correctness attaching to the respondent's determination. . The respondent in his brief contends that petitioner was a "mere holding or investment company" and that the "record in this case falls far short of overcoming the presumption existing in regard thereto." Counsel for petitioner did not file any brief. The petition, however, alleges that the respondent erred as follows: (a) In holding that petitioner had a net income for the year 1931 of Three Hundred Twenty-Two Thousand Six Hundred Ninety-Two and 33/100 ($322,692.33) Dollars; (b) In holding that petitioner was formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being distributed; (c) In refusing to consider the financial condition1938 BTA LEXIS 764">780 of the corporation at the close of the taxable year, and the manner in which its funds were invested at that date; (d) In refusing to recognize the effect of the law of the state of the creation of the petitioner which forbade the payment or distribution of any dividends because of petitioner's condition in 1931; (e) In holding that the profits of the corporation were permitted to accumulate beyond the reasonable needs of its business; (f) In refusing to recognize the rights of the corporation to keep its capital intact; (g) In refusing to recognize that the penalty under Section 104 is applicable only to consummated evasion of the tax through the accumulation of gains and profits in order to prevent the imposition of the surtax upon its stockholders; (h) In refusing to recognize that, in the determination of whether the penalty should be imposed, the inquiry should be into the substance of the corporation's affairs, and not to mere technical matters of accounting or to the form of its book entries; (i) In imposing the penalty upon the petitioner for failure to distribute its apparent or nominal profits as dividends when such action would have been in violation of the laws1938 BTA LEXIS 764">781 of the State of its creation. In the prayers for relief assignment of error (a) is to be regarded as in the alternative only. In his opening statement counsel for petitioner, after referring to the several assignments of error (a) to (i), supra, stated that there were certain differences between the instant proceeding and the case of 38 B.T.A. 1248">1256 ; affd., ; certiorari denied, . In this connection counsel for petitioner said: A. & J. Incorporated, we contend, was formed as a business corporation and not as a mere holding or investment company. It was conceded on the trial before [that] A. D. Saenger, Incorporated, was a mere holding or investment company whose sole assets were 50 per cent of the stock of A. & J. Incorporated. We are also contending and expect to adduce evidence to prove that the corporation did not receive during 1931 the income which the Commissioner finds in the decision. In other words, there is a question of fact here different from the A. D. Saenger case and a question of law based upon the different corporate purposes of the present petitioner1938 BTA LEXIS 764">782 in that case. For the purposes of this opinion we shall assume that petitioner was not formed as a mere holding or investment company for the purpose of preventing the imposition of the surtax on A. D. Saenger and J. H. Saenger, who for many years had conducted their business operations as a universal partnership. We shall assume that there was a real business purpose for organizing the petitioner and that business purpose was to carry on under corporate form instead of partnership form the widespread business activities of the two brothers. We have accepted the explanation given in that respect as a valid one and we have not found in our findings of fact that petitioner was formed for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger. We have, however, found that petitioner, after its organization, was availed of for that purpose. This finding is based upon the fact that in 1929, two years after petitioner corporation was organized, the two brothers, A. D. Saenger and J. H. Saenger, entered into negotiations with the Paramount Famous Lasky Corporation to sell to the latter the stock which the brothers owned in Saenger Theatres, Inc. 1938 BTA LEXIS 764">783 The deal was consummated in 1929 and the manner of its consummation is detailed in our findings of fact and those details need not be here repeated. Suffice it to say that when the two brothers received the Saranac Investment Corporation stock as a result of the deal they transferred it to petitioner and immediately organized personal holding companies to hold the stock which each petitioner then owned in petitioner, A. & J., Inc. That organized for A. D. Saenger was known as A. D. Saenger, Inc., and we have already held, in ; affd., , that this latter corporation was formed and availed of for the purpose of preventing the imposition of the surtax upon the sole stockholder, A. D. Saenger. The evidence in the instant case does not reveal any reasonable and valid business purpose for the transfer in 1929 by the brothers to petitioner of the stock which they received in the Saranac Investment Corporation as a result of their disposal to the Paramount Famous Lasky Corporation of their stock in Saenger Theatres, Inc. This 38 B.T.A. 1248">1257 stock had at that time a fair market value of more than $3,000,000 and1938 BTA LEXIS 764">784 paid good dividends and it was apparently transferred to petitioner as paid-in surplus, although the record does not make that entirely clear. There is no showing that petitioner was in need of any such capital contribution from its stockholders. So far as the record shows, petitioner had ample capital at that time to carry on all of its business transactions. We must conclude from the evidence that the transfer of this Saranac Investment Corporation to petitioner was a part of the plan of preventing the imposition of the surtax upon the two brothers, A. D. Saenger and J. H. Saenger. Therefore for reasons which we shall state more at length later on, we hold that petitioner was availed of in the taxable year for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger. We shall next consider assignment of error (e). If the respondent held, as alleged by petitioner, that petitioner's profits were permitted to accumulate beyond the reasonable needs of its business, such a holding is embodied in his general determination that petitioner was "subject to taxation under the provisions of section 104," as the respondent did not mention this point1938 BTA LEXIS 764">785 in his brief. The only evidence on the point, however, is the fact that petitioner's balance sheets show surplus and undivided profits at the beginning and end of the taxable year of $1,917,653.82 and $2,238,714.20, respectively. Petitioner's only business during the year, aside from collecting dividends on stocks of domestic corporations, was collecting gross rentals of $38,946.38 from 17 different pieces of property and loaning $5,600 to the R. & D. Shoe Corporation. Petitioner has offered no explanation for this large amount of surplus and undivided profits. As will be noted later in this opinion when we consider assignment of error (f), it could be that a part or all of this large surplus and undivided profits was actually a paid-in surplus, paid in at the time petitioner acquired the 2,500 shares of Saranac Investment Corporation from the two Saenger brothers in 1929. But there is no evidence in the record that it was so paid in. Therefore, upon the evidence which is before us, we are compelled to find as a fact that petitioner permitted its gains or profits to accumulate beyond the reasonable needs of its business. This fact is, under subsection (b), prima facie evidence1938 BTA LEXIS 764">786 of a purpose to escape the surtax upon petitioner's shareholders. Our next inquiry is whether petitioner has succeeded in overcoming with evidence the presumption of correctness attaching to the respondent's determination and the additional presumption arising under subsection (b) by reason of our finding that during the taxable year petitioner had permitted its gains or profits to accumulate 38 B.T.A. 1248">1258 beyond the reasonable needs of its business. In addition to the evidence mentioned above, petitioner offered some proof to the effect that the market value of its assets both at the beginning and end of the taxable year was substantially less than the cost of such assets. We are unable to find from the evidence what this market value was, but, even if we assume the situation most favorable to the petitioner, namely, that petitioner's liabilities both at the beginning and end of the year were in excess of petitioner's total assets valued at market, we should still have to hold that such a finding would be of no ultimate assistance to petitioner and that its assignments of error (c), (d), and (i) are without merit. Rands, Inc.; Nipoch Corporation; R. L. Blaffer & Co., all1938 BTA LEXIS 764">787 supra.The evidence relative to assignment of error (f) is also wholly insufficient to sustain petitioner's position. As a matter of law it is not disputed that a corporation may keep its "capital" intact without incurring the liability imposed by section 104. ; affd., ; certiorari denied, . But the evidence in the instant proceeding does not show that the declaration of a dividend equal to petitioner's gains or profits for the taxable year 1931 would have impaired petitioner's capital. In other words, petitioner could have declared a dividend of $322,692.33 during the taxable year and still have had surplus and undivided profits of $1,916,021.87, as shown by its books at the close of the year 1931. Of course, as suggested in this opinion under our discussion of assignment of error (e), it might be that a part of the large surplus and undivided profits appearing on petitioner's balance sheets at the beginning and end of the taxable year, if not all, represented a paid-in surplus, in which event the principles enumerated in 1938 BTA LEXIS 764">788 , might be applicable. We say this for the reason that the record is not clear as to the manner in which petitioner acquired the 2,500 shares of stock of the Saranac Investment Corporation, which stock had a value of over $3,000,000 at the time it was acquired by petitioner. But if any part of this large surplus and undivided profits represented a paid-in surplus and had been impaired by prior losses so that at the end of the year there were capital deficits instead of earned surplus, the burden was upon petitioner to prove that fact. . Without such proof we are unable to find that the respondent erred as alleged in assignment (f). Regarding assignments (g) and (h), suffice it to say that they are identically the same as were assigned by the petitioner and considered by the Board in the case of We need not prolong this opinion further with the discussion of every point that is necessarily inherent in a case of this kind. It 38 B.T.A. 1248">1259 would serve no useful purpose here for the reason that, after a careful consideration of all1938 BTA LEXIS 764">789 the evidence contained in the record, we are of the opinion that it falls far short of overcoming the presumption of correctness attaching to the respondent's determination, and the prima facie evidence of a purpose to escape the surtax upon petitioner's shareholders which is present by reason of the existence of some of the facts mentioned in subsection (b) of the statute. We have therefore found as a fact that petitioner was during the taxable year 1931 availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. The fact that the sole stockholders of petitioner were A. D. Saenger, Inc., and J. H. Saenger, Inc., and that we hold that these two latter corporations were formed and availed of for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger, respectively, brings the instant case, we think, within the rule of . Regarding petitioner's alternative position, little need be said. On petitioner's income tax return it reported as a part of its gross income1938 BTA LEXIS 764">*790 under section 22(a) dividends on stocks of domestic corporations in the amount of $371,175. It also deducted the same amount under section 23(p). Section 104(c) provides that such deductions must be restored to income. Petitioner apparently contends that it was in error in reporting the $370,000 dividend declared by the Saranac Investment Corporation as a part of its gross income, for the reason that it was declared for the purpose of absorbing the liability which petitioner then owed Saranac. This is not a valid reason for excluding the dividend from petitioner's gross income. The petitioner correctly reported the item, and, under section 104(c), the respondent was correct in including it in his computation of net income subject to the 50 percent additional tax under section 104(a) of the Revenue Act of 1928. The respondent's determination is approved. Decision will be entered for the respondent.Footnotes1. SEC. 104. ACCUMULATION OF SURPLUS TO EVADE SURTAXES. (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax. (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax. (c) As used in this section the term "net income" means the net income as defined in section 21, increased by the sum of the amount of the dividend deduction allowed under section i3(p) and the amount of the interest on obligations of the United States issued after September 1, 1917, which would be subject to tax in whole or in part in the hands of an individual owner. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625225/	Henry W. Minor v. Commissioner. Henry W. Minor and May Belle H. Minor v. Commissioner.Minor v. CommissionerDocket Nos. 53544, 53545.United States Tax CourtT.C. Memo 1956-175; 1956 Tax Ct. Memo LEXIS 117; 15 T.C.M. 906; T.C.M. (RIA) 56175; July 27, 1956John A. Darsey, Esq., Hurt Building, Atlanta, Ga., for the petitioners. Alben E. Carpens, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: In these consolidated proceedings the Commissioner determined deficiencies in income tax and imposed additions for fraud as follows: Henry W. Minor, Docket No. 53544Income Tax50% AdditionYearDeficiencyfor Fraud1943$ 4,671.52$2,335.7619441,120.491,301.74194513,959.749,164.30194615,356.507,678.25194712,423.036,211.52Henry W. Minor and May Belle H. Minor,Docket No. 535451948$ 1,234.70$ 617.351956 Tax Ct. Memo LEXIS 117">118 The issues for decision are: (1) Did petitioner Henry W. Minor understate his income for the years 1943 to 1948, inclusive, and if so, in what amounts? (2) Are the petitioners liable for the 50 per cent for fraud imposed by the Commissioner? (3) Is the tax for the year 1943 barred by limitation, or is it collectible by reason of fraud as prescribed in section 276(a) of the Internal Revenue Code of 1939? Findings of Fact Petitioners Henry W. Minor and May Belle H. Minor are husband and wife, residing in Atlanta, Georgia. He filed his individual income tax returns for each of the years 1943 to 1947, inclusive, and they both filed a joint return for 1948, all of which returns were filed with the then collector of internal revenue for the District of Georgia. The term petitioner hereinafter used will refer to Henry W. Minor. All income in question was earned by him. May Belle H. Minor had no income of her own and is a party herein because of the joint return filed for the year 1948. Petitioner is a doctor and has, since 1912, continuously practiced medicine in Atlanta, Georgia, and his principal income during the taxable years was derived therefrom. He had a good practice1956 Tax Ct. Memo LEXIS 117">119 which increased during World War II. Among other income sources were rents, stocks and savings deposits. Petitioner personally handled all income received and all amounts paid out, making practically all banking deposits, and he alone signed checks and disbursed same. He always kept large sums of money on his person, some times as much as $4,000, which he used for cashing checks of patients, and often for his own personal expenditures, many of which were paid in cash. He gave his wife $150 to $200 in cash monthly for household expenses. Petitioner personally made and signed all of his income tax returns, with such help as was available at the local public assistance office of the Internal Revenue Service. Petitioner had no bookkeeper and kept no regular set of books. There was no ledger journal and his records for the taxable years consisted of record cards for each patient, certain expenditure sheets, little 2 1/2 by 5 inch notebooks with loose pages, cancelled check for the year 1946, 1947 and 1948 and certain check stubs. These were all of the single entry system. Petitioner personally made all entries on his records, except his nurse or receptionist would enter the name of1956 Tax Ct. Memo LEXIS 117">120 a patient on cards prepared for new patients. Petitioner's books and records as kept did not accurately reflect his income during the taxable years here involved, and it is impossible to determine therefrom his correct income. During 1943 to 1948, inclusive, and prior thereto, petitioner kept unknown amounts of money in a safe deposit box which he and his brother maintained, and kept large sums in his office safe. He had at all times in question a general banking account in which he made deposits and against which he drew checks, and also had savings accounts in three different banks. Some cash receipts were not deposited in a bank. The following shows petitioner's bank deposits for the years 1943 to 1948, inclusive, the gross receipts from all sources he reported on his tax returns for said years, and the excesses of his deposits over his reported gross receipts: ReportedExcessYearBank DepositsGross ReceiptsBank Deposits1943$ 27,756.73$ 21,603.88$ 6,152.85194441,079.9426,992.0314,087.91194549,478.7729,163.3920,315.38194674,500.8531,025.5743,475.28194743,201.2231,639.8011,561.42194846,181.1030,523.4515,657.65Totals$282,198.61$170,948.12$111,250.491956 Tax Ct. Memo LEXIS 117">121 On the last day of each of the years 1941 to 1948, inclusive, petitioner had a credit balance in his checking account in the First National Bank of Atlanta as follows: December 31Balances inof yearChecking Account1941$ 4,147.0919424,139.1819436,799.651944$10,843.91194535,325.68194640,755.27194733,397.57194815,116.43Petitioner's balances in his three savings accounts at the end of each of the years 1943 to 1948, inclusive, were as follows: Balances in BanksDecember 31First NationalCitizens & SouthernGeorgia Savingsof yearBankNational BankBank & Trust Co.1943$1,111.33$1,047.12$1,238.0619441,122.461,057.611,266.0619451,133.711,068.201,291.5019463,145.063,085.583,330.7819473,173.233,116.523,397.7219483,205.053,147.773,466.00At the end of each of the years 1941 to 1948, inclusive, petitioner owned Government bonds at cost value, purchased with his own money, as follows: On December 31Governmentof yearBonds1941$21,037.50194224,262.50194327,825.00194431,575.00194535,325.00194641,325.00194758,200.00194871,437.501956 Tax Ct. Memo LEXIS 117">122 At the end of each of the years 1941 to to 1948, inclusive, petitioner owned corporate stocks purchased by him with his own funds as follows: On December 31Corporateof yearStocks1941$4,870.0019424,870.001943$4,870.0019444,870.0019451,370.0019461,370.0019471,370.001948745.00At the end of the years 1941 to 1948, inclusive, near relatives or members of petitioner's family owed him the following amounts because of loans made by him to them: On December 31Amount ofof yearMoney Owed1941$1,500.0019421,500.0019431,500.0019441,500.0019451,500.0019461,500.0019476,300.0019485,750.00During the years 1943 to 1948, inclusive, petitioner made non-deductible expenditures for the purposes and in the amounts listed in the table below: His Son's EducationPayment ofand EstablishmentPetitioner'sPetitioner'sYearin Dental PracticeIncome TaxesInsurance Premiums1943$2,497.87$2,200.00$3,222.8819442,497.873,235.781,222.8819452,497.872,889.915,422.8819465,000.003,977.102,510.4419478,906.385,324.452,423.131948600.009,175.045,433.011956 Tax Ct. Memo LEXIS 117">123 Exhibit A is respondent's detailed net worth statement on which his deficiency notice is based, and Exhibit 25 is petitioner's net worth statement compiled by an accountant employed by petitioner after investigation herein was begun. Without approving the correctness of either, but for the purpose of comparison and revealing the wide variance therein, both of these exhibits in their entirety are by this reference made a part hereof. From these exhibits figures (cents omitted) in the following table are taken: 12/31/4312/31/4412/31/4512/31/4612/31/4712/31/48Total Assets, Ex. "A"$105,048$101,462$113,311$133,640$148,762$147,062Total Assets, Ex. "25"141,814140,473132,973138,952126,028110,933Increase (or decrease) in Net Worth,Ex. "A"$ 5,295($ 565)$ 15,912$ 21,623$ 14,489($ 1,907)Increase (or decrease) in Net Worth,Ex. "25"$ 7,178$ 1,679($ 3,436)$ 7,273($ 13,556)($ 15,302)Net Income as Corrected (Subject toIncome Tax) Ex. "A"$ 20,216$ 16,266$ 41,142$ 43,361$ 38,043$ 20,300Net Income as Corrected (Subject toTax) Ex. "25"$ 17,849$ 10,199$ 20,710$ 22,663$ 5,962$ 3,218Net Income as Corrected (Subject toVictory Tax) Ex. "A"$ 20,951Net Income as Corrected (Subject toVictory Tax) Ex. "25"$ 18,5841956 Tax Ct. Memo LEXIS 117">124 During the taxable years, as stated below, aside from owning his home, petitioner owned real estate, all purchased by him, most of which was improved and from which he received rents, viz.: Real EstateDate AcquiredCostDate Sold922 Highland View5/28/24$ 5,180.0012/18/44 1793 Cascade Ave.10/ 1/28$ 5,126.54795 Cascade Ave.5/21/24$ 3,557.001/2 Interest in 964 Rupley Drive5/ 1/37$12,929.672/ 2/45 2Prior to1/2 Interest in Peachtree-Dunwoody Road1941$15,350.60Prior toLot 22, E. Rivers Subdivision, Acorn Ave.1941$ 1,008.24On August 14, 1950, five months after the Commissioner's agent's report was prepared, and seven months before the petitioner filed his original protest, the petitioner caused his three savings accounts to become joint accounts with his sister, Evelyn C. Minor. On September 1, 1950, the petitioner conveyed his 793 and 795 Cascade Avenue rental properties and also his one-half interest in the Peachtree-Dunwoody residence to his sisters, Mrs. Eva Mae McManmon and Miss Evelyn Minor, for a recited1956 Tax Ct. Memo LEXIS 117">125 $10 and other consideration. The properties were not subject to any mortgages at that time. During the years 1941 to 1948, inclusive, petitioner owned office furniture, X-ray and electrical equipment, and a library at the cost values of $3,500, $5,081.75 and $800, respectively. During the years 1941 to 1947, inclusive, petitioner owned crypts in the West View Cemetery of a cost value to him of $350, and in 1948 he purchased additional crypts at a total cost value of $5,320. During 1943 to 1945, inclusive, petitioner owned automobiles at a total cost value of $1,806.85. During 1946 petitioner sold a Chrysler automobile which he had owned since 1942, and failed to report same in his income tax return, from which he derived a total gain of $1,000. On or about October 1, 1946, petitioner purchased a Studebaker automobile at a cost of $1,800, which he sold in 1947 for a profit of $150, which he failed to report. On October 23, 1946, petitioner purchased a Cadillac automobile at a cost of $2,838, which he owned at the end of the years 1946 to 1948, inclusive. On or about September 30, 1947, petitioner purchased a Studebaker automobile at a cost of $1,934, which he owned at1956 Tax Ct. Memo LEXIS 117">126 the end of the years 1947 and 1948. The investigation of petitioner by Commissioner's agents started about April 1949. Shortly thereafter petitioner employed an attorney and gave him written power of attorney to act for him, and in June 1949, he paid this attorney $10,000 for his services. After the Commissioner's agents started the investigation, the petitioner had the firm of Hodges and Smith, certified public accountants, audit and take care of his records and prepare the petitioner's subsequent tax returns. Harold Smith of that firm had also previously taken care of the prior matter of petitioner's claimed loss from the sale of the 964 Rupley Drive property, improperly claimed on petitioner's 1945 tax return. No one of that accounting firm was called by petitioner to testify on his behalf. On his tax returns for the years 1946, 1947 and 1948, petitioner improperly claimed deductions for depreciation on his Cadillac automobile in the respective amounts of $177.06, $665, and $498.98. On his 1945 tax return, petitioner failed to report income in the amount of $1,000, when he understated by that amount the sales price received from the sale of the 964 Rupley Drive property1956 Tax Ct. Memo LEXIS 117">127 during that year. On his 1945 tax return petitioner improperly reported a sale of his 922 Highland View property which had actually occurred in 1944, in order to get the benefit of a claimed capital loss on another parcel of real estate in 1945. Petitioner's family expenses in the taxable years, including cash given his wife but not including sums for his son's education, were $400 per month. The table below lists Government E bonds purchased with his funds by petitioner (designated therein "H.W.M.") in the taxable years, in which his sisters, Eva or Evelyn, were named as alternative owners: Total AccrualAmountDateNumberValue TenPaid inPurchasedAlternative Ownersof BondsYears HencePurchase10/ 4/45H.W.M. or Evelyn3$2,500$1,87510/ 4/45H.W.M. or Eva32,5001,8755/15/47Eva or H.W.M.55,0003,7505/15/47E.A.M. or H.W.M.55,0003,7508/ 9/48Eva or H.W.M.55,0003,750Petitioner retained exclusive possession of these bonds. A part of the deficiency in each of the years 1943 to 1948, inclusive, was due to fraud with intent to evade tax. The return for 1943 was false and fraudulent with intent1956 Tax Ct. Memo LEXIS 117">128 to evade tax. The first column in the table below shows the amount of net income reported by petitioner in his return for each of the years 1943 through 1948, the second column shows his net income as determined by the Commissioner, and the third column shows petitioner's correct net income for each of such years, each of which amounts in column three we here find and determine as an ultimate fact. AmountAmountCorrectYearReportedDeterminedNet Income1943$10,130.32$20,216.53$18,000194410,202.4716,266.7613,750194510,747.1641,142.5327,500194616,569.3143,361.1030,000194716,795.9838,043.6227,000194815,887.2720,300.7517,000Opinion The issues here are purely factual, which have been largely resolved in our ultimate findings of fact, and we deem unecessary a detailed discussion of the evidence. The record is volunminous and it would serve no useful purpose to analyze it and set forth the reasons for our findings. The transcript of the hearings contained nearly a thousand pages of oral testimony, plus 93 written exhibits and one deposition, all of which we have carefully reviewed and considered. There1956 Tax Ct. Memo LEXIS 117">129 is no merit in petitioner's claim that his books and records correctly reflected his income for the taxable years. It is apparent from the record as a whole that they did not do so. Neither can we agree with petitioner's contention that the Commissioner was not warranted in using the net worth method in determining his income. As we stated in Estate of George L. Cury, 23 T.C. 305">23 T.C. 305: "The net worth method is merely a method of marshaling evidence to show that the amount of income actually realized was in fact greater than disclosed by the entries made in the taxpayer's books. Nothing in section 41 precludes the use of such evidence, provided that it is otherwise competent. And where the employment of the net worth method reveals a substantial gap between reported income and the increase in net worth, the latter may be taken as a guide for determining the amount of income actually received. Such is the plain import of the Bartlett and Lipsitz cases. Cf. Michael Potson, 22 T.C. 912">22 T.C. 912, 22 T.C. 912">927; H. A. Hurley, 22 T.C. 1256">22 T.C. 1256, 22 T.C. 1256">1261. [Cf. David J. Pleason, 22 T.C. 361">22 T.C. 361.]" As an offset to respondent's net worth analysis (Exhibit A), petitioner1956 Tax Ct. Memo LEXIS 117">130 offered in evidence a counter net worth analysis (Exhibit 25), compiled by a certified public accountant employed by petitioner for that purpose. These two documents differ widely in their contents. The figures and the conclusions reached therein are irreconcilable. One common attribute possessed is that the makers of each, in compiling same, apparently resolved all doubts in favor of their respective employers. This evidently is true of petitioner's net worth analysis, wherein petitioner's income, "as corrected", was fixed at $5,962 for 1947 and $3,218 for 1948, whereas petitioner, in his income tax returns, reported his income for those years at $16,795 and $15,887, respectively. Neither do we think respondent's net worth statement is realistic or in accord with the facts, and we are therefore unable to approve either statement as being correct. It is understandable why the parties in their net worth statements differed as to the facts. There was no common ground upon which to base same; there was no stipulation of facts, no books or records of any consequence, only fragmentary memoranda, cancelled checks, etc., and necessarily many of the facts and deductions therefrom were dependent1956 Tax Ct. Memo LEXIS 117">131 upon the oral testimony of petitioner, about which the parties differed widely. Furthermore, during the taxable years petitioner kept large sums of cash on his person, in his safe deposit box and in his office safe. What these amounts of cash were during any of the years, and also the source and disposition of same was in dispute. Under the state of the record here it is impossible to compute with mathematical accuracy a net worth statement. The same difficulty exists in determining petitioners' net income for each of the years in question. The evidence as a whole convinces us that petitioners' net income for each of the years was understated. The correct amount of petitioners' net income for each taxable year can only be approximated. We can not make either the finding requested by the Commissioner or by the petitioners as to the petitioners' income in the taxable years. Neither would be in accord with our appraisal of the facts. In the circumstances we have used our best judgment, based on a study of all the evidence and the record as a whole, and in our ultimate finding we have set forth our determination of the net income for each of the years in question, which is the best1956 Tax Ct. Memo LEXIS 117">132 approximation we can make on this record. Cf. Cohan v. Commissioner, (C.A. 2) 39 Fed. (2d) 540, 544; cf. Michael Potson, 22 T.C. 912">22 T.C. 912, 22 T.C. 912">929, affd. (C.A. 7) 230 Fed. (2d) 336. Except for petitioner's accountant who prepared his net worth statement and testified with reference thereto, all of petitioner's oral evidence was supplied by petitioner only. Petitioner's interest in the outcome necessarily makes his testimony subject to the closest scrutiny, and he was not a convincing witness. He sought to explain that in each of the taxable years no part of his excess bank deposits over his reported gross income was income received within that year. This we think he has failed to do. He testified that a portion of such excess deposits came from three different sources: (1) From various deposits of cash taken from his safe deposit box, received by him in prior years; (2) from his cashing of checks for his patients and others, and (3) cash given him by members of his family with which to purchase bonds for them, and also proceeds from sales of stock belonging to members of his family. We can not accept at face value these explanations, most of which1956 Tax Ct. Memo LEXIS 117">133 are based on petitioner's uncorroborated testimony. As to (1), petitioner in the taxable years did keep a large amount of cash on hand in his safe deposit box, his office safe and on his person, a practice frequently employed by tax evaders, but there was no record kept of such cash, the time it was received or the source from which it came. If bank deposits were made from such accumulated cash, the evidence is not clear or indisputable as to what year such cash was acquired or its source, and we have used our best judgment in determining same, as well as in all other controverted issues of fact. As to (2) there was no record kept and no evidence given as to all checks cashed by petitioner, either in amount or the year in which such checks were cashed, or where the cash used therfor was acquired. As to (3), in the absence of corroboration, we can not accept petitioner's testimony that a substantial part of the funds handled by him in the taxable years belonged to members of his family. His relatives to whom he attributed such ownership were his two sisters, his son, a newphew and his brother. Of these only his brother testified, and he by deposition. His brother's testimony related1956 Tax Ct. Memo LEXIS 117">134 to transactions he had with petitioner, but did not cover all financial transactions claimed to have been had with the other four relatives. No reason was given by petitioner as to why he did not call them as witnesses. Since there was no written or documentary evidence as to any of these claimed transactions, and in practically all instances no checks were given, but only cash was used, it would seem that petitioner, upon whom rested the burden of proof, should have procured the testimony of these relatives to corroborate his testimony as to such claimed transactions. Considering the close relationship of petitioner to the relatives in question, their apparent availability as witnesses, their apparent knowledge of the truth or falsity of petitioner's claimed transactions had with them, we think petitioner's failure to call them as witnesses gives rise to the inference that if these relatives had testified, their testimony would have been unfavorable to petitioner. Stoumen v. Commissioner (C.A. 3) 208 Fed. (2d) 903, 907, affirming Memorandum Opinion of the Tax Court [12 TCM 267]; Wichita Terminal & Elevator Co., 6 T.C. 1158">6 T.C. 1158, 6 T.C. 1158">1165, affd. (C. 1956 Tax Ct. Memo LEXIS 117">135 A. 10) 162 Fed. (2d) 513. Petitioner bought a number of Government E bonds in the taxable years and claimed that his sisters had contributed the purchase money therefor. The bonds were issued in his name "or" their names so that either he or they could have cashed them, depending alone upon posession. He held possession of the bonds at all times. It would have been revealing to have had the sisters testify why they had petitioner, rather than their husbands, buy the bonds, and where they secured the money with which to buy same, since they were borrowing money from petitioner during that time; and furthermore, why, if the bonds belonged to them, petitioner was permitted to retain exclusive possession of them. These and other matters require clarification and verification by the sisters and the other relatives in question. Fraud Issue: Respondent determined that a portion of the deficiencies for each of the taxable years was due to fraud with intent to evade tax. On this issue the burden of proof is on respondent. Considering the evidence and the record as a whole, we think respondent has sustained his burden of proof in establishing fraud. Petitioner was a doctor1956 Tax Ct. Memo LEXIS 117">136 of medicine, an intelligent person, and personally looked after his business affairs. He had no bookkeeper. All bank deposits were made by him or under his supervision, he signed all checks and personally prepared all of his income tax returns, with such assistance as he got from the local Internal Revenue Service. Three cogent reasons here evidencing fraud are these: (1) A substantial understatement of his income in his returns for each of the six taxable years involved. Under the evidence it is inconceivable that petitioner did not know that his income was larger in each of the years than that reported. His persistent and continuous understatement of such income is significant. (2) His uniform practice of keeping large sums of cash in his safe deposit box, in his office safe and on his person, rather than depositing same in the bank or elsewhere. This practice prevented a record being kept of amounts of money received by him, or the year in which it was received, and thereby enabled him to conceal his income, which we think was the primary reason therefor. (3) His attempt to falsely attribute to members of his family ownership of money handled by him in the taxable years. 1956 Tax Ct. Memo LEXIS 117">137 As to E bonds registered in his name or the names of his sisters, we think under the evidence a fair inference is that they were purchased with a view to tax evasion. So long as petitioner held possession of them, which he always did, the sisters could not cash them, and if a tax deficiency should be asserted against him, he could claim, as he did, that the sisters furnished the purchase money for the bonds. The third issue relates to petitioner's contention that the year 1943 is barred by limitation. Our holding that petitioner was guilty of fraud as to his tax return for that year requires us under section 276(a), I.R.C. of 1939, to sustain respondent on this issue. Decisions will be entered under Rule 50. Footnotes1. From this sale he realized a gain of $2,374.70. ↩2. Total gain from this sale was $98.58.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625226/	THOMAS R. SUTHERLAND AND SALLY L. SUTHERLAND, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, RespondentSutherland v. CommissionerDocket No. 10776-88United States Tax CourtT.C. Memo 1991-619; 1991 Tax Ct. Memo LEXIS 666; 62 T.C.M. 1533; T.C.M. (RIA) 91619; December 12, 1991, Filed 1991 Tax Ct. Memo LEXIS 666">666 Decision will be entered for the respondent. Melvin Friedman, for the petitioner Thomas R. Sutherland. Richard F. Stein, for the respondent. KORNER, JudgeKORNERMEMORANDUM FINDINGS OF FACT AND OPINION By statutory notice of deficiency dated March 23, 1988, respondent determined deficiencies in and additions to petitioners' Federal income tax as follows: Additions to TaxYearDeficiencySec. 6651(a)(1) 1Sec. 66611982$ 11,390-- $ 2,84819833,767$ 565-- 19843,91575-- Following a concession by petitioner, the remaining issues are: (1) Whether petitioners are entitled to business bad debt deductions for 1982, 1983, and 1984; (2) whether petitioners are liable for additions to tax pursuant to section 6651(a)(1) for 1983 and 1984; and (3) whether petitioners are liable for an addition to tax under section 6661 for 1982. 1991 Tax Ct. Memo LEXIS 666">667 FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Petitioner Thomas R. Sutherland and petitioner Sally L. Sutherland (Ms. Sutherland) resided in the State of Virginia at the time the petition in this case was filed. "Petitioner" shall refer to Thomas R. Sutherland. Petitioners are calendar year taxpayers. Petitioners filed a timely joint income tax return for 1982. Although petitioners' filing date for their 1983 income tax return was automatically extended to August 15, 1984, their return for that year was not filed until October 22, 1984. Petitioners were granted two extensions of time to file their 1984 income tax return. The second extension expired on October 15, 1985, and petitioners filed their 1984 joint income tax return on November 14, 1985. Petitioner was employed full-time as a pilot for Piedmont Aviation, Inc., during the years at issue, and had been involved in several business ventures during the 1970's. Petitioners' tax returns, for the years at issue, listed Ms. Sutherland's occupation as either housewife or homemaker. In March of 1991 Tax Ct. Memo LEXIS 666">668 1979, petitioner, Michael W. McQuillis (McQuillis) and J. Austin Cain (Cain) formed a corporation called Nags Head, Ltd. (Nags Head), to own and operate a restaurant/nightclub in Nags Head, North Carolina, known as Atlantis. Petitioner paid $ 245 for 245 shares in Nags Head, which shares constituted a 24.5-percent ownership interest in the corporation. McQuillis and Cain owned 51 percent and 24.5 percent of Nags Head, respectively. The total capital stock of the corporation was $ 1,000. Nags Head elected S corporation status, and filed its returns on the basis of the calendar year. On or around April 1979, Nags Head leased the premises on which Atlantis was located from Edward Ruffin (Ruffin), a friend of McQuillis. Nags Head paid for leasehold improvements to the property in the amount of $ 58,761.60. The corporation acquired $ 26,604.23 worth of equipment during the summer of 1979 to complement the equipment already on the premises. Atlantis opened in May 1979. Atlantis' business was seasonal, generating most of its income during the summer months. When petitioner had time off from his employment with Piedmont Aviation, he would assist in operating Atlantis, doing "whatever1991 Tax Ct. Memo LEXIS 666">669 needed to be done." He was not compensated for the work he performed. Petitioner advanced funds to Nags Head during the summer of 1979 to cover some of the capital costs and operating expenses of the nightclub. In return for the advances, the corporation issued two unsecured notes payable to petitioner, one dated September 1, 1979, in the face amount of $ 26,000, and another dated September 30, 1979, in the face amount of $ 16,700. Each note was executed by Cain, as vice president of Nags Head. The first note called for nine payments of $ 2,888.88 with a payment due in each of the months of June, July, and August of 1980, 1981, and 1982. Interest accrued at 10 percent per annum. 2 The second note called for three equal payments due on September 30 of 1980, 1981, and 1982, and interest on this note accrued at 12 percent per annum. In October 1979, Nags Head borrowed $ 18,000 from Wachovia Bank and Trust Company, an unrelated third party. This loan was secured and accrued interest at a variable rate of 1-1/2 percent over the bank's prime rate. The initial rate of interest on this loan was 16.5 percent, and the note was eventually paid off. 1991 Tax Ct. Memo LEXIS 666">670 On its U.S. Small Business Corporation Income Tax Return (Form 1120S) for 1979, Nags Head reported shareholder loans in the amount of $ 89,231.35, and notes payable to nonshareholders in the amount of $ 37,542.20. Entries in Nags Head's corporate books revealed that as of December 31, 1979, the corporation owed $ 37,426.32, $ 21,697.28, and $ 30,107.75 to McQuillis, Cain, and petitioner, respectively. The corporation reported total assets as of the end of 1979 of $ 86,656.30 and liabilities in the amount of $ 159,568.18. Nags Head reported a $ 73,256.50 loss for 1979, and petitioners' share of the loss was $ 17,947.85. Petitioner and the other shareholders disagreed as to the "business practices" of the enterprise around the end of the summer of 1979. Petitioner testified that he was later forced to leave the corporation, because Ruffin threatened not to renew the lease. 3 Subsequently, he attempted to collect the advances he had made to Nags Head. His attorney, Seymour M. Teach (Teach), made several telephone calls to the corporation and forwarded a demand letter for $ 21,000 to Nags Head on December 12, 1982. After having received no response from Nags Head, Teach, on or1991 Tax Ct. Memo LEXIS 666">671 about January 4, 1983, advised petitioner that the "debt" was uncollectible. Nags Head had assets and cash in the bank at the time the demand letter was sent. Records of the North Carolina State Corporation Commission reveal that Nags Head remained an active corporation until February 21, 1986. 4Petitioners reported business bad debt losses from petitioner's advances to Nags1991 Tax Ct. Memo LEXIS 666">672 Head, fully deductible in the amounts of $ 27,797, $ 8,622, and $ 11,447 in 1982, 1983, and 1984, respectively. Respondent determined that petitioners had not established that they were entitled to the reported bad debt losses for the years at issue. Respondent further determined that section 6661 applied to the deficiency for 1982, and that petitioners were liable for additions to tax under section 6651(a)(1) for both 1983 and 1984. Respondent also disallowed $ 1,424 in miscellaneous itemized deductions for 1982, which issue petitioner conceded at trial. Petitioner filed the petition in this case on behalf of Ms. Sutherland and himself on May 19, 1988. Ms. Sutherland ratified and affirmed the petition by amendment thereto on August 22, 1988. Neither Ms. Sutherland nor anyone acting as her representative appeared at trial, nor did she submit a brief. OPINION 1. Bad DebtWe must decide whether the advances extended by petitioner to Nags Head in 1979 constituted bona fide debt which became worthless in 1982, 1983, and 1984. If petitioners are entitled to bad debt deductions for the years at issue, we must then determine whether the debt constituted business debt deductible1991 Tax Ct. Memo LEXIS 666">673 under section 166(a)(1) or nonbusiness bad debt deductible under section 166(d). Based on the record, we are unable to find that the advances were debt, or that the advances, if debt, became worthless as reported by petitioners for each of the years at issue. A. Debt or EquityWhether the advances were debt depends on whether the parties intended to "establish an unconditional obligation to repay the advances." Road Materials, Inc. v. Commissioner, 407 F.2d 1121">407 F.2d 1121, 407 F.2d 1121">1124-1125 (4th Cir. 1969), affg. a Memorandum Opinion of this Court. See also Mills v. Internal Revenue Service, 840 F.2d 229">840 F.2d 229 (4th Cir. 1988), revg. a Memorandum Opinion of this Court (reversing on the facts, not law); 5Gilbert v. Commissioner, 74 T.C. 60">74 T.C. 60 (1980). "A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. * * * A gift or contribution to capital shall not be considered a debt for purposes of section 166." Sec. 1.166-1(c), Income Tax Regs.1991 Tax Ct. Memo LEXIS 666">674 In the absence of arm's-length dealing, "form does not necessarily correspond to the intrinsic economic nature of the transaction, for the parties may mold it at their will with no countervailing pull." Fin Hay Realty Co. v. United States, 398 F.2d 694">398 F.2d 694, 398 F.2d 694">697 (3d Cir. 1968). Particularly in the context of a close corporation, intention to create a debt depends "upon weighing such objective factors as reasonable expectation of repayment and the economic reality of the claimed debtor-creditor relationship." 74 T.C. 60">Gilbert v. Commissioner, supra at 65. However, no single factor or set of factors is determinative, John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521, 326 U.S. 521">530, 90 L. Ed. 278">90 L. Ed. 278, 66 S. Ct. 299">66 S. Ct. 299 (1946), and each case must be resolved on its own set of facts. Mills v. Commissioner, supra at 235. Relevant factors include: the names given to the certificates evidencing the indebtedness; presence or absence of a fixed maturity date; source of payments; right to enforce payments; participation in management as a result of the advances; status of the advances in relation to regular corporate creditors; intent of the parties; identity 1991 Tax Ct. Memo LEXIS 666">675 of interest between creditor and stockholder; "thinness" of capital structure in relation to debt; ability of corporation to obtain credit from outside sources; use to which advances were put; failure of debtor to repay; and risk involved in making the advances. [Dixie Dairies Corp. v. Commissioner, 74 T.C. 476">74 T.C. 476, 74 T.C. 476">493 (1980).]The burden is on petitioners to establish that the advances constituted debts. 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); Jewell Ridge Coal Corp. v. Commissioner, 318 F.2d 695">318 F.2d 695 (4th Cir. 1963), affg. a Memorandum Opinion of this Court; 74 T.C. 476">Dixie Dairies Corp. v. Commissioner, supra; Rule 142(a). Based on the record, petitioner has failed to sustain his burden that the advances represented debt and not equity. Several factors appear to speak in favor of characterizing the advances as loans. Two notes allegedly memorialized the advances, and the corporate ledgers of Nags Head for 1979 and 1980 included entries describing petitioner's advances as loans. Furthermore, the notes specified both payment dates and amounts, and they did not restrict the right of petitioner to enforce payment. 1991 Tax Ct. Memo LEXIS 666">676 In this respect, petitioner did attempt (although faintly) to enforce payment through his attorney. In addition, petitioner testified that it was his intent that the advances be loans and not contributions to capital, and his participation in the management of the corporation apparently did not increase. However, "consistent bookkeeping and consistent financial reporting on balance sheets are in our opinion little more than additional declarations of intent, without any accompanying objective economic indicia of debt." Alterman Foods, Inc. v. United States, 505 F.2d 873">505 F.2d 873, 505 F.2d 873">879 (5th Cir. 1974). Although petitioner may have been forced to "leave" Nags Head, nonetheless, one would have expected that the corporation would have made some of the payments, in 1980 at least, if the advances were truly debt. Petitioner, however, adduced no evidence that any of the payments or interest on the debt had been paid. 6 Nor did petitioner take action to enforce payment until the end of 1982. Moreover, the notes payable to petitioner were unsecured and were subordinate to a subsequent third-party loan from Wachovia Bank and Trust Company, which loan was secured and initially1991 Tax Ct. Memo LEXIS 666">677 accrued interest at 16.5 percent. The apparent lack of compliance with the terms of the notes and the inability of Nags Head to obtain loans on similar terms from other lenders suggest that the amounts in question represented equity and not debt. 407 F.2d 1121">Road Materials v. Commissioner, supra; Wachovia Bank and Trust Company v. United States, 288 F.2d 750">288 F.2d 750 (4th Cir. 1961). Also, petitioner's assertion of intent to have the advances constitute debt is not determinative of the issue. Uneco, Inc. v. United States, 532 F.2d 1204">532 F.2d 1204, 532 F.2d 1204">1209 (8th Cir. 1976) (objective factors are to be considered along with subjective intent to determine the character of an advance); 407 F.2d 1121">Road Materials v. Commissioner, supra at 1124 (contemporaneous facts, and not testimony, generally establish the nature of an advance).1991 Tax Ct. Memo LEXIS 666">678 Several other factors indicate that the advances represented equity. First, the source of repayments for the advances would come from the future success of the corporation, thus placing the advances at the risk of the venture. The dependance of repayment on the financial success of the corporation suggests that an advance constitutes equity. Affiliated Research, Inc. v. United States, 173 Ct. Cl. 338">173 Ct. Cl. 338, 351 F.2d 646">351 F.2d 646, 351 F.2d 646">648 (1965). This case is unlike Baker Commodities, Inc. v. Commissioner, 48 T.C. 374">48 T.C. 374, 48 T.C. 374">398 (1967), affd. 415 F.2d 519">415 F.2d 519, (9th Cir. 1969), where this Court held that notes represented debt in part because payments on the note were to come from the "continued success of a well-established business which enjoyed not only a good past earnings' record but equally good prospect for the future." Here, the advances were made at or near the inception of the venture undertaken by Nags Head, and the notes were unsecured. Moreover, petitioner failed to adduce objective evidence that would establish that the past earnings record of the nightclub provided a reasonable expectation repayment. Instead these facts support1991 Tax Ct. Memo LEXIS 666">679 respondent's contention that petitioner, with respect to the advances he made to the corporation in 1979, was a stockholder, who "intends to embark upon the corporate adventure, taking the risks of loss attendant upon it that he may enjoy the chances of profit," and not a creditor, who "does not intend to take such risks so far as they may be avoided but merely to lend his capital to others who do intend to take them." Richmond v. Helvering, 90 F.2d 971">90 F.2d 971, 90 F.2d 971">974 (4th Cir. 1937), affg. 33 B.T.A. 895">33 B.T.A. 895 (1936). Second, the advances were used by Nags Head to provide Atlantis with its initial working capital. Where a corporation has not demonstrated profitability, the use of a shareholder loan "for the purchase of capital assets and for meeting the expenses needed to commence operations" is indicative of a capital contribution. Henderson v. United States, 375 F.2d 36">375 F.2d 36, 375 F.2d 36">40 (5th Cir. 1967); Segel v. Commissioner, 89 T.C. 816">89 T.C. 816, 89 T.C. 816">831 (1987). Although Atlantis may have been operated by other persons prior to Nags Head ownership, petitioner has failed to establish its prior financial history. Furthermore, the record indicates1991 Tax Ct. Memo LEXIS 666">680 the advances were used to pay for renovations required to operate the restaurant and to acquire equipment, as well as to meet operating expenses during the summer of 1979. Third, Nags Head's high debt/equity ratio supports capital characterization. Although thin capitalization does not by itself determine the issue of whether an advance is debt or equity, it provides strong evidence of equity where other factors also point in the same direction. Curry v. United States, 396 F.2d 630">396 F.2d 630 (5th Cir. 1968); 375 F.2d 36">Henderson v. United States, supra.The purpose underlying this factor is that repayment of an unsecured loan to a thinly capitalized corporation is unlikely were the corporation to suffer business losses. Gilbert v. Commissioner, 248 F.2d 399">248 F.2d 399, 248 F.2d 399">407 (2d Cir. 1957), remanding a Memorandum Opinion of this Court (case remanded for clarification of factual support for several holdings). The shareholders of Nags Head contributed in total $ 1,000 for capital stock upon its formation in early 1979, and Nags Head reported $ 73,256.50 in losses in 1979. At the end of 1979, shareholder loans totaled $ 89,231.35, third-party loans1991 Tax Ct. Memo LEXIS 666">681 $ 37,532.00, and accounts payable $ 32,804.63. Thus, Nags Head's debt to equity ratio at the end of 1979 was substantial by any measure, whether the numerator is determined by reference to shareholder debt, or to the total liabilities of the corporation. Wood Preserving Corp. v. United States, 347 F.2d 117">347 F.2d 117, 347 F.2d 117">120 (4th Cir. 1965) (numerator is shareholder debt); 74 T.C. 476">Dixie Dairies Corp. v. Commissioner, supra at 497 (ratio determined using both shareholder debt and total liabilities as numerator). Given the other factors that favor equity characterization, Nags Head's high debt/equity ratio, which appears to be without business purpose, Byerlite Corp. v. Williams, 286 F.2d 285">286 F.2d 285, 286 F.2d 285">293 (6th Cir. 1960), supports the conclusion that the advances constituted equity. Fourth, petitioner was not the only shareholder to have advanced funds to the corporation. To the extent that advances are substantially in proportion to the shareholders' equity interest, the advances indicate a sharing of financial risk. 351 F.2d 646">Affiliated Research, Inc. v. United States, supra at 650. See also 89 T.C. 816">Segel v. Commissioner, supra.1991 Tax Ct. Memo LEXIS 666">682 Here, McQuillis and Cain had, according to the corporate books, extended loans in the amounts of $ 37,426.32 and $ 21,697.28, respectively, to Nags Head in 1979. The corporate books also show that Nags Head owed petitioner $ 30,107.75 at the end of 1979 (as well at the end of 1980). Based upon the corporate ledgers, petitioner's share of the shareholders' debt was 34 percent, McQuillis' share 42 percent, and Cain's share 24 percent. The outstanding debt owed to each of the shareholders at the end of 1979 was not so far out of proportion to their equity ownership that it militates against the characterization of the advances as equity. Based upon the entire record and after considering petitioner's arguments, we hold that petitioner has failed to sustain his burden of proving that the advances were debt. B. Worthlessness of DebtEven if we were to conclude that the advances were loans, petitioners would not be entitled to deduct such amounts as bad debts, since they have failed to establish that the debts were worthless in the years and in the amounts claimed. See sec. 166(a)(1); Rule 142(a). To be entitled to a bad debt deduction under section 166(a)(1), a taxpayer must1991 Tax Ct. Memo LEXIS 666">683 show that the debt became wholly worthless in the year in which it is claimed. Millsap v. Commissioner, 46 T.C. 751">46 T.C. 751 (1966), affd. 387 F.2d 420">387 F.2d 420 (8th Cir. 1968). Worthlessness is a question of fact. Sec. 1.166-2(a), Income Tax Regs. A debt becomes worthless "in the year in which identifiable events clearly mark the futility of any hope of further recovery thereon." James A. Messer Co. v. Commissioner, 57 T.C. 848">57 T.C. 848, 57 T.C. 848">861 (1972). Petitioners bear the burden of proving the worthlessness of debt in the year it is claimed. Perry v. Commissioner, 22 T.C. 968">22 T.C. 968, 22 T.C. 968">973 (1954). Petitioner claimed business bad debt deductions of $ 27,797, $ 8,622, and $ 11,747 in 1982, 1983, and 1984, respectively. Petitioner asserts that he was entitled to such deductions after Teach, his attorney, advised him in early 1983 that it was unlikely he would collect his debt from Nags Head. Teach did not testify and apparently based his conclusion on the fact that the corporation had failed to respond to telephone calls and a letter demanding repayment of $ 21,000. However, "mere failure to pay on demand is not proof of the worthlessness1991 Tax Ct. Memo LEXIS 666">684 of a debt." Prescott State Bank v. Commissioner, 11 B.T.A. 147">11 B.T.A. 147, 11 B.T.A. 147">148 (1928). Furthermore, petitioner testified that he had determined that Nags Head had assets and cash in 1982, and that it remained a "viable" corporation until 1986 when its name was changed. These circumstances do not establish the futility of any further attempts to recover the alleged debts. In addition, we note that petitioner failed to present any evidence as to why the bad debt deductions arising from his advances to Nags Head were spread over three years. 7 We find that petitioner failed to sustain his burden that the advances became worthless in any of the years at issue. 81991 Tax Ct. Memo LEXIS 666">685 2. Section 6651(a)(1)If a taxpayer fails to file a timely income tax return, an addition to tax of 5 percent per month of the amount of tax required to be shown on the return shall be imposed, unless the taxpayer is able to show that such failure was due to reasonable cause and not willful neglect. Sec. 6651(a)(1). Petitioners bear the burden of proving that their failure to file a timely return was due to reasonable cause and not willful neglect. Baldwin v. Commissioner, 84 T.C. 859">84 T.C. 859, 84 T.C. 859">870 (1985). Petitioners' 1983 joint income tax return was filed on October 22, 1984, and petitioners' 1984 tax return was filed on November 14, 1985. For both years petitioners had obtained extensions to file their returns; however, in each year the extension(s) had expired by the time their return was filed. Petitioner claims that he had mailed the 1983 joint income tax return prior to the expiration of the automatic extension to file on August 15, 1984, but adduced no objective evidence in support of his contention. However, respondent presented evidence that the return had been received by the Internal Revenue Service on October 22, 1984, over 2 months after the1991 Tax Ct. Memo LEXIS 666">686 expiration of the extension to file. In these circumstances, we sustain respondent's determination on this issue for this year. Petitioner claims that the joint income tax return for 1984 was filed late because he had become separated from his wife and she was unable to sign that return until after the second extension to file for 1984 had expired on October 15, 1985. Other than his testimony regarding the filing of the 1984 return, petitioner did not further substantiate his entitlement to an exception to this addition to tax. Petitioner failed to adduce evidence showing why other means of obtaining Ms. Sutherland's signature, such as forwarding the return to her prior to the expiration of the second extension to file, was impossible or not practicable. Although under certain circumstances the failure to obtain a spouse's signature might provide reasonable cause for failure to timely file, we hold that the record, in this case, does not sustain an exception. 3. Section 6661(a)Section 6661(a) imposes an addition to the tax equal to 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. An understatement of tax is substantial1991 Tax Ct. Memo LEXIS 666">687 if it exceeds the greater of $ 5,000 or 10 percent of the tax required to be shown on the tax return. Sec. 6661(b)(1)(A). Understatement for purposes of section 6661(a) means the excess of the amount of tax required to be shown on the return over the amount which is shown on the return. Sec. 6661(b)(2)(A). The amount of the understatement is reduced by the portion of the understatement attributable to an item for which the taxpayer is able to show that there is substantial authority for the tax position taken, or to an item for which the taxpayer adequately disclosed the relevant facts affecting the item's tax treatment in the return or in a statement attached to the return. Sec. 6661(b)(2)(B). Respondent determined that petitioners were liable for an addition to tax pursuant to section 6661(a) for 1982. Petitioners bear the burden of proof with respect to this issue. Rule 142(a). Having sustained respondent's determination with respect to the bad deduction for 1982 and given petitioner's concession with respect to respondent's disallowance of certain miscellaneous deductions, petitioners' understatement of income tax is substantial for the year at issue. Moreover, petitioner1991 Tax Ct. Memo LEXIS 666">*688 did not present substantial authority for the tax position he took with respect to the bad debt deduction and miscellaneous deductions for 1982, see section 6661(b)(2)(B)(i), nor did he offer any evidence that the relevant facts, regarding these deductions, had been adequately disclosed as provided in section 6661(b)(2)(B)(ii). See Schirmer v. Commissioner, 89 T.C. 277">89 T.C. 277 (1987). In light of these circumstances, we hold that petitioners have failed to sustain their burden with respect to this issue. See Rule 142(a). Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. The note, on its face, is ambiguous regarding whether the payments did or did not include interest. If nine payments of $ 2,888.88 had been made, petitioner would have been paid a total of $ 25,999.92. In effect, petitioner would have received no interest. However, petitioner testified that the terms of the note, as he understood them, were that, in addition to the nine payments, he would be paid interest on the balance due.↩3. The record is unclear as to when petitioner left the corporation, and, for that matter, what constituted leaving the corporation. In any event, petitioners did report their share of Nags Head 1980 income in the amount of $ 2,045 on their 1980 joint income tax return.↩4. Whether Nags Head continued to operate Atlantis after 1980 cannot be determined from the record. Petitioner testified to the effect that Atlantis kept operating and eventually changed its name, but did not disclose its relationship to Nags Head during the years following 1980. ↩5. The instance case is appealable to the United States Court of Appeals for the Fourth Circuit.↩6. We note that Nags Head's notes payable to petitioner total $ 42,700, and that petitioners claimed bad debt deductions over the years in issue in the total amount of $ 47,896. No explanation was offered by petitioner to account for this difference. Nor did petitioner explain why the amount of the notes differed from the amounts disclosed by the corporation's books as owing petitioner at the end of 1979. Petitioner also failed to explain why his attorney demanded only $ 21,000 from Nags Head, when petitioner maintained that no payments had been made on the two notes. Respondent does not dispute that advances were made by petitioner to Nags Head, although he leaves it to petitioners to establish their amount and character.↩7. Even if petitioner were relying on sec. 166(a)(2), the partial bad debt provision, to support his bad debt deduction for the years at issue, he has failed to show that the debts were not recoverable in part in each of the years at issue, and that respondent had abused his discretion in denying the partially bad debt deductions. Austin Co. v. Commissioner, 71 T.C. 955">71 T.C. 955, 71 T.C. 955">971↩ (1979).8. As a result of our holdings in this case, we need not determine either the amount of the advances which remained outstanding during the years at issue, nor whether the advances, if debt, constituted business or nonbusiness debt. Furthermore, petitioner did not raise the issue that he was entitled to a deduction under sec. 165(g) (concerning worthless securities) for any of the years at issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625228/	CHARLES L. & BILLIE W. ETHERIDGE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEtheridge v. CommissionerDocket No. 1027-76.United States Tax CourtT.C. Memo 1977-175; 1977 Tax Ct. Memo LEXIS 269; 36 T.C.M. 724; T.C.M. (RIA) 770175; June 8, 1977, Filed Charles L. Etheridge and Billie W. Etheridge, pro se. Harold Friedman, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: 1972$1,537.611973$1,446.43The only issue for decision is whether petitioners are entitled to deduct as a charitable contribution under section 170, 1/ amounts representing the value of personal services they rendered to "Project Upward Bound." 1977 Tax Ct. Memo LEXIS 269">270 FINDINGS OF FACT Petitioners Charles L. and Billie W. Etheridge, husband and wife, were legal residents of El Paso, Texas, at the time their petition was filed. Petitioners filed joint Federal income tax returns for 1972 and 1973 with the Director, Internal Revenue Service Center, Austin, Texas. During the years in controversy, petitioners were professors in the College of Liberal Arts at the University of Texas, El Paso (UTEP). They volunteered their services as consultants to "Project Upward Bound" (hereinafter the project or the program), a federally-supported program administered by UTEP through grants received from the Office of Economic Opportunity (OEO). Under the terms of the OEO grant, 10 percent of the necessary project funding was required to be furnished by the administering university. This 10-percent funding requirement could be satisfied by contributed voluntary services. The primary function and goal of the project was to aid educationally handicapped students by attempting to provide them with the basic skills needed to enable them to succeed at the college level of education. The program was administered to promising high school juniors and seniors1977 Tax Ct. Memo LEXIS 269">271 who were selected for participation in the program. The program participants met with instructors 3 Saturdays each month for a total of 27 Saturdays during the school term. Petitioners performed several types of services. They provided classroom instruction during the regular Saturday morning meetings, usually for 3 hours each meeting. Petitioners were compensated for their hours of actual classroom instruction, and these services are not in dispute. In addition, however, they met during each week with tutors employed under the program to discuss the week's work requirements and necessary revisions in the training program. They spent 1 to 3 hours each day outside the classroom with those tutors and working with individual students. In addition, petitioners devoted time each week to researching and outlining lesson plans. Petitioners spent approximately 9 hours per week advising tutors, counseling students, and researching lesson plans. Petitioners were not compensated for their out-of-the-classroom hours of work. On their joint Federal income tax returns for 1972 and 1973, petitioners deducted $5,475 each year as charitable contributions to the project, representing 2191977 Tax Ct. Memo LEXIS 269">272 contributed hours of annual service valued at $25 per hour. Respondent disallowed these claimed deductions, determining that contributions of services do not qualify as charitable contribution deductions under section 170. OPINION Section 170(a)(1) allows a deduction for "any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year." Subsection (c) of section 170 defines a charitable contribution as a "contribution or gift to or for the use of" organizations described therein. However, under section 1.170A-1(g), Income Tax Regs., no deduction is allowable for contributions of services. See Tate v. Commissioner,59 T.C. 543">59 T.C. 543, 59 T.C. 543">549 (1973); cf. Smith v. Commissioner,60 T.C. 988">60 T.C. 988, 60 T.C. 988">992 (1973). Petitioners are aware of this regulation, and they concede that the deduction which they claim represents the estimated value of their services. However, petitioners attempt to distinguish the services they rendered to the project from those specifically disallowed by section 1.170A-1(g), Income Tax Regs. Petitioners claim that their services were purely professional in nature and are therefore different from1977 Tax Ct. Memo LEXIS 269">273 the type of voluntary services ordinarily rendered to charitable organizations. Petitioners maintain that, in permitting UTEP to meet its 10-percent funding requirement for the project by providing professional teaching services, Congress implicitly recognized such a distinction between professional services and ordinary voluntary services. We must disagree. The regulation cited above is quite clear in disallowing charitable contribution deductions for services. It contains no qualifying language or distinctions of any kind which would lend support to petitioners' argument. Had petitioners been compensated in cash for their voluntary services and then contributed the cash to the project, they might have been entitled to deductions for the amount of the cash, but they would have had offsetting additional taxable income. The regulation is designed to deny deductions for the value of services where such value is not included in taxable income. While petitioners are to be commended for contributing their valuable services in the cause of providing better education for the beneficiaries of the project, the Internal Revenue Code simply does not allow the coveted deduction. Performing1977 Tax Ct. Memo LEXIS 269">*274 their voluntary services did not constitute a "payment" which was "made within the taxable year." Accordingly, we must sustain respondent's disallowance of the disputed charitable contribution deductions. At the termination of the trial of this case, respondent conceded an allowance of $200 in both 1972 and 1973 for materials contributed by petitioners to the project. To reflect this concession and others made by petitioners, Decision will be entered under Rule 155. Footnotes1. /↩ All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625229/	GEO. H. BOWMAN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Geo. H. Bowman Co. v. CommissionerDocket No. 9961.United States Board of Tax Appeals7 B.T.A. 399; 1927 BTA LEXIS 3190; June 17, 1927, Promulgated 1927 BTA LEXIS 3190">3190 The cost of permanent improvements voluntarily made to leased premises by a tenant at will, which continued to occupy the premises beyond the taxable year in which such expenditures were made, was not deductible in its entirety within the taxable year as an ordinary and necessary expense. Chester A. Gwinn, Esq., and Adrian C. Humphreys, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. LITTLETON7 B.T.A. 399">399 The Commissioner determined a deficiency of $7,669.66 in income and profits tax for the fiscal year ending January 31, 1921. The petitioner assigns a number of errors, all of which were withdrawn except the claim that the Commissioner erred in refusing to permit it to deduct in the taxable year as an ordinary and necessary business expense the sum of $7,084.79 representing the cost of permanent improvements made to leased premises. Petitioner contends that inasmuch as its tenancy of the premises was from month to month the total expenditure was a deductible expense within the taxable year. The position of the Commissioner is that the cost of improvements was not an ordinary and necessary business expense within the1927 BTA LEXIS 3190">3191 year and since the petitioner's tenure was indefinite in duration the cost of improvements should be exhausted in the taxable year upon the basis of the usefull life thereof. The facts are found as stipulated. FINDINGS OF FACT. The petitioner is a corporation organized and existing under the laws of the State of Ohio with its principal office at Cleveland. Its 7 B.T.A. 399">400 business is that of manufacturer, importer, wholesaler and retailer of chinaware, glassware, and kindred articles, and, as such, requires considerable storage space to carry its stock in trade. During the fiscal year ended January 31, 1921, petitioner rented for storage purposes a five-story building, 50 by 100 feet, known as the Eagle Street Warehouse, owned by Augusta B. Bowman, who is a stockholder of the petitioner to the extend of owning 490 shares out of the total 5,067 shares of stock issued and outstanding. Augusta B. Bowman is the wife of George H. Bowman, who, during the taxable year, owned more than 50 per cent of the outstanding issued capital stock of the petitioner corporation. The petitioner has not and did not have during the taxable year a lease on the Eagle Street Warehouse but occupied1927 BTA LEXIS 3190">3192 the same as a month-to-month tenant, paying therefor a monthly rental of $1,750. There is not now and there has never been any definite arrangement as to the duration of the petitioner's tenancy of said warehouse nor for the reimbursement of the petitioner for any amounts expended by it for repairs, improvements or betterment of said Eagle Street Warehouse. During the fiscal year ended January 31, 1921, the petitioner, in order to better adapt the building to its needs as a storehouse, made certain improvements such as erecting partitions, installing an elevator, etc., more specifically described as follows: W. J. Rossborough, elevator equipment$90.00Do490.00Do138.00Chafer Co., plumbing214.50Do160.31Do93.24Do129.07Reister & Thesmacher, fire doors200.00Jas. B. Hatton, plumbing208.00Do260.00Cleveland buildings, brick and sand215.96Supply Co., brick and sand120.50W. F. Hyde Co., partitions99.74A. J. Hanson, contractors1,290.86A. J. Hanson, work1,925.39Do1,449.12Total7,084.69All of the foregoing improvements are of a fixed nature and can not be economically removed by the petitioner upon vacating the1927 BTA LEXIS 3190">3193 building but must be regarded as forming a part of the realty. The improvements were necessary in carrying on petitioner's business. In its income and profits-tax return for the fiscal year ending January 31, 1921, the petitioner deducted from gross income "Improvements, 7 B.T.A. 399">401 $7,084.69," on account of the improvements to the building in question as set forth above. This deduction was disallowed by the Commissioner and the deficiency results in part from such action. OPINION. LITTLETON: Petitioner occupied the Eagle Street Warehouse and used it in carrying on its business without having a lease for any stated period of time; its tenancy was indefinite, no arrangement being made between it and the owner of the property as to such occupancy, other than that petitioner should pay monthly rental of $1,750 which apparently had no relation to the improvements in question. The owner of the building was a stockholder of the corporation and her husband owned more than 50 per cent of petitioner's outstanding stock but, regardless of this fact, we think under the facts in this proceeding that the Commissioner was correct in allowing petitioner a deduction in the taxable year1927 BTA LEXIS 3190">3194 of only a reasonable allowance for the exhaustion of the cost of improvements on the basis of the useful life. The additions and improvements in question had a useful life in petitioner's business of more than a year and were of a capital nature. In order, therefore, for petitioner to become entitled to a deduction in the taxable year on account of the expenditure in question of an amount in excess of a reasonable allowance for the exhaustion, wear and tear thereof, it must be clearly shown that the use of such improvements in petitioner's business will terminate prior to the end of their ordinary useful life. This has not been shown. The duration of petitioner's tenancy of the building was indefinite and indeterminable. It occupied the premises at the will of the lessor and until it appears that petitioner's tenancy will end at some definite time, it is entitled to a deduction in the taxable year of no more than a reasonable allowance for the exhaustion of the cost of improvements over the useful life thereof. If petitioner's tenure extends over the period of the useful life of the improvements it will have recovered its cost through the annual allowance for exhaustion; if the1927 BTA LEXIS 3190">*3195 tenure should for any reason terminate prior to the useful life of the improvements petitioner will then be entitled to a deduction from gross income of the unextinguished cost of such improvements. In either event petitioner will have obtained the deduction to which, under the statute, it is entitled. . . . . . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625230/	MRS. GRANT SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. E. HAUSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Smith v. CommissionerDocket Nos. 43300-43302, 43305, 43306.United States Board of Tax Appeals26 B.T.A. 1178; 1932 BTA LEXIS 1175; October 12, 1932, Promulgated 1932 BTA LEXIS 1175">1175 1. CORPORATION - DISSOLUTION. Where a corporation was dissolved and under the laws of the State of Washington its assets were turned over to trustees in dissolution for liquidation and distribution, held, this does not constitute a distribution to or a receipt of assets by the stockholders. Wells Fargo Bank v. Blair, 26 Fed.(2d) 532, followed. 2. Id. Where the trustees in dissolution conveyed the undivided assets to a national bank with trust powers, in trust for the purposes of liquidation and ultimate distribution to the stockholders, the transfer of the assets to the trustee was not a distribution to the stockholders. Taylor Oil & Gas Co. v. Commissioner,15 B.T.A. 609">15 B.T.A. 609 (affd., 47 Fed.(2d) 108), followed. 3. TAXABLE PERIOD - DISSOLVED CORPORATIONS IN HANDS OF TRUSTEES FOR LIQUIDATION. Trustees in liquidation should prepare and file a corporate return of annual net income for the entire year, including therein the gross income received by the corporation prior to the time of the trustees' appointment and also the gross income received under the supervision of the liquidating trustees. The action of the1932 BTA LEXIS 1175">1176 Commissioner in computing a deficiency for the period January 1 to January 12, 1925 (the date the corporation was dissolved and its affairs were put into the hands of liquidating trustees) was error, liquidation of the corporation's affairs not having been completed on January 12, 1925. Russell D. Morrill, Esq., and Josiah Willard, Esq., for the petitioners. J. G. Gibbs, Esq., for the respondent. BLACK 26 B.T.A. 1178">1178 These five cases were consolidated for hearing by order of the Board. Docket Nos. 43301 and 43305 involve the income-tax liability of the petitioners as transferees of the assets of the Smith Securities Company, a Washington corporation, for the calendar year 1924 in the sum of $83,021.52 and for the period January 1 26 B.T.A. 1178">1179 to January 12, 1925, in the sum of $5,173.75. Docket No. 43300 involves a deficiency of $3,369.43 against petitioner Mrs. Grant Smith for the period January 1, 1925, to December 7, 1925, as transferee of the assets of the estate of Grant Smith, deceased. Docket No. 43302 involves a deficiency of $35,200 for the year 1925 against petitioner W. E. Hauser, and Docket No. 43306 involves a deficiency of $1,669.771932 BTA LEXIS 1175">1177 determined against Mrs. Grant Smith for 1925. The two issues which we have to decide will be stated in the opinion. At the hearing depositions of several witnesses were introduced in evidence and certain stipulations were filed, from which we make the following findings of fact. FINDINGS OF FACT. Petitioners are individuals, residing in Seattle, Washington, with their business address at 827 Henry Building in that city. The Smith Securities Company was a corporation of the State of Washington. At the time of its dissolution on January 12, 1925, all of its stock, except directors' qualifying shares, was held in equal parts by W. E. Hauser and the estate of Grant Smith, who died on September 23, 1923. The administrators of the estate of Grant Smith were Harry H. Hunt and the decedent's widow and sole heir, Mrs. Grant Smith, who has since remarried and is now Mrs. Charles Stuart, but who will be referred to hereafter as Mrs. Grant Smith. The trustees of the company at the time of its dissolution were W. E. Hauser, Mrs. Grant Smith, and P. E. Colman. Late in 1924 the trustees discussed among themselves, and with the administrators of the estate of Grant Smith, the desirability1932 BTA LEXIS 1175">1178 of dissolving the Smith Securities Company and liquidating its assets. The liquidation of the corporation presented a difficult problem, since over half of its assets consisted of real estate, stock in corporations holding real estate and accounts receivable from close corporations, and other assets which could not be easily sold or divided. The trustees, therefore, decided that the corporation should be dissolved and that the liquid assets should be immediately divided among the stockholders and the remaining assets held and liquidated over a period of time as advantageously as possible. The three trustees were not, however, in a position to administer these assets personally, since Mr. Hauser's interests were largely centered in Louisiana and kept him away from Seattle for a greater part of the time, while Mrs. Smith had not had much business experience and did not wish to be burdened by details of administration. It, therefore, was decided by the trustees that it would be desirable to have these assets administered by someone on their behalf, and, accordingly, they approached J. T. McVay and G. C. Morrill, 26 B.T.A. 1178">1180 the president and vice president, respectively, of the1932 BTA LEXIS 1175">1179 Metropolitan National Bank of Seattle, Washington, and asked them if the bank would be willing to act as the agent of the trustees in the liquidation of the slow assets of the Smith Securities Company. These officers expressed their willingness to have the bank act for the trustees. Accordingly, the trustees proceeded to cause the dissolution of the corporation and on January 12, 1925, the Superior Court of the State of Washington entered decree dissolving the corporation and appointing, as trustees in dissolution, W. E. Hauser, P. E. Colman, and Mrs. Grant Smith. Immediately on the dissolution of the corporation, the trustees divided and turned over to the two stockholders, W. E. Hauser and the estate of Grant Smith, cash and marketable securities having a value of about $2,150,000, each of the two stockholders receiving, therefore, a little over $1,000,000. Since the stock of the Smith Securities Company held by Hauser had a cost to him of $2,215,642.50 and the stock of the Smith Securities Company held by the estate of Grant Smith had a cost to it of $2,274,337.67, neither of the stockholders received any profit on the distribution of these liquid assets. At the same time, 1932 BTA LEXIS 1175">1180 the remaining assets, consisting of real estate, notes, stocks, etc., were turned over to the Metropolitan National Bank to be held in accordance with the terms of a written trust agreement, the detailed provisions of which will be hereinafter stated. During the course of the preparation of this trust agreement, the question arose as to whether it should effect a distribution of the assets in question to the two stockholders and a transfer by them of the assets so received to the Metropolitan National Bank to be administered for them, or whether it should effect a transfer by the trustees in dissolution to the Metropolitan National Bank as agent for the trustees to administer and liquidate the assets for them and turn over the proceeds of the liquidation to the two stockholders. In the course of a conference on this question on or about May 14, 1925, Hauser, who owned 50 per cent of the stock in Smith Securities Corporation, expressly instructed Morrill, president of the Metropolitan National Bank, who in turn instructed Thorgrimson, an attorney who was preparing the trust agreement, that the bank was to act as agent for the trustees and that there was to be no distribution of1932 BTA LEXIS 1175">1181 these assets to the stockholders in the first instance. After the transfer of the assets in question to it, the Metropolitan National Bank sought and received instructions from the trustees in dissolution as to the disposition and administration of the assets that had been transferred to it, and referred to the trustees all except minor routine matters that arose in the handling of the assets. 26 B.T.A. 1178">1181 Many written communications were introduced in evidence to prove this was the course of dealing between the parties. The trustees filed an income-tax return for the period January 12 to December 31, 1925, on Form 1120, in which they treated the income from the assets held by the Metropolitan National Bank as income to the Smith Securities Company in dissolution. The bank took over the assets at the values as they stood on the books of the Smith Securities Company. The bank did not credit either of the two stockholders with any of the current income from the properties, but treated that income as income to the trustees in dissolution and as part of the assets which were available for distribution. During the year 1925, $57,500 was distributed to petitioner Hauser and the1932 BTA LEXIS 1175">1182 same amount was distributed to the estate of Grant Smith, so that unless the assets transferred to the bank and administered by it are held to have been received by the stockholders, the total distribution which petitioners received from the Smith Securities Company during 1925 was only about $1,100,000 each and fell short of the cost basis of their stock. Upon the audit of the income-tax returns involved in this proceeding for 1925, the respondent took the position that the Smith Securities Company was completely liquidated January 12, 1925, and credited each of the stockholders with the receipt of one-half of all its assets on January 12, 1925. Although the value of the assets on that date was not susceptible of exact computation, the respondent determined and the parties have stipulated that their total value was $4,961,691.72, less income-tax liability then outstanding. The respondent accordingly determined a profit to each petitioner of the difference between the value of one-half of the assets and the cost to each of the stockholders of their stock. The respondent also treated the Metropolitan National Bank as trustee for the stockholders and credited the stockholders with1932 BTA LEXIS 1175">1183 their distributive share of the income which the bank received from the assets in question. In auditing the return of the Smith Securities Company for the calendar year 1924 and for the 12-day period in 1925 prior to its dissolution, the respondent determined a deficiency for the year 1924, and also determined that the Smith Securities Company was liable for a tax on its income for the period January 1 to January 12, 1925, and on January 25, 1929, sent notices of deficiency pursuant to section 274(a) of the Revenue Act of 1926 to W. E. Hauser and Mrs. Grant Smith as transferees of the assets of the Smith Securities Company pursuant to section 280 of the Revenue Act of 1926, The trust agreement referred to in the foregoing findings of fact shows the Metropolitan National Bank of Seattle as party of the 26 B.T.A. 1178">1182 first part, and W. E. Hauser, Mrs. Grant Smith and P. E. Colman, sole surviving trustees of the Securities Company, as parties of the second part. The agreement was executed in June, 1925. This instrument recites by way of introduction under the prefatory "whereas" as follows: (a) The fact that the death of Grant Smith occurred on September 27, 1923. (b) The fact1932 BTA LEXIS 1175">1184 that his widow was his sole surviving heir. (c) The fact that Mrs. Smith and one H. H. Hunt were administrators of the estate. (d) The fact that one-half of the stock of the Securities Company was owned by the said estate and the other half by W. E. Hauser. (e) The fact that the parties of the second part were the sole surviving trustees of the Securities Company holding title as such to all of its assets. (f) The fact that, "in order to conserve, care for, liquidate and divide said property, the said trustees of the Smith Securities Company, at the request of the stockholders thereof, and pursuant to previous arrangement, did on January 12, 1925, turn over to the said first party all the assets, books, accounts, papers, files and all other records of the Smith Securities Company and the books, accounts, papers, files and all records of the old partnership firm of Grant Smith and Company (dissolved by the death of Grant Smith on September 27, 1923) together with all right, title and interest therein and thereto and all the rights, privileges, appurtenances, easements, tenements and hereditaments thereunto belonging or in any wise appertaining, excepting such liquid assets1932 BTA LEXIS 1175">1185 as were to be and actually were divided by said trustees, as for and at January 12, 1925 to be held, conserved, sold, liquidated and divided by said party as trustee, for the use and benefit of the aforesaid stockholders of said Smith Securities Company and subject to the terms and conditions of this instrument." The instrument then makes the following declaration: Now, therefore, in consideration of the premises, said first party hereby declares that on January 12, 1925, it did as trustee take over the charge and supervision of all the assets of the Smith Securities Company as above set forth, excepting those liquid assets above referred to, and that it holds title thereto for the use and benefit of the stockholders of the said Smith Securities Company, and for the purpose of collecting, conserving and liquidating such properties and paying the proceeds therefrom into a liquidation fund for the use and benefit of the aforesaid stockholders, all rights and power being subject to the terms and conditions of this agreement, as hereinafter set forth. The instrument then proceeds to declare and define the powers and duties of the bank as trustee. Thes powers are very broad, including1932 BTA LEXIS 1175">1186 the power to manage, lease or sell the real estate properties and in general include many of the powers conferred upon the trustees in liquidation. The enumerated powers are, however, subject to the following restrictions: (a) The power to sell or otherwise dispose of the real estate is qualified by the provisions that the "beneficial owners" shall have the power to dictate the price or method of disposal of any such property. See Paragraph (b) of the instrument. 26 B.T.A. 1178">1183 (b) The power to vote the stock of the other corporations (constituting part of the corpus of the trust) is qualified by the provisions that if the beneficial owners or either of them shall be present at the stockholders meetings such beneficial owner or owners shall have the right to vote the stock; and further that in any event the trustee shall vote in accordance with the directions of the beneficial owners when so requested by them. (c) Although the trustee is empowered to sell the real estate it is not expressly empowered to sell the stocks in other corporations. It is empowered to sell such stocks at the direction of the beneficial owners. The instrument contains the following provisions with1932 BTA LEXIS 1175">1187 respect to the right of the beneficial owners to withdraw from the trust: The beneficial owners of said property shall have the right at any time to withdraw from the operation of this trust and divide between themselves any item of property, either real or personal, included herein, and said trustee shall also sell or dispose of any item of such property at the price and upon the terms and at the time or times it may in writing by such beneficial owners be directed so to do. The instrument provides as follows in regard to the termination of the trust: This agreement may be terminated at any time by either first party or the beneficial owners giving the other thirty days notice of its intention so to do, in which event said first party shall account for all of said property and money held by it in said trust, and convey and transfer by proper deeds, assignments and bills of sale all of said property to such beneficial owners or to such other party as they may in writing direct. This instrument was executed by the bank and by W. E. Hauser, Mrs. Grant Smith and P. E. Colman as sole surviving trustees of the Smith Securities Company. In addition to the execution as above stated, 1932 BTA LEXIS 1175">1188 the following paragraphs are added: The undersigned, administrators of the Estate of Grant Smith, hereby consent to the execution of the foregoing agreement. DEETTE MCAUSLEN SMITH, H. H. HUNT, Administrators of Estate of GRANT SMITH, deceased.The undersigned beneficial owners of the property included in this trust hereby consent to the entering into of the foregoing instrument and agree that said trustees shall hold said property for their use and benefit under the terms and conditions herein set forth. W. E. HAUSER, MRS. GRANT SMITH. OPINION; BLACK: In Docket No. 43301 it has been stipulated that the liability of petitioner W. E. Hauser as the transferee of the assets of the Smith Securities Company for the year 1924 is $3,567.91. In Docket No. 43305 it has been stipulated that the liability of petitioner Mrs. Grant Smith as the transferee of the assets of the Smith Securities 26 B.T.A. 1178">1184 Company for the year 1924 is $3,567.91. Determination will be made accordingly. The remaining issues are: 1. Whether or not W. E. Hauser and the estate of Grant Smith received all of the assets of the Smith Securities Company in 1925; and 2. Whether or not1932 BTA LEXIS 1175">1189 the Smith Securities Company had a taxable period from January 1 to January 12, 1925, for which it was obliged to file an income-tax return. We will discuss issue No. 1 first. Petitioners contend that when the corporation, Smith Securities Company, was dissolved January 12, 1925, only the liquid assets were paid over to them and that the remainder of the assets, consisting of stocks in certain closely held corporations, real estate, certain bills receivable, etc., were retained by the trustees for orderly liquidation and that inasmuch as the value of the liquid assets which petitioners received in 1925 was less than the cost of their stock, there was no gain or loss for petitioners to report for 1925. Respondent contends that the entire assets of the corporation were distributed to petitioners January 12, 1925, and that the value of these assets received in liquidation was greater than the cost of the stock and that hence each petitioner is chargeable with the profit on his stock which respondent has found resulted from the liquidation. Section 3833 of Remington's Compiled Statutes of Washington provides: Power of Trustees upon Dissolution of Corporation. Upon the dissolution1932 BTA LEXIS 1175">1190 of any corporation formed under the provisions of this chapter, the trustees at the time of the dissolution shall be trustees of the creditors and stockholders of the corporation dissolved, and shall have full power and authority to sue for and recover the debts and property of the corporation by the name of the trustees of such corporation, collect and pay the outstanding debts, settle all its affairs and divide among the stockholders the money and other property that shall remain after the payment of the debts and necessary expenses. The decree of the Superior Court of Washington dissolving the Smith Securities Company recited: It is therefore now ORDERED, ADJUDGED AND DECREED that the said corporation be and the same is hereby dissolved and the assets of said corporation shall be held by said three trustees above named to be divided among the stockholders above named according to their said respective interest. It is well established that the mere dissolution of a corporation does not effect a distribution of its assets among its stockholders, and furthermore that such a distribution is not effected by the turning over of the assets of the corporation to trustees in liquidation1932 BTA LEXIS 1175">1191 who may also be stockholders of the corporation. 26 B.T.A. 1178">1185 The case of Wells Fargo Bank & Union Trust Co. v. Blair, 26 Fed.(2d) 532, involved the question of whether or not the assets of a California corporation were received by its stockholders in 1919 or 1920. A decree of dissolution of the corporation was entered on December 30, 1919, and filed with the Secretary of State of California on the following day. The decree directed the board of directors "to settle all of the affairs of the said corporation and to distribute and convey all the property and assets of said corporation to its stockholders in proportion to their respective interests." In January, 1920, the directors, acting as liquidating trustees, sold the assets of the corporation. Under decisions of the California courts, title to the assets of a dissolved corporation vests not in the trustees, but in the stockholders. The court held that, in spite of such decisions, there was no liquidation until the property was actually transferred to the stockholders and that, accordingly, the stockholders had not received these assets until 1920. 1932 BTA LEXIS 1175">1192 Respondent in his brief admits the force of Wells Fargo Bank & Union Trust Co. v. Blair, supra, and concedes that when the liquidating trustees, Hauser, Colman and Mrs. Grant Smith, took charge of the property of the corporation after the order of dissolution, it did not amount to a distribution of the property to the stockholders of the corporation, but respondent contends that, when the liquidating trustees entered into a trust agreement with the Metropolitan National Bank of Seattle, by which it was agreed that the bank should complete the liquidation, which arrangement was concurred in by the administrators of the estate of Grant Smith, deceased, and by the two beneficial owners of the assets of said corporation, this was a turning over of the assets of the corporation to the two stockholders, Hauser and Mrs. Grant Smith, and that although they did not actually receive these assets in 1925, they constructively received them in that year. Hence the transaction was taxable to petitioners. We do not agree with respondent's contention. We view the trust instrument entered into by the liquidating trustees with the bank as largely one of convenience by which the1932 BTA LEXIS 1175">1193 bank, because of its superior facilities, was to complete the liquidation, turning over to the stockholders of the corporation the proceeds resulting from sales as fast as it was expedient to do so. Until the stockholders actually received the assets or the proceeds resulting from the sale thereof, there was no receipt by them. Article 548 of Regulations 69 (Revenue Act of 1926), reads as follows: ART. 548. Gross income of corporations in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the 26 B.T.A. 1178">1186 stead of the corporation for such purposes. (See Section 282 and Articles 1293 and 1294). Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. * * * Article 547 of Regulations 45 (Revenue Act of 1918) is identical with the above quoted regulation and was approved by the court, as a reasonable regulation and one which should be given effect, in 1932 BTA LEXIS 1175">1194 Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108 (certiorari denied, 283 U.S. 818">283 U.S. 818, affirming the Board's decision in 15 B.T.A. 609">15 B.T.A. 609. In that case, upon dissolution of the corporation, the stockholders authorized the president and directors to act as liquidating trustees. After a sale of the assets under that authorization, the question arose whether it was a sale by the corporation, or by the stockholders, on the theory that the assets had been distributed to them. The court said in part: It is contended by petitioners that the legal title to the property vested in the president and directors as trustees by operation of law immediately upon the consummation of the necessary steps to effect the dissolution, and that the sale of the property made thereafter was for the benefit of the creditors and stockholders and not for the company. Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid and the residue distributed1932 BTA LEXIS 1175">1195 to the stockholders. We followed 15 B.T.A. 609">Taylor Oil & Gas Co. v. Commissioner, supra, in Hellebush et al., Trustees,24 B.T.A. 660">24 B.T.A. 660, and again approved the Commissioner's regulations above referred to. If said regulations were applicable in 15 B.T.A. 609">Taylor Oil & Gas Co. v. Commissioner, supra, and in 24 B.T.A. 660">Hellebush et al., Trustees, supra, we see no reason why they should not be applicable and controlling in the present proceeding. On authority of the cases above cited, we hold in favor of petitioner and against respondent on Issue No. 1. We will next discuss Issue No. 2. Section 239 of the Revenue Act of 1926, relating to the filing of income-tax returns by corporations, is printed in the margin. 11932 BTA LEXIS 1175">1196 Article 622 of Regulations 69 (Revenue Act of 1926), relating to returns filed by receivers or trustees in dissolution, etc., reads as follows: ART. 622. Return by receivers. - Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, 26 B.T.A. 1178">1187 must make returns of income for such corporations on Form 1120, covering each year or part of a year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. * * * Under section 239(a), Revenue Act of 1926, printed in the margin, and article 622, above quoted, the trustees in dissolution of the Smith Securities Company should have filed a return for the corporation covering the entire calendar year 1925. Instead, the stipulation of1932 BTA LEXIS 1175">1197 facts shows that the return which they filed on Form 1120 covered the period January 12, 1925, to December 31, 1925. This was wrong. But there is no warrant in law for the Commissioner's action in computing a deficiency for the period January 1 to January 12, 1925, liquidation of the corporation not having been completed by January 12, 1925, but extending throughout and beyond 1925. If there is any deficiency for 1925 it must be for the entire calendar year, and the Commissioner has made no such determination. Of course, if we had sustained the Commissioner's contention that liquidation of the Smith Securities Company was completed January 12, 1925, his action in computing a deficiency for that period would be correct. But, where a corporation is dissolved during a particular calendar year and its affairs remain in the hands of liquidating trustees for the remainder of the year, we know of nothing in the applicable revenue act and the Commissioner's regulations thereunder which warrants dividing up the calendar year into two taxable periods, viz., the first period covering the time prior to the date of dissolution of the corporation and the second period covering from the time1932 BTA LEXIS 1175">1198 when trustees in liquidation took charge to the end of the calendar year. In O.D. 821, C.B. 4, p. 279, it was said: Section 1764, Wisconsin Statutes (1915) provides that the corporate existence of a dissolved corporation shall be continued for the purpose of liquidating its assets and winding up its affairs. It is held, therefore, that profit resulting from the sale of assets of a Wisconsin corporation in process of liquidation is subject to income and excess profits taxes in the same manner as profits derived from the active operation of the corporation. * * * Therefore, the responsibility for filing appropriate returns for the corporation and paying taxes shown thereby to be due devolves upon the trustees in liquidation or such other legal administrators as have charge of the property and affairs of the corporation during the period of liquidation. They must make returns of income for such corporation in the same manner and form as an active corporation. Conversely, they are not required to file returns as fiduciaries. 26 B.T.A. 1178">1188 See also O.D. 73, C.B. 1, p. 235; O.D. 873, C.B. 4, p. 308; I.T. 1814, C.B. II-2, p. 210. The above citations are in conformity with1932 BTA LEXIS 1175">1199 the applicable statutes, we think, and hence we hold in favor of petitioners on Issue No. 2. If the Smith Securities Company owes a deficiency for 1925, the Commissioner must determine it for the entire calendar year 1925 and not for the 12-day period January 1 to January 12, 1925. In Docket No. 43306 it was stipulated: If it is determined by the Board of Tax Appeals that the Smith Securities Company was liquidated and all of its assets distributed to its stockholders in 1925, then the deficiency determined by the respondent in Docket No. 43306 is correct. If it is determined by the Board of Tax Appeals that the Smith Securities Company was not liquidated nor all of its assets distributed to its stockholders in 1925, then there is no deficiency due in said appeal filed under Docket No. 43306. Since we have held that the Smith Securities Company was not completely liquidated in 1925, we hold, in conformity with the foregoing stipulation, that there is no deficiency in Docket No. 43306. Reviewed by the Board. In Docket No. 43306 decision will be entered for the petitioner. In Docket Nos. 43300, 43301, 43302, and 43305 decision will be entered under Rule 50.1932 BTA LEXIS 1175">1200 Footnotes1. SEC. 239. (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporation of whose business or property they have custody and control. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625231/	Frank J. Longo, et al. 1 v. Commissioner. Longo v. CommissionerDocket Nos. 339-66 - 341-66.United States Tax CourtT.C. Memo 1968-217; 1968 Tax Ct. Memo LEXIS 82; 27 T.C.M. 1075; T.C.M. (RIA) 68217; September 26, 1968. Filed John E. Glover, for the petitioners in docket No. 339-66. Kenneth J. Murphy, Jr., 6435 Wilshire Blvd., Los Angeles, Calif., for the petitioners in docket Nos. 340-66, 341-66. Richard L. Fishman, 1968 Tax Ct. Memo LEXIS 82">83 for the respondent. 1076 FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: In these consolidated cases respondent has determined a deficiency in Callanan-Clark & Longo, Inc.'s, (hereinafter sometimes referred to as petitioner corporation or the corporation) income taxes for the taxable year March 1 to August 6, 1962, in the net amount of $5,864.18. 2Respondent further determined that petitioners James F. Callanan and Frank J. Longo are liable, as transferees of Callanan-Clark & Longo's assets, determining transfers in the amounts of $5,864.18 and $3,800, respectively. Respondent now concedes that only $2,062.41 was transferred to Frank Longo. The issues for determination are: 1. Whether the corporation suffered a deductible $20,000 loss of goodwill upon its dissolution and if not, 2. The extent of the liability of the individual petitioners as transferees of the corporation's assets. Our determination of the first issue also will determine the allowable amount of charitable contributions deductible by petitioner1968 Tax Ct. Memo LEXIS 82">84 corporation. Findings of Fact Some of the facts are stipulated and are so found. At the time the petitions in this case were filed, the individual petitioners, James F. Callanan (hereinafter sometimes referred to as Callanan) and Frank J. Longo (hereinafter sometimes referred to as Longo) resided in Los Angeles, California. The corporate petitioner has been dissolved since August 6, 1962, but had a legal existence for purposes of the instant proceeding in Los Angeles, California. For the fiscal year ending August 6, 1962, the corporation timely filed its corporate income tax return on an accrual method of accounting with the district director of internal revenue, Los Angeles, California. In 1961 James Callanan and Henry Clark were equal partners in the Callanan-Clark Insurance Agency. The agency handled primarily automobile and casualty insurance, 95 percent of which was brought in through Callanan's personal contacts in his funeral directing business, coaching and Naval Reserve activities. While Callanan brought in the clients, Clark serviced the accounts, devoting 100 percent of his time to the agency. Callanan, who spent most of his time managing his funeral directing business, 1968 Tax Ct. Memo LEXIS 82">85 devoted no more than 10 percent of his time to agency business. The agency also engaged a third man, Jack McLaughlin, who helped Clark service accounts. In addition to servicing its own clients, Callanan-Clark entered into management partnerships with various other insurance agencies for the purpose of managing the business of those agencies. One of the agencies with which such an arrangement was made was the Longo & Roach Insurance Agency, in which petitioner Frank J. Longo was a partner. Callanan-Clark managed Longo's agency from April 1, 1960 until the formation of petitioner corporation. Other agencies managed by Callanan-Clark at the time petitioner corporation was formed were: Insurance Specialists, managed since September 1, 1960, and Henricksen Insurance Agency, managed since January 1, 1961. During 1961 Callanan-Clark, through a miscalculation of its cash flow, found itself with an immediate need for $20,000. Longo had been interested in merging his agency with Callanan-Clark and was willing to pay the cash which Callanan needed in return for the merger. Callanan originally wanted $30,000 from Longo as payment for the difference between the value of the business he would1968 Tax Ct. Memo LEXIS 82">86 bring into a merged operation, as compared with that which would be supplied by Longo. He finally agreed to accept $20,000. The payment of $20,000 by Longo to Callanan was consummated when Longo borrowed $20,000 and paid that amount to the Callanan-Clark Agency. The money was then used by the agency to pay its existing obligations. Callanan-Clark recorded the receipt of the $20,000 as follows: 2/28/61 Security First Nat'l Trust Act.$20,000.00Suspense$20,000.00To record deposit of 2/8/61The credit was made to "suspense" rather than to a specific asset because at the time the amount was received, Callanan-Clark's accountant, Frank L. Bryant, was uncertain as to the nature of the assets which were 1077 being conveyed from the partnership to Longo. Bryant assumed that the payment was for the overall goodwill which the partnership had built up, but wanted the amount attributed to an asset which possibly could be depreciated for income tax purposes. He eventually decided, with the approval of Callanan and Longo, that the payment should be treated as proceeds from the sale of the customer list of the Callanan-Clark Agency in hopes that the list would be1968 Tax Ct. Memo LEXIS 82">87 subject to depreciation. At the time the $20,000 was received, Callanan-Clark's commissions from its policyholders, excluding those from the management partnership, were approximately $30,000 per annum. On its partnership Federal income tax return for the fiscal year ending December 31, 1961, Callanan-Clark reflected the receipt of the $20,000 on Schedule D as long-term capital gain from the proceeds of the sale of a capital asset "Customer List." One-half of the net capital gain from Schedule D was reported by Callanan on his joint income tax return for 1961 and the other half was reported by Clark on his return. On February 8, 1961, James Callanan and Frank Longo entered into an agreement to form the corporate petitioner, Callanan-Clark and Longo. Under the terms of the agreement each party contributed all the assets of his respective insurance agency to the corporation. Each party also contributed $500, for which each received five shares of $100 par value common stock. This stock constituted the only issued and outstanding stock of the corporation during its existence. The purpose of the corporation was to sell insurance and conduct a bonding business of all kinds and classes, 1968 Tax Ct. Memo LEXIS 82">88 with the exception of bail bonds. Upon incorporation of petitioner corporation and the transfer of its assets thereto, the partnership of Callanan & Clark terminated. Shortly after the formation of petitioner corporation, Callanan and Longo decided that the corporation would assume the $20,000 liability incurred by Longo (to pay the $20,000 cash to Callanan-Clark). On March 13, 1961, petitioner corporation executed a promissory note for $20,000, endorsed by Longo and Callanan in favor of the Bank of America, and used the proceeds to satisfy Longo's $20,000 obligation. This transaction represented a purchase by the corporation of the asset sold to Longo by Callanan, or as stated by respondent in his proposed finding of fact, "The payment by the corporation was for the customer list of the partnership." On its books and records, petitioner corporation set up a ledger card entitled "Customer List" which card contained the following entry: DateReferenceChargesCreditsBalance11/30/61JE-1$20,000.00$20,000.00The corporation also set up a ledger card entitled "Note Payable - Bank of America," which card shows $20,000 as a credit as of 11/30/61. 1968 Tax Ct. Memo LEXIS 82">89 The operation of petitioner corporation was substantially similar to that of the Callanan-Clark Agency. Henry Clark was not a shareholder in the corporation, but remained as an employee under a verbal contract as general manager. His responsibilities included allocating work, maintaining existing accounts and working with new leads. Jack McLaughlin also remained in the new organization. He handled the old Roach and Longo accounts along with new accounts attributable to Longo. Previously he had serviced the Roach and Longo accounts under the management contract with the Longo & Roach Agency. The management contracts which Callanan-Clark had, other than the Longo & Roach Agency agreement, were assumed by the corporation after being renegotiated and rewritten. Petitioner corporation's operation shortly proved to be an undesirable venture from the point of view of Callanan and Longo, and on April 26, 1962, they entered into an agreement providing for its dissolution. This agreement called for each of them to assume the corporation's assets and obligations in equal proportion. It also provided that each would receive a customer list of those clients which he had developed originally, 1968 Tax Ct. Memo LEXIS 82">90 and further provided that for a period of six years neither would accept and each would refuse to write insurance for any person whose name appeared on the list assigned to the other. The relevant provisions read as follows: 4. Assignment of Accounts. A list of the clients of the corporation for whom insurance business has been placed and is currently in force is attached hereto, marked Exhibit "A" and is incorporated herein by this reference. The said listing of clients is divided between those which were originally or primarily produced by Frank J. Longo and those which were 1078 originally or primarily produced by James F. Callanan, or his prior insurance firm. The parties do hereby assign and set over, each to the other, all future business rights in and to the respective accounts as designated and specified in Exhibit "A." This is intended to accomplish a division of the customer list of the corporation so that each may hereafter conduct a separate insurance business with the specified clients being the clients of each party's respective separate insurance business. Each party agrees to be solely responsible for servicing the accounts hereby assigned to him and to be solely1968 Tax Ct. Memo LEXIS 82">91 responsible for any return commission or other obligation which may arise by reason of the cancellation, loss or other liability arising from the broker-client relationships, to the same extent as though he had written said business in his separate general insurance agency rather than in the corporation being dissolved. * * 10. Agreements Regarding Clients. It is the intention and desire of the parties to each see that the other maintains the best possible client relations with the accounts being assigned to him, respectively as herein provided. To this end, and in view of the fact that Frank J. Longo will retain the present telephone listing of the agency, he agrees to instruct the personnel in his office to refer calls which come in and pertain to accounts assigned to James F. Callanan to the office of the latter party. In consideration of the mutual covenants contained herein and the division of the firm's customer list between the parties, each agrees that for a period of six (6) years commencing with the date of this Agreement, he will decline and refuse to accept or write insurance for any person listed on Exhibit "A" and whose insurance business is hereby assigned to the1968 Tax Ct. Memo LEXIS 82">92 other party. 11. Notices. The parties agree to coincide the date of sending notices to their respective clients with regard to the dissolution of the present agency business and each agrees not to make prior notices to the detriment of the other. The parties also agree that appropriate notices will be sent to the insurance companies involved indicating the transfer of the accounts as specified herein and indicating the party to be hereafter responsible on the respective policies. These notices will also be sent concurrently and at a time mutually agreeable to the parties. With regard to any contingency benefits on policies written through the corporation, it is agreed that any excess commissions earned thereon will be divided equally between the parties hereto, A subsequent agreement amended paragraph 4 to provide that if a client appeared on the wrong list the account and commissions would be assigned to the proper party. The above agreement not to compete between Callanan and Longo was the only restriction placed on Callanan's right to use the respective lists. There was no agreement not to compete between petitioner corporation and Callanan. Neither was there such an agreement1968 Tax Ct. Memo LEXIS 82">93 between petitioner corporation and Henry Clark, nor is there evidence in the record that either Frank Longo or Jack McLaughlin entered into any such agreement with petitioner corporation. Pursuant to the agreement of dissolution, Callanan and Longo each received tangible physical assets worth $2,062.41, and the customer lists referred to above. On May 4, 1962, Callanan, Henry Clark and Jack McLaughlin incorporated a new corporation called Callanan-Clark & McLaughlin, Inc., for the purpose of conducting a general insurance business. For the period May 1, 1962, through and including August 31, 1962, the new corporation earned total commissions of $11,096.48. This total was from 502 invoice billings, of which 427 invoices, totaling $8,643.52, were sent to people whose names appeared on the list assigned to Callanan by paragraph 4 of the agreement to dissolve petitioner corporation. At the time petitioner corporation was dissolved, the customer list in Callanan and Clark's hands was expected to produce $20,000 annually in insurance commissions. Though the accounts which Callanan took from petitioner corporation upon its dissolution were profitable to his new corporation, the list1968 Tax Ct. Memo LEXIS 82">94 of accounts had no fair market value when it was transferred to Callanan from petitioner corporation. The policies obtained from the clients were generally the result of the personal efforts of Callanan. Most accounts were automobile policies which provided coverage for one year. The rest were mostly fire and property coverage policies which provided coverage for three years. About 40 percent of the policies covered license to Ar-Tik. 1264 private individuals. There was no right of the petitioner corporation to demand that an insured continue his policy with it at any time. Even the three-year policies could be canceled by the insured at any time with a minor penalty. A list of clients similar to those of the corporate petitioner, obtained through 1079 personal contacts, has no fair market value unless those individuals who generated the business (obtained the policies) sign a covenant not to compete. Without such a covenant, there is a great risk that those originally responsible for obtaining the clients will be able to regain the clients at the expense of the purchaser. In some instances, where there is no covenant, a buyer will take the list on a contingency basis, 1968 Tax Ct. Memo LEXIS 82">95 paying a commission to the seller only when premiums are collected. This is called a "gonna" deal. However, in the absence of a covenant not to compete, the risk that the seller will regain the accounts is so great that there is no cash value attaching to the list itself. In recording the dissolution of the corporation on its books and records, petitioner corporation wrote off the asset which it had purchased for $20,000 as worthless by making the following entry on the ledger card entitled "Customer List": DateRefer- enceChargesCreditsBalance9-30-62JE-23$20,000.000As a closing journal entry under the date of September 30, 1962, the corporation made the following entry accompanied by the following explanation: Operating expenses-Customer lists$20,000.00Customer Lists$20,000.00 To write off customer lists which were purchased from Callanan and Clark March 1, 1961, for $20,000.00. When corporation was dissolved the customer lists were transferred to Callanan-Clark & McLaughlin, Inc. Though the entry is dated September 30, 1962, the customer list was distributed to the new corporation prior to August 6, 1962. 1968 Tax Ct. Memo LEXIS 82">96 On petitioner corporation's final income tax return filed for the fiscal period beginning March 1, 1962, and ending August 6, 1962, the date of dissolution, it deducted the $20,000 cost of the customer list from gross income as an expense. In his statutory notice of a deficiency, respondent disallowed the $20,000 deduction and made other adjustments as follows: EXPLANATION OF ADJUSTMENTS (a) The deduction of $20,000 claimed as an abandonment of a customers list and/or goodwill is disallowed because you have not established that you are entitled to such a deduction. (b) As a result of adjustment (a) above, the total amount of contributions paid during the year, $462.00 is allowable. The adjustment is computed as follows: Taxable income before con- tributions as revised $23,703.80Limitation on contributions de- duction - 5% $ 1,185.19Contributions paid-per return$ 462.00Contributions deduction per re- turn 185.19Adjustment-additional deduction$ 276.81In his statutory notices to the individual petitioners respondent determined both Callanan and Longo liable as transferees of petitioner corporation's property. Respondent determined that Longo1968 Tax Ct. Memo LEXIS 82">97 was liable only for the value the physical assets received, now conceded to be $2,062.41. He determined that Callanan was liable for the full amount of the deficiency determined, determining that he had received assets in excess of the deficiency determined for the corporation. Ultimate Finding of Fact At the time of petitioner corporation's dissolution, the intangible which cost it $20,000 was worthless in its hands and at that time it suffered a loss of $20,000. Opinion As partial consideration for merging its insurance agency (Callanan-Clark) with that of Frank Longo (Longo & Roach Insurance Agency), Callanan-Clark received $20,000 from Longo. This amount represented the agreed upon difference in the going concern value between Callanan's agency and Longo's agency. Longo had borrowed the $20,000 to pay Callanan-Clark this amount. Shortly thereafter he and Callanan incorporated petitioner (Callanan, Clark & Longo, Inc.), and the corporation assumed Longo's indebtedness. The parties agree, and we have found, that at the time the corporation assumed this liability, it had purchased a valuable intangible asset from Longo. Its tax basis was $20,000. 31968 Tax Ct. Memo LEXIS 82">98 1080 On its books and records, petitioner corporation recorded this amount as payment for a customer list which Callanan had brought into the corporation. Subsequently when the corporation liquidated, petitioner corporation deducted $20,000 on its final return as an ordinary loss from the abandonment of goodwill. Though the Commissioner does not necessarily agree that the $20,000 payment was for goodwill, it is his position that whatever was purchased for $20,000, it was neither abandoned nor worthless at any time prior to, or at liquidation. He points out that both prior to the incorporation of petitioner and subsequent to its liquidation, James Callanan, Henry Clark and Jack McLaughlin were operating a general insurance agency with substantially the same customers. He concludes from this fact that whatever it was that Callanan brought into the corporation which was worth $20,000, he took that same asset out and at all times the asset was worth $20,000. Consequently, he contends that there was a distribution of an asset upon the corporation's liquidation, not an abandonment of it. Respondent thus disallowed the $20,000 deduction taken by petitioner corporation. In addition1968 Tax Ct. Memo LEXIS 82">99 he determined that, under section 6901 of the Code, James Callanan, as transferee of the $20,000 intangible, plus tangible assets worth $2,062.41, is liable for the full amount of the $5,864.18 net deficiency determined for the corporation. Longo also contributed a customer list to petitioner corporation and other intangible assets, which assets were returned to him upon petitioner corporation's liquidation. However, respondent concedes that in Longo's case the intangibles had no value at the time petitioner corporation was liquidated and has consequently determined that Longo is liable as transferee only to the extent of the value of the tangible physical assets he received - $2,062.41. In the instant case, we cannot accept respondent's rationale that the corporation had intangible assets with a fair market value which it could distribute in the liquidation process. The evidence presented established that the $20,000 represented goodwill brought into the corporation by Callanan, (through Longo) which goodwill was attributable to the personal efforts of the members of the old Callanan-Clark organization, namely James Callanan and Henry Clark. It also established that the goodwill1968 Tax Ct. Memo LEXIS 82">100 had value only so long as those men remained with the company. With Callanan and Clark in the organization, the corporation was a beneficiary of the goodwill which these men had previously established individually with the various policy-holders and agencies with which they were connected. It was worth $20,000 to the corporation to have the use of the goodwill for the indefinite period of time for which Callanan and Clark would be a part of the corporation's operation. What is critical to the instant case is the complete dependence of the corporation on Callanan and Clark for retaining the goodwill which it purchased. Petitioner corporation's clients were realistically the clients of the corporation in name only. The clients identified themselves with the individuals who sold and serviced their policies, not the corporation. Because of this personal identification, Callanan and Clark had the power to take away substantially all the business for which they were responsible in the event they left the corporation. In effect the corporate goodwill blossomed intact only so long as they remained rooted in the corporate garden. When they left the firm they did not receive any goodwill from1968 Tax Ct. Memo LEXIS 82">101 the corporation, as all of the goodwill of the corporation emanated through, and was permanently attached to, them. As pointed out in the findings of fact, there is no salable goodwill where the business of a corporation is thus so dependent upon its personnel, unless these key employees enter into a covenant not to compete with the corporation. In the instant case no covenant not to compete was entered into by either Callanan or Clark, the ones responsible for the bulk of the business represented by the $20,000 payment. Charles R. Davis, an individual who has negotiated the purchase of numerous insurance agencies testified as an expert witness that the best offer which he would have made for a business similar to petitioner corporation's (in the absence of a covenant not to compete from the key personnel) was the so-called "gonna" deal referred to in the findings of fact. However, even the "gonna" deal has no ascertainable fair market value. The situation in the instant case is identical to, and controlled by our opinion in D.K. MacDonald, 3 T.C. 720">3 T.C. 720 (1944). In MacDonald the taxpayer and his 1081 wife were the sole shareholders in an incorporated insurance agency. 1968 Tax Ct. Memo LEXIS 82">102 They subsequently liquidated the corporation, distributing all assets to the husband, who proceeded to set up an insurance agency under a name similar to the name of the liquidated corporation and solicited the clients of the corporation. The issue presented to us in that case was whether there was any valuable goodwill passing from the corporation to the taxpayers upon liquidation of the corporation. The corporation had no exclusive right to the business of any policyholder, and without a covenant not to compete from the taxpayer, the business of the corporation had no market value, fair or otherwise. In holding that there was no goodwill passing to the taxpayers because the goodwill was solely attributable to the personal abilities of the taxpayers, we stated (pp. 727-728): The facts in the instant cases established that any value which this business may have had on July 31, 1941, in addition to its tangible assets, was due to the personal ability, business acquaintanceship, and other individualistic qualities of D. K. MacDonald. As one witness put it, "Mr. MacDonald was the company." The policy of the corporation was decided by D. K. MacDonald and all employees worked under1968 Tax Ct. Memo LEXIS 82">103 his direction and supervision. There existed no contract between the corporation and any of its employees, including D. K. MacDonald, with respect to future services. Neither the name of the corporation, its location, its agency agreements, nor its existing policies with customers had any value. If the law prevents the recognition of the personal ability and personality of D. K. MacDonald as an element of this corporation's good will for income tax purposes, then petitioners did not receive any good will as a result of their acquisition of this corporation's assets. We find no authority which holds that an individual's personal ability is part of the assets of a corporation by which he is employed where, as in the instant cases, the corporation does not have a right by contract or otherwise to the future services of that individual. The contrary seems to be indicated by such cases as Cox v. Helvering, 71 Fed. (2d) 987; Salvage v. Commissioner, 76 Fed. (2d) 112; affd., 297 U.S. 106">297 U.S. 106; and Beals' Estate v. Commissioner, 82 Fed. (2d) 268, affirming 31 B.T.A. 966">31 B.T.A. 966. Also cf. Donal A. Carty, 38 T.C. 46">38 T.C. 46, 38 T.C. 46">59 (1962),1968 Tax Ct. Memo LEXIS 82">104 and the cases cited therein. In MacDonald we further held that there was no marketable asset embodying the goodwill of the corporation which could be sold to a third party. As in the instant case, we recognized the possibility that a purchaser might take over the customer list of the corporation on a contingency basis such as the "gonna" type arrangement described above. In holding that this type of an arrangement has no fair market value, we cited (p. 729) the following statement from Cassatt v. Commissioner, 137 F.2d 745 (C.A. 3, 1943) at 729, which also applies to the instant situation: It is true that good will may be the subject of exchange. Here, however, Cassatt and Company [the seller] did not undertake to transfer its good will to Pierce [the purchaser] in exchange for property of an ascertainable market value. On the contrary the transfer was made in consideration of Pierce's promise to share with Cassatt and Company for six years in the future any commissions which it might earn during that period from business with Cassatt customers. The receipt of such commissions was wholly contingent upon Pierce's remaining in business and obtaining business from1968 Tax Ct. Memo LEXIS 82">105 the former Cassatt customers, neither of which it was under any obligation to do. It is settled that such a promise to make payments in the future "wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty" has no ascertainable fair market value. Burnet v. Logan, 283 U.S. 404">283 U.S. 404, 283 U.S. 404">413, 51 S. Ct. 550">51 S. Ct. 550, 51 S. Ct. 550">552, 75 L. Ed. 1143">75 L. Ed. 1143. We agree with Judge Learned Hand's statement in Bedell v. Commissioner of Internal Revenue, 30 F. (2d) 622, 624, (C.C.A. 2, 1929) that "It is absurd to speak of a promise to pay a sum in the future as having a 'Market value,' fair or unfair. Such rights are sold, if at all, only by seeking out a purchaser and higgling with him on the basis of the particular transaction. Even if we could treat the case as an exchange of property, the profit would be realized only when the promise was performed." In the instant case, for the same reasons as given in MacDonald, we hold that at the time of petitioner corporation's liquidation it had no goodwill, either in terms of a customer list or in any other form, which could be distributed to the individual petitioners or sold to a third party. Respondent points1968 Tax Ct. Memo LEXIS 82">106 out that the MacDonald case did not discuss whether the 1082 corporation could claim a loss from the worthlessness of a purchased intangible, as does the corporation in the instant case. However, we have found that, at the time it liquidated, petitioner corporation did not have either a valuable intangible asset to distribute to its shareholders or one which had a fair market value to a third party. Under such circumstances, it is clear that the intangible asset which originally cost $20,000 no longer had any value. Its value originally lay in the personal services of Callanan, Clark and McLaughlin for the period of their association with petitioner. At the time of its liquidation this period had terminated. Section 165 provides that a corporation may deduct losses incurred during a taxable year which are not compensated for by insurance or otherwise. 4Rev. Rul. 57-503, 1957-2 C.B. 139, specifically provides that where a corporation's goodwill becomes worthless due to the abandonment of its business and its attendant assets, including goodwill, its basis in goodwill is deductible as an ordinary loss. In the instant case there is possibly an even stronger situation1968 Tax Ct. Memo LEXIS 82">107 than that envisaged by the regulation, as the goodwill embodied by Callanan-Clark, and McLaughlin abandoned the corporation. We hold that under these circumstances petitioner corporation had suffered a $20,000 loss of intangible goodwill. We further hold that it correctly deducted its $20,000 cost on its final return in accordance with section 165(a) of the Code, section 1.165-2, Income Tax Regs., and Rev. Rul. 57-503, supra. Our decision eliminates any deficiency in petitioner corporation's return for the fiscal year ending August 6, 1962. Consequently, there is no transferee liability on the part of either James Callanan or Frank Longo. Decisions will be entered for the petitioners. Footnotes1. Cases of the following petitioners are consolidated herewith: James F. Callanan, Transferee, docket No. 340-66, and Callanan-Clark & Longo, Inc., docket No. 341-66.↩2. Respondent determined a deficiency of $5,916.96, noting an overassessment of $52.78 to arrive at the net amount shown.↩3. We note that petitioner corporation had already obtained this intangible asset, and with a tax basis of $20,000 at the time of its incorporation. This is so because Longo had paid $20,000 to Callanan for the asset and it thus had a basis of $20,000 in his hands. When he transferred all of his agency's assets to petitioner corporation, this intangible was included, and since he transferred his assets to the corporation in exchange for its stock, and immediately thereafter he and Callanan were in control of the corporation, the corporation took over his basis under sections 351 and 358 of the Code.↩4. SEC. 165 LOSSES. (a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625233/	PEAVY-BYRNES LUMBER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Peavy-Byrnes Lumber Co. v. CommissionerDocket No. 15824.United States Board of Tax Appeals38 B.T.A. 249; 1938 BTA LEXIS 891; August 4, 1938, Promulgated 1938 BTA LEXIS 891">891 Petitioner seeks special assessment for reasons named in section 327(d), Revenue Acts 1918 and 1921. By reason of prior Board and court decisions, petitioner now has had included in its invested capital for the two taxable years before us, the cost of all its assets. Held, the record presents no such abnormal conditions affecting petitioner's capital or income as would entitle petitioner to have its excess profits tax determined as provided in section 328 of the Revenue Acts of 1918 and 1921. S. L. Herold, Esq., and John B. Files, Esq., for the petitioner. John E. Marshall, Esq., and Claude R. Marshall, Esq., for the respondent. BLACK38 B.T.A. 249">250 In a deficiency notice dated March 12, 1926, the Commissioner determined deficiencies in income and excess profits tax for the calendar years 1920 and 1921 against petitioner in the amounts of $171,277.81 and $37,444.93, respectively. The sole remaining issue is whether petitioner is entitled to have its excess profits tax for these years determined as provided in section 328 of the Revenue Acts of 1918 and 1921. Upon motion made and considered July 14, 1937, it was duly ordered that the hearing1938 BTA LEXIS 891">892 be limited to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice. The issues defined in subdivision (a) of Rule 62 have been settled in previous reports and decisions made in this and other proceedings formerly consolidated herewith. Before considering the issue defined in subdivision (b) of Rule 62, we shall give a brief resume of such previous reports and decisions. This proceeding was in 1927 consolidated with eight other proceedings, two of which (Docket Nos. 16354 and 25984) involved this petitioner for years other than 1920 and 1921, three of which (Docket Nos. 15822, 16356, and 25985) involved the Peavy-Wilson Lumber Co., and the remaining three (Docket Nos. 15823, 16355, and 25986) involved the Peavy-Moore Lumber Co. On December 7, 1928, we promulgated a report () covering all nine proceedings, in which we held, among other things, that the three Peavy lumber companies were affiliated, and also that petitioner acquired certain timber rights from the Krause & Managan Lumber Co., Ltd., in 1909 rather than in 1913. On June 30, 1931, the Fifth Circuit handed down a decision, 1938 BTA LEXIS 891">893 , involving all nine proceedings, in which it affirmed our holding on the affiliation issue, but reversed our holding on the interpretation of the contract between petitioner and the Krause & Managan Lumber Co., Ltd., the court holding that petitioner acquired the timber rights on July 28, 1913, rather than on November 20, 1909, when the contract was entered into. On January 18, 1932, we promulgated a second report () covering all nine proceedings, in which we determined for purposes of depletion and invested capital the cost and actual cash value, respectively, of the timber rights held by the Fifth Circuit to have been paid in for stock on July 28, 1913. On April 18, 1932, the Supreme Court handed down a per curiam opinion, , involving all nine proceedings, saying, "The judgments of the Circuit Court of Appeals in these cases are reversed and the cases remanded to the Circuit Court of Appeals with instructions to remand to the Board of Tax Appeals for further proceedings in conformity with the opinion of this Court in 1938 BTA LEXIS 891">894 ." The effect of this opinion by the Supreme Court was that the three Peavy lumber companies were not affiliated for tax purposes during the taxable years involved. Thereafter, on May 31, 1932, petitioner 38 B.T.A. 249">251 in the present proceeding (Docket No. 15824) filed an amended petition requesting that its excess profits tax for 1920 and 1921 be determined as provided in section 328 of the Revenue Acts of 1918 and 1921. On July 7, 1932, the Board "ORDERED that the petitioner be allowed to file an amended petition in this proceeding raising a question of the right to have its tax assessed under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921." On November 10, 1932, final decisions, from which no further appeals were taken, were entered in all the above mentioned dockets except Nos. 15824 and 16354. A decision was also entered on November 10, 1932, in Docket No. 16354, from which petitioner filed a petition for review by the Fifth Circuit, which court, on March 17, 1934, handed down its decision, 1938 BTA LEXIS 891">895 , holding that the Board erred in its report at , in reducing the value on July 28, 1913, of $665,000 by an amount to reflect timber cut before July 28, 1913. The proceeding in Docket No. 16354 was finally closed with our report, , which was affirmed by the , and certiorari was denied by the Supreme Court, . Thus we are left with the sole issue of special assessment in the present proceeding, Docket No. 15824. This issue was submitted upon oral testimony of one witness and upon a stipulation of facts. It was also agreed at the hearing that the record of evidence in the former hearings involving other issues, in so far as it may be applicable, shall be considered in the instant case. Inasmuch as all other issues save special assessment have now been settled, we shall make findings of fact only as they bear on the issue of special assessment. FINDINGS OF FACT. Petitioner is a corporation organized November 8, 1909, under the laws of the State of Louisiana, with an authorized capital stock of 5,000 shares of the par value of $1001938 BTA LEXIS 891">896 per share, of which 2,500 shares were issued fully paid in 1909. The capital of the company was principally invested in a mill and in such equipment as was necessary for the operation of a mill and to conduct the business of manufacturing and selling lumber. On November 20, 1909, petitioner, as second party, entered into a written contract with the Krause & Managan Lumber Co., Ltd., as first party, wherein the first party contracted to sell to petitioner a tract of pine timber containing 206,140,227 feet. The salient provisions of that contract are these: Paragraph 2. - A price fixed of $4 per thousand feet for the timber as cut and further provisions for the increase of that price according to a sliding scale set out in the agreement. Paragraph 6. - The obligation of the petitioner "to build a double band saw mill and a planing mill of sufficient capacity to handle the 38 B.T.A. 249">252 output of the mill in a modern manner" and other provisions for the efficient operation of such mill. Paragraph 7. - A provision that "if either party shall purchase any timber in the territory below defined, the same shall belong to the party of the second part at cost * * and1938 BTA LEXIS 891">897 all timber purchased by either party in such territory shall be manufactured at the mill of the party of the second part, subject to the provisions and stipulations of this contract." Paragraphs 13 and 14 of the agreement are as follows: PARAGRAPH THIRTEEN. It is agreed and stipulated by and between the parties hereto, as a further consideration of this sale, that if the lumber sawed from said timber should reach an average of sixteen ($16.00) dollars per thousand feet f.o.b. the cars at the mill of the party of the second part for any full semi-annual period as shown by the semi-annual statement of the party of the second part, then the party of the first part shall receive in addition to the four ($4.00) dollars per thousand feet hereinabove stipulated, twenty five cents per thousand feet for said timber, and twenty five per cent of any advance in average price for any semi-annual period over and above ($16.00) dollars per thousand. * * PARAGRAPH FOURTEEN. As a further consideration of this sale it is expressly stipulated and agreed that when the net profits from the operation of the mill of the party of the second part shall have repaid the total original investment1938 BTA LEXIS 891">898 in said mill and appurtenances and belongings, then the party of the second part will pay to the party of the first part one half of all net profits from the further operation of said mill and shall transfer a half interest in all the property and assets of the party of the second part or one half of its capital stock, less one share, to the party of the first part, as its option, provided, the party of the first part shall never acquire in any manner as much as one-half of the capital stock of the party of the second part. Dividends equaling at least ninety per cent of the cash profits shall be declared annually, after repayment of the original investment as hereinabove provided. The Peavy-Byrnes Lumber Co. complied with all the obligations of the foregoing contract. On July 28, 1913, the net profits from the operation of petitioner's mill had repaid petitioner's original investment therein, and on that date the Krause & Managan Lumber Co., Ltd., exercised the option provided for in paragraph 14 of the agreement and elected to take one-half of petitioner's capital stock. Accordingly, on July 28, 1913, 2,500 shares of petitioner's stock were issued to the stockholders of Krause1938 BTA LEXIS 891">899 & Managan as the nominees of that corporation. The timber which petitioner acquired from Krause & Managan under the terms of the aforesaid contract was necessary to the success of petitioner's business. Prior to the construction of its mill and manufacturing facilities, it was necessary to have the assurance of a supply of timber which would last for a good many years. The Krause & Managan timber afforded that assurance. It was upon the 38 B.T.A. 249">253 strength of the acquirement of this timber that petitioner's mill and other manufacturing facilities were constructed. During 1920 and 1921 petitioner cut 11,144,730 feet and 3,744,991 feet, respectively, of timber purchased by it from the Krause & Managan Lumber Co., Ltd., under the November 20, 1909, contract, for which footage petitioner paid, under paragraphs two and thirteen of the contract, $119,004.28 and $21,513.39, respectively. During this same period petitioner cut 14,318,727 feet and 15,008,659 feet, respectively, of timber purchased by it from parties other than Krause & Managan for which footage petitioner paid $88,517.31 and $69,803.86, respectively. All of the timber mentioned in the preceding paragraph was cut1938 BTA LEXIS 891">900 at one plant and was put through the same sawmill. It all came out of the same vicinity or block and was all pine timber. There was no distinction made in the cutting of the timber as to whether it should all be sold together or separately. It was all sold together as lumber, and no distinction was made in the price received for such lumber as to whether the timber had been purchased from Krause & Managan or from outsiders. The respondent in his deficiency notice determined petitioner's invested capital, net income, excess profits tax, income tax, total tax liability, tax previously assessed, and deficiency for each of the taxable years here involved to be as follows: 19201921Invested capital$483,668.76$427,718.34Net income602,544.56146,502.02Excess profits tax213,332.3734,048.58Income tax38,473.8611,245.34Total tax liability251,806.2345,293.92Previously assessed80,528.427,848.99Deficiency171,277.8137,444.93Percentage of excess profits tax to net incomepercent35.4123.24The parties have stipulated that "in accordance with the final decisions in this and companion cases" petitioner's1938 BTA LEXIS 891">901 invested capital, net income, excess profits tax, income tax, total tax liability, tax previously assessed, and deficiency for each of these years "computed without the benefit of special assessment" are as follows: 19201921Invested capital$698,679.36 $745,885.62 Net income523,406.93 134,499.41 Excess profits tax169,636.72 14,365.71 Income tax34,929.66 12,013.37 Total tax liability204,566.38 26,379.08 Tax previously assessed:Original80,528.42 7,848.99 Additional Sept. 14, 1929113,947.16 3,449.65 Deficiency (if special assessment is denied)10,090.80 15,080.44 Percentage of excess profits tax to net income32.41%10.68%38 B.T.A. 249">254 During the taxable years 1920 and 1921 there were no abnormal conditions affecting the capital or income of petitioner. OPINION. BLACK: Whether petitioner is entitled to have its excess profits tax for the years 1920 and 1921 determined as provided in section 328 of the Revenue Acts of 1918 and 1921, depends first upon whether it meets the required tests specified in section 327 of those acts. The material provisions of the latter section are the same in both acts and are1938 BTA LEXIS 891">902 as follows: SEC. 327. That in the following cases the tax shall be determined as provided in section 328: * * (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a nominal invested capital * * . Petitioner does not contend that it falls within any of the grounds specified in subdivisions (a), (b), or (c) of section 327, but relies solely upon subdivision (d). Cf. ; 1938 BTA LEXIS 891">903 . The parties are agreed that the sole question for consideration at this time is whether the record discloses abnormal conditions affecting the capital or income of petitioner. If so, petitioner has made a prima facie case under section 327(d), supra, notwithstanding that it can not be determined, in the absence of comparative data, whether there is gross disproportion between the tax of this petitioner and comparable taxpayers, or whether petitioner, in the light of such comparison, would be subject to exceptional hardship. These are matters for later determination, if that be necessary, under the provisions of Rule 62(c) of the Board's rules of practice. Cf. ; . Petitioner contends that both its capital and income were affected by abnormal conditions. The principal abnormal condition allegedly affecting both capital and income which petitioner contends existed during the taxable years involved his its origin in the 1909 krause & Managan contract. Petitioner contends that if Krause & Managan, in1938 BTA LEXIS 891">904 1913, had elected under 38 B.T.A. 249">255 paragraph 14 of the contract to take one-half of all the net profits and a one-half interest in all of petitioner's property instead of one-half of petitioner's capital stock, which it did elect to take, petitioner would have been entitled to take one-half of its net profits as a deduction for additional cost of timber, and that the absence of such a deduction from gross income produced an abnormality in petitioner's net income. Among the errors assigned in the original and first amended petitions were that the respondent had erred in failing to deduct from petitioner's gross income for 1920 and 1921, one-half of the net profits for those years, and, in the alternative, that the respondent had erred in failing to find that the value of the 2,500 shares of stock issued to Krause & Managan on July 28, 1913, was $562,500, which value should be allowed both for invested capital and depletion purposes, instead of the value of $125,000 allowed by the respondent. On March 10, 1928, petitioner further amended its petition to strike out $562,500 and insert in lieu thereof $613,750; and on December 5, 1931, it amended the second amended petition to strike1938 BTA LEXIS 891">905 out $613,750 and insert in lieu thereof $1,250,000. The Board and the Fifth Circuit have denied petitioner's contention for a deduction of one-half of its net profits, and it has been found from the evidence and finally decided that the value of the 2,500 shares of stock issued to Krause & Managan, or its nominees, on July 28, 1913, was $665,000, which value has been the basis for allowances in invested capital and for depletion deductions in the stipulated deficiencies set forth in our findings of fact. The alleged abnormality of capital is apparently based upon the fact that the Board did not find from the evidence that the value of the stock issued to Krause & Managan was $1,250,000, as alleged by petitioner in its third amended petition. It is true that the Board did not find that the capital stock issued to Krause & Managan had a value of $1,250,000, but that was because the evidence did not warrant it. We held that the evidence showed that the stock had a value of $665,000 on July 28, 1913, the basic date. We held, however, that these 2,500 shares were issued for the entire 206,140,227 feet in the tract on November 20, 1909; and that, since 52,124,702 feet had been cut between1938 BTA LEXIS 891">906 November 20, 1909, and July 28, 1913, leaving on the latter date 154,015,525 feet uncut, the value of the stock issued in payment of the timber standing on July 28, 1913, was 154015525/206140227 of $665,000, or $497,135.92. In this reduction the court held that we were in error and reversed us on that point. See . The court in the concluding part of its opinion said: We agree with the Board's conclusion that the cost of the timber and the value of the stock ought to be and are the same. We agree too with its conclusion that a value of $665,000 as of that date is reasonable and supported 38 B.T.A. 249">256 by the evidence. We do not agree with its conclusion that any less than this amount fairly represents the then value of the stock, the then cost of the timber exchanged for it. The order of the Board is therefore reversed and the cause is remanded with directions to redetermine petitioner's tax liability in accordance with its finding of $665,000 as the fair market value of the stock, the cost of the timber, as of July 28, 1913, when the exchange was made. It is true that the court's opinion above1938 BTA LEXIS 891">907 referred to involved Docket No. 16354, which involved prior taxable years, but it is equally applicable here. In the stipulation filed by the parties, which has been embodied in our findings of fact, petitioner's income for the years 1920 and 1921 was recomputed on the basis of the court's opinion above referred to. As illustrating the effect on petitioner's invested capital resulting from applying the prior Board and court decisions, we give the following example: Petitioner's invested capital, as determined in the Commissioner's deficiency notice, for the year 1920 was $483,668.70. Now it is $698,679.36, by giving effect to the adjustments which have been made. For 1921 petitioner's invested capital as determined in the deficiency notice was $427,718.34. New it is $745,885.62, by giving effect to the adjustments which have been made. Petitioner, in support of its contentions that it is entitled to special assessment, cites as authority ; ; 1938 BTA LEXIS 891">908 ; ; ; and . The facts in this case are entirely different from the facts involved in the cases cited by petitioner and we do not regard any of them in point. Contrary to what took place in the cases above cited, all of petitioner's income producing assets, so far as we can see, have now been included in petitioner's invested capital in the manner provided by statute. Petitioner also contends that by reason of this contract with Krause & Managan it was able to purchase timber at a total cost very much below the actual cash value of the timber and that therefore the contract possessed a certain intangible value over and above its cost of $665,000, which, although income producing, could not be included in petitioner's statutory invested capital. The facts, however, do not support petitioner in this contention. The contention would doubtless be a valid one if petitioner had paid only $4 per thousand feet as provided in paragraph 2 of the1938 BTA LEXIS 891">909 contract, but by reason of paragraph 13 of the contract, petitioner paid Krause & Managan in 1920 and 1921 much more than $4 per thousand feet 38 B.T.A. 249">257 for the timber. This was in addition to the $665,000 which had already been paid under paragraph 14 of the contract. During the taxable years 1920 and 1921 petitioner cut 11,144,730 and 3,744,991 feet, respectively, from the Krause & Managan tract. The parties have stipulated that petitioner paid Krause & Managan for this timber $119,004.28 in 1920 and $21,513.39 in 1921, under paragraphs 2 and 13 of the contract. The total average cost per thousand feet of this timber to petitioner in cash in 1920 and 1921 was $10.68 and $5.74, respectively. During the same years petitioner cut 14,318,727 and 15,008,659 feet, respectively, from sources other than the Krause & Managan tract at a total cost of $88,517.31 and $69,803.86, respectively, which is at an average cost per thousand feet of $6.18 for 1920 and $4.65 for 1921, which was considerably less than the average cost per thousand feet of the timber cut from the Krause & Managan tract. We think these facts clearly show the lack of any so-called intangible value of the Krause1938 BTA LEXIS 891">910 & Managan contract not included in invested capital, as contended for by petitioner. Cf. ; ; ; affd., ; certiorari denied, . We have carefully considered every phase of this case and are unable to find any abnormal conditions affecting petitioner's capital or income. On the contrary, we think this is a case where petitioner's excess profits tax, computed without the benefit of the special assessment provisions of the statute, is high merely because petitioner earned within the taxable years a high rate of profit upon a normal invested capital. It follows that petitioner is not entitled to have its excess profits tax for 1920 and 1921 determined as provided in section 328 of the Revenue Acts of 1918 and 1921. Cf. ; ; 1938 BTA LEXIS 891">*911 . Reviewed by the Board. In accordance with the stipulation, decision will be entered that there is a deficiency of $10,090.80 for the year 1920, and that there is a deficiency of $15,080.44 for the year 1921.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625234/	Estate of A. Carl Borner, Deceased, Bertha J. Borner, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentEstate of Borner v. CommissionerDocket No. 39669United States Tax Court25 T.C. 584; 1955 U.S. Tax Ct. LEXIS 13; December 20, 1955, Filed 1955 U.S. Tax Ct. LEXIS 13">13 Decision will be entered under Rule 50. Where a husband and wife, holding property as tenants by the entireties, transferred such property to an irrevocable trust, reserving the income to themselves for their joint lives and for the life of the survivor, held, such property was includible in the husband's gross estate under section 811 (c) of the 1939 Code, both as a transfer in contemplation of death and a transfer in trust with the right to income reserved for life, and held, further, that only one-half the value of such property is includible in decedent's gross estate. Robert R. Batt, Esq., for the petitioner.Edward Pesin, Esq., for the respondent. Mulroney, Judge. MULRONEY 25 T.C. 584">584 The Commissioner determined a deficiency in estate tax in the amount of $ 11,546.21. The issues are: (1) Whether a transfer made by decedent and his wife, tenants by the entireties, to an inter vivos irrevocable trust, with income reserved for their joint lives and for the life of the survivor, was a transfer in contemplation of death 25 T.C. 584">585 under section 811 (c) of the Internal Revenue Code of 1939; (2) if such transfer was in contemplation of death, the value of the property to be included in the gross estate; and (3) in spite of the fact that such property was transferred in trust, whether or not it should be included in decedent's gross estate under section 811 (e).Other issues, namely, an unrelated valuation question and the deductibility of additional counsel fees and other expenses have been agreed to by the parties in the stipulation and shall be given effect under the Rule 50 computation.FINDINGS OF FACT.All the facts have been stipulated and are found accordingly.Petitioner is the duly qualified executrix1955 U.S. Tax Ct. LEXIS 13">15 of the Estate of A. Carl Borner, deceased. The Federal estate tax return for the Estate of A. Carl Borner, deceased, was filed with the collector of internal revenue for the first collection district of Pennsylvania at Philadelphia, Pennsylvania.Decedent died on November 7, 1947, a citizen of the United States and a resident of Philadelphia, Pennsylvania, being survived by his wife, Bertha J. Borner.Petitioner made a timely election to have the decedent's gross estate valued, for purposes of the Federal estate tax, as of a date subsequent to decedent's death as authorized by section 811 (j) of the Internal Revenue Code of 1939.On May 18, 1938, the decedent and his wife, Bertha J. Borner, both being then 62 years old, transferred in trust certain stock and securities owned by them as tenants by the entireties and having a fair market value as of May 18, 1938, of $ 85,140.41, together with certain securities owned by decedent's wife alone and having a fair market value as of that date of $ 8,276.11. The consideration for the stock and securities owned by decedent and his wife, as tenants by the entireties, had been furnished by the decedent alone.The indenture of trust of May 1955 U.S. Tax Ct. LEXIS 13">16 18, 1938, provided that the net income of the trust was to be paid to the grantors, equally "share and share alike" for their joint lives, with all the income to be paid to the survivor for the balance of his or her life. Upon the death of such survivor, income and principal of the trust were to go to other persons. There was no power of revocation under the trust.The fair market value of the assets comprising the corpus of the trust as of the optional valuation date was $ 112,812.81. Of this amount, $ 102,818.31 was attributable to the entireties property transferred in trust by the decedent and his wife, Bertha J. Borner, on May 18, 1938, and the balance was attributable to the separate property of the wife transferred in trust by her on that date.25 T.C. 584">586 Petitioner included in gross estate with respect to the said trust the amount of $ 55,149.59. In his notice of deficiency, respondent increased the amount includible in gross estate with respect thereto to $ 102,818.31.Decedent executed his will on June 30, 1938, leaving his entire estate to his wife, and if she did not survive him the estate would go to the trustees of the 1938 trust to be held upon the terms of said trust. 1955 U.S. Tax Ct. LEXIS 13">17 On May 18, 1938, the decedent was suffering from Parkinson's disease. The initial symptoms of the disease appeared in 1927, at which time the decedent was informed by his physicians that Parkinson's disease was a progressive malady which might be a contributory cause of his eventual death but which would not necessarily shorten his normal life expectancy. By 1936 the decedent's condition was such that he was forced to retire from his business. By May 18, 1938, his condition rendered him incapable of walking or speaking intelligibly and he required the constant attention of a servant. One of the causes of his death on November 7, 1947, was Parkinson's disease.At the time of his death decedent and his wife owned as tenants by the entireties a certain house on the lot situated at 1723 West Erie Avenue, Philadelphia, Pennsylvania, all of the consideration for which had been furnished by the decedent. The fair market value of said house and lot as of the optional valuation date was $ 11,500.The transfer in trust made by decedent and his wife on May 18, 1938, of the stock and securities owned by them as tenants by the entireties was made in contemplation of death within the meaning1955 U.S. Tax Ct. LEXIS 13">18 of section 811 (c) of the 1939 Code.At the time of the transfer in trust, the interest of decedent in the stock and securities transferred was one-half the value of such property. This amount is includible in decedent's gross estate.OPINION.Decedent and his wife, Bertha J. Borner, both being then 62 years old, made a transfer in trust of stock and securities owned by them as tenants by the entireties. At the date of such transfer, May 18, 1938, this property had a value of $ 85,140.41, and at the optional valuation date (sec. 811 (j)), the value was $ 102,818.31. Consideration for the stock and securities owned by decedent and his wife as tenants by the entireties had been furnished by the decedent alone. The trust was irrevocable, and the settlors reserved the income for the joint lives and for the life of the survivor. At the time of the transfer, decedent was suffering from Parkinson's disease. This malady had afflicted him since 1927, when he had been informed by physicians of its progressive nature. By 1936 the decedent's condition made it impossible for him to continue his business and by May 18, 1938, the date of the transfer, he was incapable of speaking intelligibly, 1955 U.S. Tax Ct. LEXIS 13">19 25 T.C. 584">587 or of walking, and he was cared for constantly by a servant. Decedent's will, executed on June 30, 1938, left all his property to his wife, but if she predeceased him, all of his property was to go into the trust of May 18, 1938.The nature of the transfer in trust, together with the almost concurrent execution of a will by decedent, and the age and illness of decedent at such time, all point to a plan, testamentary in nature, in which motives associated with death appear uppermost. Estate of O'Neal v. Commissioner, 170 F.2d 217, affirming Memorandum Opinion of this Court. We conclude under these circumstances that the transfer in trust made by decedent was in contemplation of death under section 811 (c). It is also clear the transfer is taxable under 811 (c) in that it is "a transfer by trust * * * under which he [transferor] has retained for his life * * * the right to the income from the property."Petitioner next makes the argument that if the tranfer in trust was made in contemplation of death, then only one-half the value of the property so tranferred must be included in his gross estate. Respondent contends the entire value1955 U.S. Tax Ct. LEXIS 13">20 of the property should go into the gross estate.Section 811 (c) of the 1939 Internal Revenue Code includes in the gross estate the value of any property "To the extent of any interest therein * * of which * * * [decedent] has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property * * ." Petitioner makes the contention that decedent's interest in the property transferred to the trust extended only to one-half of such property. He relies upon Estate of Sullivan v. Commissioner, 175 F.2d 657, reversing 10 T.C. 961, and Estate of Brockway v. Commissioner, 219 F.2d 400, affirming on other issues 18 T.C. 488. Both of these cases involved transfers of property held by a husband and wife as joint tenants to a third party, and the issue common to both cases was whether such transfer, being in contemplation of death, 1955 U.S. Tax Ct. LEXIS 13">21 brought into the husband's gross estate, at death, the entire value of the property so tranferred, or only one-half. In Estate of Sullivan, supra, the Ninth Circuit, reversing the Tax Court, held that only one-half the property transferred by the decedent was includible in his gross estate. Decedent, under the law of California, possessed only a half interest in the jointly held property, and therefore, this was all he was able to convey. We adopted this analysis in Estate of Brockway, supra, as a correct interpretation of section 811 (c).We agree with petitioner that the rationale of the Sullivan and Brockway cases is applicable here. It is true that these cases involved 25 T.C. 584">588 joint tenancies, while here the property transferred was held in a tenancy by the entireties. Differences do exist between the two estates but such differences are not sufficient to compel unlike tax results under the provisions of section 811 (c). The only difference is a tenancy by the entireties is based on the ancient common law fiction that husband and wife are one, and the right of survivorship cannot be destroyed without1955 U.S. Tax Ct. LEXIS 13">22 mutual consent, while in a joint tenancy one tenant, by transferring, can destroy the survivorship right. We conclude as a practical matter, the tenancy by entirety and joint tenancies are so much alike that the rule applied in the joint tenancy cases should be applied here where the tenancies are by the entirety, which means each tenant owns one-half. This conclusion does not rest upon any peculiarities of Pennsylvania property law. Pennsylvania law, while determinative of the nature of property rights in joint tenancies and tenancies by the entireties, cannot control the application of the Federal tax statutes to such property rights.We are fortified in our conclusion that practicalities should govern by a fairly recent opinion of the Supreme Court of Pennsylvania. In In re Zipperlein's Estate, 367 Pa. 622">367 Pa. 622, 80 A.2d 817, the Pennsylvania court had before it a case where there was a devise of property to a decedent's stepson and his wife and the question was as to the rate of inheritance tax on the value each received. The Pennsylvania court recognized the distinction between estates by entirety and joint estates but applied its1955 U.S. Tax Ct. LEXIS 13">23 tax law in a practical manner saying:in considering, from a practical standpoint, the question as to the proper tax to be imposed under the 1919 Act, the stepson and his wife must be regarded as each having a one-half interest in the bequest, with the result that the tax on his half share will be at the rate of 2% and the tax on her half share at the rate of 10%.Respondent relies upon Estate of William MacPherson Hornor, 44 B. T. A. 1136, affd. 130 F.2d 649, for the proposition that the entire value of property transferred by a husband and wife, holding as tenants by the entireties, to an irrevocable trust, with income reserved for their joint lives, then for the life of the survivor, was includible in decedent's gross estate. We believe that case is distinguishable on its facts. In the Hornor case, the trust set up by the tenants by the entireties not only reserved, as here, the income for their joint lives and the life of the survivor, but also left in the hands of the settlors a joint power of revocation, modification, and withdrawal exercisable during their joint lives. In the present case, the trust is irrevocable, 1955 U.S. Tax Ct. LEXIS 13">24 and without powers of modification, and therefore we do not regard the Hornor case as controlling.We conclude that the transfer made by petitioner and his wife, as tenants by the entireties, of property to an irrevocable trust, with the 25 T.C. 584">*589 income reserved for their joint lives and for the life of the survivor, was a transfer made in contemplation of death within the meaning of section 811 (c), and that one-half of the value so transferred in trust shall be included in decedent's gross estate.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625235/	Glenn A. Noble and Iva Lee Noble, Petitioners v. Commissioner of Internal Revenue, RespondentNoble v. CommissionerDocket No. 4276-76United States Tax Court70 T.C. 916; 1978 U.S. Tax Ct. LEXIS 59; September 13, 1978, Filed 1978 U.S. Tax Ct. LEXIS 59">59 Decision will be entered under Rule 155. Petitioner's businesses were located in Brentwood, Tenn. Brentwood built a new sewer system and enacted an ordinance requiring petitioner to disconnect his private sewage treatment plant, hook up to the new system, and pay the City a one-time "tap fee" to help cover the capital cost of the system, and a monthly service charge to help cover Brentwood's operating expenses. Held: The "tap fee" was a special assessment for an improvement benefiting petitioner's property. It was a capital expenditure. It was not deductible as a tax or business expense. Held, further, the intangible asset (use of Brentwood's sewer system) purchased by payment of the tap fee had a useful life coextensive with the life of a sewer system it helped to pay for and could be amortized over that life. Held, further, on the facts, the useful life of the sewer system (hence the right to use thereof) was 50 years. Richard H. Frank, Jr., for the petitioners.Wm. Robert Pope, Jr., for the respondent. Hall, Judge. HALL 70 T.C. 916">916 Respondent determined a deficiency of $ 2,620.69 in petitioners' income tax1978 U.S. Tax Ct. LEXIS 59">61 for 1973. Due to concessions by both parties, the sole issue for decision is the tax treatment of a sewer tap fee paid by petitioners to the City of Brentwood, Tenn., in 1973. Specifically, the questions presented are:(1) Whether petitioners' sewer tap fee paid to the City of Brentwood is a nondeductible tax for local improvements within the meaning of section 164(c)(1); 170 T.C. 916">917 (2) Whether petitioners' sewer tap fee is an ordinary and necessary business expense, or a capital expense; and(3) Whether petitioners' sewer tap fee can be depreciated under section 167.FINDINGS OF FACTMost of the facts have been stipulated by the parties.At the time they filed their petition, Glenn A. and Iva Lee Noble were residents of Brentwood, Tenn. Iva Lee Noble is a party only by virtue of having filed a joint return with her husband. When we hereafter refer to petitioner, we will be referring to Glenn.Petitioner1978 U.S. Tax Ct. LEXIS 59">62 owned and operated the Travelers Rest Motel in Brentwood, Tenn., during the year in issue. He also owned a market and a restaurant in Brentwood, both of which were rented to others during 1973.Prior to 1973, petitioner maintained his own sewage treatment plant for the motel, restaurant, and market. In 1973 he abandoned his private sewage treatment plant and began using Brentwood's new sewer system. A city ordinance required him to connect his motel, restaurant, and market properties to Brentwood's sewer system, as a condition to his continued use of the properties, or be subject to a penalty of $ 50 per violation (with each day constituting a separate violation).Petitioner was required to pay a monthly service charge for use of Brentwood's sewer system. In addition to the monthly service charge, petitioner was also required to pay an initial "tap fee" to Brentwood. The tap fee gave the property owner the indefinite right to use the sewer system (subject to the monthly charge). This tap fee was established by a municipal ordinance, and the fee varied with the type of user. The purpose of the sewer tap fee was to pay the cost of expanding the sewage treatment plant. The fee1978 U.S. Tax Ct. LEXIS 59">63 was based on the estimated use of the system by each new user. For example, the tap fee for a residence (based on 350 gallons per day) was $ 500, while the tap fee for businesses was $ 1.43 per gallon of estimated usage per day. During 1973, petitioner reached an agreement with the then 70 T.C. 916">918 city manager of Brentwood that he would pay a $ 6,000 tap fee for all three properties. 2The sewage system was constructed with the proceeds of loans obtained from the State of Tennessee. Sewer tap fees totaling $ 618,430 had been collected by June 30, 1976. Of this amount, $ 553,646 was placed by Brentwood in certificates of deposit. 1978 U.S. Tax Ct. LEXIS 59">64 Brentwood presently is considering a bond issue to pay off the indebtedness (totaling approximately $ 1.9 million); the proceeds of such a bond issue and the certificates of deposit would be used to retire this outstanding obligation. In the meantime, the interest earned on the certificates of deposit has been deposited into the sewer system's operating account to defray the carrying charges of Brentwood's long-term indebtedness.On his return for 1973, petitioner deducted $ 2,750 of the $ 6,000 tap fee as an ordinary and necessary business expense of his motel. Of the remainder, petitioner allocated $ 2,750 of the tap fee to the restaurant and $ 500 to the market. These latter amounts were capitalized and depreciated by petitioner on his return.In the statutory notice, respondent determined that the $ 6,000 tap fee was a capital expenditure with an indeterminate life. 31978 U.S. Tax Ct. LEXIS 59">65 OPINIONThe sole issue for decision is the tax treatment of a sewer tap fee of $ 6,000 paid by petitioner, pursuant to a municipal ordinance, to the City of Brentwood in 1973.Petitioner owned and operated a motel in Brentwood, and he also owned a market and restaurant which were rented to others during 1973. Prior to 1973, he maintained his own private sewage treatment plant for the motel, restaurant, and market. In 1973 he was forced by Brentwood to abandon using this facility. A municipal ordinance required, instead, that petitioner connect his properties to Brentwood's sewer system or be subject to a penalty of $ 50 per day.For his use of Brentwood's sewer system, petitioner was 70 T.C. 916">919 charged a monthly service charge. In addition, he was also required to pay an initial "tap fee" of $ 6,000 to Brentwood. This tap fee theoretically represented the cost of expanding the sewer system to serve petitioner. Although Brentwood has not yet spent the tap fees collected, present plans call for most of the tap fees to be used to help retire the indebtedness incurred by Brentwood for the construction of the sewer system.Petitioner contends that the sewer tap fee he paid to Brentwood1978 U.S. Tax Ct. LEXIS 59">66 is deductible as an ordinary and necessary business expense or as an amount expended for the production of income or, in the alternative, that it represents a capital expenditure amortizable over the useful life of the improvements on his property. Respondent, on the other hand, contends either that the tap fee is a nondeductible tax under section 164(c) or that the tap fee represents the cost of a capital improvement with an indeterminate life and, as a consequence, is not depreciable.Section 164(c)(1) provides that no deduction is allowed for "Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph shall not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges."The statutory phrase "Taxes assessed against local benefits" means "special assessments." Caldwell Milling Co. v. Commissioner, 3 B.T.A. 1232">3 B.T.A. 1232, 3 B.T.A. 1232">1234 (1926). Such special assessments are characterized by the fact that they are "imposed because of and [are] measured by some benefit inuring directly to the property against which the assessment is levied." Sec. 1.164-4(a), Income1978 U.S. Tax Ct. LEXIS 59">67 Tax Regs. They bear the further characteristic that "the property subject to the tax is limited to the property benefited." Sec. 1.164-4(a), Income Tax Regs.The sewer tap fee assessed by Brentwood was directly related to the benefit to petitioner's property in that it made available to the property use of the city's sewer system. The fee was based on the estimated capital cost of expanding the system to accommodate the use by each new user. For example, the tap fee for businesses was based on $ 1.43 per gallon of estimated daily usage. Petitioner's property attained specific benefit from the sewer system separate and apart from any other benefit the sewer system might have for the public.Section 164(c)(1) also requires that the assessment be for a local benefit "of a kind tending to increase the value of the 70 T.C. 916">920 property assessed." For the purpose of section 164(c)(1), it is not necessary to prove that the petitioner's property actually increased in value by virtue of the benefit conferred upon the property. 3 B.T.A. 1232">Caldwell Milling Co. v. Commissioner, supra. The evidence in this case does not disclose whether the value was enhanced by the 1978 U.S. Tax Ct. LEXIS 59">68 new sewer connection. Petitioners, on whom the burden of proof rests, have not demonstrated the contrary. In any event, a city's sewer connection is a benefit "of a kind tending to increase the value" which is all the statute requires.Section 164(c)(1) does not prevent the deduction of a tax assessed for maintenance or interest charges. Harwell v. Commissioner, 170 F.2d 517">170 F.2d 517 (10th Cir. 1948); Lee Wilson & Co. v. Commissioner, 25 B.T.A. 840">25 B.T.A. 840 (1932); Little v. Commissioner, 21 B.T.A. 911">21 B.T.A. 911 (1930). The burden is on petitioner to show the amounts assessed for maintenance and interest charges. Sec. 1.164-4(b)(1), Income Tax Regs. The tap fees collected from petitioner and other subscribers to the municipal sewer system have for the most part been held in certificates of deposit. The city intends to apply the certificates of deposit to the existing indebtedness for the construction of the sewer system. Although the interest earned by the certificates of deposit has been applied to the carrying charges on the long-term indebtedness, none of the amount originally contributed appears to have been1978 U.S. Tax Ct. LEXIS 59">69 applied to either interest or maintenance charges of the sewer treatment facility. Petitioner has failed to carry his burden of showing that any part of the assessment was for maintenance or interest.Therefore, we conclude that the sewer tap fee is not deductible under section 164 as a tax. We must next determine whether it is deductible under any other provision of the Internal Revenue Code. We do not regard as dispositive the conclusory statement in Belfast Investment Co. v. Commissioner, 17 B.T.A. 213">17 B.T.A. 213, 17 B.T.A. 213">231 (1929), to the effect that a special assessment which cannot be deducted as a tax cannot be deducted "under any theory," and we do not understand that respondent takes that broad position in this case. That opinion does not indicate that the allowability of the recovery of the special assessment through depreciation deductions was either argued or considered. Indeed, in Rev. Rul. 73-188, 1973-1 C.B. 62, the Commissioner ruled that property owners were entitled to depreciate a special assessment by a city against their properties for their 70 T.C. 916">921 share of the expense of converting a downtown street1978 U.S. Tax Ct. LEXIS 59">70 into an enclosed mall even though such assessment was not deductible either as a tax because of section 164(c)(1) or as a business expense under section 162.Petitioner's primary contention is that the sewer tap fee paid to Brentwood is deductible as an ordinary and necessary business expense or as an amount expended for the production of income. Secs. 162 and 212. Respondent does not deny that payment of the sewer tap fee was necessary. He contends, instead, that it was not an ordinary expense as required by sections 162 and 212, but was a nondeductible capital expenditure. See sec. 263.With a payment of the one-time sewer tap fee, petitioner acquired a valuable improvement to his land, namely, access to the city's sewer system. This improvement is of long duration (i.e., more than 1 year). In addition, petitioner paid a monthly service charge for use of the system. The monthly service charge is an ordinary and necessary expense; the sewer tap fee is a capital expenditure which benefits the land as well as the businesses on the land over more than 1 year. See secs. 1.263(a)-1(a)(1) and 1.263(a)-2, Income Tax Regs. See also Teitelbaum v. Commissioner, 294 F.2d 541">294 F.2d 541, 294 F.2d 541">544 (7th Cir. 1961);1978 U.S. Tax Ct. LEXIS 59">71 Woolrich Woolen Mills v. United States, 289 F.2d 444">289 F.2d 444 (3d Cir. 1961). We agree with respondent that the sewer tap fee is a capital expenditure.The next question is whether petitioner can depreciate this capital cost under section 167. Petitioner contends that he is entitled to amortize the sewer tap fee over the life of the improvements on his land. Respondent asserts that the benefits from the sewer tap fee will always be available to the land and are indeterminate and therefore nondepreciable. We disagree with both parties. The fee was paid to hook up to Brentwood's new sewer system. When that sewer system must be replaced, and/or the pipes carrying the sewage to the sewer plant must be replaced, petitioner again will presumably be subject to a special assessment to pay for a replacement plant and/or pipes. If not (and even if the next plant is financed in some other way), at the least, the value of petitioner's contribution to the capital cost of the present system will have been exhausted. The benefits (use of the new plant) obtained by payment of the sewer tap fee therefore have a life coextensive with the life of the system. 70 T.C. 916">922 1978 U.S. Tax Ct. LEXIS 59">72 Other cases have the concluded that the life of an intangible right may have the same life as the tangible asset to which the right pertains. In Wells-Lee v. Commissioner, 360 F.2d 665">360 F.2d 665 (1966), the Eighth Circuit held that staff fees paid by osteopathic physicians to secure hospital facilities where they could bring and treat patients were amortizable over the life of the hospital. In Badger Pipe Line Co. v. United States, 401 F.2d 799">401 F.2d 799 (1968), the Court of Claims held that a pipeline company was entitled to amortize a pipeline right-of-way (easement) over the life of the pipeline. Accord, Texas-New Mexico Pipe Line Co. v. United States, 401 F.2d 796">401 F.2d 796 (Ct. Cl. 1968). See also Northern National Gas Co. v. O'Malley, 277 F.2d 128">277 F.2d 128 (8th Cir. 1960).While we conclude that the sewer tap fee is amortizable over the life of the sewer system, we have no proof of what that life may be. Under the circumstances, we look to Rev. Proc. 72-10, 1972-1 C.B. 721, for a class life for this sewer system which was put into service before 1978 U.S. Tax Ct. LEXIS 59">*73 March 21, 1977 (the effective date for Rev. Proc. 72-10 as opposed to Rev. Proc. 77-10, 1977-1 C.B. 548, applicable to years after such date). Sewers fall under asset guideline class 00.3, land improvements, having a 20-year asset guideline period. The sewage treatment plant appears most akin to asset guideline class 49.3, water utilities (including assets used in the gathering, treatment, and commercial distribution of water) having an asset guideline of 50 years. Under all the circumstances, we hold that the tap fee to use the Brentwood sewer system is amortizable over a period of 50 years.Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year is issue.↩2. Subsequently Brentwood sued petitioner for the additional sum of $ 4,903.75. This amount was the difference between the tap fee paid by petitioner and the amount required pursuant to the municipal ordinance. As the result of the lawsuit, petitioner was required to pay an additional tap fee of $ 4,903.75 in 1976. This additional tap fee is not involved in the deficiency before this Court.↩3. To connect his business properties to Brentwood's sewer system, petitioner installed piping from the properties to the system in 1973. Respondent allowed petitioner a depreciation deduction for this piping.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625236/	LOUIS DEMPF, JR. AND STELLA M. DEMPF, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDempf v. CommissionerDocket No. 15363-79.United States Tax CourtT.C. Memo 1981-720; 1981 Tax Ct. Memo LEXIS 26; 43 T.C.M. 138; T.C.M. (RIA) 81720; December 21, 1981. Louis Dempf, Jr., pro se. Bradford A. Johnson, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined a deficiency in petitioners' Federal income tax for the calendar year 1976 in the amount of $ 8,562.48. The issues for decision are whether petitioners1981 Tax Ct. Memo LEXIS 26">27 sustained a loss in 1976 as a result of certain transfers to Towne Kar Kare, Inc., and if so, whether it is capital or ordinary. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners are husband and wife who resided in Delmar, New York, at the time the petition herein was filed. They timely filed their joint Federal income tax return for 1976 with the Internal Revenue Service at Albany, New York. Stella M. Dempf is a party to this proceeding solely by virtue of having filed a joint income tax return with her husband; consequently, Louis Dempf, Jr., will hereinafter be referred to as petitioner. Petitioner is an attorney with offices in Labany, New York. Since entering the private practice of law in 1955 petitioner has concentrated his efforts on the legal affairs of small businesses. It was his usual method of operating to assist individuals interested in going into business with the formation and development of their proprietorship, partnership or corporation. Petitioner would usually not charge a fee for the time he devoted to a fledgling company in hope that as the company grew and prospered he would be retained to handle their legal1981 Tax Ct. Memo LEXIS 26">28 affairs for a fee. He was continually ready, willing and able to be a corporate officer or director, as well as to devote time to the actual operation and management of a business interprise. Petitioner believes that this had been a rewarding way in which to conduct his legal practice. In 1968 or 1969, petitioner was approached by Bill and Bob Webb (hereinafter sometimes referred to as the Webbs) who sought to begin a carwash business. Petitioner assisted them by looking for a location, checking zoning, and ultimately negotiating the purchase of an existing carwash. Petitioner did not charge the Webbs a fee for these services. In November 1969, petitioner helped the Webbs form a corporation to own and operate the carwash--Towne Kar Kare, Inc. (hereinafter TKK). TKK finalized the purchase of the Woodlawn Car Wash in March 1970 for $ 72,000. At that time each of the Webbs owned 10 shares (50 percent) of TKK stock. Petitioner was then the secretary of TKK and on its board of directors, but he did not own any stock therein. By August 1970, TKK had run into financial difficulties. On August 4, 1970, petitioner accepted the Webbs' offer to purchase 10 shares (one-third interest) 1981 Tax Ct. Memo LEXIS 26">29 of TKK for $ 2,000. The business, however, continued to lose money. For its taxable years ending September 30, 1972, through September 30, 1976, TKK incurred net losses of $ 23,651.30, $ 6,310.06, $ 10,939.20, $ 15.56, and $ 4,443.43, respectively. 1 In order to operate notwithstanding these losses, TKK, through petitioner's contacts, borrowed heavily from local financial institutions with which he had longstanding relationships. Additionally, the petitioner personally made the following payments to or on behalf of TKK: PayeeDateAmountHarvey Segal8/14/70$ 400.00TKK, Inc.12/10/70350.00TKK, Inc.1/7/712,650.00State Tax Commission4/22/712,650.00TKK, Inc.9/24/711,500.00TKK, Inc.8/25/711,000.00TKK, Inc.8/3/711,000.00TKK, Inc.5/19/712,000.00Duren Sales Corp.10/19/721,400.00Cash10/26/721,000.00Heartland Leasing10/31/721,319.99Heartland Leasing11/3/721,319.99NYS Tax Commission11/21/72470.55NYS Tax Commission11/21/72299.60TKK, Inc.10/30/721,000.00TKK, Inc.1/27/722,000.00TKK, Inc.1/10/722,000.00TKK, Inc.6/2/722,000.00William Webb6/30/72104.86City of Schenectady12/22/725,579.15Heartland Leasing1,319.99TKK, Inc.1/8/72200.00Niagara Mohawk12/27/72884.04National Legal Supply1/8/7380.35Niagara Mohawk Power2/23/731,144.32Corp.William Webb4/25/731,462.14Chris Dempf6/14/7356.00Niagara Mohawk Power7/10/731,027.50Corp.Cash8/4/7310.00TKK, Inc.?/5/7335.00L. Dempf, D. Burns,8/31/7310.00W. Webb, d/b/aTowne AssociatesMark Dempf11/5/7343.00Towne Associates 212/5/732,700.00Towne Associates12/31/731,500.001981 Tax Ct. Memo LEXIS 26">30 Petitioner made no payments to or on behalf of TKK after 1973. Petitioner claims that all of the checks dated 1970, 1971 and 1972, and $ 3,777.97 of the checks dated 1973 constitute loans in the total sum of $ 36,306.49 made by him to TKK. No promissory notes were ever given by TKK to petitioner, no interest was ever agreed upon or paid on these alleged loans, and petitioner held no security for repayment. There were no corporate resolutions which authorized or recognized petitioner's payments as loans. The corporate balance sheets of TKK, which were routinely checked by independent accountants, reflected loans from petitioner of only $ 21,500 for the period ending September 30, 1973. In the summer of 1976 the shareholders of TKK decided to terminate the business. Although it was intended to take place in late 1976, final disposition of TKK and/or its assets took place on January 15, 1977. TKK never went into either receivership or bankruptcy. By a letter dated April 13, 1977, attached to petitioner's 1976 Federal income tax return, Michael Costello, an associate attorney in the law1981 Tax Ct. Memo LEXIS 26">31 firm of which petitioner was a partner, determined that TKK then had $ 50,000 of liabilities, no assets, and was insolvent. He concluded that petitioner's loans to TKK were therefore uncollectible. On his Federal income tax return for 1976, petitioner claimed a business bad debt deduction in the amount of $ 36,306.49 as a result of payments to and on behalf of TKK made between 1970 and 1973, which had become uncollectible in 1976. In his notice of deficiency respondent has disallowed this deduction on the following grounds: (1) petitioner has not established that his payments to TKK were in fact loans; (2) if the payments were loans, they represent a nonbusiness bad debt which has not been established as becoming worthless or uncollectible during 1976. OPINION Although there seems to be some dispute between the parties as to the precise figures, the parties appear to be in agreement that petitioner did transfer substantial amounts of money to TKK and to others on its behalf. The primary concern of the parties, particularly the petitioner, throughout this litigation has been the nature of those transfers as either debt or equity of TKK. The petitioner's evidence has concentrated1981 Tax Ct. Memo LEXIS 26">32 on matters tending to prove that the payments were loans and that they were made primarily as an integral and necessary part of his legal practice. Petitioner thus concludes that since these loans became uncollectible in 1976, he is entitled to a business bad debt deduction for that year. Sec. 166(a)(1). 3Respondent, on the other hand, insists that the petitioner's payments represent an equity investment in TKK. Alternatively, respondent argues that if the transfers were loans, they were investment-related nonbusiness debts, deductible, if at all, subject to the limitations of section 166(d)(1)(B). Moreover, it is the government's position that even if the petitioner's payments were loans he has failed to show that they became uncollectible or worthless during 1976, thus precluding any deduction whatsoever. Assuming arguendo that petitioner's payments to TKK represent loans, whether they are of a nature potentially deductible as business bad debts under section 166(a) or as nonbusiness bad debts under section 166(d), 1981 Tax Ct. Memo LEXIS 26">33 to be deductible in 1976 they must be shown to have become worthless during that year. The determination of worthlessness requires a "practical approach," looking to all the facts and circumstances both objective and subjective. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287 (1945). Furthermore, it is the burden of the petitioner to establish that the asserted loss occurred in the year in which he claimed it. 326 U.S. 287">Boehm v. Commissioner, supra; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Thus, not only must petitioner herein show that his loans had no value by the end of 1976, but he must also show that they did have value at the beginning of that year which, due to subsequent events, diminished to nothing. Wilson v. United States, 179 Ct. Cl. 725">179 Ct. Cl. 725, 376 F.2d 280 (1967); Hoover v. Commissioner, 32 T.C. 618">32 T.C. 618 (1959). Upon our review of all of the facts and circumstances presented we are of the opinion that petitioner has failed to establish either that the alleged loans had some value at the beginning of 1976 or that they had no value by the end of that1981 Tax Ct. Memo LEXIS 26">34 year. In essence we have no more than petitioner's bare statements that his loans were uncollectible as of December 31, 1976. This is not enough to establish the loss. 32 T.C. 618">Hoover v. Commissioner, supra at 630. Additionally, he made no effort to show that the loans had value as of the beginning of 1976 or, for that matter, at any time after 1973. Petitioner testified that sometime in the summer of 1976 he and Bill Webb decided to "transfer out and sell out all of the facilities and what-have-you to other parties" but that "it didn't actually get closed or transferred until January 15, 1977." He failed, however, to enlighten this Court as to what those facilities were, to whom they were transferred, and for what consideration. Moreover, TKK's Federal corporate income tax returns (Form 1120) for 1973 through 1976 signed by petitioner contained blank balance sheets (Schedule L). No corporate books or other evidence has been presented from which we can determine TKK's net assets either at the beginning or the end of 1976. Petitioner also testified that he did not loan TKK additional funds after 1973, but the record is devoid of any explanation for the sudden discontinuance1981 Tax Ct. Memo LEXIS 26">35 of loans. Taken together these facts could indicate that petitioner sustained a loss in 1974 or 1975 as much as they could for 1976. The fact that petitioner is an attorney, that he is apparently aware of his burden of proof herein, and that he is seemingly in control of evidence which would answer these substantial factual questions, gives rise to a presumption that if such evidence were provided it would be unfavorable to his cause. Giddio v. Commissioner, 54 T.C. 1530">54 T.C. 1530, 54 T.C. 1530">1535 (1970). Petitioner relies almost entirely on his letter from Michael Costello, an associate in the law firm of which petitioner is a partner, for his assertion of worthlessness of the loans in 1976. We place very little weight on this evidence. Not only was Costello presumably under the control of petitioner, given their employee-employer relationship, but the associate was not produced at trial so that the method upon which he reached his conclusions could be explored on cross examination. Also, without knowledge of TKK's assets and the capital contributions of its shareholders, the fact that TKK had accumulated losses of in excess of $ 100,000 is meaningless. Although we have no reason1981 Tax Ct. Memo LEXIS 26">36 to dispute that petitioner honestly believes that he sustained a loss in 1976, that belief alone is insufficient to carry his burden. See Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287 (1945). Consequently, having found that petitioner has failed to prove worthlessness in 1976, and due to the possibility that petitioner may seek to raise the issues presented herein for a different taxable year not currently before the Court, we should not and do not express any opinion as to the nature of petitioner's payments to TKK as equity, business debts or nonbusiness debts. To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. TKK experienced net losses for its years ending September 30, 1970 and 1971, in the respective amounts of $ 19,203.46 and $ 39,030.21.↩2. Towne Associates was a partnership formed by the shareholders of TKK in 1973.↩3. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625237/	SUMTER COCA-COLA BOTTLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sumter Coca-Cola Bottling Co. v. CommissionerDocket No. 9079.United States Board of Tax Appeals7 B.T.A. 890; 1927 BTA LEXIS 3084; July 30, 1927, Promulgated 1927 BTA LEXIS 3084">3084 1. The value of an exclusive right to bottle and sell Coca-Cola within certain territory ascertained for the purpose of determining gain or loss upon the sale of the business to which it appertained. 2. Under the circumstances herein, certain debts ascertained to be worthless within the taxable year, allowed as deductions from gross income. George E. H. Goodner, Esq., for the petitioner. L. L. Hight, Esq., for the respondent. MARQUETTE 7 B.T.A. 890">890 This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $5,346.27. FINDINGS OF FACT. The petitioner was incorporated in the year 1913 under the laws of South Carolina to take over the business of a partnership that was engaged in bottling and selling Coca-Cola in Sumter, S.C., and vicinity under a franchise or agreement. The capital stock of the petitioner was of the par value of $5,000 and all of it was issued in June, 1913, for the business and assets of the partnership, including the Coca-Cola franchise. This franchise, which had been granted to the partnership in 1904, gave it the exclusive right to bottle, label and sell1927 BTA LEXIS 3084">3085 Coca-Cola in Sumter, S.C., and certain territory adjacent thereto. The transfer of this franchise to the petitioner was approved and ratified by the Coca-Cola Bottling Co. of Atlanta, Ga., which owned and controlled the bottling rights of Coca-Cola in a number of States, including South Carolina, and it thereafter made shipments of Coca-Cola syrup to the petitioner. The petitioner could buy Coca-Cola syrup only from the Coca-Cola Bottling Co., and that company could sell only to recognized franchise holders. 7 B.T.A. 890">891 Part of the territory covered by the petitioner's franchise was sublet so that it operated only in what was known as the Sumter Plant territory. The petitioner had a royalty interest in the subleased territory, which royalty interest was transferred to one J. K. Croswell in the year 1916. The actual cash value of the franchise, or right to bottle and sell Coca-Cola in the Sumter Plant territory, at the time it was acquired by the petitioner was $23,622. In August, 1918, the petitioner sold its inventories, machinery, equipment, supplies and its Coca-Cola franchise for $47,000, of which $25,000 was represented by five notes for $5,000 each. In computing the1927 BTA LEXIS 3084">3086 profits from this sale the respondent determined that the cost to the petitioner of the physical assets sold was $21,032.58, and that the cost of the Coca-Cola franchise was $15,000, or a total cost of $36,032.58. The respondent also determined that the five $5,000 notes received in part payment by the petitioner were worth their face value and that the petitioner had realized a profit of $11,467.42 on the sale. After the sale of its inventories, machinery, equipment, supplies and franchise on August 12, 1918, the petitioner discontinued business except the collection of its outstanding accounts, which business was carried on through the remainder of the year. At the time of the sale of the assets the accounts outstanding amounted to about $1,200. Certain accounts were subsequently collected so that at December 31, 1918, the accounts uncollected amounted to $993.83. These accounts were considered worthless at that date and no further attempt was made to collect them, nor were they ever paid. No book entry was ever made charging them off as worthless because the petitioner at that time had ceased to keep books of account. The petitioner filed an income and profits-tax return1927 BTA LEXIS 3084">3087 for the year 1918 as provided by law. On November 18, 1923, the respondent notified the petitioner by letter mailed that date that it was proposed to assess additional tax against the petitioner for the year 1918 in the amount of $17,205.75. The additional tax was assessed on or about February 1, 1924. The petitioner on or about March 1, 1924, filed a claim for abatement of the additional tax so assessed and for refund of $490.72, the amount of tax originally assessed and paid on the return. On March 10, 1925, the respondent mailed to the petitioner a letter notifying it that its claim for abatement and refund had been allowed for $11,859.48 and rejected for $5,836.99, the deficiency in tax therefore being $5,346.27. The respondent's letter of March 10, 1925, is the basis for this proceeding. In computing the petitioner's net income for 1918 the respondent included therein the amount of $11,467.42, determined by him to have 7 B.T.A. 890">892 been realized by the petitioner as profit from the sale of its assets in the year 1918, and refused to allow as a deduction from gross income the amount of $993 representing debts claimed by the petitioner to have been worthless on December 31, 1918. 1927 BTA LEXIS 3084">3088 OPINION. MARQUETTE: The first question presented for determination by the record in this proceeding is the value of the Coca-Cola franchise at the time it was acquired by the petitioner. The petitioner and the respondent are in accord that the value of the franchise at that time is the proper basis for determination of gain or loss from the subsequent sale in 1918, but they do not agree as to what the value was, the petitioner contending that it was $23,622, and the respondent that it was $15,000. There appears to be no dispute as to the cost of the physical assets sold in 1918. Charles V. Rainwater, secretary and treasurer of the Coca-Cola Bottling Co. of Atlanta, which controlled the bottling rights for Coca-Cola in a number of States, testified that he had been such secretary and treasurer since 1906 and had supervision of the making and approving of all contracts and subcontracts involving the right to bottle and sell Coca-Cola in the territory controlled by his company. He was familiar with the amount of Coca-Cola syrup consumed in each territory and the profits realized by the bottlers, and had bought and sold franchises on his own account and owned interests in various1927 BTA LEXIS 3084">3089 bottling plants. He stated that originally selling rights for Coca-Cola were given away in order to induce and stimulate the use of that product, but that by 1913 the franchises or rights to sell in certain territories, had become very valuable and that he considered a first line contract or state right had a value of $5 for each gallon of syrup consumed in the territory per year, and the subcontract, such as the one involved here, a value of $2 for each gallon of syrup consumed in the territory per year. The average consumption of syrup in the Sumter Plant territory during the years 1911, 1912, and 1913 was 11,811 gallons, and he considered the franchise right to that territory worth $23,622 when it was acquired by the petitioner in 1913. The testimony of Rainwater was not impeached or contradicted in any way and we are of the opinion that it establishes that the franchise in question had a value of $23,622 in June, 1913, and we so hold. The next question is whether the petitioner, in computing its net income for 1918, is entitled to deduct the amount of $993, representing uncollected debts existing on December 31, 1918. The evidence shows that the petitioner had sold all of1927 BTA LEXIS 3084">3090 its assets in August, 1918, and remained in business only for the purpose of collecting its outstanding accounts. Some of these accounts were collected between 7 B.T.A. 890">893 August and December, 1918, and on the latter date there remained the amount of $993 uncollected. These accounts the petitioner's officers considered worthless and no further effort was made to collect them, and they remained uncollected. No book entry was made charging these debts off for the reason that the petitioner had ceased to keep books. We are of the opinion that the debts were worthless and were so ascertained by the petitioner during the taxable year 1918, and that the deduction claimed should be allowed. The petitioner also alleged in its petition that the respondent erred in holding that the five promissory notes of $5,000 each, received by the petitioner in part payment for the assets sold in 1918 were worth par, However, the evidence produced as to this issue is not sufficient to warrant us in disturbing the respondent's determination and the petitioner so concedes in its brief. Order of redetermination will be entered on 15 days' notice, under Rule 50.Considered by PHILLIPS, MILLIKEN, 1927 BTA LEXIS 3084">3091 and VAN FOSSAN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625238/	JOSEPH RONALD JONES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTJones v. CommissionerDocket No. 6221-80.United States Tax CourtT.C. Memo 1981-458; 1981 Tax Ct. Memo LEXIS 284; 42 T.C.M. 843; T.C.M. (RIA) 81458; August 25, 1981. Joseph Ronald Jones, pro se. John F. Dean, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined a deficiency of $ 2,020.34 in petitioner's Federal income tax for the year 1977. Concessions having been made, the only issue presented for our decision is whether petitioner is entitled to a deduction for wagering losses to the extent of his reported wagering winnings under section 165(d). 1FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. 1981 Tax Ct. Memo LEXIS 284">285 Petitioner resided at Baltimore, Maryland at the time of filing his petition. During 1977 petitioner was employed by Hemingway Transport, Inc. as a truck driver. On his 1977 Form 1040 he reported, in addition to other income, $ 4,300 of gambling winings from having won a "Triexacta," picking three winning horses in their correct order of finish. He also listed as an itemized deduction on his Schedule A a deduction of $ 4,200 for gambling losses resulting from having purchased losing lottery tickets. That loss deduction was disallowed by the respondent on the ground that "you have not met the requirements of Section 165 for claiming gambling losses." Petitioner attempted to substantiate his losses by taking a shoe box full of losing lottery tickets to his audit for the audit agent to examine. He stated to the agent that he had brought about $ 5,000 worth of tickets. After petitioner left, the agent looked through the box, and without counting the tickets noted that many were of one or two sets of numbers, and most were purchased at one of two stores. The box contained approximately $ 5,000 worth of losing tickets purchased by petitioner in 1977. The box was mailed back to1981 Tax Ct. Memo LEXIS 284">286 petitioner, but mail at that time was not sent certified. Petitioner never received the box. Petitioner won small amounts of between $ 200 and $ 300 during 1977 in addition to his reported win of $ 4,300. He did not report this money because of an erroneous belief by him that winnings of under $ 500 were not taxable. He also regularly frequented the race track and regularly played certain lottery numbers. OPINION Petitioner claimed a deduction for wagering losses but admitted having some small unreported gambling winnings. Under section 165(d) wagering losses are deductible only to the extent of wagering gains. However, where it appears a taxpayer has not reported all wagering winnings, and he does not establish that his wagering losses exceed those unreported winnings, he will be entitled to no deduction. E.g., ; , affg. per curiam a Memorandum Opinion of this Court. Petitioner contends that his only wagering win during 1977 was a win in the amount of $ 4,300 on a horse race. Respondent contends that since petitioner has admitted to having1981 Tax Ct. Memo LEXIS 284">287 won at least $ 200 to $ 300 and has failed to show his losses exceeded his unreported winnings, petitioner is entitled to no deduction. We hold for the petitioner. We doubt petitioner's testimony that he was first exposed to horse racing in 1977 and that in 1977 he won but one race--winning $ 4,300. Petitioner admitted to the audit agent to having some small additional winnings, and the record does not support his allegation that he was referring to a later tax year when he made that admission. Nonetheless, we are convinced that petitioner sustained net losses from his gambling activities. Petitioner's admission to the audit agent of having won "small amounts between $ 200 and $ 300" does not change our view. The statement itself is ambiguous as to the time period encompassed, but we believe petitioner was referring to winnings for an annual period. We think that had the audit agent, who was a very intelligent and articulate witness, considered this admission to be on anything other than a per year basis intense questioning would have ensued. It did not. We are thus left with an admission by petitioner of having unreported winnings of at least $ 200 to $ 300 per year. 1981 Tax Ct. Memo LEXIS 284">288 However, petitioner's allegation of having lottery losses of $ 5,000 more than offset his unreported winnings if believed. The parties stipulated that the shoe box petitioner took to audit contained $ 4,200 worth of losing tickets. We think petitioner agreed to this stipulation for fear that he would have no proof of any losses without it. The shoe box of lottery tickets had not been returned to him, or if returned was lost in the mail. It is unlikely that petitioner exaggerated in stating that the shoe box contained $ 5,000 of losing tickets, knowing the audit agent was likely to count them. While hardly free from doubt, we conclude on the basis of the entire record that petitioner's lottery losses exceeded both his reported and unreported wagering winnings. Moreover, it appears to us that petitioner reported only $ 4,200 of wagering losses because of an erroneous assumption by him that such losses were deductible only to the extent each loss exceed $ 100. Wagering losses, however, are deductible under section 165(d), which contains no such $ 100 limitation. We find petitioner's winnings from his wagering activities should be increased by $ 300--totalling $ 4,600--and that1981 Tax Ct. Memo LEXIS 284">*289 he is entitled to a loss deduction of $ 4,600. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625239/	ROSCOE PETERS DAWSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; ROBERT B. DAWSON, JR. and MARY E. DAWSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDawson v. CommissionerDocket Nos. 2056-78, 2080-78.United States Tax CourtT.C. Memo 1981-618; 1981 Tax Ct. Memo LEXIS 113; 42 T.C.M. 1516; T.C.M. (RIA) 81618; October 26, 1981. 1981 Tax Ct. Memo LEXIS 113">113 Held, determinations by the Commissioner as to the amounts of profits and losses realized by Ps from two businesses sustained since Ps failed to produce evidence to refute the determinations. Roscoe Peters Dawson, pro se in docket No. 2056-78. Robert B. Dawson, Jr., pro se in docket No. 2080-78. Alvin v. Sherron, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in the petitioners' Federal income taxes: Addition to TaxSec. 6653(a)PetitionerYearDeficiencyI.R.C. 1954 1Roscoe Peters Dawson1972$ 97$ 519739614819741,20960Robert B. Dawson Jr.,197291746and Mary E. Dawson19731,5367719742,273114The Commissioner concedes that the petitioners are not liable for the additions to tax determined by him. After other concessions by the Commissioner and the petitioners, the only issue to be decided is the amount of profits or losses realized by Roscoe Dawson and Robert1981 Tax Ct. Memo LEXIS 113">114 Dawson from certain businesses. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. Petitioner Roscoe Peters Dawson maintained his legal residence in Los Angeles, Calif., when he filed his petition in this case. He timely filed individual Federal income tax returns for 1972, 1973, and 1974 with the Internal Revenue Service, Fresno, Calif. Petitioner Robert B. Dawson, Jr., maintained his legal residence in West Covina, Calif., and petitioner Mary E. Dawson maintained her legal residence in Covina, Calif., when they filed their joint petition in this case. They timely filed joint Federal income tax returns for 1972, 1973, and 1974 with the Internal Revenue Service, Fresno, Calif.Petitioners Roscoe and Robert Dawson are brothers. During 1972, they conducted, together with another individual, a business which was known as "Johnny's Originals" and which made women's clothing. During 1973 and 1974, they conducted, with another individual, a business known as "Osten Ice Cream" which sold ice cream at retail. On his individual returns for 1972, 1973, and 1974, Roscoe Dawson reported the following business income and expenses: YearBusinessIncomeExpensesDifference1972Johnny's Originals$ 1,209$ 5,419($ 4,210)1973Osten Ice Cream9007,787( 6,887)1974Osten Ice Cream9006,765( 5,865)1981 Tax Ct. Memo LEXIS 113">115 Roscoe Dawson deducted the excess of expenses over income as a loss in each year. On their joint returns for 1972, 1973, and 1974, Robert and Mary Dawson reported the following business income and expenses: YearBusinessIncomeExpensesDifference1972Jonny's Originals$ 4,129$ 10,708($ 6,579)1973Osten Ice Cream9008,180( 7,280)1974Osten Ice Cream9,440( 9,440)Robert and Mary Dawson also deducted the excess of expenses over income as a loss in each year. In his notices of deficiency, the Commissioner determined that Johnny's Originals incurred a loss of $ 9,970.62 in 1972, and that Osten Ice Cream incurred losses of $ 7,809.30 in 197o and $ 1,862.15 in 1974. Of the loss incurred by Johnny's Originals, the Commissioner determined that Roscoe Dawson was entitled to deduct $ 3,324.00 and that Robert and Mary Dawson were entitled to deduct the same amount. Of the loss incurred by Osten Ice Cream for 1973, he determined that Roscoe Dawson was entitled to deduct $ 3,083.00 and that Robert and Mary Dawson were entitled to deduct $ 1,643.00. Finally, with respect to 1974, the Commissioner determined that Roscoe Dawson was1981 Tax Ct. Memo LEXIS 113">116 entitled to deduct a loss of $ 946.00 from Osten Ice Cream and that Robert and Mary Dawson should have reported income of $ 28 from such business. In determining that Robert and Mary Dawson were not entitled to deduct as much as Roscoe Dawson for 1973 and that Robert and Mary Dawson should have reported income for 1974, the Commissioner determined that Roscoe paid a greater share of expenses of Osten Ice Cream than did Robert. OPINION The only issue to be decided is the amount of profits or losses realized by Roscoe Dawson and Robert Dawson from Johnny's Originals and Osten Ice Cream. The petitioners have the burden of showing that the determinations of the Commissioner were erroneous. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). The petitioners presented no persuasive evidence to refute the determinations of the Commissioner. The only evidence introduced by them was the testimony of Roscoe and Robert Dawson, but such testimony was overly vague. The Dawson brothers testified that in operating Johnny's Originals and Ostem Ice Cream, they incurred numerous expenses which were not reflected on the books of1981 Tax Ct. Memo LEXIS 113">117 such businesses. However, when they attempted to specify such expenses, they were unable to provide details about them, such as exactly when expenditures were made or precisely who was paid. On the whole, their testimony was conclusory and unconvincing, and it does not refute the determinations of the Commissioner. At trial, the Dawsons recognized that their testimony was vague and that documentary evidence was needed as corroboration. However, they claimed that the failure to produce documentary evidence was not the fault of the petitioners because records which would corroborate the additional expenses were stolen from them in 1978. They explained that such records had been kept in an office next door to the location of Johnny's Originals, that they and their associates were evicted from the office in 1978, and that the landlord seized the records in the eviction and has since refused to return them. Such explanation of the failure to produce records is not helpful. The petitioners produced no evidence of any attempts to secure the records from the landlord. They testified that they had heard that the landlord had disposed of the records, but such second-hand information1981 Tax Ct. Memo LEXIS 113">118 does not justify their failure to make an earnest attempt to retrieve the records. Moreover, even if the petitioners had produced their records, it is doubtful the records would have substantiated additional expenses. At trial, Frank Moore, the revenue agent who performed the audits in these cases, testified that the determinations of the income and expenses of Johnny's Originals and Osten Ice Cream in the notices of deficiency are merely summaries of records furnished earlier by the petitioners. He stated that, for the audits, the petitioners produced the books of the businesses as well as their personal records. Hence, since the determinations in the notices of deficiency are based on the petitioners' records, the petitioners have been allowed all the deductions to which they were entitled unless the petitioners failed to produce all their records for the audits. We have no reason to believe that they held back any records. Since the petitioners have produced no reliable evidence to refute the determinations made by the Commissioner, and in view of the concessions by the parties, Decisions will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625240/	IRENEE DU PONT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Du Pont v. CommissionerDocket No. 41368.United States Board of Tax Appeals20 B.T.A. 482; 1930 BTA LEXIS 2102; August 6, 1930, Promulgated 1930 BTA LEXIS 2102">2102 TRUST - INCOME - INSURANCE. - Where the petitioner created trusts and the income therefrom was used for the purpose of paying premiums on insurance on his own life, the income of the trusts should be included in petitioner's income under section 219(h) of the Revenue Acts of 1924 and 1926. Kingman Brewster, Esq., and J. S. Y. Ivins, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. BLACK 20 B.T.A. 482">483 Deficiencies in income tax and surtax were determined by respondent as follows: 1924, $16,955.37; 1925, $6,476.22; 1926, $10,201.31, amounting in all to $33,632.90. The petitioner created several trust funds, the income from which was used to pay premiums on insurance on his own life. This income, amounting to $50,422.40 for 1924, $50,370.10 for 1925, and $50,422.40 for 1926, was added to that of petitioner by respondent, thus creating the deficiencies and this is alleged to be erroneous by petitioner in asking redetermination. FINDINGS OF FACT. The petitioner, under date of September 18, 1923, executed nine trust agreements for the benefit of his wife, their nine children, and other members and relatives of his family. These1930 BTA LEXIS 2102">2103 trusts were irrevocable for their duration, which was in the first instance until December 18, 1926, with provision for further extension upon notice by the trustor to the trustee. Two such notices have been given and the trusts have been extended to December 18, 1932. By the trust agreements, the petitioner transferred to the Wilmington Trust Co., as trustee, the following properties: (a) 32 insurance policies on the petitioner's life. (b) 830 shares of 7% preferred stock of the Christiana Securities Co., a corporation existing under the laws of the State of Delaware. The nine trust agreements were in full force and effect during the years 1924 to 1926, inclusive, and the 32 insurance policies were likewise in full force and effect and held under the terms of the trusts during those years. The transfer of the insurance policies was absolute and complete. By the trust instruments the trustee was made the owner of such policies and, if the trusts terminated prior to the petitioner's death, all interest in the policies would vest in certain named beneficiaries. The petitioner is not one of such beneficiaries. If the petitioner dies prior to December 18, 1932 (or1930 BTA LEXIS 2102">2104 such other date to which the trusts might further be extended), the proceeds of the life insurance policies are to become a trust fund in the hands of the trustee, designated as the "Primary Trust Fund." The net income therefrom and the fund itself would be distributed and paid over to named beneficiaries, other than the petitioner or his estate, as indicated in the trust agreements. The petitioner retains no right to change the beneficiaries under the insurance policies named in the trust agreements. He has no right to surrender the policies for the surrender values indicated therein, nor to borrow against them. There is no provision under which title to the policies could revest in the taxpayer either at his own discretion or the joint discretion of himself and anybody else. 20 B.T.A. 482">484 As to the shares of stock transferred under the trust agreements, the trustee receives the income from the securities, applies the same to the payment of taxes, governmental charges, and incidental expenses, including its commissions, and uses the balance of the income for the payment of premiums on the policies of life insurance for the period of the trusts, or so long as the petitioner lives, 1930 BTA LEXIS 2102">2105 whichever is the shorter. If the trusts terminate prior to the petitioner's death, the securities and any income not paid out, all of which is designated the "Secondary Trust Fund," are to be transferred to the petitioner. If the petitioner dies prior to the end of the trusts, the securities and any net income thereon are to be distributed to the nine children or their issue in the manner specified therein. In such case no part of the "Secondary Trust Fund" goes to the petitioner's estate. Such is the combined substantive effect of the provisions of the nine trust agreements. To simplify the description of the separate interest of each child dependent upon contingencies, nine distinct trusts (each applying to a one-ninth share in the trust funds) are provided for. During the year 1924 dividends from securities transferred to and held by the Wilmington Trust Co. as trustee, amounting to $50,422.40, were received by such trustee and, pursuant to the terms of the trusts, were used to pay insurance premiums. During the year 1925 dividends amounting to $50,370.10, and during the year 1926 dividends amounting to $50,422.40, were so received and applied. These amounts have been1930 BTA LEXIS 2102">2106 treated by the Bureau as income taxable to the petitioner and subject to income tax and surtax under the Revenue Acts of 1924 and 1926. This action is based upon the Commissioner's interpretation of section 219(h) of the Revenue Acts of 1924 and 1926. The petitioner's wife and all the children, who were beneficiaries of the trusts, were living during the years 1924 to 1926, and are still living. OPINION. BLACK: The taxable years involved in this proceeding are 1924, 1925, and 1926 and hence are governed by the Revenue Acts of 1924 and 1926. Under section 219 of each of these acts it is provided that the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary, except under certain conditions prescribed in subdivisions (g) and (h) of said section. In this proceeding we are not concerned with subdivision (g) and only with that part of subdivision (h) which reads as follows: 20 B.T.A. 482">485 Where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph1930 BTA LEXIS 2102">2107 (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor. The petitioner was the grantor of the trusts involved in this proceeding, the part of the income of the trusts upon which the deficiencies are based was used to pay premiums on policies of insurance on the life of the grantor, and respondent has included the amount of such premiums in computing the net income of the grantor for the respective taxable years, as is provided in section 219(h). Petitioner attacks this determination of respondent on the following grounds: (1) subdivision (h) of section 219 has no application to the income of an irrevocable trust; (2) even if the language of the subdivision does have application to an irrevocable trust, it does not have any application to an irrevocable trust created prior to the enactment of such subdivision; and (3) if said subdivision (h) of section 219 does have the application contended for by the Commissioner, it is unconstitutional and void because it is violative of the Fifth Amendment to the Constitution of the United States. Similar contentions have already been fully considered by the1930 BTA LEXIS 2102">2108 Board in Frederick B. Wells,19 B.T.A. 1213">19 B.T.A. 1213, and Alfred F. Pillsbury,19 B.T.A. 1229">19 B.T.A. 1229, and decided adversely to the contentions made by petitioner. See also Corliss v. Bowers,281 U.S. 376">281 U.S. 376. Counsel for petitioner lay considerable stress in their brief on their contention that petitioner was under no obligation to pay premiums on the insurance policies assigned to the trustee, and that since the evidence shows that the policies had been irrevocably assigned to the trustee, the petitioner no longer had any interest in them. It is of course true that in an ordinary insurance policy the insured is under no legal obligation to pay the premiums due on the policy. If he fails to make the payments within the time prescribed in the policy, it lapses. But if he wants to keep the policies alive and in force he must make payment of the premiums. The policies of insurance involved in this proceeding were for the benefit of petitioner's wife and nine children. Evidently it was the desire of the petitioner to keep these policies alive and in full force. The expense involved in the payment of life insurance premiums by a husband and father1930 BTA LEXIS 2102">2109 on policies for the benefit of his wife and children is regarded as a personal expense under the internal revenue laws, and is not an allowable deduction in determining the net income of the taxpayer. If, by the method used in this proceeding, the petitioner can transfer to a trust the burden of paying these insurance 20 B.T.A. 482">486 premiums and secure the deduction that way, in so far as payment of surtax is concerned, then he has accomplished by indirect means that which the law would not permit him to accomplish directly. It was this sort of thing which Congress sought to prevent when it enacted the part of subdivision (h) of section 219, Revenue Acts of 1924 and 1926, which we have quoted at the beginning of this opinion. Under the authorities above cited, Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625241/	APPEAL OF THE RYAN CO.Ryan Co. v. CommissionerDocket No. 54.United States Board of Tax Appeals2 B.T.A. 764; 1925 BTA LEXIS 2273; October 1, 1925, Decided Submitted April 27, 1925. 1925 BTA LEXIS 2273">2273 1. Upon concessions by the taxpayer that certain credits on the books of a corporation were dividends and by the Commissioner that interest should not have been accrued upon dividend credits, held, that income should not be increased on account of income alleged to have accrued on such credits. 2. Other claims of the taxpayer disallowed for lack of evidence. Eugene J. Holland, Esq., for the taxpayer. J. Harry Byrne, Esq., for the Commissioner. IVINS2 B.T.A. 764">764 Before IVINS, 1 MORRIS, and LOVE. This is an appeal from a determination by the Commissioner of a deficiency in income and profits taxes for 1920 in an amount of less than $10,000, arising out of his action (1) in increasing income by certain items of accrued interest on notes, (2) in excluding certain items from invested capital, and (3) in including in income certain items of accrued interest on "withdrawals" charged to stockholders on the books. The Commissioner's determination also shows overassessments for 1918, 1919, and 1921. The Commissioner originally filed a motion to dismiss this appeal, 1925 BTA LEXIS 2273">2274 alleging that it had not been filed within the period prescribed by the Revenue Act of 1924. At the hearing on the motion the Board directed further investigation of the date of filing, but the Commissioner subsequently filed an answer and at the hearing thereon abandoned his motion. From the pleadings and admissions of counsel the Board makes the following FINDINGS OF FACT. The taxpayer is an Illinois corporation with its principal office at Chicago. "Withdrawals" charged to stockholders upon the books of the corporation were dividends, not loans. 2 B.T.A. 764">765 DECISION. The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice, in accordance with Rule 50. OPINION. IVINS: The Commissioner's answer contains a plea in bar of the Board's jurisdiction in so far as the appeal relates to the years 1918, 1919, and 1921, because overassessments were found for those years. The plea is overruled on authority of the Board's decisions in the ; and 1925 BTA LEXIS 2273">2275 The taxpayer alleges three errors of the Commissioner, being (1) the inclusion in taxable income of certain items of accrued interest on notes receivable, which notes the taxpayer asserts represent payment for capital stock; (2) the exclusion from invested capital of the par value of the capital stock for which the said notes were given because the stock is held not to be "paid in"; and (3) the inclusion in taxable income of items of accrued interest on alleged "withdrawals" by stockholders although such withdrawals were held to be dividends. The Commissioner's answer conceded that in the event the taxpayer admitted that the withdrawals were dividends, or that the Board found that they were in fact dividends, the interest accrued thereon was not income. The taxpayer conceded that the withdrawals were dividends taxable to the stockholders, and it follows that no interest should have been accrued by the corporation on account of them. Therefore, the net income found by the Commissioner should be reduced by the amount of such accruals. For lack of any competent evidence with respect to the other points in the petition, 1925 BTA LEXIS 2273">2276 we are constrained to affirm the determination of the Commissioner thereupon. ARUNDELL not participating. Footnotes1. This decision was prepared by Mr. Ivins during his term of office. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625242/	THE FIRST NATIONAL BANK, PHILIPSBURG, PENNSYLVANIA, PETITIONER, v. Commissioner of Internal Revenue, Respondent.First Nat'l Bank v. CommissionerDocket No. 101772.United States Board of Tax Appeals43 B.T.A. 456; 1941 BTA LEXIS 1501; January 30, 1941, Promulgated 1941 BTA LEXIS 1501">1501 After default of a note secured by shares, the lender took the shares into its asset account at their fair market value and charged off as worthless the amount of the loan in excess of such value. For computing gain on the subsequent sale of the shares, basis held to be their value when taken over. Lawrence Cake, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent. STERNHAGEN 43 B.T.A. 456">456 OPINION. STERNHAGEN: The Commissioner determined deficiencies of $1,719.77 in income tax and $888.52 in excess profits tax for 1936, and $226.82 in income tax for 1937. The petitioner seeks a reduction of the profit from the sale of securities through an increase in the basis. The principal facts are stipulated and are found as agreed. The petitioner in 1933 loaned $5,766.17 to Shirey on his note with interest and took 150 shares of General Refractories Co. as collateral. The note was defaulted and in 1935 petitioner took the collateral, which was then worth $2,250. Petitioner charged this amount to its securities account and charged the remaining $3,216.17 to profit and loss. On its return for 1935 petitioner showed a net loss of $55,356.99, 1941 BTA LEXIS 1501">1502 in which was included the charge-off, $3,216.17 representing the Shirey loan. In 1936 the General Refractories Co. shares were sold for $6,713.86. Similarly the petitioner in 1934 loaned $18,000 to Miller and took various shares as collateral. The collateral was forfeited in 1935, when it was worth $7,926.75. Petitioner charged off $10,073.25 in that year and his amount was reflected in the aforesaid net loss on its tax return. The shares were sold in 1936 and 1937 for $23,825.05 and $4,764.90. The taxpayer contends that in determining the gain or loss from the sale of the collateral shares, the basis is the original amount loaned, that being the true cost, and not the value of the shares when it acquired wonership of them. It puts aside the fact that its net loss in 1935 reflected the charge-off of the unpaid portion of the loans as of no significance because its new loss was sufficiently greater to absorb any tax benefit from the deduction. The contention must be rejected. When the loans became worthless to any extent above the value of the collateral, the petitioner properly charged off the worthless amount and deducted it on its return. It simultaneously took the1941 BTA LEXIS 1501">1503 collateral at fair market value into its asset accounts, thereby applying it pro tanto to a satisfaction of the loans. 43 B.T.A. 456">*457 Thus the value of the shares immediately became their basis, as if they had been purchased for the amount. The subsequent sale or disposition resulted in gain or loss computed upon that basis. The fact that the 1935 charge-off served only to enlarge the petitioner's net loss and gave it no immediate reduction of taxes because it had no taxable income, had no significance as a factor of the computation in the later year. . See also Paul and Mertens, Law of Federal Income Taxation, vol. 3, §§ 28.77, 28.78. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625245/	Old Town Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentOld Town Corp. v. CommissionerDocket No. 81740United States Tax Court37 T.C. 845; 1962 U.S. Tax Ct. LEXIS 198; February 1, 1962, Filed 1962 U.S. Tax Ct. LEXIS 198">198 Decision will be entered under Rule 50. McGraw, contemplating the purchase of the controlling shares in petitioner, negotiated with Roberts for the possible future employment of Roberts by petitioner. After the stock purchase was consummated, Roberts was employed by petitioner but was discharged a shorttime thereafter. Roberts commenced a lawsuit containing one cause of action against petitioner for breach of contract and three causes of action against McGraw for fraud and breach of contract. McGraw notified petitioner that he would seek reimbursement from petitioner in the event he was held liable to Roberts. Petitioner's attorney, believing that McGraw's potential claim against petitioner had substance, advised petitioner it would be to petitioner's best interests to compromise the claims against itself and against McGraw. Petitioner, relying upon this advice, compromised all of the claims and assumed all of the legal expenses attendant to the suit. Held, the portion of the expenses attributable to the claims against McGraw was an ordinary and necessary business expense to petitioner within the meaning of sec. 162(a) of the 1954 Code. Karl W. Windhorst, Esq., Paul Farber, Esq., Carl J. Rubino, Esq., and Paul L. Franken, Esq., for the petitioner.Robert S. Bevan, Esq., and Clarence Dunnaville, Jr., Esq., for the respondent. Fisher, Judge. FISHER37 T.C. 845">845 Respondent determined a deficiency in petitioner's income tax for the year 1953 in the amount of $ 52,000. The greater portion of the deficiency, and the only part here in issue, results from respondent's disallowance of $ 100,000 of a $ 117,128.78 business expense deduction in 1955, thereby decreasing the net operating loss for 1955 which could be carried back to 1953. The sole issue for our determination 37 T.C. 845">846 is whether the compromise settlement and legal fees paid or accrued by petitioner in 1955 in connection with a lawsuit against one of its employees are ordinary and necessary1962 U.S. Tax Ct. LEXIS 198">200 business expenses of petitioner.FINDINGS OF FACT.Some of the facts and some evidence have been stipulated. The facts stipulated are found as such and are incorporated herein by reference.The petitioner, Old Town Corporation, was incorporated about March 17, 1917, under the laws of the State of New York and maintained its principal place of business in Brooklyn, New York. Its principal business has been the manufacturing and selling of carbon papers, inked ribbons, duplicators, and duplicating supplies.Petitioner has been listed since 1951 on the American Stock Exchange or its predecessor, the New York Curb Exchange.James H. McGraw, Jr. (hereinafter referred to as McGraw), formerly the president, chairman of the board, and a principal stockholder of McGraw-Hill Publishing Company, severed all relationship with that company in April 1951. He then commenced an investigation of petitioner as a possible new business venture. In May 1952, McGraw engaged Stewart, Dougall and Associates, Inc., management consultants, to make a study and report of the operations of the petitioner. This report, submitted in August, was prepared under the supervision of Charles Roberts (hereinafter1962 U.S. Tax Ct. LEXIS 198">201 referred to as Roberts), who, at that time, was a senior associate of Stewart, Dougall and Associates, Inc. During the course of the preparation of the report, McGraw was in close contact and became well acquainted with Roberts.As an additional preliminary step of investigation, McGraw engaged Borden Putnam (hereinafter referred to as Putnam), formerly treasurer of McGraw-Hill Publishing Company and then a partner of the accounting firm of J. K. Lasser & Co., to render a financial analysis of petitioner, which report was submitted to McGraw.During the period from May through September 1952, McGraw and Roberts had discussions with respect to the former acquiring the majority of the voting stock of petitioner. It was understood between them that in order to obtain said majority, McGraw was negotiating for the 45.9 percent block of voting stock owned by the Eaton family. During these months, there were also discussions between McGraw and Roberts as to the employment of Roberts as president of petitioner, if and when McGraw should purchase a majority of the voting stock of petitioner.At the time of these discussions concerning the possible future employment of Roberts by petitioner, 1962 U.S. Tax Ct. LEXIS 198">202 he was cognizant of the fact that 37 T.C. 845">847 McGraw was neither a shareholder, officer, nor director of petitioner. McGraw, however, advised Roberts that he would purchase the shares in petitioner only if he could assure himself that Roberts would accept employment by the petitioner for a substantial number of years.After various discussions between Roberts and McGraw concerning the terms for the prospective employment by petitioner of Roberts, McGraw advised Roberts on November 7, 1952, that he was then confident he would purchase the majority of voting stock of petitioner in December 1952, and he advised Roberts to resign from his present employment to be available as soon as the purchase was consummated.On November 9, 1952, Roberts wrote the following letter to McGraw:Charles S. Roberts950 Soundview DriveMamaroneck, New YorkNovember 9, 1952Mr. James McGraw, Jr.79 East 79th StreetNew York, New YorkDear Jay:In accordance with our discussion on Friday, November 7, I am recording our agreement of the financial aspects relating to my employment by Old Town Corporation.Base Salary: $ 50,000 per annumCommon Stock Option: 12,000 sharesIncentive Compensation1962 U.S. Tax Ct. LEXIS 198">203 Plan: agreement in principlePension Plan: as establishedCommon Stock OptionThe Company will give me the option to buy 12,000 shares of its Common Stock at $ 10.50 a share or at the average market price of the stock during the 20 days following payment of the proposed Preferred Stock dividend, whichever is lower. I shall have the right to exercise this option to the extent of 1,200 shares at any time during each year of employment. The option shall be cumulative, i.e., stock not acquired under the option during any year or years shall continue to be available at any time during employment.The option shall expire when employment terminates, but any balance of stock available under the cumulative provision above may be acquired at the option price within 90 days after termination of employment.Incentive Compensation PlanI propose for your consideration an incentive compensation plan containing the following two elements:1. The Company would pay me 1% of the Net Income before taxes on that amount exceeding $ 1,200,000.2. The Company would pay me 1% of Net Sales on that amount exceeding the Net Sales realized by the Company for the calendar year 1952.I am looking1962 U.S. Tax Ct. LEXIS 198">204 forward to our association in building Old Town into a truly great and profitable company. I have taken all the steps necessary in order to be available on January 1.Cordially yours,(signed) Charles S. Roberts37 T.C. 845">848 McGraw, upon receiving the letter, inscribed the following notation upon the original: "Charley: This is fine with me but Sullivan & Cromwell or some other good legal firm should put this in shape."Sullivan & Cromwell, referred to above, was general counsel to the petitioner.McGraw also assured Roberts he was confident that any arrangements he made to attract people he thought should be in the company would be approved by the board of directors of petitioner when he controlled the majority of the stock in petitioner.Subsequently, the terms set forth in the letter of November 9, 1952, were modified by Roberts and McGraw to eliminate the alternative stock option price, change the effect of termination of employment on the stock option, and provide for a company car to be supplied by the petitioner. Roberts deemed all negotiations to be for the prospective employment by petitioner rather than by McGraw.During this time McGraw also had discussions with Putnam concerning1962 U.S. Tax Ct. LEXIS 198">205 the latter's possible employment by petitioner as vice president in charge of financial operation of the petitioner.On December 22, 1952, a meeting was held at the office of the petitioner which was attended by McGraw, Roberts, Putnam, Eaton, Batchker, petitioner's president, and Schenker, attorney for McGraw. A further meeting was held on December 23, 1952, at the Links Club which was attended by the same men with the exception of Roberts and Schenker.A report of both meetings was prepared by Putnam in letter form addressed to McGraw under date of December 24, 1952, which stated, in part, as follows:The following matters were discussed at the December 22nd meeting:(1) Executive Organization of the Company: * * As soon as Mr. McGraw, Jr., takes delivery of the stock he is purchasing from Mr. Eaton, et al, Mr. Charles S. Roberts is to be elected Executive Vice-President of the Company, and Mr. Putnam as Vice-President and Treasurer.Mr. McGraw, Jr., agreed to the designation of Executive Vice-President for Mr. Roberts with the understanding that he would immediately assume full responsibility as the chief executive operating officer of the Company. It was further understood1962 U.S. Tax Ct. LEXIS 198">206 that at the stockholders' meeting on April 14th, Mr. Roberts will be elected President of the Company. At that time Mr. Batchker will become Vice Chairman of the Board.The matter of title for Mr. McGraw, Jr., was left open with the understanding that, as majority stockholder, he will direct policy and assume top responsibility for the direction of the Company and its management.(2) Board of Directors:Until the stockholders' meeting Messrs. McGraw, Jr., Roberts and Putnam will be invited to attend all Directors' meetings.Mr. Schenker stated that no changes can take place in the Board of Directors at this time. Accordingly, such changes will be deferred until the stockholders' 37 T.C. 845">849 meeting, at which time Messrs. McGraw, Roberts and Putnam will be elected directors. * * (9) Effective Date for Participation by Messrs. Roberts and Putnam:Mr. Roberts pointed out the strong desirability of indoctrination on our part at the earliest possible moment. Since there is a possibility that common stock will not actually be transferred until January 15th, he suggested that we should plan to spend approximately full time in the Company's offices beginning January 2, 1953. 1962 U.S. Tax Ct. LEXIS 198">207 It is not anticipated that either Messrs. Roberts or Putnam would have any official responsibility or authority until the stock is actually transferred -- that this interim period would be used for study and becoming generally acquainted with the mechanics of operations. Messrs. Eaton and Batchker expressed general agreement with this idea and we assume it will work out as suggested by Mr. Roberts.(10) Timetable:December 30Stockholders' meeting.December 30Immediately after the stockholders' meeting, assuming anaffirmative vote on the new preferred issue, contracts willbe executed between Mr. Eaton, et al and Mr. J. H. McGraw,Jr., and Mr. Eaton, et al, and the purchasers of thepreferred stock, presumably Kidder, Peabody & Co.January 2, 1953Or immediately thereafter, distribution of new preferredstock.January 2 toTransfer of common stock to J. H. McGraw, Jr. The actualJanuary 15,date of transfer will be dependent on the sale date for the1953preferred stock. Mr. Eaton has been advised by counselthat he must sell his common and preferred stock at thesame time.January 13Regular meeting of the Board of Directors.The following matters1962 U.S. Tax Ct. LEXIS 198">208 were reviewed at the December 23rd meeting. Paragraph numbers below refer to paragraphs preceding. * * (9) It was agreed that Messrs. Roberts and Putnam should spend as much time as they see fit in the Company's office, starting January 2nd. Details to be worked out with Mr. Batchker.Although Batchker and Eaton (who were both present at the above meetings) were at that time the controlling shareholders and were directors of petitioner, the meetings did not constitute a meeting of petitioner's board of directors.On December 31, 1952, Roberts terminated his association with Stewart, Dougall and Associates, Inc., and between January 2 and 16, 1953, was in attendance at the offices of petitioner.On February 2, 1953, a contract of sale was signed with respect to the sale to McGraw of a majority of the voting stock of petitioner and on February 10, 1953, the sale was effected. Later that same day, the board elected Roberts as executive vice president and Putnam as vice president and treasurer, each at a salary of $ 35,000 per annum.On February 11, 1953, the following day, McGraw notified Batchker and Eaton that he had previously agreed with Roberts and Putnam on 37 T.C. 845">850 a1962 U.S. Tax Ct. LEXIS 198">209 salary of $ 50,000 per annum and the use of a company car, and that the petitioner should honor this agreement. Batchker refused McGraw's request. McGraw replied that he would "recommend" such action to the new board after it had been established in April 1953.A few days later, McGraw wrote the following letter to Putnam:James H. McGraw, Jr.79 East 79th StreetNew YorkFebruary 13, 1953Mr. Borden R. PutnamOld Town Corporation750 Pacific StreetBrooklyn, New YorkDear Mr. Putnam:I understand from you that Mr. Batchker has taken the position which he states is on advice of Sullivan & Cromwell that he should not authorize the purchase of company cars for you and Mr. Roberts, and that he should not authorize the effective date for your salaries of January 1, 1953. I understand that your salaries will begin as of the day of your election, that is, February 10, 1953.This will authorize you to draw checks on my personal account to pay for cars ordered by yourself and Mr. Roberts. You will both execute notes to me in order that I may be protected until April 14, when the new Board of Directors for Old Town Corporation will be elected. At that time I am1962 U.S. Tax Ct. LEXIS 198">210 quite confident the new Board will approve the purchase of the company cars and reimburse me, and will also make appropriate adjustments in the salaries for yourself and Mr. Roberts so that your full salaries for 1953 will be at the rate of $ 50,000 each.Very truly yours,(signed) James H. McGraw, Jr.On March 27, 1953, Putnam, then treasurer of petitioner, in an initialed memorandum set out the terms of employment for Roberts which were to be included in a subsequent contract between Roberts and petitioner. The employment for a 3-year period was substantially upon the same terms as those originally agreed upon by Roberts and McGraw.McGraw assured Roberts that he would recommend all the above-stated terms for employment to the board for approval at the following meeting.The new board, now with 14 directors, contained 4 directors from the old 6-man board.At the board meeting immediately following the stockholders meeting of April 14, 1953, Roberts was elected president of petitioner. A resolution was passed by the board in which Roberts' salary for the full year ending December 31, 1953, was fixed at $ 50,000. No other terms for the employment of Roberts, however, were established1962 U.S. Tax Ct. LEXIS 198">211 by the board.On May 4, 1953, McGraw notified Roberts that Batchker, Eaton, Sharpe, and Putnam had threatened to leave the company because of 37 T.C. 845">851 Roberts' management and suggested that Roberts resign as president of petitioner and return to his old employment.On May 19, 1953, the board held a meeting to consider the status of Roberts' employment. The minutes of said meeting state, in part:Mr. McGraw reported to the Board that a situation had developed concerning Mr. Charles S. Roberts, President of the Company. To summarize, Mr. McGraw reported that Mr. Roberts had been unable to establish a working basis with the rest of the Management of the Company and that in the best interest of the Company, Mr. McGraw had suggested to Mr. Roberts on May 4, 1953, that he should resign as President and Director of the Company. At the meeting with Mr. Roberts, the matter of any financial settlement in connection with the termination of his employment was not discussed but was left for subsequent consideration. It was understood that Mr. Roberts would seek to reestablish himself with Stewart, Dougall & Associates and then would give Mr. McGraw his idea of an appropriate settlement. 1962 U.S. Tax Ct. LEXIS 198">212 However, before there was any further discussion, there was received a letter from Mr. Roberts' attorney who requested that our attorneys get in touch with him to discuss the matter. At this point, the matter was turned over to our counsel, Messrs. Sullivan and Cromwell. To date, there has been no agreement between the lawyers and we have not received a resignation from Mr. Roberts. * * After discussion, the Board decided that a Special Meeting of the Board of Directors should be held at 9:30 A.M. Monday morning, May 25, at the New York Office of the Company, 345 Madison Avenue, for the purpose of taking action to remove Mr. Roberts from the office of President of the Corporation. Mr. Putnam was directed to deliver and mail to Mr. Roberts a notice of the intended action. After the notice had been prepared, Mr. Putnam left the room and upon his return reported that the notice had been delivered to Mr. Roberts in the latter's office and had been mailed to him at his home. * * It was suggested that action be taken to provide for a settlement with Mr. Roberts if prior to the special meeting of the Board he should resign on acceptable terms. After discussion and on motion duly1962 U.S. Tax Ct. LEXIS 198">213 made, seconded and unanimously carried, it was voted that the resignation of Mr. Roberts as President, a Director and a member of the Executive Committee of the Company be accepted if forthcoming prior to his removal from the office of President, and that in the event of such resignation Mr. Putnam be authorized on behalf of the Company to cause to be paid to Mr. Roberts an amount not exceeding Mr. Roberts' salary for the balance of the calendar year and to execute and deliver to Mr. Roberts a release of all claims of the Company against him, all subject to the execution and delivery by Mr. Roberts of a release of all claims of his against the Company and each of the Directors of the Company individually.In answer to this proposal, Roberts' attorney, Shepard, notified petitioner on May 21, 1953, that while Roberts would release the petitioner upon the payment of the balance of his salary, $ 31,250, he would not release any other claims against others associated with the corporation.Roberts did not resign or accept any settlement. On May 25, 1953, the board held the special meeting referred to above. A resolution was 37 T.C. 845">852 passed removing Roberts from the office of president, 1962 U.S. Tax Ct. LEXIS 198">214 and McGraw was formally elected to fill that position. Roberts attended the meeting with another counsel, Bernays. Bernays asked whether the company's proposal to pay Roberts his salary to the end of the year ($ 31,250) had been conditioned on Roberts' furnishing releases of his claims against the directors individually as well as against the corporation. Petitioner's attorney, Foshay, told him that, as was customary in matters of this kind, the proposal had been conditioned on the exchange of general release of all claims. Bernays then asked whether consideration had been given to effecting a settlement between Roberts and petitioner alone. Foshay replied that Roberts' other counsel, Shepard, had threatened legal action against petitioner, McGraw, and possibly other directors, and that, in his discussions with such counsel, it had been agreed that there was nothing in the situation which could not be disposed of through agreement on a monetary payment to Roberts, and that in the event of such agreement general releases of all claims would be exchanged. Foshay added that since Shepard demanded $ 75,000 and that petitioner offered only $ 30,000, further discussion had become 1962 U.S. Tax Ct. LEXIS 198">215 futile.Bernays then denied the validity of the removal proceedings as being without cause; stated that the board was not acting in good faith; and protested against the entire removal action of the board as being a device to force Roberts to resign and compel him to settle with the petitioner claims which he had against McGraw.As of May 23, 1953 (2 days before the meeting at which Roberts was removed from office), none of the directors, except McGraw and possibly Putnam, whether on the new or the old board, were aware of the exact terms of employment discussed by Roberts and McGraw. McGraw had, however, informed the directors of discussions with Roberts concerning a salary of $ 50,000 and the use of a company car.Petitioner paid to Roberts, prior to his removal from office, the sum of $ 18,752.05. The unpaid balance of his yearly salary of $ 50,000 for 1953 amounted to $ 31,250.Not having reached any settlement of all the claims, Roberts instituted an action on June 25, 1953, in the Supreme Court of the State of New York against McGraw and the petitioner. The complaint stated four separate and distinct causes of action. The first three were asserted against McGraw personally1962 U.S. Tax Ct. LEXIS 198">216 on the grounds of fraud and breach of contract. The first count for fraud alleged that McGraw had fraudulently induced Roberts to sever his association with his previous employer with the assurance that McGraw would be able to employ Roberts on the agreed terms, that McGraw had never discussed the terms with the directors of petitioner, nor had McGraw ever attempted to recommend such terms to the board. The second and third counts, founded upon breach of contract, allege that 37 T.C. 845">853 McGraw breached a contract with Roberts whereby he was to use his influence on the board of directors to cause Roberts to be employed by petitioner on the terms agreed to between them. The fourth action was against petitioner for wrongfully discharging Roberts and preventing him from performing his duties as president of petitioner. Roberts sought $ 500,000 in damages against McGraw and $ 31,250 in damages against petitioner. The latter amount represented the balance of his 1953 salary.Roberts, McGraw, Putnam, and Batchker were examined under oath in extensive pretrial examinations of the Roberts action covering over 2,800 pages of transcript. It was not filed, however, with the Supreme Court1962 U.S. Tax Ct. LEXIS 198">217 of New York.Both defendants were represented by Sullivan & Cromwell, general counsel for petitioner.On March 9, 1954, McGraw wrote a letter to the petitioner in which he stated, in part:It is my view that all my activities with respect to the Roberts matter were for the Corporation and in the corporate interest.Accordingly, this letter will serve to advise you that I reserve the right to claim reimbursement from you for any liability which I might incur in the * * * [Roberts] action.The above letter was brought to the attention of the board of directors at its meeting held March 15, 1954. The substance of the Roberts action, together with McGraw's position relative to reimbursement, was reported to the petitioner's stockholders in the corporate financial statements of 1953 and 1954, and to the Securities and Exchange Commission in the 1954 report.A special board of directors meeting was held on October 7, 1955. Prior to said meeting, a memorandum relating to a proposal for settlement of the Roberts action which had been prepared by Sullivan & Cromwell was mailed to each of the directors. The memorandum stated in part:The Special Meeting of the Board of Directors is called1962 U.S. Tax Ct. LEXIS 198">218 for the purpose of submitting to the Board a proposal for the settlement of an action now pending in the Supreme Court of the State of New York, County of New York, entitled Charles S. Roberts v. James H. McGraw, Jr. and Old Town Corporation. In this action, commenced in June 1953, Roberts, who was Executive Vice President of this corporation from February 10, 1953 to April 14, 1953 and was both a director and President of this corporation from April 14, 1953 until May 25, 1953, sued both this corporation and James H. McGraw, Jr., (a) claiming as against the corporation that he had been discharged without cause and was entitled to recover his salary for the balance of the calendar year 1953 in the amount of $ 31,250, and (b) claiming as against Mr. McGraw that he was entitled to damages of $ 500,000 based on (i) his loss of his employment with Stewart, Dougall & Associates, Inc. (where he was earning $ 20,000 a year), (ii) on his loss of a prospective five-year employment contract at $ 50,000 a year with this corporation, which he alleged Mr. McGraw had agreed 37 T.C. 845">854 to recommend to the Board of Directors of Old Town and to advocate, and (iii) on his loss of business reputation. 1962 U.S. Tax Ct. LEXIS 198">219 The case has been actively litigated for over two years and a great deal of testimony has been taken on both sides in preparation for trial. The corporation's general counsel, Sullivan & Cromwell, have appeared in the action both on behalf of the corporation and of Mr. McGraw. The Board has been advised generally of the progress of the litigation from time to time.Before the publication of the annual report of the corporation for the year 1953, Mr. McGraw advised the corporation that, as he had testified under oath in his pre-trial examination, he had never agreed with Roberts to recommend or advocate his employment by Old Town for a five-year term or any other definitive period; that all of Mr. McGraw's activities with respect to the Roberts matter from their inception had been performed exclusively in the interest of the corporation and were completely unrelated in any way to Mr. McGraw's personal affairs; that to the extent that he participated as a director and as Chairman of the Executive Committee in the dismissal of Roberts, Mr. McGraw acted solely in what he and the Board of Directors considered the best interest of the corporation notwithstanding that he was aware, as1962 U.S. Tax Ct. LEXIS 198">220 was the Board of Directors, that if he participated in that action he would be exposed personally to a suit by Roberts. Mr. McGraw by letter to the corporation dated March 9, 1954 formally advised the corporation that he reserved the right to claim reimbursement from the corporation for any liability which he might incur in the suit. (A copy of Mr. McGraw's letter is attached.)The corporation has been informed that Mr. McGraw's personal legal advisers, Messrs. Schenker & Schenker, have expressed to him the opinion that, on the basis of the evidence elicited in the course of the pre-trial depositions in Roberts v.McGraw and the other facts known to them, his claim for indemnification against the corporation is a meritorious one.Mr. McGraw has advised that he will not compromise the litigation with his personal funds, but will insist that the action be tried and the issue of his liability be determined without waiver of his right to present a claim for reimbursement against the corporation if it is determined that he is liable to Roberts to any extent.The corporation has taken no action with respect to Mr. McGraw's claim for indemnification in the Roberts matter, except1962 U.S. Tax Ct. LEXIS 198">221 to disclose the making of the claim in its report on Form 8-K to the Securities and Exchange Commission and in the "Notes to Financial Statements" contained in the annual reports to stockholders for the years 1953 and 1954.The corporation's general counsel have advised that Mr. McGraw's claim for reimbursement against the corporation should be regarded as having substance. Without attempting at this time to predict the outcome of an assertion of such claim, they advise further that it would not, in their opinion, constitute waste or mismanagement but would be a valid and lawful exercise of their powers for the Board of Directors of the corporation as a matter of business judgment to effect a settlement of the action, including the claims against Mr. McGraw, out of its own funds. They point out that such a settlement would eliminate the risk that the corporation's possible liability to Mr. McGraw on his claim for reimbursement would be measured by the amount of a possible jury verdict against Mr. McGraw greatly exceeding the portion of the settlement amount that could be considered applicable to the settlement of Roberts' claims against Mr. McGraw. They point out further that settlement1962 U.S. Tax Ct. LEXIS 198">222 will save further legal expense and the time and effort of senior officers of the company, avoid public litigation of a personnel matter, and avert possible future controversy and incident expense in connection with any claim of Mr. McGraw for reimbursement.37 T.C. 845">855 Counsel have advised further that if the Roberts action were tried, there could be no guaranty that the defense would succeed, that the fact that the dismissal of Roberts was evidently required in the best interest of the corporation would not constitute a defense to Roberts' claims in and of itself and that, while the outcome of a trial could be regarded as uncertain, nevertheless there was a risk of a judgment in favor of Roberts and against the corporation directly in an amount not exceeding $ 31,250 plus interest and against Mr. McGraw personally in a substantially greater amount.A settlement of the action has been negotiated and is recommended by the management and by the corporation's general counsel, subject to the approval of the Board, * The board of directors at the above meeting voted to adopt counsel's recommendation for settlement upon the following terms:1. The petitioner to pay $ 80,000 to Roberts. 1962 U.S. Tax Ct. LEXIS 198">223 2. Roberts to discontinue the lawsuit and give general releases running in favor of petitioner and its officers and directors, including McGraw.3. McGraw to release the corporation of any claim for reimbursement with respect to the Roberts action.4. Petitioner to discharge the total expense of defending the action.An agreement effecting settlement on the above-agreed terms was executed by the interested parties on October 11, 1955.The minutes of the special meeting of the board were approved by the regular board meeting held on October 20, 1955. The directors present at this meeting were D. E. Broggi, president of Neptune Motor Company; G. A. Rentschler, chairman of the board of directors of Baldwin-Lima-Hamilton Co.; W. F. Rockwell, chairman of the boards of directors of Rockwell Manufacturing Company and Rockwell Spring & Axle Co.; H. E. Talbott, president of H. E. Talbott & Company; H. A. May, senior vice president of Westinghouse Air Brake Co.; E. L. Tabat, vice president of petitioner, and B. R. Putnam, vice president and treasurer of petitioner.The petitioner in settlement of the Roberts action either paid or accrued in 1955 on its corporate books the following items aggregating1962 U.S. Tax Ct. LEXIS 198">224 $ 117,128.78:Amount ofYear ofPayeeDescriptionPaymentpayment$ 80,000.001955-1956RobertsSettlement of all claims.30,000.001956Sullivan & CromwellLegal fees for defending allclaims.5,000.001956Carl J. RubinoOpinion rendered to petitioner inRoberts action.746.741955Sullivan & CromwellReimbursement of expensesconcerning all claims.208.2919561,173.751955H B. SansomCost of transcript for pretrialexamination.The petitioner files its Federal income tax returns and maintains its books on an accrual method of accounting. Its returns for the calendar years 1953 and 1955 were filed with the director of internal revenue for the district of Brooklyn, New York.37 T.C. 845">856 Petitioner, on its Federal income tax return for the calendar year 1955, claimed a deduction in the amount of $ 117,128.78 for "settlement of litigation plus related expenses" and reported a net operating loss in the amount of $ 218,581.40.On May 1, 1956, the petitioner filed an Application for Tentative Carryback Adjustment (Form 1139) requesting a refund of income tax paid for the calendar year 1953 by reason of the net operating loss reported1962 U.S. Tax Ct. LEXIS 198">225 for 1955. Pursuant to said application, in August 1956 petitioner received a refund of income tax in the amount of $ 113,662.33.Subsequently respondent disallowed $ 100,000 of the claimed deduction of $ 117,128.78 in 1955 on the ground that the amount did not constitute an ordinary and necessary expense of the petitioner in carrying on any trade or business under section 162(a) of the 1954 Code, thereby reducing the net operating loss carryback to 1953 and creating a deficiency for the year 1953.OPINION.The Roberts suit contained four separate causes of action -- one against petitioner for breach of contract, and three against McGraw for fraud and breach of contract. Petitioner and McGraw were not codefendants in any one cause of action. Nevertheless, McGraw notified petitioner that, inasmuch as the transactions which resulted in the causes of action against him were undertaken for the benefit of petitioner, he would seek reimbursement from petitioner in the event he was held personally liable to Roberts. Petitioner, therefore, was confronted with a direct claim by Roberts and a contingent claim by McGraw. Petitioner compromised the claims against itself and McGraw, paid all1962 U.S. Tax Ct. LEXIS 198">226 legal expenses attendant thereto, and deducted the total amount of $ 117,128.78 as an ordinary and necessary business expense. From this amount, respondent disallowed $ 100,000, determining that such amount was attributable to the claims against McGraw and was not an ordinary and necessary business expense of petitioner under section 162(a) of the Code of 1954. 1The record does not disclose the portion of the attorneys' fees and compromise payment which was directly attributable to the claims against McGraw. In the absence of evidence to the contrary, we cannot say respondent's determination that $ 100,000 was so attributable was clearly erroneous or arbitrarily established. The sole issue before us, then, is whether the amount expended by petitioner in connection with the actions against McGraw1962 U.S. Tax Ct. LEXIS 198">227 constituted an ordinary and necessary business expense of petitioner. Petitioner 37 T.C. 845">857 marshals a formidable array of authorities as advancing its cause; respondent counters with an equally impressive display of decisions in support of his position. But these cases, and the many others discovered by us in independent research, fail to prove "any verbal formula that will supply a ready touchstone." Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933). "Review of the many decided cases is of little aid since each turns on its special facts." Deputy v. DuPont, 308 U.S. 488">308 U.S. 488, 308 U.S. 488">496 (1940).Thus, unfettered, we proceed to determine the question in this case on its own special facts, taking advantage of whatever help we may find in the decided cases. We are bound to give to the words "ordinary and necessary" their usual, ordinary, and everyday connotation, without reference to "some esoteric concept derived from subtle and theoretic analysis." Old Colony R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552 (1932).Was the expenditure in issue necessary?In the usual situation where a taxpayer compromises1962 U.S. Tax Ct. LEXIS 198">228 a legal claim of an adverse party and incurs legal expenses in connection with it, the courts are slow to override petitioner's judgment as to the necessity of incurring the expenses. Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90 (1952). This is based upon the logical assumption that a taxpayer, when dealing with an adverse party, will not incur expenses unless they are actually required or reasonably justified by the needs of the business.On the other, hand, there is the situation when a taxpayer, such as an employer, compromises and pays the legal expenses of a claim against one of its employees without any liability on the employer's part or any business motive involved. In such cases, the employer-taxpayer will generally be held not to have incurred a necessary business expense. This is based upon the view that without obligation or business purpose, the expense could not have been necessary. See Blackwell Oil & Gas Co., 20 B.T.A. 661">20 B.T.A. 661 (1930), affd. 60 F.2d 257 (C.A. 10, 1932); Edwards & Son v. United States, 255 F.2d 407 (C.A. 2, 1958).The present situation, 1962 U.S. Tax Ct. LEXIS 198">229 having elements of both the aforementioned situations, is more difficult. It is not, as petitioner contends, merely a compromise of a potential claim which we may safely infer that petitioner would not have paid unless necessary, inasmuch as petitioner and McGraw were not in all respects adverse parties and other considerations may have been involved. On the other hand it is not, as respondent contends, a mere voluntary payment of expenses for an employee inasmuch as there is the element of liability and business motive on petitioner's part. The entire transaction, therefore, must be carefully scrutinized.37 T.C. 845">858 As an aid in ascertaining whether the expenses were "necessary" within the meaning of the Code in a situation such as presented here, three tests have been enumerated in Levitt & Sons, Inc. v. Nunan, 142 F.2d 795, 798 (C.A. 2, 1944), remanding on other grounds a Memorandum Opinion of this Court.The first test is whether petitioner was entirely confident that any suit which McGraw would institute would not succeed. Obviously, if such confidence existed, it would indicate that petitioner did not deem the compromise to be a necessary1962 U.S. Tax Ct. LEXIS 198">230 business expense. The record discloses, however, that at no time did petitioner ever possess such confidence regarding McGraw's potential claim. On the contrary, petitioner had always taken McGraw's claim seriously and had not cast it off as a sham. The acknowledgment of the possible liability to McGraw was disclosed in its report to the Securities and Exchange Commission and in its annual reports to stockholders for the years 1953 and 1954. Petitioner, seeking to ascertain the validity of McGraw's potential claim, sought the advice of its counsel, Sullivan & Cromwell, who had been familiar with all the facts of the case. Counsel advised petitioner that McGraw's potential claim had merit and substance. In the light of counsel's opinion it would hardly be reasonable to expect laymen to retain confidence concerning the ability of petitioner to successfully defend any suit instituted by McGraw.The second test is whether the payments in question were made for the purpose of avoiding the damages or liability which might have resulted from a suit by McGraw.While respondent states he is not urging that petitioner acted fraudulently or in bad faith, he contends the main intent of 1962 U.S. Tax Ct. LEXIS 198">231 petitioner was to benefit McGraw. Petitioner contends, however, that while McGraw was ostensibly benefited, the reason for compromising the claim for McGraw was to avoid a possible cause of action by McGraw in the event he was held liable personally to Roberts.Without the benefit of being able to search into the minds of the members of the board of directors who voted for the compromise on behalf of petitioner, we can only analyze the facts surrounding the adoption in ascertaining their intent.The most significant evidence of the intent of the board members at the time of the adoption of the compromise settlement in issue is their reliance on the memorandum which was prepared by petitioner's attorneys, Sullivan & Cromwell, and presented to the board members at that meeting. This memorandum strongly recommended the compromise of the claims against McGraw by petitioner as being in the best interests of petitioner in that it would preclude exposing petitioner to possible greater liability, legal fees, and damage to its reputation. 37 T.C. 845">859 The exact terms of compromise recommended by counsel were adopted in toto, clearly indicating the reliance of the board upon counsel's recommendation. 1962 U.S. Tax Ct. LEXIS 198">232 The compromise of the claims against McGraw by petitioner undoubtedly was beneficial to him. It may well be that he encouraged petitioner to compromise the claim. We, however, may not infer that petitioner would act solely to accommodate McGraw, particularly since the directors would be accountable to shareholders for corporate waste or mismanagement if they caused corporate funds to be used for private purposes.The majority of the members of the board who were present at the special meeting when the compromise was adopted and the general meeting when it was approved were not closely related to petitioner or McGraw, but held important positions in other unrelated businesses. We are satisfied from the record before us that the board of directors acted substantially upon the recommendation of counsel in voting for the compromise as being in the best interests of petitioner. We do not agree with respondent's contention that the members of the board were completely under the influence of McGraw or that they, as experienced businessmen, would knowingly expose themselves to personal liability to shareholders for corporate waste.We conclude, therefore, that the intent of the board 1962 U.S. Tax Ct. LEXIS 198">233 of directors in compromising the claim on behalf of McGraw was to protect petitioner from a possible lawsuit and the exposure to liability, added legal fees, and damages to its reputation. Petitioner, with this intent, deemed the expenses to be necessary.The third test, and possibly the most important, is whether the belief held by petitioner concerning the validity of McGraw's claim was justified so far that a reasonable person in its place would have thought that the settlement for McGraw would be necessary. This test transcends the belief or intent of petitioner and determines whether it was reasonable under the circumstances for petitioner to deem the expenditure in issue to be necessary.It should be noted that one of the tests of determining necessity is not, as respondent contends, whether petitioner was in fact liable to reimburse McGraw but whether petitioner was justified in believing there existed sufficient exposure to liability in order to justify believing that the compromise was necessary. We know of no requirement that there must be a legal obligation to make an expenditure before it can qualify as a necessary business expense. Waring Products Corporation, 27 T.C. 921">27 T.C. 921, 27 T.C. 921">929 (1957).1962 U.S. Tax Ct. LEXIS 198">234 Business, like everything else, can only be conducted upon prophecies, and prophecies are hardly infallible. Levitt & Sons, Inc. v. Nunan, supra at 798.A compromise payment may be necessary albeit there is doubt concerning 37 T.C. 845">860 the ultimate liability to pay. The applicable principle was expressed in Laurence M. Marks, 27 T.C. 464">27 T.C. 464 (1956), where we said (p. 467):An analysis of the entire record convinces us that the payment in question was an ordinary and necessary expense of petitioner's trade or business as an investment banker and director, within the intendment of section 23(a) of the Internal Revenue Code of 1939. Although the stipulation characterized the payment as having been made "voluntarily," it can neither be properly characterized as gratuitous, nor as personal to petitioner in the nature of an expense to protect his personal reputation. There was a serious question as to whether he was in fact liable under section 16(b) of the Securities Exchange Act of 1934. At the time the payment was made it was by no means clear that Shamrock could not have recovered the amount paid had it attempted to litigate1962 U.S. Tax Ct. LEXIS 198">235 the matter. The payment was in satisfaction of a bona fide possible cause of action, arising out of petitioner's trade or business, and was by no means "voluntary" in the sense of being gratuitous or without a valuable consideration.While we see that a compromise may be reasonable when there is doubt concerning liability, we have present here the added factor as to whether petitioner was justified in believing that there existed any exposure to liability. Respondent alleges, in effect, that it was unreasonable for petitioner to even register any doubt concerning its liability to McGraw. He also states that the fact petitioner acted in good faith and thought that McGraw's claim had substance, and even the fact that petitioner acted upon the advice of counsel, is wholly irrelevant and immaterial. We cannot agree.The members of the board of directors were men of wide business knowledge. Nevertheless, the matter of liability of petitioner to McGraw was too highly technical for laymen to analyze. It is reasonable and ordinary for members of a board of directors in a situation such as this to rely upon the advice of their attorneys who are familiar with the law as well as the facts1962 U.S. Tax Ct. LEXIS 198">236 in the case. We cannot say that counsel's opinion was so baseless or erroneous that it was unreasonable for the directors to have relied upon it. Nor can we say from the record before us that counsel's opinion as to the substance of McGraw's claim was erroneous. The potential suit between McGraw and petitioner is not before us to be decided and we do not have all the facts before us. Pretrial examination of the parties concerning the transaction in issue resulted in excess of 2,800 pages of disputed testimony. The burden is not upon this Court to determine petitioner's liability to McGraw nor to predict the outcome of the New York courts. A taxpayer, acting in good faith with the intention of compromising a potential claim which he reasonably believes has substance, should not be denied a business deduction even if the facts finally indicate that it was unnecessary to pay the settlement. Here we cannot say with any degree of certainty that the expenditure did not help petitioner for we cannot, from the record before us, hold that there was no possibility of 37 T.C. 845">861 the New York courts holding petitioner liable to McGraw for reimbursement.Petitioner acted reasonably and was1962 U.S. Tax Ct. LEXIS 198">237 justified in relying upon the advice of its counsel in determining that the expenditure in issue was a necessary one. See John W. Clark, 30 T.C. 1330">30 T.C. 1330 (1958); C. Ludwig Baumann & Co. v. Marcelle, 203 F.2d 459 (C.A. 2, 1953). We conclude that the payment of the compromise and legal expenses on behalf of McGraw was a necessary expense to petitioner's trade or business. Cf. Catholic News Publishing Co., 10 T.C. 73">10 T.C. 73 (1948).We are satisfied also that the expenses were ordinary. As stated in Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">114 (1933):Ordinary in this context does not mean that the payments must be habitual or nominal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. Nonetheless, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack.The fact that the suit1962 U.S. Tax Ct. LEXIS 198">238 against McGraw sounded mostly in fraud does not make the expense any less ordinary. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 320 U.S. 467">472 (1943).After McGraw notified petitioner of his intention to seek reimbursement from petitioner in the event that he was found liable to Roberts, petitioner sought the advice of its attorney who recommended a settlement of McGraw claims on the ground that petitioner, if it failed to do so, would be exposed to greater liability, added legal fees, and damage to its reputation. The claims were settled in good faith for a fraction of the amount for which petitioner might have been held liable. We hold the expenditures in issue to have been an "ordinary and necessary" business expense within the meaning of section 162(a) of the Code of 1954 and hence fully deductible.Decision will be entered under Rule 50. Footnotes1. SEC. 162. TRADE OR BUSINESS EXPENSE.(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, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625246/	APPEAL OF ANNIE S. KENNEDY ET AL., EXECUTORS, ESTATE OF D. J. KENNEDY, DECEASED.Kennedy v. CommissionerDocket No. 5244.United States Board of Tax Appeals4 B.T.A. 330; 1926 BTA LEXIS 2305; July 23, 1926, Decided 1926 BTA LEXIS 2305">2305 1. The value of certain shares of stock forming a part of the gross estate of the decedent determined. 2. Loans on insurance policies on the life of the decedent, in which the widow of the decedent was beneficiary, deducted from the face of the policies in making settlement thereunder, held not to constitute claims against the estate of the decedent. William B. Secrist, Esq., for the petitioners. J. F. Greaney, Esq., for the Commissioner. SMITH 4 B.T.A. 330">330 Before SMITH, LITTLETON, and TRUSSELL. The petitioners admit a deficiency in estate tax in the amount of $20,379.11, but appeal from the determination of a deficiency of $16,418.57 in excess of that amount. The points in issue are the valuation of certain shares of stock owned by the decedent at the date of his death, and the right of the executors to deduct from the gross estate certain loans on insurance policies on the life of the decedent deducted from the face of the policies in making settlement thereunder. FINDINGS OF FACT. The petitioners are executors of the estate of D. J. Kennedy, who died August 5, 1923, a resident of Pittsburgh, Pa.The return for Federal estate1926 BTA LEXIS 2305">2306 tax filed by the petitioners showed a net estate of $800,026, and a tax due of $35,500.02. The Commissioner 4 B.T.A. 330">331 determined the net estate to be $1,207.976.96 and the total tax liability to be $72,297.70, or a deficiency in tax of $36,797.68. At the date of death, the decedent owned 2,098 shares out of a total issue of 2,100 shares of stock of the Bulger Block Coal Co., a Pennsylvania corporation, the value of which stock was returned for estate-tax purposes at $712,152. The value of this stock was placed by the Commissioner at $1,026,131.80. This stock is not dealt in on any stock exchange and its value was arrived at by the Commissioner by an appraisement of the corporate assets. In his appraisement the Commissioner included among the assets of the company an insurance policy for $15,000 on the life of the decedent, which policy named the company as beneficiary. This asset was computed to have a value of $15,000, even though the surrender value at the date of death of the decedent was only $3,000. The Commissioner also included among the assets of the company 1,060 shares of stock of the Superior Mining Co., upon which he placed a value $60of per share, total $63,600. 1926 BTA LEXIS 2305">2307 The taxpayer alleges error in appraising these two assets at any amount in determining the value of the 2,098 shares of stock of the Bulger Block Coal Co. The Superior Mining Co. was organized in 1917 but did not start profitable operation until 1919. During the year 1923 it had 5,900 shares of capital stock outstanding of a par value of $100 each. These shares were all paid for in cash at par. This company acquired and owned 1,600 acres of coal land, and up to January 1, 1925, it had mined out 184 acres. The results of operations for the years 1920 to 1923, inclusive, were as follows: 1920 earnings$148,829.071921 earnings36,625.951922 earnings31,308.761923 earnings9,922.65The company also operated at a loss after deducting from gross income allowable amounts for depreciation and depletion for the years 1924 and 1925. On July 31, 1923, it had capital stock outstanding and a surplus of $590,000 and $18,120.19, respectively. Among its assets it had coal lands which were carried at a value of $433,025.07, and miners' houses, and machinery and equipment at $200,681.24 and $298,093.66, respectively. It had bonds outstanding of $320,000 and notes1926 BTA LEXIS 2305">2308 payable and accounts payable of $50,194.39, and accrued bond interest of $1,600. In May, 1925, 100 shares of the stock of this company put up as collateral for a loan were sold at $10 per share. This is the only sale of the stock known to the officers of the Superior Mining Co.The decedent also owned 1,812 shares of a total issue of 1,814 shares of stock in the D. J. Kennedy Co., a Pennsylvania corporation. 4 B.T.A. 330">332 These shares of stock were returned by the petitioners for estate-tax purposes at $280,860. The value determined by the Commissioner was $298,690.06. Shares of stock of this company were not dealt in on any market and their value was arrived at by the Commissioner by an appraisement of the corporate assets. In arriving at this value the Commissioner included in the corporate assets $10,000, which was the face amount of an insurance policy on the life of the decedent in which the D. J. Kennedy Co. was beneficiary and on which the premiums had been paid by it. The surrender value of the policy at the date of the death of the decedent was $2,000. At the date of death, the decedent's life was insured by a number of policies for a total of $115,669.26. The1926 BTA LEXIS 2305">2309 widow of the decedent was the beneficiary under all of these policies. No part of this insurance was included in the gross estate, as shown by the estate-tax return filed by the petitioners, but there was deducted from the gross estate $50,613.90, which represented loans made to the decedent in his lifetime by the insurance companies upon the policies as collateral. The Commissioner added to the gross estate shown by the estate-tax return the face value of the policies in excess of $40,000, or $75,669.26, but did not disallow the deduction of the $50,613.90 as represented by loans made upon the policies. OPINION. SMITH: The Commissioner increased the value of the gross estate of D. J. Kennedy, deceased, in the amount of $407,950.96 but did not change the amount of the deductions. The petitioners took exception to only a portion of the increase made by the Commissioner in the value of the gross estate. The Commissioner now admits error in adding to the gross estate $75,669.26, which is the amount of the proceeds of insurance policies paid to the widow of the decedent in excess of $40,000, but by appropriate pleading claims that there should be disallowed from the deductions1926 BTA LEXIS 2305">2310 $50,613.90, representing the amount of loans upon the policies, which amount was deducted from the face of the policies in making settlement to the widow. (1) The Commissioner determined the value of 2,098 shares of Bulger Block Coal Co. owned by the decedent at the date of his death by appraising the value of the assets of that company and by deducting from such appraised value the liabilities. In making this determination he valued an insurance policy owned by the Bulger Block Coal Co. upon the life of the decedent at its face value, $15,000, although the surrender value at the date of his death was only $3,000. Petitioners allege error in this respect, claiming 4 B.T.A. 330">333 that the insurance policy should not be included at any value whatever. They also allege that he erred in valuing 1,060 shares of stock of the Superior Mining Co. owned by the Bulger Block Coal Co. at $60 per share, total $63,600. They contend that these shares had no value whatever at the date of the death of the decedent. The net result of their contentions with respect to the valuation of the 2,098 shares of Bulger Block Coal Co. stock is an allegation that the Commissioner overvalued this stock to1926 BTA LEXIS 2305">2311 the extent of $78,600; that, valuing the stock upon the basis of the value of the assets, the Commissioner should have increased the returned value only $235,379.80 and that the further increase to $313,979.80 was error. Relative to the value at which the insurance policy should be included in the assets of the Bulger Block Coal Co., the Commissioner cites the decision of the court in , affirmed . In that case the decedent assigned certain policies of insurance in contemplation of death. In determining the value thereof for purposes of the state inheritance tax, the policies were included at the full amount payable on death, although the act provided that the value to be included was the value as of the date of the transfer. The surrogate rejected the claim of the taxpayer that the insurance policies should be valued at their cash surrender value and held that the value at the time of the transfer was the value at the date of the death of the decedent three days later. The taxing statute requires assets to be included in the gross estate at their value at the time of the death of the decedent. 1926 BTA LEXIS 2305">2312 This was not the value at any time before death but at the exact moment of death. In our opinion, the value of the insurance policy now under consideration was, at the moment of death, its face value, which is the amount used by the Commissioner. Relative to the value of the shares of stock of the Superior Mining Co. owned by the Bulger Block Coal Co., the evidence of record shows that the bituminuous coal business was much depressed in 1923, and that although the Superior Mining Co. had large coal Reserves and a large plant, it had only a small amount of current assets. The company had to meet a large amount of interest on its bonds each year and had to pay off $35,000 of its bond indebtedness each year. Whether it would be able to make such payments from the profits of operation during the succeeding years was in 1923 very uncertain. We are of the opinion, however, that the stock had a cash value in 1923, and upon the entire evidence we determine that value to have been $10 per share. We therefore think that the Commissioner was justified in increasing the reported value of the shares of the Bulger Block Coal Co. 4 B.T.A. 330">334 owned by the decedent to the extent of $260,979.80, 1926 BTA LEXIS 2305">2313 but that the further increase of $53,000 was error. (2) The petitioners contend that the Commissioner erred in his valuation of 1,812 shares of stock of the D. J. Kennedy Co. by including among the assets of the company an insurance policy of $10,000 at its face value rather than at $2,000, its cash surrender value. This insurance policy, the same as that owned by the Bulger Block Coal Co., was on the life of the decedent and was payable to the company. For reasons above stated, we are of the opinion that the insurance policy was properly included by the Commissioner at its face value rather than at its cash surrender value. (3) The petitioners deducted from the gross estate in the estate-tax return $50,613.90, which represented the amount of loans which had been made upon certain insurance policies upon the life of the decedent, the beneficiary named in these policies being Annie S. Kennedy. The Commissioner allowed these deductions to stand on the return but added to the gross estate $75,669.26, this being the amount of the insurance in excess of $40,000. The Commissioner now admits that this addition was in error, under the decision in 1926 BTA LEXIS 2305">2314 , but by appropriate pleading claims that the $50,613.90 claimed as a deduction from the gross estate was not a proper deduction in that it was not a "claim against the estate" within the meaning of section 403(a)(1) of the Revenue Act of 1921. In support of his contention he cites the case of , in which case the United States Supreme Court held that certain amounts loaned or advanced to policyholders in Louisiana upon the security of the policies were advancements of the insurance reserve by the company rather than loans. The petitioners, on the other hand, rely upon the decisions of the courts in ; ; ; ; and contend that loans made on insurance policies are claims against the individual to whom the money is loaned. The petitioners have not placed in evidence the agreements made between the decedent and the insurance companies relative to these loans. 1926 BTA LEXIS 2305">2315 Apparently, in all cases Annie S. Kennedy was the beneficiary of the policy at the time the loans were made. The policies invariably provided that the insurance company, in making settlement under them, would deduct from the amount payable to the beneficiary any and all indebtedness to the company in respect of the policy. Such deductions were actually made in amking settlement for the policies. The cases cited by the petitioners in support of their contention that the amounts borrowed on the policies were claims against the 4 B.T.A. 330">335 estate of the decedent are not in point; for in those cases the insurance companies were not able to deduct from the face amount of the policy at the time of settlement the amounts borrowed on the policies, and the courts held, in view of the undertakings of the borrowers, that they were personally liable for the amounts borrowed. In the instant proceeding the insurance companies were able to deduct from the face of the policies, in making settlement thereunder, the amount of the loans upon the policies. Since they were enabled to make such deductions, there was no claim against the estate of the decedent for the payment of the loans, even though1926 BTA LEXIS 2305">2316 the decedent himself may have obligated himself to make payment. We are therefore of the opinion that upon the record before us there is no proof that the insurance companies had any claim against the estate of the decedent for the amounts loaned upon the policies, and that the motion of the Commissioner to disallow the proposed deduction of the $50,613.90 is correct. Order of redetermination will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625247/	Edith L. Joyce v. Commissioner.Joyce v. CommissionerDocket No. 5617-64.United States Tax CourtT.C. Memo 1966-175; 1966 Tax Ct. Memo LEXIS 109; 25 T.C.M. 914; T.C.M. (RIA) 66175; July 25, 1966Donald L. Alderton, for the petitioner. Merritt S. Yoelin, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: The Commissioner determined a deficiency in petitioner's income tax for the year 1961 in the amount of $136.34. The only issue for decision is whether the sum of $1,189.20 received by petitioner, Edith L. Joyce, representing widow's benefits from the sustentation fund of the General Conference of Seventh-Day Adventists is includable in her gross income. Findings of Fact Some1966 Tax Ct. Memo LEXIS 109">110 of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Edith L. Joyce, a petitioner, a resident of Portland, Oregon, filed a joint income tax return with her deceased husband, Charles S. Joyce (hereinafter referred to as Charles) for the taxable year 1961 with the district director of internal revenue for the district of Oregon. Petitioner had previously been married to Arthur Beazley, a minister of the Seventh-Day Adventists. Beazley had been active in the ministry from 1918 until his retirement in 1947. Upon retirement he received monthly payments from the sustentation fund of the General Conference of Seventh-Day Adventists. The fund had been established in 1911 and has been making payments to retired employees and/or their beneficiaries since that time. The plan encompasses all employees of the Seventh-Day Adventist Church in whatever capacity they are employed and is designed to provide security for those employees who have devoted their lives to Church service. The existence of the plan is generally known to the Church employees and at least in the case of nonministerial employees1966 Tax Ct. Memo LEXIS 109">111 produces a benefit to the employer. Such benefit arises in the additional motivation of an employee to accept employment in the Church. The plan is noncontributory and is sustained by payments from the total Church organization. Benefits are based upon the length of service of the employee and the receipt of said benefits is conditioned on the continued loyalty of the employee to the Church. Benefits to the widow of a deceased employee are computed in the same manner but are limited to three-quarters of the payment received by the deceased spouse. The receipt of such payments by the widow is dependent on maintenance by her of her status as a widow; her continued loyalty to the Church; and, if she is under 65 years of age, her financial condition and ability for self-support. It is also understood that all individuals receiving sustentation shall pay a faithful tithe to the Church. Beazley continued to receive payments from the fund from the date of his retirement in 1947 until his death in 1954. Upon his death and without application by petitioner, she continued to receive moneys from the fund amounting to three-fourths of the monthly retirement payments made to Beazley. These payments1966 Tax Ct. Memo LEXIS 109">112 continued until August 6, 1961, when petitioner married Charles, at which time the payments were terminated pursuant to the regulations governing the fund. In December of 1961, after the death of Charles, and again without the necessity of an application being filed by petitioner, the payments to her were resumed. Such payments were, as were the prior payments, based upon her status as the widow of Beazley. During 1961, the taxable year in question, petitioner received payments from the fund aggregating $1,189.20. With reference to these payments, petitioner received a Form 1099 from the General Conference for the year 1961, which characterized the payment as "other income." It is the usual practice of the General Conference to withhold income tax from payments to a retired employee or his widow if the payments exceed the amounts claimed for exemptions and dependents of the recipient. The Conference's reason for making such payments of "other income" was that the Church felt morally obligated to make them in order to assist those who have devoted their lives to the service of the Church. No part of the $1,189.20 received by petitioner was reported on, nor was the Form 1099 attached1966 Tax Ct. Memo LEXIS 109">113 to, the joint income tax return filed by petitioner and her deceased husband, Charles, for the year 1961. The petitioner did, however, include a notice stating that she had received the payments but contending that such payments were not taxable. Respondent in his statutory notice of deficiency determined that the payments from the sustentation fund were taxable as ordinary income and should have been included in petitioner's gross income. Opinion The sole issue for determination is the characterization of the payments, representing widow's benefits, received by petitioner from the sustentation fund of the General Conference. Petitioner maintains that the payments were gifts and as such are excludable from gross income under section 102(a) of the Internal Revenue Code of 1954. 1 Respondent, on the other hand, contends that the benefit payments are gross income within the scope of section 61(a). 21966 Tax Ct. Memo LEXIS 109">114 We agree with respondent. The determination of the nature of the payments as gifts or as taxable income is basically a question of fact. Smith v. Commissioner, 305 F.2d 778 (C.A. 3, 1962), affirming a Memorandum Opinion of this Court, certiorari denied 371 U.S. 904">371 U.S. 904 (1962). Under the rationale of the Supreme Court's decision in Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 363 U.S. 278">286 (1960), the ultimate criterion is stated in terms of an inquiry into the basic or dominant reason that explains the action of the transferor. Case law, both prior and subsequent to the Duberstein opinion, suggests a number of factors to be considered in determining the intention of the transferor. To constitute a gift within the meaning of the tax statute, the benefits paid must proceed from a "detached and disinterested generosity," Bogardus v. Commissioner, 302 U.S. 34">302 U.S. 34, 302 U.S. 34">43 (1937); or "out of affection, respect, admiration, charity or like impulses," Robertson v. United States, 343 U.S. 711">343 U.S. 711, 343 U.S. 711">714 (1952). The absence of a legal or moral obligation to make such payments, Old Colony Tr. Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 279 U.S. 716">730 (1929),1966 Tax Ct. Memo LEXIS 109">115 or the fact that payments are voluntary, Tomlinson v. Hine, 329 F.2d 462 (C.A. 5, 1964), do not per se establish that a gift was intended. However, payments which do proceed from a legal or moral obligation are not gifts. 302 U.S. 34">Bogardus v. Commissioner, supra. Additional factors, which militate against a determination that gifts were intended, have been findings: (1) that a plan or past practice of payment was in existence, Cronheim's Estate v. Commissioner, 323 F.2d 706 (C.A. 8, 1963), affirming a Memorandum Opinion of this Court; Simpson v. United States, 261 F.2d 497 (C.A. 7, 1958), certiorari denied 359 U.S. 944">359 U.S. 944 (1959); (2) that the needs of the widow were neither the prerequisite for, nor the measure of payment, Cronheim's Estate v. Commissioner, supra; and (3) that the transferor considered the payment as compensation, including the withholding of income tax, Gaugler v. United States, 312 F.2d 681 (C.A. 2, 1963); Margaret H. D. Penick, 37 T.C. 999">37 T.C. 999 (1962). However, in determining that certain payments constituted gifts, courts have seized upon the following: that payments1966 Tax Ct. Memo LEXIS 109">116 were made directly to the widow rather than to the estate; that the widow performed no services for the transferor; that full compensation had been paid for the services of the deceased husband; and that the transferor derived no benefit from the payment. Estate of Arthur W. Hellstrom, 24 T.C. 916">24 T.C. 916 (1955); see also Florence S. Luntz, 29 T.C. 647">29 T.C. 647 (1958). The determination of the transferor's dominant motive does not rest upon any single factor but is rather a conclusion reached after due consideration of all the relevant factors. On the facts of this case, in light of the aforementioned legal principles, it is the opinion of this Court that the payments were not gifts. The widow's benefits paid to petitioner were pursuant to a plan which had been in existence for fifty years. The plan encompasses all employees of the Seventh-Day Adventist Church and is financed by a percentage levy on all Church organizations. It provides for identical treatment of all employees whether they are ministers of the gospel or are employed in another of the Church's varied undertakings. The benefits payable to a worker, and similarly those paid to his widow, are fixed according1966 Tax Ct. Memo LEXIS 109">117 to a computation based upon the length of service by the employee to the Church. Consideration is also given to the degree of major responsibility borne by the worker. In many respects, therefore, the Church's plan, though voluntary, is the equivalent of a retirement plan. The record reveals that employees are generally made aware of the existence of the fund and that, in this respect, the Church benefits from the plan in that it provides an additional inducement for workers to enter the Church's employ. Petitioner strongly urges that the concept of economic benefit to the Church is without application in the case of those employed as ministers. In this context she seeks to differentiate her case on the basis of the nature of her husband's ministerial employment. As the Court has noted earlier, the plan makes no distinction. We are of the opinion, therefore, that regardless of the motive of an individual employee or class of employees, the motive of the Church, as transferor, must be gleaned from the plan as administered by the Church. Under these circumstances we refer to language of the Fifth Circuit in the case of Tomlinson v. Hine, supra, at 466, which stated: 1966 Tax Ct. Memo LEXIS 109">118 The existence of a plan or practice is most persuasive against the theory that a payment is a gift, and, we think it is decisive where a benefit to the Company is expected. * * However, we do not rest our decision solely upon this ground. In addition, petitioner has not shown that the payments made to her were in response to her financial condition. On the contrary, the record shows that at the death of Beazley and again at the death of Charles, no application for benefits was required of petitioner, nor is an application generally required in such circumstances. Therefore, payments from the plan were made to petitioner without any inquiry into her financial condition being made by the Church. In addition, the measure of the payments is based on a computation which ignores financial condition, in that benefits are computed solely on the basis of length of service and the degree of major responsibility borne by the employee. This lack of consideration of petitioner's financial status is a highly relevant factor in determining that the motive of the transferor was not to make a gift to petitioner. Cronheim's Estate v. Commissioner, supra.Our conclusion is further1966 Tax Ct. Memo LEXIS 109">119 strengthened by the additional factor that the Church itself treated the payments as "other income" and made it a practice to withhold income tax on the payments to the extent that the payments exceed the amount of exemptions and dependents of the recipient. This factor, though not decisive, is, again, highly relevant to the determination that no gift was intended. Gaugler v. United States, supra.Finally, the testimony shows that the Church recognized a moral obligation to make such payments to those employees, and their widows, who have loyally rendered service to the Church. This fact alone has been held sufficient to prevent payments from constituting gifts. 363 U.S. 278">Commissioner v. Duberstein, supra, at 285. The Court is aware, as petitioner points out, that the payments were made directly to her and that she did not perform any services for the payor. Nor was she interested in the payor through stockholdings. However, petitioner has not met the burden of demonstrating that such payments were intended as gifts. On the contrary, there is affirmative evidence that the payments were not so motivated. Therefore, on consideration of all the relevant factors in1966 Tax Ct. Memo LEXIS 109">120 this case, we are of the opinion that, under the established legal guidelines, the payments to petitioner were not gifts as that term is used in section 102(a). Decision will be entered for the respondent. Footnotes1. SEC. 102. GIFTS AND INHERITANCES. (a) General Rule. - Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. ↩2. SEC. 61. GROSS INCOME DEFINED. (a) General Definition. - Except as otherwise provided in this subtitle, gross income means all income from whatever source derived * * *↩	01-04-2023	11-21-2020

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