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https://www.courtlistener.com/api/rest/v3/opinions/4624226/	Benjamin Taylor, Jr., Petitioner v. Commissioner of Internal Revenue, RespondentTaylor v. CommissionerDocket No. 3446-76United States Tax Court71 T.C. 124; 1978 U.S. Tax Ct. LEXIS 36; November 6, 1978, Filed 36 Decision will be entered for the respondent. Petitioner claimed a moving expense deduction for expenses of returning from military service to the school where he was to complete work on his Ph.D. Held, as a student, petitioner is not an employee within the meaning of sec. 217(c)(2) and, therefore, any deduction claimed for the expenses of such a move must be disallowed. Benjamin Taylor, Jr., pro se.Ruud L. DuVall, for the respondent. Irwin, Judge. IRWIN124 Respondent determined deficiencies in petitioner's income tax for the calendar year 1972 in the amount of $ 411.98.After a concession by petitioner, the only question which 125 remains for our decision is whether petitioner is entitled to deduct his claimed moving expenses in the amount of $ 1,482 for his move from Washington, D.C., to Philadelphia, Pa., in September 1972.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts along with attached exhibits are incorporated herein by this reference.Petitioner was a resident of Bethesda, Md., at the time of filing his38 petition herein. Although it is not clear where he filed his return for the year in issue, his return indicates that he resided in Richmond, Va., at that time.During 1970, petitioner was a Ph.D. candidate in biochemistry in the graduate school of the University of Pennsylvania (hereafter university). He had been a Ph.D. candidate since 1963. In June of 1970, petitioner was granted a leave of absence by the university in order to fulfill his military obligation. Until his discharge in September 1972, he was stationed at Walter Reed Hospital in Washington, D.C. He was then reinstated in the graduate program as a full-time student at the university. Therefore, upon his discharge, he moved back to Philadelphia to complete his degree requirements. On December 21, 1973, he graduated from the program.During this time, petitioner did research work in the university's laboratory under the supervision of his advisers for the primary purpose of completing his doctoral thesis. Periodically, he was requested to perform a limited amount of work by Dr. Rutman, his principal adviser, which did not pertain to his doctoral thesis. Petitioner always complied with these requests because he39 felt that Dr. Rutman, as the person who oversaw the completion of his Ph.D., had ultimate control over his obtaining of the degree.Petitioner was not required to pay any tuition fees to the university; he was, however, required to pay $ 100 in 1972 as facility fees for the use of the university's laboratory and another $ 100 in facility fees for 1973. Those fees covered the use of laboratory equipment and accident insurance while working in the university's laboratory. In addition, petitioner paid $ 30 per semester for student health and accident insurance.During the period petitioner was completing the work 126 required for his Ph.D., he did not receive any cash remuneration for the work which he did in the university's laboratory. Nor did he receive paid vacations, paid sick leave, retirement credits in the university's retirement program, and he was not eligible for the university's employee group health and accident plan.OPINIONRespondent raises two objections with respect to petitioner's deduction of his moving expenses incurred in 1972. First, respondent asserts that petitioner does not meet the definition of "employee" as it is used in section 217 (c)(2) 1 and, 40 therefore, is not entitled to a moving expense deduction for the year in issue. Second, if this Court should find that petitioner satisfies the employee requirement, he contests petitioner's deduction of various items of the claimed moving expense deduction which he contends were either not expenses of the move or were not properly substantiated. Petitioner, apparently in support of his position that he qualifies as an employee within the meaning of section 217(c)(2), asserts that he had a considerable amount of time and effort invested in the pursuit of his Ph.D and that university rules obligated him to return upon completion of his military commitment.Section 217(c)(2) states in part:(c) Conditions for Allowance. -- No deduction shall be allowed under this section unless -- * * * (2) either -- (A) during the 12-month period immediately following his arrival in the general location of his new principal41 place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or(B) during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A).Thus, we are first confronted with the question of whether petitioner as a student is an employee for purposes of the above-quoted provision.127 Section 1.217-2(a), Income Tax Regs., states in part: "The term 'employee' as used in this section has the same meaning as in sec. 31.3401(c)-1 of this chapter." Section 31.3401(c)-1(a), Employment Tax Regs., states in part: "The term 'employee' includes every individual performing services if the relationship between him and the person for whom he performs such services is the legal relationship of employer and employee." However, because the Code and regulations under section 3401 are concerned with the collection of income taxes at the source42 on wages, and students are not compensated in their status as such, neither the Code, nor the regulations, nor the case law thereunder is helpful in resolving the issue herein. We must, therefore, examine the relationship between petitioner and the university to see if it satisfied the legal relationship of employer-employee.For purposes of determining when the legal relationship of employer and employee exists under section 31.3401(c)-1(a), Employment Tax Regs., section 31.3401(c)-1(b), Employment Tax Regs., adopts the common law test. Cf. United States v. Webb, Inc., 397 U.S. 179">397 U.S. 179, 194 (1970), wherein the Supreme Court stated with respect to section 31.3121(d)-1(c)(2), Employment Tax Regs., which has language almost identical to section 31.3401(c)-1(b), that "the regulation provides a summary of the principles of the common law, intended as an initial guide for determination * * [of] whether a relationship 'is the legal relationship of employer and employee.'"A recent case applying the common law rules is Weaver v. Weinberger, 392 F. Supp. 721">392 F. Supp. 721 (S.D.W.Va. 1975), wherein the court had to determine the meaning of the43 word "employee" for purposes of eligibility for black lung benefits. The applicable regulation, 20 C.F.R. sec. 410.110(m), provided that: "'employee' means an individual in a legal relationship (between the person for whom he performs services and himself) of employer and employee under the usual common-law rules." In applying the so-called common law rules the court stated at page 723:The relationship of employer and employee is synonymous with the ancient terms of master and servant. Pennsylvania Casualty Co. v. Elkins, 70 F. Supp. 155">70 F. Supp. 155 (1947). Generally speaking, an employee is a person who renders service to another usually for wages, salary or other financial consideration, and who in the performance of such service is entirely subject to the direction and control of the other, such other being the employer. * *128 We believe that definition suffices for purposes of resolving the issue before us. It makes clear that at the foundation of the employer-employee relationship is the concept of a mutual benefit with services being rendered at the direction of an employer in return for some sort of remuneration. 2 This relationship of mutual44 benefit is absent in the context of the relationship between a university and its students in their capacity as such. Petitioner received no remuneration and the services which he performed were only incidental to his primary goal of education. Therefore, we hold that petitioner, as a graduate student at the university, was not an "employee" within the meaning of section 217(c)(2) and the deductions which he seeks for moving expenses in relocating at the university must be denied. Because of our resolution of this issue, we do not need to reach the question of whether certain of petitioner's alleged moving expenses were in fact expenses of the move and were properly substantiated.*45 Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect for the year in issue.↩2. Petitioner relies on the case of Hartung v. Commissioner, 55 T.C. 1">55 T.C. 1 (1970), revd. 484 F.2d 953">484 F.2d 953 (9th Cir. 1973), for the proposition that a moving expense deduction is allowable under sec. 217 even though the employment position resulting from the move generates no taxable income. In that case, the taxpayer obtained employment in Australia, the income from which was exempt from income tax under sec. 911. The issue before this Court was whether the expenses of the move to Australia, otherwise deductible under sec. 217, must be disallowed because subsequent to the move all income earned by the taxpayer was exempt from taxation. We held that the moving expenses were deductible. Without passing on petitioner's interpretation of Hartung as decided by this Court, Hartung↩ is not relevant to the issue with which we are concerned, that is, whether petitioner is an employee for purposes of sec. 217(c)(2).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624227/	MICHAEL J. WHITTEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentWhitten v. CommissionerDocket No. 23543-91United States Tax CourtT.C. Memo 1993-57; 1993 Tax Ct. Memo LEXIS 62; 65 T.C.M. (CCH) 1918; February 22, 1993, Filed 62 An order granting respondent's motion to dismiss will be entered. For petitioner: Ben A. Douglas. For respondent: Audrey M. Morris. BEGHEBEGHEMEMORANDUM OPINION BEGHE, Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to tax for the taxable years 1985, 1986, and 1987, as follows: 198519861987Deficiency$ 48,041$ 40,138$ 166,806Additions to Tax:Sec. 6651(a)(1)4,9086,17312,600Sec. 6653(a)(1)2,402-- -- Sec. 6653(a)(2)1 -- -- Sec. 6653(a)(1)(A)-- 2,0078,340Sec. 6653(a)(1)(B)-- 2 3 Sec. 66547181,0071,150This case is before us on respondent's motion to dismiss for lack of jurisdiction, on the ground that petitioner failed to file his petition within the 90-day period prescribed by section 6213(a). 1 When petitioner filed his petition, on the 91st day after respondent63 sent the statutory notices of deficiency, he was a resident of Denton, Texas. Petitioner claims that he is entitled to the 150-day filing period allowed in section 6213(a) for notices addressed to a person outside the United States. For the reasons set forth below, we hold for respondent and will grant respondent's motion to dismiss. BackgroundOn July 17, 1991, respondent mailed petitioner three sets of statutory notices of deficiency, for the taxable years 1985, 1986, and 1987, to his last known address, 2145 Woodbrook, Denton, Texas 76205, which was his residence, and to his two business addresses: (1) P.O. Box 1566, Denton, Texas 76202 and (2) his office at 218 North Elm, Denton, Texas 76201. Respondent mailed the notices by certified mail, return receipt requested. The notices of deficiency stated, in part: If you want to contest this deficiency in court before making any payment, you have 90 days from 64 the above mailing date of this letter (150 days if addressed to you outside of the United States) to file a petition with the United States Tax Court for a redetermination of the deficiency. The petition should be filed with the United States Tax Court, 400 Second Street, NW., Washington, D.C. 20217, and the copy of this letter should be attached to the petition. The time in which you must file a petition with the Court (90 or 150 days as the case may be) is fixed by law and the Court cannot consider your case if your petition is filed late. * Petitioner filed his petition with the Court on October 16, 1991, 91 days after respondent mailed him the statutory notices. Petitioner is an attorney licensed to practice law in Texas. At noon on Wednesday, July 17, 1991, petitioner left his office and went home. Petitioner, his wife, and two minor sons had reservations to travel to Toronto, Canada, on Saturday July 20, 1991, and planned to return to Denton on Saturday, July 27, 1991. The principal purpose of petitioner's trip was to attend a convention in Toronto of the American Trial Lawyers Association. The trip was also intended to be a family vacation. After petitioner65 left his office on Wednesday, July 17, he did not return to the office before he and his family left for Canada on July 20. During this intervening period, petitioner did some household chores, packed the family suitcases, and spent some quality time with his sons. In anticipation of his week-long trip, petitioner filed a request with the Denton Post Office to suspend delivery of mail to his residence, effective July 18 or 19, until he should return to pick it up on Monday, July 29, 1991, when he scheduled his regular mail delivery service to resume. On July 19, 1991, the U.S. Postal Service unsuccessfully attempted to deliver the statutory notices of deficiency to petitioner's post office box and office, respectively. Because no one was at petitioner's office to sign for letters, the postman left a notice (PS Form 3849), stating that petitioner could pick up the certified letter at the Post Office during business hours. The Postal Service placed a similar notice in petitioner's post office box, and petitioner did not pick up that notice until he returned from Toronto. On that same day, July 19, in accordance with petitioner's request to suspend his residential mail delivery, 66 the Denton Post Office held the statutory notices addressed to his residence and did not deliver any certified mail notices to his house. On Saturday morning, July 20, 1991, petitioner and his family traveled by private automobile to the Dallas-Fort Worth airport, from which they flew to Toronto, Canada, by commercial carrier. Petitioner and his family returned to Denton on Saturday, July 27, 1991. On Monday morning, July 29, 1991, petitioner went to his office and had actual notice that the Postal Service had attempted to deliver certified mail to his office. Later that day, petitioner picked up from the Post Office the mail that had been held for him while he was away. Petitioner actually received at least one set of the statutory notices of deficiency on July 29, 1991. On Tuesday, October 15, 1991, petitioner sent his pro se petition to the Court by Federal Express overnight delivery. The Court received and filed the petition the next day, October 16, 1991, 91 days after respondent had mailed the notices of deficiency. October 15, 1991, was not a Saturday, Sunday, or legal holiday in the District of Columbia. DiscussionSection 6213(a) generally provides that a petition67 for redetermination of a deficiency must be filed with the Tax Court within 90 days after respondent mails the notice of deficiency. Section 6213(a) also provides that the filing period shall be 150 days if the notice is "addressed to a person outside the United States". Petitioner concedes that if he does not qualify for the 150-day period, his petition was not timely filed. Section 7502 and the regulations thereunder provide that a petition filed with the Tax Court is considered timely filed if it is timely mailed and other conditions are satisfied. Sec. 7502(a)(1); sec. 301.7502-1(a), (b)(1)(ii), Proced. & Admin. Regs. 2 A petition is timely mailed if the taxpayer properly mails his petition to the Tax Court on or before the 90th (or 150th) day after the notice of deficiency is mailed, 3 even if the Court does not receive it until after the 90th (150th) day. Blank v. Commissioner, 76 T.C. 400">76 T.C. 400, 403-404 (1981); Smetanka v. Commissioner, 74 T.C. 715">74 T.C. 715, 716 (1980). However, petitions delivered by private carriers, such as Federal Express, do not get the benefit of the section 7502 timely mailing rule, 4 even though68 the taxpayer delivers the petition to the carrier on the 90th day and the envelope bears that date. Petrulis v. Commissioner, 938 F.2d 78 (7th Cir. 1991), affg. T.C. Memo. 1991-39; Blank v. Commissioner, supra; see Estate of Levinsky v. Commissioner, T.C. Memo. 1982-544. 69 We must dismiss a case for lack of jurisdiction if the petition is not filed within the 90-day (150-day) period prescribed by section 6213(a). Malekzad v. Commissioner, 76 T.C. 963">76 T.C. 963 (1981); Estate of Moffat v. Commissioner, 46 T.C. 499">46 T.C. 499 (1966); see also Gonzalez v. Commissioner, T.C. Memo. 1992-313. Petitioner contends that this jurisdictional provision should be construed in a way that facilitates rather than forecloses access to the Tax Court, the statutory prepayment forum. See Levy v. Commissioner, 76 T.C. 228">76 T.C. 228, 231 (1981); Lewy v. Commissioner, 68 T.C. 779">68 T.C. 779, 781-782 (1977). Petitioner also asserts that the Court, in deciding whether he had 90 days or 150 days within which to file his petition, should focus on the congressional purpose underlying the 150-day rule, and not apply the statute mechanically. Levy v. Commissioner, supra; Lewy v. Commissioner, supra.The 150-day provision was originally enacted in the Revenue Act of 1942, ch. 219, 56 Stat. 798, 70 to alleviate the hardships caused by delays in mail delivery during World War II. S. Rept. 1631, 77th Cong., 2d Sess. (1942), 2 C.B. 504">1942-2 C.B. 504, 554, 618. After the war, the provision was retained "to assist those taxpayers who reside and conduct their business and professional activities * * 'outside the United States.'" Degill Corp. v. Commissioner, 62 T.C. 292">62 T.C. 292, 297 (1974); accord Camous v. Commissioner, 67 T.C. 721">67 T.C. 721, 735 (1977). The 150-day rule is designed to prevent the hardship caused by delays in receipt of notices of deficiency due to taxpayers' absence from the United States and the relatively slow international mails. Looper v. Commissioner, 73 T.C. 690 (1980). In Lewy v. Commissioner, supra, the taxpayer, a French attorney, maintained residences and offices in New York City and Paris. On the day the Commissioner mailed a statutory notice of deficiency to the taxpayer's New York residential address, 5 he was preparing to leave the United States and left the country the next day for an extended stay abroad. The notice71 was delivered to the taxpayer's New York residence after the taxpayer had departed the United States. The taxpayer did not have actual notice of the statutory notice until he returned to New York nearly 3 months later. The taxpayer mailed his petition on the 91st day, and it was filed with the Court on the 95th day after the Commissioner had mailed the statutory notice. The Commissioner moved to dismiss for lack of jurisdiction, but the taxpayer objected on the ground that he had 150 days to file his petition In Lewy, the Court concluded that the answer to the Commissioner's argument that the filing period should be confined to 90 days should not turn on the taxpayer's "ephemeral presence" in the United States on the date of mailing. Instead, the Court looked to the purpose for which the 150-day rule was enacted. Inasmuch72 as the taxpayer regularly spent long periods of time in Paris and his stay there of almost 3 months from the date of mailing to the date of actual receipt caused the actual delay in receipt, the Court held that the taxpayer was entitled to the 150-day filing period and denied respondent's motion to dismiss. Lewy v. Commissioner, supra at 783. The Court reached a similar result in Levy v. Commissioner, supra.There, the taxpayers were in the United States for part of the day on which the statutory notice was mailed but left that day at 9:15 a.m. for a 4-day vacation in Jamaica. The Court found that a 4-day delay in their receipt of the statutory notice was caused by their absence from the country, and held that the 150-day period applied. The Court said in Levy v. Commissioner, supra at 231, that "the petitioners were abroad when the statutory notice was delivered at their home, and this seems to be what the statute contemplates." See also Mindell v. Commissioner, 200 F.2d 38 (2d Cir. 1952); Estate of Krueger v. Commissioner, 33 T.C. 667 (1960)73 (temporary absence from the United States does not preclude application of the 150-day rule). By contrast, the taxpayers in Malekzad v. Commissioner, supra, did not get the benefit of the 150-day rule even though they had left for Mexico on the Saturday morning that the statutory notice was delivered to their house in Beverly Hills, California. The taxpayers returned the next day and no delay in the receipt of the notice resulted from their absence from the country for a day and a half. See also Cowan v. Commissioner, 54 T.C. 647 (1970) (no actual delay caused by day trip to Mexico); Logan v. Commissioner, T.C. Memo. 1993-22. Petitioner's failure actually to receive the statutory notices until after he returned from his trip is not the kind of hardship the 150-day rule was designed to prevent. Unlike the taxpayer in Lewy v. Commissioner, supra, petitioner does not regularly conduct business anywhere outside the United States. The purpose of his trip to Canada was to attend a convention and take a family vacation. Even though petitioner's actual74 receipt of the statutory notices was delayed by 10 days, the delay was due to petitioner's voluntary suspension of his mail delivery on a day that he was not out of the country for any part of the day. Petitioner's receipt of the statutory notices was also delayed by the fact that he did not go to his post office box or office on Friday, July 19, 1991, to check his mail. We are not faced with factual situations like those in Levy v. Commissioner, supra, and Lewy v. Commissioner, supra. Petitioner was in the United States on the date of mailing (July 17) and in the United States on the date (July 19) the Postal Service tried to deliver and could have delivered the notices to him if he had not suspended his home mail delivery and had checked his post office box or office. Although petitioner was making preparations to leave the country during this 3-day period, and might even be considered to have already commenced his vacation, his continued presence in the United States was more than ephemeral. Petitioner's suspension of his mail delivery service on Friday, July 19, 1991, does not obviate the fact that he was*75 still in the United States all that day, even though the next day he was going to leave the country for a week. July 19 was the day on which the Postal Service tried to deliver copies of the notices of deficiency to petitioner's post office box and office. It was also the day on which the Postal Service in all likelihood would have delivered the notices of deficiency to his home had he not suspended his residential mail delivery. On July 29, 1991, when petitioner returned from Canada, he received the deficiency notices and still had 78 days remaining in which to file a timely petition with this Court, but he filed late, on the 91st day after respondent mailed him the notices of deficiency. We hold that the statutory notices were not addressed to a person outside the United States and that the 150-day filing period provided in section 6213(a) does not apply. The petition was untimely and we lack jurisdiction over this case. To reflect the foregoing, An order granting respondent's motion to dismiss will be entered. Footnotes1. 50% of the interest due on $ 48,041.↩2. 50% of the interest due on $ 40,138.↩3. 50% of the interest due on $ 166,806.↩1. All section references are to the Internal Revenue Code in effect for the years in question.↩2. Among other conditions that must be satisfied are that the postmark on the envelope containing the petition be dated within the period set by sec. 6213(a), that the envelope bear the proper postage, and that it be properly addressed. Sec. 7502(a)(2); Smetanka v. Commissioner, 74 T.C. 715">74 T.C. 715, 716↩ (1980).3. If the last day for filing the petition falls on a Saturday, Sunday, or legal holiday in the District of Columbia, the statutory period is extended to the next business day. Sec. 6213(a); secs. 301.7502-1(c)(3) and 301.7503-1, Proced. & Admin. Regs.↩4. The dispute over the time petitioner had to file his petition could have been avoided if he had sent his petition to the Court by U.S. Mail, and it had been properly postmarked on or before Oct. 15, 1991. Although private carriers such as Federal Express are highly reliable for purposes of effecting actual delivery to addressees the next day, the timely mailing rule requires that the letter be received by the U.S. Postal Service, an agency of the U.S. Government. Thus, in determining the viability of last minute petition filings, receipt by the Postal Service is more efficacious than actual delivery by a private carrier.↩5. The Commissioner also mailed a copy to the taxpayer's Paris address but he apparently did not receive it. Lewy v. Commissioner, 68 T.C. 779">68 T.C. 779, 780↩ (1977).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624228/	JAMES LE FAY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentLe Fay v. CommissionerDocket No. 13291-78.United States Tax CourtT.C. Memo 1982-420; 1982 Tax Ct. Memo LEXIS 330; 44 T.C.M. (CCH) 582; T.C.M. (RIA) 82420; July 26, 1982. 330 Held, since P did not appear at trial and offerred no evidence, the Commissioner's motion to dismiss for lack of prosecution is granted; therefore, P is liable for the deficiencies determined by the Commissioner and for an addition to tax under sec. 6654, I.R.C. 1954, for failure to pay estimated tax. Held, further, P is liable for additions to tax under sec. 6653(b), I.R.C. 1954, for fraud. Held, further, P is liable as a transferee to the extent of the assets received by him, plus interest. Sec. 6901, I.R.C. 1954. James Le Fay, pro se. John W. Dierker, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes: Additions to TaxSec. 6653(b)Sec. 6654YearDeficiencyI.R.C. 1954 1I.R.C. 19541972$7,263.35$3,631.67$232.42197317,547.678,773.83197412,854.746,427.37The Commissioner also determined the following deficiencies in, and additions332 to, the Federal income taxes of Southwestern C & L Oil & Gas, Inc. (Southwestern): Additions to TaxYearDeficiencySec. 6653 (b)Sec. 66551973$2,594.41$1,297.21197411,867.355,933.67$247.30He determined transferee liability against the petitioner with respect to such deficiencies and additions to the extent of the assets of such corporation received by him, $8,890.30, plus interest thereon. The issues for decision are whether the Commissioner has carried his burden of proving: (1) That any part of the underpayments of tax by the petitioner was due to fraud within the meaning of section 6653(b), and (2) that the petitioner is liable as a transferee of property of Southwestern. FINDINGS OF FACT The petitioner, James Le Fay, resided in Treasure Island, Fla., at the time he filed his petition in this case. During 1972, 1973, and 1974, the petitioner was married and was engaged in the retail sale of chinchillas through a sole proprietorship, Southwestern Chinchilla Co. During such years, he failed to maintain or to submit for examination by the Commissioner complete and adequate books of account and records for such business. The333 records which he maintained during such years consisted of certain bank records. However, such records were incomplete, failed to disclose all receipts and disbursements, and did not properly reflect the correct taxable income of the petitioner. As a result, the Commissioner determined the taxable income of the petitioner for such years on the basis of the bank deposits method. During 1972, the petitioner maintained a checking account at the Garland Bank & Trust Company, Garland, Tex. (Garland Bank), and made deposits to such account in the total amount of $47,953.54. After adjustment for a nontaxable deposit of $160.00, the net amount of such deposits was $47,793.54. During 1972, the petitioner also maintained a checking account at the Citizens National Bank, Dallas, Tex. (Citizens Bank), and made deposits to such account in the total amount of $50,152.14. After adjustment for a nontaxable deposit in the amount of $480.00, the net amount of such deposits was $49,672.14. In addition, during 1972, he maintained a checking account at the First State Bank of Bellaire, Tex. (Bellaire Bank), and made deposits to such account in the net amount of $12,799.01. The petitioner denied334 the existence of such account when an internal revenue agent questioned him about his bank accounts. During 1972, he withheld cash in the amount of $530.00 from deposits made to Bellaire Bank and $1,155.00 from deposits made to Citizens Bank. One-half of the net amount of all such deposits and cash withheld was taxable to the petitioner as his share of community income. Based on the records the petitioner submitted to the agent examining his returns and the bank records, the Commissioner determined that, for 1972, the petitioner incurred deductible business expenses in the amount of $64,925.10 and itemized deductions of $3,364.79, one-half of which was his community share of such expenses and deductions. Thus, the Commissioner determined the petitioner's community share of taxable income as follows: Net deposits$55,132.35Cash withheld from deposits842.50$55,974.85Less: Business expenses$32,462.55Itemized deductions1,682.39Exemption750.0034,894.94Taxable income$21,079.91Tax liability$ 7,263.35During 1973, the petitioner maintained a checking account at Garland Bank and made deposits in such account in the total335 amount of $26,892.74; he maintained an account at Citizens Bank and made deposits to such account in the total amount of $59.75. During 1973, he also maintained a checking account at the Valley View Bank, Dallas, Tex. (Valley Bank), and made deposits to such account in the total amount of $127,286.34. After adjustment for a nontaxable deposit of $260.00, the net amount of such deposits was $127,026.34. During 1973, the petitioner withheld cash from deposits in the amount of $4,000.00, and he received constructive dividends from Southwestern in the amount of $2,729.29. Based on the records the petitioner submitted to the agent examining his returns and the bank records, the Commissioner determined that, for 1973, the petitioner and his wife incurred deductible business expenses in the amount of $106,304.90 and itemized deductions of $3,315.71 and that they were entitled to exemptions in the amount of $2,250.00. Thus, the Commissioner determined the taxable income of the petitioner and his wife as follows: Net deposits$153,978.83Cash withheld from deposits4,000.00Constructive dividend(less $200 exclusion)2,529.29Wife's wages609.84$161,117.96Less: Business expenses$106,304.90Itemized deductions3,315.71Exemptions2,250.00111,870.61Taxable income$ 49,247.35Tax liability$ 17,547.67336 During 1974, the petitioner maintained a checking account at Valley Bank and made deposits to such account in the total amount of $111,081.60. He withheld cash from such deposits in the amount of $120.00. After adjustment for nontaxable deposits in the amount of $10,100.00, the net amount of such deposits was $100,981.60. Also, during 1974, the petitioner received constructive dividends from Southwestern in the amount of $47,737.31. Based on the records the petitioner submitted to the agent examining his returns, the bank records, and the schedule C of the joint return filed by the petitioner and his wife, the Commissioner determined that, for 1974, $12,221.28 of such constructive dividends was used to pay deductible business expenses of Southwestern Chinchilla Co., that the petitioner incurred other deductible business expenses in the amount of $86,825.00, that the petitioner and his wife incurred itemized deductions of $5,682.65, and that they were entitled to exemptions in the amount of $2,250.00. Thus, the Commissioner determined the taxable income of the petitioner and his wife as follows: Net deposits$100,981.60Cash withheld from deposits120.00Constructive dividend(less $200 exclusion)47,537.31$148,638.91Less: Business expenses$ 99,046.28Itemized deductions5,682.65Exemptions2,250.00106,978.93Taxable income$ 41,659.98Tax liability$ 12,854.74337 During 1972, 1973, and 1974, neither the petitioner nor his wife received any gifts, bequests, inheritances, legacies, or devises; nor did they receive any nontaxable or excludable income, receipts, cash, or other assets other than the items taken into account by the Commissioner. The petitioner did not file a return for 1972. Instead, he and his wife filed a Form 1040A which disclosed only their names and address and his social security number and upon which they claimed two exemptions. Attached to such document was the following statement which was signed by the petitioner: "Records for 1972 are not completely available due to theft and destruction." For 1972, the petitioner failed to report taxable income in the amount of $21,079.91. The petitioner and his wife filed joint returns for 1973 and 1974. Attached to the 1973 return was the following statement which was signed by the petitioner: "Records for 1973 are not completely available due to theft and desturction [sic]." Attached to the 1974 return was the following statement signed by the petitioner: "Records for 1974 are not completely available due to theft and destruction. * * These Figures were taken from monthly338 sales and expense books. These books have since disappeared." Both the 1973 and 1974 returns, and the form he used for 1972, were filed in September 1975, after the Commissioner had commenced his investigation of the petitioner. On the 1973 return, the petitioner and his wife reported gross income of $609.84, the wages of his wife which had been reported on a Form W-2, and requested a refund of $79.44, the amount of Federal income tax withheld from such wages. On such return, they omitted taxable income of $49,247.35. On the 1974 return, they claimed a loss of $2,389.00 and failed to report taxable income of $39,270.98. In a notice of deficiency sent to the petitioner for 1972, the Commissioner determined that he was liable for a deficiency for the amount of the tax liability computed by the Commissioner and that the petitioner was liable for the addition to tax under section 6653(b) for fraud and the addition to tax under section 6654 for failure to pay estimated tax. In a notice of deficiency sent to the petitioner and his wife for 1973 and 1974, the Commissioner determined that they were liable for deficiencies in tax in accordance with his computation of their tax liability339 for those years and that they were liable for the addition to tax under section 6653(b) for fraud. The petitioner's wife has not commenced an action in this Court with respect to such notice. Southwestern was engaged in the oil business. At the beginning of 1975, its assets consisted of checking accounts at the Dallas International Bank (Dallas Bank), Valley Bank, and Citizens Bank. Between January and March 1975, the petitioner, as an authorized official of Southwestern, wrote checks on such accounts totaling $8,890.30. Such checks were payable to cash, to the petitioner, to his wife, and to Southwestern Chinchilla Co. In November 1975, the account at Dallas Bank was closed. After the payment of such checks, Southwestern had no assets other than a balance of a few cents in its checking accounts. In a notice of liability sent to the petitioner in August 1978, the Commissioner determined that such checks represented transfers of the assets of Southwestern to the petitioner and that he was liable as a transferee to the extent of such transfers, plus interest, for the deficiencies and additions to tax which he had determined were due from Southwestern. The Commissioner determined340 that Southwestern owed deficiencies in income tax for 1973 and 1974, was liable for the addition to tax for fraud for each of such years, and was liable for the addition to tax under section 6655 for failure to pay estimated tax for 1974. OPINION At trial, no appearance was made by or on behalf of the petitioner, and counsel for the Commissioner moved pursuant to Rule 123(b), Tax Court Rules of Practice and Procedure, 2 to dismiss this case for lack of prosecution as to the deficiencies in income taxes and the addition to tax under section 6654. Rule 123(b) provides: (b) Dismissal: For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, the Court may dismiss a case at any time and enter a decision against the petitioner. The Court may, for similar reasons, decide against any party any issue as to which he has the burden of proof; and such decision shall be treated as a dismissal for purposes of341 paragraphs (c) and (d) of this Rule. The petitioner has the burden of disproving the Commissioner's determination of deficiencies in income taxes. Rule 142(a); Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933). Likewise, the petitioner has the burden of proving that the Commissioner's determination of an addition to tax under section 6654 was erroneous. Ruben v. Commissioner,33 T.C. 1071">33 T.C. 1071 (1960); O'Donohue v. Commissioner,33 T.C. 698">33 T.C. 698 (1960). Since the petitioner did not appear at trial and offered no evidence, it is clear that we can and should enter an order dismissing his case for lack of prosecution with respect to the deficiencies in income taxes and addition to tax under section 6654. Freedson v. Commissioner,565 F. 2d 954 (5th Cir. 1978), affg. 67 T.C. 931">67 T.C. 931 (1977). 3The first issue for decision is whether to sustain the Commissioner's determination of fraud for each of the years in issue. 342 The Commissioner has the burden of proving fraud by clear and convincing evidence. Rule 142(b); sec. 7454(a); Miller v. Commissioner,51 T.C. 915">51 T.C. 915, 918 (1969). In order to prove fraud, the Commissioner must show that the petitioner intended to evade taxes which he knew or believed he owed, 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); Webb v. Commissioner,394 F. 2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court; Acker v. Commissioner,26 T.C. 107">26 T.C. 107, 112-113 (1956). The presence or absence of fraud is a factual question to be determined by an examination of the entire record. Mensik v. Commissioner,328 F.2d 147">328 F. 2d 147, 150 (7th Cir. 1964), affg. 37 T.C. 703">37 T.C. 703 (1962); Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 105-106 (1969). Since fraud can seldom be established by direct proof of intention, the petitioner's entire course of conduct can often be relied on to establish circumstantially such fraudulent intent. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 223-224 (1971);343 Otsuki v. Commissioner,supra at 105-106. The petitioner's failure to come forward with any evidence to dispute the Commissioner's determination of deficiencies for the years in issue is not determinative of fraud, for a mere understatement of income does not establish fraud. Carter v. Campbell,264 F. 2d 930, 936 (5th Cir. 1959). However, a consistent pattern of under-reporting of substantial amounts of income over a period of years is, standing alone, persuasive evidence of fraud. Holland v. United States,348 U.S. 121">348 U.S. 121, 139 (1954); Lollis v. Commissioner,595 F. 2d 1189, 1191 (9th Cir. 1979), affg. a Memorandum Opinion of this Court; United States v. Burrell,505 F. 2d 904, 911-912 (5th Cir. 1974); Estate of Upshaw v. Commissioner,416 F.2d 737">416 F. 2d 737, 741 (7th Cir. 1969), affg. a Memorandum Opinion of this Court; Cefalu v. Commissioner,276 F. 2d 122, 129 (5th Cir. 1960), affg. a Memorandum Opinion of this Court; Stone v. Commissioner,56 T.C. at 224; Otsuki v. Commissioner,53 T.C. at 107. Also, a taxpayer's failure344 to maintain accurate books and records may also constitute significant evidence of fraud. Lollis v. Commissioner,595 F. 2d at 1192; Estate of Upshaw v. Commissioner,416 F. 2d at 741; Cefalu v. Commissioner,276 F. 2d at 129; Otsuki v. Commissioner,53 T.C. at 110. We are satisfied that the Commissioner has carried his burden of proving fraud by clear and convincing evidence for each of the years at issue. The petitioner's books and records were insufficient to disclose his income, and accordingly, the Commissioner computed such income by use of the bank deposits method. The use of such method is an acceptable method of establishing income under such circumstances. Gromacki v. Commissioner,361 F. 2d 727 (7th Cir. 1966), affg. a Memorandum Opinion of this Court; Goe v. Commissioner,198 F. 2d 851 (3d Cir. 1952), affg. a Memorandum Opinion of this Court; Halle v. Commissioner,175 F. 2d 500 (2d Cir. 1949), affg. 7 T.C. 245">7 T.C. 245 (1946); Mauch v. Commissioner,113 F. 2d 555 (3d Cir. 1940),345 affg. 35 B.T.A. 617">35 B.T.A. 617 (1937); Harper v. Commissioner,54 T.C. 1121">54 T.C. 1121 (1970). The revenue agent testified and explained how he computed the petitioner's income, and we have no basis for questioning his analysis. He provided the petitioner an opportunity to show that any additional deposits represented nontaxable income or that he was entitled to any additional deductions, but the petitioner failed to furnish any information showing that he was entitled to any such adjustments. We recognize that the Commissioner cannot carry his burden of proving fraud merely by relying on the petitioner's failure to disprove his determination. See Estate of Beck v. Commissioner,56 T.C. 297">56 T.C. 297, 363 (1971); Otsuki v. Commissioner,53 T.C. at 106. However, here, the Commissioner has produced convincing evidence to support his determination, and accordingly, we have found that the petitioner received the amounts of unreported taxable income computed by the Commissioner. Such amounts of unreported taxable income are substantial and reflect a pattern346 of the consistent failure to report large amounts of income. Such evidence is a very persuasive indication of fraud. Holland v. United States,348 U.S. at 139; Lollis v. Commissioner,595 F. 2d at 1191; Adler v. Commissioner,422 F.2d 63">422 F. 2d 63, 66 (6th Cir. 1970), affg. a Memorandum Opinion of this Court; Estate of Upshaw v. Commissioner,416 F. 2d at 741; Cefalu v. Commissioner,276 F. 2d at 129; Stone v. Commissioner,56 T.C. at 224; Otsuki v. Commissioner,53 T.C. at 107-108. Furthermore, the petitioner filed no returns for the years at issue until the Internal Revenue Service had commenced its investigation of him. The returns filed by him were grossly inaccurate, and his excuse for the delay and inaccuracy was not convincing--the revenue agent could find sufficient records to compute the petitioner's income. In addition, the petitioner's denial of the existence of an account at Bellaire Bank constitutes further evidence of his attempts to conceal his income and347 mislead the Commissioner. Such conduct is another important indicium of fraud. United States v. Newman,468 F. 2d 791, 794 (5th Cir. 1972); Powell v. Granquist,252 F.2d 56">252 F. 2d 56, 60-61 (9th Cir. 1958); Estate of Beck v. Commissioner,56 T.C. at 365; Stone v. Commissioner,56 T.C. at 224; Beaver v. Commissioner,55 T.C. 85">55 T.C. 85, 93 (1970). In summary, the evidence is overwhelming that for each of the years in issue the petitioner attempted to evade taxes which he knew or believed that he owed, by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Therefore, we sustain the Commissioner's imposition of an addition to tax for fraud under section 6653(b) for each of the years in issue. The next issue for decision is whether the petitioner is liable as a transferee under section 6901 for the unpaid deficiencies in and addition to the income taxes of Southwestern for 1973 and 1974. The Commissioner contends that the petitioner is so liable to the extent of the checks written on such corporation's accounts, $8,890.30, plus interest. 348 The Commissioner has the burden of proving that the petitioner is liable as a transferee, and the petitioner has the burden of proving that Southwestern is not liable for the deficiencies in income taxes and addition to tax under section 6655 determined by the Commissioner. Rule 142(c); sec. 6902(a). Since the petitioner did not appear at trial and did not introduce any evidence, it is clear that he has not met his burden as to the deficiencies in income taxes and addition to tax under section 6655. Rule 142(a). Since the deficiencies and addition to tax under section 6655 exceed the assets which the Commissioner claims were transferred to the petitioner, the Commissioner has made no attempt to prove that Southwestern is liable for the addition to tax under section 6653(b); he presented evidence merely to establish the petitioner's liability as a transferee. To meet his burden of proof, the Commissioner must show that there was a transfer of assets from Southwestern to the petitioner, that such transfer was made for inadequate consideration, 349 that Southwestern was insolvent at the time of the transfer or became insolvent as a result of the transfer, and the value of the assets transferred. Holmes v. Commissioner,47 T.C. 622">47 T.C. 622, 626 (1967); Moran v. Commissioner,45 T.C. 528">45 T.C. 528, 529-530 (1966). Although the record before us is meager, it clearly establishes that the Commissioner has met his burden of proof. Between January and March 1975, the petitioner issued checks to or for his benefit on Southwestern's checking accounts which, except for a few cents, exhausted such accounts. Such accounts were Southwestern's sole assets at that time. Such checks show that all the assets of Southwestern were in effect transferred to the petitioner, and the records contain no indication that Southwestern received any consideration for such transfers. Also, from the fact that Southwestern had no remaining assets, we can infer that the corporation received no consideration for such transfers. In determining whether Southwestern was insolvent or was made insolvent by such transfers, its liability for Federal*350 income taxes, plus interest and additions, even if unknown at the time of the transfer, must be taken into account. Holmes v. Commissioner,supra;Leach v. Commissioner,21 T.C. 70">21 T.C. 70, 75 (1953). Thus, even if there were no other creditors, Southwestern's income tax liability exceeded its assets at the time of such transfers, and therefore, it was insolvent. Finally, since all such transfers were made by check, there is no question as to the value of the assets received by the petitioner. Accordingly, we find and hold that the petitioner is liable as a transferee to the extent of the assets received by him, plus interest. However, such liability is limited to the deficiencies in income taxes and addition to tax under section 6655, as determined by the Commissioner. An order will be entered granting the Commissioner's motion to dismiss, and a decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. All references to a Rule are to the Tax Court Rules of Practice and Procedure.↩3. See Gaar v. Commissioner,T.C. Memo. 1981-696↩, on appeal (5th Cir., March 29, 1982).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624229/	FREDERICK L. LECKIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Leckie v. CommissionerDocket No. 86565.United States Board of Tax Appeals37 B.T.A. 252; 1938 BTA LEXIS 1065; February 1, 1938, Promulgated 1065 1. Default was made in the payment of principal and interest due on first mortgage bonds of a corporation. The holders of 97 percent of the bonds transferred them to a bondholders' committee. One of the three pieces of real estate securing the bonds was sold under foreclosure and bid in by the committee. The committee immediately organized a new corporation and transferred to it, in exchange for all of its stock, the bonds deposited with it and the right to purchase the property at the foreclosure sale under the bid which it had made. Sheriff's deed to the property was made direct to the new corporation. Most of the sum bid was paid by a credit endorsed upon the bonds. Subsequently the two remaining pieces of real estate were sold under foreclosure and purchased by the new corporation. The stock of the new corporation was ultimately delivered to the depositing bondholders. Held:(1) Following Commissioner v. Kitselman, 89 Fed.(2d) 458, that a statutory reorganization was effectuated by the bondholders and under section 112(b)(3) of the Revenue Act of 1934 no gain or loss is to be recognized. (2) That whether there was a reorganization or not1066 there was a transfer of property by one or more persons to a corporation solely in exchange for its stock and immediately thereafter such persons were in control of the corporation; hence no gain or loss is to be recognized under section 112(b)(5) of the Revenue Act of 1934. 2. Under the facts petitioner has not sustained his burden of proving what portion of the debt, originally represented by the bonds but which during the taxable year were transferred to the corporation in exchange for its stock, became worthless during the taxable year; nor is there sufficient evidence from which the value of petitioner's interest in the new corporation can be ascertained. Arthur E. Petersilge, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. MELLOTT253 OPINION. MELLOTT: The Commissioner determined a deficiency in petitioner's income tax for the year 1934 in the amount of $867.29. In an amended answer which he, as respondent, filed in the instant proceeding he not only denied that he had erred in determining the deficiency but alleged that he had erred in not increasing petitioner's net income by the addition of $3,004 as a capital1067 net gain. He accordingly asked for an increased deficiency. Petitioner, in his reply, admitted that such capital gain was realized. Effect will be given to this admission in a recomputation under Rule 50. The sole issue for determination is whether or not the respondent erred in disallowing the deduction from gross income of $4,610.35 as a bad debt. In the notice of deficiency it is stated that said amount was disallowed because a bondholders' committee, acting for the holders of bonds issued by the Morgan Properties Co., had "acquired the properties of [the company] in pursuance of a plan of reorganization, hence under section 112(b) of the Revenue Act of 1934 no loss is recognized." The petition alleges that the respondent erred in disallowing the amount claimed and in holding that the bonds were not ascertained to be partially worthless; that he erred in holding that the committee acquired the properties "in pursuance of a plan of reorganization in such manner as to prevent the necognition of loss under section 112(b)"; and that he "erred in holding that a partial bad debt deduction cannot be allowed if the holders of the bonds evidencing said debt participate in a plan1068 of reorganization by means of which they acquire the properties of the debtor which were mortgaged to secure the debt." All of the facts were stipulated. A summary will be sufficient for present purposes. In November 1926 petitioner paid $5,000 for $5,000 par value bonds of the Morgan Properties Co. (hereinafter called the Morgan Co.). The bonds were secured by a mortgage covering all of the properties of the Morgan Co., consisting of two parcels in Ohio and one in New York. The Morgan Co. leased all of its properties to the Morgan Lithograph Co. (hereinafter called the Lithograph Co.), the agreed rental being an amount equal to the interest on the bonds, the annual maturities of the bonds, and taxes and operating expenses of the Morgan Co. The Lithograph Co. sustained losses from its operations for each of the four years ending June 30, 1929, to June 30, 1932, inclusive, and failed to pay the rental maturing August 1, 1932. The Morgan Co. defaulted in the payment of principal and interest due on its bonds August 15, 1932. 254 The bondholders' protective committee (hereinafter called the committee) was formed December 1, 1932. On January 5, 1933, petitioner deposited1069 his bonds with the committee. Ultimately 97 percent of the $1,280,000 outstanding bonds were so deposited. The Union Trust Co. of Cleveland was the designated depositary of the bonds. All depositing bondholders assented to the provisions of the bondholders' protective agreement. On June 3, 1933, the United States District Court at Cleveland, Ohio, appointed a receiver for the Lithograph Co. upon the application of one of its creditors. The trustee for the bondholders filed a claim for the rent due the Morgan Co. and received three dividends, totaling $86,043.71, in 1934. Nondepositing bondholders received their shares of this sum in cash, while the shares of the depositing bondholders were paid to the committee. Under date of July 1, 1933, the committee adopted a "plan of readjustment" and forwarded copies thereof to all bondholders on July 6, 1933. Bondholders assented to the plan by depositing their bonds with the committee, or by permitting them to remain with the committee if they had already been deposited. In accordance with the provisions of the plan the following steps were taken: On January 12, 1934, the committee caused the trustee for the bondholders to commence1070 foreclosure proceedings. On June 4, 1934, the Payne Avenue plant of the Morgan Co. located in Cleveland, Ohio, was sold at public sale pursuant to the foreclosure decree. The committee bid $75,250 and its bid was accepted. On June 5, 1934, the committee organized an Ohio corporation known as Industrial Properties, Inc. On July 11, 1934, the committee assigned to this corporation the $1,235,000 principal amount of the bonds which had been deposited with it pursuant to the plan and also its bid at the foreclosure sale. Most of the sum bid at the foreclosure sale, or $69,145.29, was paid by a credit in that amount endorsed on the deposited bonds, the balance of the debt represented by the bonds remaining uncanceled. The difference between the sale price and the amount credited on the bonds (which difference was for court costs and other cash requirements of the foreclosure), was paid in cash out of the funds received by the committee in connection with the claim for rent due from the Lithograph Co. All of the capital stock of the new corporation, Industrial Properties, Inc., was received by the committee and held by it during the year 1934 for the benefit of the depositing bondholders. 1071 On November 30, 1934, the second parcel of Ohio property of the Morgan Co., was sold at a public sale, pursuant to the foreclosure decree. Industrial Properties, Inc., was the purchaser, the price bid being $30,000, of which $27,096.32 was paid by a credit in that 255 amount endorsed on the deposited bonds. The balance of the debt represented by the bonds remained uncanceled and the difference between the sale price and the amount credited on the bonds was paid in cash out of the proceeds of the claim for rent. Industrial Properties, Inc., leased the first mentioned property for two years to a corporation formed to continue the business of the Lithograph Co. This corporation was given the option to purchase the property under lease for $500,000 at any time while the lease was in effect. The last mentioned property was leased to an Ohio corporation engaged in the business of producing continuous business office forms printed on paper. The New York property could not be sold for enough to produce any substantial return to bondholders, and this situation existed prior to December 31, 1934. Following the receipt of an offer from Laundered Service, Inc., a New York1072 corporation, in June 1935, the committee caused foreclosure proceedings to be instituted on the New York property covered by the mortgage. At the foreclosure sale in December 1935, Industrial Properties purchased this property for $46,000. It applied the deposited bonds in part payment of the purchase price, leaving the balance of the debt represented by the bonds uncanceled. It paid in cash taxes of approximately $18,060, and also court costs in connection with the foreclosure. Industrial Properties, Inc., immediately transferred this property to Laundered Service, Inc., for $45,000, of which $15,000 was paid in cash and the balance was represented by a bond secured by a purchase money mortgage. Under date of October 1, 1936, the committee wrote a letter to the depositing bondholders, including petitioner, advising them of the action theretofore taken pursuant to the plan. The letter stated that the committee, in accordance with the plan, would distribute the capital stock of the new corporation to holders of certificates of deposit on the basis of one share for each $100 principal amount of bonds deposited with the committee and that the new corporation contemporaneously1073 would pay a dividend of $2 per share. Petitioner surrendered the certificate of deposit which had been given to him when his bonds were turned over to the depositary and on October 19, 1936, received 50 shares of the capital stock of Industrial Properties, Inc., and $100 in cash representing dividends at the rate of $2 per share. Nondepositing bondholders have received cash distributions totaling $154.5873 per $1,000 bond, representing their proportional interest in the amounts received through sale of the properties and on the claim for rent filed in the receivership of the Morgan Co. Of this sum they received $127.928 per $1,000 bond during 1934. 256 Petitioner is one of the partners in the firm of Duncan, Leckie, McCreary, Schlitz & Hinslea, attorneys, of Cleveland, Ohio, which represented the trustees for the bondholders under the trust mortgage and prosecuted the Ohio foreclosure action, including the sale of the two Ohio properties owned by the Morgan Co. The facts with respect to the condition of the Morgan Co. were known to these attorneys (including petitioner) in 1934. Petitioner determined in 1934 that the debt represented by the bonds was partially worthless, 1074 made a partial charge-off of $4,610.35 in 1934, and claimed a bad debt deduction of this acount in his income tax return for that year. This deduction was disallowed by the respondent. At the hearing both parties made reference to the case of , which had been reversed by the United States Circuit Court of Appeals for the Seventh Circuit in , and upon brief it is discussed at length. At the time of the hearing application had been made to the Supreme Court for a writ of certiorari but the writ had been neither denied nor granted. Respondent, having prevailed in the Circuit Court and the facts in the instant proceeding being somewhat analogous to those in that case, relies upon the decision of the court. Petitioner, while admitting that an affirmance by the Supreme Court of the decision of the court in the Kitselman case would have been decisive of the present controversy, nevertheless urges that the Board give further consideration to the question since the denial of the writ, which has subsequently occurred, 1075 , is not tantamount to a decision by the Supreme Court upon the question decided. In other words, he relies upon the decision of the Board. The Board has therefore made a careful reexamination of the whole question, and has given due consideration to the argument and authorities cited by both parties, including the opinions of the court and the Board in the Kitselman case. In the Kitselman case the Board held that there was not an exchange of stock or securities within the meaning of section 112(b)(3) of the Revenue Act of 1928 since, under the view then held by the Board, there was not a reorganization within the definition of that term in section 112(i). The Circuit Court, having before it the group of cases decided by the Supreme Court December 16, 1935, especially ; ; and , reversed the decision of the Board and held that there was a reorganization. It held, citing the above cases, that bonds are securities within the meaning of the statute and that they, 1076 but not mere short term notes, represent sufficiently definite, material, and substantial 257 interest to satisfy the implicit requirement of a "continuity of interest." Cf. ; . The Circuit Court of Appeals for the Ninth Circuit, in , has held under the same section of a later revenue act that collateral trust bonds of a corporation, which were exchanged for stock, are securities within the meaning of such section. The Board has made a similar holding in (on appeal to the Ninth Circuit) and . There is no difference in principle between those cases and the case at bar, though in them stock was exchanged for bonds while in the instant case bonds were exchanged for stock. But the statute (sec. 112(b)(3), supra ) in each instance refers to "stock or securities." It seems, therefore, that the court was fully justified in concluding that the bondholders had effectuated1077 a statutory reorganization and that a similar holding should be made in the instant proceeding. If, however, the Circuit Court erred in holding in the Kitselman case that a statutory reorganization had been effected - which we do not intimate - and if we are wrong in making a similar holding here, which carries with it, as it does, a holding that section 112(b)(3) 1 of the Revenue Act of 1934 is applicable, respondent must nevertheless prevail. Section 112(b)(5) 1 is clearly applicable and under it no finding need be made that there was a reorganization. It provides 258 that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control of the corporation. Petitioner and a majority of the bondholders, in 1933, transferred their bonds to the committee; but they remained the equitable owners of them. When, in 1934, the committee transferred the property and bonds held by it in trust for the bondholders, to the new corporation in exchange for all its stock, the committee held such stock as trustees1078 for the bondholders and they, through their trustees, were in control of the new corporation. The plan contemplated that the stock of the new corporation would be "distributed or exchanged * * * pro rata among the depositing bondholders", and this was subsequently carried out. It seems clear, therefore, that the exchange in 1934 came squarely within section 112(b)(5) and hence no gain or loss is to be recognized. 1079 At first blush it might seem, inasmuch as petitioner determined in 1934 that the debt represented by the bonds was partially worthless and charged off a portion of his investment in such bonds, that the amount should be allowed as a deduction from his gross income. But not so. His investment in 1934 was that of an equitable owner in the property held by the committee as trustee for him and the other bondholders. We have no evidence from which we can determine the value of such ownership or his aliquot part in it; but we are satisfied that it, even in 1934, had a greater value than he would have us ascribe to it. Clearly it had at least as much value as a similar amount of bonds owned by a nondepositing bondholder. Such bondholders realized, during 1934, more than 12 1/2 percent of their investment. If petitioner had kept his bonds and hence had been a nondepositing holder, he would not have sustained a loss equivalent to that which he charged off. But he did not do so. He participated in the reorganization and exchanged his bonds for stock of the new corporation. It is obvious that he and the other bondholders represented by the committee felt, and we believe justifiably, 1080 that in so doing they would be able to minimize, if not entirely eradicate, their loss; for the reorganized Lithograph Co. was given the option of purchasing, for $500,000, the property which the committee had bid in for $75,250. In addition, the property had been leased to the reorganized company at $10,000 for the first year, $15,000 plus current taxes for the second year, with the option of extending the lease for three years at a rental of $25,000 for the third year and $30,000 for each of the fourth and fifth years, and the first year's rent had been paid. 259 The new company had also acquired the second parcel of Ohio property prior to the end of 1934 and a mortgage note in the face amount of $13,000, secured by a first mortgage on a residence in Lakewood, Ohio, all for $30,000, the deposited bonds having been applied in part payment thereof. This property was leased for a period of five years, ending April 30, 1940, at an annual rental of $7,500 for each of the first two years, $8,000 for the third year and $9,000 for the fourth and fifth years, with the option to the lessee of renewing the lease for an additional period of five years at a rental to be agreed upon, 1081 but not to exceed $12,000, and to purchase the property at an amount equal to ten times the annual rental then current. The committee and the new company also had a substantial interest, as the holder of 97 percent of the outstanding bonds, in the property located in New York. In a letter written by the committee to the depositing bondholders under date of October 1, 1936, it was stated that the new corporation then had on hand the following cash and properties: 1. Cash $37,640.63. 2. The Payne Avenue property, leased to Morgan Lithograph Corporation. 3. The East 30th Street property leased to Bonnar-Vawter Fanform Company, Inc. 4. A purchase money note in the face amount of $60,000 executed by Morgan Lithograph Corporation, secured by a chattel mortgage on equipment and machinery sold to that corporation and located in the Payne Avenue plant, Cleveland, Ohio. 5. A bond in the face amount of $30,000 executed by Laundered Service, Inc., secured by a purchase money mortgage on the Elmhurst, New York, Property, the unpaid balance of principal upon which is $29,500. 6. A defaulted note in the face amount of $13,000 secured by a first mortgage on a dwelling on1082 West 117th Street in Lakewood, Ohio, upon which foreclosure proceedings are pending. The total amount of the indebtedness of the new corporation was stated to be not in excess of $11,500. In that year petitioner received a cash dividend of $100 upon his stock in the corporation. While the value of petitioner's interest in the corporation in 1936 is no criterion by which the value of such interest in 1934 can be determined, it is nevertheless obvious, even if the situation as it existed in 1936 be ignored, that such interest had a value greater than that reported by him. If, therefore, we are in error in concluding that section 112(b)(3) or (b)(5) precludes the allowance of the claimed deduction, the deficiency determined by the Commissioner must be approved for failure of the petitioner to establish the portion of the debt which was worthless. Reviewed by the Board. Judgment will be entered under Rule 50.Footnotes1. SEC. 112. RECOGNITION OF GAIN OR LOSS. (a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. (b) EXCHANGES SOLELY IN KIND. - * * (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation, a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. * * * (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. * * * (g) DEFINITION OF REORGANIZATION. - As used in this section and section 113 - (1) The term "reorganization" means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation, or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred * * *. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624230/	WILLIAM D. KLEIMAN AND EDRIS M. KLEIMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKleiman v. CommissionerDocket No. 25260-82.United States Tax CourtT.C. Memo 1984-308; 1984 Tax Ct. Memo LEXIS 365; 48 T.C.M. (CCH) 301; T.C.M. (RIA) 84308; June 19, 1984. 365 Held: Wages received by petitioner-husband in exchange for his services are income, subject to taxation. Sec. 61(a)(1), I.R.C. 1954. William D. Kleiman, pro se. Crispin G. Cantrell, for the respondent. CHABOTMEMORANDUM OPINION CHABOT, Judge: Respondent determined a deficiency in Federal individual income tax and an addition to tax under section 6653(a) 1 (negligence, etc.) against petitioners for 1979 in the amounts of $3,694 and $184.70, respectively. After concessions by both sides, the issue for decision is whether petitioners are subject to taxation on the amounts paid to petitioner-husband in exchange for his services. 2366 The instant case has been submitted fully stipulated; the stipulation is incorporated herein by this reference. When the petition in the instant case was filed, petitioners William D. Kleiman (hereinafter sometimes referred to as "Kleiman") and Edris M. Kleiman, husband and wife, resided in Madison, Wisconsin. In 1979, Kleiman sold his services to a company that manufactures boilers. In exchange for his services, Kleiman received $30,635.67 in 1979. Petitioners maintain that "wages cannot be regarded as income within the meaning of the Sixteenth Amendment." Respondent contends to the contrary, and further asserts that wages are income subject to taxation under the Internal Revenue Code of 1954. Petitioners' contentions have been analyzed in sufficient detail in Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1119-1122 (1983); we see no need to restate the analysis. The payments received by Kleiman in exchange for his services are income, subject to taxation (sec. 61(a)(1)). We hold for respondent. Decision will be entered in accordance with the parties' stipulation.Footnotes1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for the year in issue. ↩2. The parties have stipulated that, if petitioners do not prevail on this issue, then petitioners are liable for a deficiency and an addition to tax under section 6653(a) in the amounts of $952 and $48, respectively.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624231/	MELVIN B. SMITH AND VELDA A. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket No. 4217-82.United States Tax CourtT.C. Memo 1984-509; 1984 Tax Ct. Memo LEXIS 166; 48 T.C.M. (CCH) 1205; T.C.M. (RIA) 84509; September 24, 1984. Melvin B. Smith, pro se. Michael J. O'Brien and LeRoy D. Boyer,167 for the respondent. WILES MEMORANDUM OPINION WILES, Judge: Respondent determined the following deficiencies in, and additions to, petitioners' Federal income taxes: Addition to TaxYearDeficiency1 Sec. 6653(a) 1978$466.08$23.301979446.0822.30After concessions by the parties, the sole issue remaining for decision is whether petitioners are entitled to a foreign tax credit under section 901 for the taxable years in issue. Some of the facts have been stipulated and are found accordingly. Petitioners Melvin B. Smith and Velda A. Smith (hereinafter petitioners) resided in Wichita, Kansas, when they filed their petition in this case. Petitioners timely filed their joint income tax returns for the taxable years 1978 and 1979 with the Internal Revenue Service Center in Austin, Texas. They computed their taxable income on a calendar basis and reported their income and deductions in accordance with the cash method of accounting. During the168 taxable years 1978 and 1979 petitioners had no foreign source income. They claimed foreign tax credits of $401.08 and $40.56 on their 1978 and 1979 returns, respectively, based upon a carryover of foreign taxes from the taxable year 1976. Respondent determined that petitioners were not entitled to claim a foreign tax credit during the years in issue on the basis that they had no foreign source income in those years. In general, subject to the limitation of section 904, section 901(a) and (b) 2 allows a foreign tax credit for the amount of any creditable taxes paid or accrued during the taxable year to a foreign country or United States possession. 169 The section 904 limitation on which we focus in this case is the following: SEC. 904. LIMITATION ON CREDIT. (a) Limitation.--The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. For purposes of the preceding sentence in the case of an individual the entire taxable income shall be reduced by an amount equal to the zero bracket amount. 3 [Emphasis added.] In the present case, petitioners had no income from sources without the United States during 1978 and 1979 and, hence, no taxable income from such sources in those years. See sec. 862(b). Pursuant to section 904(a), therefore, the maximum allowable foreign tax credit for petitioners' 1978 and170 1979 taxable years is zero. Under the express language of sections 901(a) and (b) and 904(a), the limitation of section 904(a) applies regardless of whether the foreign taxes that give rise to a credit are those that are actually paid or accrued during the taxable year in issue or those that the deemed paid or accrued during the taxable year in issue pursuant to section 904(c) 4 because they arise as a result of carrybacks or carryovers from other taxable years. 5 See (former dissenting opinion of Wilbur, Cir. J., reported at adopted as the majority opinion, upon rehearing); . 171 It is true, as petitioners note, that the underlying purpose of the foreign tax credit provisions is to eliminate double taxation. See ; .Contrary to petitioners' contention, however, Congress did not intend that a taxpayer be allowed a credit against United States tax for all creditable foreign taxes paid. Rather, Congress limited the foreign tax credit through section 904(a) because [i]t is not the purpose of this foreign tax credit allowance to relieve taxpayers from bearing the full United States tax burden attributable to income arising from sources within this country.See H. Rep. No. 350, 67th Cong., 1st Sess. 178 (1921); H. Rep. No. 855, 76th Cong., 1st Sess. 5 (1939). [; footnote omitted.] Petitioners here are requesting that the foreign taxes they paid be used to offset United States tax on United States source income. This is not the purpose of the credit and is specifically prohibited by section 904(a). 172 We hold for respondent on this issue. Due to the parties' concessions, 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 taxable years in issue, unless otherwise indicated.↩2. SEC. 901. TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS OF THE UNITED STATES. (a) Allowance of Credit.--If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) * * . (b) Amount Allowed.--Subject to the limitation of section 904, the following amounts shall be allowed as the credit under subsection (a): (1) Citizens and domestic corporations.--In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States * ↩3. The limitation of section 904(a) may be expressed by means of the following formula: Taxable income from sources without the United States / Entire taxable income X United States tentative tax = Maximum allowable credit.↩4. Sec. 904(c). Carryback and Carryover of Excess Tax Paid.--Any amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accured to foreign countries or possessions of the United States in [certain] * * preceding * * * [and] succeeding taxable years, * * * to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). * * * ↩5. We, therefore, need not analyze the complicated provisions of section 904(c), and accompanying regulations, as petitioners request. We assume, arguendo, that after the application of section 904(c), petitioners had foreign taxes deemed paid or accrued in 1978 and 1979 available for a section 901 credit.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624232/	WILLIS O. GARRETT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Garrett v. CommissionerDocket No. 40721.United States Board of Tax Appeals19 B.T.A. 1256; 1930 BTA LEXIS 2228; May 29, 1930, Promulgated 2228 Selling costs incident to the sale of real estate by one not a dealer, the profit being reported on the installment method, held to constitute a reduction of selling price and not a deduction from income. Decision in Mirs. E. A. Giffin,19 B.T.A. 1243">19 B.T.A. 1243, followed. Willis O. Garrett pro se. Maxwell E. McDowell, Esq., for the respondent. ARUNDELL1256 For the year 1925 the respondent determined a deficiency in tax in the amount of $638. Of this amount $431.06 is in controversy. The issue is whether, in reporting on the installment basis the taxable 1257 profit from a sale of real estate, petitioner may deduct a commission and expenses from the initial payment received on the sale. The facts were stipulated. FINDINGS OF FACT. On December 25, 1918, petitioner acquired by gift an unimproved lot in a subdivision known as Garden of Eden in the city of Miami, Dade County, Fla. The fair market value of the lot at that time was $2,500. In 1925 petitioner sold the lot for a contract sale price of $85,000 and in that year conveyed title to the purchaser by general warranty deed. He received $20,000 of the sale2229 price in cash in 1925, but no part of the balance was due, payable, or paid to the petitioner in that year. The balance of the purchase price, to wit, $65,000, was represented by four promissory notes maturing in the years 1926, 1927, 1928, as follows: six months, one, two, and three years, respectively, and payment of the notes was secured by a first mortgage on the land, which mortgage and notes were made and delivered by the purchaser to petitioner in the year 1925. The petitioner expended $261.50 in 1925 for revenue stamps, abstract and recording fees, and accrued taxes and legal fees incident to and in connection with the sale of the real estate. The petitioner paid a commission of $5,000 to a real estate broker other than the purchaser in the year 1925 for and in consideration of services rendered by said broker in negotiating the sale of the real estate. The services so rendered were the sole consideration for the payment of the commission and said services were completely performed in 1925. The contract between the petitioner and real estate broker under which the commission was paid was completely performed in the year 1925. The liability of petitioner to pay the2230 broker his commission was not in any respect contingent upon the above-mentioned promissory notes, representing the deferred payments, being paid, and in the event of default in the payment of said deferred payment notes petitioner had no claim whatsoever for the recovery of any part of the commission paid. The commission paid was reasonable in amount. The petitioner did not keep books of account during the year 1925, and he reported his income for said year on the cash receipts and disbursements basis. Petitioner was not a dealer in real estate in the year 1925. 1258 The petitioner and the respondent computed the taxable profit on the sale here involved as follows: PETITIONER'S METHODSale price:Cash$20,000.00Mortgage65,000.00$85,000.00Cost, acquired by gift December 25, 19182,500.00Total profit to be realized82,500.00Percentage of profit, 97%.97% of $20,000.00 initial payment19,400.00Commission and selling expenses$5,161.50Tax to date of sale100.005,261.50Realized cash profit14,128.50RESPONDENT'S METHODSale price$85,000.00Cost$2,500.00Commission and selling expenses5,161.507,661.50Total profit to be realized77,338.50Percentage of profit, 90.98 11/17%.90.98 11/17% of $20,000.00, initial payment$18,197.29Less taxes100.00Net taxable profit for 192518,097.29*2231 OPINION. ARUNDELL: The question presented in this case is the same as that in , and in accordance with our decision in that case we affirm the respondent's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624233/	JOHN WATTS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWatts v. CommissionerDocket No. 8457-93United States Tax CourtT.C. Memo 1995-196; 1995 Tax Ct. Memo LEXIS 197; 69 T.C.M. (CCH) 2537; T.C.M. (RIA) 95196; May 3, 1995, Filed 197 Decision will be entered under Rule 155. John Watts, pro se. For respondent: Michael D. Baker PARKERPARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows: Additions to TaxSection1Section2SectionYearDeficiency6653(b)(1)6653(b)(2)66541983$ 3,292$ 1,6463$ 201198430,07315,03741,77519853,1051,553517819861,3561,017665Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years before the Court, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent concedes that petitioner did198 not have long-term capital gains during the taxable years 1983 and 1984, and petitioner concedes that the amounts of his remaining income as determined by respondent in the notice of deficiency are correct. The remaining issues to be decided are: (1) Whether petitioner is liable for the deficiencies in taxes attributable to his remaining income for each of the years at issue; (2) whether petitioner is liable for the additions to tax for fraud under section 6653(b)(1) and (2) for the taxable years 1983, 1984, and 1985 and under section 6653(b)(1)(A) and (B) for the taxable year 1986; (3) if petitioner is not liable for part or all of the additions to tax for fraud for any of the years at issue, whether petitioner is liable for the additions to tax for negligence under section 6653(a)(1) and (2) for the taxable years 1983, 1984, and 1985 and under section 6653(a)(1)(A) and (B) for the taxable year 1986; (4) if petitioner is not liable for part or all of the additions to tax for fraud for any of the years at issue, whether petitioner is liable for the addition to tax under section 6651(a) for failure to file tax returns for each of the years at issue; and (5) whether petitioner199 is liable for the addition to tax under section 6654(a) for failure to pay estimated tax for each of the years at issue. FINDINGS OF FACT Essentially all of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. BackgroundPetitioner, John Watts, resided in Philadelphia, Pennsylvania, at the time he filed the petition in this case. When petitioner came to this country, he did not speak English. He worked hard and became a masonry worker. People liked his work, and he made money and many friends. On April 18, 1967, petitioner and his now deceased former wife, Violet Watts (Mrs. Watts), granted six rental properties to an inter vivos trust controlled by petitioner and purportedly created for the benefit of his children, Gregory Watts, Andria Watts, Olga Watts, and Alexander Watts. On January 4, 1980, petitioner executed a trust indenture for the six properties granted to the inter vivos trust. 1200 On July 1, 1969, petitioner and Mrs. Watts purchased an apartment building located in Atlantic City, New Jersey, for $ 126,000. On August 1, 1979, petitioner sold the apartment building for $ 340,000. Petitioner received $ 34,000 of the sale price at the time the agreement of sale was signed and $ 66,000 at the time of settlement. Petitioner held a mortgage note on the property for $ 190,000. The mortgage note required that principal and interest be paid for 5 years based on an amortization over a 15-year period with an interest rate of 10 percent. The balance was to be paid in full at the end of the 5-year term. In addition, the purchasers were obligated to pay and did pay petitioner $ 50,000 of the mortgage balance on January 2, 1980. During the taxable years 1983 and 1984, petitioner received each scheduled payment due on the mortgage note. Petitioner received interest on the mortgage note in the amounts of $ 17,724.06 in 1983 and $ 10,473 in 1984. On August 24, 1984, petitioner received $ 159,946.85 as the final payment on the mortgage note. On August 27, 1984, petitioner purchased a $ 55,000 certificate of deposit (CD) from Fidelity Bank (the Fidelity CD). The Fidelity201 CD was for a term of 30 months with interest at the rate of 11.11 percent. On August 27, 1984, petitioner deposited $ 18,278 of the $ 159,946.85 payment into his Fidelity Bank checking account, and, on August 29, 1984, he deposited $ 7,000 of that payment into his Fidelity Bank money access account. During the taxable year 1984, petitioner received interest income in the amount of $ 2,046 from Fidelity Bank, which the bank reported to the Internal Revenue Service (the IRS). During the taxable year 1984, petitioner maintained a savings account at First American Savings Bank. On August 27, 1984, petitioner purchased a CD at First American Savings Bank for $ 80,000 (the First American CD). During the taxable year 1984, petitioner received interest income from the First American CD in the amount of $ 3,163, which interest was automatically deposited into his First American savings account and which interest First American reported to the IRS. During the taxable year 1985, petitioner received interest income from the Fidelity CD in the amount of $ 6,138. During the taxable year 1985, petitioner received interest income from the First American CD in the amount of $ 9,044.61 and interest202 income from the First American Bank savings account in the amount of $ 38.17. During the taxable year 1986, petitioner received interest income from his Fidelity Bank CD in the amount of $ 6,138. During the taxable year 1986, petitioner received interest income from his First American CD in the amount of $ 8,090.68 and interest income from his First American savings account in the amount of $ 28.65. In summary, during the taxable years at issue, petitioner received interest income in the following amounts, rounded to the nearest dollar: Taxable YearIncome1983198419851986Mortgage note$ 17,724$ 10,473----Fidelity CD02,046$ 6,138$ 6,138First AmericanCD03,1639,0458,091Savings account003829Total Interest$ 17,724$ 15,682$ 15,221$ 14,258In addition to the interest income, petitioner received other income during the taxable year 1985 in the amount of $ 5,727. Petitioner did not file Federal individual income tax returns (Forms 1040) for the taxable years 1983, 1984, 1985, or 1986. He also did not file in any of those years any Federal fiduciary income tax return (Form 1041) for the trust he purportedly created203 for his children. In the notice of deficiency, respondent determined that petitioner had taxable income during the years at issue in the following amounts: Taxable YearIncome 1983 1984 1985 1986 Interest$ 17,724 $ 15,682 $ 15,220 $ 14,270 Interest forfeiture0 0 0 (1,240)Other income0 0 5,727 0 Capital gain2,992 65,874 0 0 Personal exemption(1,000)(1,000)(1,040)(1,080)Taxable income$ 19,716 $ 80,556 $ 19,907 $ 11,950 OPINION DeficienciesIn the notice of deficiency for the years before the Court, respondent determined that petitioner failed to report capital gain on the installment sale of the Atlantic City apartment building. Following the trial of this case, however, respondent discovered that, in a previous examination of petitioner's taxable years 1977 through 1982, the examining agent had included the entire long-term capital gain in the year of the sale, 1979. As a result, respondent filed a notice of partial concession, conceding the capital gains issue for 1983 and 1984. At the trial of this case, petitioner did not dispute the amount of his income for the years before the Court 2205 204 and instead explained his reasons for not filing returns or paying any tax. Petitioner failed to pay his taxes and to file his returns because he contends that he is "The Messiah and the Witness from heaven". He testified that one day he started reading a Bible and began to see that the Bible was describing his destiny, his past, his present life, and his future. Petitioner says that the Bible identifies his name, the place of his birth, his father, mother, children, and wife. Petitioner also testified that he is the owner of this country, that he bought this land 300 years ago. As the owner of this country, petitioner says that he is to collect taxes, not pay them. He states that he cannot pay the taxes because he cannot break the law of God. Petitioner also testified that, after Watergate, President Nixon "gave the presidency" to him rather than to then Vice-President Ford. Petitioner contends that the country owes him for 20 years of "presidency wages". 3As to the petitioner's equitable claim of "set-off" against the taxes due and owing, this Court takes judicial notice of the fact that Gerald Ford was President of the United States following President Nixon's resignation in 1974, and that Presidents Carter, Reagan, Bush, and Clinton206 have been duly elected to and served in that office since that time. Furthermore, this Court lacks jurisdiction with respect to such a claim. See Gertz v. Commissioner, 64 T.C. 598">64 T.C. 598, 600 (1975); see also Akins v. Commissioner, T.C. Memo. 1993-256, affd. without published opinion 35 F.3d 577">35 F.3d 577 (11th Cir. 1994); Randall v. Commissioner, T.C. Memo. 1993-207, affd. without published opinion 29 F.3d 621">29 F.3d 621 (2d Cir. 1994). We hold that petitioner is liable for the deficiencies in taxes on his income for the years at issue as determined by respondent in the notice of deficiency, except for the capital gain for the taxable years 1983 and 1984, which had already been included in petitioner's income for the taxable year 1979, and except for $ 12 of the interest income for 1986.4207 Additions to Tax1. FraudIn the notice of deficiency, respondent determined that petitioner is liable for the additions to tax for fraud under section 6653(b)(1) and (2) for the taxable years 1983 through 1985 and section 6653(b)(1)(A) and (B) for the taxable year 1986. Respondent bears the burden of proof and must establish each element of fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Wright v. Commissioner, 84 T.C. 636">84 T.C. 636, 639 (1985). Fraud is actual, intentional wrongdoing, and the intent is the specific purpose to evade a tax believed to be owing. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968). Respondent must show that petitioner intended to evade taxes by conduct calculated to conceal, mislead, or otherwise prevent the collection of the tax. Id. at 1004. Fraud is never to be presumed. Toussaint v. Commissioner, 743 F.2d 309">743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo. 1984-25. The existence of fraud is a question of fact to be determined on the basis of the entire record. 208 Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud, however, can seldom be proved by direct proof of the taxpayer's intention. Fraud can be established by circumstantial evidence and by reasonable inferences drawn from the taxpayer's entire course of conduct. Spies v. United States, 317 U.S. 492">317 U.S. 492, 499 (1943); Toussaint v. Commissioner, supra at 312. Courts frequently list various factors or "badges of fraud" from which fraudulent intent may be inferred. Although such lists are nonexclusive, some of the factors this Court has considered as indicative of fraud are (1) understatement of income, (2) inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of assets, (5) failure to cooperate with the tax authorities, (6) engaging in illegal activities, and (7) dealing in cash. Meier v. Commissioner, 91 T.C. 273">91 T.C. 273, 297-298 (1988) (citing Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307-308 (9th Cir. 1986),209 affg. T.C. Memo 1984-601">T.C. Memo. 1984-601). Respondent has established that petitioner intentionally failed to file tax returns, and while that is a factor to be considered, failure to file, standing alone, does not prove fraud. Kotmair v. Commissioner, 86 T.C. 1253 (1986). Petitioner did not conceal his assets or his income. His money was in banks or other financial institutions, which reported the interest to the IRS. His records were adequate and permitted the parties to stipulate to the various items of unreported income. While there has been a pattern of petitioner's failing to file returns or pay taxes, his actions seem to be motivated by what he sees as his religious mission rather than by any attempt to evade taxes. Based on the entire record, we conclude that respondent has failed to prove by clear and convincing evidence any intent on petitioner's part to evade taxes. Therefore, we hold that petitioner is not liable for the additions to tax for fraud. 2. NegligenceIn the notice of deficiency, respondent determined that, in the event petitioner is not liable for the additions to tax for fraud, petitioner is liable210 for the additions to tax for negligence under section 6653(a)(1) and (2) for the taxable years 1983 through 1985 and under section 6653(a)(1)(A) and (B) for the taxable year 1986. Negligence is the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Respondent's determination of negligence is presumed correct, and petitioner bears the burden of proving otherwise. Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791 (1972). We find, under the circumstances of this case, that petitioner was negligent. Petitioner intentionally failed to file returns for any of the years at issue. Additionally, petitioner has no legal basis to claim that he should not be required to file returns and pay income taxes. We hold, therefore, that petitioner is liable for the additions to tax for negligence for each of the years at issue. 3. Failure to FileIn the notice of deficiency, respondent determined that, in the event petitioner is not liable for the additions to tax for fraud, petitioner is liable for the additions to tax211 for failure to timely file returns for each of the years at issue under 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). The burden of proof is on petitioner to show that the failure is due to reasonable cause and not willful neglect. United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245 (1985); Baldwin v. Commissioner, 84 T.C. 859">84 T.C. 859, 870 (1985). To prove "reasonable cause", a taxpayer must show that he or she exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. Crocker v. Commissioner, 92 T.C. 899">92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. To disprove "willful neglect", a taxpayer must prove that the late filing did not result from a "conscious, intentional failure or reckless indifference." United States v. Boyle, supra at 245-246.212 Generally, a taxpayer may establish reasonable cause for failing to file a timely return by proving that he or she reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return and later found that such advice was erroneous or mistaken. See United States v. Boyle, supra at 250; Estate of Paxton v. Commissioner, 86 T.C. 785">86 T.C. 785, 820 (1986). Petitioner intentionally failed to file tax returns. He has not convinced the Court that his failure to file was due to reasonable cause. Accordingly, we hold that he is liable for the addition to tax for failure to file under section 6651(a) for each of the years at issue. 4. Failure to Make Estimated Tax PaymentsIn the notice of deficiency, respondent determined that petitioner is liable for the addition to tax under section 6654(a) for failure to pay estimated tax. Section 6654(a) imposes a tax penalty for an individual taxpayer's underpayment of estimated tax and sets forth a formula for determining the amount of the penalty. Petitioner did not come within any of the applicable exceptions for the year 1983. Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 913 (1988).213 This penalty may be waived for the taxable years 1984, 1985, and 1986, but only if the taxpayer proves that he or she fits into one of the exceptions enumerated in section 6654(e). 5Section 6654(e)(3)(A) provides that the addition to tax provided in section 6654(a) shall not be imposed with respect to any underpayment "to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience." Sec. 6654(e)(3)(A). We conclude that this exception does not apply here. Accordingly, petitioner is liable for the addition to tax under section 6654(a) for each of the years at issue. 214 To reflect respondent's concession and the above holdings, Decisions will be entered under Rule 155. Footnotes. In the alternative to the fraud additions, respondent determined additions to tax for negligence and failure to file.↩1. For the taxable year 1986, the section is 6653(b)(1)(A).↩2. For the taxable year 1986, the section is 6653(b)(1)(B).↩3. 50 percent of the interest due on $ 3,292.↩4. 50 percent of the interest due on $ 30,073.↩5. 50 percent of the interest due on $ 3,105.↩6. 50 percent of the interest due on $ 1,356.↩1. The record does not establish the existence of a valid trust for the benefit of petitioner's children. In any event, any such trust would be a grantor trust; it is clear that petitioner himself controlled the property and received the income in this case.↩2. Petitioner testified that he had "no arguments with [respondent's counsel]" and that respondent's counsel did a "terrific job". At the Court's direction respondent's counsel had assisted petitioner in organizing his documentation, which had never been made available to respondent before the calendar call of the trial session. The parties were able to submit a comprehensive stipulation of facts when the case was called for trial 4 days later.↩3. Respondent's pre-trial memorandum characterized petitioner as a tax protestor. After working with him in the pre-trial preparations, respondent's counsel characterized him as contending that "he's of a higher order". Petitioner seemed to be sincere in his religious beliefs. The Court initially had some concern as to whether petitioner was competent to represent himself in this proceeding (Rule 60(d) -- last sentence) but became satisfied that he was competent to do so. Petitioner understood the nature of the Tax Court proceeding, the Court's jurisdiction to determine the deficiencies for the years at issue, and the financial aspects of the case. Although petitioner's arguments for not filing tax returns and not paying taxes may be unreasonable, petitioner had the capacity to maintain his action in this case.↩4. The deficiency notice indicated interest income of $ 14,270 for 1986, but the record before the Court established that the amount was $ 14,258.↩5. Sec. 6654 was substantially amended by sec. 411 of the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 494, 788, 790, and now allows the Commissioner, under sec. 6654(e)(3)↩, to waive the addition "by reason of casualty, disaster, or other unusual circumstances [where] the imposition of such addition to tax would be against equity and good conscience." However, this amendment does not apply to the 1983 taxable year. DEFRA sec. 414(a)(2), 98 Stat. 793.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624234/	R. E. WYCHE, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL, REVENUE, RESPONDENT. Wyche v. CommissionerDocket Nos. 75071, 75072, 75073, 75074, 75075, 75083, 75102, 75156, 75807, 75808, 75809.United States Board of Tax Appeals36 B.T.A. 414; 1937 BTA LEXIS 716; August 4, 1937, Promulgated 716 On January 20, 1930, a corporation paid to its stockholders a cash dividend of $89,505 and petitioners in these proceedings received the amounts of such dividend set opposite their names in our findings of fact. The corporation was solvent when the dividend was paid and remained so for several months after the dividend was paid. Held, petitioners are not liable as transferees for the corporation's income taxes for the year 1930. Samuel Keller,21 B.T.A. 84">21 B.T.A. 84; affd., 59 Fed.(2d) 499, followed. Benjamin E. May,35 B.T.A. 84">35 B.T.A. 84, distinguished. S. P. Cousin, Esq., and S. L. Herold, Esq., for the petitioners. Lloyd W. Creason, Esq., and C. R. Marshall, Esq., for the respondent. BLACK 414 These consolidated cases involve the liability of the petitioners as transferees of the assets of the Sales-Walker Oil & Gas Co., of Plain Dealing, Louisiana, for the unpaid income tax in the amount of $9,556.28 assessed against the corporation for the year 1930, plus interest due thereon. The amounts of transferee liability which the Commissioner has determined against each petitioner are as follows: 717 PetitionerDocket No.AmountR. E. Wyche75071$3,870.00J. E. Walker750729,556.28W. M. Pollock750732,700.00D. A. Pollock750742,025.00George W. Wetherbee750759,556.28C. W. Lane750831,800.00W. E. Hall75102$9,556.28J. T. Tanner751561,350.00Fenet & Caldwell758071,260.00S. J. Caldwell, Jr758081,260.00J. D. Fenet758091,260.00It is the contention of the respondent and he so determined, that the payment of a dividend by the taxpayer corporation on January 415 20, 1930, to the petitioners in the sum of $89,505 rendered the corporation insolvent and that the petitioners are liable for said tax and interest as transferees to the extent determined by him. Petitioners contend that this determination of the respondent is erroneous because the insolvency of the taxpayer was not brought about by the payment of the dividend in question, but was caused by subsequent losses in drilling and oil operations. Petitioners further allege that the respondent erred in not allowing the transferor taxpayer 27 1/2 percent depletion on a cash payment of $100,000 it received on January 18, 1930, as a bonus for an assignment718 of certain oil and gas leases; in not allowing a net loss to be carried over from 1928; and in not allowing a loss on equipment and abandoned wells in 1930. No evidence was introduced at the hearing relative to the last two allegations of error and presumably petitioners have abandoned them and consequently respondent's action thereon is approved. FINDINGS OF FACT. The Sales-Walker Oil & Gas Co., of Plain Dealing, Louisiana, sometimes hereinafter referred to as Sales-Walker Co., was a corporation organized under the laws of Louisiana in 1923 for the purpose of owning, leasing, dealing in, and operating oil and gas properties. During the taxable year it had outstanding $99,450 par value of its capital stock. Prior to the taxable year the taxpayer corporation became the owner of a number of oil and gas leases in the Carterville Oil Field in Bossier Parish, Louisiana. One of these was known as the Bolinger lease and another as the Kilgore lease. The Kilgore lease adjoined the Bolinger lease and in 1929 was assigned by the taxpayer to the Muslow Oil Co., the taxpayer retaining a 1/24 royalty interest therein. The first discovery well in the Carterville Oil Field was brought719 in by the Muslow Oil Co. on the Kilgore lease in November 1929 and was less than a quarter of a mile from the Bolinger lease. The Muslow Oil Co. in the latter part of December 1929 brought in another well, known as Peyton No. 1, located on a different piece of property within 150 to 200 feet of taxpayer's Bolinger property. The first well produced about 1,500 barrels daily and the second about 1,700 barrels. On December 27, 1929, the Sales-Walker Co. made a contract with R. G. Smitherman to drill a well on its Bolinger lease at a cost of $15,000. The well was to be located about 300 feet from the Muslow Oil Co.'s Peyton No. 1 well and about a quarter of a mile from its Kilgore well and on a line between the two. The drilling rig was 416 moved to the Bolinger lease at once and drilling began about January 10, 1930. On January 8, 1930, the taxpayer entered into a contract with the Phillips Petroleum Co. of Oklahoma, by which it assigned and transferred to the Phillips Petroleum Co. all its rights, title, and interest under certain oil and gas leases, which included the Bolinger lease, for a cash consideration of $100,000 and a contract to pay $150,000 out of oil, if720 and when produced. The contract in that respect reads as follows: As additional consideration, Assignee agrees to pay Assignor the sum of Seventy-Five Thousand and No/100 ($75,000.00) Dollars, out of one-half (1/2) of seven-eighths (7/8) of the first oil produced, saved and marketed from said premises, if and when produced, saved and marketed; and thereafter Seventy-Five Thousand and No/100 ($75,000.00) Dollars out of one-fourth (1/4) of seven-eights (7/8) of the next oil produced, saved and marketed from said premises, if and when produced, saved and marketed. It is understood that Assignee's agreement to make such oil payments does not impose upon Assignee any obligation to develop said property, nor does it impose upon Assignee any obligation to make such payments unless the property produces oil sufficient to make them out of the working interest as stipulated. It was further agreed that the Sales-Walker Co. would complete the well it had contracted for with Smitherman and that the purchaser, Phillips Petroleum Co., would pay it $15,000 for said drilling. In addition there was a small producing well already on the property. The purchaser further obligated itself to begin721 drilling two additional wells on or before April 1, 1930. On January 18, 1930, the cash payment of $100,000 was made to the transferor corporation by the Phillips Petroleum Co. and on January 20, 1930, the board of directors of the taxpayer met and took the following action, as shown by the minutes: The President and Chairman, George W. Wetherbee, explained the object of said meeting was for the discussion of payment of dividends, as a result of the sale of certain leases the Company owns in Bossier Parish, Louisiana, which leases were sold to the Philips Petroleum Company, as per authorization by Stock Holders meeting, which was held on January 14, 1930, after full discussion of the Company's affairs and indebtedness, and upon motion of J. M. Henderson and second by W. M. Pollock, the following resolution was unanimously adopted, to-wit: BE IT RESOLVED, that J. E. Walker, Secretary & Treasurer, be and he is hereby authorized to issue and pay a dividend of 90% to all the stockholders holders of this corporation out of the funds now on hand of this corporation, and also to pay all of the current debts and obligations of this corporation due and owing at this time. There being722 no further business coming before the Board of Directors at this time, the meeting adjourned, subject to call. 417 The dividend was paid at once to the petitioners, who owned the number of shares and received the amounts opposite their names, as follows: NameShares ownedAmount paidW. M. Pollock30$2,700.00George W. Wetherbee158.514,265.00R. E. Wyche433,899.00D. A. Pollock22.52,625.00J. E. Walker247.522,275.00C. W. Lane201,800.00W. E. Hall142.512,825.00J. T. Tanner (a member of Morefield & Tanner, a former partnership which received $1,395)1 15.697.50Fenet & Cald well (a partnership of which petitioner S. J. Caldwell, Jr., and J. D. Fenet were members and received equal parts of $1,260 or $630 each)14.1,260.00The dividend distribution of $89,505 made by the Sales-Walker Co. to its stockholders on January 20, 1930, was not made while the corporation was insolvent and the dividend distribution in question did not leave the corporation insolvent after it was paid. Prior to the taxable year the taxpayer paid its stockholders dividends of 57723 percent on its capital stock. The well, which was contracted for and was being drilled when the sale was made, proved a commercial failure and after drilling two other dry holes the Phillips Petroleum Co. quit further operations and was ready to abandon the property in July 1930. No oil had been produced and nothing had been paid the taxpayer on account of the $150,000 in oil payments. On July 10, 1930, by written contract with the Phillips Petroleum Co., the Sales-Walker Co. reacquired the property for a consideration of $1,600 cash and released the Phillips Petroleum Co. of its obligation to pay the taxpayer $150,000 in oil payments. After reacquiring the property the taxpayer attempted to operate the well, which it had started in January 1930, but its efforts were not successful and after expending the funds it had on hand further operations were discontinued the the property was abandoned in 1931. Thereafter the Sales-Walker Co. was insolvent and has been insolvent ever since. The Sales-Walker Co. filed a corporation income tax return for the year 1930 which disclosed gross income of $89,950.09, deductions of $7,653.04, and a net income of $82,297.05, upon which a tax724 of $9,875.65 was reported. This tax was duly assessed and has never been paid. A small amount thereof has been abated and the amount now unpaid is $9,556.28 plus interest as provided by law. $85,550.35 of the profit of the taxpayer resulted from the sale to the Phillips Petroleum Co. The obligation of the Phillips Petroleum Co. to pay the Sales-Walker Co. $150,000 in oil payments, if and when oil was 418 produced from the property, had a fair market value of $75,000 on January 20, 1930, when the dividend of $89,505 was paid by the Sales-Walker Co. to its stockholders. The taxpayer did not claim and the respondent did not allow 27 1/2 percent depletion on the cash payment of $100,000. OPINION. BLACK: There are two questions presented by the pleadings for decision. (1) Are petitioners liable as transferees of the Sales-Walker Co.? The amount which each petitioner received of the January 20, 1930, dividend distribution is not in issue. Those amounts have been stipulated. Each petitioner does however dispute that he is liable as transferee for any amount. (2) If petitioners are liable as transferees, are they entitled to have the transferors' tax liability725 for the year 1930 reduced by the allowance of 27 1/2 per centum depletion of the $100,000 cash payment received from Phillips Petroleum Co. as part payment for the assignment of the oil leases in question? It will be unnecessary to discuss issue No. 2 until we have decided issue No. 1, for if we decide issue No. 1 in petitioners' favor then it will be unnecessary for us to decide issue 2, not having the transferor corporation before us. The burden of proof to establish transferee liability is of course upon respondent. As we have already stated, petitioners each admit that they received certain cash dividend distributions from the Sales-Walker Co. in January 1930, but the mere fact of a transfer of part of its assets by a corporation to its stockholders does not establish transferee liability. A necessary item of proof in any transferee proceeding is that the taxpayer transferor was insolvent at the time of the transfer or that the transfer itself made the transferor insolvent, or that the transfer was one of a series of distributions in pursuance of complete liquidation, which left the corporation insolvent. 1 Stockholders receiving dividends from a solvent corporation not726 in liquidation can not be held as transferees. 2Respondent does not dispute the correctness of the foregoing propositions, but he does contend that when the Sales-Walker Co. distributed in January 1930 the cash dividend of $89,505 to its stockholders, it thereby distributed the most of its assets which had value and that the remaining assets left in the hands of the corporation 419 were of insufficient value to discharge its liabilities, including the tax liability here involved. Petitioners contend727 that no tax liability against the corporation had yet accrued for the year 1930, when the dividend distribution was made in January 1930, and therefore the $9,556.28 tax liability here in question should not be considered in determining the corporation's solvency after the dividend distribution was made. We cannot agree with this contention. It seems to be well settled that transferee liability extends to afteraccruing taxes in the sense of retroactive liability for taxes in the year of transfer or prior years. In other words, the liability need not have been known when the transfer was made. 3 So, after all, the decision as to whether petitioners are liable as transferees in the instant case turns upon a question of fact rather than one of law. That question of fact is whether the contingent payments of $150,000 which Phillips Petroleum Co. had contracted to pay the Sales-Walker Co. out of oil, if and when produced, had a fair market value of $75,000 at the time contract was received and at the time the cash dividend distribution of January 20, 1930, was made. 728 The parties all seem to be agreed that the principal asset which the Sales-Walker Co. had left on hand after the payment of the dividend in question was the $150,000 Phillips Petroleum Co. contract for the contingent oil payment. There was, to be sure, several thousand dollars cash left on hand and some other property against which there were only small liabilities exclusive of the tax here involved. The exact amount of these assets and liabilities, exclusive of the oil payment, we have been unable to determine from the evidence. If, however, as respondent contends, this contingent oil contract in question had no fair market value at the time of the dividend payment in question and was not salable at any price, then it seems clear that the Sales-Walker Co. was made insolvent by the dividend distribution and continued so until the present time and there was never any time after the dividend was paid that the corporation could have sold its assets for enough to pay all its liabilities, including the tax liability here in question. On the other hand, if petitioners' contention that the transferor corporation's contract for these contingent oil payments of $150,000 had a fair market729 value of $75,000 at the time the dividend distribution was made is true, then it is clear that the corporation was not made insolvent by the dividend distribution, but its insolvency resulted from subsequent events which had nothing to do with the dividend distribution. 420 The petitioners produced three witnesses: George W. Wetherbee, R. G. Smitherman, Jr., and W. E. Hall, who testified that the contract for $150,000 contingent oil payments from the Phillips Petroleum Co. could have been sold for at least 50 cents on the dollar, or $75,000 in all. Wetherbee and Hall are petitioners in these proceedings and their testimony is of course subject to being weighed from the standpoint of self-interest, but the other witness, R. G. Smitherman, Jr., so far as the record shows, has no interest in these proceedings and his testimony must therefore be viewed as a witness who has no selfinterest. On this evidence we have found that the corporation's contract with the Phillips Petroleum Co. for contingent oil payments had a fair market value of $75,000 at the time of the dividend distribution. This holding makes it necessary for us to hold that the transferor corporation was not730 rendered insolvent by the dividend distribution to stockholders in question, but that its insolvency resulted from later events which occurred in 1930. Counsel for the Commissioner, in contending that the contract of the Sales-Walker Co. with the Phillips Petroleum Co. for contingent oil payments of $150,000, if and when produced, had no fair market value and should be considered valueless in determining whether the dividend distribution of $89,505 rendered Sales-Walker Co. insolvent, cites such cases as , and . From these cases respondent seems to deduce that as a matter of law such contracts have no salable value and therefore should not be considered in determining the solvency or insolvency of a particular taxpayer at the time of a dividend distribution to its stockholders. We do not think , and Board and court cases which have followed it go so far. These cases simply hold that where the future payments are highly contingent in character, a taxpayer on the accrual basis should not be compelled to accrue them as income even though they do731 have some value, or where the taxpayer is on the cash basis he should not be compelled to treat them as property, the equivalent of cash, received in exchange for other property. For example, in the recent case of , we held that the rights acquired by the taxpayer to certain contingent oil payments similar to those in question in the instnat case were contingent in character and that, although the evidence showed they had a fair market value and could have been sold at a substantial discount, the fair market value of such contracts was not accruable as taxable income. In that case we said: The fact that the rights had a fair market value does not of itself require that the amount thereof be accrued as taxable income. ; ; : * * While 421 it is undoubtedly true, as above stated, that the fact that these contracts are property of a sort and have a fair market value does not of itself require that the amount thereof be accrued as taxable income, it is also732 true, we think, that the value of such contracts, where the evidence shows they have value, would have to be considered in determining whether the corporation owning them was solvent or insolvent. In the Burnet v. Logan case, supra, although the Supreme Court held that the taxpayers were entitled to a return of capital investment before paying income tax based on conjectural market value of annual payments, the Commissioner had valued and taxed the right to receive such contingent payments as a part of Mrs. Logan's mother's estate. As to that phase of the matter, the Supreme Court said: * * * From her mother's estate Mrs. Logan obtained the right to share in possible proceeds of a contract thereafter to pay indefinite sums. The value of this was assumed to be $277,164.50 and its transfer was so taxed. Some valuation, speculative or otherwise, was necessary in order to close the estate. Thus, while the value of such a right to receive contingent payments will not be counted as accrued income for one on the accrual basis, or as the receipt of property equivalent to cash for one on the cash basis, nevertheless the value of such a right will be counted as a part733 of the estate, for estate tax purposes. Suppose, for example, that in the case of Mrs. Logan's mother the contract to receive contingent payments, valued at $277,164.50 by the Commissioner for estate tax purposes, had been the only property of the estate and there had been claims against the estate of $25,000. Would it have been held that the estate was insolvent and unable to pay its debts? We think not. Just so in the instant case we do not think we can hold that the Sales-Walker Oil Co. was left insolvent when it distributed to its stockholders a dividend of $89,505 and had left on hand a few thousand dollars cash, some tangible property of comparatively small value, and this contingent right to receive $150,000 in oil payments, which witnesses have testified could have been sold for $75,000. The facts show that the transferor company continued in business a good long while after the dividend distribution in question. As a matter of fact the evidence shows that it has never been dissolved, but still owns a small oil royalty interest from which it occasionally derives an income of an inconsequential amount. There is no doubt but that the transferor corporation is at present734 insolvent and can not pay the tax liability here in question, but, as we have already endeavored to point out, we do not think that respondent has met the burden of proof of showing that this insolvency was brought about by the January 20, 1930, dividend distribution 422 to stockholders. On the contrary, the facts show that several months after the dividend distribution in question, to wit, in July 1930, the transferor corporation, Sales-Walker Co., reacquired the leases from the Phillips Petroleum Co. for $1,600 cash and the cancellation of the contingent oil payments of $150,000. This was after the Phillips Petroleum Co. had drilled three dry holes on the leases and had evidently concluded that the land was unproductive of oil in paying quantities. The transferor corporation was however more optimistic and spent approximately $7,000 more in trying to develop the property as oil producing property and finally abandoned the effort in 1931 after practically all of its funds had been exhausted. It seems to us that it was these subsequent events, including the collapse of Phillips Petroleum Co. obligation to pay $150,000 out of oil if and when produced, which brought about735 the insolvency of the transferor corporation. We think this case is distinguishable from . In that case a corporation exchanged most of its assets for cash and stock of another corporation and pursuant to a plan of complete liquidation, distributed assets to its stockholders in liquidation of its capital stock. A fund left for the payment of creditors was dissipated so that the Federal income tax liability was never paid. On these facts we held that all stockholders receiving distributions in complete liquidation of their stock are liable as transferees of the corporation, since a stockholder is not entitled to receive in such complete liquidation any assets of a corporation until all of its obligations to creditors are discharged. In the instant case there is no evidence to show that the $89,505 dividend declared and paid January 20, 1930, was in pursuance of a plan for the complete liquidation of Sales-Walker Co. On the contrary, as we have already pointed out, the corporation continued in business and later on in the year bought back the leases which it had sold to the Phillips Petroleum Co. and endeavored to develop them. This*736 effort proved a commercial failure and in 1931 the corporation found itself wholly insolvent, with all its money spent and nothing with which to pay the tax liability here involved. We therefore hold on these facts that petitioners are not liable as transferees of the Sales-Walker Oil & Gas Co. This holding makes it unnecessary that we pass upon issue No. 2, relating to the question of percentage depletion on the alleged bonus payment of $100,000. Reviewed by the Board. Decision will be entered as to each petitioner that there is no liability as transferee of the Sales-Walker Oil & Gas Co.Footnotes1. Proceedings of the following petitioners are consolidated herewith: J. Elmer Walker, W. M. Pollock, D. A. Pollock, George W. Wetherbee, C. W. Lane, W. E. Hall, J. T. Tanner, Fenet & Caldwell, S. J. Caldwell, Jr., and J. D. Fenet. ↩1. One half of the shares owned by partnership. ↩1. ; ; ; ; ; affd., ; ; ; and . ↩2. ; appeal dismissed, ; ; and . ↩3. See in general upon this subject: ; United States↩v.; ; affd., ; .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624235/	Estate of Betty Berry, Deceased, Louis Berry, Executor, Louis Berry, Surviving Spouse, Petitioners, v. Commissioner of Internal Revenue, Respondent; L.C.G. Trust No. 2, A. R. Glancy, Jr., Successor Trustee, Petitioner, v. Commissioner of Internal Revenue, RespondentBerry v. CommissionerDocket Nos. 89806, 89963United States Tax Court43 T.C. 723; 1965 U.S. Tax Ct. LEXIS 121; February 25, 1965, Filed February 25, 1965, Filed 121 Decisions will be entered under Rule 50. The G.B.M. Co., a partnership comprised of petitioners and two other partners, sold the Raleigh Hotel located in Washington, D.C., on October 26, 1953, for a stated purchase price of $ 3,240,000. Sellers took back an 11-year note in the stated amount of $ 1,548,739.10. The contract recites the note is to be without interest, but includes a prepayment discount schedule. Earlier offer to purchase made by the buyer contemplated a purchase price of $ 2,800,000 with the sellers taking back a note bearing interest at 4 1/2 percent for the deferred payments. The discount schedule included in both the contract and note was suggested by the sellers' representatives, and was represented by them to, and in fact did, closely parallel the interest which would have accrued under the buyer's earlier offer. In a former proceeding brought in the Tax Court by the buyer, this Court held that the stated purchase price of $ 3,240,000 included $ 440,000 of prepaid interest. Raleigh Properties, Inc., T.C. Memo. 1962-150. Held, the same ruling is required here. Frank W. Donovan and Charles D. Savage, for the petitioners.Ronald S. Supena, for the respondent. Bruce, Judge. Drennen, J., concurs in the result. Mulroney, J., dissenting. Forrester, J., agrees with this dissent. BRUCE 724 Respondent, in his statutory notice of deficiency dated August 29, 1960, determined deficiencies in the income123 taxes of the petitioners for the years and in the amounts hereinafter set forth. By amendment to his answer filed in each of these proceedings, on April 8, 1964, in accordance with the provisions of section 6214(a) of the Internal Revenue Code of 1954, respondent claimed additional deficiencies for 2 of the 3 taxable years involved in each proceeding, based upon the opinion of this Court in Raleigh Properties, Inc., T.C. Memo. 1962-150. The deficiencies per statutory notice, the additional deficiencies per amendment to answer, and the total deficiencies claimed by respondent, are as follows:Docket No. 89806Deficiency perAdditional deficiencyYearstatutory noticeper amendmentTotalto answer1955$ 7,259.25$ 3,566.77$ 10,826.0219568,450.79122.048,572.83195710,249.1110,249.11Docket No. 89963Deficiency perAdditional deficiencyFiscal year endedstatutory noticeper amendmentTotalto answerOct. 31, 1955$ 918.15$ 510.72$ 1,428.87Oct. 31, 19561,674.2917.061,691.35Oct. 31, 19571,561.281,561.28124 The only issue is whether $ 440,000 of the $ 1,683,237.77 profit from the sale of the Raleigh Hotel in Washington, D.C., constitutes ordinary income rather than capital gain.FINDINGS OF FACTSome of the facts have been stipulated and they are found accordingly.725 The petitioners in docket No. 89806 are the estate of Betty Berry, deceased, Louis Berry, executor, and Louis Berry, surviving spouse, with offices at 3500 David Stott Building, Detroit, Mich. For the taxable years 1955 through 1957, Betty Berry and Louis Berry filed joint Federal income tax returns with the district director of internal revenue, Detroit, Mich.The petitioner in docket No. 89963 is the L.C.G. Trust No. 2, created under a declaration of trust dated November 1, 1944, and during the years in issue was a partner of the G.B.M. Co. A. R. Glancy, Jr., is acting as successor trustee with his principal office at 418 Ford Building, Detroit, Mich. Federal income tax returns for the trust for the taxable years ended October 31, 1955, October 31, 1956, and October 31, 1957, were filed with the district director of internal revenue at Detroit, Mich.The G.B.M. Co. was a partnership with its office in125 Detroit, Mich., composed of the following persons and entities with percentage interests as indicated.PercentLouis Berry40Peter A. Miller40L.C.G. Trust No. 2, A. R. Glancy, Jr., successor trustee15Glancy Hospital Trust, A. R. Glancy, Jr., trustee5On October 26, 1953, a contract of purchase and sale was entered into between Louis Berry and his associates, copartners in the G.B.M. Co., as sellers, and Joseph Massaglia, Jr., as purchaser of the Raleigh Hotel, located at 12th Street and Pennsylvania Avenue NW., in Washington, D.C.In the negotiations prior to execution of this contract Massaglia was represented by Palmer Johnson as his attorney, and the sellers were represented by Nordblom Co. of Boston, Mass., as one of the brokers, and by Peter A. Miller, one of the partners in the G.B.M. Co., as the other broker. David M. Miro, petitioner Berry's attorney, also represented the sellers in the negotiations.By letter dated September 1, 1953, Nordblom, as requested by Massaglia, sent Johnson, for the latter's perusal prior to Massaglia's expected arrival in Santa Monica on September 7, 1953, a draft of a proposed "Offer to Purchase" directed126 to Louis Berry and Peter A. Miller, whereby the buyer agreed to purchase the Raleigh Hotel for $ 2,800,000 payable: $ 25,000 with the offer, $ 535,000 on closing, not later than November 1, 1953, and $ 2,240,000 by execution of a purchase money bond and mortgage providing for payments of $ 6,000 per 726 month, first applied to interest at 4 1/2 percent, balance applied to principal to retire the complete indebtedness in 21 years or until paid out.Subsequently, 1 Massaglia, through his attorney, made a written offer to the sellers differing in some respects from the proposed offer enclosed with the Nordblom letter of September 1, 1953, but still providing for a purchase price of $ 2,800,000, with cash payments of $ 560,000 ($ 25,000 on acceptance of the offer, and $ 535,000 on closing) and interest of 4 1/2 percent on the deferred portion of the purchase price, the entire amount of the note to be paid by January 1, 1965. Thereafter, Johnson received a telephone call from a representative of the sellers, believed by him to have been Miller, to the effect that this offer was not acceptable to the sellers and that the only way they would sell would be at a price of $ 3,240,000127 -- $ 440,000 greater than the price mentioned in Massaglia's offer -- and that the note would be made non-interest-bearing. The representative stated that the additional $ 440,000 approximately equaled what the interest would be over a period of 11 years under the terms of the offer drawn by Johnson. Johnson replied that this would not be acceptable to the purchasers for the reason that if the note were paid before maturity, the purchaser would be penalized. Later, the representative of the sellers again telephoned Johnson and suggested the use of a prepayment discount schedule whereby, if the non-interest-bearing note were paid off in advance of the 11 years, an amount which was reduced year by year would be deducted from the note. Johnson satisfied himself that the schedule was roughly parallel to the interest on the deferred payments under the offer of Massaglia and agreed to the suggestion of the sellers' representative. The contract dated October 26, 1953 (Exhibit 9-I), was drafted by Miro upon Berry's instructions and after consultation with Berry and Miller.128 The contract dated October 26, 1953, consists of a written offer executed by Joe Massaglia, Jr., to purchase the Raleigh Hotel property, containing a long recitation of the terms and conditions of the offer. The offer is directed to Louis Berry and Peter A. Miller and the document (Exhibit 9-I) contains an acceptance clause signed by Berry and Miller wherein they "accept the foregoing offer of Joe Massaglia, Jr. to purchase the Raleigh Hotel, Washington, D.C. and agree to sell on the terms and conditions therein set forth." It also contains the acceptance of the two trusts, the other two partners of G.B.M. Co., signed by A. R. Glancy as trustee for each.The terms and conditions set forth in Massaglia's offer are, in part, as follows:727 I, Joe Massaglia, Jr., called the buyer, agree to purchase the Raleigh Hotel * * Washington, D.C.* * * The purchase price shall be Three Million Two Hundred and Forty Thousand Dollars * * payable as follows:Attached hereto is my certified check for Fifty thousand dollars ($ 50,000.00) to be cashed by you upon your acceptance of this offer, and I will pay you an additional Five hundred and ten thousand dollars ($ 510,000.00) 129 in Cashier's or certified check on the closing date, which shall be on or before December 1st, 1953, and not later. I understand that there is a certain first mortgage now against this property held by the National Life and Accident Insurance Company of Nashville, Tennessee, having an unpaid principal balance of $ 1,139,961.03, and bearing interest at the rate of four per cent (4%) per annum on the unpaid principal balance, and which interest thereon is paid to October 1st, 1953, and payable in installment payments of $ 12,300.00 per month until September 1st, 1955, and thereafter at the rate of $ 10,000.00 per month until the maturity date, January 1st, 1965, each installment including interest to date of payment. I will execute a purchase money note payable to you and secured by a recordable second mortgage and chattel mortgage upon the building and land and personal property purchased hereby, to be prepared by your counsel, in the amount of the purchase price less the $ 560,000.00 total cash payment and the amount due on the said first mortgage on the closing date, and which said purchase money note shall be payable in installments of Six thousand dollars ($ 6000.00) per month130 commencing thirty days after the closing date and on the same day of each month thereafter until September 1st, 1955, and then payable in installments of Seven thousand five hundred dollars ($ 7500.00) per month commencing September 1st, 1955, and on the first day of each month thereafter, all without interest thereon except after default and then at the rate of seven percent (7%) per annum, and the entire amount of said note to be paid not later than January 1st, 1965, said note to contain an acceleration clause in the event of thirty days default and to provide for attorney fees in the event of suit thereon. Said note shall contain a pre-payment discount schedule in accordance with Schedule "A" attached hereto. I have examined the first mortgage to the National Life and Accident Insurance Company of Nashville, Tennessee, and am familiar with the terms thereof, and upon closing agree to assume and perform all the conditions thereof.* * * This offer may be assigned by me prior to closing to an individual or corporation to be formed for the purpose of taking title thereto, and in such event you agree to accept such assignee as the sole maker of the promissory note and second131 mortgage and chattel mortgage described above.* * * Schedule "A" Attached to Offer of Joe Massaglia, Jr. to Louis Berry, of Detroit, Michigan, and Peter A. Miller, of New York City, Pertaining to the Raleigh Hotel, Washington, D.C.Schedule "A"The following constitutes the pre-payment discount schedule pertaining to the second purchase money note and mortgage referred to in the attached agreement.In the event of the payment upon any installment date of the entire principal balance owing upon said second purchase money note, there shall be deducted 728 from the unpaid principal balance the discount set forth opposite the following respective period applicable to the date of such payment in full:Discount FromPrincipalBalance:Period: (payment date)To and including December 1, 1954$ 400,000.00To and including December 1, 1955350,000.00To and including December 1, 1956300,000.00To and including December 1, 1957250,000.00To and including December 1, 1958200,000.00To and including December 1, 1959165,000.00To and including December 1, 1960130,000.00To and including December 1, 1961100,000.00To and including December 1, 196260,000.00To and including December 1, 196330,000.00132 On or about November 4, 1953, Massaglia and his attorney, Palmer Johnson, caused Raleigh Properties, Inc., to be incorporated under the laws of California, and on November 16, 1953, Massaglia assigned all his right, title, and interest in the above contract to Raleigh Properties, Inc. It is stipulated that the sale of the Raleigh Hotel was consummated on or about November 23, 1953, between the G.B.M. Co., a partnership, the seller, and Raleigh Properties, Inc., a California corporation, the purchaser.On November 24, 1953, Raleigh Properties, Inc., executed its note in the amount of $ 1,548,739.10, payable to Louis Berry and his associates, a copartnership trading as G.B.M. Co. The note provided for monthly payments in the amount of $ 6,000 commencing January 2, 1954, to and including September 1, 1955; $ 7,500 commencing October 1, 1955, to and including December 1, 1964; the entire amount then remaining unpaid to become due and payable on January 1, 1965. No specific provision was made for the payment of interest, except that each unpaid installment was to bear interest after maturity at the rate of 7 percent per annum until paid. The note contained the following provision: 133 The right is reserved to prepay the entire sums due hereunder, at any time, without penalty therefor. In the event of the payment upon any installment date, of the entire balance owing hereunder, there shall be deducted from said balance owing hereunder the discount set forth opposite the following respective periods applicable to the date of such payment in full:Period: (payment date)Discount From Principal Balance:[Same as in contract dated October 26, 1953, set forth above]All payments received by the partnership on the note were credited by it to principal and none to interest. There were no notations on any of the checks received from Raleigh Properties, Inc., directing the application of the payment represented by the check to either 729 principal or interest, nor was any check of Raleigh Properties, Inc., accompanied by a letter of transmittal giving any directions.On its books, Raleigh Properties, Inc., entered the hotel properties at a cost of $ 2,800,000, and set up $ 440,000 as "prepaid interest." Thereafter, Raleigh Properties, Inc., set up on its books each year, and claimed as a deduction in its returns, a proportional part of the $ 440,000134 as an interest expense. The Internal Revenue Service audited the books of Raleigh Properties, Inc., for the taxable years 1954, 1955, and 1956, and disallowed the interest deduction. Raleigh Properties, Inc., appealed the Commissioner's determination to the Tax Court, Raleigh Properties, Inc., supra, and this Court held that the stated purchase price of $ 3,240,000 included $ 440,000 of prepaid interest, a proportional part of which the petitioner therein, Raleigh Properties, Inc., was entitled to deduct in each of the taxable years. 2 At the trial of the instant case, the Court was asked to take judicial notice of the above decision.The Internal Revenue Service audited the returns of the G.B.M. Co. partnership for the taxable years 1954, 1955, 1956, and 1957 and determined that the part of the profit from the sale of the Raleigh Hotel represented interest, and135 therefore was taxable as ordinary income under section 61(a)(4) of the Internal Revenue Code of 1954. In accordance with this determination deficiencies for the taxable years involved were asserted against the petitioners, each a partner in the G.B.M. Co., based upon their distributive share of the ordinary income.In the statutory notices of deficiencies respondent determined that of the $ 1,708,739.10 profit that was reported on this sale, $ 1,308,739.10 constitutes capital gain and $ 400,000 is ordinary income. This allocation was based on the prepayment discount, commencing December 1, 1954, as set forth in the contract and note. The additional $ 40,000 income was claimed in an amendment to the answer and is attributable to the period from November 24, 1953, the date of the note, to December 1, 1954, the date on which the note could have been discounted by $ 400,000 if payment in full had been made at that time.OPINIONThis case involves the same transaction as was involved in the case of Raleigh Properties, Inc., supra, decided by this Court on June 22, 1962. The material facts are substantially the same. All of the operative documents, 136 or copies thereof, i.e., the offer (Exhibit 8-H), the contract of purchase and sale (Exhibit 9-I), and the note (Exhibit 10-J), were introduced in evidence in both proceedings. Palmer 730 Johnson, who represented the purchaser, testified in both proceedings. The petitioner Louis Berry, one of the copartners in the G.B.M. Co., sellers of the Raleigh Hotel, though not a party to the former proceeding, likewise testified in both proceedings -- in the former proceeding by deposition and in the present proceeding in person. The same basic issue involved in the former case is presented herein -- whether $ 440,000 of the stated purchase price represents prepaid interest. The only difference between the two cases is that in the former case the purchaser was the petitioner and claimed that $ 440,000 of the stated purchase price represented interest, whereas, in the present case, two of the copartners in the G.B.M. Co., sellers of the property, are petitioners and contend that no part of the stated purchase price represents interest.In the Raleigh Properties, Inc., case we held that the stated purchase price of $ 3,240,000 included $ 440,000 of prepaid interest, stating: 137 In Elliott Paint & Varnish Co., 44 B.T.A. 241">44 B.T.A. 241, a case involving somewhat similar circumstances, this Court stated at page 245:"* * * The question must turn, of course, upon what was the actual agreement of the parties. Was it an agreement to pay so much as purchase price and the balance as interest? This must be determined from all of the evidence, documentary and otherwise."An intention of the parties different from that expressed in the documents witnessing their agreements will not lightly be assumed. The true substance of that intention is to be determined, however, from all of the evidence and is not limited to the formal contract or note. Elliott Paint & Varnish Co., supra;Judson Mills, 11 T.C. 25">11 T.C. 25. Facts, not semantics, govern. Cf. Court Holding Co., 324 U.S. 331">324 U.S. 331.Despite the recitation in the contract that the note is to be without interest, we are satisfied that interest was intended and paid.Petitioner's first offer to the sellers, dated October 26, 1953, proposed a price of $ 2,800,000 with an 11-year note in the approximate amount of $ 1,090,000, bearing interest at 4 1/2 percent, to be138 taken back by the sellers. The sellers' attorney contacted petitioner's attorney with respect to this offer. He noted that the interest thereunder would total very close to $ 440,000 over the term of the note, and stated that the sellers insisted that the $ 440,000 be added to the purchase price and to the note, and that the note be made non-interest-bearing. Petitioner's attorney refused to accept this proposition, pointing out that petitioner had prepayment privileges and that the seller was, in effect, proposing that interest for the full period of the note be added thereto. Thus, if petitioner were to prepay under such circumstances, it would be paying interest for the full 11-year term of the note.The sellers' attorney then proposed a prepayment-discount schedule to be included in the contract and note, providing specified discounts in decreasing amounts over the term of the note. Petitioner's attorney accepted this proposal after satisfying himself that if petitioner prepaid the note as discounted on any of specified dates, the resultant cost to petitioner would approximate the originally-contemplated principal payments plus 4 1/2 percent interest to the date paid.The139 discount schedule was included in the contract and note. The $ 440,000 added to the stated purchase price and to the note is within $ 200 of the amount 731 petitioner would have paid in interest under the terms of the buyer's offer of October 26, 1953.In Elliott Paint & Varnish Co., supra, the purchaser originally offered $ 27,500 in cash for a piece of property. The seller refused the offer, preferring a deferred-payment plan. The final purchase price of $ 40,000 was agreed upon after a computation had been made for the seller showing that $ 27,500 plus interest thereon at 5 percent per annum for 10 years would total $ 41,250. This or a similar computation was discussed by the parties in arriving at the purchase price of $ 40,000. On brief, the petitioner therein set forth a table dividing the semiannual payments called for by the contract into principal and interest at 5 1/2 percent on a declining balance of principal. The Court rejected the assertion that part of each payment constituted interest, but noted at page 246:" * * If the parties had actually adopted such a table as a part of their agreement, it might be pretty strong evidence in support140 of the petitioner's contention."In the instant case the discount schedule included in the contract and note (being a mathematical parallel of interest at 4 1/2 percent), the treatment of the amount on petitioner's books and all of the circumstances surrounding the final agreement of the parties convince us that interest was intended. Cf. Judson Mills, supra.With respect to respondent's alternative contention that if the total purchase price of $ 3,240,000 included an element of interest the amount is neither identifiable nor ascertainable, we find that the evidence establishes both the existence and the amount of the interest.We think a similar holding is required in the present case. 3 In the absence of a statutory provision to the contrary, the same rules should govern in determining whether interest is includable in income by the seller as are used to determine whether interest is deductible by the purchaser.141 Decisions will be entered under Rule 50. MULRONEY Mulroney, J., dissenting: I respectfully dissent. I think the holding in the case of Raleigh Properties, Inc., supra, is clearly wrong. It is based upon a passing observation in Elliott Paint & Varnish Co., 44 B.T.A. 241">44 B.T.A. 241, with respect to a principal and interest table set forth in the taxpayer's brief wherein the author of the opinion commented that if the parties "had actually adopted such a table as a part of their agreement it might be pretty strong evidence in support of the petitioner's contention." Such a statement does not even rise to the dignity of dictum.The reasoning and conclusion reached in Elliott Paint & Varnish Co., supra, is strong authority for petitioner's position here, as is also Clay B. Brown, 37 T.C. 461">37 T.C. 461, affd. 325 F. 2d 313, certiorari granted 377 U.S. 962">377 U.S. 962.732 The majority opinion is clearly contrary to the many holdings of this and other courts, all to the effect that an installment sale contract that does not provide for interest on deferred payments cannot be construed by the142 tax collector as involving the payment of interest.In addition to Elliott Paint & Varnish Co. and Clay B. Brown, both supra, which are authority for petitioner, the following are the citations of a few other cases decided before and since the holding in Raleigh Properties, Inc., which support petitioner: Carl Lang, et al., 3 B.T.A. 417">3 B.T.A. 417; Daniel Bros. Co. v. Commissioner, 28 F. 2d 761 (affirming opinion of this Court); Henrietta Mills v. Commissioner, 52 F. 2d 931 (affirming opinion of this Court); Hundahl v. Commissioner, 118 F. 2d 349; and Kingsford Co., 41 T.C. 646">41 T.C. 646.This case is stronger for the taxpayer than most of the cited cases. Here the contract between the parties not only did not provide for interest but specifically provided against any interest, in that it stipulated the deferred payments were to be without interest. Not only was petitioner's evidence all to the effect that the contract was to be without interest but respondent's one witness, Palmer Johnson, who represented the purchaser, testified to the same effect. 1 Respondent's position here is143 that the contract which the seller rejected (price $ 2,800,000 and 4 1/2-percent interest on deferred payments) and the buyer admitted he could not get, was the true agreement between the parties. The parties were free to contract for an installment sale without providing for interest on the deferred payments. Respondent writes a new contract for them when he fails to give effect to the no-interest provision.144 The fact that the purchaser agreed to pay the final purchase price without interest on deferred payments because it was close to (but not identical with) his original offer with interest on deferred payments is immaterial. Elliott Paint & Varnish Co., supra. That fact should not have given the purchaser interest deductions and it should not give the seller interest income. The prepayment discount schedule is likewise immaterial on the issue of whether or not the installment contract provided for interest. A discount from the deferred payment price for cash or early payment does not render the discount interest. *733 Kingsford Co., supra;Hundahl v. Commissioner, supra.The fact that in the event of default the buyer was liable for the full purchase price shows conclusively that the discount was not interest.I feel we made a mistake when we allowed the purchaser the interest deduction in Raleigh Properties, Inc. That should not prevent us from now refusing to hold the seller received interest income when all of the facts and the applicable law practically command such a conclusion. Footnotes1. Exhibit 8-H bears the typewritten date, partially erased, of "Oct. 26, 1953."↩2. An appeal from this decision was filed by the Commissioner and later dismissed pursuant to stipulation of the parties thereto.↩3. It is to be noted that the Internal Revenue Code was amended by sec. 224(a) of the Revenue Act of 1964, which added sec. 483, providing that where a deferred payment contract provides for no interest or interest at an unreasonably low rate a portion of each payment after the first 6 months shall be treated as interest income to the seller.↩1. The following is a portion of Johnson's testimony:"A. Mr. Miller told me that there would be no deal if the contract were written as I had written it, stating that the price was two million eight, and that the interest was 4 1/2 percent. He told me that. Mr. Miller did not tell me anything about how the $ 440,000 was to be treated on our books."Q. Didn't Mr. Miller tell you that unless the face of the note were $ 3,240,000 less the mortgages the seller wouldn't sell?"A. Yes, that's true."Q. And that if the note wasn't made specifically noninterest bearing, they wouldn't sell?"A. That's right."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624236/	DAVID J. SECUNDA and ELIZABETH K. SECUNDA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSecunda v. CommissionerDocket No. 8959-74.United States Tax CourtT.C. Memo 1977-185; 1977 Tax Ct. Memo LEXIS 257; 36 T.C.M. (CCH) 763; T.C.M. (RIA) 770185; June 14, 1977, Filed David J. Secunda, pro se. Robert B. Marino, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined a deficiency in petitioners' 1972 Federal income tax. Petitioners have neglected to append to either their petition or amended petition, filed with this Court, a copy of the statutory notice of deficiency as required by Rule 34(b)(8), Tax Court Rules of Practice and Procedure, and consequently we do not know the exact amount of the original deficiency determined by respondent. We do know by way of stipulation, however, that in his notice of deficiency dated August 16, 1974, respondent disallowed in full petitioners' claimed medical expense deduction of $1,414 and charitable258 contribution deduction of $838. Petitioners also claimed an interest deduction of $4,157 of which respondent disallowed $2,143. Respondent has now conceded that petitioners should be allowed a medical expense deduction of $1,436.30, and that the charitable contribution deduction of $838 claimed on the return should be allowed in full. Respondent has further conceded that petitioners' claimed interest deduction should be allowed to the extent of $3,354.59. Thus, the sole issue now before us involves the propriety of a claimed interest deduction in 1972 of $802.41, relating to payments made by petitioners during that year on educational loans incurred by petitioners' three children. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners, David J. and Elizabeth K. Secunda (hereinafter petitioners), filed their joint 1972 Federal income tax return with the Internal Revenue Service Center in Holtsville, New York. At the time their petition herein was filed they resided in Summit, New Jersey. Petitioners' son, John, and their daughters, Mary and LeAnne, individually borrowed funds from the Summit and Elizabeth Trust Company to pay for their259 respective higher educations. All such loans were guaranteed either by the United States Government or the New Jersey Higher Education Assistance Authority. During 1972, the year at issue, the following loans taken out by John, Mary and LeAnne remained outstanding: IndividualDate of LoanAmount of LoanInterest RateJohn2/1/68$1,0006%10/24/681,0007%10/3/691,0007%9/11/701,5007%Mary10/24/68$1,0007%3/26/701,0007%9/11/701,5007%LeAnne1/28/68$1,0006%8/19/681,0007%The notes involved were executed by the children in their individual capacities, and petitioners did not execute such notes as either makers, co-makers, or endorsers. However, during 1972, petitioners made the interest payments to the Summit and Elizabeth Trust Company as such payments became due, even though they were not liable for such interest or for repayment of the loans. OPINION Section 163(a) 1 provides that "[There] shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness." On their 1972 return, petitioners deducted interest payments that they made during that year260 on loans taken out by three of their children. Respondent disallowed this claimed deduction, and we hold that respondent's determination must be sustained. The courts have continuously and consistently held that taxpayers may not deduct interest on obligations of others, but may only properly claim deductions on obligations owed the taxpayer himself. Sheppard v. Commissioner,37 B.T.A. 279">37 B.T.A. 279 (1938); Dean v. Commissioner,35 T.C. 1083">35 T.C. 1083 (1961); Anderson Dairy, Inc. v. Commissioner,39 T.C. 1027">39 T.C. 1027 (1963). Petitioners have stipulated that they did not execute the notes in question as makers, co-makers, or endorsers and that they were not liable for the repayment of the loans. Given these facts, we have no choice but to deny that portion of their claimed interest deduction. The main thrust of petitioners' argument is that they entered into oral contracts with each of their children in which they agreed to make the respective payments of principal and interest on the loans. Even if we were to find such oral contracts to be enforceable, 261 2 the children would remain primarily liable on the notes and petitioners would be in a position analogous to that of a guarantor. We have consistently held that payments made by a guarantor are not deductible as interest because the obligation belongs to the debtor, and the guarantor is only secondarily liable therefor. Rushing v. Commissioner,58 T.C. 996">58 T.C. 996 (1972).Accordingly, we find this argument raised by petitioners to be without merit. Because of other adjustments, Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩2. The enforceability of this type of contract is extremely doubtful in light of N.J.S.A. 25:1-5↩ (1940).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624237/	RICHARD H. BLACK, DECEASED, PHYLLIS M. BLACK, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBlack v. CommissionerDocket No. 9967-80.United States Tax CourtT.C. Memo 1984-136; 1984 Tax Ct. Memo LEXIS 535; 47 T.C.M. (CCH) 1318; T.C.M. (RIA) 84136; March 20, 1984. Stephen S. Case, for the petitioner. William A. Clarke and Dennis C. DeBerry, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge:* Respondent determined a Federal estate tax deficiency of $41,366.17. The issue for decision is whether more than one-half of the value of securities held in a revocable trust established by decedent and his wife, securities537 that had previously been owned by them as joint tenants with right of survivorship, is includable in decedent's gross estate under either section 20401 or section 2038. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto incorporated herein by this reference. Decedent Richard H. Black died August 2, 1977. Petitioner Phyllis M. Black is decedent's surviving spouse and is the personal representative of his estate. Petitioner resided in Sun City, Arizona, at the time she filed the petition in this case. Petitioner timely filed a Federal estate tax return (Form 706) for decedent's estate with the Internal Revenue Service Center at Ogden, Utah. Decedent ("Mr. Black") and petitioner538 ("Mrs. Black") were married on June 24, 1939. When they got married, they had virtually no savings or assets of any kind. Before her marriage, Mrs. Black had been employed by the Chicago Northwest Railroad, and she continued to work for the failroad until March of 1941. During World War II, from December of 1942 until July of 1945, Mrs. Black worked at a bomber plant. Except for these two periods, Mrs. Black was not employed outside of the home during her marriage. Mr. Black worked for the K-Mart/S.S. Kresge Corporation ("Kresge") from 1939 until his retirement in 1973, except for a period of time during the war when he served as a civilian teacher for the Navy. Mr. Black had a successful career with Kresge, becoming Treasurer and Vice-President before his retirement in 1973. During the war, Mr. Black purchased war bonds with Mrs. Black's earnings, while his earnings were used to pay household expenses. After the war, the Blacks purchased their first home for approximately $8,500, using the war bonds purchased from Mrs. Black's earnings as a down payment. The Blacks sold this home in 1952 and used the proceeds to purchase a second home. All of the mortgage loan payments539 on both homes were made from Mr. Black's earnings. They sold the second home in 1976 for approximately $81,000 and used the proceeds for investments, having already purchased a third home for their retirement in Sun City, Arizona. Sometime in 1962 or 1963, Mrs. Black received an inheritance of about $3,000 from an aunt. Sometime in 1965 or 1966, Mrs. Black received an inheritance of about $10,000 from her father. Except for $500, Mrs. Black turned these inheritance over to Mr. Black for him to invest. In 1975, Mrs. Black also received a small inheritance of an undetermined amount from a sister. As of June 10, 1977, the Blacks owned the following securities as joint tenants: $100,000.00 Ford Motor Credit Debenture, 8 1/2 percent, due March 15, 1991 $100,000.00 Singer Company Debenture, 8 percent due January 15, 1999 $50,000.00 Ford Motor Credit Debenture, 7.85 percent due January 15, 1994 $50,000.00 Public Service Electric & Gas Bond, 8.45 percent, due September 1, 2006 $30,000.00 Ford Motor Credit Note, 8 1/4 percent, due November 1, 1988 $25,000.00 BankAmerica Debenture, 8 3/4 percent, due May 1, 2001 2,200 Shares of K-Mart/S.S. Kresge Corporation Common Stock540 On June 10, 1977, Mr. and Mrs. Black created the Black Revocable Trust. The Blacks served as trustees (referred to in the trust instrument in the singular as "trustee"). The trust agreement identified the trust corpus as follows: Trustors transfer to Trustee all property listed in Schedule A, Husband's Separate Property and Schedule B, Wife's Separate Property, attached to this agreement…. During their joint lives, the Blacks retained unrestricted rights to all trust income and principal. During their joint lives, Mr. Black had a power to direct the investment of the trust assets.Upon Mr. Black's death or incapacity, Mrs. Black had a power to approve or reject the trustee's investment recommendations. The trestee was relieved of liability if the Blacks exercised or failed to exercise these powers. Upon the death of the first trustor to die, the trust agreement called for a division of the trust estate into two separate trusts--the "Survivor's Trust" and the "Decedent's Trust." To the Survivor's Trust were to be allocated the "Surviving Trustor's Separate property and Surviving Trustor's interest in community property…" and in addition an amount for the maximum marital541 deduction. 2 The remainder of the trust assets were to be allocated to the Decedent's trust. With respect to the Survivor's Trust, the Surviving Trustor had an unrestricted right to all income and principal and a general testamentary power of appointment. 3With respect to the Decedent's542 Trust, the Surviving Trustor and the Blacks' daughter, Dorothy Gayle Standish, were beneficiaries entitled to discretionary income and principal distributions. Although the Surviving Trustor was trustee, the Surviving Trustor was not to "participate in any decision to invade principal for his or her benefit;" the decision to invade principal on behalf of the Surviving Trustor was vested in a co-trustee or successor trustee other than the Surviving Trustor.The Surviving Trustor had a special power of oppointment with respect to the remaining corpus and accumulated income of the Decedent's Trust. In default of the Surviving Trustor's exercise of the special power of appointment, the remainder of the Decedent's Trust was distributable 75 percent outright to their daughter, Dorothy Gayle Standish, if she survived the Blacks, and the remaining 25 percent (or all of the estate if the daughter did not survive the Blacks) was to be held in further trust for the benefit of the Blacks' grandchildren living at the time of the Surviving Trustor's death.With respect to the trustees' discretionary powers over principal and income, the trust agreement provided as follows: Trustee is directed543 to regard the income beneficiary or beneficiaries at any given time as having primary rights under this agreement and Trustee is directed to consider only the welfare of income beneficiaries in the exercise of discretionary powers and disregard the interests of any successor beneficiaries. Any discretionary right to use principal shall include the right to exhaust principal for such purpose.No beneficiary shall have any right to compel Trustee to make any discretionary payment or expenditure or question the propriety of any discretionary payment or expenditure made by Trustee. Any discretionary determination made by Trustee shall be final as to all beneficiaries. The Blacks retained a power of revocation worded as follows: Trustors may revoke this trust agreement in whole or in part and amend this trust agreement from time to time by written instrument signed and delivered to Trustee during the lifetime of both Trustors…. From an after the death of one Trustor, the power to alter, amend and revoke shall be exercisable by the Surviving Trustor, but only with respect to the property held in [the Survivor's Trust]. Finally, the agreement provided: Property transferred to544 this trust shall retain its character as community property of both Trustors or separate property of either Trustor and upon withdrawal from the trust or upon revocation of this trust, during the lifetime of both Trustors, property shall be reconveyed to Trustors, or either of them, in the form existing prior to the establishment of this trust. On June 14, 1977, the Blacks executed documents which provided as follows: THE BLACK REVOCABLE TRUST Schedule "A" - Husband's Separate Property A. STOCKS: 1,100 Shares of the Common Stock of K MART B. CORPORATE BONDS: 1. $13,000BANKAMERICA CORPORATION8-3/4% Debenture, due May 1, 20012. $15,000FORD MOTOR CREDIT COMPANY8-1/4% Suordinated (sic) Note, due November 1, 19883. $50,000FORD MOTOR CREDIT COMPANY8-1/2% Subordinated Debenture, due March 15, 19914. $25,000FORD MOTOR COMPANY7.85% Sinking Fund Debenture, due January 15, 19945. $25,000PUBLIC SERVICE ELECTRIC AND GAS COMPANYFirst and Refunding Mortgage Bond8.45% Series G, due September 1, 20066. $50,000THE SINGER COMPANY8% Sinking Fund Debenture, due January 15, 1999RECEIPT of the above described assets545 of RICHARD H. BLACK is hereby acknowledged this 14th day of June, 1977. /s/ RICHARD H. BLACK, as Trustor and Trustee /s/ PHYLLIS M. BLACK, as Trustor and Trustee THE BLACK REVOCABLE TRUST Schedule "B" - Wife's Separate Property A. STOCKS: 1,100 Shares of the Common Stock of K MART B. CORPORATE BONDS: 1. $12,000BANKAMERICA CORPORATION8-3/4% Debenture, due May 1, 20012. $15,000FORD MOTOR CREDIT COMPANY8-1/4% Subordinated Note, due Nobember (sic) 1, 19883. $50,000FORD MOTOR CREDIT COMPANY8-1/2% Subordinated Debenture, due March 15, 19914. $25,000FORD MOTOR COMPANY7.85% Sinking Fund Debenture, due January 15, 19945. $25,000PUBLIC SERVICE ELECTRIC AND GAS COMPANYFirst and Refunding Mortgage Bond8.45% Series G, due September 1, 20066. $50,000THE SINGER COMPANY8% Sinking Fund Debenture, due January 15, 1999RECEIPT of the above described assets of PHYLLIS M. BLACK is hereby acknowledged this 14th day of June, 1977. /s/ RICHARD H. BLACK, as Trustor and Trustee /s/ PHYLLIS M. BLACK, as Trustor and Trustee On the same day, the Blacks took their jointly owned securities to the First National Bank546 ("the Bank"). The Bank executed receipts for the delivery of the securities, and had the securities reissued. Those securities listed on "Schedule 'A' - Husband's Separate Property" were reissued to the Blacks as trustees under a trust agreement dated June 10, 1977, for the benefit of Richard H. Black. Those securities listed on "Schedule 'B' - Wife's Separate Property" were reissued to the Blacks as trustees under a trust agreement dated June 10, 1977, for the benefit of Phyllis M. Black. At the date of decedent's death, August 2, 1977, the trust contained, without any additions or subtractions, the same securities listed in "Schedule 'A' - Husband's Separate Property" and "Schedule 'B' - Wife's Separate Property" executed on June 14, 1977. On January 23, 1979, a delinquent gift tax return for the fourth quarter of 1973 was filed for Mr. Black, reporting a taxable gift to Mrs. Black of a one-half interest in the following securities: 100M Singer Company 8% Sinking Fund Deb. due Jan. 15, 1999 50M Ford Motor Co. 7.85% Sinking Fund Deb. due Jan. 15, 1994 Also on January 23, 1979, a delinquent gift tax return for the third quarter of 1976 was filed for Mr. Black, reporting547 a taxable gift to Mrs. Black of a one-half interest in the proceeds from the sale of their Michigan residence. On the estate tax return filed for decedent, petitioner reported on "Schedule G - Transfers During Decedent's Life," only the assets listed on "Schedule 'A' - Husband's Separate Property" of the Black Revocable Trust. Petitioner did not report any of the assets of the Black Revocable Trust on Form 706 "Schedule E - Jointly Owned Property." In his notice of deficiency, respondent determined that all of the assets in the Black Revocable Trust "were held as joint tenants by decedent and his spouse as of decedent's date of death…" and that "[a]ll of the contributions for these items, except $10,000, were furnished by the decedent." Respondent increased the gross estate by $198,409, allowed a deduction for unclaimed gift tax, and also increased the amount of the allowable marital deduction as a result of increasing the amount of the assets of the Black Revocable Trust includable in decedent's gross estate. OPINION Petitioner reported in decedent's gross estate the value of only one-half of the Black Revocable Trust, representing the value of the assets listed on "Schedule548 'A' - Husband's Separate Property." The issue for our decision is whether any more of the Black Revocable Trust is includable in decedent's gross estate. Respondent's primary argument is that the entire value of the trust is includable under section 2040. 4 Under that section all jointly held property is includable in the estate of the first of the joint tenants to die, except to the extent that the survivor can prove contribution. Respondent's position is that the Blacks transferred jointly held property to a revocable trust retaining joint and survivor life interests therein. Citing Estate of Hornor v. Commissioner,44 B.T.A. 1136">44 B.T.A. 1136 (1941), affd. 130 F. 2d 649 (3d Cir. 1942); Estate of Derby v. Commissioner,20 T.C. 164">20 T.C. 164 (1953); and Estate of May v. Commissioner,T.C. Memo. 1978-20, respondent argues that the Blacks' transfer of their jointly held securities to the Black Revocable Trust was ineffective for Federal estate tax purposes to sever the joint tenancy.5 We agree. 549 Petitioner argues that this case is factually distinguishable from Hornor,Derby, and May. Petitioner views the creation of the Black Revocable Trust as involving two separate and distinct acts--first, a severance of the joint tenancy assets into property held by the spouses separately and individually, and second, a contribution of those individually owned assets to the Black Revocable Trust. Petitioner also argues that the Blacks' interests in the trust thereafter continued to be a divided ownership, and that upon revocation, the assets would have been returned to the spouses separately and individually, not in a joint ownership form. Petitioner's purported factual distinctions are not borne out by the record. We do not attach to the separate scheduling of the joint securities the significance that petitioner does. While the trust agreement refers to separate schedules of assets, identified as the respective separate property of the husband and the wife, Schedules A and B were not executed until four days after the trust was created. Moreover, the jointly held securities were not surrendered and reissued for the separate benefit of each spouse until four days550 after the trust was created. Realistically, we cannot view these separate acts as anything but interdependent steps in a single integrated transaction. The Blacks transferred their joint tenancy property into a revocable trust, and that does not suffice to sever the joint tenancy under the Hornor,Derby, and May line of cases. Likewise, we accept neither the premise nor the importance of petitioner's characterization of the Blacks' interest in the trust as "separate." During their joint lives, all trust income and principal rights were subject to the Blacks' unfettered discretion. Assuming the Blacks as trustees may have been required to segregate the Schedule A and B assets, 6 the division of the Black Revocable Trust into two trusts at the death of the first spouse was really only an estate planning device. The goal was to minimize estate taxes at the first death by providing a marital deduction gift adequate to reduce to a minimum the taxes due at the death of the first spouse, and to shelter the balance of the first spouse's assets from taxation at the death of the second spouse. See Price, Contemporary Estate Planning, secs. 5.30-5.48 (1982). After the death551 of the first spouse, the bulk of the assets were allocated to the Survivor's Trust, over which petitioner possessed the same unfettered dominion that the Blacks possessed over the entire trust during their joint lives. We also believe that had the Blacks exercised their power of revocation, the trust securities would have been reconveyed to them as joint tenants with right of survivorship. The pertinent clause of the trust agreement provided as follows: Property transferred to this trust shall retain its character552 as community property of both Trustors or separate property of either Trustor and upon withdrawal from the trust or upon revocation of this trust, during the lifetime of both Trustors, property shall be reconveyed to Trustors, or either of them, in the form existing prior to the establishment of this trust. [Emphasis supplied.] Prior to the establishment of the trust, the Blacks held their securities as joint tenants with right of survivorship. As discussed above, the securities were not segregated until after the creation of the revocable trust. We are unpersuaded by petitioner's construction of this paragraph, emphasizing the use of the plural form (both Trustors) when discussing community property juxtaposed against the singular form (either Trustor) when discussing separate property. Under Arizona law, a joint tenancy with right of survivorship between a husband and wife is a separate property estate, not community property. Becchelli v. Becchelli,109 Ariz. 229">109 Ariz. 229, 508 P.2d 59">508 P. 2d 59, 64 (1973); Collier v. Collier,73 Ariz. 405">73 Ariz. 405, 242 P. 2d 537, 541 (1952).553 See also DeFuniak & Vaughn, Principles of Community Property, sec. 134, pp. 330-333 (2d ed. 1971). Their respective joint tenancy interests in the securities were "the separate property of either Trustor." We believe that the above quoted trust provision is concerned only with the characterization of the property as community or separate, and not with the nature of the ownership as joint or individual. 7We conclude that this case is factually indistinguishable from the Hornor,Derby, and May cases. We reject petitioner's alternative postion that we should overrule Hornor,Derby, and May. The cases upon which petitioner relies for the argument that the Blacks' joint tenancy was severed for Federal estate tax purposes, and which554 she contends are inconsistent with Hornor,Derby, and May, are plainly distinguishable because they involved irrevocable transfers. 8 The Blacks' transfer of their jointly held securities to a revocable trust in which, during their joint lives, they retained unrestricted dominion over principal and income was ineffective, for Federal estate tax purposes, to sever their joint tenancy. We will continue to follow the long-settled rule of the Hornor,Derby, and May cases. Accordingly, we hold that the assets of the Black Revocable Trust are includable in decedent's gross estate under section 2040. Therefore, we need not address respondent's alternative argument under section 2038. Section 2040 includes in a decedent's gross estate the entire value of jointly held property, except to the extent that the surviving joint tenant555 can prove contributions. Sec. 2040(a). In essence, section 2040 raises a rebuttable statutory presumption that the decedent furnished the entire consideration for the jointly held property. See Foster v. Commissioner,90 F. 2d 486, 488 (9th Cir. 1937); Stephens, Maxfield & Lind, Federal Estate and Gift Taxation, par. 4.12[8] (1978). 9 Here, respondent allowed $10,000 as the contribution of the surviving spouse, presumably reflecting Mrs. Black's inheritance from her father in 1965 or 1966. However, we have found as a fact that she received other inheritances that she turned over to Mr. Black for him to invest. We have also found that some of the investments in the Black Revocable Trust were traceable to the war bonds purchased with Mrs. Black's earnings during World War II. Although these findings were based on petitioner's testimony, we found her believable, and respondent has not in any way impeached her credibility. Petitioner's occasional lack of specificity is understandable given the considerable passage of time since these events. 556 Respondent did not reduce the value of the assets includable in decedent's gross estate to reflect these additional contributions by Mrs. Black. Nor did respondent allow as a contribution by Mrs. Black any appreciation in the value of the Blacks' homes attributable to her down payment on their first home. See section 20.2040-1(a)(2), Estate Tax Regs. 10 Cf. Estate of Goldsborough v. Commissioner,70 T.C. 1077">70 T.C. 1077 (1978), affd. without published opinion 673 F. 2d 1307, 1310 (4th Cir. 1982). Although the record does not show the exact amounts of some of these inheritances nor of Mrs. Black's contribution to the Blacks' first home, we are convinced that the value of her contributions to the Black Revocable Trust as of the time of her husband's death exceeded the $10,000 allowed by respondent. Accordingly, using our best judgment, and resolving all doubts against petitioner, cf. Cohan v. Commissioner,39 F. 2d 540 (2d Cir. 1930), we conclude that she has contributed $10,000 more than respondent has allowed (for a total of $20,000), which must be excluded from the value of the trust assets included in decedent's gross estate under section557 2040. See Stephens, Maxfield & Lind, supra, at par. 4.12[8], p. 4-246. 11558 To reflect the foregoing, Decision will be entered under Rule 155.Footnotes. This case was tried before Judge Sheldon V. Ekman, who died January 18, 1982. By order of the Chief Judge, the case was assigned to Judge Edna G. Parker↩ for disposition. 1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable year in question, and all references to Rules are to the Tax Court Rules of Practice and Procedure.↩2. The marital deduction formula gift was described as: … an amount equal to the maximum marital deduction allowable to the estate for Federal estate tax purposes, diminished by (a) the value for Federal estate tax purposes of all items of property and interests in property included in the gross estate for Federal estate tax purposes, which qualify for the marital deduction, and which pass or have passed to the Surviving Trustor under other provisions of this Trust or outside of this Trust by any other meams, and (b) the difference, if any, between the amount determined above, including any adjustments under clause (a), and the exact amount necessary to eliminate payment of Federal estate taxes by the estate.↩3. In default of the Surviving Trustor's exercise of the general power of appointment, the remaining principal and undistributed income were to be added to the Decedent's Trust.↩4. As in effect at the time of decedent's death, Section 2040 provided in pertinent part: (a) General Rule.--The value of the gross estate shall include the value of all property to the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money's worth, there shall be excepted only such part of the value of such property as it proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, as a tenancy by the entirety by the decedent and spouse, then to the extent of one-half of the value thereof, or, where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants. Neither party has argued the applicability of section 2040(b), as in effect at the time of decedent's death, which provided that with respect to certain "qualified joint interests" created by a taxable gift between husband and wife, only one-half of the value of the jointly held property was includable in the estate of the first spouse to die. However, section 2040(b) is effective only for joint interests created after December 31, 1976, and the interests in this case were probably all created long before that date. For the estates of decedents dying after December 31, 1981, section 403(c)(1) of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172, 301-302, amended section 2040(b)↩ to provide that all joint interests with rights of survivorship between husband and wife are "qualified joint interests" without regard to the manner in which the joint interest was created, so that only one-half of the value of the jointly held property is includable in the estate of the first spouse to die. 5. Although the Black Revocable Trust was created only two months before decedent's death, respondent does not posit includability upon a section 2035 transfer within three years of death. Under the governing law, a section 2035 severance of the joint tenancy results in only one-half of the value of the joint tenancy property being included in the estate of the contributing decedent. Sullivan's Estate v. Commissioner,175 F. 2d 657 (9th Cir. 1949), revg. 10 T.C. 961">10 T.C. 961 (1948); Estate of Brockway v. Commissioner,18 T.C. 488">18 T.C. 488, 498-499 (1952), affd. on other issues, 219 F. 2d 400↩ (9th Cir. 1954).Petitioner has already included one-half of the value of the joint tenancy property in the decedent's estate. Respondent's argument here in that there has been no valid severance of the joint tenancy for Federal estate tax purposes, and that the full amount of the joint tenancy property is includable.6. As respondent points out, there was no express provision in the trust agreement for any separate accounting. The agreement provided that upon the death of the first spouse, the trustee was to allocate to the Survivor's Trust all of the survivor's "separate property." That "separate property" had already been identified in the agreement, at least as to the initial assets listed on Schedule A and Schedule B. Had the trust remained in operation any period of time, it might well be that the only way the trustee could have made a proper segregation after the death of the first spouse would have been to have maintained separate accounts during the lives of both spouses.↩7. We note that this provision is a standard provision in revocable trusts in community property states (like Arizona) and that the purpose of such a clause is to preserve the community character of the property, and thus the step-up in basis under section 1014(b)(6) of the surviving spouse's community share.See Rev. Rul. 66-283, 2 C.B. 297">1966-2 C.B. 297↩; Price, Contemporary Estate Planning, sec. 10.6 at p. 586 (1982).8. Estate of Sullivan v. Commissioner,175 F. 2d 657 (9th Cir. 1949); Glaser v. United States,306 F. 2d 57 (7th Cir. 1962); United States v. Heasty,370 F. 2d 525↩ (10th Cir. 1966).9. See also Estate of Balazs v. Commissioner,T.C. Memo. 1981-423, affd. in an unpublished opinion 693 F. 2d 134↩ (11th Cir. 1982).10. Section 20.2040-1(a), Estate Tax Regs., provides in pertinent part: Joint interests.--(a) In general. A decedent's gross estate includes under section 2040 the value of property held jointly at the time of the decedent's death by the decedent and another person or persons with right of survivorship, as follows: * * (2) * * * [T]he entire value of the property is included except such part of the entire value as is attributable to the amount of the consideration in money or money's worth furnished by the other joint owner or owners. * * * Such part of the entire value is that portion of the entire value of the property at the decedent's death (or at the alternate valuation date described in section 2032) which the consideration in money or money's worth furnished by the other joint owner or owners bears to the total cost of acquisition and capital additions.↩* * * [Emphasis added.] 11. See Estate of Balazs v. Commissioner,T.C. Memo. 1981-423 at n. 3; Estate of Carpousis v. Commissioner,T.C. Memo. 1974-258↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624238/	FRANCES M. JOHNSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJohnson v. CommissionerDocket No. 1514-74.United States Tax CourtT.C. Memo 1975-70; 1975 Tax Ct. Memo LEXIS 298; 34 T.C.M. (CCH) 371; T.C.M. (RIA) 750070; March 24, 1975, Filed Frances M. Johnson, pro se. Alan R. Herson, for the respondent. 299 RAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined a $152 deficiency in petitioner's 1972 income tax. Substantially all of the facts have been stipulated, and the stipulation is incorporated herein by this reference. A small amount of testimony was pressented, which, however, did not add materially to the facts already before the Court. Petitioner is and has been a widow since 1969. Her total income in 1972 consisted of $9,208 in wages, and she computed her tax on her 1972 return to be $1,328. However, since the income taxes withheld from her wages amounted to $1,665, she claimed a refund of the difference, namely $337. In computing her tax she had correctly used the rates applicable to single persons. Upon review of her return the Internal Revenue Service made two corrections in her computation: (a) by using the standard deduction rather than the itemized deductions on the return it allowed her a somewhat greater total deduction than she had claimed; and (b) it incorrectly gave her the benefit of rates applicable to "surviving spouses". See sec. 1(a)(2), I.R.C. 1954. As thus recomputed by I.R.S., her tax was $1,159, with the consequence that there300 appeared to be an overpayment in the amount of $506 ($1,665 withholding minus $1,159 tax), and a refund in that amount was made to petitioner. Thereafter, I.R.S. discovered that petitioner in fact had correctly used the rates applicable to single persons and was not entitled to the "surviving spouse" rates since she had been a widow for more than two years (sec. 2(a)(1)(A), I.R.C. 1954). Accordingly, it determined that the $506 refund which had been made to petitioner was $152 greater than it should have been, and the Commissioner thereupon determined a deficiency against her in that amount. Petitioner is understandably vexed by such bureaucratic bungling, and complains that the payment of such deficiency would cause a hardship upon her at this time, taking into account her limited modest resources. She would like to hold the Government to the position which it originally took when it made the refund to her. However, the law is clearly against her. To the extent that the refund was excessive, namely, $152, it may be taken into account in the determination of a deficiency. Section 6211(a)(2) and (b)(2). While we sympathize with petitioner we have no course open to us other than to*301 approve the Commissioner's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624240/	SEWELL L. AVERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Avery v. CommissionerDocket Nos. 76053, 78474.United States Board of Tax Appeals32 B.T.A. 948; 1935 BTA LEXIS 866; July 16, 1935, Promulgated 866 The base for the computation of the 15 percent limitation on the deduction for charitable and other contributions is gross income less all permissible deductions except contributions, regardless of whether the tax is computed under the capital net gain or capital net loss provisions of the Revenue Act of 1928. Leland K. Neeves, Esq., for the petitioner. Chester A Gwinn, Esq., for the respondent. SMITH 948 OPINION. SMITH: These proceedings involve deficiencies in petitioner's income tax for the calendar years 1930 to 1932, inclusive, as follows: Docket No.YearDeficiency760531930$14,980.23Do19311,507.1478474193232,724.79The parties have submitted a written stipulation settling all but one of the issues raised in the petitions and answers and setting forth all of the material facts. The one remaining issue, which is common to all three years, is whether the statutory 15 percent limitation on charitable contributions is to be computed on the entire net income or on the ordinary net income without deduction of capital net losses. The stipulated facts relevant to this issue may be summarized as*867 follows: During the years 1930 to 1932, inclusive, the petitioner's total net income, exclusive of capital net losses, his capital net losses, and charitable contributions were as follows: YearNet incomeCapital net lossesCharitable contributions1930$156,812.46$128,299.35$86,937.791931393,194.85199,059.58105,236.351932377,799.79797,717.8954,921.34The sole question here in issue has been determined by the Board in , after the submission of these proceedings. We there held, upon authority of Helvering v., that capital net losses as well as capital net gains are to be included in ascertaining the net income upon which the 15 percent limitation on charitable contributions is to be computed. For reasons therein stated, we so hold in these proceedings. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624242/	ANTHONY QUINN and KATHERINE QUINN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentQuinn v. CommissionerDocket No. 4871-70United States Tax CourtT.C. Memo 1974-64; 1974 Tax Ct. Memo LEXIS 253; 33 T.C.M. (CCH) 310; T.C.M. (RIA) 74064; March 18, 1974, Filed. Earl C. Crouter, for the petitioners. Stephen W. Simpson, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined a $23,144.59 deficiency in petitioner's Federal income tax for the calendar year 1964. The issues remaining for decision are (1) whether petitioners have met the requirements of section 274 1 for substantiation of their deduction of travel expenses (including meals and lodging) incurred in connection with preliminary research for making a motion picture, and (2) the correct allocation of petitioner-husband's agent's commissions between foreign taxable income and foreign income excludible under section 911. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Anthony and Katherine Quinn, then husband and wife, were residents of Los Angeles County, California, at the time they filed their petition herein. They filed their 1964 joint Federal income tax return with the district director of internal revenue at Los Angeles. Katherine255 Quinn is a party to this action solely because she filed a joint return with her husband, and hereinafter "petitioner" refers to Anthony Quinn. In 1964 petitioner was a motion picutre actor, writer, producer and director. He has been involved in the motion picture industry since 1937, and has been producing his own pictures since 1953. Petitioner was engaged in the production of the motion picture "Zorba the Greek" during part of 1964. Prior to the filming of this picture, Mr. Cacoyannis, the director, asked petitioner to take the role of Zorba in the film, which petitioner did. At that time Cacoyannis was unable to guarantee petitioner's usual compensation, with the result that petitioner assumed the additional role of co-producer to protect his interest. 2 Petitioner and Cacoyannis initially dealt with United Artists, which agreed to finance and release the picture if it could be done for less than $770,000. As co-producer in "Zorba the Greek," petitioner traveled to Paris to begin looking for the best possible cast for the picture. In Paris he talked with Simone Signoret256 about costarring with him in the film. After leaving Paris, petitioner went to Belgrade to finish filming another picture. In Belgrade he asked Sam Shaw, a photographer for Life magazine, to help him research the character of Zorba. Petitioner's then secretary, petitioner's son, Duncan Quinn, and Shaw all joined petitioner in Belgrade. Petitioner, accompanied by this group, traveled from Belgrade to Athens by train, to conduct research and make preparation for filming "Zorba the Greek." Petitioner and his research group traveled by train because petitioner wanted to be close to and a part of the Greek people in order to develop a background for the picture. Petitioner felt that the presence of his son was an important research aid since the character Zorba had to develop a father-son relation with another character in the film, and petitioner's son presented the proper vehicle through which to develop that relationship or emotion in the character of Zorba. From Athens the research party went to the Island of Rhodes where they spent approximately ten days looking for a location to shoot the film. Petitioner thought there were benefits in shooting the film on Rhodes, since he had257 many friends on the Island and was a close friend of the governor of Rhodes. Petitioner's party returned to Athens to report their findings to Cacoyannis, taking with them hundreds of photographs of possible locations and other information. However, by the time they arrived in Athens, Cacoyannis had decided to make the picture in Crete in a little village called Xania. The group then flew to Xarachian where petitioner, upon arriving, hired an automobile and drove through the country to Xania. It required about a month to six weeks to find a cast and the proper location and to allow petitioner sufficient time to research the character of Zorba. It was at this time that petitioner asked Jack Gaffney, his stand-in for many years, to join the group in preproduction activities. While in Xania petitioner rented a house because the accommodations at the only hotel were very poor. Forthermore, he provided his own furniture and furnishings, because these were not available with the house. Approximately a week before the actual shooting of the picture began, United Artists terminated their interest in the film. This left petitioner and Cacoyannis liable for about $300,000 spent in258 preparation for the picture. In hopes of saving the picture, petitioner made several telephone calls to New York to find another company to finance the film. As a result of these phone calls, Darryl Zanuck loaned petitioner the necessary money on a personal basis. However, the picture "Zorba the Greek" was eventually financed and released by Twentieth Century Fox. Numerous expenses were incurred in connection with all of the activities carried on by petitioner and his research party. For example, petitioner and his party purchased air and train tickets, paid for hotel rooms and meals (including tips), rented automobiles and boats, rented a house in Xania, and paid for the long distance telephone calls made to procure financing for the film. Petitioner was paid only $150 in expenses per week by the production company, instead of his usual $1,000 per week. Petitioner paid the rest of these expenses himself. Petitioner has no receipts and he made no records (substantially contemporaneous or otherwise) of his various expenditures. In January or February of 1973, petitioner had his then secretary prepare a schedule showing his approximation of the amounts he expended on the Zorba259 trips. 3In 1964 petitioner received $100,000 cash from Twentieth Century Fox. In addition, he was entitled to a 1/3 participation in the profits from "Zorba the Greek" for his work in connection with that motion picture. 4 Petitioner reported only $87,300 of the $100,000 cash as gross income on his 1964 Federal income tax return. He did not report $12,700 of the $100,000 in the belief that that amount represented reimbursement for out-of-pocket expenses which constituted ordinary and necessary business expenses that he was entitled to deduct.Respondent determined that the $12,700 was compensation for services rendered, and that no part of it was allowable as a business expense deduction because petitioner had failed to meet the substantiation requirements of section 274. Accordingly, respondent increased petitioner's income by $12,700. During 1964 petitioner paid his agent a commission equal to ten percent of his gross salary. The same260 fee was paid whether the jobs the agent procured for petitioner were to be performed within or without the United States. During that year petitioner made some films where he decided to defer a portion of his compensation. However, petitioner's agent did not wish to defer any of his commissions, and therefore petitioner paid him the total amount of his commissions on the amount petitioner earned, not the amount petitioner received. Petitioner's accountant determined that the proper proportion of the agent's commissions attributable to petitioner's foreign income excludible under section 911 was ten percent of petitioner's excludible income of $20,000. Therefore, petitioner allocated $2,000 of his agent's commissions to excludible income and did not claim the $2,000 as a deduction. Respondent determined that since the agent's commission exceeded 10 percent of petitioner's income for the year, petitioner's allocation was improper, and reallocated petitioner's agent's commissions according to section 1.911-2(d) (6), Income Tax Regs. Accordingly, respondent increased petitioner's income by $970.44, the additional amount which respondent determined represented nondeductible commissions. 261 A OPINION Petitioners contend they are entitled to deduct the travel expenses in issue (including meals and lodging while away from home) as ordinary and necessary business expenses within the meaning of section 162, and, further, that they have met the substantiation requirements of section 274. Respondent asserts that petitioners have failed to show that they met the requirements of section 274. We hold that regardless of whether petitioner's travel expenses constitute ordinary and necessary business expenses deductible under section 162, petitioners have failed to substantiate those expenses by adequate records or other sufficient evidence, and that therefore the expenses are disallowed pursuant to section 274(d) and the regulations thereunder. Section 274(d) provides in part that "no deduction shall be allowed * * under section 162 or 212 for any traveling expense (including meals and lodging while away from home) * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense * * , (B) the time and place of the travel, * * [and] (C) the business purpose of the expense * * ." 262 Section 1.274-5(b) (2), Income Tax Regs., provides that the elements to be proved with respect to travel expenses are (i) the amount of each separate expenditure for travel away from home, such as the cost of transportation or lodging, (ii) dates of departure and return for each trip away from home, and number of days away from home spent on business, (iii) destination or locality of travel, described by name of city or town, and (iv) business reason for travel or nature of the business benefit derived as a result of travel. The taxpayer must substantiate each element of an expenditure by adequate records or by sufficient evidence corroborating his own statement. Section 1.274-5(c) (1), Income Tax Regs. To meet the "adequate records" requirements of section 274(d), a taxpayer must maintain an account book or similar record and documentary evidence which, in combination, are sufficient to establish each element of an expenditure. Section 1.274-5(c) (2) (i), Income Tax Regs. Documentary evidence, such as receipts, paid bills or similar evidence sufficient to support an expenditure, is required for (a) any expenditure for lodging while traveling away from home, and (b) any other expenditure263 of $25 or more, except that in the case of transportation charges, documentary evidence is not required if not readily available. Section 1.274-5(c) (2) (iii), Income Tax Regs.Where a taxpayer fails to maintain adequate records or provide documentary evidence, he must establish such elements (i) by his own statement, whether written or oral, containing specific information in detail as to such elements, and (ii) by other corroborative evidence sufficient to establish such element. Section 1.274-5(c) (3), Income Tax Regs.Respondent concedes that petitioner is entitled to $25 a day for the 52 days he was away from home on business in Greece and Crete without regard to his failure to substantiate any such expenses, 5 presumably in accordance with Rev. Rul. 63-13, 1 C.B. 69">1963-1 C.B. 69. This ruling provides in part that if an employer reimburses his employee for subsistence expenses not exceeding $25 per day while away from home on business, such reimbursement shall be deemed substantiated within the meaning of section 1.274-5(c), Income Tax Regs., if (1) the employer reasonably limits payment of such travel expenses to those which are ordinary and necessary in the conduct264 of his trade or business, and (2) the elements of time, place and business purpose of the travel are substantiated. See section 1.274-5(f), Income Tax Regs.Clearly in this case petitioner has completely failed to meet the substantiation requirements of section 274(d) and is not entitled to any travel expense deduction except for that amount conceded by respondent. Petitioner kept no records, adequate or otherwise, and no receipts of any kind. The only evidence we have is his uncorroborated statement and an exhibit, prepared by a secretary other than the one who traveled with petitioner in 1964, wherein petitioner set forth his approximations of the amounts spent for the travel (including meals and lodging while away from home) in issue. The limitations provided in section 274(d) supersede the doctrine of Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (C.A. 2, 1930), which held that, where the evidence indicated that a taxpayer had incurred deductible travel expenses but the exact amount could not be determined, the265 Court should make a close approximation and not disallow the deduction entirely. "Section 274(d) contemplates that no deduction shall be allowed a taxpayer for such expenditures on the basis of such approximations or unsupported testimony of the taxpayer." Section 1.274-5(a), Income Tax Regs. Therefore, we hold that petitioners are not entitled to deduct any travel expenses in excess of those conceded by respondent. Petitioner's exhibit indicates that, by his estimate, $1,300 was spent for rental of camera equipment, purchase of film, development of film, etc. This particular expense does not fall within the special substantiation requirements of section 274. While petitioner has presented no documentary evidence or corroborating testimony regarding this expense, we have no reason to doubt his veracity. Therefore we hold that petitioner is entitled to deduct $1,300 for the cost he incurred for camera rental, purchase of film, development of film, etc. Petitioner also argues that the travel expenses in issue are deductible under section 174 as research and experimental expenditures. Research and experimental expenditures are defined in the regulations as "expenditures incurred266 in connection with the taxpayer's trade or business which represent research and development costs in the experimental or laboratory sense. * * * [The] term does not include * * * expenditures paid or incurred for research in connection with literary, historical, or similar projects." Section 1.174-2(a) (1), Income Tax Regs. The research incident to the filming of "Zorba the Greek" falls into the latter classification, and therefore is not deductible under section 174. Next we consider the issue whether petitioner's allocation or respondent's allocation of petitioner's agent's commissions to income excludible under section 911 is the correct allocation. Petitioner concluded that since he paid a 10 percent commission to his agent on his entire gross income, he should attribute 10 percent of his excludible income (10 percent of $20,000, or $2,000) to commissions on such income and classify the $2,000 as nondeductible under section 911(a). However, in the year in issue petitioner's agent's commissions exceeded 10 percent of petitioner's gross income. During that year petitioner made some films where he decided to defer a portion of his compensation. However, petitioner's*267 agent did not wish to defer any of his commissions, and therefore petitioner paid him the total amount of his commissions on the amount petitioner earned, not the amount petitioner received. As a result, instead of disallowing a flat 10 percent of the $20,000 excludible income in this year, respondent made another allocation. Respondent, in precise accordance with regulations section 1.911-2(d) (6), allocated total commissions attributable to petitioner's foreign gross income in proportion to the ratio that the amount excludible under section 911 ($20,000) bears to petitioner's total foreign gross income for that year. Petitioner makes no contention that the regulations are invalid. In the absence of any such contention, or any other reason advanced why the respondent's allocation is erroneous, we hold that respondent's determination is correct. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue. ↩2. Petitioner indicated that he and Cacoyannis were equal partners in the production company. ↩3. The secretary who prepared petitioner's summary of travel expenses was not the same one who traveled with petitioner during 1964. ↩4. There is no indication in the record that he had any ownership interest in the film. ↩5. The amount conceded by respondent appears to ignore the $150 a week petitioner testified he was paid for living expenses by the production company. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624243/	RICHARD LEE KARELAS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentKarelas v. CommissionerDocket No. 34321-86.United States Tax CourtT.C. Memo 1988-562; 1988 Tax Ct. Memo LEXIS 591; 56 T.C.M. (CCH) 832; T.C.M. (RIA) 88562; December 13, 1988. Richard Lee Karelas, pro se. Dale A. Raymond, for the respondent RUWEMEMORANDUM FINDINGS OF FACT AND OPINION RUWE, Judge: In a notice of deficiency dated April 30, 1986, respondent determined a deficiency of $ 1,040.60 in petitioner's Federal income tax for 1983. The sole issue for decision is whether petitioner is entitled to a legal fee deduction in the amount of $ 8,000. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Westminister, California, when he filed his petition in this592 case. Petitioner filed his Federal income tax return for 1983 with the Internal Revenue Service Center, Fresno, California. Petitioner's return was prepared by a tax return preparer who was paid for those services. During 1983, petitioner operated a maintenance business from his home on a part-time basis. Petitioner reported income and claimed deductions from his maintenance business on Schedule C of his 1983 return. Petitioner claimed an $ 8,000 legal fee deduction on this Schedule C. The legal fees which petitioner deducted arose from petitioner's divorce proceedings. Petitioner's divorce proceedings began in March 1982, in Chicago, Illinois. Divorce proceedings were then filed in California in September 1982, and petitioner's divorce became final in November 1983. The major issue in the divorce proceedings was the custody of petitioner's two minor children. OPINION Petitioner appears to argue that we should consider the fact that he relied upon the advice of a tax return preparer when he deducted the legal fees in question. The fact that petitioner may have been improperly advised about deductions is irrelevant to our decision. We must apply the law to the facts593 that we have found. Section 162 1 allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262 disallows deductions for personal, living, or family expenses. To determine whether an expense is a nondeductible personal expense, as opposed to a deductible trade or business expense, we must look to the origin and character of the expense. . The legal fees which petitioner paid during 1983 arose from petitioner's divorce. The major issue in the divorce proceedings was the custody of petitioner's children. All of the legal expenditures related to petitioner's divorce proceedings stemmed entirely from petitioner's marital relationship. Petitioner's marital relationship was personal. Accordingly, petitioner is not entitled to deduct his 1983 legal fees. Decision will be entered for the respondent.Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and as in effect during the year in issue.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624245/	Lindley S. Bettison and Elizabeth B. Bettison, his wife v. Commissioner.Bettison v. CommissionerDocket No. 80675.United States Tax CourtT.C. Memo 1961-168; 1961 Tax Ct. Memo LEXIS 182; 20 T.C.M. (CCH) 866; T.C.M. (RIA) 61168; June 9, 1961182 Held, payments made by petitioner during the taxable year 1956 to his wife by a former marriage represent alimony payments deductible under section 215, I.R.C. of 1954. Commissioner v. Lester, 366 U.S. 299">366 U.S. 299 (May 22, 1961) followed. Douglas D. Royal, Esq., Wayne Title and Trust Bldg., Wayne, Pa., for the petitioners. Joseph S. Mangano, Esq., for the respondent. MULRONEY Memorandum Opinion MULRONEY, Judge: The respondent determined a deficiency in petitioners' income tax of $613.10 for the year 1956. The sole question for decision is whether payments made pursuant to an agreement by183 Lindley S. Bettison during the taxable year 1956 to his wife by a former marriage represent alimony, deductible under section 215 of the Internal Revenue Code of 1954, or are child support payments and not deductible. The facts have been stipulated. They are found accordingly. Petitioners Lindley S. and Elizabeth B. Bettison are husband and wife and reside in Rosemont, Pennsylvania. They filed a joint income tax return for the year 1956 with the district director of internal revenue at Philadelphia, Pennsylvania. Elizabeth B. Bettison is a petitioner here only by virtue of having joined in filing a joint return. Lindley S. Bettison will hereafter be referred to as petitioner. Petitioner married Wilmetta C. Bettison in Ohio in 1944. One child, Linda E. Bettison, was born of their marriage. In December 1949 a divorce action was instituted in a Pennsylvania court by Wilmetta against petitioner and a decree granting her a divorce was entered in February 1950. In contemplation of the divorce, on December 1, 1949, petitioner and Wilmetta entered into an agreement which recited, in part: WHEREAS, * * * a divorce proceeding is contemplated, and WHEREAS, 184 it is the desire of the parties to enter into an agreement under the terms of which the husband, in recognition of his general obligation to support his wife, may discharge the legal obligation which arises out of the family and marital relationship * ** * * the parties do hereby mutually covenant and agree with each other, as follows: * * 4. In lieu of all right of dower which she may have in his estate, the husband hereby agrees to pay to the wife the sum of One Thousand Dollars ($1,000.00) at the time of the execution hereof * * and in addition thereto, the husband shall deposit in escrow * * * the sum of Fourteen Thousand Dollars ($14,000.00) under an escrow agreement under the terms of which the bank shall pay said sum unto the wife upon the presentation to it within six (6) months of the date hereof of a certified copy of a final decree in divorce between the parties hereto * * * 5. In addition to the payments mentioned in the preceding paragraph, the husband shall pay to the wife the sum of Three Hundred Dollars ($300.00) per month for her support and maintenance, and which she may use in maintaining a a home for * * * the minor child of the parties, payable185 monthly, the first of which monthly payments has already been made, the receipt whereof is hereby acknowledged, the second of which shall become due on January 1st, 1950, and subsequent payments monthly thereafter. 6. In addition to the above mentioned payments, the husband shall also pay, or, upon production of receipted bills by the wife, shall reimburse her for, all dental, orthodontic, medical and hospital expenses incurred by the wife on behalf of the said minor child of the parties, whenever the expenses resulting from any one illness, accident, or abnormal physical or mental condition shall exceed the sum of Fifty Dollars ($50.00) within any given period of three (3) months. In the event that the illness, accident, or abnormal physical or mental condition meets this qualification, the husband shall pay the full amount of the expenses thereof and not merely the excess of such expenses above the sum of Fifty Dollars ($50.00). 7. The payments mentioned in Paragraphs 5 and 6 hereof shall continue so long as the wife has the custody of and supports the said minor child in a manner consistent with her income, and until the child attains the age of eighteen (18) years or until186 her death, whichever shall be first to occur. * * * If, after the child attains the age of eighteen (18) years, she shall be attending an accredited college or university, the husband shall either pay all college or university expenses, including tuition, supplies, and board and lodging, until the expiration of four (4) years from the time said child is first eligible for college or university, or shall continue the payments mentioned in Paragraphs 5 and 6 hereof until the expiration of such period, whichever the wife shall elect. Provided, however, that after the child attains the age of eighteen (18) years such payments shall only continue while the child is attending a college or university, and that if the child shall be dismissed from more than one college or university because of academic deficiency, misconduct, or any other cause, or, having entered a college or university, shall for any reason fail to attend the same for a period of six (6) months, for any cause other than the child's illness or physical incapacity, the husband's liability hereunder shall cease. 8. Anything herein or at law to the contrary notwithstanding, in the event that the wife should remarry, the payments187 mentioned in Paragraph 5, as extended by Paragraph 7 hereof, shall be decreased to the sum of Two Hundred Dollars ($200.00) per month. 9. This agreement is made in lieu of a possible court order and for the purpose of providing support for the wife, not only prior to the entry of a final decree in divorce, but, in view of the wife's right to institute a divorce proceeding in her native State of Ohio, or in some other state in which permanent alimony is incident to a divorce decree, it is intended to provide for the support of the wife thereafter. Thus, the wife agrees * (b) that for any year during any portion of which the marital relationship shall not be in existence between the parties, she will, if requested so to do by the husband, file a separate individual federal income tax return in which all payments received by her from the husband under Paragraphs 5, 6, and 7 hereof are included in her taxable income and are disclosed as having been received from him, and that she will pay such federal income tax thereon as may be due, any provision of law to the contrary notwithstanding. * 16. In the event that the wife should institute, or cause or permit to be188 instituted, any action for the purpose of obtaining support for herself, or for the said [child], the husband's obligation to make further payments hereunder shall immediately cease and determine, unless he shall then be in excess of six (6) months in arrears hereunder. * * * After entering into the agreement above, petitioner made monthly payments of $300 to his former wife until she remarried in June of 1951. After her remarriage he reduced the monthly payments to $200 in accord with the provisions of the agreement. Petitioner made installment payments totaling $2,400 under the agreement to his former wife during the year 1956. He deducted this amount on his (joint) tax return for that year and there described them as "Alimony payments under decree of court." Respondent disallowed this deduction in the deficiency notice. Petitioner argues that the amounts paid in 1956 were alimony and deductible under section 215 of the Internal Revenue Code of 1954 because the agreement does not earmark them for support of the child and places no restriction on the manner in which his former wife may expend them. After the briefs were filed in this case, the Supreme189 Court decided Commissioner v. Lester, 366 U.S. 299">366 U.S. 299 (May 22, 1961), affirming 279 F.2d 354">279 F. 2d 354, which reversed 32 T.C. 1156">32 T.C. 1156. The Supreme Court granted the Commissioner's petition for certiorari (364 U.S. 890">364 U.S. 890) in Lester to resolve a conflict between the Second Circuit's Lester opinion, above, on one hand and Eisinger v. Commissioner 250 F. 2d 303 (CA-9) 1 and Metcalf v. Commissioner, 271 F. 2d 288 (CA-1) 2 on the other. On brief respondent argues that Eisinger and Metcalf are controlling of this case and that the circuit court opinion in Lester is wrong. Petitioner argues that the separation agreement in Lester is indistinguishable in any pertinent respects from the one here. We agree. In the Lester opinion the Supreme Court stated, in part: We have concluded that the Congress intended that, to come within the exception portion of § 22(k), 3 the agreement providing for the periodic payments must specifically state the amounts or parts thereof allocable to the support of the children. * * [Footnote added. 190 ] No specific statement of an amount payable for the support of petitioner's child appears in the agreement in this case. Although the agreement lends itself to the inference that the amounts paid after remarriage were for the support of the child, Justice Douglas' concurring opinion in Lester points out that such an inference is not enough. We therefore hold that petitioner is entitled to deduct $2,400 in 1956 as alimony payments under section 215 of the Internal Revenue Code of 1954. It appears that as a result of our holding above, an adjustment may191 be necessary for medical expenses on petitioner's 1956 return. Therefore, Decision will be entered under Rule 50. Footnotes1. Affirming a Memorandum Opinion of this Court. ↩2. Affirming 31 T.C. 596">31 T.C. 596↩.3. Section 22(k) of the Internal Revenue Code of 1939 is the substantial equivalent of section 71 of the Internal Revenue Code of 1954. Section 215 of the Internal Revenue Code of 1954 provides that a husband may take as a deduction from his gross income payments made to a former wife which are includible in her gross income pursuant to section 71↩. The latter section excludes from the wife's gross income any part of the payments "which the terms of the * * * agreement fix, * * * as a sum which is payable for the support of minor children of the husband."	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624246/	Jack Williams, Petitioner v. Commissioner of Internal Revenue, RespondentWilliams v. CommissionerDocket No. 1011-74United States Tax Court64 T.C. 1085; 1975 U.S. Tax Ct. LEXIS 63; September 25, 1975, Filed 63 Decision will be entered for the respondent. Petitioner was a real estate salesman for Dart Industries. He received a commission from Dart Industries for each real estate purchase transaction he arranged between Dart Industries and a purchaser. In 1971, petitioner purchased some properties from Dart Industries for his own account, receiving a 10-percent commission on each transaction. Held, petitioner may not exclude from gross income the real estate commissions he received from transactions in which he purchased property for his own account. Commissioner v. Daehler, 281 F. 2d 823 (5th Cir. 1960), revg. 31 T.C. 722">31 T.C. 722 (1959), followed. Herbert Laskin, for the petitioners.William K. Shipley64 , for the respondent. Dawson, Chief Judge. Forrester, J., concurring. Featherston, J., agrees with this concurring opinion. DAWSON1086 OPINIONRespondent determined a deficiency of $ 2,270 in petitioner's Federal income tax for the year 1971. The issues presented for our decision are (1) whether the petitioner, a real estate salesman, may exclude from his gross income commissions received from transactions in which he purchased property for his own account, and (2) whether the petitioner, who later reacquired property from a third person to whom he originally sold that same property, may exclude from gross income commissions he received on the initial sale of the property to that third person.This case was submitted under Rule 122, Tax Court Rules of Practice and Procedure. All of the facts have been stipulated by the parties. We adopt the stipulation of facts and the exhibits attached thereto as our findings. The pertinent facts are summarized below.Jack Williams (hereinafter referred to as petitioner) was a legal resident of Newhall, Calif., at the time he filed his petition herein. His Federal income tax return for 1971 was filed with the Internal Revenue65 Service Center at Ogden, Utah.Petitioner worked for Dart Industries (hereinafter referred to as Dart) as a real estate salesman in 1971. He received a 10-percent commission from Dart for each real estate purchase transaction he arranged between Dart and a purchaser. Dart's salesmen were required to return a portion of their commissions if a purchaser defaulted during the first 18 months after purchase and the properties were retaken by Dart.During 1971 the petitioner purchased some properties from Dart for his own account and paid 10 percent of the purchase price at that time as a downpayment. The total purchase price charged to petitioner was the very same amount that would have 1087 been charged to any other purchaser of those properties. Petitioner then received $ 5,375 from Dart as commissions on the sales of the properties on his own account. Petitioner apparently purchased the property on his own account only because he knew that an amount equal to his downpayment would be returned to him in the form of his commission, and his out-of-pocket cost would, as a result, be reduced.Also in 1971 the petitioner arranged a real estate purchase transaction whereby Mr. Ed66 Fisher purchased certain properties from Dart, and petitioner received $ 3,790 as his commission. Later in 1971, when Mr. Fisher fell behind in his payments to Dart, petitioner acquired those properties from him, in order to protect his previously earned commissions.The commissions received by petitioner in 1971 from his own purchases, and the commission from the original sale of property to Mr. Fisher, were included in petitioner's gross receipts on Schedule C of his 1971 Federal income tax return, but the same amounts were deducted as "Reimbursements and Finder's Fees" to arrive at a gross-profit figure for petitioner's real estate business. The net effect of this was that none of these commissions were included in his gross income for 1971.Petitioner contends that the commissions he received on the property he sold for his own account and those he received on the initial transaction with Mr. Fisher merely amounted to a reduction in the cost of those properties, and thus did not constitute income.Respondent, on the other hand, contends that the commissions constitute payment for services rendered to petitioner's employer, and thus should be included in his gross income.In 67 our opinion the petitioner received income in the form of commissions paid to him by his employer, Dart, on the transactions made by petitioner on his own account, and in those transactions in which he purchased property from Mr. Fisher to protect a previously earned commission. In so holding, we agree with the views expressed by the Court of Appeals in Commissioner v. Daehler, 281 F. 2d 823 (5th Cir. 1960), revg. 31 T.C. 722">31 T.C. 722 (1959). We will follow it. Cf. George E. Bailey, 41 T.C. 663">41 T.C. 663 (1964), following Commissioner v. Minzer, 279 F. 2d 338 (5th Cir. 1960).Compensation for services which takes the form of commissions is specifically included in the definition of gross income, 1088 provided in section 61(a)(1). 1 The specific language of section 1.61-2, Income Tax Regs., under the heading "Compensation for services, including fees, commissions, and similar items," provides: "Wages, salaries, [and] commissions paid salesmen * * * are income to the recipients unless excluded by law." (Emphasis added.) The fact that the commissions received by petitioner68 were derived from transactions in which he was purchasing property for his own account does not alter the commissions' character as income to him. Commissioner v. Daehler, supra.In a similar case involving stockbroker commissions, we held that commissions received by a stockbroker on the purchase of securities for his own account were taxable income to him. Leonard J. Kobernat, T.C. Memo 1972-132">T.C. Memo. 1972-132. The only real difference between that case and this one is the nature or form of the assets involved.In Ostheimer v. United States, 264 F. 2d 789 (3d Cir. 1959), substantially the same situation existed. That case, however, involved a life insurance agent rather than a real estate salesman. During 1947, 1948, and 1949, the taxpayer conducted a business as a life insurance agent. He had a contract with 11 different69 life insurance companies under which he was to receive a commission on each life insurance policy he wrote for them. During the tax years involved the taxpayer was the owner and beneficiary of life insurance policies which he had purchased on the lives of his business partner and three of his key employees. In addition, four of his children also owned policies issued on their lives which were paid for by the taxpayer and given to his children. In his joint Federal income tax returns for those years, he did not include in gross income any of the amounts equal to the commissions he received on the policies involved. In the Ostheimer case, as in the present case, the taxpayer contended that the commissions he received on the premiums he paid were simply his "discount," and not income.The Court of Appeals stated (264 F. 2d at 792):the life insurance companies paid taxpayer commissions on the premiums as compensation for his services in placing the policies involved. The payments were in discharge of the contractual obligation of the insurance companies to pay taxpayer commissions on all premiums paid on policies which he wrote. In 1089 other70 words, the commissions were a "payment in return for services rendered", and as such constituted "gross income."The Ostheimer case is virtually indistinguishable from the instant case, the only difference being the nature of the asset involved. We think the reasoning of the Ostheimer case is equally applicable here.Petitioner attempts to avoid characterization of the commissions as income by calling them a reduction in price. While it is true that petitioner's out-of-pocket costs are 10 percent less than that of other purchasers, the purchase price paid by him was exactly the same for him as it was for any other purchaser. Any reduction in petitioner's out-of-pocket costs was the result of the commission paid him by Dart, not a reduction in price. Petitioner's costs were less than those of other purchasers since he had done what none of the other purchasers had done -- rendered services to his employer, Dart, for which he was paid his usual commission. Dart did not lower the price of the properties for petitioner, nor did it sell the property to petitioner at a bargain price. It sold the property to him at its normal price, for which petitioner was paid a commission. 71 Petitioner's argument appears to be that since he, acting as a salesman, expended no effort in arranging the transaction, i.e., he did not have to find a suitable buyer and take him out to show him the property, the commissions paid to him do not constitute compensation. But, in fact, petitioner's services in this transaction were exactly the same as the services he rendered in all his other sales. He found a buyer (himself) willing and able to purchase property from his employer, and for this service he was paid his usual commission.Petitioner would have us draw an analogy between his situation and the "little old lady" who goes to the grocery store and buys ground beef on sale for 79 cents per pound, reduced from the previous day's price of 89 cents a pound. He argues that both are in the class of individuals who were intended to be benefited by the lower price. He compares the person who has bought beef for 10 cents less than the day before with the petitioner who has received a 10-percent commission on the sale of property to himself. The analogy is inappropriate. The "little old lady" is a customer only, while petitioner is an agent, or employee, who is being paid for 72 his services. The "little old lady" has rendered no services which entitle her to compensation. She has merely 1090 received a "bargain" by purchasing a product available to every member of the consuming public who happens to shop in that particular store.Petitioner relies on Benjamin v. Hoey, 139 F. 2d 945 (2d Cir. 1944), to support his argument. There the taxpayer was a partner in a stock brokerage firm. He bought and sold securities through the firm for his personal account and paid to it the normal brokerage commission on each transaction. The court in that case held that the taxpayer's share of his own commissions was not taxable income. It is clearly distinguishable on its facts. The taxpayer paid his share of the commissions to himself (as partner in the brokerage firm), while the petitioner here paid the purchase price to Dart, his employer. In the instant case there was no partnership relationship between petitioner and Dart, only an employee-employer relationship.Petitioner also received commissions on the sale of real estate to Mr. Fisher. This property was subsequently reacquired by petitioner to preserve the commission he73 made on the initial sale of the property. He argues that this situation should be treated the same as if he had originally purchased the property on his own account. We agree and conclude that these commissions must likewise be included in his gross income for the taxable year 1971.Decision will be entered for the respondent. FORRESTERForrester, J., concurring: On the sale to Ed Fisher petitioner earned his $ 3,790 commission when the sale was made and his subsequent buy from Fisher had no effect on that completed transaction, but it did save petitioner from having to refund a part of that commission to Dart and petitioner should now be able to capitalize that saving as a part of his cost in the Fisher properties. Footnotes1. All statutory references herein are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624247/	H. LEWIS BROWN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brown v. CommissionerDocket No. 87744.United States Board of Tax Appeals40 B.T.A. 565; 1939 BTA LEXIS 830; September 28, 1939, Promulgated 830 Petitioner, the surviving member of a partnership, instituted action in its name to recover a fee earned by it for legal services rendered. While suit was pending, he assigned his one-half interest in the claim of the partnership to a corporation organized by him in exchange for stock. The suit was decided in favor of the partnership. Client appealed but ultimately agreed to settle for $41,800. In 1933, petitioner received a check for $20,900 and endorsed it to the corporation, but did not include the amount received in his gross income. Held, the amount received by petitioner represented his share of partnership earnings and must be included in his gross income. H. Lewis Brown, Esq., pro se. Frank M. Thompson, Esq., for the respondent. MELLOTT565 The respondent determined a deficiency in petitioner's income tax for the year 1933 in the amount of $9,338.43. The sole issue is whether or not $20,900, being one-half of a fee for legal services rendered by the law partnership of Burroughs & Brown, must be included in petitioner's income. FINDINGS OF FACTS. Petitioner was a member of the partnership of Burroughs & Brown, attorneys831 at law, with offices in New York City. Beginning about February 1927 and continuing to October 1929, the partnership rendered legal services for Charles T. Davis in a controversy between him and one Kelsey. Burroughs died June 19, 1929, while the action was pending and before any judgment had been rendered or any settlement had been reached. The firm voluntarily withdrew as Davis' attorney and subsequent proceedings were conducted by other attorneys. Petitioner was unable to agree with Davis upon the fee and an action was instituted in the name of Burroughs & Brown in the Supreme Court of New York County for a determination of the amount of the fee and for a decree establishing a lien upon the proceeds of the litigation, a portion of which had been deposited with a trust company. The Supreme Court dismissed the action but the Appellate Division reversed, holding that Burroughs & Brown had not lost their lien by reason of the substitution of a new attorney in their stead; that there had been no waiver of their lien by reason of an assignment executed by Davis; and that "petitioner's [the firm's] lien, when established, will attach to * * [the] trust 566 fund if832 any part thereof is necessary to satisfy petitioner's lien." . Pursuant to the order of the Appellate Division, the amount of the compensation for legal services rendered by the firm of Burroughs & Brown was fixed on November 2, 1933, at $50,000 with interest from November 10, 1929. The defendant in that action appealed but a settlement was reached on December 6, 1933, under which the sum of $41,800 was to be, and was, paid to the firm of Burroughs & Brown. Petitioner caused the Eastern Chemical Co. to be organized as of August 23, 1933, with an authorized capital stock of $10,000, par value $10 a share, all of one class. Petitioner subscribed for 100 shares and the certificate therefor was issued to him on December 5, 1933. On October 29, 1933, petitioner assigned to the Eastern Chemical Corporation his "entire undivided one-half interest in and to a certain claim of Burroughs & Brown against Charles T. Davis and/or Austin S. Davis as Trustee for legal services between the years 1927 and 1929, both inclusive, which claim is the subject matter of a certain proceeding now pending in the Supreme Court * * ." He also assigned833 to the corporation all of his "right and interest in and to any lien or remedy for the enforcement thereof so far as I have the legal right to assign the same, or may be able to do so without impairing the force or effect thereof." The assignment, which was written in longhand upon the stationery of the Waldorf Astoria, states that it was given at 7 p.m., October 29, 1933, and in the upper right-hand corner thereof appears the following statement, also in longhand: "Delivered to me for the within named Eastern Chemical Corporation, by the signer this October 30th, 1933, at 9:00 o'clock a.m. Clyde D. Sandgren." The assignment recited a consideration of "one dollar ($1.00) and other valuable consideration." The other consideration consisted of 100 shares of the capital stock of the Eastern Chemical Corporation which were issued to petitioner on that date or very shortly thereafter. The amount of $41,800 was paid to the firm of Burroughs & Brown on December 6, 1933, in two checks, each for $20,900. One check was made payable to the estate of A. H. Burroughs, the deceased partner, and the other was made payable to the petitioner. Petitioner endorsed the check to the Eastern Chemical834 Corporation and it included the amount thereof as part of its gross income for the year 1933. A claim for refund was subsequently filed by the corporation for the amount of tax paid. It was stipulated that "in the event the Board's determination sustains the Commissioner in his treatment of the thing which had been made the subject of testimony in this 567 proceeding, that a refund would be made to the Eastern Chemical Corporation of the amount of tax attributable to the identical fee which was included in that corporation's return." Following the death of Burroughs, petitioner continued the practice of law under the firm name of Burroughs & Brown. He caused a partnership return of income to be filed for the year 1933, showing the entire net earnings of the firm distributable to him as an individual. Attached to and forming a part of said return was a statement signed by petitioner reading as follows: Beginning in the year 1927 and ending in the month of October, 1929, Burroughs & Brown, a partnership composed of the late A. H. Burroughs, who died on June 19, 1929, and the undersigned, H. Lewis Brown, performed certain services for one Charles T. Davis. After the service835 was terminated, litigation ensued with respect to the amount of compensation due Burroughs & Brown for the services performed. Under the terms of the partnership agreement, the estate of the said Burroughs and the said Brown are entitled each to one-half of whatever might be recovered. While the litigation was pending, the said Brown assigned his one-half interest in the claim to Eastern Chemical Corporation, solely in exchange for an issue of stock, and immediately after such exchange the said Brown was in control of said corporation. After such assignment and transfer, the claim was compromised for $41,800, and one-half thereof, to-wit: $20,900, was paid to City Bank Farmers Trust Company, as executor of the estate of the said A. H. Burroughs, and the other half was paid to said Eastern Chemical Corporation, as assignee of the said Brown. No part of said amount is covered in the present return. Petitioner reported on his personal return of income the amount shown by the partnership return as being distributed to him, but no part of the $41,800 was reported as income in the partnership return or in petitioner's personal return. Petitioner and the partnership kept their books836 and made their returns of income on the cash basis. The 200 shares of stock of the Eastern Chemical Corporation (which were the only shares ever issued) were subsequently transferred by petitioner to his wife as a gift, and report thereof was made under the gift tax law both by petitioner and his wife. On September 16, 1936, the Eastern Chemical Corporation was dissolved and its assets distributed to petitioner's wife as a liquidating dividend. OPINION. MELLOTT: Petitioner contends that respondent erred in including the $20,900 in his gross income. He argues that the assignment of his interest in the claim of the partnership for stock in the Eastern Chemical Corporation constituted a nontaxable exchange under section 112(b)(5) of the Revenue Act of 1932. Hence, he says, no taxable gain is to be attributed to him from the exchange. The 568 respondent contends, and we think correctly, that there is no reason to discuss the applicability of this section; for he did not determine the deficiency in tax upon the theory, nor does he now urge, that the exchange gave rise to taxable gain. He merely determined that the amount, "representing a fee for personal service, which837 was transferred to Eastern Chemical Corporation, is income to you who earned it." In making this determination he relied upon the rule enunciated and applied by the courts in such cases as ; ; ; affd., , and others. If the rule of the cited cases is applicable, the deficiency should be upheld; otherwise it should be set aside. The issue, therefore, may be resolved by determining whether or not such rule is applicable. , applies literally the section of the revenue act imposing a tax upon the net income of every individual, including "income derived from salaries, wages or compensation for personal service * * * of whatever kind and in whatever form paid." (Cf. sec. 22, Revenue Act of 1932.) It holds that the import of the act is to tax income to those who earn it and to prevent the escaping of the tax "by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earns838 it." , follows the Earl case and holds that the "earner" of income - "the one whose personal efforts have produced it" - is taxable upon such income. Two other situations in the same category are income from owned property ( ) and income derived from combined personal effort and property ( ). , applied the same general rule, holding that an assignment by a husband to his wife of an undivided one-half interest in a contract of employment "effected merely an equitable assignment of petitioner's possible future income" and that the amount received was taxable income to the assignor. It would serve no useful purpose to list and discuss the various cases applying the principles of the above cases. Suffice it to state that they hold, as succinctly stated by the Court of Appeals for the Fifth Circuit, that "No device or arrangement, be it ever so shrewdly and cunningly contrived, can make future earnings taxable to any but the earner of them, can make future income from property839 taxable to any but the owner of the right or title from which the income springs." . Cf. ; affd., ; . 569 But, says petitioner, the facts in the instant proceeding bring the income in question within the rule of such cases as ; ; ; and . Other cases to the same general effect are ; affd., ; ; certiorari denied, ; ; ; ; ; and 840 . These cases stand for the general principle that property, which in and of itself is a producer of income, together with any income theretofore produced by it but not yet reduced to possession by the owner, may be assigned without subjecting the assignor to the income tax upon the income ultimately collected by the assignee. Petitioner recognizes the scope of the above decisions and argues that the income in question is not taxable to him because, as he expresses it, "the thing assigned was not income but was a capital asset, itself a producer of income." Petitioner cites New York cases - ; ; ; - and statements by textbook writers to the effect that a chose in action, a right to recover money or property under a contract, and similar rights, constitute property and are assignable. But we are of the opinion that the answer to our question is not to be found in generalities. We are not concerned with the question whether petitioner did or did not have an assignable right in the claim841 for compensation. The question, as correctly stated by the petitioner, is whether the thing which was assigned was itself a "producer of income" or whether what was assigned was the income itself. In determining this question the transaction should be examined in the light of the revenue acts rather than by merely determining whether or not the assignment is considered to be a property right under the laws of the state. Section 182(a) of the Revenue Act of 1932 provides that there shall be included, in computing the net income of each partner, "his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * ." The partnership of Burroughs & Brown, though dissolved by the death of Burroughs in June of 1929, had an income of $41,800 in 1933. If there had been no assignment by petitioner of his right to receive his aliquot portion of such income, he would probably not deny that it was taxable to him as "net income of the partnership", or as his share of partnership earnings. At first blush it may seem to be somewhat anomalous 570 that a partnership may have income notwithstanding the fact that it has been dissolved by the842 death of a partner; but "the winding up of the business of the firm is the precise result which is contemplated by the [partnership] agreement." ; . As pointed out by the Court of Appeals for the Second Circuit in , "on dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed." Thus, when petitioner instituted and carried on the suit in the Supreme and Appellate Courts of New York in his capacity of surviving partner, he was, as the partnership agreement contemplated, attempting to recover the income which the partnership had earned. The dissolution of the partnership by the death of Burroughs did not have the effect of vesting a one-half interest in all of the partnership property in his executors and a like interest in petitioner. Their rights were fixed by the partnership agreement; and even "the representatives of the deceased partner have no legal interest in [the firm] assets and no legal right to interfere in their administration, so long as the survivor is prosecuting the843 business of closing up the estate and applying its proceeds in the payment of firm debts." In other words, it could not be ascertained whether the partnership would, or would not, have anything to distribute until its various claims were collected and its debts paid. This of necessity was dependent upon the outcome of the litigation which was being carried on by the surviving partner. Petitioner's argument, that the services had been rendered prior to the taxable year and that therefore the income resulted from the "property" which had been transferred, is not convincing. The income resulted from the performance of legal services by the partnership. Petitioner did not attempt to assign anything but his "undivided one-half interest in and to a certain claim of Burroughs & Brown." The evidence does not show that Davis or the trust company ever had any notice of the assignment nor does it disclose that the assignee ever took any part either in carrying on the litigation or in making settlement of it. The litigation was carried on by the surviving partner for the benefit of the partnership and it received the fee. The fact that petitioner844 chose to recognize the assignment which he had made to his wholly owned corporation and to turn the check over to it is immaterial. The income was the income of the partnership in the year it was received. The only alternative to this conclusion, which seems to suggest itself, is, that the partnership realized income in an earlier year; but petitioner does not argue that any such conclusion should be reached, for in that event the income to 571 the partnership would antedate the assignment and be taxable to him. , and , seem to justify including the amount in controversy in petitioner's income for 1933. Here, as in the Leininger case, "that which produced the income was not [the assignor's] * * * individual interest in the firm, but the firm enterprise itself. * * * There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management." The assignee may have become the beneficial owner of one-half of the income which the assignor received from the firm enterprise, but "it is still true845 that * * [the assignor] and not * * * [the assignee] was the member of the firm and that * * * [the assignee] and only a derivative interest." As pointed out in the Rossmoore case, the theory that a partner's interest is "like that of a shareholder in a company * * * - a right against the 'firm entity' and assignable as such" is incompatible with the whole idea of partnerships under the revenue acts; for they "have consistently retained the common-law view, treating all income of the firm as taxable to the partners, whether distributed or not, and ignoring the firm as a taxpayer except for purposes of information." Petitioner's contention that "the thing assigned was a producer of income" is not sustained merely by a showing that the assignee received the amount from the assignor after he had collected it. The activities of the partnership produced the income and the thing assigned "produced" nothing. Petitioner's contention, that the firm, prior to the assignment, had done everything necessary to make the fee payable and hence that the income had been completely "earned" before the assignment, is materially weakened, if not entirely negatived, by the showing that*846 it was necessary to carry litigation to enforce its collection to a successful conclusion before the amount was payable. If the firm had abandoned all efforts to enforce collection, the present controversy would probably never have arisen; for in that event it is quite likely that the fee would not have been collected by anyone. We are of the opinion and hold that the respondent did not err in including the amount in controversy in petitioner's gross income for the year 1933. Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624248/	Work Clothing Corporation v. Commissioner.Work Clothing Corp. v. CommissionerDocket No. 13062.United States Tax Court1949 Tax Ct. Memo LEXIS 182; 8 T.C.M. (CCH) 506; T.C.M. (RIA) 49126; May 19, 1949182 W. E. Norvell, Jr., Esq., 706 Commerce-Union Bank Bldg., Nashville, Tenn., for the petitioner. Edward L. Potter, Esq., for the respondent. MURDOCKMemorandum Findings of Fact and Opinion The Commissioner determined a deficiency of $226.29 in income tax for the fiscal year ended October 31, 1942. The petitioner has assigned as error the action of the Commissioner in failing to allow a deduction of basis less salvage for loss on account of the demolition of some buildings, in failing to allow depreciation on buildings at the rate of 4 per cent instead of 3 per cent, and in failing to allow a deduction for the expense of painting and repairing buildings. Findings of Fact The petitioner is a corporation organized under the laws of Tennessee on November 14, 1941. Its return for the taxable year was filed with the collector of internal revenue for the district of Tennessee. The original name of the petitioner was "Public Square Arcade Market." It was authorized in its charter to buy and sell, rent, mortgage, and operate real estate. Its name was changed on June 10, 1943 to Work Clothing Corporation and its charter was enlarged to permit it to deal in goods. The183 petitioner was organized to acquire, and it did acquire on or about November 20, 1941, property formerly used as a street railway transfer station. The property was improved with several old brick buildings and a long, high shed-like structure. The intention of the petitioner at the time it acquired the property was to convert it into a public market. The useful life of the improvements at the date of acquisition by the petitioner was twenty-five years. The petitioner had no intention at that time of demolishing any of the buildings. The petitioner employed an architect in December 1941 to draw up plans for converting the existing structures on the property into a public market with offices, stalls for occupancy by merchants, and aisles for the use of customers. A set of plans was drawn but the conclusion was reached that the stalls were too large and that they would have to be reduced in size so that more stalls could be rented in order to permit the property to be operated profitably. The petitioner's representative, after further discussion with the architect, began in January 1942 to doubt the feasibility of converting the property to a public market without demolition. He184 then tried unsuccessfully to rent the property to a government agency. He was at a loss for a while to know what to do with the property in order to save the investment in it. He began, in the early part of 1942, to consider the possibility of demolishing some of the buildings and turning a part of the property into a parking lot. A contract to demolish the buildings was let on April 2, 1942, and the decision to demolish the buildings and turn a part of the property into a parking lot was reached shortly before that date. The demolition was completed in June 1942. The petitioner paid $75,000 for the property. A fair allocation of the cost between land and buildings at the time of purchase would be $50,000 to the land and $25,000 to the buildings, of which $5,000 would represent a fair allocation to the buildings which were demolished. Salvage in the amount of $1,690.85 was realized from the demolition of the buildings. The petitioner, on its return for the taxable year, reported a loss of $3,101.10. The Commissioner added to income $4,113.70 as a result of four adjustments and thereby determined that net income amounted to $1,012.60. One of the adjustments which he made was to185 add to income $2,876.23 which had been deducted on the return based upon the demolition of the buildings. The adjusted basis for gain or loss on the buildings at the time they were demolished was $4,933.34. The petitioner, during the taxable year, sustained a deductible loss of $3,242.49. The stipulation of facts is incorporated herein by this reference. Opinion MURDOCK, Judge: The petitioner claims that it sustained a loss in the amount of $3,192.48 in the taxable year on account of the demolition of the buildings, which loss is deductible for income tax purposes. It would reduce the cost of the demolished buildings by depreciation up to the date when demolition was completed at an annual rate of 4 per cent. The Commissioner concedes that depreciation should be allowed on all of the buildings at an annual rate of 3 per cent. The petitioner no longer used in its business the buildings to be demolished after it began to demolish them and, therefore, depreciation on those buildings should stop at that time rather than at the time the demolition was completed. The Commissioner argues that the demolition of the buildings was contemplated at the time the property was purchased, 186 and, therefore, no loss should be allowed, but the part of the cost allocable to the demolished buildings should still be regarded as cost of the property which the petitioner purchased. The respondent concedes that a deduction for loss upon demolition of the buildings would be proper in some amount if there was no intention to demolish the buildings at the time the property was acquired and if the intention to demolish came later because of some change in plans. In other words, the parties are not in disagreement as to the applicable principles of law. The record clearly shows that the property was bought by the petitioner for the purpose of converting it into a public market; the petitioner at that time had no intention of demolishing any of the buildings; efforts were made to follow out the original purpose; it was later found that the original plans were not feasible; and the petitioner was required to change its plans and adapt the property to another purpose which required demolition of some of the buildings. It follows that the petitioner is entitled to deduct the cost of the buildings, less depreciation up to the time when demolition was begun and less salvage. The amount187 of salvage has been stipulated. The evidence shows that $5,000 of the total cost should be regarded as the cost of the buildings demolished. Those buildings were old. The Commissioner allowed depreciation at the rate of 3 per cent. The petitioner claimed depreciation at the rate of 4 per cent. The record shows that the probable useful life of the buildings from the date of acquisition by the petitioner was not more than 25 years. Depreciation should be allowed at the rate of 4 per cent. The petitioner makes some contention in regard to deductions for painting and repairs, but the record is too vague on this point to justify any definite findings of fact. Decision of no deficiency will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624249/	VIRGIL E. AND LORRAINE REINHARDT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentReinhardt v. CommissionerDocket No. 12321-92United States Tax CourtT.C. Memo 1993-397; 1993 Tax Ct. Memo LEXIS 408; 66 T.C.M. (CCH) 566; August 30, 1993, Filed 408 Decision will be entered under Rule 155. For petitioners: Raymond N. McCabe and Edward M. Griffith, Jr.For respondent: Matthew I. Root. COLVINCOLVINMEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Judge: The primary issue in this case is whether additions to tax for either fraud or negligence apply to petitioners, who were distributors for the Buffalo News during the years at issue. Respondent determined deficiencies in petitioners' Federal income tax of $ 3,487 for 1986, $ 5,498 for 1987, $ 6,677 for 1988, and $ 6,281 for 1989. Respondent determined additions to tax for fraud under section 6653(b)(1)(A) of $ 2,510 for 1986 and $ 3,686 for 1987, under section 6653(b)(1)(B) in amounts to be determined for 1986 and 1987, under section 6653(b)(1) of $ 4,446 for 1988, and under section 6663 of $ 4,345 for 1989. Respondent determined in the notice of deficiency and asserted in the answer other additions to tax and penalties as described below. Petitioners concede that respondent's determination of deficiencies in their income tax for 1986, 1987, 1988, and 1989 is correct, and that they are liable for the additions to tax for substantial understatement of tax under section 6661409 for 1987 and 1988. The issues for decision are: (1) Whether petitioners are liable for additions to tax for fraud under section 6653(b) for 1986, 1987, and 1988, and under section 6663 for 1989. We hold that they are not. (2) Alternatively, whether petitioners are liable for additions to tax for negligence under section 6653(a) for 1986, 1987, and 1988. We hold that they are not. (3) Whether petitioners either were negligent or substantially underpaid their tax for 1989, and thus are liable for the accuracy-related penalty under section 6662(a). We hold that they are. Respondent bears the burden of proof on the negligence and substantial underpayment additions to tax and the accuracy-related penalty because they were first raised in respondent's answer. Rule 142(a). Section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. 1. PetitionersPetitioners resided in Lancaster, New York, when they filed the petition. Petitioners were married in 1969 and continue to live in the home they bought in410 1972. Petitioners have three sons who were teenaged or younger during the years in issue. Mr. Reinhardt has a high school education. He has had no business or accounting courses. He has worked at a variety of unskilled and semi-skilled jobs such as a gas station attendant. He was drafted in 1966 and served in the Armed Forces from 1966 to 1968. In 1968 he resumed work in a gas station. He worked in a factory as a laborer (e.g., shoveling sand) from about 1970 to 1982. In 1982 the factory closed. Mr. Reinhardt has filed tax returns as required throughout his adult life, including for the years in issue. However, he has never prepared a return. He has always used a tax preparer. He does not trust himself to correctly prepare a tax return. Mrs. Reinhardt has a sixth grade education and has had no accounting training. 2. Distribution of Newspapers by PetitionersThe Buffalo News distributes newspapers through employees and through independent dealers who are independent contractors. Petitioners were independent dealers for the Buffalo News. They purchased newspapers from the Buffalo News and resold them at a profit. Mrs. Reinhardt distributed the Buffalo News 411 from 1981 to 1991. Mr. Reinhardt distributed the Buffalo News from 1982 to 1989. They served home delivery customers and single copy outlets. Petitioners used youth carriers to deliver papers to about three-fourths of their home delivery customers. Mr. Reinhardt collected from his own customers and from the youth carriers who collected from their customers. Each week petitioners paid the Buffalo News a wholesale rate for newspapers sold. Independent dealers made the payment to their district manager. Seventy-five to ninety percent of petitioners' collections were in cash. Petitioners each had a checking account during the years they distributed papers. They regularly deposited more than three-fourths of their gross receipts in their checking accounts during the years in issue. Both petitioners regularly kept the check register for these accounts throughout the years in issue, recording deposits and the payee of each check. Both petitioners wrote checks from their checking accounts to pay family expenses, such as the mortgage, utilities, home maintenance, food, clothes, and their children's educational expenses. Both petitioners received a weekly circulation statement from412 the Buffalo News, which they paid with checks drawn on their checking accounts. The circulation statements showed the number of papers and total charges to petitioners for papers drawn by them, and gave various credits. For example, there was a car allowance credit based on petitioners' use of cars to distribute papers; a coupon credit to compensate petitioners for delivery to new customers using coupons in lieu of payment; a subscriber credit, applicable, for example, if a phony subscription was placed through the telemarketing service; and a credit for returns of unsold papers from single copy outlets. Mr. Reinhardt knew that credits appeared on the weekly statements. The Buffalo News had a general policy of having district managers interview their new independent dealers when they signed their independent dealer agreement to explain the agreement and to inform them of various aspects of being a dealer, such as the independent dealer's responsibility to keep records. The interviews usually lasted about 25 minutes to 1 hour. The policy of the Buffalo News was not to give tax advice to independent dealers or to discuss the distributor's tax return. When Mr. Reinhardt signed413 his dealer agreement, the interview lasted only 5 or 10 minutes and included no discussion of recordkeeping or taxes. When Mrs. Reinhardt became an independent dealer, no one from the Buffalo News discussed gross receipts or taxes with her. During the years at issue and before, Mr. Reinhardt never had a meeting with anyone from the Buffalo News to discuss business or tax matters, and never received correspondence from the Buffalo News on business or tax matters. Petitioners each received Forms 1099 from the Buffalo News indicating payment to them of $ 4,183 for 1986, $ 4,412 for 1987, $ 4,688 for 1988, and $ 2,298 for 1989. Petitioners did not receive Forms W-2 from the Buffalo News for the years in issue. 3. Petitioners' Income Tax ReturnsMr. Reinhardt always arranged for a tax preparer to prepare petitioners' Federal income tax returns. Petitioners' Federal income tax returns were prepared by Charles J. Mendola (Mendola) for tax years 1985 (or earlier) to 1988. Mendola usually scheduled his clients for interviews lasting 1-1/2 hours. He prepared the return during the interview. Mr. Reinhardt attended the interview and brought the Forms 1099, interest and bank statements, 414 house payment records, and some other bills. Mr. Reinhardt brought no other records. Mendola knew that petitioners delivered papers, but never asked Mr. Reinhardt any questions about his newspaper income. Mr. Reinhardt never told Mendola he incurred business, utility, rental, or car and truck expenses, or to deduct a certain amount for entertainment. Mendola claimed some deductions on petitioners' Schedules C to which they were not entitled, such as for travel and entertainment, meals, truck expenses, and rental expenses. Mendola knew petitioners had bank accounts but never saw their checkbooks. Mr. Reinhardt never refused any request for information by Mendola. Mendola believed Mr. Reinhardt was extremely unsophisticated. Mendola became sick before the filing season for tax year 1989. He referred about 30 clients to the accounting firm Buccieri and Buccieri. The Buccieri firm found errors on many of the returns Mendola had prepared. The firm had difficulty with the Mendola referrals because Mendola had claimed larger deductions (e.g., charitable deductions and miscellaneous deductions) and obtained larger refunds for many of them than did the Buccieri firm for 1989. The415 Buccieri firm could find no explanation for why the 1988 deductions claimed were so high compared to 1989. Petitioners' 1989 return was prepared by Carol A. Pope (Pope) of the Buccieri firm. That was her first year preparing returns for clients. Pope's tax training consisted of a 10-week course sponsored by a national tax return preparation company. Pope's firm assigned her to prepare some of the simpler tax returns. Under her firm's procedures, her returns were to be reviewed by one of the C.P.A.'s and signed by them as the preparer. However, contrary to this procedure, Pope signed as preparer of petitioners' 1989 return. Buccieri and Buccieri's procedure was to give clients a 15-page income tax organizer to complete and bring to their interview. Mr. Reinhardt completed very little of the organizer. The only section he completed was the personal information section. He either left the remainder of the organizer blank or included a few entries. For example, he left pages 4, 7, 9, 12, and 13 completely blank. He included only sporadic entries in the remainder of the organizer. For example, he only had a single entry on each of pages 3, 5, and 6. On page 8, he made three416 entries about employee business expenses. On page 11, under self-employed income and expense, he entered $ 2,298 next to "BEN", presumably for the Buffalo Evening News. Under self-employed expenses he claimed $ 35 for accounting and legal and $ 434 for automobile expenses. He answered eight out of nine yes or no questions on page 14. He also signed at the bottom of the last page. He completed no other sections. He also gave the firm a copy of his 1988 return and the Forms 1099 for 1989. Petitioners were audited around 1990. They took their bills from the Buffalo News and their checkbooks to the interview. The auditor did not ask to see their bank records. Examiner C.N. Luther prepared an examination report dated June 29, 1990, which said in part: TP's approximately 50 years old. No obvious health problems. Neither has any bookkeeping or accounting training or experience. Both appeared to be befuddled when questioned about why income in question was not reported. Both appeared confused about income and expenses on Schedule C.The examiner asked: "Why didn't you report income?" Petitioners answered: "It's cash income" and "everybody told us cash income doesn't417 have to be reported." The examiner asked if petitioners discussed it with their preparer and petitioners said no. The examination report does not suggest petitioners failed to cooperate in any way. Around February 16, 1991, petitioners executed a Form 2848, appointing Nicholas D. Buccieri (Buccieri), a C.P.A. with Buccieri and Buccieri, to represent them in dealing with the Internal Revenue Service (IRS) for the years 1986 to 1989. Buccieri first reviewed the return prepared by Pope in early 1991. Pope left the Buffalo area around the summer of 1991. Petitioners erroneously believed their reporting obligation was limited to the amounts shown on their Forms 1099. Neither anyone from the Buffalo News nor petitioners' tax preparers for the years at issue told petitioners that they should report their gross receipts and cost of goods sold. During the years in issue, petitioners received but did not report gross receipts of $ 93,206 for 1986, $ 108,321 for 1987, $ 118,264 for 1988, and $ 68,530 for 1989 from the sale of newspapers. They had, but did not report, cost of goods sold expenses of $ 76,680 for 1986, $ 86,050 for 1987, $ 96,930 for 1988, and $ 47,454 for 1989. Petitioners418 maintained no books and records for their newspaper distributor activity during the years in issue other than their checkbooks. However, petitioners did not conceal their newspaper distributor activity or bank records from their tax preparers or the IRS examiner. OPINION The parties agree that respondent's determination of deficiencies in petitioners' income tax liabilities is correct. 1. FraudRespondent has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). For returns due after December 31, 1986, but before January 1, 1989 (e.g., petitioners' returns for 1986 and 1987), there is an addition to tax for fraud of 75 percent of the portion of the underpayment, which is attributable to fraud, plus 50 percent of the interest payable under section 6601, which is attributable to such position. Sec. 6653(b)(1)(A) and (B). For returns due after December 31, 1988, and before January 1, 1990 (e.g., petitioners' 1988 return), there is an addition to tax of 75 percent of the underpayment which is attributable to fraud. Where respondent shows that any of the underpayment was due to fraud, there is a rebuttable presumption that the entire 419 underpayment is due to fraud. Sec. 6653(b)(2). For returns due after December 31, 1989 (e.g., petitioners' 1989 return), there is a penalty of 75 percent of the underpayment attributable to fraud similar to the addition to tax for fraud applicable for the previous year under section 6653(b)(1). Sec. 6663(a). To prove fraud, respondent must establish that: (1) Petitioners have underpaid taxes for each year, and (2) some part of the underpayment was due to fraud. Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983). Respondent need not prove the precise amount of the underpayment resulting from fraud. Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 105 (1969). Respondent need only prove that "any part" of an underpayment results from fraud. Secs. 6653(b) and (c), 6663(a). For purposes of section 6653(b), fraud means "actual, intentional wrongdoing," Mitchell v. Commissioner, 118 F.2d 308">118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A. 424">40 B.T.A. 424 (1939), or the intentional commission of an act or acts for the specific purpose of evading a tax believed to be owing, Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968),420 affg. T.C. Memo 1966-81">T.C. Memo. 1966-81; McGee v. Commissioner, 61 T.C. 249">61 T.C. 249, 256 (1973), affd. 519 F.2d 1121">519 F.2d 1121 (5th Cir. 1975). Fraud is never presumed; rather, it must be established by affirmative evidence. Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970). Fraud may be inferred from any conduct, the effect of which is to mislead or conceal, Spies v. United States, 317 U.S. 492">317 U.S. 492, 499 (1943), or where an entire course of conduct establishes the necessary intent, Patton v. Commissioner, 799 F.2d 166">799 F.2d 166, 171 (5th Cir. 1986), affg. T.C. Memo. 1985-148; Kotmair v. Commissioner, 86 T.C. 1253">86 T.C. 1253, 1260 (1986); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). The sophistication of the taxpayer is relevant in deciding if a taxpayer has committed fraud. Halle v. Commissioner, 175 F.2d 500">175 F.2d 500, 502-503 (2d Cir. 1949), affg. 7 T.C. 245">7 T.C. 245 (1946). Fraudulent intent is more easily inferred where the taxpayer421 is intelligent, educated, and knowledgeable about taxes. Simms v. Commissioner, 422 F.2d 340">422 F.2d 340 (4th Cir. 1970), affg. T.C. Memo. 1968-298; O'Connor v. Commissioner, 412 F.2d 304">412 F.2d 304, 310 (2d Cir. 1969), affg. in part and revg. in part T.C. Memo 1967-174">T.C. Memo. 1967-174. Respondent points out that petitioners' returns did not include gross receipts or the cost of goods sold and included erroneous claims for deductions in the years in issue. Respondent argues that it is unbelievable petitioners would think that the small amounts reported on their Forms 1099 and 1040 were correct in light of the fact that: (1) Petitioners received a large amount of money for distributing about 200,000 newspapers per year; (2) personal expenses paid from petitioners' accounts exceeded their reported income; (3) petitioners' mortgage expenses and food expenses were 15 times greater than their taxable income in 1986 and 3 times greater than their taxable income for 1987; and (4) Mr. Reinhardt knew he was making money and a decent living. Respondent also argues that the fact that petitioners knowingly deposited422 their customers' payments and kept check registers shows that petitioners knew the receipts were business gross receipts, includable in income. We do not believe that petitioners made this connection. We believe respondent's position gives insufficient consideration to the particular circumstances plainly shown here. Petitioners are clearly unsophisticated and have little understanding of the tax laws. They have always recognized their obligation to file and have filed returns. However, they have never prepared their returns; they have always relied on a paid preparer. Most of petitioners' receipts from their customers were in cash. They regularly deposited more than three-fourths of their gross receipts in their checking accounts. Petitioners kept check registers in which they regularly recorded their weekly deposits of checks and cash and payees of checks they wrote. The existence of petitioners' check registers shows that petitioners regularly maintained records of their newspaper distribution activity. Respondent argues that the fact that petitioners kept check registers shows "a degree of business acumen * * directly contradicting their claimed ignorance of the finances423 of the newspaper business." We disagree. The ability to keep a check register, i.e., to record checks and deposits, does not show business acumen relating to the newspaper business. We also note that there is no evidence that petitioners misled or failed to cooperate fully with the IRS examiner. We are convinced the blame for the errors on the returns lies with Mendola, not petitioners. Mendola testified that, for the 1986 return, Mr. Reinhardt gave him a $ 377 figure for insurance for a truck used for business. Mr. Reinhardt told Mendola that Mr. Reinhardt used a room in his house for papers, and Mendola chose the number to deduct for it. Mendola testified that "I gave him $ 92" for expenses of refreshments, etc., for youth carriers, even though Mr. Reinhardt did not suggest an amount. Mendola knew that petitioners distributed papers and that they had checking accounts. He testified that Mr. Reinhardt told him he had no cost of goods sold and that he thought Mr. Reinhardt was extremely unsophisticated. However, he apparently made no effort to see the check registers or petitioners' Buffalo News statements. If he had, he would have had access to considerable detail about424 their gross receipts and costs of goods sold. Buccieri testified that in 1991 when he first reviewed the 1988 return prepared by Mendola, he could easily see it was not complete because it contained no cost of goods sold information. Someone more sophisticated than Mr. Reinhardt would have realized that Mendola was doing a poor job. We believe Mr. Reinhardt did not realize it. Mr. Reinhardt testified that he used tax preparers because he did not believe he could prepare a tax return accurately. We think his reliance on preparers was total. He testified that he believes income is not taxable unless there is a Form 1099 or W-2. That belief is wrong, but respondent has not convinced us that Mr. Reinhardt knew it was wrong. Petitioners did not know that their gross receipts and costs of goods sold must be reported. Based on all the facts here, we conclude that respondent has not clearly and convincingly proven fraud for any year in issue. 2. Negligence for Tax Years 1986 to 1988In the answer, respondent alleged that, as an alternative to the addition to tax for fraud, petitioners are liable for negligence under section 6653(a)(1)(A) and (B) for 1986 and 1987, section425 6653(a)(1) for 1988, and section 6662(b)(1) for 1989. Respondent has the burden of proving that petitioners are liable for negligence because respondent first raised negligence in the answer. Rule 142(a). Thus, respondent must prove that petitioners intentionally disregarded rules and regulations or that petitioners acted unreasonably, imprudently, and without due care in filing their returns. Sec. 6653(a). For returns due before 1990, if any part of an underpayment of tax is due to negligence or intentional disregard of rules and regulations, an addition to tax of 5 percent of the underpayment is added. Sec. 6653(a). For returns due before 1989, there is also added an amount equal to 50 percent of the interest payable under section 6601 on the portion of the underpayment attributable to negligence. Sec. 6653(a). Negligence is lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). In deciding whether a taxpayer was negligent or intentionally disregarded rules and regulations, it is appropriate for the Court to consider the taxpayer's426 experience and knowledge. Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 740 (1973); Sutor v. Commissioner, 17 T.C. 64">17 T.C. 64, 69 (1951); Lagoy v. Commissioner, T.C. Memo. 1992-213; DeRochemont v. Commissioner, T.C. Memo. 1991-600; Kerr v. Commissioner, T.C. Memo. 1990-155; Whitaker v. Commissioner, T.C. Memo 1988-418">T.C. Memo. 1988-418; Dexter v. United States, 306 F. Supp. 415">306 F. Supp. 415, 428 (N.D. Miss. 1969) (no negligence where taxpayer with limited education and business acumen relied on accountant and lawyer). Taxpayers may not be negligent if they rely in good faith on tax professionals, they provide their agents with all information necessary to prepare the return, and the incorrect return is the result of the preparer's mistakes. Weis v. Commissioner, 94 T.C. 473">94 T.C. 473, 487 (1990); Industrial Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272">66 T.C. 272, 283 (1976); Pessin v. Commissioner, 59 T.C. 473">59 T.C. 473, 489 (1972).427 A taxpayer's honest misunderstandings of law and fact coupled with his reliance on financial advisers may not be negligence. See Vorsheck v. Commissioner, 933 F.2d 757">933 F.2d 757, 758-759 (9th Cir. 1991), affg. in part and revg. in part an Oral Opinion of this Court; Otis v. Commissioner, 73 T.C. 671">73 T.C. 671, 675 (1980); Woody v. Commissioner, 19 T.C. 350">19 T.C. 350, 355 (1952) (Court reviewed); Lyons v. Commissioner, T.C. Memo. 1991-84; Scotten v. Commissioner, T.C. Memo 1966-206">T.C. Memo. 1966-206, affd. 391 F.2d 274">391 F.2d 274 (5th Cir. 1968). Petitioners credibly testified that they did not understand the law and that they relied in good faith on their return preparers. Respondent has not convinced us that petitioners' reliance on the return preparers was unreasonable or not in good faith. We conclude that petitioners are not liable for the addition to tax for negligence for 1986, 1987, or 1988 under section 6653(a). 3. The Accuracy-Related Penalty for Tax Year 1989In 1989, the additions to tax for negligence under section 6653(a), valuation428 overstatement under section 6659, and substantial understatement of tax liability under section 6661 were replaced with an accuracy-related penalty. Sec. 6662; Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c), 103 Stat. 2106, 2339. Section 6662 applies to petitioners' 1989 income tax return. Under section 6662, a 20-percent penalty is imposed on the portion of the underpayment attributable to various factors, including negligence and substantial understatement of income tax. See Ypsilantis v. Commissioner, T.C. Memo 1992-644">T.C. Memo. 1992-644. Under section 6662(b)(2), a 20-percent penalty is imposed on the portion of the underpayment attributable to a substantial understatement of income tax. A substantial understatement exists if for any taxable year the amount of the understatement of tax exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year, or $ 5,000. Sec. 6662(d)(1)(A); see Peterman v. Commissioner, T.C. Memo. 1993-129. We conclude that petitioners are liable for this penalty because their understatement of tax ($ 6,281) exceeded both 10 percent of the*429 tax required to be shown on their return ($ 6,281) and $ 5,000, and no exceptions apply. Since the section 6662(a) penalty applies because of petitioners' substantial understatement, we need not decide if petitioners were negligent for 1989 for purposes of section 6662(b)(1). Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624254/	APPEAL OF JENNIE I. IRWIN, AS EXECUTRIX, AND EUGENE P. MCCAHILL, ADMINISTRATOR WITH THE WILL ANNEXED, OF THE ESTATE OF MARY E. MCCAHILL.Irwin v. CommissionerDocket No. 2547.United States Board of Tax Appeals2 B.T.A. 875; 1925 BTA LEXIS 2237; October 16, 1925, Decided Submitted July 17, 1925. 2237 Royalties received during the taxable years involved from iron ore which had been mined, removed from the leased premises and stockpiled prior to March 1, 1913, were not taxable income, but were choses in action and due decedent prior to that date. Guy Chase, Esq., for the taxpayer. A. Calder Mackay and Ward Loveless, Esqs., for the Commissioner. GRAUPNER 875 Before GRAUPNER, TRAMMELL, and PHILLIPS. This appeal involves income and profits taxes for the years 1916 to 1919, inclusive, amounting to $39,944.29. The deficiency results from the refusal of the Commissioner: (1) to allow depreciation on farm buildings for the year 1916; (2) to exclude from taxable income certain amounts received as royalties for ore mined, removed, and stockpiled prior to March 1, 1913; and (3) to allow as and for depletion of ore mined on decedent's property on the Masaba Range in St. Louis County, Minn., the rate claimed by the executors. FINDINGS OF FACT. 1. Jennie I. Irwin, is one of the executors named in the last will of Mary E. McCahill, deceased; and Eugene P. McCahill is administrator with the will annexed of said estate of Mary E. McCahill, 2238 duly appointed by the probate court for Wabasha County, Minn., to take the place of John Grimes, deceased, who was the other executor named in the said will. Mary E. McCahill died August 14, 1922. 2. Decedent, during the year 1916 and for some time prior thereto, was the owner of a 1,360-acre farm in Wabasha County, Minn., which she operated in producing grains and livestock on a large scale. Upon said farm property and used in carrying on said farming and stock-raising business there were 15 buildings, hereinafter referred to, not including her dwelling house, which were computed to have cost the amount set opposite each of said 876 building or buildings. In her income-tax return in 1916, decedent claimed depreciation on said buildings at the rate and in the amounts shown in the table below. No depreciation on said buildings, or any of them, had been allowed in the Commissioner's determination of net income for 1916. During the trial the Commissioner admitted that a mistake had been made as to the valuation of the farm building during the year 1916. The buildings referred to, together with the computed costs and rates and amounts of depreciation claimed, were as2239 follows: Computed cost.Rate claimed.Amount of depreciation.Per cent.1 brick farm building$9,375.002$187.501 concrete farm building250.0037.509 frame farm buildings14,750.003442.504 frame farm buildings18,125.004725.00Total42,500.001,362.50The depreciation claimed was reasonable. 3. The decident kept two sets of records; one set of books covered the operation and management of the 1,360-acre farm owned by her and the other set of books covered the income received and disbursements made in connection with the interests owned outside of her farm, consisting of investments in stocks, bonds, loans, and iron ore mining property. The farm records were kept on the basis of cash receipts and disbursements. 4. The decedent was the sole fee owner of a mine known as the Shenango Iron Ore Mine, located on the Masaba Range in St. Louis County, Minn., which she inherited from her husband and which is described as follows: The East Half of the Southeast Quarter of Section 22, the Northwest Quarter of Section 23, and the Northeast Quarter of the Northeast Quarter of Section 27, all in Township 58 North, of Range2240 20 West, in St. Louis County, Minnesota. This was commonly known, and is at times hereinafter referred to, as the Shenango Mine. 5. The Shenango Furnace Co., a corporation, became the lessee of the above-described premises in the year 1906, and has continued in possession and has operated a mine on the land above-described continuously to the present time under the following lease: LEASE. This Indenture, Made this twenty-sixth day of May One thousand nine hundred, by and between Patrick H. Rahilly and Catherine Rahilly his wife, of Lake City, Wabasha County, Minnesota, parties of the first part, and O. D. 877 Kinney and George C. Howe of the City of Duluth, St. Louis County, Minnesota, parties of the second part, Witnesseth: That the parties of the first part in consideration of the sum of One Dollar, to them in hand paid by the parties of the second part the receipt whereof is hereby acknowledged, and in further consideration of the covenants and conditions herein contained, to be kept and performed by the parties of the second part, do hereby let, lease and demise, to the parties of the second part for the term of thirty-five years from and after the First2241 day of June, one thousand nine hundred, the following described land and premises situated in the County of St. Louis in the State of Minnesota, viz., the East half of the Southeast quarter of Section twenty-two (22); the Northwest quarter of the Southwest quarter of Section twenty-three (23) and the Northeast quarter of the Northeast quarter of Section twenty-seven (27), all in Township 58 North of Range 20 West of the Fourth Principal Meridian; which premises are leased to the parties of the second part for the purpose of exploring for, mining, taking out and shipping therefrom the merchantable iron ore, which is or which hereafter may be found on, in or under said land, together with the right to construct all buildings make all excavations, openings, ditches, drains, railroads, wagon roads and other improvements upon said premises, which are or may become suitable or necessary for the mining or removing of iron ore from said premises, with the right, during the existence of this lease, to cut and use the timber other than pine and tamarack, which is hereby expressly reserved, found upon said premises, subject to a certain timber deed dated April 23rd, 1898, and recorded in the2242 office of the Register of Deeds in St. Louis County, Minnesota, on the 3rd day of May, 1898, in Book 153 of Deeds at page 269, also to a deed for a railroad right of way to the Swan River Logging Company Limited, with a contract back to move the track if necessary, in order to mine the ore thereunder, so far as may be necessary for fuel, other than for smelting purposes, and so far also as may be necessary for the construction of buildings required in the operation of any mine or mines found on the premises hereby demised, and also the timber, subject to said timber deed, and the tamarack which is hereby expressly reserved, required for drains, tramways, supports, railroads within such mine or mines, or connecting the mine or mines with the main line or lines of railroad, over or upon which the said ore may be transported, provided, however, that the parties of the second part shall have the right at any time to terminate this agreement in so far as it requires the parties of the second part to mine ore on said land or to pay a royalty therefor, or to pay taxes thereon, by giving sixty days written notice to the parties of the first part either in person or by mail registered and in2243 case notice is given by mail registered, it may be addressed to Patrick H. Rahilly and Catherine Rahilly, Lake City, Minnesota, the parties of the first part, the parties of the second part paying rent or royalty for any part of a year this lease shall remain in force, at the rate hereinafter agreed and set forth; and thereupon the foregoing lease and demise shall terminate, and all arrearages and sums which may be due under the same, up to and including the date of its termination, as set forth in such notice, shall be paid upon settlement and adjustment thereof. The parties of the first part further agree that the parties of the second part shall have the right under this agreement to assign this lease, and to contract with others to work such mine or mines, or any part thereof, for the purpose of mining for iron ores, with the same rights and privileges as are herein granted to the said parties of the second part, and that the uninterrupted rights of the parties of the second part to take, use and carry away 878 iron are herein provided for, shall continue unsuspended, notwithstanding any disagreement between the parties hereto respecting the same or this contract, providing2244 they shall duly pay for all ore shipped or agreed to be shipped at the time or times and in the manner stipulated for in and by this contract. The parties of the second part in consideration of the premises hereby covenant and agree to and with the parties of the first part, that the parties of the second part will, on the tenth (10th) days of April, July, October, and January in each year (or on the day ensuing, if that day falls on Sunday) during the period hereinbefore stipulated, or during the period this contract continues in force, pay to or for the use of the parties of the first part, at such bank in the City of Duluth as the parties of the first part may from time to time, in writing, designate, for all the iron ore mined and shipped from said land during the three months preceding the first day of the month in which payment is to be made as aforesaid, royalty at the rate of twenty (20) cents per ton for each ton mined and shipped from the East half of the Southeast quarter of Section twenty-three (23) and the Notheast quarter of the Northeast quarter of Section twenty-seven (27), all in Township 58 North of Range Twenty (20) West of the Fourth Principal Meridian, in St. 2245 Louis County, Minnesota, each ton to be reckoned as twenty-two hundred and forty pounds (2240 lbs.). The parties of the second part, at the time of such payment, shall transmit to the parties of the first part an exact and truthful statement of the amount of iron ore shipped during the three months for which such statement shall be made. The iron ore so shipped by the parties of the second part, from said land, shall be weighed by the railroad company transporting the same from said land, which weights shall determine the quantity as between the parties hereto. Said parties of the second part shall furnish to the parties of the first part, monthly statements showing the total amount of the aforesaid weights; the right, however, being conceded to the parties of the first part to inspect, review and test the correctness of the railroad company's scales and weights, at any time, and in such manner as they may see fit to adopt, it being understood that any errors in these respects, when ascertained, shall be recognized and corrected in their accounts. The parties of the second part agree to pay all taxes, general or specific, upon the land so demised, which may be assessed, either2246 against said lands and the improvements thereon, or the iron ore product thereof; or any personal property of said mines, from and after the date of this lease, during the continuance of this lease, and at the termination of this lease to quietly and peaceably surrender the possession of said land to the parties of the first part. The parties hereto having prior to the execution of this lease, entered into an agreement dated December 1st. 1899, by which the parties of the first part gave to the parties of the second part an option for this lease, by the terms of which option the parties of the second part paid to the parties of the first part on the execution of said agreement for option, the sum of $1000 and agreed to pay as provided therein, the further sum of $1000 on the first day of February, 1900, and the further sum of $3000 on the 1st day of June, 1900, as advance royalties, it is hereby agreed that such payments being made shall stand and be treated as payments to the extent of $5000 for the first royalties falling due under the terms of this lease, but shall be forfeited to first parties as liquidated damages in case second parties abandon this lease prior to January 1st, 2247 1901, or before sufficient ore to amount to $5000.00 has been taken out. 879 The parties of the second part further covenant that during the period for which this agreement continues in force there shall be mined and shipped from said land at least 25,000 tons of iron ore during the year 1900 and prior to January 1st, 1901, 50,000 tons during each of the years 1901 and 1902, 75,000 tons during the year 1903 and 100,000 tons during the years 1904 and each and every year thereafter during the continuance of this lease and in case the parties of the second part shall not ship from said land the quantity of iron ore per annum as herein specified, commencing with the time specified, the parties of the second part shall nevertheless pay to the parties of the first part a royalty of twenty (20) cents per ton upon 25,000 tons for the year 1900, upon 50,000 tons for each of the years 1901 and 1902, upon 75,000 tons for the year 1903 and upon 100,000 tons for the year 1904 and upon 100,000 tons for each and every year thereafter up to and until this lease shall expire or be terminated in the manner hereinbefore expressed, provided, however, that if in any one or more years more iron2248 ore is thus paid for than is actually mined or shipped in such year or years, then in such case the iron ore so paid for and not shipped may be mined and shipped in any subsequent year during the continuance of this lease without other payment therefor but such ore so permitted to be mined and shipped in any subsequent year in consideration of such prepayment. must be in excess of the amounts above stipulated to be mined and shipped for the respective years as above specified. It is mutually understood and agreed that upon the termination of this agreement, whether by the acts of the parties or either of them, or by limitation or otherwise, the parties of the second part shall have ninety days in which to remove all engines, tools, machinery, railroad tracks and structures erected or placed by said parties on said land, but shall not remove or impair any supports placed in the mines nor any timbers of frameworks necessary to the use and maintenance of shafts or other approaches to the mines. The parties of the second part shall open, use and work the said mines in such manner only as is usual and customary in the skillful and proper mining operations of similar character, when2249 conducted by the proprietors themselves, and so as not to do, cause or permit any unnecessary or unusual permanent injury to the same, or inconvenience or hindrance in the subsequent operating of the said mines, and in working of said mines the parties of the second part shall deposit all earth, rocks and other useless material or rubbish at such places and in such manner, as will not conflict with or embarrass the future operating of said mines. The parties of the first part expressly reserve to themselves (and the parties hereto agree that the parties of the first part shall have) the right, in person, or by their agents or servants to enter into and upon the above demised premises, and any part or parts thereof, at any time or times, to inspect and survey the same, and measure the quantity of ores that shall have been mined or shipped therefrom, not unnecessarily or unreasonably hindering or interrupting the works or operations of lessees. The parties of the first part do hereby, for themselves, their executors, administrators and assigns, covenant with the said parties of the second part, their executors, administrators and assigns, that they, paying the royalty or rent hereby2250 reserved and performing and observing the several covenants by the lessees hereinbefore contained, may peaceably hold and enjoy the said premises and the rights herein granted, during the said term without any interference or interruption by the parties of the first part, their executors, administrators or assigns, or any person lawfully claiming through or under them or any of them. 880 The covenants, terms and conditions of this lease shall run with the land and be in all respects binding and operative upon all assignees, sublessees and grantees under the parties of the second part. The parties of the second part agree that when this lease shall for any cause terminate, said parties will enter or cause to be entered a certificate of that fact upon the proper book of record in said St. Louis County, provided this lease shall have been recorded there. It is further provided and the present lease is granted upon express condition, that, if the rent hereby reserved (the said royalty being treated as rent) or any part thereof, or the said taxes shall be and remain unpaid after the days and times when by the preceding covenants the same should be paid (and if the same2251 shall remain in default for more than sixty days after notice in writing to the parties of the second part, specifying the default), or in the event of the termination of the foregoing lease and demise, as hereinbefore provided, or in case the said parties of the second part shall fail to keep and perform any of the covenants or conditions herein expressed to be kept and performed on their part, then and from thenceforth and in either of these events it shall be lawful for the parties of the first part, after sixty days notice in writing, as aforesaid, at their option into and upon the said premises so demised, with or without any process whatever to re-enter, and the same to have and possess again, as of their first and former estate, and the parties of the second part, and all persons claiming under said parties wholly to exclude therefrom. It is understood that the parties of the first part reserve and shall at all times have, possess and hold, a lien upon all the ore mined, and on all improvements made on said premises by the parties of the second part, as a security for any unpaid balances of money due under this contract, such balance being deemed and to be treated as balances2252 of purchase money, and which lien may be enforced against such property in like manner as liens conferred by chattel mortgages are or may be entitled to be enforced under the laws of the State of Minnesota. It is further mutually agreed that all grants, stipulations and conditions herein expressed shall apply to and bind the successors, heirs, executors, administrators and assigns (as the case may be) of the said respective parties. The said lease was signed, witnessed, acknowledged, and filed for record in St. Louis County on June 2, 1900, at 10 a m., in Book X of Agreements, on page 43. 6. The Shenango Furnace Co., a corporation, came into possession of the premises above referred to under an assignment of the above-described lease during the year 1906, and in 1911 Mary E. McCahill became the owner in fee of said premises through the death of her husband, who had purchased said premises some time prior to the year 1906 from Patrick Rahilly and wife. Said lessee commenced shipping lean and rich ore from the Shenango mine in 1906, and in each of the years 1906, 1907, and 1908 said lessee mined, shipped, and paid the royalty of 20 cents per ton for all ore which it so shipped2253 or removed from said mine. The Shenango Furnace Co. employed two methods in mining ore on said premises, namely, the open-pit method and the shaft or underground method. 881 7. Commencing in July, 1910, and continuing during the years 1911 and 1912 and until about February 28, 1913, the said lessee mined from said Shenango mine and hauled away from the leased land to other property not owned or in any way controlled by lessor and without weighing or causing the same to be weighed, large quantities of iron ore, to wit, about 1,480,643 tons, without making payment of royalties due to said lessor therefor. There were also mined and removed from the Shenango mine by lessee after March 1, 1913, and stockpiled, as hereinafter stated, without being weighed or paid for, 1,269,310 tons. The iron ore removed as stated above was stockpiled on what is known as the Pillsbury and Niles land, according to the following tabulated statement: Stockpile No.Location.Prior toAfter Mar. 1,Mar. 1,Totals 1913. 1913. 1910-1918.Tons.Tons.Tons.1Niles 40s289,500289,5001Pillsbury 40s671,616481,9931,153,6091McCahill land170,753170,7532Pillsbury 40s468,150495,034963,1843do51,371121,530172,901Total stockpiled1,480,6371,269,3102,749,9472254 All of the ore placed in stockpile by the Shenango Furnace Co., the lessee herein referred to, was taken by the open-pit steam shovel method from an open-pit mine in taxpayer's premises. 8. Under the terms of the lease, lessee was to pay royalty at the rate of 20 cents per ton for all iron ore mined and removed from the premises, and such royalty became due and payable on the 10th day of the month after the close of each quarter year following such taking and removal. 9. Mary E. McCahill frequently demanded payment for said iron ore so mined, removed, and stockpiled, but said lessee refused to make payment therefor until a notice to cancel the lease had been served on the lessee and an action had been instituted in the district courts by the lessee to enjoin the lessor from taking any steps to cancel the lease or take possession of the leased premises. 10. Negotiations for settlement for royalties on stockpiled ore were thereafter carried on between the lessor and the lessee, and on July 16, 1914, they entered into a contract in writing fully compromising and settling the injunction proceedings and all differences and controversies between the lessor and lessee in regard2255 to ore taken from open-pit mine and stockpiled. 11. In the agreement of compromise and settlement the lessee conveyed to Mary E. McCahill the title in fee to the land (called the Pillsbury forties) upon which certain quantities of such stockpiled 882 ore had been deposited by it, the said land and the ore thereon to be regarded thereafter as though they were a part of leased premises, with a reservation that at the expiration of said mining lease the lessee shall have the right at its option to designate, point out, and have staked off in some compact space so much of such ore as the lessee should have paid for, and at the request of the lessee said lessor should execute a deed reconveying to the lessee the land covered by such ore. It was provided in said agreement of compromise and settlement that from and after March 1, 1914, the lessee, in addition to paying royalty, should pay to the fee owner, from time to time, so long as the said mining lease should continue in force and as royalties are payable thereunder, a sum equal in amount to 10 cents per ton on all ore mined and shipped directly from said leasehold premises until a sufficient amount has been paid to the2256 fee owner in such extra payments to cover the royalty at the rate of 20 cents per ton on the lean ore already stockpiled, until 1,500,000 tons have been thus or otherwise paid for. After payment has been made on account of the said 1,500,000 tons of lean ore, the lessee shall from time to time, so long as the said lease continued in force, and in like manner, continue to pay to the fee owner, an additional sum equal in amount to 10 cents per ton on all the ore mined and shipped directly from the leasehold premises, until a sufficient amount had been paid to the fee owner in such extra payments, or otherwise, to cover the royalty at the rate of 20 cents per ton on all the ore stockpiled on said leasehold premises after March 1, 1914, and running in its natural state 36 per cent and higher in metallic iron. 12. All payments contemplated under said compromise agreement were made in the years 1914 to 1920, inclusive. The leassee paid lessor the royalties on 1,500,000 tons of said ore in stockpile when the said agreement was made, which was July 16, 1914, plus the royalties on 528,297 tons of ore stockpiled after said date, aggregating $405,659.56 for 2,028,297 tons of stockpiled2257 ore. Said payments were made as follows: In 1914, lessee paid to the lessor royalties aggregating $50,966.20, which constituted full payment for 254,831 tons of ore stockpiled prior to March 1, 1913. During the year 1915, the lessee paid to the lessor royalties aggregating $93,962.25, which was in full payment for 469,815 tons of ore stockpiled prior to March 1, 1913. During the year 1916, lessee paid to lessor royalties aggregating $98,477.28, which constituted full payment for 492,386 tons of ore stockpiled prior to March 1, 1913. During the year 1917, lessee paid to the lessor royalties aggregating $52,722.20, which constituted full payment for 263,611 tons of ore stockpiled prior to March 1, 1913. During the year 1917, lessee paid to lessor additional royalties 883 aggregating $15,003.60, which constituted full payment for 75,018 tons of ore stockpiled after March 1, 1913. During the year 1918 lessee paid to the lessor royalties aggregating $52,530.06, which constituted full payment for 262,650 tons of ore stockpiled after March 1, 1913. During the year 1919, lessee paid to the lessor royalties aggregating $24,026.07, which constituted full payment for 120,1302258 tons of ore stockpiled after March 1, 1913. During the year 1920, lessee paid to the lessor royalties aggregating $17,971.20 for 89,856 tons of ore stockpiled after March 1, 1913. 13. The decedent in her amended return for the year 1916 and her returns of income or the years 1917, 1918, and 1919, deducted depletion at the rate of $0.167829 per ton as the estimated fair market value per ton on March 1, 1913. In arriving at this estimate she adopted the estimate of the Minnesota Tax Commission, which was 7,138,831 tons. Upon that tonnage decedent expected to receive, according to the terms of the lease, 20 cents per ton, or an aggregate of $1,427,766.20. During a period of nine years (1909 to 1917) of mining by the open-pit method the Shenango Furnace Co. had mined and removed an average of 802,121 tons per year, at which rate it was estimated the March 1, 1913, tonnage would be removed by the end of the year 1921. Under this estimate the executors claim the fair market value of the mine on March 1, 1913, was determined to be $1,198,104.01, which estimated tonnage produced a fair market value on March 1, 1913, of $0.167829 per ton. 14. The Commissioner computed the fair2259 value on March 1, 1913, at $0.148515 per ton for the open-pit iron ore and $0.101206 per ton for such ore as was to be mined by the underground method. For the years 1916, 1917, and 1918, the Commissioner allowed and deducted depletion at said rates on tonnages of ore newly mined. For the year 1919 the Commissioner allowed and deducted depletion on such tonnages of ore newly mined and shipped at a flat rate of $0.131468 per ton, without regard to whether it was open-pit iron ore or underground iron ore. 15. The cost or fair market value on March 1, 1913, of the decedent's claims against the Shenango Furnace Co. was equal to the amount agreed upon in 1914 in the settlement of such claims. DECISION. The deficiency as determined by the Commissioner is allowed in part and disallowed in part. The tax liability of the executors should be computed in accordance with the following opinion. Final determination will be settled on consent or on 10 days' notice, in accordance with Rule 50. 884 OPINION. GRAUPNER: The questions involved in this appeal are: (1) Whether the executors are entitled to a deduction for 1916 for the exhaustion, wear and tear of the farm buildings2260 arising out of their use and employment in the farming and stock-raising business; (2) whether the royalties received for iron ore mined, removed, and stockpiled prior to March 1, 1913, are taxable income; and (3) whether the executors are entitled to a greater allowance for depletion of the Mary E. McCahill mineral interests on the ore mined, removed, stockpiled, and sold after March 1, 1913, than that allowed by the Commissioner? We will take up the propositions in the order named above. From the evidence submitted it appears that decedent was the owner throughout the year 1916 of a 1,360-acre farm in Wabasha County, Minn., upon which there were a number of buildings which were used for the purpose of carrying on farming operations and stock raising as a business, and that no depreciation on said buildings, or any of them, had been allowed in the Commissioner's determination of net income for the year 1916. The Commissioner during the trial acknowledged that a mistake was made in the valuation of the farm buildings during the year 1916, and we are of the opinion that the executors are entitled to a reasonable deduction for 1916 for the exhaustion, wear and tear of the farm buildings, 2261 and they are allowed to deduct from gross income the sum of $1,362.50, the amount claimed by them as and for depreciation on the farm buildings during said year. The second proposition involved in this appeal is whether or not the amount received for ore mined, transported, and removed from the premises of the lessor prior to March 1, 1913, but which was not paid for until after March 1, 1913, is taxable income. The Shenango Furnace Co., a corporation, operated a mine on the premises of lessor for several years prior to 1910 and mined, shipped, and paid a royalty of 20 cents per ton to lessor, according to the terms of the lease, for all ore which was so shipped. Beginning in July, 1910, and continuing during the years 1911 and 1912 and until about February 28, 1913, the lessee, through the open-pit method of mining, mined and removed a certain amount of ore and stockpiled it on premises in which the lessor had no interest, and the lessee did not pay for this ore so removed a certain amount of ore and stockpiled it 1913, a demand was made by the lessor upon the lessee for payment failure to pay such royalty, the lessor demanded possession of the mine, whereupon an action was commenced2262 by the lessee to enjoin the lessor from taking possession of the mine or in any way interfering 885 with the operations of the mine. While the action was pending, negotiations of settlement were carried on and, on July 16, 1914, a settlement was made whereby the lessee agreed to pay the lessor for all ore mined and stockpiled prior to March 1, 1913, as well as for all ore mined and stockpiled subsequent to March 1, 1913, according to the findings hereinbefore set forth. In the determination by the Commissioner of gross income for the years 1916 and 1917 were included the amounts paid by the lessee to the lessor for ore mined and stockpiled prior to March 1, 1913. Under the terms of the lease set forth in the findings, the relation of the decedent to the lessee was that of landlord and tenant. Such leases have been before the courts frequently and it has uniformly been held that they create only the relation of landlord and tenant and that the royalties are rents and are not the purchase price of ore sold. ; 2263 ; O.D. 591 (Cum. Bul. No. 3, p. 113). The amount due decedent from the lessee prior to March 1, 1913, was an obligation which not even a forfeiture of the lease would have extinguished. . Only the increase, if any, over the cost or March 1, 1913, value could be taxed under the statute. . Under the terms of the statute. . Under the terms of the settlement between the lessor and the lessee, no interest was paid on the amount due prior to March 1, 1913. From the evidence submitted we are of the opinion that the royalties received for ore mined, removed, and stockpiled prior to March 1, 1913, were not taxable income but were choses in action and due decedent prior to March 1, 1913. The determination of the Commissioner in regard to the amount paid for ore mined prior to March 1, 1913, is disallowed. The third proposition involved in this appeal is whether or not the executors are entitled to a grater amount of allowance for the depletion of mineral interests*2264 on the ore mined, removed, stockpiled, and sold after March 1, 1913, than that allowed by the Commissioner. Some evidence was submitted at the trial as to the estimated fair market value per ton on March 1, 1913, but such evidence was very indefinite, both as to the value per ton on March 1, 1913, and as to the amount of tonnage, and, in the absence of sufficient proof to the contrary, the executors are not entitled to a greater rate of depletion for ore mined after March 1, 1913, whether such ore was mined by the open-pit method or underground method, than that allowed by the Commissioner, and the determination of the Commissioner as to the value of ore mined after March 1, 1913, is approved. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624255/	APPEAL OF GEORGE P. FISHER, EXECUTOR OF THE ESTATE OF ANNA F. HAY.Fisher v. CommissionerDocket No. 1775.United States Board of Tax Appeals3 B.T.A. 679; 1926 BTA LEXIS 2594; February 11, 1926, Decided Submitted July 18, 1925. 2594 1. Land held by the estate of a decedent may, for the purpose of valuing the gross estate, have a substantial value, although the land produced no income and no market for its sale had developed. 2. The average price of sales of stocks during the year of decedent's death held to be the measure of values of such stocks for estate-tax purposes. Dana Latham and R. S. Doyle, Esqs., for the taxpayer. L. C. Mitchell, Esq., for the Commissioner. TRUSSELL 679 Before GREEN, MORRIS, and TRUSSELL. This is an appeal arising from a determination of a deficiency in estate tax in the amount of $3,291.94. It involves the valuation of an undivided one-fifth interest in certain real estate and certain shares of stock. FINDINGS OF FACT. The taxpayer is the estate of Anna F. Hay, of which George P. Fisher, of Chicago, Ill., is the duly appointed and qualified executor. At the time of her death on September 25, 1922, the decedent owned 1,565 shares of the capital stock of the Oconto Co., a Wisconsin corporation, and a like number of shares of the Bay de Noquet Co., a Michigan corporation; also an undivided one-fifth interest, as a beneficiary2595 of a trust, in 1,280 acres of land in and near Oconto, Wis. On the estate-tax return the undivided one-fifth interest in the real estate was valued at $3,000, and the stock in the corporations mentioned was valued at $195,625, or $125 for each two 680 shares of stock, one share of the stock of each corporation being taken together and treated as a unit. In determining the tax due from the estate, the Commissioner has increased the value of the undivided one-fifth interest in the real estate to $5,228, and has increased the valuation of the shares of stock to $289,525, or $185 per unit. The real estate in which the decedent owned an undivided one-fifth interest was composed of two tracts. One tract, containing 1,100 acres, was principally marsh land from which marsh hay was cut at a small profit. The other tract was composed of 180 acres of agricultural land, located in the town of Oconto, Wis. It was not suitable for subdivision into lots. This tract of land was usually rented from year to year, but during part of the time a tenant was not procured and during some years the rental was not sufficient to pay taxes on the property. The operation of these tracts resulted2596 in a net operating loss of $3,973.04 for the years 1913 to 1922, inclusive. This loss was a charge upon the land at the time of the decedent's death. These two tracts were offered for sale through agents, but no offers were received. The assessed valuation of an undivided one-fifth interest in the land for the year 1922 was $5,308. This valuation was protested by the trustees but no adjustment was made. The Oconto Co. and the Bay de Noquet Co. are engaged in the lumber business. Their assets consist chiefly of timber holdings and cut-over land in Michigan and Wisconsin. The stock of both corporations is held by eight individuals and is not listed on any exchange or traded in actively. The authorized capital stock of the Oconto Co. is $1,000,000, consisting of 10,000 shares of $100 par value, while the authorized capital stock of the Bay de Noquet Co. is $100,000, consisting of 10,000 shares of $10 par value. Neither of these corporations maintained a reserve for exhaustion or depletion of the properties. At the date of the death of the decedent, it was estimated that there was sufficient timber on the Wisconsin properties to justify the operation of a mill thereon for 82597 or 9 years, and on the Michigan property for about 10 or 11 years. The consolidated net earnings of the two corporations for the five-year period 1918 to 1922, were as follows: EARNINGS.1918$88,998.941919260,380.241920346,184.50LOSSES.1921$324,364.291922243,811.87The average net income for those years was $25,477.51, which is a return of approximately 2 per cent on the stock valued at $125 per unit and little more than 1 per cent valued at $185 per unit. 681 During the year 1922 there were three sales of the stock of these corporations. The number of units of stock, date of transaction, and price were as follows: Number of units.Date of sale.Price per unit.40Feb. 20, 1922$162.5022Apr. 27, 1922162.5015Nov. 1, 1922165.00In the case of the first transaction mentioned above, the purchaser first agreed to buy 20 units for $175 per unit, but before the transaction was closed it was agreed that there should be added 20 additional units at $150 per unit. The sales of February 20 and April 27 were made to one of the officers of the corporation by heirs of a former officer. The sale of2598 November 1 was by the same individuals to a company physician. In the year 1923 a resolution was passed by the board of directors, whereby offers of the stock of the corporation were to be made to employees for $200 per unit. Of this amount, 20 per cent was to be paid in cash, the remainder to be spread over a period of five years. For this remainder the employees were required to give notes bearing 5 per cent interest. Under this arrangement 102 shares of stock were sold. The resolution recited that these sales were to be made to employees for the purpose of increasing their loyalty, and, although the agreements of sale contained no provision with reference to the redemption of the stock, it was generally understood that the company would see that employees purchasing stock would lose no money in connection with the transaction, and in one or two instances the stock was repurchased by the companies at the request of employees. DECISION. The value of the decedent's interest in the lands in controversy at the date of her death was $5,228. The value of the corporation stocks at the date of decedent's death was $162.98 per unit of shares of the two affiliated corporations. 2599 Final determination of deficiency will be settled on 15 days' notice, pursuant to Rule 50. OPINION. TRUSSELL: The testimony offered by the taxpayer shows that the interest of the deceased in the lands in question had been held since prior to 1913; that during the period from 1913 to 1922 the income from these lands had been insufficient to pay taxes and other carrying charges; and that the lands had been placed on the market for 682 sale, but no prospective buyers had appeared. The value of lands for purposes of the estate tax can not be measured wholly by the amount of income produced or by the fact that during any given period no one has cared to buy such lands. Lands may have a substantial value even though they produce no income and the market for their sale has not yet developed. These lands were in and adjacent to a settled community, and it is well known that owners frequently hold such lands in anticipation of realizing their true value from future sales. The record of this appeal does not contain any evidence as to such true value, except the local assessor's valuation and the Commissioner's valuation. We are, therefore, of the opinion that the valuation2600 placed upon these lands by the Commissioner can not be modified. The securities held by the estate are stocks in two affiliated corporations, which appear to have been engaged for many years in the lumbering business in the State of Wisconsin and Michigan. The record shows that during a period of five years prior to the decedent's death the average net earnings of the corporation had been $25,477.51 upon an outstanding capital of $1,100,000; that no sales of stock had been made, except transfers between former stockholders and a few sales to employees. The testimony indicates that the lumbering business could not continue for more than 10 or 12 years, and that, from the average profits during the five years from 1918 to 1922, inclusive, no stockholder could anticipate a sufficient return in dividends to establish a value of the stocks even equal to the amount returned by the taxpayer. A summary of the record shows that three officers and directors of the corporations issuing the stocks under consideration testified that in their judgment the stocks were not, during 1922, worth in excess of $125 per unit, although during the same year one of these directors purchased a number2601 of shares at different times and at varying prices, which averaged $162.50 per unit; and in the following year these same directors authorized sales of these stock units to employees, on the basis of installment payments, at $200 per unit, and allowed the books of account of the companies to stand showing a valuation of $400 per unit, with no book provision for the depletion of timber resources. From this record we are able to find one outstanding fact upon which to base a conclusion as to values. The heirs of one deceased former stockholder, desiring to convert their securities into money, were able, during the year 1922, to sell 77 shares at an average of $162.98. We are thus led to the conclusion that the heirs of the estate here under consideration, had they offered their stock for sale, could not have obtained a higher price *683 per unit of the two stocks. We, therefore, hold that the unit values of the stocks of these two affiliated corporations were, at the date of decedent's death, $162.98 per unit.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624258/	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 1994-274; 1994 Tax Ct. Memo LEXIS 277; 67 T.C.M. (CCH) 3096; June 16, 1994, Filed 277 For petitioners: A. Jerry Busby. For respondent: Stephen J. McFarlane. WRIGHTWRIGHTMEMORANDUM OPINION WRIGHT, Judge: This matter is before the Court on petitioners' motion for an award of reasonable litigation and administrative costs under Rule 231 and section 7430. 1 The merits of the underlying case were decided in Di Re v. Commissioner, T.C. Memo. 1993-523, filed November 16, 1993, and to the extent necessary for the disposition of this motion, the facts and holdings in T.C. Memo. 1993-523 are incorporated by this reference. References to petitioner in the singular are to Luigi Di Re. The primary issue for our consideration in the underlying case was whether petitioners failed to report income from gambling winnings for each of the taxable years 1986, 1987, 1988, and 1989. We held278 that petitioners did not fail to report taxable income from gambling winnings for the years at issue, and therefore, found it unnecessary to consider the other issues in the case relating to various additions to tax determined by respondent in the notice of deficiency. A summary of the pertinent facts follows. 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, a dog racing track. Generally, petitioner started his nightly betting with $ 600 to $ 800 in cash, and if petitioner lost that amount, he cashed checks at the track in order to continue gambling. 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 the Phoenix Greyhound Park, and in addition to writing checks, petitioner obtained cash from an automated teller machine located at the track. The record clearly shows that petitioner did not cash checks or obtain cash at the track for any reason other than gambling. Petitioner redeposited279 his winnings, if any, into his checking account, less the cash he started with each evening. Under section 7430(a), a "prevailing party", in specified civil tax proceedings, may be awarded a judgment for reasonable administrative and litigation costs. To be a prevailing party under section 7430(c)(4), the party seeking such award must: (1) Establish that the position of the United States in the proceeding was not substantially justified, sec. 7430(c)(4)(A)(i); (2) substantially prevail with respect to the amount in controversy, or have substantially prevailed with respect to the most significant issue or set of issues presented, sec. 7430(c)(4)(A)(ii); and (3) establish that he or she has a net worth which did not exceed $ 2 million at the time the proceeding was commenced, sec. 7430(c)(4)(A)(iii). Additionally, a judgment for administrative and litigation costs will not be awarded under section 7430(a) unless the Court determines: (1) That the prevailing party has exhausted the administrative remedies available with the Internal Revenue Service (IRS or Service), sec. 7430(b)(1); and (2) that the prevailing party has not unreasonably protracted the court proceeding, sec. 7430(b)(4). 280 See Polyco, Inc. v. Commissioner, 91 T.C. 963 (1988); Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 83 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988). A party seeking costs bears the burden of proving that he is entitled to them. Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685">94 T.C. 685, 688 (1990); Stieha v. Commissioner, 89 T.C. 784">89 T.C. 784, 790 (1987). We now examine the above-mentioned factors as they bear on the issue presented in the instant case. Respondent agrees that petitioners substantially prevailed in the underlying litigation, met the net worth requirement, and have not unreasonably protracted the Court proceeding. Thus, we will begin our analysis considering whether respondent's position was substantially justified. Whether the position of the United States in this proceeding was substantially justified depends on whether respondent's position and actions were reasonable in light of the facts of the case and the applicable legal precedents.2Pierce v. Underwood, 487 U.S. 552">487 U.S. 552 (1988); Huffman v. Commissioner, 978 F.2d 1139">978 F.2d 1139, 1146 (9th Cir. 1992),281 affg. in part, revg. in part and remanding T.C. Memo. 1991-144; Sher v. Commissioner, supra at 84. The fact that respondent ultimately is unsuccessful at litigation or concedes the case is not necessarily determinative that respondent's position was unreasonable. Wasie v. Commissioner, 86 T.C. 962">86 T.C. 962, 969 (1986). Petitioners bear the burden of proving that respondent's position was not substantially justified. Rule 232(e); Huffman v. Commissioner, supra at 1145. Petitioners claim that they are entitled to both administrative costs and litigation costs. Petitioners must therefore separately establish that respondent's position in each of the proceedings, administrative and judicial, was not substantially justified. Id. at 1146. In deciding whether petitioners have met their burden, we will examine the basis for respondent's position and the manner in which the position was maintained. Wasie v. Commissioner, supra at 969. 282 With respect to a claim for reasonable administrative costs, the position of the United States means the position taken by the United States in any administrative proceeding to which section 7430 applies as of the earlier of (1) the date of the receipt by the taxpayer of the notice of decision of the Appeals Office of the Service, or (2) the date of the notice of deficiency. Sec. 7430(c)(7)(B). It appears from the record that prior to the issuance of the notices of deficiency, the instant case had not been considered by any Service Appeals office and therefore no notice of any decision of such an office was sent to petitioners. Accordingly, for purposes of petitioners' claim for reasonable administrative costs, the position of the United States means the position taken by the Service in an administrative proceeding to which section 7430 applies as of March 20, 1991, the date of the notices of deficiency in the instant case. With respect to a claim for reasonable litigation costs, the position of the United States means the position taken by the United States in a judicial proceeding to which section 7430 applies. Sec. 7430(c)(7)(A). Thus, the position of the United States means283 the position taken by respondent in the instant case. This case was commenced by the filing of the petition on June 6, 1991. Therefore, the position of the United States for purposes of petitioners' claim for reasonable litigation costs is the position first taken by respondent in the instant case on or after June 6, 1991. In meeting their burden of demonstrating that the position of the United States was not substantially justified, petitioners must show that, as of the time period applicable under section 7430(c)(7) in respect of each proceeding, legal precedent did not substantially support that position, given the facts available to respondent. Coastal Petroleum Refiners, Inc. v. Commissioner, supra at 688. Respondent's position on the date of the issuance of the notices of deficiency and on the date petitioners filed their petition, and thereafter, was that petitioners failed to report taxable income derived from gambling winnings during the taxable years at issue. In taking this position, respondent relied on the bank deposits method of reconstructing income. It is well established that where a taxpayer fails to maintain adequate records, 284 the Commissioner may prove the existence and amount of unreported income by any method that will clearly reflect the taxpayer's income. Sec. 446(b); Holland v. United States, 348 U.S. 121">348 U.S. 121, 130-132 (1954); Harper v. Commissioner, 54 T.C. 1121">54 T.C. 1121 (1970). 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 respondent to arrive at the taxpayer's income. Adjustments are then made to eliminate deposits that reflect nonincome items such as gifts, loans, transfers between bank accounts, and redeposits. We found that petitioners failed to keep adequate records, and that respondent's use of the bank deposits method was appropriate. Thus, we find respondent's use of the bank deposits method in the instant case to be reasonable. We now must determine whether respondent applied the method in a reasonable manner. Petitioners contend that respondent's position at both the administrative level and the litigation phase was not substantially justified because respondent, using the bank deposits method, 285 failed to "back out" or give credit to petitioners for redeposits of funds into their bank account. In essence, petitioners claimed that they were not given credit for the full amount of petitioner's gambling losses. Petitioners further contend that respondent acted unreasonably in pursuing this litigation after respondent was made aware of petitioner's wagering expenses. The existence of information with respect to the amount of any gambling losses or cash redeposits into petitioners' bank accounts was within the exclusive knowledge of petitioners. Until this information is shared with respondent, respondent has no way of knowing the extent of nontaxable sources of income, if any. When there is a factual determination of this kind with respect to a tax return, respondent is not obliged to concede the case until the necessary documentation is received to prove the taxpayer's contentions and claims. Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 765 n.10 (1989). Indeed, it would be unreasonable to require respondent to make a blind concession rather than continuing the factual investigation. Three months before trial, petitioners' counsel and expert witness286 met with an IRS Appeals officer at which time petitioners provided copies of checks written to a racetrack, a source and application of funds schedule for 1 year in controversy, and a bank account analysis for that same year. Approximately 17 days before trial, petitioners provided respondent with a large, unorganized box of documents. A revenue agent organized and scheduled the material, and as a result, respondent was able to make several concessions. Two weeks before trial, respondent received petitioners' trial memorandum listing, for the first time, the witnesses petitioners intended to call. Petitioners' trial memorandum lists the witnesses that are to testify, but does not indicate in any detail what the content of their testimony will be. Respondent contends, based upon the proposed testimony as described in the trial memorandum, that petitioners' witnesses did not have sufficient personal knowledge to substantiate petitioners' claims. While it is true that we did find that respondent failed to credit petitioners for various gambling expenses, the burden of showing such duplications was on petitioners. See Zarnow v. Commissioner, 48 T.C. 213">48 T.C. 213, 216 (1967).287 Our finding for petitioners in the underlying case was based on (1) the testimony of several witnesses who had extensive firsthand knowledge of petitioner's gambling activity and who clearly demonstrated to this Court that petitioner was, without question, a net loser at the track, and (2) the documentary evidence provided by petitioners, including petitioner's canceled checks written to the track, his ATM activity at the track, his various loans, cashed-in CD's, and withdrawn IRA's. Respondent was at no time aware of the content of the witnesses' testimony and was not provided with all the documentary evidence until shortly before trial. On the basis of this record, we conclude that respondent's position and the manner in which it was maintained at both the administrative and trial level was reasonable in light of the facts and circumstances known to respondent. We find that petitioners have failed to establish that respondent's position was at any time substantially unjustified; thus, petitioners are not a "prevailing party" under section 7430, and we need not address the issue of whether petitioners exhausted their administrative remedies. Accordingly, petitioners are not 288 entitled to an award of reasonable administrative and litigation costs. To reflect the foregoing, An appropriate order and decision will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. For civil actions or proceedings commenced after Dec. 31, 1985, sec. 1551(d)(1) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2752, changed the language of sec. 7430 describing the position of the United States from "unreasonable" to "was not substantially justified." This and other courts, however, have held that the "substantially justified" standard is not a departure from the previous reasonableness standard. See also Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 764↩ n.7 (1989).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624259/	Edward A. Myers, Petitioner, v. Commissioner of Internal Revenue, RespondentMyers v. CommissionerDocket No. 12005United States Tax Court11 T.C. 164; 1948 U.S. Tax Ct. LEXIS 108; August 11, 1948, Promulgated 108 Decision will be entered under Rule 50. 1. Upon the facts, held, petitioner's wife and daughter were not partners for Federal tax purposes; held, further, that petitioner's son contributed vital additional services and was a partner from November 1 of the taxable year and that the amount of the percentage of partnership profits allocated to him is not taxable to petitioner.2. Held that, as the evidence shows petitioner did not owe his wife any debt during the taxable year, the amount he paid to her as interest during that year is not deductible. Horace S. Robeson, Esq., and Edward W. Schietinger, C. P. A., for the petitioner.George C. Lea, Esq., for the respondent. Hill, Judge. HILL 164 Respondent determined a deficiency of $ 30,305.24 in petitioner's income tax for the calendar year 1943.In the original petition herein certain assignments of error and issues were presented respecting the year 1942, involved herein, because of the Current Tax Payment Act of 1943. By amended petition all assignments of error and issues respecting 1942 were eliminated. The questions presented under the amended petition are:(1) Whether petitioner's wife, daughter, 109 and son were bona fide partners during the year 1943 and, if so, whether they were partners effective January 1, 1943, or effective November 1, 1943.(2) Whether petitioner is entitled to a deduction in the year 1943 of $ 8,640 as interest paid in that year to his wife.The tax returns were filed with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh.165 FINDINGS OF FACT.Partnership issue. -- The partnership here involved was first organized in 1926, for the purpose of designing and manufacturing hearing aid devices sold under the trade-mark "Radioear." It then, as now, operated under the name of E. A. Myers & Sons, with headquarters in Pittsburgh, Pennsylvania. At the time of its organization the partners were petitioner and his two sons, Edwin J. Myers and Leslie M. Myers. Approximately one year after the formation of the partnership Leslie resigned for the purpose of engaging in another activity.The partnership continued in business thereafter with the two remaining partners until December 28, 1935, when two additional partners, Samuel F. Lybarger, petitioner's son-in-law, and Alfred E. Pelz became partners.The partnership110 operated in the form as above indicated until January 2, 1942, when Alfred E. Pelz withdrew. There were no further changes until November 1, 1943, when the articles of copartnership were amended to recite that Leslie, Sara, petitioner's wife, and Alberta M. Lybarger, his daughter, were partners.The amendments to the articles of copartnership executed on that date read, in part, as follows:Whereas, the party Sara M. Myers of the Township of Mount Lebanon, County of Allegheny, State of Pennsylvania, is desirous of becoming a full partner in the said partnership in consideration of a payment made to the partnership in the amount of Sixteen Thousand Dollars ($ 16,000.00), receipt of which is hereby acknowledged; andWhereas, the party Alberta M. Lybarger of the Township of Peters, County of Washington, State of Pennsylvania, is desirous of becoming a full partner in the said partnership in consideration of a payment made to the partnership in the amount of Ten Thousand Six Hundred Ninety-six and 96/100 Dollars ($ 10,696.96), receipt of which is hereby acknowledged; andWhereas, the party L. M. Myers of the Township of Mount Lebanon, County of Allegheny, State of Pennsylvania, is desirous111 of becoming a full partner in the said partnership, in consideration of a payment made to the partnership in the amount of Four Thousand Eighty-Two and 67/100 Dollars ($ 4,082.67), receipt of which is hereby acknowledged;It Is Hereby Agreed1. That the parties Sara M. Myers, Alberta M. Lybarger and L. M. Myers shall, in consideration of their investments tendered and accepted as of this date, be accepted into full partnership in the firm of E. A. Myers & Sons, with the understanding that the above-mentioned new partners shall have the right to full and complete participation in the profits for 1943, the same as if this Amendment had been executed as of January 1, 1943.* * * 3. From and after the date hereof, said partnership agreement of December 28, 1935 shall continue in force and shall govern the relations of the partners 166 among themselves; it being understood that this Amendment is not intended to supersede nor in any way affect said partnership as concerns the rights or obligations of individual partners.Paragraphs 3 to 8, inclusive, of the partnership agreement of December 28, 1935, incorporated in the amendatory agreement of November 1, 1943, by paragraph 3 thereof112 as above set forth, provide as follows:3. Each partner shall be entitled to share in the profits of the business for the year One Thousand Nine Hundred and Thirty-six (1936) and for succeeding years, in direct proportion to the ratio which exists, at the end of each year, and as provided herein, between the amount of his investment account and the total amount of the investment account. As partners' investment accounts may not be constant throughout the entire year, as a result of withdrawals (as provided herein), for the purpose of arriving at the amount of a partner's investment account for ony one year, the amount of the investment account, as it stands on the books at the end of each month shall be added and divided by Twelve (12) and this average sum shall be construed to be the amount of each partner's investment, for the purpose of distribution of profits at the end of the year.4. At the end of each year, it shall be decided by the parties representing the majority of the investment account, what disposition is to be made of the accrued book-profits for that year; that is, whether all or any part shall be paid in cash to each of the individual partners as their interest 113 may appear, or whether it shall be allowed to remain in the business as working capital and as such, be credited in the proper proportion to each partner's investment account.5. Should the parties representing the majority of the investment account decide to increase the capital investment, each partner shall be privileged to make a further investment, which shall bear the same ratio to the total increase contemplated as his individual investment bears to the total investment account before this increase is effected. In case any one or more of the partners should not desire to take his or their proportion of this increase, his or their portion of this increase may be taken by the remaining partners under the same plan of distribution.6. Withdrawals of any amount of capital from the investment account, at any time, shall be made only upon the agreement of the parties representing the majority of the investment in the business.7. In every instance, where perfect agreement between the partners does not exist with reference to the policies to be followed by the partnership, the partners representing the majority of the investment shall have the right to decide what policy or policies114 shall be followed and the other partner or partners shall consider this decision as final.8. If the parties representing the majority of the investment account should decide that it was for the best interests of the business, for any reason whatsoever, to have any one or more of the partners discontinue his connection with the business, such remaining partners shall have the option of purchasing his or their holdings at their then book value plus Twenty (20) per cent of said book value; provided further, that if the discontinuance of such withdrawing partner is caused by any illegal or dishonest act against the best interests of the business, said Twenty (20) per cent bonus shall not be paid. The judgment of the partners representing the majority of the investment in the business shall be accepted as final with respect to whether or not the circumstances surrounding a partner's forced withdrawal, shall or shall not warrant the payment of the Twenty (20) per cent bonus mentioned herein.167 In the articles of copartnership (above set forth in part) executed on December 28, 1935, the control and management of the partnership was vested in the partner representing the majority115 of the investment account. Such partner was petitioner, who held the majority of interest in the partnership from 1936 through 1942. He determined, by virtue of his majority interest, what disposition was to be made of accrued book profits; decided whether the capital investment of each partnership should be increased; approved all withdrawals of money; determined what policy or policies should be followed by the partnership in case of disagreement with respect thereto among the other members of the partnership; and decided whether, if it was believed to be in the best interest of the firm, any one or more of the partners should discontinue their association with the firm. Those articles of copartnership governed the activities of the partnership from December 28, 1935, and through the taxable year here in question.Sara, who according to the amendment to the articles contributed $ 16,000 to the partnership, married petitioner in 1896. At the time of their marriage Sara received a gift of $ 135 from her father. She was admitted to practice law in the State of Indiana just prior to her marriage, but she did not practice either before or after that time.Soon after the marriage116 (the exact date is not shown) Sara invested the $ 135 wedding gift in a company known as the Garrett Engine Boiler & Machine Works. That company was reorganized and its name changed to Model Gas Engine Co. in 1904. It continued in business until about 1915, when a dispute arose between petitioner and certain other members of the board of directors. This led to petitioner's severing his connection with it in 1915. His rights in the company were purchased for $ 92,000. Of this amount petitioner gave Sara $ 5,000. In 1918 she received $ 1,000 from the estate of an aunt and in 1922 she received an additional $ 1,000 from the estate of her mother. She loaned all of the above mentioned sums to petitioner.In 1930 Sara and petitioner built a new home in Mount Lebanon, Pennsylvania, at a cost of $ 18,000. She agreed to share equally with petitioner in the expense of purchasing that home and the money used for her share was considered to be repayment for the sums she had previously loaned to petitioner. Title to the property was conveyed to Sara and petitioner by a joint deed. Sara did not loan any money to petitioner subsequent to that time.On November 1, 1943, petitioner gave 117 Sara a check for $ 17,000. Sara deposited this amount in the Farmers Deposit National Bank of Pittsburgh. On November 8, 1943, she drew from this account a check for $ 16,000 payable to the partnership for an interest therein. Sara did not serve the partnership in any capacity during 1943, either in the way of contributing services or of sharing in the management. Her only record of any services to the firm was prior to 1928 when 168 she performed clerical duties, and during the years 1928 and 1929, when she helped petitioner demonstrate his hearing aid devices in various places throughout the country.Alberta Lybarger, who according to the amended articles contributed $ 10,696.96 to the partnership, is Samuel F. Lybarger's wife. He was during the year in question, as heretofore mentioned, a partner, and, in addition, was the firm's chief engineer.On December 23, 1937, petitioner wrote Alberta that he had given her on that day the sum of $ 5,000 which was to be invested in the partnership. This letter reads in part as follows:The sum of five thousand dollars ($ 5,000.00) I have given you this day is to be invested in the Radioear Hearing Aid business of E. A. Myers & 118 Sons, in a way that it will share in the earnings of the business in equal proportion to investments made by the partners.At the end of the year 1938 and each year thereafter, the earnings from this five thousand dollars (exclusive of any part of such earnings which may have been or are to be paid in cash, in accordance with the plan of distribution of the profits of E. A. Myers & Sons' partnership) are to be invested in like manner.The purpose of this gift is to enable one of the partners to make and keep this investment for you, and this investment, when properly made by one of the partners, shall be, in every respect, subject to the articles of the Partnership Agreement.In accordance with the above instructions Alberta's husband wrote the partnership the following letter under date of December 30, 1937:Gentlemen:I am enclosing my check for five thousand dollars ($ 5,000.00) to be credited to my invested capital account.Inasmuch as this is money received from Alberta E. Myers Lybarger, my wife, which I have agreed to invest for her, this part of my investment is being made by me in her behalf and for her benefit, and all profits derived therefrom will be payable by me to 119 Alberta E. Myers Lybarger, my wife.You are hereby authorized to set up a special investment account in my name in this amount and to treat this special account in the same way as my regular investment account with the Company.On December 3, 1941, petitioner gave Alberta an additional $ 4,000, which was part of a donation of $ 12,000 he made to all three of his children. Concerning this transaction, petitioner stated as follows in a letter dated December 3, 1941:I have this day made a gift of twelve thousand dollars ($ 12,000.00) to my three children, to be distributed equally, four thousand dollars ($ 4,000.00) to Alberta E. Myers Lybarger, L. M. Myers and E. J. Myers. Four thousand dollars ($ 4,000.00) is to be transferred from my investment account to the investment account of E. J. Myers.Four Thousand Dollars ($ 4,000.00) is to be transferred from my investment account to the special investment account of S. F. Lybarger as provided for such special investment in S. F. Lybarger's letter of authorization of December 30, 169 1937, [set forth in part above] covering a similar investment made by him for the benefit of his wife, Alberta E. Myers Lybarger.In a letter written120 by E. J. Myers to petitioner dated December 28, 1942, the following is stated concerning Alberta's proposed investment in the partnership.As far as Alberta is concerned, all of the earnings of her special investment will be paid to Sam and Sam in turn will pay that amount to Alberta and thus his income will be split up to enable separate tax returns to be filed.The "special investment" mentioned in the above quoted paragraph was $ 9,000 given to Alberta by petitioner for the purpose of putting it in the partnership. In accordance with the above instructions, the earnings from the above mentioned sums were either left to accumulate in the capital account of the partnership or were distributed to Samuel, her husband, who deposited such moneys in their joint checking account. On August 27, 1943, Samuel wrote the officials of the Treasury Department located in Pittsburgh, Pennsylvania, in part as follows:My wife, Alberta M. Lybarger, is not, and never has been a partner in E. A. Myers and Sons. * * The actual situation is that I have invested money belonging to my wife in the partnership. This money is invested in my name, and as far as the partnership is concerned, is handled121 in the same way as the rest of my investment, except that I have had the bookkeeper carry the amounts separately so that I know how much is due my wife from me.In increasing my investment with money belonging to Mrs. Lybarger, I agreed that any earnings on this money would be paid to her by me. The first increase in my investment account with money I received from Mrs. Lybarger was made on December 20, 1937. A second increase was made on December 3, 1941.Alberta did not contribute services or share in the control and management of the firm during 1943.Leslie M. Myers, according to the amended articles, contributed $ 4,082.67 to the capital of the partnership. Leslie received a gift of $ 2,500 from petitioner in 1937. This was not invested in the partnership. On December 3, 1941, petitioner gave him $ 4,000, which was donated for the specific purpose of investment in the partnership. In a letter written under date of December 3, 1941, petitioner gave the following instructions with respect to this money.Four thousand dollars ($ 4,000.00) is to be transferred from my investment account to a special investment account in my name. This special investment account will then represent122 the four thousand dollars ($ 4,000.00) gift to L. M. Myers thus invested by me on behalf and for the benefit of L. M. Myers, and all profits derived therefrom shall be payable by me to L. M. Myers, except that in view of L. M. Myers' previous indebtedness to me, all of the first four thousand dollars ($ 4,000.00) earned by this special investment account shall be payable to me to apply on the said indebtedness. Earnings in excess of this four thousand dollars ($ 4,000.00) exclusive of any part of such earnings which may be paid 170 in cash, in accordance with the plan of distribution of the profits of E. A. Myers & Sons' partnership, are to be credited to this special investment account in my name and are to be paid by me to L. M. Myers.During the taxable year in question Leslie established a program for rationing hearing aid batteries. This work included determining the number of batteries which should be allocated to the partnership's various distributors. In addition to that, he purchased supplies needed for the manufacture of the products of the partnership, which required that he do considerable traveling for the purpose of seeing Government officials with respect to123 obtaining priorities and contacting suppliers relative to obtaining required materials. Moreover, he tested hearing aid devices, for which, by virtue of his deafness, he was peculiarly adapted, and he was in charge of the program for establishing additional distributors for the partnership's products.The net distributable profits of the partnership for the taxable year 1943 amounted to $ 82,353.14.From 1936 through 1947, the various percentages of interest for the different partners were as follows:YearAlbertaSamuel F.E. A.E. J.AlfredLeslieSaraLybargerLybargerMyersMyersPelzMyersMyersPer centPer centPer centPer centPer centPer centPer cent19362.37 88.47 7.58 1.5819373.09 85.37 9.79 1.7519389.00 73.10 15.80 2.1019399.40 71.80 16.43 2.3719409.41 71.88 16.33 2.3819416.532.53 71.75 16.81 1.960.42194214.05763.582 22.361 194311.3553.11440.172 23.855 4.19717.307In his notice of deficiency, under "Explanation of Adjustments," the respondent stated as follows:(a) It is determined that Alberta Lybarger, Canonsburg, Pennsylvania, L. M. 124 Myers, Pittsburgh, Pennsylvania, and Sara M. Myers, Pittsburgh, Pennsylvania, were not members of the partnership firm of E. A. Myers and Sons during the year 1943 for income and victory tax purposes, and it is further determined that your distributable share of the corrected income of that partnership for the year 1943 amounted $ 65,943.37 rather than $ 38,283.02 as reported in your return; accordingly, your income from that source has been increased to the extent of $ 27,660.35.Interest issue. -- In his 1943 individual income and victory tax return petitioner deducted the amount of $ 8,640 as interest paid during the taxable year.In an explanation of adjustment with respect to the reported interest payment attached to the notice of deficiency, respondent stated as follows:(b) It is determined that the amount of $ 8,640.00 claimed in your return as 171 alleged interest paid to Sara M. Myers is not an allowable deduction in the computation of your income tax net income and victory tax net income.From and after 1930 petitioner owed no debt to Sara and there was no accrual of interest due from petitioner to Sara in 1943.OPINION.The respondent contends petitioner's wife, 125 Sara, his daughter, Alberta, and his son, Leslie, were not, for Federal tax purposes, partners of E. A. Myers & Sons during 1943, and that the distributable share of the partnership income attributed to them is taxable to petitioner. The Tower and Lusthaus cases 1 determined that a member of a family may become a partner for tax and other purposes if he either invests capital originating with him, or substantially contributes to the control and management of the business, or otherwise performs vital additional services.So far as Alberta and Sara are concerned, it is admitted by petitioner that during the taxable year in question they neither performed services nor shared in the control and management of the business. It is urged, however, that they both invested capital originating with themselves. We do not agree with this contention.The facts disclose that126 prior to 1930 Sara loaned petitioner certain sums she had previously received from him, from her father as a wedding gift, and from the estates of her mother and an aunt, and that he repaid his debt to her in full when they shared the expense of purchasing their home in 1930. There is not in this record convincing evidence of any additional loans Sara made to petitioner.It is claimed by petitioner, however, that he owed Sara $ 17,000 in 1943. He made out a check to her for this amount drawn on partnership funds on November 1, 1943, and she in turn, gave $ 16,000 of this amount to the partnership on November 8, 1943.Sara could not explain the origin of this alleged debt. Upon cross-examination she was asked: Q. Can you tell us, Mrs. Myers, the principal amount -- can you state precisely just how your husband owed you this $ 17,000 you claim he owed you?After several attempts to describe the source of the debt, she was asked: Q. Now, what was the next principal amount you got? We are trying to account for the $ 16,000 or $ 17,000.A. Do you know, I just can't tell you exactly. I would rather not say -- I do not want to say about this; my husband [petitioner] 127 knows all about that.However, petitioner's attempted explanation of the debt which he claimed he owed to Sara was not convincing. We think it apparent that the money which it is claimed was invested by Sara in the partnership 172 originated with petitioner. In the absence of more compelling proof to the contrary, we conclude that "no capital not available" for use in the business before was brought into the business as a result of Sara's becoming a partner and, since she performed no service whatever to the partnership, we hold that she was not a partner of E. A. Myers & Sons for tax purposes during 1943. See Commissioner v. Tower, supra.Alberta's capital investment, petitioner contends, grew out of his "gifts" to her of $ 5,000 in 1937 and $ 4,000 in 1941. Both of these sums were given to her for the express purpose of investment by her husband in his partnership account. Both were transferred from petitioner's investment account and placed in a "special investment account" in her husband's name. He received all the earnings from that account and, in turn, accounted therefor to Alberta.Petitioner, by virtue of the terms of the articles128 of copartnership executed on December 28, 1935, which remained in effect through 1943, retained dominion over the above described amounts. As the partner representing the majority of the percentage of investment in the partnership from 1935 through 1942, he, among other things, determined what disposition should be made of accrued book profits; had control over all withdrawals from the partnership funds; and determined with finality all policies of the partnership in the event of disagreement among the partners. Hence, petitioner did not absolutely and irrevocably divest himself of the title, dominion, and control of that money. See Francis E. Tower, 396">3 T. C. 396, 402; affirmed by the Supreme Court sub nom. Commissioner v. Tower, supra, and cases therein cited. It is therefore apparent that Alberta did not contribute any capital originating with her and that she was not a partner for tax purposes during 1943.Petitioner urges, however, that, even if it be determined that Alberta was not a partner, petitioner should not be taxed for her distributable share of the partnership income. We believe his contention is well taken.The moneys which129 petitioner gave to Alberta in 1937 and 1941 were intended to be and were used to increase the investment interest of Samuel F. Lybarger in the partnership. His status as a partner since 1935 is clearly established. We are not concerned here with the arrangement whereby he held for the benefit of Alberta a part of his share of distributable profits of the partnership, except to point out that what Alberta received in this respect is traceable to her husband's partnership investment rather than to petitioner's partnership investment. Also, whether or not Alberta became a partner by investment in the partnership of the moneys received from her husband, petitioner is not taxable with the share of partnership profits received by her in 1943.173 It will be noted from the table set forth in our findings that petitioner's percentage of interest in the partnership was reduced in 1943 in approximately the total percentage of interest represented for only Leslie and Sara. On the other hand, Alberta's husband's percentage of interest was reduced in 1943 in roughly the same amount as that represented as her interest. It is thus at once apparent that no avoidance of taxes was effected130 by petitioner so far as Alberta's purported partnership status is concerned. We therefore hold, although Alberta was not a partner during 1943, that petitioner should not be taxed for her distributable share of the partnership income. See Durwood v. Commissioner, 159 Fed. (2d) 400.With respect to petitioner's son Leslie, the evidence is convincing that he contributed vital services to the partnership during 1943. He established in that year a rationing system for determining how many hearing aid batteries should be sent to various distributors located throughout the United States; he worked out the details with respect to setting up additional distributors; and he purchased supplies for the partnership which required working out material problems with suppliers and priority questions with Government officials. We believe those duties constituted a vital factor in the production of the partnership income and rendered Leslie's status that of a partner for all purposes.Although the amended articles of copartnership were not executed until November 1, 1943, petitioner contends that Leslie was a partner from January 1, 1943. He supports his argument131 by pointing to the amendment which states that Leslie should have the right to full and complete participation in the profits for 1943 the same as if the amendment to the articles had been executed as of January 1, 1943.In his income tax return for 1943 Leslie stated that he "became a partner 10/1/43." During cross-examination at the hearing he admitted that he was in error and that he did not become a partner until November 1, 1943. We believe Leslie's admission that he was not a partner until the latter date overcomes the declaration contained in the amended articles that he was such from the first of the year. We hold that beginning November 1, 1943, Leslie was a partner of E. A. Myers & Sons and that his interest in the partnership for the months of November and December 1943 was 4.197 per cent.Paragraph 3 of the partnership agreement of September 28, 1935, provides for the allocation of the partnership's distributable profits and prescribes the formula for determining the respective distributable shares of the partners therein on the basis of a calendar year period.The amendment to the partnership agreement whereby Leslie became a partner continues in effect the provisions132 of the partnership agreement of September 28, 1935. In paragraph 3 of such last mentioned agreement, which is set forth above in our findings of fact, it 174 appears that each partner's distributable share of the partnership profits is determined in direct proportion to the ratio between his capital investment and the total capital investment of the partnership. Such paragraph provides for averaging over a full calendar year period the amount of a partner's partnership invested capital under a formula prescribed therein. By annualizing for the entire year 1943 Leslie's partnership investment account in the last two months of that year and using the averaging formula above mentioned, we find that the average percentage ratio of Leslie's investment account for the entire year 1943 was .6995 per cent. We hold, therefore, that Leslie's share of the distributable profits of the partnership for the year 1943 was .6995 per cent of the total distributable profits for that year. Accordingly, the amount of such percentage so allocated to Leslie should not be included in petitioner's gross income for tax purposes. Otherwise, on this point, the determination of the respondent is approved. *133 Petitioner contends that respondent erred in disallowing the deduction of an amount of $ 8,640 which was characterized as interest payments to Sara. We have found that prior to 1923 Sara loaned petitioner about $ 7,000 and that about the year 1930 petitioner and Sara built a home at a cost of $ 18,000. She agreed to share equally with petitioner in the expense of building such home and agreed that the money used for her share thereof was considered to be repayment for the sum she had previously loaned to petitioner. Thus we have found that whatever debt petitioner owed to Sara prior to 1930 was paid by the arrangement above indicated. We also have found that Sara did not loan any money to petitioner subsequent to that time. Such findings of fact were fully warranted by the evidence, and, in accordance therewith, we hold that there existed no debt owed by petitioner to Sara upon which there was an accrual of interest of any amount in 1943. It follows that respondent did not err in disallowing this deduction.Decision will be entered under Rule 50. Footnotes1. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624260/	NORMAN C. THOMAS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentThomas v. CommissionerDocket No. 10203-78.United States Tax CourtT.C. Memo 1981-128; 1981 Tax Ct. Memo LEXIS 610; 41 T.C.M. (CCH) 1123; T.C.M. (RIA) 81128; March 23, 1981. Norman C. Thomas, pro se. Albert B. Kerkhove, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar year 1976 in the amount of $ 4,133 and an addition to tax under section 6651(a), I.R.C. 1654, 1 in the amount of $ 1,240. This case was set for trial on the Omaha, Nebraska, calendar commencing February 2, 1981. After the case was set for trial, petitioner on January 5, 1981, filed a motion for summary judgment which was set for hearing at Omaha, Nebraska, on February 2, 1981. When the case was called from the calendar for trial, petitioner611 stated that his total case was a legal argument as set forth in his memorandum accompanying his motion for summary judgment and that he had no evidence to present but the case should be decided against him if his motion were not granted. Respondent then, on February 2, 1981, filed a motion for summary judgment in which he requested a judgment for the amount of the deficiency determined stating that there was no material issue of fact in the case. The points raised in petitioner's motion for summary judgment are all basically claims that the income tax is unconstitutional and that amounts received from wages are not subject to income tax. Therefore the issue for decision presented by the two motions for summary judgment is the constitutionality of the income tax and whether amounts received as wages are subject to income tax. The agreed facts in this case show that the determination of deficiency was based entirely on gross income from wages received by petitioner of $ 17,889, a standard deduction and one personal exemption. Petitioner received wages from North Central Airlines, Inc., for the year 1976 in the amount of $ 17,888.55 from which income tax in the amount of $ 3,099.72612 was withheld. Petitioner has attached a copy of his Wage and Tax Statement 1976 Form W-2 to his motion for summary judgment. On April 15, 1977, petitioner filed a Form 1040 with several attachments including a copy of the Form W-2 from North Central Airlines, Inc., claiming a refund of the entire $ 3,099.72 withheld from his wages. On September 16, 1977, a United States Treasury check was issued to petitioner returning to him the amount which had been withheld from his wages. Thereafter an investigation of petitioner's tax return was begun and on June 9, 1978, the deficiency notice, which forms the basis of this case, was issued. In his petition filed from the notice of deficiency, petitioner alleges in general the unconstitutionality of the income tax, the application of the Fifth, Sixth, Seventh, and Eighth Amendments of the Constitution of the United States to relieve him from income tax on his wages, and that he is entitled to a jury trial. He further alleges that this Court does not have jurisdiction to redetermine his tax liability. The petition contains no allegation of any error in respondent's tax computation in the notice of deficiency other than the various constitutional613 allegations and the allegations that wages are not subject to income tax. These are the same arguments petitioner makes in his memorandum in support of his motion for summary judgment. Respondent in his memorandum in support of his motion for summary judgment states that it has been previously held in a number of cases that the income tax is constitutional and that wages are subject to tax. It has long been held that an income tax is constitutional and that an income tax imposed on earned income is constitutional. It has likewise been held in numerous cases that a taxpayer is not entitled to a jury trial in this Court and that this Court has jurisdiction to redetermine deficiencies in income tax. See Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392">57 T.C. 392 (1971), affd. 467 F.2d 474">467 F.2d 474 (8th Cir. 1972); Cupp v. Commissioner, 65 T.C. 68">65 T.C. 68 (1975), affirmed without published opinion 559 F.2d 1207">559 F.2d 1207 (3d Cir. 1977); Swanson v. Commissioner, 65 T.C. 1180 (1976). In a case in the United States Court of Appeals for the Eighth Circuit to which an appeal in this case would lie involving the right of respondent to issue614 summons to banks in investigating the tax liability of a taxpayer, with Norman C. Thomas, appellant intervenor, the Court specifically held the income tax constitutional as applied to wages. See United States v. Thomas, 624 F.2d 1108">624 F.2d 1108 (8th Cir. 1980), in which the Court stated: It is clear that tax on income is constitutional and a direct tax, and that Congress has intended to tax income from a number of sources, including compensation for labor or services performed. United States v. Francisco, No. 79-1795 (8th Cir. Feb. 6, 1980) (slip op. at 4); see generally, Eisner v. Macomber, 252 U.S. 189">252 U.S. 189, 198 (1920); Brushaber v. Union Pacific R.R., 240 U.S. 1">240 U.S. 1, 18-19 (1916). * * * 2Since the only errors petitioner has assigned are the unconstitutionality of the income tax particularly as applied to wages, his right to a jury trial, and the lack of jurisdiction of this Court to redetermine the deficiency, and the only facts alleged are argumentative ones proposing to support these alleged errors, petitioner's motion for summary judgment is denied and respondent's*615 motion for summary judgment is granted. An appropriate order and decision will be entered. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue, unless otherwise stated.↩2. This opinion is unpublished; language taken from slip opinion.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624261/	George Weiderman Electric Co., Inc. v. Commissioner.George Weiderman Elec. Co. v. CommissionerDocket No. 17654.United States Tax Court1950 Tax Ct. Memo LEXIS 313; 9 T.C.M. (CCH) 17; T.C.M. (RIA) 50002; January 10, 1950Morris Gogolick, Esq., 521 Fifth Ave., New York, N. Y., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: This proceeding is for the redetermination of a deficiency in income tax asserted against the petitioner for the year 1945, in the amount of $971.99. The only question for us to decide is whether the petitioner is entitled to a deduction for a bad debt, or a loss, alleged to have been sustained as a result of purchasing 100 shares of its own capital stock, for $13,122.21. The314 case was submitted on a stipulation of facts and oral evidence. The facts as stipulated are so found. Such part thereof as it is considered necessary to set forth are included with other facts found from the evidence adduced in our Findings of Fact Petitioner is a corporation organized and existing under the laws of the state of New York, with its principal place of business in Brooklyn, New York. Its income tax return for the year 1945 was filed on an accrual basis with the collector of internal revenue for the first district of New York. At the beginning of the year 1945 petitioner's issued and outstanding capital stock consisted of 500 shares of common stock of the par value of $100 per share. Of this stock 100 shares were owned by one A. Sidney Reynolds, who had been employed by petitioner as a salesman. On December 26, 1945, Reynolds was indebted to the petitioner corporation in the sum of $8,872.21 and he was not then in the petitioner's employ. Negotiations resulting in the purchase by the petitioner of the 100 shares of its stock from Reynolds began on December 3, 1945, at which time Reynolds said he would sell them for $10,000. The petitioner was willing to pay315 $10,000 but claimed an offset of an indebtedness Reynolds owed the petitioner. Negotiations for the purchase of the stock followed through the month of December. The transaction was closed on December 27, by petitioner purchasing from Reynolds the 100 shares of stock for $13,122.21 and in payment thereof petitioner canceled Reynolds' indebtedness to it in the amount of $8,872.21 and gave him a check for $4,250. In its income tax return for the year 1945 the petitioner claimed a deduction for bad debts in the amount of $3,557.91, of which sum the amount of $3,122.21 represented a loss alleged to have been sustained by the petitioner as the result of purchasing, for $13,122.21, 100 shares of its common stock having a par value of $100 per share. Opinion On its income tax return filed with the Commissioner, petitioner claimed the amount of $3,557.91 as a bad debt, of which the respondent disallowed the amount of $3,122.21. The petition claims deduction of the latter amount as bad debt for 1945. As we understand petitioner's briefs, we conclude that it has now abandoned the contention that the amount in question represented a bad debt, and, if it is not abandoned, we hold that petitioner316 has offered no evidence that the amount was a bad debt. However, the petitioner does argue that the amount should be allowed as a loss and contends that the deduction is controlled by sections 22 (a), 111 and 113 (a) of the Revenue Act of 1938, and Section 29.22 (a)-15 of Regulations 111. In its argument that it suffered a loss, petitioner contends that the fair market value of the stock must be established to determine the amount of loss, and further contends that, on the basis of Buena Vista Land & Development Co., v. Lucas, 41 Fed. (2d) 131, it has established that the fair market value of the 100 shares of stock purchased from Reynolds was $10,000. We do not think that such a value has been established. The Buena Vista case did allow a basis to be established on evidence comparable to the evidence that petitioner here relies on, but in that case such evidence was all the court had. We are of the opinion that the Buena Vista case stands only for the principle that the best evidence available is all that can reasonably be required. However, in the instant case the offer to buy and sell the stock by the respective parties for $10,000 is not the best evidence of the317 fair market value of the stock. The transaction was not consummated at that price. Rather, within the same month that the $10,000 offer was made, the petitioner paid $13,122.21 for the stock (that is, he canceled Reynolds' indebtedness to it in the amount of $8,872.21 and paid the additional amount of $4,250). Such evidence of an actual sale, within the same month, is better evidence of the fair market value of the stock than the evidence of a mere offer to buy and sell, which offer was never consummated. The best evidence before us is that the fair market value of the 100 shares of stock purchased was at least $13,122.21. Since petitioner has failed to prove a fair market value of the stock purchased other than the amount of $13,122.21, we conclude that it has failed to prove its case on the contention advanced in its briefs. Neither are we convinced that petitioner has proved that he sustained a loss on the purchase of the stock in accordance with the statutes and regulations cited. We have carefully considered the sections of the Revenue Act of 1938 and the sections of Regulations 111, cited above. We do not regard them as entitling petitioner to the loss now sought. The petitioner318 purchased stock, paying, in part, by releasing an indebtedness to it. With no showing that the indebtedness was in fact worthless, even in part, and with the petitioner not now claiming worthless debt, we have passed that question. Yet it is obvious that the only way the petitioner could have been injured was by not collecting its debt in full, for in fact it merely purchased property for an agreed price. Purchase, not sale, of property does not, ordinarily at least, result in loss; and the petitioner has failed to show that the facts of sale here involved caused a loss to it. If it paid more than the property was worth - a point also not shown, as above noted - it will merely have a higher basis if, and when it sells the property. We are unable to find a loss to one who, voluntarily, even though in order to collect a debt (not otherwise shown uncollectible) pays a certain price for property, even assuming, what is not here shown, that the purchase price was more than value. We are not convinced that petitioner has suffered a loss. From the facts before us, we conclude that petitioner acquired 100 shares of its stock, previously owned by Reynolds, in which it now has a cost basis319 of $13,122.21, and that no loss was thereby sustained in 1945. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624262/	STREET AND FINNEY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Street & Finney, Inc. v. CommissionerDocket No. 17663.United States Board of Tax Appeals24 B.T.A. 187; 1931 BTA LEXIS 1681; September 28, 1931, Promulgated 1681 Petitioner, an advertising agency, held to be entitled to classification as a personal service corporation. Newton K. Fox, Esq., and Adrian C. Humphreys, Esq., for the petitioner. Eugene Meacham, Esq., and C. E. Lowery, Esq., for the respondent. SEAWELL187 The Commissioner determined deficiency in income and profits tax for 1920 in the amount of $8,350.49 and for 1921 in the amount of $1,275.25. The petitioner asserts that the Commissioner committed error in computing its taxable net income for the calendar year 1920 in failing and refusing to allow as a deduction from gross income the sum of $3,519.25, representing a debt due from Frank Miller Company which was ascertained to be worthless and charged off within the taxable year 1920, and that the Commissioner likewise erred in failing and refusing to allow as a deduction from gross income the sum of $571.16, representing alleged debts due from American Railway Express ($333.76) and Mince Meat Manufacturers Association ($237.40) which were ascertained to be worthless and charged off within the taxable year 1921. The petitioner also alleges that the Commissioner erred in1682 holding that it is not entitled to classification as a personal service corporation in the calendar years 1920 and 1921. At the hearing, counsel for the Commissioner conceded error on the part of the Commissioner in failing and refusing to allow as deductions the respective amounts for the respective years above mentioned and also conceded that capital was not an income-producing factor, leaving for our determination only the question of whether or not the petitioner is entitled to classification as a personal service corporation in the calendar years 1920 and 1921, the petitioner claiming that its income for those years 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. The case is submitted on the pleadings, stipulations, testimony of witnesses and numerous exhibits. FINDINGS OF FACT. The petitioner is a corporation, organized and incorporated in 1903 under the laws of the State of New York, and after its incorporation and during the years 1920 and 1921 was engaged in the advertising business in New York, N.Y.188 Prior to incorporation, 1683 such business was conducted individually by Frank Finney. In 1903, Julian Street became associated with Finney and the business was incorporated under the name of Street and Finney, Inc. In 1903 Julian Street withdrew from the business, but the name, Street and Finney, Inc., was retained by the petitioner. The original authorized and issued stock was 100 shares of common of a par value of $100 per share. The original stock was issued for the advertising business conducted by Frank Finney, furniture, fixtures, and good will. No cash was paid in for the stock. On July 1, 1921, the capitalization was changed to 2,000 shares of no par value common stock, the new shares being issued and exchanged for the old shares. No additional capital was at any time paid in. The following were stockholders of the petitioner during the taxable years: Shares held in 1920Frank Finney50F. N. Finney, his wife49Wyman M. Fitz1Fitz resigned in July, 1920, and his share of stock was transferred to E. D. Beach. Shares held in 1921Frank Finney, old shares until July 150Frank Finney, new shares after July 11,000F. N. Finney, old shares until July 148F. N. Finney, new shares after July 11,000E. D. Beach, old shares until July 121684 E. D. Beach transferred his two shares to F. N. Finney on July 1, 1921. The following were officers of the petitioner during the taxable years: Year 1920 - Frank Finney, president. F. N. Finney, treasurer. Wyman M. Fitz, secretary until July, 1920. E. D. Beach, secretary after July, 1920. Year 1921 - Frank Finney, president. F. N. Finney, treasurer. E. D. Beach, secretary. During the taxable years the following amounts were paid to officers and stockholders: Year 1920Frank Finney, president, salary and bonus$18,964.95F. N. Finney, treasurer, salary and bonus6,000.00W. Fitz, secretary, salary and bonus11,920.34Total36,885.29Year 1921Frank Finney, president, salary and bonus$17,799.18F. N. Finney, treasurer, salary and bonus8,750.00E. D. Beach, secretary, salary3,507.84Total30,057.02189 The number of employees of the petitioner and salaries and wages paid in the taxable years were as follows: Year 1920Year 1921ItemNumberAmount paidNumberAmount paidArt8$31,137.166$25,573.49Copywriting613,137.81515,344.20Office management and research727,550.04513,004.29Detail service743,587.33628,132.95Mechanical preparation1026,410.44710,407.50Audit and accounting49,457.3059,884.00Media25,140.0014,680.00Contact assistant17,596.19Clerks, stenographers, typists,3055,312.161424,003.69errand boys, etc. (approximately)211,813.24138,626.31Bonus, general5,175.02Total216,988.26138,626.31Amounts which were charged to 16,374.149,532.64clients for work performed in researches, art, etc., performed by employeesNet amount paid200,614.12129,093.671685 In the above figures are included the amounts of salary and bonus paid to employees of the petitioner as follows: EmployeesItem19201921ARTG. G. ClarkSalary$5,300.00$8,849.86Bonus5,197.431,732.25COPY WRITINGE. FitzSalaryn(1)2,600.00Bonus(1)5,667.86OFFICE MANAGEMENT AND RESEARCHH. B. LeQuatteSalary5,300.002,600.00Bonus5,197.421,732.25DETAIL SERVICEL. D. HansenSalary5,023.165,600.12B. Leedo5,775.00(2)F. G. Conwaydo5,300.007,600.00Bonus6,212.702,042.77A. HanchettSalary5,300.002,600.00Bonus5,197.421,732.55E. D. WeeksSalary2,625.005,850.00MECHANICAL PREPARATION OF ADVERTISEMENTST. L. WallaceSalary7,499.96n(2)CONTACT ASSISTANTC. S. Towerlinn(2)7,596.19190 The various sources and amounts of petitioner's income for the year 1920 were as follows: Magazine$232,565.85Newspaper46,279.50Poster660.00Preparatory work70,277.27Commissions on cost-plus contracts958.73Miscellaneous sales23.21Interest on Liberty bonds467.92Other interest887.50Special discount from printers and engravers4,185.09356,307.071686 The various expenses of the petitioner for the year 1920 were as follows: General expenses including office supplies and stationery$30,384.62Legal expenses1,276.97Bank exchange and interest1,160.74Traveling and entertaining expense18,035.14Salaries to officers36,885.28Salaries, wages, and bonus to employees216,269.17Rent13,701.73Publicity7,263.51Telephone, telegraph, and postage5,505.46Bad debts claimed by the petitioner, disallowed by the 4,653.86Commissioner and involved in this appeal335,136.49 The various sources and amounts of petitioner's income for the year 1921 were as follows: Magazine$114,933.91Newspaper55,056.25Poster1,104.66Preparatory work44,991.90Service fee in lieu of commission6,477.35Miscellaneous1,458.08Special discount from printers and engravers5,181.62Interest1,107.67Rent, part of office sublet2,733.36233,044.80The various expenses of the petitioner for the year 1921 were as follows: Salaries and bonus to officers$30,057.02Salaries, wages, and bonus to employees133,159.19Preparatory work - sales expense7,791.45Publicity4,424.27Entertaining2,662.24Traveling8,782.83Postage and shipping$1,853.70Office supplies3,317.03Telephone2,226.44Telegraph753.72Rent15,146.56Insurance1,278.37Legal expense1,534.62Dues in associations1,894.50Rate and credit service198.52Bank exchange69.63Office repairs and maintenance208.54Miscellaneous operating expenses3,736.52Interest2,126.52Taxes1,176.06Bad debts claimed by the petitioner, disallowed690.34by the Commissioner and involved in this appeal223,087.711687 191 The gross sales of the petitioner for the year 1920 were $2,407,893.16 and for the year 1921 were $1,427,424.99. The petitioner derived no income from Government contracts during the years 1920 and 1921. The petitioner is an incorporated advertising agency. It had no machinery or printing presses and all mechanical work was done on the outside. Its principal stockholders during the taxable years 1920 and 1921 were Frank Finney and his wife, F. N. Finney. During said years, Frank Finney was regularly engaged in the active conduct of the affairs of the petitioner. He created the ideas around which the advertising campaigns were developed. He was not an artist, one P. G. Clark being employed as such. Finney, however, gave the artist the ideas and instructions as to what to prepare and the designs were submitted to him in rough forms and sketches and were gradually developed under his direction until finally approved by him. As to copywriting, Finney gave the ideas for the copy, roughed out the copy and turned it over to the copywriters for them to fill in the ideas. Copywriters did not completely execute any advertising and all their work, before acceptance, 1688 was approved by Finney. As to media, the selection of magazines and newspapers and the space orders therein were all made by or under Finney's direction. All assistants and employees connected with petitioner's business worked under Finney's direction and supervision and such assistants and employees could not themselves have successfully carried on the business and retained the accounts. Finney conducted researches and closed all contracts with clients. Advertising space was not contracted for by the petitioner without an order from a client and space was not purchased by the petitioner and sold to 192 clients. Contracts between the clients and advertising agency could be terminated by the client at any time on 30 days' notice, the petitioner receiving no further commissions thereon. All advertising space ordered by the petitioner in publications belonged to the client. The petitioner's income came from commissions received from publications upon the insertion of advertising matter for its clients and service fees where the clients inserted no advertising matter in publications. The petitioner was not trading or merchandizing in anything. It had nothing to sell1689 but services, the rendition of which to its clients was its sole and only business. Mrs. F. N. Finney, the wife of the president of petitioner, was its treasurer. In order to discharge her duties as such she usually went to the office several times each week. Her time and attention, however, were devoted to the business of the company to such extent that she had little home life. She spent time at her home originating and experimenting with recipes of products of clients. She made frequent business trips with her husband and rendered much service in aiding him to secure accounts and in holding same; also in an advisory capacity in trying to develop new products. The advertising agency required the service and advice of a woman and Mrs. Finney, during the taxable years in issue, was the only woman rendering such service. Both she and her husband were engaged in the conduct of the affairs of the corporation, as heretofore stated. The principal clients of the petitioner in 1920 numbered 24 and in 1921 numbered 23. OPINION. SEAWELL: The issues raised by the pleadings are whether or not the respondent erred in failing and refusing to allow as deductions from gross income1690 for the years 1920 and 1921 alleged bad debt items in the amounts of $3,519.25 and $571.16, respectively, and whether the petitioner is entitled to classification as a personal service corporation in said years. At the hearing, the respondent conceded error in refusing to allow the aforesaid bad debt item. In reference to the claim for personal service classification, the applicable law for the years 1920 and 1921 is found in section 200 of the Revenue Acts of 1918 and 1921, respectively. In order to qualify as a personal service corporation, the section requires such corporation to meet these tests: (1) The income of the corporation must be ascribed primarily to the activities of the principal owners or stockholders; (2) such principal owners or stockholders must themselves be regularly engaged in the active conduct of the affairs of the corporation; (3) capital, whether invested or borrowed, must not be a material income-producing factor; and (4) gains, profits or 193 income derived from trading as a principal, or gains, profits, commissions or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, inclusive, 1691 must not amount to or exceed 50 per centum of the gross income. A failure to comply with any one of these requirements is fatal to a claim for personal service corporation classification. , and . The evidence is clear that the petitioner did not derive gains, profits or income from trading as a principal or derive such, or commissions or other income, from a Government contract or contracts made during the statutory period above mentioned. The respondent at the hearing conceded that capital was not a material income-producing factor. It only remains, therefore, for this Board to consider and determine, in the circumstances of the instant case, whether the income of the petitioner is to be ascribed primarily to the activities of the principal owners or stockholders and whether such principal owners or stockholders were themselves, during the taxable years in question, regularly engaged in the active conduct of the affairs of the corporation. The evidence shows that Finney and his wife were, during both years in quetion, the principal stockholders, 1692 Frank Finney being the president and his wife the treasurer of the petitioner. Both are shown to have been active in the conduct of the business of the corporation and, in view of what the evidence shows they did, were, in our opinion, and must nesessarily have been, in the sense of the statute, regularly engaged in the conduct of the affairs of the corporation. All that was done in the conduct and operation of the business was under the direction and supervision of Frank Finney, the president, who closed all contracts - a most important function. The petitioner's manner of conducting its business was not materially different from numerous other advertising agencies which we have held entitled to personal service classification. We are of the opinion, therefore, that petitioner is entitled to such classification, the evidence showing that petitioner's income during 1920 and 1921 is to be ascribed primarily to the activities of Finney and his wife, the principal stockholders, who were themselves during such years regularly engaged in the active conduct of the affairs of the corporation. Our determination herein is in accordance with and controlled by our decisions in 1693 ;;; ; . Judgment will be entered under Rule 50.Footnotes1. Officer. ↩2. Not employed. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624263/	ROOKWOOD POTTERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rookwood Pottery Co. v. CommissionerDocket Nos. 9593, 18125, 28420.United States Board of Tax Appeals11 B.T.A. 470; 1928 BTA LEXIS 3800; April 10, 1928, Promulgated 3800 1. Intangibles acquired by petitioner at organization for capital stock excluded from invested capital because of failure to prove value at acquisition. 2. Where petitioner fails to prove that its proposed method of arriving at inventory at cost more clearly reflects income than the method employed by the respondent, the holding of the respondent will not be disturbed. H. A. Mihills, C.P.A., for the petitioner. Harry LeRoy Jones, Esq., and John D. Kyler, Esq., for the respondent. SIEFKIN470 These are proceedings, under Docket Nos. 9593, 18125, and 28420, consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes for the fiscal years ended January 31, 1921, to January 31, 1926, as follows: Fiscal year ended - Kind of taxDeficiency in taxJan. 31, 1921Income and profits$3,771.36Jan. 31, 1922Income and profits4,992.71Jan. 31, 1923Income1,161.71Jan. 31, 1924Income$1,524.40Jan. 31, 1925Income3,446.17Jan. 31, 1926Income4,976.66Under Docket Nos. 9593 and 18125, relating to the years 1921 and 1922, the petitioner raises as an issue3801 the refusal of the respondent to restore, for invested capital purposes, certain intangibles in the amount of $16,140.92, alleged to have been acquired upon organization of the petitioner in 1890, and subsequently, in 1894, written off the books by a charge to profit and loss. The second issue raised with respect to the appeals for the years 1921 and 1922 relates to the reduction of the invested capital by deduction of taxes for prior years, but at the hearing this issue was abandoned by the petitioner. 471 The error assigned in Docket No. 28420 is that in determining the deficiencies the respondent has increased taxable income of the petitioner for the year 1923 in the amount of $7,206.83, for the year 1924 in the amount of $10,115.24, for the year 1925 in the amount of $47,502.20, and for the year 1926 in the amount of $71,178.24, which represent the aggregate effect of certain increases of pottery and faience inventories during said years. FINDINGS OF FACT. The petitioner is an Ohio corporation engaged in the production of artistic pottery and faience. Its plant is in Eden Park, Cincinnati, Ohio. The foundations of the business were laid by Mrs. Maria Longworth3802 Storer in about 1880. In 1883, William Watts Taylor became a partner in the enterprise and assumed active direction of the business. In 1889, Mrs. Storer transferred her interest to Taylor and he formed the petitioner in May, 1890, becoming its president and remaining such until 1913, when Joseph Henry Gest, the present incumbent, became the president. The Rookwood Pottery, in the beginning, was primarily conducted as an artistic enterprise. Exhibits furnished by the Rookwood Pottery won honors at the Pottery and Porcelain Exhibition, Pennsylvania Museum, Philadelphia, in 1888, at the Exhibition of American Art Industries at the same place in 1889, at the Exposition Universale, Paris, and at the World's Columbian Exposition, Chicago, in 1893. While Mrs. Storer was interested in the Rookwood Pottery a patent covering a slip painting process and two trade-marks were issued by the United States Patent Office to this company. When the petitioner was formed in May, 1890, it acquired all of the assets of the individual business operated under the name Rookwood Pottery then owned by William W. Taylor, such assets specifically including the real estate, personal property, good3803 will, patent, trade-marks, and all other property, real and personal, of each kind and description of the business. The stockholders of the petitioner authorized the issuance of, and the directors of the petitioner caused to be issued, shares of the capital stock of the petitioner of a total par value of $40,000 to Taylor in consideration for the assets so acquired. Upon acquisition of these assets the tangible assets were entered upon the petitioner's books at a valuation of $23,859.08, and the intangible assets at a valuation of $16,140.92. By order of the directors of the petitioner the intangible assets were written off its books on or about February 20, 1894, by a charge against the surplus account. The petitioner has no books of record of its predecessor, and the books of the petitioner 472 for the first five years of its existence are also not available. None of the original incorporators of the petitioner are now living. The petitioner has never kept inventories on a basis of cost accounting but has taken the inventories on the basis of selling price. Prior to 1920 an arbitrary percentage was applied against the physical inventory at selling price in an attempt3804 to approximate cost. On January 31, 1920, the petitioner changed its method of arriving at cost by establishing the reserve method, and amended returns were filed for 1917, 1918 and 1919, but for those years the method of computing inventories as applied by the respondent was accepted. The petitioner places a selling value upon articles manufactured, and such price is marked upon the bottom of each article. Petitioner consigns its goods to a large number of agents throughout the country, and when the inventories are taken the goods on hand and the goods on consignment are listed at the sales price noted for each piece of pottery. The books are closed monthly, and the inventory is adjusted at this time. The inventory at the beginning and end of each year is taken at selling price. Articles which the petitioner purchased for sale are carried at the contemplated selling price. The raw materials are carried at cost. Goods in the process of manufacture are given a value based upon the contemplated selling price, taking into consideration the stage of completion of the article. At times the selling price of articles is reduced to encourage sale, but this is done infrequently. 3805 During the years in controversy the petitioner attempted to reduce the inventory at selling price to inventory at cost by applying a reserve which reflected cumulatively the cost of production for all prior years. This reserve was calculated to represent expected gross profit. Having no record of the dates of manufacture of goods on consignment, petitioner assumed that the percentage of goods on consignment manufactured in each year was the same as that which applied to goods on hand at the plant. However, the goods on consignment, generally, were more recently manufactured than the goods on hand at the plant. Prior to 1927 the petitioner kept no detailed account of the dates of manufacture of goods on inventory. During the years under review the respondent determined the total production cost of pottery as follows: For the year 1922$116,721.68For the year 1923107,972.68For the year 1924103,750.83For the year 1925108,133.63For the year 192697,577.62473 Respondent further found the pottery produced valued at selling prices for each of the years as follows: For the year 1922$389,171.94For the year 1923328,193.35For the year 1924282,485.96For the year 1925244,756.23For the year 1926169,461.113806 Respondent determined the percentage of pottery production cost to pottery production at sales price for each year as follows: Per cent.For the year 192230For the year 192332.9For the year 192436.73For the year 192544.18For the year 192657.58The inventory of pottery at selling prices at the beginning and end of each period as valued by the petitioner and used by respondent are: Beginning of year 1923$525,905.51Beginning of year 1924610,755.57Beginning of year 1925648,099.05Beginning of year 1926646,662.24End of year 1926564,164.10Respondent, in his determination of the increase of taxable income for the years 1923, 1924, 1925 and 1926, increased the cost of pottery inventory of petitioner at the beginning and end of each period by applying the ratio of the current year's cost of production to production at sales prices, to the entire pottery inventory at the end of each period. The inventories as used by petitioner in its returns, the inventories as adjusted by the respondent and the resulting increase in income are shown in the following schedule: Pottery inventoryAs used in taxAs adjusted byIncreased byreturnrespondentrespondentFor year 1923:End$185,672.39$200,938.58$15,266.19Beginning147,350.79157,771.5310,420.74Increase of income by respondent4,845.45For year 1924:End212,489.72238,046.7825,557.06Beginning185,672.39200,938.5815,266.19Increase of income by respondent10,290.87For year 1925:End222,451.81285,695.3863,243.57Beginning212,489.72238,046.7825,557.06Increase of income by respondent37,686.51For year 1926:End194,072.45324,845.69130,793.24Beginning222,451.81285,695.3863,243.57Increase of income by respondent67,549.673807 474 OPINION. SIEFKIN: The sole question to be decided under Docket Nos. 9593 and 18125, relating to the years 1921 and 1922, is whether the respondent has erred in failing to include in invested capital of the petitioner for those years the amount of $16,140.92, which, it is alleged, is the value of intangibles acquired for stock by the petitioner at organization in 1890. The evidence discloses that the Rookwood Pottery was founded by Mrs. Storer about 1880, at which time, and for some years thereafter, the enterprise was devoted to the advancement of the art of pottery making. In 1883, William Watts Taylor became a partner, and in 1889, Mrs. Storer transferred her interest in the business to him. During this period Rookwood products had been given recognition in a number of art exhibits, and the United States Government had issued to it a patent on a slip painting process and two trademarks. In 1890 the petitioner was organized and $40,000 of its capital stock was issued to William Watts Taylor for the assets of the Rookwood Pottery. Of this amount $16,140.92 was allocated to intangibles on the books of the petitioner by order of the directors of the petitioner. 3808 The intangible assets were written off its books on or about February 20, 1894, by a charge against the surplus account. No records of the petitioner's predecessor are available nor are the books of account of the petitioner available as regards the first five years of its existence. The minutes of the directors' meetings of the petitioner are submitted in evidence and show earnings and invested capital for this period. All of the original incorporators of the petitioner are now dead. The president of the petitioner who was, however, not connected with this enterprise in 1890, testified that prior to 1890 the cost of developing the secret processes and formulae might have been in excess of $16,140.92. Section 326(a) of the Revenue Act of 1921 provides as follows. That as used in this title the term "invested capital" for any year means (except as provided in subdivision (b) and (c) of this section): * * * (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per3809 centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest: In the present proceeding the actual cash value of the property acquired for the stock is not shown. The testimony of the petitioner does not prove with any certainty the value of the intangibles at the time of acquisition. The only evidence before us is the statement in the petition, admitted by the respondent, to the effect that intangibles 475 were placed upon the books of the petitioner at $16,140.92. The mere fact that such a value was put upon them in the books does not prove their value. No evidence is submitted as to the earnings of the Rookwood Co. prior to 1890, the evidence being to the effect that by 1889 the business was self-supporting. The evidence indicates that prior to this time the business was not profitable. Evidence is submitted as to the earnings of the petitioner subsequent to acquisition of these assets, but we have heretofore held that while subsequent earnings may be considered of evidentiary value for purposes of corroborating the value of intangible assets established by prior earnings and by other evidence, such evidence3810 alone can not be the basis of a determination as to the value of intangible assets. See , and . We must, therefore, approve the action of the Commissioner in excluding this amount from invested capital. The only issue arising under Docket No. 28420, relating to the years 1923, 1924, 1925 and 1926, concerns the increase of the pottery inventories of the petitioner by the respondent during those years. Due to the fact that there was about a 100 per cent turnover of faience during each of these years, no objection is raised to the application of the respondent's method to this item. The evidence discloses that the character of the business of the petitioner renders it impossible to keep a record of the cost of each article manufactured. Each piece of pottery is distinctive, and not until it has gone through all the processes of manufacture, is it certain what its value will be or whether it will have any value. The department which manufactures an article fixes its selling price, which is marked on each article. The pottery is then consigned to agents of the petitioner throughout3811 the country. When it is found that goods of a certain description do not sell in a particular locality the goods are recalled and sent to an agent in another section. Occasionally, but not frequently, the selling price of a piece of pottery is reduced in order to encourage a sale. At all times when inventories are taken the petitioner takes into account the merchandise on hand at the plant and on consignment. The physical inventory represents goods on hand which were manufactured in a number of previous years. The goods in process of manufacture are given a value based upon an assumed selling price of the finished article and reduced in accordance with the state of completion of the particular article Raw materials are inventoried at cost, and articles purchased by petitioner for resale are listed at selling price. During the years in question the respondent increased the cost of pottery inventory of petitioner at the beginning and end of each 476 period by applying the ratio of the current year's cost of production to production at sales price, to the entire pottery inventory at the end of each period. Section 203 of the Revenue Act of 1921, and section 205 of3812 the Revenue Acts of 1924 and 1926, provide as follows: That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly a may be to the best accounting practice in the trade or business and as most clearly reflecting the income. In the present proceeding the petitioner has not shown that its method of taking inventories conforms as nearly as may be to the best accounting practice in the trade or business. We must then determine whether its method most clearly reflects the income. The method employed by the petitioner of arriving at cost of production of the physical inventory is to deduct from the inventory a reserve which is calculated to represent expected profit, and which reflects cumulatively the cost of production during all prior years. There is no doubt that the method employed by the respondent fails to reflect the true cost of production of the goods on inventory, but the same may be said of the petitioner's method. During the years3813 in controversy the petitioner has inventoried its pottery merchandise at assumed selling prices, and has attempted to reduce this to cost by the application of a reserve which reflects the cumulative cost of production for all prior years. However, the evidence discloses that petitioner assumed that the proportion of goods on consignment manufactured in the various years was the same as the goods at the plant. Furthermore, the petitioner has inventoried goods in process of manufacture at assumed selling prices when there was no assurance that such goods would ever be finished, and if so, that they would have the value assigned to them. Prior to 1927 the petitioner kept no record of the date of manufacture of goods on inventory. The petitioner has accepted the method employed by the respondent with respect to the period prior to 1920. In , we stated: The taxpayers appear to have accepted the determination of the Commissioner for the taxable year 1918, in which their income from the Greenwood Pickery is determined upon the basis of the closing inventory of 1918, which, for purposes of the year 1919 is now sought to3814 be increased. Determinations of the Commissioner involving inventories which have compensating effects upon succeeding taxable years are not to be disturbed except by clear and convincing evidence of error, particularly in cases in which the taxpayer has received the benefit of alleged error in an earlier year, barred at the time of appeal to this Board by the statute of limitations. 477 In , we stated: * * What the inventory practice is, is of some importance; that the practice should be uniform is of the highest importance. In , we stated: Furthermore, at no time in this proceeding has the petitioner contended that the method used by the Commissioner for the determination of the cost of goods sold is incorrect or not in accordance with sound accounting principles; nor has it contended that the results obtained by the Commissioner through the use of that method are incorrect, except for such inference as may be drawn from the contention contained in the brief * * . A greater responsibility rests upon the petitioner than the mere proving that3815 the methods used by the Commissioner are wrong. We can not assume, though the petitioner succeed in proving the fallacy of the Commissioner's methods that the results obtained thereby are necessarily incorrect. That is something which, if true, the petitioner must establish by competent evidence. We are not so much concerned with the methods employed as we are with the results obtained through the use of the methods. * * * The petitioner has failed to prove that its method of arriving at inventories at cost more clearly reflects its income than the method employed by the respondent, and the holding of the respondent will, therefore, not be disturbed. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624264/	Estate of Arthur Sweet, Deceased, Tracy-Collins Trust Company, Administrator, Petitioner, v. Commissioner of Internal Revenue, RespondentSweet v. CommissionerDocket No. 46406United States Tax Court24 T.C. 488; 1955 U.S. Tax Ct. LEXIS 159; June 24, 1955, Filed 159 Decision will be entered for the respondent. In June 1947, the decedent conveyed property to a revocable trust. Under the trust agreement, the trust income was to be paid to the decedent for life and then to his wife for her life. At their deaths, the trust was to terminate and the principal was to be distributed to the decedent's children. In July 1948, the decedent amended the trust agreement to give his wife a power of appointment "over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes." Held: (1) A decision entered by the District Court of Utah construing the instruments as creating two trusts amounted to a consent decree and it is not controlling. (2) The trust instruments executed by the decedent created only one trust. (3) The power of appointment in the decedent's wife did not extend to the "entire corpus" of the trust, and, therefore, no part of the trust assets qualifies for the marital deduction under section 812 (e) (1) (F) of the 1939 Code. Maurice J. Hindin, Esq., for the petitioner.Leonard A. Marcussen, Esq., for the respondent. Harron, Judge. HARRON 489 The Commissioner determined a deficiency in estate tax of $ 35,565.27. Part of the deficiency is conceded. The amount of the deficiency which is contested by the petitioner is $ 16,556.45. The question to be decided is whether two separate trusts were created by an amended trust agreement executed by the decedent during his lifetime. The petitioner asserts that the agreement created two trusts, and claims the marital deduction provided for in section 812 (e) (1) of the Internal Revenue Code of 1939 with respect to the one over which the decedent's wife, who survived him, had a power of appointment. The respondent disallowed the deduction because he determined that only one trust was created161 by the agreement, and that the surviving wife's power of appointment did not extend to the entire corpus of such trust.FINDINGS OF FACT.The facts which have been stipulated are found accordingly.Arthur Sweet, hereinafter referred to as the decedent, died on September 29, 1948. He was survived by his wife, Margaret M. Sweet, and by four children. The Tracy-Collins Trust Company of Salt Lake City, Utah, is the administrator c. t. a. of the decedent's estate. The decedent was a resident of Salt Lake City at the time of his death and for a long period prior thereto. The estate tax return was filed with the collector of internal revenue for Utah.In June 6, 1947, the decedent, as trustor, and the Tracy-Collins Trust Company, as trustee, executed a trust agreement whereby the decedent established a revocable trust. The decedent conveyed 650 shares of common stock of the Sweet Candy Company, a Utah corporation, to the trustee for the uses and purposes of the trust. Thereafter, he conveyed additional securities and his right to a money deposit, to the trustee. Under the trust agreement, the decedent reserved the right to receive the trust income during his life, to withdraw part162 or parts of the trust principal, and to alter, amend, or revoke the trust. Paragraph III of the instrument provided as follows:(1) Upon the death of the TRUSTOR, the TRUSTEE shall pay from the principal of the Trust Estate, any and all income, estate and transfer taxes levied upon or assessed against the property constituting the Trust Estate, and the income therefrom.(2) Upon the death of the TRUSTOR, and after the payment of the items enumerated in paragraph (1) above, the TRUSTEE shall pay the net income 490 from the Trust Estate annually unto MARGARET M. SWEET, wife of the TRUSTOR, during her lifetime.Paragraph IV of the instrument provided that after the death of the decedent and his wife, the trust was to terminate and the principal and any accumulated and undistributed income were to be distributed, in equal shares, to the decedent's four children.The trust agreement was drawn up by Samuel J. Carter, who was then engaged in the practice of law. In July 1947, shortly after the execution of the agreement, Carter became a vice president of the Tracy-Collins Trust Company and head of its trust department. On July 13, 1948, Carter wrote to the decedent as follows:By163 amending your trust to give Mrs. Sweet the power to appoint final distribution upon her death, after your death, over one-half of your trust estate, your estate would save a very substantial amount in taxes in the event of your death. For instance if your estate should be appraised upon your death at $ 200,000.00, the tax thereon would amount to approximately $ 31,500.00. If, however, Mrs. Sweet is given the power of appointment over one-half of your estate, the tax on your entire estate would amount to about $ 4,800.00. This savings is made possible by the Revenue Act of 1948, which became effective in April of this year. I suggest that you discuss this matter with Mr. Hindin, and if you conclude that an amendment should be made to the agreement, we will prepare one upon your requesting us to do so.The decedent desired to take advantage of the tax benefits referred to in Carter's letter and requested Carter to prepare an appropriate amendment to the trust agreement of June 6, 1947. On July 27, 1948, the decedent and the Tracy-Collins Trust Company executed a "Supplemental Trust Agreement" which Carter had prepared. This supplemental agreement canceled paragraph IV of the original164 agreement, which pertained to the distribution of corpus after the deaths of the decedent and his wife, and substituted the following:IV.(1) MARGARET M. SWEET, wife of the TRUSTOR, shall have the power of appointment over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes. The power of appointment of the said MARGARET M. SWEET shall be exercisable in favor of herself, or in favor of her estate, or in favor of any other person, whom she shall elect to appoint. The power may be exercised by Will, or in the alternative, by written instrument other than a Will, on file with the TRUSTEE, at the death of said MARGARET M. SWEET; it may be exercised from time to time and each appointment may be revoked or modified. In the absence of an appointment completely disposing of said portion of the Trust Estate, upon the death of the said MARGARET M. SWEET, said portion of the Trust Estate shall terminate and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR, BARBARA SWEET HARTMAN, the daughter165 of the TRUSTOR, MARGARET "PEGGY" SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.491 (2) The remainder of the Trust Estate, over which the said MARGARET M. SWEET has no power of appointment, shall terminate upon the death of the last survivor of the TRUSTOR, and said MARGARET M. SWEET, and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR, BARBARA SWEET HARTMAN, the daughter of the TRUSTOR, MARGARET "PEGGY" SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.(3) Should any of the said children of TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET "PEGGY" SWEET and ARTHUR DAVID SWEET, predecease the TRUSTOR, or die during the operation of the Trust Estate, then, in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares to the then living child or children of such deceased child.(4) Should any of the said children of the TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET "PEGGY" SWEET and ARTHUR DAVID SWEET, predecease166 the TRUSTOR, or die during the operation of the Trust Estate, and leave no child or children surviving, then in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares, unto the then living brother or sisters of such deceased child.The supplemental agreement ratified and confirmed the original agreement in all other respects. The final paragraph of the original agreement and of the supplemental agreement reads as follows:In Witness Whereof, the said ARTHUR SWEET has hereunto set his hand, and TRACY-COLLINS TRUST COMPANY, of Salt Lake City, Utah, in acceptance of these trusts, has caused these presents to be executed by its Vice President, and its corporate seal to be hereunto affixed, duly attested by its Secretary, on the day and year first above written.In administering the trust agreements, the trustee established and maintained records for only one trust, and filed only one fiduciary return for the trust in each of the years 1948 to 1951, inclusive.On October 1, 1948, two days after the decedent's death, undistributed trust income in the amount of $ 7,943.16 was transferred167 by the trustee from the income cash account to the principal cash account and became part of the trust principal. Thereafter, the entire trust income, after deduction for trustee's fees and other charges, was received and held by the trust for distribution to the decedent's spouse and was disbursed to her from time to time upon her request. The first of these distributions was in the amount of $ 2,000 and occurred on February 14, 1950. On May 13, 1950, the Utah State inheritance taxes in the amount of $ 14,244.72 were paid with funds in the hands of the trustee. This disbursement was erroneously charged to the income account, contrary to the provisions of paragraph III of the trust agreement; however, this error was corrected on January 20, 1951, by a transfer of the same amount from the principal account to the income account.Sometime in 1951 officials of the Tracy-Collins Trust Company agreed to a determination made by the respondent that the value of 492 the trust corpus should be increased for Federal estate tax purposes. Prior to this revaluation of the trust corpus, the estate received the full benefit of the marital deduction provided for in section 812 (e) of the168 Internal Revenue Code of 1939 by reason of the receipt by the decedent's surviving spouse of certain insurance proceeds and legacies having a value equal to or in excess of 50 per cent of the decedent's adjusted gross estate. After the value of the trust corpus was increased, the value of these insurance proceeds and legacies no longer equaled 50 per cent of the adjusted gross estate. The respondent determined that no part of the trust property qualified for the marital deduction, and a 30-day letter was issued on October 25, 1951, proposing to assert the deficiency involved in this proceeding. The petitioner filed a protest against the proposed deficiency on November 24, 1951.As a result of the respondent's refusal to recognize that the amended trust agreement created two separate trusts, one of which qualified for the marital deduction, the Tracy-Collins Trust Company, as trustee, filed a complaint in the District Court of the Third Judicial District, Salt Lake County, Utah, on August 22, 1952. The decedent's wife and four children were named as defendants and were given notice of the action. The trustee's complaint alleged that questions of interpretation and construction169 of the trust instruments had arisen since the decedent's death and that it was vital to the interests of the cestuis que trust and for the protection of the trustee that the court interpret the instruments and instruct the trustee in its duties as trustee. The specific question for decision set forth in the complaint was whether the trust instruments created a single trust or two separate trusts. The trustee alleged that unless the court resolved the issue, great accounting complexities would arise which would impede the administration, control, and management of the trust assets to the injury of the defendants' interests, and that it was without an adequate remedy at law to secure the relief and protection to which it was entitled as a trustee. The complaint suggested that the instruments executed by the decedent created two separate trust estates, and the decedent intended, by executing the supplemental agreement, to have the trust assets segregated into two separate trusts.The State court held a hearing on the complaint on September 25, 1952. The defendants filed an appearance but failed to answer or otherwise plead to the complaint and did not appear either in person 170 or by counsel. The defaults of each and all of the defendants were entered in the cause by the court. At the trial, the plaintiff, the trustee, appeared by its attorney. The court heard sworn evidence on behalf of the trustee and argument by the trustee's attorney. The court had before it the agreement of trust and the supplemental agreement of trust. The court rendered its judgment the same day. The 493 court found, in almost the exact language of the suggestion set forth in the complaint, in part, as follows:9. That said trust agreement dated the 6th day of June, 1947 as amended and modified by the supplemental trust agreement dated the 27th day of July, 1948, created two separate and distinct trust estates and by said agreements the Trustor intended to divide and segregate the assets and properties conveyed, assigned and transferred to plaintiff in trust into two separate and distinct trust estates as follows:(a) One trust estate consists of such portion of the assets and properties held by plaintiff in trust as equals one-half of the value of the Trustor's adjusted gross estate, as appraised for Federal Estate Tax purposes. As to this trust estate the defendant, 171 Margaret M. Sweet, possesses the power of appointment in favor of herself, or in favor of her estate, or in favor of any other person whom she shall elect to appoint; * . That said defendant, Margaret M. Sweet, is entitled to receive during her lifetime the net income from this trust estate, payable annually to her.(b) A second and distinct trust estate consisting of assets and properties remaining after the allocation of the trust estate first above described of the assets and properties of a value as equals one-half of the value of the Trustor's adjusted gross estate, as appraised for Federal Estate Tax purposes. Over this second trust estate the said Margaret M. Sweet shall possess no power of appointment and, the same shall terminate upon the death of Margaret M. Sweet, * . That the said defendant, Margaret M. Sweet, is entitled to receive during her lifetime the net income from this trust estate, payable annually to her.The court ordered the trustee to "separate, segregate and divide" all the trust properties "into two separate trust estates of the amounts and values hereinbefore described" and to manage, control, and administer each trust as a separate entity. On 172 November 12, 1952, the trustee established accounts for two separate trusts. The cash was physically divided into two equal parts placed in two separate accounts. The securities held in the trust corpus were not physically segregated, but the accounts of each of the two trusts were credited with an undivided one-half interest in each class of security then held by the trustee. The accounts were thereafter administered as separate trusts.For the year 1952, the trustee filed a fiduciary return for each of the two trusts established pursuant to the State court judgment.OPINION.The chief question to be decided is whether any part of the property conveyed in trust by the decedent qualifies for the marital deduction under the provisions of sections 812 (e) (1) (F) and 812 (e) (1) (A) of the 1939 Code. Decision of the question turns upon whether the Supplemental Trust Agreement executed by the decedent on July 28, 1948, had the effect of converting one trust into two separate trusts.494 Under the Supplemental Trust Agreement, the decedent's surviving spouse was given the income from the entire trust property for life, and a power of appointment over such portion of the173 trust estate as equals one-half of the value of the decedent's adjusted gross estate, as appraised for Federal estate tax purposes. If only one trust was created, rather than two trusts, no part of the trust property qualifies for the marital deduction under section 812 (e) (1) (F) because the power of appointment in the surviving spouse did not extend to the "entire corpus" of one trust. Estate of Louis B. Hoffenberg, 22 T. C. 1185 (1954); Estate of Harrison P. Shedd, 23 T. C. 41 (1954).The petitioner contends that the property subject to the power of appointment constitutes the corpus of one trust which was created by the Supplemental Trust Agreement, and that the balance of the trust property constitutes the corpus of a second, separate trust. Accordingly, the petitioner claims that the corpus of one alleged trust qualifies for the marital deduction under the provisions of section 812(e) (1) (F), because the surviving spouse had the right to the income from the trust property for life and a power of appointment over the entire corpus of the alleged trust. No claim is made that the other alleged trust, over which174 the surviving spouse is said to have had no power of appointment, qualifies for the marital deduction.The petitioner relies primarily on the decision of the District Court of Utah, dated September 25, 1952. It also relies on the terms of the trust instruments to support its contention that the Supplemental Trust Agreement created two separate trusts. The petitioner does not cite any decision of this Court or of any other Federal court in support of its contention.The evidence shows that the State court action was instituted by the trustee after the Commissioner refused to recognize the Supplemental Trust Agreement as creating two separate trusts; that the defendants in that action, the decedent's wife and four children, failed to answer or otherwise plead to the trustee's complaint; and that their defaults were entered by the court. The evidence shows, also, that the trustee's complaint set forth one specific question to be decided by the court, namely, whether two trusts were created, and that it suggested that two trusts were created by the instruments executed by the decedent.The court's decision, which was rendered on the same day as the hearing, found, in almost the exact175 language of the complaint, that two trusts were created. We think it is clear from the facts that there was no real controversy between the parties in the Utah District Court; that the proceedings were nonadversary proceedings; and that the decision of the Utah District Court amounted to a consent decree rather than a decision on issues regularly submitted by parties to an adversary proceeding. We must conclude that the decision of the 495 Utah court is not controlling here where the issue to be decided arises under the Federal Internal Revenue Code. We are unable to regard the decision of the Utah court as a determination of interests in property under State law. See, James S. Reid Trust, 6 T. C. 438; Erik Krag, 8 T. C. 1091; Lois J. Newman, 19 T. C. 708; and Estate of Ralph Rainger, 12 T. C. 483, affd. 183 F. 2d 587, certiorari denied 341 U.S. 904">341 U.S. 904.Furthermore, the trustee, the plaintiff in the action filed in the Utah District Court, failed to comply with the court's judgment and order. The court176 ordered that the corpus of the so-called first trust, which was said to be subject to the surviving spouse's power of appointment, was to consist of properties with a value equal to one-half of the value of the decedent's adjusted gross estate. One-half of the value of the adjusted gross estate exceeded one-half of the value of the trust properties. Nevertheless, the trustee allocated only an undivided one-half interest in the trust properties to the so-called first trust, rather than such larger portion of the trust properties as equaled one-half of the value of the adjusted gross estate.We turn now to consideration of the trust instruments executed by the decedent. The original trust agreement was executed on June 6, 1947. In July 1948, the decedent, was informed about the marital deduction provisions which were enacted in the Revenue Act of 1948. The evidence leaves no doubt that the decedent executed the Supplemental Trust Agreement on July 27, 1948, in order to obtain the benefits of these new provisions. But the question to be decided is not whether the decedent intended to obtain the benefits of the marital deduction for his estate. It is, rather, whether the language177 of the trust agreement, as amended, discloses an intention to create two trusts. U. S. Trust Co. v. Commissioner, 296 U.S. 481">296 U.S. 481; Estate of Louis B. Hoffenberg, supra;James S. Reid Trust, supra.The two intentions are not synonymous. Under the circumstances of this case it is clear that the decedent could have intended to secure the tax benefits without intending to create, or without being aware of the necessity for creating, two trusts. Carter's letter of July 13, 1948, which advised the decedent of the provisions of the Revenue Act of 1948, indicated only that the decedent's wife should be given a power of appointment "over one-half of your trust estate," or "over one-half of your estate," and it did not refer to the necessity for creating two separate trusts. In any event, the test is the intention expressed by the trust instruments. Estate of Louis B. Hoffenberg, supra;James S. Reid Trust, supra.We think a fair reading of these instruments discloses an intent to create only one trust. The original trust instrument refers178 to the trust in the singular 26 times, most frequently by the phrase "the Trust Estate." This instrument also utilized the word "trusts" twice, once when the decedent reserved to himself the 496 power to "alter, amend, revoke, cancel or annul, in whole or in part, this agreement, and the trusts hereby created," and again in the final paragraph, which recites that the trustee had caused the trust agreement to be executed on its behalf "in acceptance of these trusts." We do not attach much significance to the uses of the word "trusts" in the original agreement. The original agreement admittedly created only one trust, and the two plural references obviously refer to the plurality of beneficial interests and fiduciary obligations arising from the trust. The Supplemental Trust Agreement, which provided only a substitution for paragraph IV of the original agreement, contains nothing to indicate an intention on the decedent's part to change the manner in which the trust properties were held or to have the properties thereafter held in two separate trusts. On the contrary, the eight references to the trust property in the revised paragraph IV are all to "the Trust Estate," the same179 phrase used throughout the original instrument, and demonstrate an intention on the grantor's part that the properties should be held as a single trust.We conclude that the Supplemental Trust Agreement created only one trust, and that no part of the trust assets qualifies for the marital deduction under the provisions of section 812 (e) (1) (F) and 812 (e) (1) (A) of the 1939 Code. The respondent's determination is sustained.It appears that the Supplementary Trust Agreement was prepared for the decedent within a short time after the Revenue Act of 1948 was enacted, and considerably before May 13, 1949, when the Commissioner's regulations pertaining to the marital deduction provisions of the 1948 Act were approved. 1 The Supplementary Trust Agreement appears to have been drafted more with an eye to section 812 (e) (1) (H), 2 as added by the then new statute, than to the requirement of section 812 (e) (1) (F) that the surviving spouse have a power to appoint the "entire corpus" of the trust. When the trust instruments subsequently were questioned by the respondent, the trustee endeavored to obtain a helpful decision from the Utah District Court, as set forth in the Findings of180 Fact. But, we have pointed out above, the decision of the State court is not controlling in our consideration 497 of the question, and the relief sought by the petitioner cannot be granted on the basis of the State court's consent decree.Obviously, the result which is reached here is harsh. It is unfortunate that the desire of the decedent and of his advisors, 181 namely, to amend the original trust so that the estate would have the benefits of the marital deduction under section 812 (e) (1) (F) of the 1939 Code, is frustrated by the lack of a correct understanding of all of the technical requirements of the statute. The conclusion which this Court is obliged to reach is particularly unfortunate because the decedent originally created a revocable trust and he could have, with ease, revoked that trust and substituted two separate trusts. But in our opinion, with all due deference to the decree of the District Court of Utah in a nonadversary proceeding, the decedent did not create two trusts.The Court has given the problem careful as well as sympathetic consideration, but after considerable deliberation and lapse of time, during which the mandate of the applicable statutory provision has been made clear, it is concluded that the respondent's determination is correct.Decision will be entered for the respondent. Footnotes1. See T. D. 5699, 1949-1 C. B. 181↩, 191, 212.2. SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -- * * (e) Bequests, Etc., to Surviving Spouse. -- (1) Allowance of marital deduction. -- * * *(H) Limitation on Aggregate of Deductions. -- The aggregate amount of the deductions allowed under this paragraph (computed without regard to this subparagraph) shall not exceed 50 per centum of the value of the adjusted gross estate, as defined in paragraph (2).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624268/	IDI MANAGEMENT, INC., AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentIDI Management, Inc. v. CommissionerDocket No. 6830-74.United States Tax CourtT.C. Memo 1977-369; 1977 Tax Ct. Memo LEXIS 71; 36 T.C.M. (CCH) 1482; T.C.M. (RIA) 770369; October 25, 1977, Filed William R. Seaman and Ronald E. Heinlen, for the petitioner. Conley G. Wilkerson, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined the following deficiencies in petitioner's Federal income tax: YearDeficiency1963$ 75,297.0419641,837.351965226,925.691966552,921.681967644,722.0119681,587,827.911969514,598.331970403,146.00By amended petition, petitioner claims that the net operating losses for its 1971 and 1972 taxable years are available for carryback to some of the years for which the respondent has asserted deficiencies.The issues before us concern four longterm construction contracts executed by petitioner, a taxpayer reporting income therefrom on the completed contract basis. More particularly, we are asked to decide whether, in the year of contract completion, petitioner properly accrued in income the fair market value rather74 than the face value of debt obligations arising from such contracts. Resolution of this issue will affect the disposition of other issues relating to bad debt deductions by petitioner in respect of the partial worthlessness of such obligations in the year of completion and in subsequent years. FINDINGS OF FACT Some of the facts have been stipulated by the parties and are found accordingly. Petitioner, IDI Management, Inc. (IDI), is an Ohio corporation and had its principal place of business in Cincinnati, Ohio, at the time of the filing of the petition herein. At all times material herein, petitioner was engaged, directly and through subsidiary corporations, in the business of designing, engineering, constructing, and selling individual plant process units and complete facilities for the manufacture of agricultural chemicals used primarily for fertilizer. Petitioner and its subsidiaries filed consolidated Federal income tax returns for the 1963-1970 calendar years with the district director of internal revenue, Cincinnati, Ohio. Both petitioner and one of its subsidiaries, whose transactions are involved herein, used the accrual method of accounting.They accounted for long-term75 construction on their own books and records by percentage of completion and they used the completed contract method of accounting for tax purposes. Reference herein to petitioner shall be deemed to refer to the subsidiary as well as IDI. On November 1, 1966, petitioner executed a long-term construction contract (#1157), effective as of June 27, 1966, pursuant to which it agreed to design and construct an addition to a fertilizer plant for St. Paul Ammonia Products, Inc. (St. Paul), at a contract price of $9,662,340. The contract called for an initial $1,000,000 payment, monthly progress payments thereafter, and final payments due on acceptance and 60 days later. Subsequently, the parties to the contract mutually agreed to eliminate a substantial portion of the expansion work called for by the contract when it appeared that St. Paul's plan of financing would not be completed as scheduled. Petitioner could not abandon the contract when St. Paul was unable to obtain financing because highly specialized construction materials had already been ordered and cancellation of such orders involved substantial costs. By October 27, 1967, St. Paul had made progress payments of only $219,639.91. 76 On that date, petitioner and St. Paul entered into a settlement agreement recognizing interest owing petitioner on past due progress payments in the amount of $248,240.34 and fixing the remaining portion of the contract price at $5,086,202.41, subject to certain additional charges which were finally determined in 1969 to be $266,690.91. Pursuant to this agreement, St. Paul delivered to petitioner: (a) an unsubordinated 7 percent demand promissory note dated October 27, 1967 for $248,240.34; (b) 490,000 shares of St. Paul common stock to be applied against the contract price at the rate of $1.00 per share, and (c) 7 percent subordinated demand construction notes in a total face amount of $4,596,202.41. In November, 1967, St. Paul paid the note for $248,240.34. At a special meeting of the shareholders of St. Paul on October 26, 1967, a general plan of refinancing of the company was approved. The plan included the foregoing settlement agreement with petitioner to be executed the following day; it recognized that the construction debt to petitioner as well as $4,700,000 of its 5-1/2 percent debentures were past due; and, it authorized $7,500,000 of new bank debt to which the construction77 notes issued to petitioner would be subordinated. The purpose of the new debt was to pay the past due debentures and to provide new working capital. The refinancing was implemented in November, 1967. No part of the bank loan proceeds was available for payment to the petitioner other than the $248,240.34 used to pay the demand note mentioned above. To facilitate the refinancing, petitioner gave up its right under Minnesota law to file a mechanic's lien against the newly constructed plant and agreed to hold the new bank creditors harmless against any outstanding mechanic's liens, or any that might be filed in the future, in respect of facilities constructed by petitioner pursuant to its contract with St. Paul. Petitioner completed the long-term construction contract for St. Paul in 1968. In respect of past due interest on the construction notes, St. Paul issued to petitioner the following 7 percent interest-bearing demand promissory notes: DateFace Amount2/1/68$ 84,620.165/1/6880,792.108/1/6884,013.4811/1/6885,495.602/1/6987,003.485/1/6985,651.82Total$507,576.64At a special meeting of the shareholders of St. Paul on November 28, 1969, a78 plan of recapitalization was adopted whereby common stock of St. Paul would be issued in exchange for various outstanding debts and securities of St. Paul. The effectiveness of the plan was conditioned upon the acceptance of the plan on or before February 2, 1970, by holders of 95 percent of the principal amount of St. Paul's 6 percent convertible subordinated debentures, 95 percent of the principal amount of its interim notes, and 100 percent of the construction notes (held by petitioner) with the right of St. Paul to reduce the required percentages to 75 percent. By February 2, 1970, St. Paul had received consents representing over 80 percent of the required amounts and its board of directors decided to proceed with the implementation of the plan. Pursuant to the plan, petitioner surrendered its $4,596,202.41 of St. Paul's construction notes and its $507,576.64 of St. Paul promissory notes issued in respect of past due interest in exchange for 4,203,779 shares of St. Paul common stock and a new $900,000, 7 percent subordinated construction note. At the same meeting on November 28, 1969, the St. Paul shareholders authorized the borrowing of $2,500,000 from Manufacturers Hanover79 Trust Company (Hanover) for the construction of a 275-ton-per-day nitric acid plant. Under the terms of the new loan, Hanover would have a first mortgage lien on all assets of St. Paul, all stock or securities of St. Paul, and certain other securities owned by Continental Nitrogen and Chemicals, Inc. (Continental). 1 No part of the loan proceeds was available for payment to petitioner in respect of obligations arising from Contract #1157. On June 30, 1971, St. Paul was indebted to petitioner for unpaid interest in the amount of $364,191.18. As of that date and pursuant to the so-called Phase II of the recapitalization authorized in November 1969, petitioner exchanged such indebtedness as well as St. Paul's 7 percent note in the face amount of $900,000 for 12,641 shares of St. Paul Series A Convertible Preferred Stock. Each of the preferred shares had a par value of $100 and was convertible into 66.667 shares of St. Paul common stock at the option of the holder. St. Paul paid no cash dividends on either its common or preferred80 stock at any time material herein. On January 6, 1967, and February 1, 1967, petitioner entered into two contracts (#1143 and #6257) with the Oklahoma Ordnance Works Authority (O.O.W.A.), an Oklahoma public trust, for the construction of a facility containing ammonia, nitric acid, and ammonium nitrate plants, related buildings, and equipment for a total price of $7,500,000. The contract price was payable partly in cash ($3,000,000) and partly in industrial revenue bonds to be issued by O.O.W.A. ($4,500,000), but such bonds were subject to a participation by O.O.W.A.. As of February 1, 1967, O.O.W.A. entered into a lease with Cherokee Nitrogen Company (Cherokee) (a wholly-owned subsidiary of Continental, the major shareholder of St. Paul prior to its recapitalization), pursuant to which Cherokee would operate the facilities constructed for O.O.W.A. by petitioner. As of July 1, 1967, petitioner entered into a long-term construction contract (#6274) with Cherokee for additional facilities to be built at the O.O.W.A. fertilizer plant, leased by Cherokee, for a price of $4,075,000. The contract price was subsequently reduced to $4,000,000. The facilities to be constructed were81 also subject to the lease from O.O.W.A. to Cherokee. In 1968, petitioner completed its two contracts with O.O.W.A. (#1143 and #6257) as well as its contract with Cherokee (#6274). As provided by contract, O.O.W.A. paid petitioner $3,000,000 in cash and gave to petitioner $4,500,000 Series A, 6 percent Industrial Development Subordinated Revenue Bonds issued by O.O.W.A. in satisfaction of the $7,500,000 contract price. In order to make the cash payment, O.O.W.A. borrowed $2,500,000 from the First National Bank and Trust Company of Tulsa and $500,000 from The Oklahoma Industrial Finance Authority. As security for such loans, O.O.W.A. executed an indenture of mortgage, a security agreement, and an assignment of rents (due from Cherokee) in favor of each of the lenders with the First National Bank and Trust Company of Tulsa having first priority. The O.O.W.A. bonds delivered to petitioner were due July 15, 1977. Although they carried interest from date of issue, payment of interest was postponed until October 15, 1971. The bonds were subject to a $400,000 Participation Certificate giving O.O.W.A. a right to 4/45ths of the proceeds, whether principal or interest. They were secured82 solely by the lease to Cherokee, a trust indenture, and a third mortgage of the plant leased to Cherokee, 2 but such security given was subject to the prior interests of the First National Bank and Trust Company of Tulsa and The Oklahoma Industrial Finance Authority. 3Upon completion of its contract (#6274) with Cherokee in 1968, petitioner booked an open account receivable from Cherokee for the full adjusted contract price of $4,000,000. On or about April 15, 1971, petitioner, Cherokee, and O.O.W.A. entered into a three-party agreement pursuant to which petitioner accepted 100 O.O.W.A. Series B Industrial Development Subordinated Revenue Bonds in the principal amount of $10,000 each in satisfaction of $1,000,000 of the open account construction contract with Cherokee. Petitioner also accepted 50,000 shares of $10 par value Cherokee common stock in satisfaction of $2,500,00083 of the Cherokee contract debt. On or about July 30, 1971, petitioner accepted an additional 10,000 shares of the $10 par value Cherokee common stock in satisfaction of the remaining $500,000 of the Cherokee debt. As of December 31, 1968, and December 31, 1969, the fair market values of the various debt obligations held by petitioner as a result of its contracts with St. Paul, O.O.W.A., and Cherokee were as follows: 12/31/68 FairObligationFace ValueMarket ValueSt. Paul 7% subordinated$4,596,202.41$2,000,000.00Construction NotesO.O.W.A. Series A, 6%4,500,000.002,600,000.00Industrial DevelopmentSubordinated Revenue BondAccount Receivable from4,000,000.002,500,000.00CherokeeTotal$13,096,202.41$7,100,000.0012/31/69 FairSt. Paul 7%$900,000.00$360,000.00SubordinatedConstruction NoteReceivable due from266,690.57 1106,676.23St. PaulInterest due from244,536.1897,814.47St. PaulTotal$1,411,226.75$564,490.70As of November 28, 1969, and84 December 31, 1969, the fair market value of 4,203,779 shares of St. Paul common stock was $840,755.80. The 60,000 shares of Cherokee common stock that petitioner received in 1971 had a fair market value of $920,000 at the time of receipt. From 1967 to 1970, the nitrogen fertilizer industry experienced a serious imbalance in supply and demand. Although consumption increased, production increased at a higher rate due to production efficiencies effected primarily by new plant facilities in the Gulf Coast and southern regions of the country. Because of this increased supply as well as the sensitivity of demand to other market conditions, industry prices dropped sharply during this period. New production facilities enabled companies to market ammonia products at prices equal to or below St. Paul's and Cherokee's production costs. Both companies suffered during this period. St. Paul, which had been in existence for some years, curtailed its production of ammonia in 1967-1968 and purchased its ammonia needs in the market.Cherokee, which had only come into being in 1967, was experiencing a difficult start. St. Paul's June 30 fiscal year-end balance sheets for 1966 through 197385 were as follows: ST. PAUL AMMONIA PRODUCTS, INC. Balance Sheets as of June 30 1 (All footnotes not included) Assets1966196719681969Current Assets: Cash and equivalent: 4$ 1,653,224$ 257,528$ 320,575$ 594,052Receivables: Trade Accounts1,482,1222,010,8182,526,3622,858,905Other8,467802,966708,088114,4662,813,7843,234,4502,973,371Less allowance fordiscounts, priceadjustments and doubtfuln/a28,461143,127104,778receivablesNet receivables1,490,5892,785,3243,091,3232,868,593Inventories: Finished productsFinished and in process93,386868,4531,152,043825,593Raw materials and212,867197,840190,031225,555chemicalsParts and supplies432,665471,199460,753248,088Total Inventories743,9181,537,4921,802,8271,299,236Prepaid expenses54,94163,04566,132157,005Total current assets3,942,6724,643,3885,280,8574,918,886Investment in 5.0%-owned135,00085,00070,000companyPlant and equipment, atcost: Land257,911253,728261,658261,658Plant and equipment14,872,63120,734,23520,998,13212,202,515Specialized repair partsOffice and agency208,571254,768254,168257,699buildingsOffice fixtures and other103,645123,544311,019341,958equipmentConstruction in progress66,374 21,416,98415,442,75821,371,27521,891,35114,480,814Less allowance for6,900,6427,675,19810,817,1754,714,319depreciationNet plant and equipment8,542,11612,696,07711,074,1769,766,495Deferred turnaround,debenture, loanand other expenses and61,00434,67220,027290,098other assets$12,545,792$18,509,137$16,460,060$15,045,47986 Assets19701971 31972 319735Current Assets: Cash and equivalent: 4$ 536,992$ 414,523$ 637,079$ 1,343,509Receivables: Trade Accounts2,413,5323,016,3142,724,8623,1 91,767Other48,70857,67175,38352,0382,462,2403,073,9852,800,2453,243,805Less allowance fordiscounts, priceadjustments and doubtful200,000162,000117,350106,000receivablesNet receivables2,262,2402,911,9852,682,8953,137,805Inventories: Finished productsFinished and in process625,8251,570,2592,202,241465,648Raw materials and153,749177,386139,624145,212chemicalsParts and supplies144,125633,027643,135388,875Total Inventories923,6992,380,6722,985,000999,735Prepaid expenses104,726670,870779,605809,214Total current assets3,827,6576,378,0507,084,5796,290,263Investment in 5.0%-owned61,00069,00025,922companyPlant and equipment, atcost: Land264,575645,575639,007638,207Plant and equipment12,483,29419,316,35619,522,31820,720,606Specialized repair parts424,590Office and agency266,665533,678535,274512,468buildingsOffice fixtures and other318,881707,946726,724695,051equipmentConstruction in progress1,948,465137,998189,02269,66415,281,88021,341,55321,612,34523,060,586Less allowance for5,722,8067,286,4138,598,34910,134,613depreciationNet plant and equipment9,559,07414,055,14013,013,99612,925,973Deferred turnaround,debenture, loanand other expenses and72,01533,166280,359319,935other assets$13,519,746$20,535,356$20,378,934$19,562,09387 ST. PAUL AMMONIA PRODUCTS, INC. Balance Sheets as of June 30 (All footnotes not included) 88 1LIABILITIES1966196719681969Current liabilitiesDemand notes payable to$$$ 4,680,823$ 5,103,779construction companyNotes payable to banks170,0006,547,5859,451,458Current maturities of2,625,7219,922,15232,3531,031,424long term debt2Accounts payable475,872792,0771,224,0172,277,877Accrued liabilities285,253326,987525,495452,163Advance deposits on bulkproduct salesFederal and State incomes320,370121,393taxes, estimatedTotal current liabilities3,715,21611,332,80913,010,27318,316,701Long term debt3,660,2541,421,7791,564,450646,253Deferred income taxes802,0001,167,000Stockholders equity: Preferred stock2,000,0002,000,0002,000,0002,000,000Common stock32,81333,93846,18846,188Additional paid-in959,1381,093,0131,570,7631,570,763capitalAccumulated earnings1,376,3711,460,598(1,731,614)(7,534,426)(deficit)Less treasury stockTotal stockholders equity4,368,3224,587,5491,885,337(3,917,475)$12,545,792$18,509,137$16,460,060$15,045,479LIABILITIES1970197119721973Current liabilitiesDemand notes payable to$ 900,000$$$construction company3Notes payable to banks9,951,13710,256,68911,726,90512,792,944Current maturities of348,7081,113,2181,372,5431,352,724long term debtAccounts payable2,587,4322,539,6721,843,4301,978,905Accrued liabilities1,235,628683,111863,929833,084Advance deposits on bulk456,47826,446product salesFederal and State incomestaxes, estimatedTotal current liabilities15,022,90514,592,69016,263,20316,904,121Long term debt214,622 35,110,7374,461,8783,292,229Deferred income taxesStockholders equity: Preferred stock33,679,9004,326,2004,995,20045Common stock200,022 3200,131208,131200,131Additional paid-in1,320,2131,333,5541,333,5541,333,554capitalAccumulated earnings(3,246,016)(4,381,656)(6,188,429)(7,226,267)(deficit)Less treasury stock(16,875)(16,875)Total stockholders equity(1,717,781)831,929(345,419)(714,257)3$13,519,746$20,535,356$20,378,914$19,562,34389 During fiscal 1966 through 1973, St. Paul had the following net income (or loss): 1966$456,964196784,2271968(3,192,212)1969(5,802,812)1970(3,246,016)1971(1,135,640)1972(1,806,773)1973(1,037,838)90 As of December 31, 1968, St. Paul's balance sheet showed a small excess of assets over liabilities.4The following chart reflects St. Paul's cash flow in relation to its debt obligations: ST. PAUL AMMONIA PRODUCTS, INC. Cash Flow vs. Debt Obligations Held By IDI Management, Inc. Years Ended June 30 1196719681969Net income (loss)$ 84,227[3,192,212)[5,802,812)Add charges not requiring funds(depreciation, amortization, etc.)1,165,8882,041,7282,795,561Funds from operations (deficit)1,250,115(1,150,484)(3,007,251)Add proceeds of debt or other5,168,5481,248,6283,438,061securitiesTotal funds available6,418,66398,144430,810Less: Additions to plant andequipment5,928,517522,1821,458,743Funds available for debt retirement490,146(424,038)(1,027,933)Bank loans170,0006,436,3539,451,458Amount owing IDI Management5,168,5484,680,8235,103,77991 19701971Net income (loss)[3,246,016)[1,135,640)Add charges not requiring funds(depreciation, amortization, etc.)1,031,4211,564,587Funds from operations (deficit)(2,214,595)428,947Add proceeds of debt or other5,445,710 210,539,041 3securitiesTotal funds available3,231,1159,681,154Less: Additions to plant andequipment535,4426,088,759Funds available for debt retirement2,695,6734,450,289Bank loans9,951,13710,256,689Amount owing IDI Management900,000 23Cherokee, whose financial condition was important to IDI not only because of the Cherokee account receivable but also because the O.O.W.A. bonds held92 by IDI were payable out of Cherokee's lease payments to O.O.W.A., 5 had June 30 fiscal year-end balance sheets for 1968 through 1973 as follows: CHEROKEE NITROGEN COMPANY Balance Sheets As of June 30 1 (All footnotes not included) ASSETS196819691970Current Assets: Cash$ 123,727$ 248,540$ 153,927ReceivablesNet trade accounts receivable801,9861,042,634459,978Insurance claims receivableOther receivables7,35813,40323,471Total receivables809,3441,056,037483,449InventoriesFinished and in process673,376541,787530,389Spare parts100,000251,751276,478Total Inventories773,376793,538806,867Prepaid expenses31,461143,40688,977Total Current Assets1,737,9082,241,5211,533,220Funds reserved for construction: CashInsurance Claims receivableProperty plant & equipment at cost11,462,08211,654,30112,114,030Less accumulated depreciation694,7831,741,9822,820,214Net property plant, equipment10,767,2999,912,3199,293,816Advance to affiliated companyDeferred charges and other costsless amortization: Plant and product development costsStart -up and maintenance expense150,886119,428133,021OtherTotal deferred charges & othercosts150,886119,428133,021Costs in excess of net tangible assetsof acquired business (not amortized)47,16966,34866,348$12,703,262$12,339,616$11,026,40593 ASSETS197119721973Current Assets: Cash$ 108,762$ 98,300$ 207,097ReceivablesNet trade accounts receivable513,211759,967483,773Insurance claims receivable544,191Other receivables18,0066,4806,549Total receivables531,217766,4471,034,513InventoriesFinished and in process1,295,904588,028110,472Spare parts324,555335,249353,924Total Inventories1,620,459923,277464,396Prepaid expenses31,15831,29329,426Total Current Assets2,291,5961,819,3171,735,432Funds reserved for construction: Cash97,302Insurance Claims receivable1,119,2341,216,536Property plant & equipment at cost12,488,79612,566,74011,836,832Less accumulated depreciation3,764,0524,729,7155,204,952Net property plant, equipment8,724,7447,837,0256,631,910Advance to affiliated company82,182Deferred charges and other costsless amortization: Plant and product development costs56,781Start -up and maintenance expense117,85190,23628,802Other8,309Total deferred charges & othercosts117,85190,23693,892Costs in excess of net tangible assetsof acquired business (not amortized)66,34866,34866,348$11,200,539$9,812,926$9,826,30094 CHEROKEE NITROGEN COMPANY Balance Sheets as of June 30 (All footnotes not included) 1Liabilities196819691970Current Liabilities: $$$Current instalments of long termdebt: IDI Management, Inc.Other2,000,0001,222,090812,707Notes payable: Banks1,193,3781,134,455Continental Nitrogen and ChemicalsOklahoma Natural Gas Co.Accounts PayableIDI Management, Inc.37,80821,429Other457,402673,573894,229Accrued Expenses51,63258,32749,425Total current liabilities2,509,0343,185,1762,912,245Construction liabilitiesLong term debt includingcapitalized lease rentals 2IDI Management, Inc.4,000,0008,850,6309,209,142Other8, 001,7242,123,9921,162,99312,001,72410,974,62210,372,135Less current instalments2,000,0001,222,090812,707Total Long Term Debtexcluding current instalments10,001,7249,752,5329,559,428Shareholders equity: Common Stock $10 par value100,000100,000100,000Additional paid in capital300,000664,000 3664,000Accumulated earnings (deficit)(207,496)(1,362,092)(2,209,268)Total Shareholders equity192,504(598,092)(1,445,268)$12,703,262$12,339,616$11,206,40595 Liabilities197119721973 6Current Liabilities: $$Current instalments of long termdebt: IDI Management, Inc.340,290769,750Other506,667206,10453,253Notes payable: Banks2,096,3221,165,230435,008Continental Nitrogen and Chemicals12,00010,500Oklahoma Natural Gas Co.93,00093,00039,000Accounts PayableIDI Management, Inc.95,32149,89148,046Other542,942401,621274,757Accrued Expenses60,92148,10466,024Total current liabilities3,407,1732,314,7401,685,838Construction liabilities216,541Long term debt includingcapitalized lease rentals n(2)IDI Management, Inc.6,403,1306,733,1306,792,750Other795,119523,982368,8967,198,2497,257,1127,161,646Less current instalments506,667546,394823,003Total Long Term Debtexcluding current instalments6,691,5826,710,7186,338,643Shareholders equity: Common Stock $10 par value700,000 4700,000700,000Additional paid in capital854,732 5854,732854,732Accumulated earnings (deficit)(452,948)(767,264)30,546Total Shareholders equity1,101,784 4787,4681,585,278$11,200,539$9,812,926$9,826,30096 During fiscal 1968 through 1973, Cherokee showed the following net income (or loss): 1968$ (307,479)1969(1,054,788)1970(847,176)1971(452,948)1972(314,316)1973244,100 1As of December 31, 1968, Cherokee's balance sheet showed that its total liabilities (long-term and current) exceeded its total97 assets by approximately $291,403. 6The following chart shows Cherokee's cash flow in relation to its debt: Cherokee Nitrogen Company Cash Flow vs. Debt Obligations Held by IDI Management, Inc. Years Ended June 30 5196819691970Net income (loss)[307,479)$ (1,054,788)$ (847,176)Add charges not requiringfunds (depreciation, amort-ization, etc.)694,7831,361,2101,414,262Funds from operations387,304306,422567,086Add proceeds of debt orother securitiesn.a.368,832Less: Addition to plantand equipmentn.a.203,363459,729Additional start-upcosts and deferreditemsn.a.6,24179,623Funds available for debtretirementn.a.465,65027,734Bank loans and other Notes1,193,0001,134,455Owing IDI ManagementIndirectly through CapitalizedLease Agreement 14,500,0004,500,0004,500,000Directly - constructionNotes4,000,0004,000,0004,000,000Accrued Interest709,142 4Total8,500,0008,500,0009,209,14298 197119721973Net income (loss)$ (452,948)$ (314,316)224,100Add charges not requiringfunds (depreciation, amort-ization, etc.)1,324,6331,391,2131,015,761Funds from operations871,6851,076,8971,239,871Add proceeds of debt orother securities21,6731,005,271 3Less: Addition to plantand equipment374,76677,9441,292,931Additional start-upcosts and deferreditems74,14758,958100,500Funds available for debtretirement422,772961,668851,711Bank loans and other Notes2,096,3221,165,230435,008Owing IDI ManagementIndirectly through CapitalizedLease Agreement 15,500,0005,500,0005,500,000Directly - constructionNotesAccrued Interest903,1301,233,1301,292,750Total6,403,130 26,733,1306,792,75099 At the end of 1968, Continental, owning a controlling stock interest in both St. Paul and Cherokee, contemplated a rearrangement of the capital structures of these two companies as well as a third company in which Continental had a controlling interest. This plan, known as "MidAmerica Financing," contemplated the infusion of some $19,000,000 into the three companies from which St. Paul and Cherokee would satisfy their obligations to IDI. By the end of 1968, however, there was no assurance that the MidAmerica Financing could have been completed. Because outside financial interests, who were considering participation in MidAmerica Financing, wanted an independent appraisal of the three companies' economic prospects, Arthur D. Little, Inc., was retained by Continental to investigate their economic outlook. The report dated January, 1969, determined that the supplydemand problem in the nitrogen industry could correct itself by 1971 causing nitrogen prices to recover. Moreover, the report concluded that St. Paul and Cherokee were favorably situated and, with the infusion of new capital, could turn around by 1970.MidAmerica Financing fell through prior to December 31, 1969. 100 In December, 1969, St. Paul's bank creditors advised the company that, because their existing loans were in jeopardy, they were prepared to foreclose.St. Paul's management persuaded the banks to wait at least six months because their net yield from a foreclosure would not be great. The banks consented to St. Paul's continuing operations at least until June 30, 1970. In February, 1970, St. Paul began negotiating for the purchase of an ammonia plant from the Apple River Chemical Company (Apple River Plant), the company from which St. Paul had been buying ammonia. The management of St. Paul saw this acquisition as affording an opportunity to help put the company back on its feet and to ward off foreclosure. The sale was consummated in November, 1970. St. Paul's senior bank creditors were aware of the negotiations but, because any debt that would have been necessary for such purchase would be subordinate to their claims, the purchase did not concern them. The banks never pursued their plan of foreclosure. St. Paul continued to operate and by 1974 was showing a profit. Cherokee, too, remained in operation throughout the years in question and, by 1973, was operating at a profit. 101 On December 31, 1968, petitioner wrotedown the value of the St. Paul notes, the O.O.W.A. bonds, and the Cherokee account receivable in the aggregate amount of $6,220,000 and reported the balance as gross income for that year in respect of its completed contracts, 7 reflecting the estimated fair market value of such obligations ($6,876,202.41). 8 For its 1969 taxable year, petitioner charged off $852,967.95 and claimed a deduction therefor as the portion of the St. Paul and Cherokee obligations it deemed to be worthless. 9 For its 1971 taxable year, petitioner claimed a bad debt deduction in the amount of $580,000 representing the difference between the amount of the Cherokee account previously taken into income (and not previously deducted) and the fair market value of the Cherokee stock petitioner accepted as payment of the account receivable ($920,000). 102 Throughout the years in question, petitioner attempted to avoid becoming too financially involved as an investor in the companies for which it constructed facilities lest it discourage other customers for construction contracts by putting itself in a competitive position with such customers. Other than as previously indicated, the record does not show that petitioner received any payment in respect of the St. Paul obligations or the Cherokee account receivable during the years in question, although it made demands therefor. OPINION Taxable year 1968The first issue herein involves the amount of income petitioner is required to report for 1968, when it completed its contracts with St. Paul, O.O.W.A., and Cherokee and the fair market values of their obligations to petitioner were significantly less than their face values. Respondent contends that petitioner may not limit the amount includible in income to the fair market values of such obligations because the completed contract method of accounting requires the accrual of the gross contract price (or the face value of the debtor's obligations) in the year the contract is completed. Because this argument was first raised103 in an amended pleading by respondent, he concedes that he bears the burden of proof in respect of the amount includible in petitioner's income for 1968 from the St. Paul, O.O.W.A., and Cherokee contracts. 10If respondent's position is sustained, we must also decide whether petitioner is entitled to any deductions for partial worthlessness of such obligations in 1968 11 and, in any event, in the subsequent years before104 us. Initially, we note that there is no express statutory directive in respect of the face versus fair market value controversy herein. Moreover, prior to 1976, respondent's regulations offered no guidance. In T.D. 7397, 1 C.B. 115">1976-1 C.B. 115, however, respondent amended his regulations concerning accounting for long-term contracts and section 1.451-3(d)(1), Income Tax Regs., now provides: under the completed contract method, gross income derived from long-term contracts must be reported by including the gross contract price of each contract in gross income for the taxable year in which such contract is completed * . The regulations then go on to carve out exceptions for "disputed" claims. Respondent, however, has not argued that his 1976 regulation should be literally applied and has acknowledged that there is a further exception which recognizes that an item need not be included in income by a taxpayer utilizing the completed contract method of accounting, to the extent105 that it is "contingent and uncertain" (see National Contracting Co. v. Commissioner,37 B.T.A. 689">37 B.T.A. 689, 701-702 (1938), affd. 105 F.2d 488">105 F.2d 488 (8th Cir.) 1939)), a phrase which has been redefined as "reasonable uncertainty about the ultimate payment." See Hudson v. Commissioner,11 T.C. 1042">11 T.C. 1042, 1050 (1948), affd. per curiam sub nom. Hudson Engineering Corp. v. Commissioner,183 F.2d 180">183 F.2d 180 (5th Cir. 1950). 12 Given respondent's position, we need not reach the issues of whether the regulation should be literally applied or, if so applied, the extent to which it should be given retroactive effect. See section 7805(b). 13106 Respondent contends that on December 31, 1968, there was not reasonable uncertainty that the excess of the face values of the debt obligations of St. Paul, Cherokee, and O.O.W.A. received by petitioner in that year over their fair market values would be collected. 14 Petitioner, on the other hand, takes the position that the fair market values of the obligations (which have been stipulated herein) are determinative of the issue of collectibility. Thus, while petitioner and respondent may agree that uncertain collectibility will justify nonaccrual, the standards for measuring such collectibility propounded by each are clearly distinct. We note, however, that, although fair market value is related to the certainty of payment (or collectibility), the concepts are not "synonymous." See Jones Lumber Co. v. Commissioner,404 F. 2d 764, 767 (6th Cir. 1968), affg. T.C. Memo. 1967-81, and relied upon by this Court in Steele v. Commissioner,T.C. Memo 1969-177">T.C. Memo. 1969-177. Accordingly, we reject petitioner's contention that a completed-contract-basis taxpayer necessarily measures its income for the year of completion by the fair market values of its debtor's107 obligations. We also do not agree with petitioner that this Court has heretofore twice approved the use of fair market value by a completed-contract-basis taxpayer in accounting for debt obligations. In the first case, Hudson v. Commissioner, supra, one of the taxpayers was an engineering company (Engineering) that reported income on the completed contract basis. One contract negotiated by Engineering involved the construction of a processing plant for a fee of $120,000. The company commissioning the processing plant sustained net losses through the year in which the contract was completed; moreover, payment of Engineering's fee was subordinated to a substantial amount of other debt which was secured by a mortgage of all of the debtor company's properties.Engineering received no payment in the year of completion and reported no income in respect of the fee108 to which it was entitled. Respondent valued the fee at $50,000 for the year of completion and determined that such value was properly includible in Engineering's income. This Court upheld that determination on the ground that Engineering failed to show sufficient uncertainty as to payment of $50,000 to warrant exclusion of that amount as income. See 11 T.C. at 1050. Although we noted that respondent's valuation indicated that he thought there was sufficient uncertainty as to the payment of such amount to excuse the accrual thereof, the issue of the includibility of the remaining $70,000 was simply not before the Court. Consequently, Hudson does not stand for the the proposition that, had the respondent determined that all of the $120,000 fee should have been included in income, this Court would not have sustained that determination. In the second case, American Electric Co., Ltd. v. Commissioner,T.C. Memo. 1966-76, a subcontractor, reporting income on the completed contract basis of accounting, performed services for a general contractor and accepted in payment of such services cash as well as a 6 percent, 25-year debenture of a third party109 that the general contractor had held, in full satisfaction of the subcontract.The Court sustained the petitioner's inclusion in income for the year in which the subcontract was completed of the cash plus the fair market value of the debenture received. The fact is, however, that the obligation involved was that of a third party, not the debtor, and was received in full satisfaction of the debt. This distinction was emphasized in Steele v. Commissioner,supra, where a homebuilder accepted second mortgages as part payment for homes that he sold and, under the completed contract method of accounting, reported only the fair market values of such mortgages as income in the year of completion. The Court sustained respondent's determination that the taxpayer was required to include in income the face values of such mortgages because they were neither contingent nor uncertain as to collectibility. The receipt of third-party obligations in satisfaction of a debt is quite different from the receipt of obligations of the debtor itself, as is the case herein. In the former situation, the obligations constitute property and a standard of fair market value is an appropriate110 standard to apply. In the latter situation, the taxpayer is simply receiving evidence of his debtor's continuing obligation in a different form; the right of the creditor to receive full payment of the debtor's obligation remains and, in the case of an accrual or a completed-contract-basis taxpayer, the existence of that right is the critical determinant subject only, in a situation such as involved herein, to the question of collectibility. 14Admittedly, in American Electric Co., Ltd., supra, we spoke both in terms111 of fair market value and proof by the taxpayer of "contingencies or reasonable uncertainties extant in the year of completion in order for taxability of the full amount to be postponed." But even leaving aside the significant element of a third-party obligation, our language does not necessarily make fair market value the test of certainty under any and all circumstances. At most, that case stands for the proposition that we applied a dual test and came to the conclusion that the taxpayer satisfied both criteria. As we see it, the issue herein is a factual one, namely, whether the difference between the face and fair market values of the obligations involved represents an amount sufficiently uncertain as to payment so as to justify petitioner's exclusion of such amount from income. 15 It is to the resolution of that issue that we now direct our attention. In so doing, we are mindful that the term "reasonable uncertainty" should be read narrowly so that the general rule requiring the inclusion of gross contract price in income is not swallowed up by the exception thereto. Cf. Georgia School-Book Depository, Inc. v. Commissioner,1 T.C. 463">1 T.C. 463, 469 (1943). We also112 understand that mere postponement of, or mere difficulty in making, payment will not suffice to prevent inclusion in income.Cf. Harmont Plaza, Inc. v. Commissioner,64 T.C. 632">64 T.C. 632, 650 (1975), affd. by order 549 F. 2d 414 (6th Cir. 1977). As of December 31, 1968, both St. Paul and Cherokee faced serious financial difficulty. St. Paul had been forced to curtail its costly production of amonia. In 1967, subsequent to its execution of the construction contract with petitioner, St. Paul had to borrow $7,500,000 to service its past due debentures and to provide working capital. The borrowing came about as part of a general plan of refinancing, including its settlement agreement with petitioner whereby petitioner was to receive stock and notes for its contract rather than cash. Moreover, the notes were subordinated to the new $7,500,000 loan and petitioner surrendered its right to file a mechanic's lien against the facilities113 it constructed. All indications in the record are that petitioner had little choice but to accept the settlement agreement. The contract was not yet completed. Yet, construction could not be halted because the necessary construction materials, which were highly specialized, had been ordered and were in the fabrication process. Cancellation of such orders involved steep penalties.Progress payments were delinquent, although petitioner made demands therefor. Petitioner's treasurer testified that petitioner believed its only hope of realizing any payment was for St. Paul to remain in business and this, in turn, required the borrowing of new capital to which petitioner would have to subordinate its claims. By the end of 1968, St. Paul's situation had worsened rather than improved. Its current liabilities (including its obligations to petitioner) were more than two times its current assets. Although its balance sheet, as of the end of 1968, showed total assets in excess of total liabilities, the assets included the carrying of its plant and equipment at cost. A fair inference from the record is that, given the general state of the industry at the end of 1968 owing in large measure114 to new entrants with larger, more efficient plants, liquidation of these fixed assets would yield far less than book value. In any event, under the circumstances, we think it was incumbent upon the respondent, who bore the burden of proof, to challenge such inference with evidence to the contrary. This he has not done. Therefore, although St. Paul did not show "balance sheet insolvency" at the close of 1968, it clearly did not have current assets with which to pay petitioner's subordinated claims, and there is real doubt as to whether its total assets could have satisfied any, let alone all, of such claims. 16 Moreover, St. Paul was generating losses and was a part of an industry that was in a severe depression.115 As for Cherokee, upon whose financial success petitioner depended for payment of both the O.O.W.A. bonds and the account receivable from Cherokee, the company was insolvent as of December 31, 1968, 17 and its immediate financial outlook was certainly bleak in light of general industry conditions. Petitioner secured two appraisals of the fair market values of the disputed obligations as of the end of 1968 and 1969. These appraisals were supported by the testimony of two experts at the trial. Both appraisals valued the obligations at 50-55 percent of face value as of the close of 1968. Because of the parties' stipulation as to the fair market values of the obligations, our interest in such appraisals turns upon the factors which the experts took into account in determining the fair market values rather than those values as actually116 determined. Both the testimonial and documentary evidence on this point indicate that collectibility was a key ingredient in determining fair market value, and the ultimate conclusion was that the only market for such obligations would be among speculators or "venture capital investors." We think fair market value can represent a number of things. It can represent a discounted value of a right to receive a sum certain in the future as to which there is no doubt about collection. Or, it can represent more of a "gamble," e.g., the price one is willing to pay for the "chance" to receive a greater sum in the future. Respondent argues that where fair market value is 50 percent or more of a maximum return, "as a matter of practical economics," there must be reasonable prospects of realizing a greater amount. When there is some doubt as to the collectibility of an obligation, which respondent concedes there is here, we agree that such doubt is an element reflected in fair market value. Just as we have rejected petitioner's contention that fair market value is necessarily determinative of collectibility (see p. 34, supra), so do we reject respondent's contention that when fair117 market value is a certain percentage of face value, ipso facto, there must be insufficient doubt to prevent the inclusion of face value in income. The factors underlying the valuation must be examined. This is particularly true in a situation, such as is involved herein, where respondent, who had the burden of proof, offered no evidence of "marketability" as distinguished from "fair market value". See Underhill v. Commissioner,45 T.C. 489">45 T.C. 489, 494 (1966). The respondent attempts to negate the possibility of a reasonable expectation, as of the end of 1968, that the difference between the face and fair market values of the obligations was uncollectible by pointing to the proposed MidAmerica Financing as well as the Arthur D. Little, Inc., report predicting a turnaround in the fertilizer industry. From the limited evidence we have before us concerning the MidAmerica Financing, we cannot conclude that it was more than a slight possibility already factored into the fair market valuation. 18 In fact, the MidAmerica Financing never did materialize. Although the Arthur D. Little, Inc., report was prepared by independent investigators, its optimism must be tempered by118 the fact that it was commissioned by Continental in order to attract new capital. Moreover, any specific profit projections for St. Paul and Cherokee presupposed the acquisition of new capital. Because the new capital was anticipated from MidAmerica Financing and because we have already found that the possibility of such financing was slight, the profit picture painted by the report is of questionable reliability herein. We have also had the benefit of testimony from an audit partner in the independent accounting firm certifying petitioner's 1968 financial statement. He testified that he agreed with petitioner's write-down of income for 1968; in fact, he testified that he had sufficient doubts as to the collectibility of the balance, i.e., the writtendown amount of the obligations, and, for that reason, the auditor's opinion as to that amount was qualified to show that119 the obligations in their entirety were questionable assets. The accountant's judgment was based upon the fact that both companies had current liabilities in excess of current assets, both were experiencing losses, both showed insufficient cash flow with which to service their respective debts, and both had significant other debts to which their obligations to petitioner were subordinated. Petitioner's treasurer also testified that, in both 1968 and 1969, he regarded the debts from St. Paul and Cherokee as being uncollectible. By way of contrast, respondent produced no witnesses to testify affirmatively on the issue, even though he had the burden of proof. Based upon the entire record before us, we conclude that respondent has failed to sustain his burden of proof that there was not a reasonable uncertainty as to the ultimate payment of the portion of the disputed obligations in excess of their December 31, 1968, fair market values and that petitioner may exclude such excess from its income for 1968. 19 We cannot say that petitioner's business judgment was sufficiently lacking in sagacity so as to require petitioner to include the face amount of the obligations in income. Cf. 120 Portland Manufacturing Co. v. Commissioner,56 T.C. 58">56 T.C. 58, 73 (1971).Our disposition of this issue makes it unnecessary for us to reach petitioner's alternative argument as to the partial worthlessness in 1968 of the obligations involved herein (see footnote 11, supra), including respondent's passing contention on brief that the manner of petitioner's chargeoff for 1968 does not satisfy the requirements of section 166(a)(2), a contention which we would, in any event, consider to be of doubtful validity. Taxable year 1969Petitioner next claims entitlement to a partial bad debt deduction for 1969 in respect of St. Paul's obligations outstanding on December 31 of that year. 20 Petitioner contends that the difference between the face values of such obligations and their fair market values as of the end of 1969 was worthless and deductible to the extent that its bases exceeded such fair market values. The obligations in issue are: Face ValueSt. Paul 7% Construction Notes$4,596,202.41St. Paul 7% Promissory Notes507,576.64Account Receivable from St. Paul266,690.57Interest due from St. Paul244,536.18121 At the close of 1969, a plan of recapitalization of St. Paul had been approved by its shareholders and was in the process of being submitted for approval by the necessary percentage of holders of debt obligations (see pp. 7-8, supra). Prior to that time, petitioner had agreed to surrender the St. Paul construction and promissory notes in exchange for 4,203,779 shares of St. Paul common stock and a new 7-percent $900,000 note of St. Paul. The parties have stipulated that as of December 31, 1969, the fair market value of the stock was $840,775.80 and122 the fair market value of the note was $360,000. While the state of the record is not crystal clear, we think it a fair inference that the parties are in agreement that these values should be used in measuring the petitioner's partially worthless bad debt deduction, if we hold that any such deduction is allowable. The December 31, 1969 fair market values of the account receivable from St. Paul and the interest due from St. Paul were $106,676.23 and $97,814.47, respectively. 21By the end of 1969, petitioner had charged off its books the following sums in respect of the St. Paul obligations (see footnote 9, supra): Charge-offNotes receivable$5,061,741.26 22(Both constructionand promissory)Account receivable266,690.51Interest due244,536.18TOTAL$5,572,967.95123 Such total charge-off exceeds the deductions claimed herein. In his notice of deficiency, respondent disallowed any deduction in respect of the St. Paul obligations on the ground that St. Paul was a continuing business and neither its debts nor its stock could be considered worthless. To the extent that the issue of partial worthlessness is thus posed, petitioner has the burden of proof. However, by amended pleading, respondent asserts that no deduction in respect of the St. Paul notes that were ultimately exchanged, pursuant to the plan of recapitalization, for 4,203,779 shares of St. Paul common stock should be allowed on the additional ground that such recapitalization qualified as a corporate reorganization under section 368(a)(1)(E) and that the notes exchanged by petitioner for stock pursuant thereto constituted "securities" within the meaning of section 354(a). Alternatively, respondent's amended pleading argues for the disallowance of any deduction in respect of such exchange because any "loss" thereon represented a contribution of capital to St. Paul. Respondent concedes that the issues raised in his amended answer constitute new matters as to which he bears the burden124 of proof. We begin by rejecting respondent's fleeting pitch that petitioner is not entitled to any bad debt deduction in respect of the St. Paul construction and promissory notes for the reason that such notes were, according to respondent, "tantamount to a stock interest or at least a right to subscribe, or to receive stock in St. Paul" and therefore constituted "securities" for which a deduction is allowed under section 165 only in the year of total worthlessness. Respondent's position is not within the scope of the deficiency notice, was not pleaded, was not raised at trial, and is raised on brief only as an afterthought to his argument as to the applicability of the reorganization provisions. It cannot be gainsaid that, prior to the end of 1969, petitioner had agreed to accept St. Paul stock, provided the various other conditions of the recapitalization plan, including the necessary acceptance of other creditors, was forthcoming. Thus, at most, it had a conditional right to stock which would come to fruition only upon the happening of a number of other events beyond the control of either St. Paul or petitioner. Under the foregoing circumstances, assuming that this issue125 is properly before the Court (as to which we have serious doubts), we are satisfied that the notes in question should be treated as what they appear to be on their face, i.e., debt, and that section 166 applies. We must now decide whether petitioner has satisfied the requirements of section 166(a)(2) 23 in order to take a partial bad debt deduction for 1969. The only requirement therein subject to dispute between the parties is whether the excess over the December 31, 1969 fair market value of the St. Paul obligations (after taking into account, as petitioner concedes, any portion thereof not previously included in income for 1968, see section 1.166-1(e), Income Tax Regs.) was "worthless." This is a question of fact. Respondent correctly notes that section 166(a)(2) confers-- a discretion upon the respondent, which, although not boundless, requires respondent's determination as to deductibility126 to be upheld unless found to be plainly arbitrary or unreasonable * . In attempting to make the required showing it is the taxpayer's burden to introduce evidence which establishes that in the year the partial worthlessness was claimed, the amount of such worthlessness could be predicted with "reasonable certainty." * * [Sika Chemical Corp. v. Commissioner,64 T.C. 856">64 T.C. 856, 862-63 (1975), affd. without published opinion 538 F.2d 320">538 F.2d 320 (3rd Cir., 1976).] Although the respondent is given greater discretion in the area of partially worthless debts than in the area of wholly worthless debts, such discretion does not include the power to disregard soundly exercised business judgment. Portland Manufacturing Co. v. Commissioner,supra.24If St. Paul's situation was bad at the end of 1968, as we think it was (see pp. 40-42, supra), that characterization could be applied "double in spades" at the end of 1969. By that time, the MidAmerica Financing plan had fallen through. On December 31, 1969, St. Paul was insolvent. Its balance sheet showed127 liabilities exceeding total assets by $5,250,311. The fixed assets in such balance sheet were carried at cost less depreciation amounting to approximately $9.5 million. At this time, the aggregate face value of St. Paul's subordinated debt to petitioner was approximately $5,107,000. Thus, from the balance sheet figures alone, St. Paul was unable to satisfy any of its debts to petitioner. Petitioner has introduced evidence that matters were far more serious than the books would indicate. Its senior bank creditors threatened foreclosure on December 31, 1969. At that time, St. Paul determined that immediate liquidation would yield total proceeds of only $4,230,000, including $2,000,000 for its fixed assets. Of these proceeds, St. Paul expected only $2,080,000 would be available for its senior bank creditors whom they owed some $9.5 million, leaving petitioner with nothing. Respondent has offered no challenge to the figures presented. If insolvency alone dictated the degree of an obligation's worthlessness, which it does not (see Trinco Industries, Inc. v. Commissioner,22 T.C. 959">22 T.C. 959, 965 (1954); see generally 5 Mertens Law of Federal Income Taxation, sec. 128 30.57 (1975 rev.)), we could conclude St. Paul's obligations to petitioner were wholly worthless. By the same token, we do not accept respondent's contention that the ability of St. Paul to continue as an operating entity automatically precludes any partial worthlessness of its obligations. See Sika Chemical Corp. v. Commissioner,supra. Cf. Riss v. Commissioner,478 F.2d 1160">478 F.2d 1160 (8th Cir. 1973); Steadman v. Commissioner,50 T.C. 369">50 T.C. 369, 378 (1968), affd. 424 F.2d 1">424 F.2d 1 (6th Cir. 1970). Moreover, the situation at the close of 1969 was such that St. Paul's prospects of remaining in business were, to say the least, doubtful. Respondent also argues that the plan of recapitalization adopted by St. Paul in November of 1969 and the determination of St. Paul's management to keep the company afloat preclude partial worthlessness. Neither of these factors, however, would seem to have been comforting to petitioner on December 31, 1969, when St. Paul's bank creditors came knocking at its door. Nor do St. Paul's 1970 negotiations for, and eventual purchase of, a new ammonia plant change the outlook as of December 31, 1969, particularly129 where it appears that such plant was acquired as a "sink or swim" type effort. In addition, both petitioner's own treasurer and its independent accountant testified that they agreed to a write-down of the St. Paul obligations to their estimate of the December 31, 1969, fair market values. Based upon the record as a whole, we conclude that petitioner has carried its heavy burden of proving that St. Paul's obligations to it were partially worthless as of December 31, 1969, to the extent that their face values exceeded their fair market values (after deducting that portion of the face values which we have held was not required to be included in petitioner's income in 1968) and that respondent's denial of such partial worthlessness was unreasonable. 24130 In so finding, we reject respondent's position that the partial worthlessness of that portion of the St. Paul obligations exchangeable for stock pursuant to the plan of recapitalization was in fact a loss suffered on the actual exchange in February, 1970, pursuant to a plan of recapitalization constituting a corporate reorganization within the meaning of section 368(a)(1)(E) 25 and that the obligations surrendered constituted securities for purposes of section 354(a), 26 so that no gain or loss is recognizable on such exchange. As a threshold matter, we assume that St. Paul underwent a statutory recapitalization at least insofar as others exchanged stock or securities for stock. However, 131 petitioner's exchange of notes for stock in February 1970 does not necessarily preclude a partial bad debt deduction for the year ending December 31, 1969. The worthlessness (or partial worthlessness) of a debt and the sale or exchange of such debt are separate and distinct events, provided for separately by the Code. If partial worthlessness is factually established as happening prior to a sale or exchange, two identifiable tax events have occurred. Cf. Levine v. Commissioner,31 T.C. 1121">31 T.C. 1121 (1959). This is true even where both such events occur within the same taxable year. Cf. Mitchell v. Commissioner,187 F.2d 706">187 F.2d 706 (2d Cir. 1951), revg. and remanding 13 T.C. 368">13 T.C. 368 (1949). 27 Whether or not the charge-off for worthlessness ought to be integrated with a subsequent sale or exchange or a compromise with the debtor is a factual question. See Levine v. Commissioner, supra.28132 Although the partial worthlessness claimed herein in respect of the St. Paul notes has been measured in terms of the value petitioner would receive in the subsequent exchange (see p. 50, supra), other factors contributed significantly to our conclusion that the claimed partial worthlessness of St. Paul's obligations in fact existed as of the end of 1969. These other factors have previously been set forth.See pp. 55-58, supra. In evaluating those factors, we have taken into account the effect of the plan of recapitalization that was in the wind. This is all that is required; the fact of the subsequent exchange does not per se preclude the charge-off and the consequent allowable deduction. In view of our conclusion that petitioner's charge-off should not be integrated with the subsequent exchange, we need not determine whether, as respondent contends, the St. Paul construction notes were securities for purposes of section 354 (an issue fraught with ramifications in the area of reorganizations generally) or whether as part of such exchange petitioner made a contribution to the capital of St. Paul and suffered no loss. 29133 Taxable year 1971The last issue is the amount of petitioner's net operating loss for 1971 which petitioner claims is available for carry-back to the years in issue.On its 1971 return, petitioner claimed a net operating loss of $659,156, of which $580,000 is now in dispute.The amount in dispute relates to a partially worthless bad debt deduction claimed by petitioner in an amended petition in respect of its acceptance, pursuant to the three-party agreement among petitioner, Cherokee, and O.O.W.A., of $1,000,000 in Series B, O.O.W.A. bonds and 60,000 shares of Cherokee stock in satisfaction of the $4,000,000 account receivable from Cherokee (written down by petitioner to $2,500,000 prior to 1971 by virtue of our previous holdings herein (see pp. 47-48, supra)) which petitioner claims was a compromise with its debtor.Respondent argues that any loss which petitioner suffered on the exchange of $3,000,000 of its account receivable for 60,000 shares of Cherokee stock is not recognizable for tax purposes under section 354(a) because the three-party agreement was in reality a plan of recapitalization of Cherokee which constituted a corporate reorganization within the meaning134 of section 368(a)(1)(E) and, further, because the account receivable was a "security" which petitioner exchanged for stock. Alternatively, respondent argues that no deduction is warranted because petitioner voluntarily canceled the debt in exchange for stock or because the difference between what petitioner gave up and what it received constituted a contribution to the capital of Cherokee. Unlike the partial worthlessness claimed in respect of the St. Paul obligations at the end of 1969 and prior to the exchange thereof for St. Paul stock, the partial worthlessness claimed by petitioner in respect of the Cherokee account receivable for 1971 is part and parcel of the exchange thereof for Cherokee stock. Whether petitioner realized a loss as a result of such exchange depends upon whether it was a compromise with Cherokee and whether the difference between petitioner's basis in the account receivable and the value of the stock it accepted in satisfaction thereof was worthless. See, generally, 5 Mertens, Law of Federal Income Taxation, sec. 30.36 (1975 rev.). If the transaction with the debtor is more in the nature of a voluntary forgiveness of all or part of the indebtedness, there135 can be no worthlessness within the meaning of the bad debt provisions. Cf. Lidgerwood Mfg. Co. v. Commissioner,22 T.C. 1152">22 T.C. 1152 (1954), affd. 229 F.2d 241">229 F.2d 241 (2d Cir. 1956). Unfortunately, the record before us is simply insufficient to determine the collectibility of the $580,000 difference between the written-down amount of the account receivable ($2,500,000) and the aggregate value of the O.O.W.A. bonds and Cherokee stock ($1,000,000 + $920,000) as of the time of the exchange. 30 We have not been favored with any detailed, independent appraisals of Cherokee's ability to pay the account receivable at the time the stock was received by petitioner. The record merely contains balance sheets and other financial data relating to Cherokee as of June 30, 1970, and June 30, 1971, plus some conclusory testimony. Thus, we cannot find on the record before us that petitioner has carried its burden of proving that it realized a loss as a result of any partial worthlessness of the Cherokee account receivable in 1971. 31136 Even assuming arguendo, however, that petitioner did realize a loss as a result of any partial worthlessness of the Cherokee account receivable, there is a further difficulty with any deduction thereof. Respondent has taken the position that the Cherokee account receivable was a "security" in petitioner's hands and that the exchange of such security for Cherokee stock constituted a recapitalization within the meaning of section 368(a) (1)(E) so that no gain or loss is recognized under section 354. Irrespective of whether said account receivable was a security for purposes of section 354, we think the nonrecognition rules of section 351 effectively preclude any deduction in respect of the exchange. 32Section 351(a) provides: General Rule.--No137 gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately atfer the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property. Control, under section 368(c) means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. From Cherokee's balance sheets, it is apparent that Cherokee had but one class of $10 par common stock. Prior to the issuance of shares to petitioner, 10,000 shares were outstanding. In April, 1971, petitioner exchanged $2,500,000 of the account receivable for 50,000 newly-issued shares of Cherokee and came into control of 83.33 percent of Cherokee's stock. Several months later, petitioner exchanged $500,000 of the account receivable for an additional 10,000 shares giving it 85.71 percent of the stock.138 Viewed either together or separately, the exchanges satisfied the control test of section 368(c). The critical question, as far as the instant case is concerned, is whether the Cherokee account receivable which was exchanged for Cherokee stock constituted "property" within the meaning of section 351, a term which is broadly construed. See DuPont deNemours & Co. v. United States,471 F.2d 1211">471 F.2d 1211, 1218-1219 (Ct. Cl. 1973); H.B. Zachry Co. v. Commissioner,49 T.C. 73">49 T.C. 73, 80, n. 6 (1967). Clearly, an obligation of the corporation issuing stock in satisfaction of its indebtedness can qualify as property under section 351. Duncan v. Commissioner,9 T.C. 468">9 T.C. 468 (1947). Although section 351 does not apply to "stock or securities issued for services," we are satisfied that the Cherokee stock received by petitioner does not fit the mold of this exception. In the first place, the agreements out of which the account receivable arose speak in terms of "acquisition by purchase" and "purchase and sale" of "facilities." Granted that the construction of such facilities involved the rendition of services, the fact of the matter is such services were139 directed at the creation of the facilities -- property in which petitioner had an interest prior to the transfer to Cherokee. Compare James v. Commissioner,53 T.C. 63">53 T.C. 63 (1969); cf. Roberts Co. v. Commissioner,5 T.C. 1">5 T.C. 1 (1945). Finally, we note that, irrespective of the nature of the original contract, the actual transfer in 1971 involved an account receivable by a taxpayer which had already accrued income in respect thereof. 33The account receivable was property in the hands of petitioner and the subsequent exchange thereof for stock was a transfer of property. See Duncan v. Commissioner,supra; see also Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders, par. 3.03 (1971). By the operation of section 351, petitioner recognizes no loss on its transfer and carries over its adjusted basis in the obligation surrendered to the stock received. Section 358. 140 Decision will be entered under Rule 155. Footnotes1. Prior to the issuance of stock pursuant to the plan of recapitalization, Continental was the shareholder owning the most common stock of St. Paul.↩2. Cherokee accounted for such lease as a purchase and financing. ↩3. The amount of the rentals Cherokee was to pay O.O.W.A. under the lease was calculated to be sufficient to amortize the principal and interest owing on the two mortgages and the O.O.W.A. revenue bonds over the term of the lease.↩1. This receivable is shown as $266,690.91, $266,690.57, and $266,690.51 at various parts of the record. We deem the differences to be immaterial herein.↩1. Source: Certified financial statements of Peat, Marwick, Mitchell & Co. ↩4. Cash restricted for application against Demand Notes payable to bank totalled $177,778 in 1968; $466,476 in 1969; $489,256 in 1970; $398,952 in 1971; $637,079 in 1972 $1,269,915 in 1973. ↩2. Advance on preliminary engineering study for proposed construction. ↩3. Certification of financial statement by Peat, Marwick, Mitchell & Co. "subject to the continued availability of current borrowing on Demand Notes or the ability of the Company to obtain permanent financing of such indebtedness." ↩5. Certain items in the 1972 certified financial statement were "reclassified to conform with the 1973 presentation" of the balance sheet in the 1973 Annual Report to stockholders. In 1972 lawsuits were filed against the Company alleging violations of the Minnesota Pollution Control Agency (MPCA) seeking injunctive relief and compensation for damages of $1,000,000 together with punitive damages. The Company estimated $1-2 million costs will be required over a period of years to comply with present standards.↩1. Source: Certified financial statements prepared by Peat, Marwick, Mitchell & Co. ↩2. estated is the Company's 1968 Annual Report as $5,168,548 Demand Notes payable to construction company and $4,753,804 Current maturities of long term debt.↩3. Refelcts Plan of Recapitalization under which $4,203,779 Construction Notes hold by IDI Management Inc., $806,990 Convertible Debentures, $2,000,000 Preferred Stock and $434,940 accrued interest was exchanged for a total of 6,153,347 Common Shares and $7,445,709 contributed to capital. ↩4. Sowly created Comvertible Proferred Stock issued in payment of notes payable to banks and a construction company $1,735,931, prepaid interest to 6/30/72 on notes payable to banks $544,100, purchase obligation $500,000 and $900,000 Demand Note payable to construction company. ↩5. Reflects issuance of Convertable Preferred Stock in payment of interest of $646,300 in 1972 and $669,000 in 1973.↩4. The following summarizes the unaudited balance sheets as of December 31, 1968 and 1969: Assets12/31/68 Does not reflect $2,081,718 loss on closing ammonia plant during the second fiscal quarter.1↩12/31/69Current assets$ 5,034,280$ 3,711,797Net plant and equipment11,035,0829,476,440Other assets200,546Intangible assets97,959185,390Total assets$16,167,321$13,574,173LiabilitiesCurrent liabilities$14,387,760$18,084,984Long term debt1,577,719739,500Stockholders equity (deficit)201,842(5,250,311)Total liabilities$16,167,321$13,574,1731. Source: Certified financial statements prepared by Peat, Marwick, Mitchell & Co. ↩2. Reflects effect of Plan of Recapitalization approved by stockholders under which $806,990 Convertible Debentures, $4,203,779 Construction Notes due IDI Management, and $434,940 accrued interest was exchanged for common stock of the Company. ↩3. Reflects issuance of $3,679,000 Preferred stock in payment of obligations and accrued interest including $900,000 demand Note payable to IDI Management.↩5. See footnote 3,supra↩.1. Source: Audited financial statements prepared by Peat Marwick, Mitchell & Co.↩1. Source: Audited financial statements prepared by Peat, Marwick, Mitchell & Co. ↩2. Reflects treatment of lease of plant facilities from Oklahoma Ordnance Works Authority as a purchase. ↩3. Reflects cancellation by parent of $364,000 Notes Payable to it, and treated as contribution to paid-in capital. ↩6. On January 17, 1973 a fire and explosion caused substantial damage to plant facilities. As a result, portions of the facilities were inoperative for a period of time during 1973.↩4. Reflects issuance of 60,000 shares of common stock to IDI Management, Inc. in satisfaction of $3,000,000 indebtedness. ↩5. Reflects charge to paid-in capital of accumulated deficit as of July 1, 1970 of $2,209,268. ↩1. Exclusive of extraordinary items (insurance recovery and income tax reduction due to net operating loss carry forward).↩6. The following summarizes the unaudited balance sheets as of December 31, 1968 and December 31, 1969: ↩Assets12/31/6812/31/69Current assets$ 1,625,967$ 1,934,743Net plant and equipment10,296,5209,575,945Intangible assets171,007192,212Total assets$12,093,494$11,702,900LiabilitiesCurrent liabilities$ 2,384,897$ 3,245,529Long term debt10,000,0009,106,903Net equity deficit (loss)(291,403)(649,532)Total liabilities$12,093,494$11,702,9005. Source: Certified financial statements prepared by Peat, Marwick, Mitchell & Co.↩1. Capitalized lease obligation collateralizing bank loan ↩4. Includes $88,512 other notes ↩3. Extraordinary items ↩2. Reflects issuance of 60,000 shares of Cherokee common stock in satisfaction of $3,000,000 obligations owing IDI Management Consists of: Series A Industrial Development Revenue Bonds $4,500,000 Series B Industrial Development Revenue Bonds 1,000,000 ↩7. ↩ObligationFace ValueSt. Paul Construction Notes$4,596,202.41O.O.W.A. Bonds4,500,000.00Cherokee Account Receivable4,000,000.00Total$13,096,202.41Less Write-Down6,220,000.00Income Reported$ 6,876,202.418. The aggregate fair market values of such obligations as of December 31, 1968, has now been stipulated at $7,100,000 (p. 13, supra↩). 9. The deduction for worthlessness represented the decline in estimated fair market value as follows: Difference Between Face Valueand IDI's Estimate of 12/31/69ItemFair Market ValueCherokee account receivable$1,500,000.00($4,000,000.)St. Paul construction and5,061,741.26promissory notes($4,596,202.41 and$507,576.64)Accrued interest due from St. Paul244,536.18($244,536.18)St. Paul account receivable266,690.51($266,690.51)Total$7,072,967.95Less 1968 Write-offExcluded from Income(6,220,000.00)Claimed Partial Bad$ 852,967.95Debt Deduction for 1969The fair market value of these obligations on December 31, 1969 has now been stipulated as noted on p. 13, supra↩.10. In its 1968 return, petitioner accrued as income only amounts representing the estimated fair market values of the obligations in question. In his notice of deficiency, respondent challenged those amounts on the ground that petitioner failed to establish that the fair market values of the obligations were less than their face values. The parties have since stipulated the fair market values of the obligations as of the close of 1968 and they are substantially below their face values. (See p. 13, supra.↩) By amendment to his answer to the amended petition, respondent alleged that, under the completed contract method of accounting the obligations were includible in petitioner's income in their "full face amount" rather than their fair market values.11. The partial bad debt deduction for 1968 is raised by petitioner as an alternative to its position that it need not accrue the face values of the obligations as income for such year.↩12. See also Steele v. Commissioner,T.C. Memo. 1969-177, which adopts the phrase "uncertain because * * * collectibility was in doubt"; American Electric Co., Ltd. v. Commissioner,T.C. Memo. 1966-76 ("reasonable uncertainty"). Cf. Jones Lumber Co. v. Commissioner,404 F.2d 764">404 F.2d 764, 766 (6th Cir. 1968), affg. T.C. Memo. 1967-81 ("reasonable doubt as to its collectibility" and "doubtful collectibility") Harmont Plaza, Inc. v. Commissioner,64 T.C. 632">64 T.C. 632, 651 (1975), affd. by order 549 F.2d 414">549 F.2d 414↩ (6th Cir. 1977) ("doubtful collectibility"). 13. Unless otherwise stated all section references are to the Internal Revenue Code of 1954, as amended and in effect during the taxable years in issue.↩14. Neither party asks us to decide whether the time for determining reasonable uncertainty should be the date of the receipt of such obligations by petitioner rather than the end of its fiscal year. Under the circumstances herein, we doubt that our conclusion would differ if the former date were used.↩14. Petitioner's argument that the only difference in tax treatment of an item by an accrual basis, as contrasted with a cash basis, taxpayer is timing and not substantive tax treatment is an oversimplified generalization.For example, an accrual basis taxpayer reports an account receivable when it accrues, and his right to a deduction, when he receives a lesser amount in payment in a later year, is subject to his ability to prove that the amount sought to be deducted is worthless. On the other hand, a cash basis taxpayer reports only the amount which is in fact paid in a later year and is never put to the proof required for a deduction.↩15. This inquiry may be akin to but not necessarily the same as in evaluating a partially worthless bad debt. See Corn Exchange Bank v. United States,37 F.2d 34">37 F.2d 34, 35 (2nd Cir. 1930). See also footnote 11, supra↩.16. As of December 31, 1968, total assets exceeded total liabilities by a scant $201,842. Fixed assets were carried at a cost less depreciation in the amount of $11,035,082.We have no specific evidence of the fair market value of such assets. Because of general industry conditions, and the inability of St. Paul's production facilities to operate profitably in the face of competition from newer facilities, it is not unreasonable to infer that book value exceeded fair market value by an amount at least equal to $201,842 plus the $2,596,202.41 that petitioner claims is uncertain as to payment in respect of the St. Paul obligations (face less fair market value). See p. 56, infra,↩ concerning evidence of December 31, 1969, liquidation values of St. Paul's fixed assets.17. Such insolvency is reflected in Cherokee's balance sheet as of December 31, 1968. Respondent offered no evidence that the balance sheet figures did not reflect an actual excess of liabilities over the fair market value of Cherokee's assets. Indeed we think it fair to infer, as we did in the case of St. Paul, that such was actually the case.↩18. Indeed, St. Paul's earlier attempts to finance the construction of facilities by petitioner had been unsuccessful even before its rather pronounced financial descent. The unavailability of such financing triggered the need for petitioner to accept stock and notes under the 1967 settlement agreement.↩19. An adjustment to income is necessary to reflect the fair market values as stipulated by the parties.↩20. Petitioner also argued conditionally for an additional partial bad debt deduction in respect of Cherokee's obligation to the extent that its basis therein exceeded the December 31, 1969 fair market value. Because of our determination for 1968 that petitioner may report only the fair market value of the obligation in issue as income, petitioner need only report $2,500,000 of the $4,000,000 Cherokee account receivable as income in that year. The maximum write-off claimed by petitioner for this receivable for both 1968 and 1969 is $1,500,000. Hence, no bad debt issue remains for 1969 in respect of the Cherokee obligation.↩21. Although not clearly indicated in the record, we infer that the promissory notes, account receivable, and interest were taken into income by petitioner during or before its 1969 taxable year. See section 1.166-1(e), Income Tax Regs.↩ In this connection, we note that respondent has not argued that these amounts were not so reported.22. This amount represents the sum of $4,596,202.41 and $507,576.64, or $5,103,779.05 less $42,037.79 representing petitioner's valuation of the shares of St. Paul stock which it would receive if the plan of recapitalization was consummated. The last figure has now been stipulated at $840,775.80, and the $900,000 construction note, which petitioner determined to be valueless at the time of the charge-off, has now been stipulated at $360,000.↩23. Section 166(a)(2), as in effect for the taxable year in question, provides: 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.↩24. See also Harrington v. Commissioner,T.C. Memo. 1972-181↩.24. Petitioner is entitled to deduct an amount calculated as follows: Face Value of St. Paul Obligations =$4,596,202.41266,690.57244,536.18$5,107,429.16Amount Reported as Income (see footnote 21, supra↩)$2,000,000.00(construction notes)507,576.64(promissory notes)266,690.57(account receivable)244,536.18(interest)$3,018,803.39Less 12/31/69 Fair Market Value$1,200,755.80(construction and promissory notes)106,676.23(account receivable)97,814.47(interest)($1,405,246.50)Partial Bad Debt Deduction =$1,613,556.8925. Section 368(a)(1)(E) provides: (a) Reorganization.-- (1) In general.--For purposes of parts I and II and this part, the term "reorganization" means- * * * (E) a recapitalization * * * ↩26. Section 354(a) provides: (a) General Rule.-- (1) In general.--No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation * * *.↩27. This Court's original position in Mitchell was that a charge-off of a partially worthless debt followed by a sale of the debt to a third party within one taxable year triggered only capital loss on the sale and no bad debt deduction. The court of appeals reversed and stated that if two such separate events occur within one taxable year, the partial bad debt deduction need not be denied. The opinion of the court of appeals has met with subsequent acceptance by this Court. See Levine v. Commissioner,31 T.C. 1121">31 T.C. 1121, 1125↩ (1959). 28. Cf. Ardela, Inc. v. Commissioner,T.C. Memo. 1969-83↩.29. As a result of our decision that the petitioner was entitled to a partially worthless bad debt deduction, separate and apart from the recapitalization, its basis in the obligations of St. Paul surrendered in the February 1970 exchange was reduced to the point where no gain or loss would be realized on the exchange, whether taxable or nontaxable.↩30. Petitioner actually accepted 50,000 shares of Cherokee stock and O.O.W.A. bonds in partial ($3,500,000) settlement of the account receivable on or about April 15, 1971, and accepted an additional 10,000 shares of Cherokee stock on or about July 30, 1971, in settlement of the remaining balance ($500,000). ↩31. We recognize that our conclusion differs from that which we reached in respect of the worthlessness of the St. Paul obligations in 1969 (as to which petitioner also had the burden of proof). Such difference merely reflects diverse elements which must be taken into account in a case such as this and evaluated by a trial court. Compare pp. 55-58, supra, where we were able to find partial worthlessness in light of detailed independent appraisals of the debts disputed therein, threatened foreclosure by senior creditors, balance sheets reflecting insolvency at the relevant time estimates of value for assets carried on such balance sheets, etc. See and compare pp. 47-48, supra,↩ where the record did not permit us to find that respondent carried his burden of proving that the collectibility of certain obligations at the end of 1968 was not uncertain.32. To be sure, respondent did not specifically argue the applicability of section 351, but his contribution to capital argument can be construed as encompassing this issue. Moreoever, the respondent's failure to advance a particular legal theory does not preclude our application of such theory to resolve an issue in his favor. See Smith v. Commissioner,56 T.C. 263">56 T.C. 263, 291↩ and n.17 (1971) and cases cited therein.33. The reason for eliminating stock issued for services from section 351 was to prevent compensation for services from escaping taxation upon receipt. See H. Rept. No. 1337 to accompany H.R. 8300, 83d Cong., 2d Sess., A117 (1954).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624269/	Estate of L. J. Burda, Louise Burda, Independent Executrix v. Commissioner.Estate of Burda v. CommissionerDocket No. 112690.United States Tax Court1943 Tax Ct. Memo LEXIS 189; 2 T.C.M. (CCH) 497; T.C.M. (RIA) 43350; July 21, 1943189 E. H. Suhr, Esq., 2201 Second Nat'l Bank Bldg., Houston, Tex., for the petitioner. Frank B. Schlosser, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: Respondent determined a deficiency in estate taxes in the amount of $8,771.71. The basis of this determination, the correctness of which is the sole issue raised here, is the fair market value of shares of stock in the Maintenance Engineering Corporation of Houston, Texas, as determined by the respondent. The proceeding was submitted on a stipulation of facts, exhibits, and oral testimony. The stipulated facts are found as stipulated. Hereinafter follows a resume of the pertinent facts which, in so far as they do not appear in the stipulation, are found from the testimony. Findings of Fact Petitioner is the duly qualified and acting Independent Executrix of the Estate of L. J. Burda, who died testate on January 14, 1942 while a resident of Houston, Texas. A timely estate tax return was filed with the collector of internal revenue for the first district of Texas at Austin, Texas. At the time of his death, L. J. Burda was the owner of an undivided one-half interest in 7,975 shares of Class A 190 voting stock and 7,975 shares of Class B non-voting stock of Maintenance Engineering Corporation. In his estate tax return such stock was valued at $3 per share. The respondent increased this valuation to $10 per share, and determined a deficiency in the sum of $8,771.71 against the estate. Maintenance Engineering Corporation was organized on April 1, 1924, with a capitalization of $5,000. The business in which the corporation is engaged, buying and selling steel products, principally oil field supplies, is highly competitive. On January 14, 1942, Maintenance Engineering Corporation, a Texas corporation, had a total capitalization of 120,000 shares, each share having a par value of $1. It was divided into 60,000 shares Class A stock having voting rights, and 60,000 shares Class B stock having no voting rights. The following is a balance sheet taken from the books of the Maintenance Engineering Corporation as of December 31, 1941, the date nearest the date of death, and on which the assets are stated at their correct and fair market values: AssetsCash$79,778.80Notes Receivable1,776.12Accounts Receivable88,369.39Inventory186,587.80Securities68,957.83Warrants Receivable3,409.66U.S. Treas. Notes41,200.00Deferred Charges1,309.95Autos12,708.03Delivery Equipment1,303.47Furniture & Fixtures4,770.35Machinery & Equipment8,897.90Land16,300.00Buildings37,453.64Spur Track1,327.02Shelving & Laboratory429.47$554,579.43Liabilities and CapitalAccounts payable$ 47,154.81Federal & other taxes111,648.60Common stock outstanding(120,000 shares)120,000.00Surplus275,776.02Total$554,579.43191 Maintenance Engineering Corporation had a net worth of $395,776.02 on December 31, 1941. From January 1, 1937 to December 31, 1942, Maintenance Engineering Corporation paid the following dividends: For 1937$120,000 or $1.00 per shareFor 193848,000 or.40 per shareFor 193938,400 or.32 per shareFor 194076,800 or.64 per shareFor 194148,000 or.40 per shareFor 194248,000 or.40 per shareC. E. Naylor, who is 52 years of age, is president and manager of the corporation. His title first was chairman of the board but that title was later abolished. He has served in the same capacities since the corporation was organized in 1924. Although at the date of death of decedent the Maintenance Engineering Corporation had some 30 or 40 employees, 6 or 7 of whom were salesmen on the road, the business of the company with the large majority of the business houses for which the company was an outlet and those to whom it distributed was the result of the prior and continuing contacts of C. E. Naylor. C. E. Naylor and his wife, Marie B. Naylor, owned, on January 14, 1942, 31,250 shares of Class A stock of the corporation, being 52.08 per cent of the voting stock. C. E. Naylor192 has voted the stock he and his wife own in the corporation for at least 15 years. Neither stock was listed on any Exchange. From April 25, 1941 to November 7, 1941, C. E. Naylor sold 3,650 shares of Class B stock of the corporation. Of these, 2,050 shares were sold at $4 per share, and 600 shares were sold at $3.80 per share. From February 21, 1942 to February 24, 1942 there were sold 1,500 shares of Class B stock of the corporation for $3 per share. Between September 1, 1942 and March 30, 1943, there were sold 1,900 shares of Class B stock. Of these, 1,500 shares were sold $3at per share, 100 shares were sold at $3.80 per share, and 300 shares were sold at $4 per share. From September 1, 1942 to September 5, 1942, there were sold 150 shares of Class A stock at $4 per share. All of these sales and purchases were voluntary. These sales totaled 28 in number, in 6 of which neither the buyer nor the seller was connected with the company. In two others, the purchaser was not so connected and in 7 others the seller was not connected with the company. In such of these sales as occurred by employees when they left the employment of the company and they resold their stock to officers193 or other employees, the price at which it was sold was the same at which they purchased it. The following statement shows, with respect to the Maintenance Engineering Corporation, its invested capital as of the beginning of the year, the net earnings after the deduction of Federal income taxes, and the dividends paid for each of the years 1937 to 1941, inclusive: EarningsafterDeduction ofInvestedFederalDividendsYearCapitalTaxesPaid1937$134,957.18$147,792.62$120,0001938162,749.8089,166.4448,0001939203,844.4185,885.9738,4001940252,755.38122,676.8376,8001941302,075.93141,700.0948,000The fair market value of the 7,975 shares of Class B non-voting stock of Maintenance Engineering Corporation and the 7,975 shares of Class A voting stock of Maintenance Engineering Corporation was $5 per share at the date of decedent's death and the value of the decedent's community interest therein at that date was $39,875. Opinion In the estate tax return all the stock, without regard to class, with the value of the decedent's community interest in which we are here concerned, was valued at $3 per share, as of the date of194 decedent's death. Respondent, in determining the deficiency, increased this value to $10 per share, without distinguishing the classes to which it belonged. There is no attempt here by either party to differentiate the valuation of the two classes of stock involved, so we accept them as equal in fair market value. The respondent concedes on brief that the basis of his determination of value was as follows: "Respondent determined a value of $10.00 per share by capitalizing at 10% the average net earnings of the corporation over the five year period 1937 to 1941, inclusive." We think that was an insufficient basis, without more, to support the finding of value upon which respondent supports the contested deficiency. As we said in : The Board is in no position to "find that the value should be computed on the basis of average net income," for the question of fair market value is ever one of fact and not of formula. Net earnings are important, but they are only one of the many factors upon which value of shares may be considered, and the significance to be given to such figures depends upon the evidence of all the 195 circumstances in which they are found. Cf. James Couzens, supra, (at 1170). Without knowledge of the setting in which the earnings appear, they lack substantial evidentiary force from which a useful inference of fair market value can be drawn. Furthermore, it would be entirely unwarranted for the Board, without evidence supporting it, to select a multiple of average earnings as the basis for a finding of fair market value. It is true that we sustained the fair market value determined by the respondent in that case but we did so only because * * The evidence does not contain data upon which a finding can be made that the fair market value of the shares was less than the $35 a share which the Commissioner has determined. That value must be adopted, not because of the stipulated formula of ten times average earnings, but because there is no adequate evidence proving it to be incorrect or another figure to be correct. On appeal the First Circuit, in effect, affirmed the Board's holding that the question of fair market value is always one of fact and never one of formula, but reversed the Board in its conclusion that the stock was worth $35 per share196 on the critical date. . The case here is much stronger for the petitioner than was that in the cited case. It is true that Maintenance Engineering Corporation, apparently from its inception, had been highly successful and prosperous; that its dividend policy had been consistently liberal; and that as of December 31, 1941, just two weeks before decedent's death, its balance sheet showed an excellent financial condition. On the other hand, its business was highly competitive. Its success was largely due, apparently, to the efforts of C. E. Naylor who, together with his wife, controlled the company. The book value of the stock was $3.40 per share as of January 31, 1942, two weeks before decedent's death. The stock was unlisted even locally. A substantial number of shares of both classes of stock were sold, however, between April 25, 1941 and September 5, 1942, at prices varying from a low of $3 per share to a high of $4 per share. No authority need be cited for the rule that bona fide sales and purchases are, under ordinary circumstances, entitled to great weight in the determination197 of fair market value. It may be admitted that a large part of this stock was sold or resold to employees for the purpose of keeping them interested in the business, but even so the sales were voluntary and can not therefore be deprived of all the weight to which they would otherwise be entitled. Moreover, petitioner introduced the testimony of two witnesses, each of whom expressed an opinion on the fair market value of this stock on the critical date. Respondent admitted the qualifications of one of these witnesses. That witness fixed the value of the stock in dispute at $5 per share as of the date of decedent's death. His reasons supporting that valuation were, in the main, sound in our judgment. Respondent neither discredited him on cross-examination nor did he introduce the testimony of any witness on his part. See . Thus, giving effect to the fact that some of the sales and purchases of Maintenance Engineering Corporation stock listed in our findings of fact were colored, to some extent, by a desire on the part of the seller to maintain the interest of the purchaser in the business of that company, we think, and have so*198 found, that the stock, the value of the community interest of the decedent which is in issue, was worth $5 per share on the critical date. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624273/	JAMES J. DAGON and MARY P. DAGON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDagon v. CommissionerDocket No. 20643-82.United States Tax CourtT.C. Memo 1984-138; 1984 Tax Ct. Memo LEXIS 537; 47 T.C.M. (CCH) 1326; T.C.M. (RIA) 84138; March 20, 1984. Jack M. Battaglia and Thomas M. DiPiazza, Jr., for the petitioners. Barry J. Finkelstein, for the respondent. FAYMEMORANDUM FINDINGS OF FACT AND OPINION FAY, Judge:538 Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows: Sec. 6653(b) 1YearDeficiencyAddition to Tax1973$2,286.16$1,143.0819741,646.23823.1219754,090.422,045.2119766,358.803,179.40The issues are (1) whether petitioners are liable for the additions to tax for fraud under section 6653(b), and (2) whether the statute of limitations bars the assessment of the deficiencies. FINDINGS OF FACT Some of the facts are stipulated and found accordingly. Petitioners, James J. Dagon and Mary P. Dagon, resided in Hornell, New York, when the petition was filed herein. Petitioners were married in 1950 and have seven children. Mr. Dagon has worked at the Dagon Funeral Home (herein the funeral home) since he graduated from the Renauard School of Embalming in New York City in 1949. Mrs. Dagon was employed as a school nurse by the Hornell Central School District during the years in issue. 539 The funeral home was started by Mr. Dagon's grandfather in 1884 and was subsequently operated by his father until 1947. From 1947 until 1949, Mr. Dagon's mother operated the funeral home with the assistance of a state licensed manager. Although Mr. Dagon took charge of the funeral home in 1949, his mother remained involved in the business throughout the years in issue. Mr. Dagon personally maintained the books and records of the funeral home consisting of a national funeral register (herein the register), a cash receipts and disbursements journal (herein sometimes referred to as the journal), and a checking account at the Steuban Trust Company (herein the business checking account). Mr. Dagon maintained the register on a regular basis only because he believed it was necessary in order to retain his operating license. He kept a separate page in the register for each funeral and recorded on each page, among other information, the funeral charges, the amount billed, and the customer's payment record. When the funeral home received payments, Mr. Dagon entered the amount on the appropriate page in the register. Often Mr. Dagon or his mother would place the money under a rug540 in Mr. Dagon's office before depositing the payments into the business checking account. When the deposits were finally made, Mr. Dagon recorded the amount, date, and name of the deceased on the check stubs. In addition, whenever a funeral expense was paid, Mr. Dagon recorded similar information on the check stubs pertaining to that expense. Since the check stubs contained a record of the funeral home's income and expenses, Mr. Dagon used them to prepare the funeral home's cash and disbursements journal. 2Petitioner's 1973 return was prepared by an attorney who used summary sheets Mr. Dagon prepared on the basis of the information contained in the journal. Petitioners' 1973 amended return and 1974 return were prepared by a certified public accountant who also used summary sheets prepared by Mr. Dagon. Both the attorney and the accountant knew that Mr. Dagon maintained the journal, the register, and check stubs, but never asked to see those records in order to verify the accuracy of petitioners' returns. Petitioners hired another accountant to prepare their 1975 and 1976 returns. Although this accountant used541 the journal in connection with his preparation of the returns, he too failed to examine the register and check stubs even though he knew Mr. Dagon used the check stubs to prepare the journal. In 1977 Mr. Dagon was informed by a special agent of the Internal Revenue Service that he was being investigated for possible criminal violations of the Internal Revenue Code. The criminal investigation continued for approximately nine months during which time the special agent met with Mr. Dagon on several occasions. Mr. Dagon gave the special agent all of the funeral home's books and records, explained the procedures he followed in preparing those records, informed the special agent that he maintained a safe deposit box and allowed him to inspect it, and provided the special agent complete access to his personal banking records. Mr. Dagon never attempted to mislead or deceive the special agent during their meetings, nor did he alter or destroy any of the funeral home's records. In fact, respondent was able to determine the amount of petitioners' omitted income for each of the years in issue on the basis of the records Mr. Dagon gave to the special agent. On their returns for the years542 in issue petitioners omitted gross receipts of the funeral home as follows: 3YearReceipts Omitted1973$9,366.8319742,788.19197513,864.00197620,380.92The amount of gross receipts omitted each year fell into the following three categories: (1) the difference between the receipts recorded in the journal and the receipts reported on the tax returns; (2) the receipts deposited in the checking account but not recorded in the journal; and (3) the receipts which were neither deposited in the checking account nor recorded in the journal. 4 In his notice of deficiency, respondent determined that petitioners fraudulently understated their incomes for each of the years at issue. Petitioners concede that they understated their income, but deny that the understatements were due to fraud. 543 OPINION The first issue is whether petitioners are liable for additions to tax for fraud under section 6653(b). Section 6653(b) provides for a 50 percent addition to tax if any part of the underpayment of a tax required to be shown on a return is due to fraud. For purposes of section 6653(b), fraud is an intentional wrongdoing with the specific intent to evade a tax believed to be owed. , affd. ; , cert. denied . The existence of fraud is a question of fact to be determined from the entire record. . The burden of proof is on respondent to prove fraud by clear and convincing evidence.Sec. 7454(a); Rule 142(b). Because direct proof of fraudulent intent is seldom possible, respondent may show the requisite intent from the conduct of the taxpayer and the surrounding circumstances. However, fraud is never imputed or presumed and courts544 should not sustain findings of fraud upon circumstances which at most create only suspicion. . In the instant case, respondent asserts that several factors establish by clear and convincing evidence that petitioners' returns for the years 1973, 1974, 1975, and 1976 were fraudulent. Specifically, respondent asserts that (1) petitioners made substantial omissions of income, (2) petitioners intentionally omitted income because they were faced with financial difficulties, and (3) Mr. Dagon misled the special agent during their meetings. For the following reasons, we hold that respondent has not met his burden of proving that any part of the underpayment during any of the years at issue was due to fraud. Substantial omissions of income alone are not enough to prove fraud. ; . Although petitioners omitted substantial amounts of income, we find these omissions resulted from Mr. Dagon's carelessness in keeping the funeral home's records rather than from any desire to evade taxes. In an effort545 to show that the omissions were intentional, respondent asserts that petitioners were faced with financial difficulties during the years in issue. However, even if the record indicated that financial problems existed, and we are not sure that it does, there is no showing that petitioners were thereby motivated to omit income. Mr. Dagon clearly did not conceal any of the funeral home's records from his tax return preparers. Although his return preparers either used summary sheets or the journal, they were aware of the existence of all the other records. Moreover, we think it is significant that not only on the basis of these records was income omitted, but also deductions which petitioners were entitled to were not taken. We also find that during all of their meetings Mr. Dagon cooperated completely with the special agent. He gave the special agent the register, journal, and check stubs for all the years in issue and explained how each record was maintained. Mr. Dagon never altered or destroyed any records nor did he mislead or deceive the special agent. Based on the records he made available to the special agent, respondent was able to determine the amount of petitioners' omitted546 income for all the years in issue. Thus, there has been no showing that Mr. Dagon ever intended to mislead the respondent. See . Finally, we do not find the presence of any of the typical hallmarks of fraud. There is no evidence of misrepresentation of facts, concealment, artifice, or device to hide income on the part of petitioners. Petitioners' transactions were out in the open and anyone could, without much effort, determine their income simply by analyzing the funeral home's records. Such circumstances do not indicate a willful effort to underreport income and evade tax. Thus, we conclude that respondent has not established by clear and convincing evidence that any part of petitioners' underpayment of taxes for the years in issue was due to fraud. Accordingly, we find that petitioners are not liable for the additions to tax for fraud under section 6653(b). The second issue is whether the statute of limitations bars the assessment of the deficiencies for the years in issue. Respondent argues that the statute of limitations is open because part of petitioners' underpayment of taxes for each of547 the years in issue was due to fraud.Sec. 6501(c). Since we have found that no part of petitioners' underpayment was due to fraud, we find that the statute of limitations bars the assessment of the deficiencies for all of the years in issue because the notice of deficiency was mailed more than three years after petitioners' returns were filed. 5 Sec. 6501(a). To reflect the foregoing, Decision will be entered for petitioners.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The funeral home used the cash basis method of accounting.↩3. The amounts of gross receipts reported on petitioners' tax returns for the years in issue were as follows: ↩YearReceipts Reported1973$73,822.54197479,282.08197588,655.331976101,164.004. ↩1973197419751976(1) The difference between$685.03$979.69$280.00$1.80the receipts recorded inthe journal and the receiptsreported on the tax returns(2) The receipts deposited4,591.00593.505,316.0018.077.92in thechecking account but not re-corded in the journal(3) The receipts which were4,090.801,215.008,268.002,301.20neither deposited in thechecking account nor re-corded in the journalTotal Amount of$9,366.83$2,788.19$13,864.00$20,380.92Receipts Omitted5. We note that the six-year statute of limitations under sec. 6501(e)(1)(A) may have been applicable herein. However, since respondent, who has the burden of proving that petitioners omitted from gross income an amount in excess of 25 percent of the amounts stated, did not plead nor argue this on brief, we need not address it herein. See , affd. without discussion on the point .↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624274/	Arthur E. and Glenda Brauer, Petitioners v. Commissioner of Internal Revenue, RespondentBrauer v. CommissionerDocket No. 2825-78United States Tax Court74 T.C. 1134; 1980 U.S. Tax Ct. LEXIS 73; September 3, 1980, Filed 73 Decision will be entered under Rule 155. P entered into a contract to sell his farm in St. Charles County, Mo., to M for cash. M intended to exchange the St. Charles farm for a 10-acre tract owned by T, who was interested in the St. Charles farm. Before the transaction was consumated, P decided he wanted to exchange the St. Charles farm for Gasconade farm, a "like-kind" property, owned by F. M agreed to acquire Gasconade and trade it, plus cash, to P in exchange for St. Charles farm. Due to unforseen circumstances, the transaction could not be completed as planned. M acquired a contract to purchase Gasconade, which it transferred to P along with prearranged cash boot. F conveyed Gasconade directly to P. P conveyed St. Charles farm to M. M then conveyed St. Charles farm to T and received in exchange a deed for the 10-acre tract plus cash. The cash was disbursed by the escrow agent to pay for the Gasconade property, to pay P's boot, and to pay cost. Held, the transaction qualified as an exchange of St. Charles farm for like-kind property under sec. 1031, I.R.C. 1954, and P was required to recognize as gain only the cash boot he received. John E. Russell, for the petitioners.David 74 J. Duez, for the respondent. Drennen, Judge. DRENNEN1134 Respondent determined a deficiency of $ 19,385 in petitioners' income tax for the taxable year ended December 31, 1974.Due to concessions, the only issue for decision is whether petitioners' transfer of their interest in a 239-acre farm and acquisition of a 645-acre farm constituted an exchange which qualifies for nonrecognition of gain, except to the extent of boot, under section 1031, I.R.C. 1954. 1FINDINGS OF FACTSome of the facts were stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.Petitioners Arthur E. Brauer and Glenda Brauer (hereinafter petitioners), husband and wife, resided in St. Louis, Mo., when 1135 they filed their petition in this case. They filed a joint Federal income tax return for 1974 with the Internal Revenue Service Center, Kansas City, Mo.In 1968, petitioners purchased, as tenants by the entirety, 239 acres of farmland located in St. Charles County, Mo. (hereinafter St. 75 Charles farm).On February 22, 1974, petitioners entered into a 6-month exclusive-listing agreement with Stealey Building & Realty Co. (hereinafter Stealey Realty) for the sale of the St. Charles farm at a total purchase price of $ 298,750 ($ 1,250 per acre). In the event the property was sold, Stealey Realty was to receive a 6-percent commission.Stealey Realty located a group of individuals, Henry Tochtrop, Walter Tochtrop, and Geraldine Kerkemeyer (hereinafter Tochtrop group), who were interested in acquiring the St. Charles farm. The Tochtrop group owned a commercially zoned 10-acre tract which it wanted to exchange for petitioners' farm. Milor Realty Co. of St. Louis (hereinafter Milor Realty) was interested in acquiring the 10-acre tract owned by the Tochtrop group. Petitioner had no interest in acquiring this 10-acre tract. The Tochtrop group and Milor Realty, therefore, executed a contract under which the Tochtrop group agreed to transfer its 10-acre tract, plus cash, to Milor Realty in exchange for the St. Charles farm, which Milor Realty agreed to acquire from petitioners. On March 15, 1974, petitioners entered into an unconditional contract to sell the St. Charles farm 76 to Milor Realty for the price of $ 298,750, payable $ 5,000 as an earnest deposit, $ 248,900 in cash at closing, and by Milor Realty's assumption of a $ 44,850 deed of trust on the property. Closing was set for May 8, 1974. The contract specified that a commission of $ 15,425 was to be paid to Stealey Realty, and one of $ 2,500 was to be paid to Sandfam Corp. (a corporation owned by an agent of Milor Realty). This contract was expressly approved by the Tochtrop group.The earnest money deposit of $ 5,000 was paid by Milor Realty to Stealey Realty and was deposited by the latter corporation in an escrow account.Subsequent to March 15, 1974, petitioner Arthur E. Brauer (hereinafter Brauer) decided that, due to the capital gains tax consequences which would result from the sale of the St. Charles 1136 farm, he wanted to acquire another tract of land, in a nontaxable exchange, for the St. Charles farm.Brauer was familiar with a 645-acre farm in Gasconade County, Mo. (hereinafter Gasconade farm), owned by Chester B. Franz, Inc. (hereinafter Franz). Prior to March 15, 1974, Brauer was under the impression that this property was not available for acquisition. Shortly after March 15, 1974, 77 when he learned that the Gasconade farm was available at a cost of approximately $ 300 per acre, Brauer decided to acquire the property.After he learned that the Gasconade farm was available, Brauer met with representatives of Stealey Realty concerning the possibility of an exchange 2 of the St. Charles farm for the Gasconade farm. Brauer was informed that an exchange was possible, although it would cost an additional $ 6,000 in commissions for Stealey Realty and Milor Realty. Brauer agreed to pay this sum.Stealey Realty thereafter entered into discussions concerning an exchange of the two farm properties with an officer of Milor Realty and with N. B. Sandbothe, who was both an agent of Milor Realty and president of Sandfam Corp. Following these discussions, Stealey Realty, Milor Realty, Mr. Sandbothe, and Brauer orally agreed to have Milor Realty acquire the Gasconade farm and exchange it with petitioners for the St. Charles farm. It was also agreed that the additional $ 6,000 commission to be 78 paid by Brauer would, after the payment of attorney's fees, be evenly split between Stealey Realty and Mr. Sandbothe.On May 30, 1974, William Oney (hereinafter Oney), an employee of Stealey Realty, and Franz executed a real estate contract for the purchase and sale of the Gasconade farm. The contract provided for a purchase price of $ 193,572, payable $ 2,000 as earnest money upon execution of the contract, with the balance due upon delivery of the deed. The contract specified that the buyer was "William Oney or assignee" and that closing was to take place on or before June 14, 1974. The contract also provided:This sale contingent on the trade of the Braur [sic] farm in St. Charles CountyMissouri with Milnor [sic] Realty Corporation.1137 To be deed as directed by buyer.This purchase is made with the understanding of the parties that this farm will be traded to * * * [petitioners] by buyer. The $ 2,000 in earnest money was paid by Stealey Realty from the $ 5,000 escrow fund which had been established following Milor Realty's payment of earnest money under the contract of March 15, 1974, for the purchase of the St. Charles farm.Oney, rather than Milor Realty or one of its employees, entered 79 into the contract for the purchase of the Gasconade farm because, during the time period concerned, the Milor Realty officer originally involved in this transaction died and no other officer or employee of Milor Realty was sufficiently familiar with the transaction so that Milor Realty was willing to execute the contract. Due to these circumstances, it was decided that Oney would execute the real estate contract in order to keep the transaction on track. It was still intended, however, that Milor Realty would receive the warranty deed on the Gasconade farm. This was to be accomplished by Oney's assignment of the contract to Milor Realty, with Milor Realty then purchasing the farm.Closing for the transfer of each of the properties involved, namely, the St. Charles farm, the Gasconade farm, and the 10 acres owned by the Tochtrop group, was scheduled for June 13, 1974.At some point prior to the date set for closing, it was discovered during a title search on Gasconade farm that a dispute existed concerning the boundaries of the property. The boundary dispute was not resolved prior to the closing date. Because of this dispute, Milor Realty indicated that it did not want to take title 80 to, nor give a warranty deed on, Gasconade farm.On June 13, 1974, as part of the closing of the various transfers, Oney assigned by written instrument his interest in the May 30, 1974, contract to Milor Realty. Thereafter, on the same date, Milor Realty assigned by written instrument its interest in that contract to petitioners.At the same time petitioners received the assignment from 1138 Milor Realty: (a) Petitioners received a general warranty deed on the Gasconade farm from Franz; 3 (b) petitioners conveyed the St. Charles farm by general warranty deed to Milor Realty; and (c) Milor Realty conveyed the St. Charles farm by general warranty deed to the Tochtrop group in exchange for a 10-acre tract and, as will be detailed infra, cash. To complete the above transactions, payments totaling $ 248,900 were made at closing by the following instruments:(a) Four cashier's checks totaling $ 157,000 payable to individual members of the Tochtrop 81 group were endorsed to Milor Realty;(b) $ 1,350 was paid to Milor Realty by means of a personal check of a member of the Tochtrop group; and(c) One cashier's check in the amount of $ 90,550 payable to Lenette Realty & Investment Co., a name used by Milor Realty for purposes of this transaction, was endorsed to Milor Realty.Each of the checks noted above were endorsed, in turn, from Milor Realty to petitioners to St. Paul Title Co., the disbursing agent of escrow funds.In addition to receiving the general warranty deed on the Gasconade farm, petitioners received a check from St. Paul Title Co. in the amount of $ 36,853. Also, Milor Realty assumed, and paid, a $ 44,850 deed of trust on the St. Charles farm. Petitioners received no other cash or property.Franz received a check in the amount of $ 191,242.47 from St. Paul Title Co. The balance of the $ 5,000 in the Stealey Realty escrow account was paid as commissions to Stealey Realty and Sandfam Corp., or as attorney's fees. Milor Realty did not receive any fees from the transactions.On their 1974 joint income tax return, petitioners reported a long-term capital gain of $ 81,703 from the transactions, computed as follows:FMV of farm received$ 193,572Cash received36,853Mortgage on property given44,850182 275,455Less:Basis of property given$ 125,000Depreciation14,000$ 111,000Gain realized164,455Taxable to extent of cash and mortgagereceived81,7031139 In the statutory notice of deficiency, respondent determined that the disposal by petitioners of the St. Charles farm and their acquisition of the Gasconade farm was a sale followed by a reinvestment and not an exchange of like-kind properties within the meaning of section 1031. Accordingly, a deficiency in tax was determined based upon recognition of petitioners' entire gain.OPINIONThe principal question to be decided is whether petitioners' transfer of their interest in the St. Charles farm and acquisition of the Gasconade farm constituted an exchange which qualifies for nonrecognition of gain under section 1031.Section 1031 provides that "no gain or loss shall be recognized if property held for productive use in trade or business or for investment * * * is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment." 484 If other property not of a like kind or money -- i.e., "boot" -- is also received in an exchange, gain is recognized to the extent of such boot. Sec. 1031(b). There is no dispute concerning whether the farms involved were of "like kind," or whether petitioners held the properties 83 for the requisite purposes. The 1140 fact that the farms were of like kind, however, is not sufficient. It is necessary that there be an "exchange" of like-kind property. Respondent contends that the various transfers did not amount to an exchange because contractual interdependence did not exist between petitioners' transfer and receipt of property. Contractual interdependence is defined by respondent to mean that the essence of any exchange is that (1) the prospective recipient of petitioners' property (or his agent) must transfer to petitioners the property to be received by petitioners; and (2) title to the property received by petitioners must be transferred in consideration for the property transferred by petitioners. According to respondent, the instant transaction lacked contractual interdependence because petitioners acquired the Gasconade farm directly from Franz with no intervening legal or equitable interest being held by Milor Realty, and Franz received only cash. Thus, respondent argues, the transaction was a purchase of the Gasconade farm for cash and a sale of St. Charles farm for cash. Petitioners, of course, argue that the various transfers fit within the framework of section 1031.As originally structured, petitioners agreed to sell the St. 85 Charles farm outright for cash to Milor Realty, with Milor Realty then exchanging the farm for a 10-acre tract owned by the Tochtrop group. It was only subsequent to the signing of the unconditional sales contract that Brauer, for tax reasons, decided to try to effect a nontaxable exchange of the St. Charles farm for the Gasconade farm. Following this decision, Brauer, Milor Realty, and the real estate agents involved entered into discussions concerning a possible exchange of the properties. As a result of these discussions, it was orally agreed that Milor Realty would acquire the Gasconade farm and exchange it with petitioners for the St. Charles farm.For reasons explained in our findings of fact, the transaction did not conform to this oral agreement. The details of the transaction, as carried out, are also set forth in our findings of fact. In summary, petitioners received a purchase contract for the Gasconade farm by assignment from Milor Realty, a warranty deed for the Gasconade farm directly from Franz, and $ 36,853 in cash from the escrow agent. In turn, petitioners transferred the St. Charles farm by warranty deed to Milor 1141 Realty, which in turn transferred it to the Tochtrop 86 group in exchange for the 10-acre tract and cash.In determining whether as a result of the foregoing transaction petitioners "exchanged" like-kind property so as to come within section 1031, it is first helpful to identify those factors which are not crucial. Although the transaction at issue is somewhat unusual, the presence of multiple parties and transfers of property does not preclude qualification under section 1031. See, e.g., Barker v. Commissioner, 74 T.C. 555 (1980). Furthermore, the fact that Milor Realty immediately transferred the St. Charles farm to the Tochtrop group in exchange for cash and a 10-acre tract does not prevent section 1031 treatment. W. D. Haden Co. v. Commissioner, 165 F.2d 588 (5th Cir. 1948), affg. on this issue a Memorandum Opinion of this Court.We also do not believe that crucial to our determination is the fact that petitioners originally signed an unconditional contract to sell St. Charles farm and it was only later that a solely tax-motivated decision was made to effect an exchange of the property. Alderson v. Commissioner, 317 F.2d 790">317 F.2d 790 (9th Cir. 1963), revg. 38 T.C. 215">38 T.C. 215 (1962); Coupe v. Commissioner, 52 T.C. 394">52 T.C. 394 (1969). But see Rogers v. Commissioner, 44 T.C. 126 (1965), 87 affd. per curiam 377 F.2d 534">377 F.2d 534 (9th Cir. 1967), which is distinguishable. Futhermore, it is also not crucial that the subsequent agreement by the parties to effect an exchange was oral or that the sales contract was never revoked or amended in writing.Respondent argues that the failure of the parties to reduce to writing the oral agreement is important. He contends that because the closings of the various transfers were consistent with the written sales contract, i.e., that the St. Charles farm was sold for cash, petitioners are barred by both the Danielson rule 5 and the statute of frauds from introducing oral testimony to contradict the terms of the written contract. Leaving for decision, infra, whether the various transfers effected a sale of St. Charles farm and a reinvestment in the Gasconade farm, we do not agree with respondent's contention.In Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967), vacating and remanding 44 T.C. 549">44 T.C. 549 (1965), cert. denied 389 U.S. 1142 858 (1967), a case involving the amount allocated in a business-sale agreement 88 to the seller's convenant not to compete, the Third Circuit Court of Appeals held that a party to the agreement could challenge the tax consequences of that agreement "only by adducing proof which in an action between the parties to the agreement would be admissible to alter * * [respondent's construction thereof] or to show its unenforceability because of mistake, undue influence, fraud, duress, etc." Commissioner v. Danielson, supra at 775. We decline respondent's invitation to extend the holding of Danielson to the facts of this case. 6The tax consequences of the unconditional sales contract are not an issue herein. There is no question whether the contract, when executed, encompassed 89 the parties' entire agreement or whether a negotiated provision in the contract is contrary to the parties' intention. To these types of construction problems are applied the Danielson rule and this Court's "strong proof" rule. Ullman v. Commissioner, 29 T.C. 129">29 T.C. 129 (1957), affd. 264 F.2d 305">264 F.2d 305 (2d Cir. 1959). See, e.g., Spector v. Commissioner, 71 T.C. 1017">71 T.C. 1017, 1023 (1979), on appeal (5th Cir., Oct. 3, 1979). See also Sullivan v. United States, 363 F.2d 724">363 F.2d 724, 726-727 (8th Cir. 1966). The issue herein is whether subsequent to the execution of the sales contract an agreement was reached to effect an exchange and whether the ultimate transaction was an exchange. Thus, we believe the Danielson rule has no application in the instant case.The statute of frauds is also not applicable. Even if the oral modification of the written contract for the sale of St. Charles farm were required to be in writing under the Missouri statute of frauds (Mo. Ann. Stat. sec. 432.010 (Vernon)), the purpose of the statute is to protect one party from the enforcement of an oral agreement. See Shaffer v. Hines, 573 S.W.2d 420">573 S.W.2d 420 (Mo. Ct. App. 1978); see also Mustard v. United States, 140 Ct. Cl. 205">140 Ct. Cl. 205, 155 F. Supp. 325">155 F. Supp. 325, 332-333 (1957). 90 Enforcement of the oral contract is not at issue herein. The property subject to the oral agreement 1143 was actually transferred between the parties to that agreement. Thus, we conclude that the statute of frauds is not applicable.Moreover, it is clear from the evidence before us, which record includes the testimony of all the parties to the transaction, that an oral agreement was reached. There is no indication that, after the oral agreement was made, any steps were taken in accordance with the original sales contract. Rather, the evidence shows that the parties took steps in accordance with the oral agreement to effect an exchange. Certainly, the sales contract for the Gasconade farm and the payment by petitioners of an additional sales commission bears this out. We believe it is immaterial that the parties only orally agreed to effect an exchange, since "Tax consequences must depend on what was actually intended and accomplished." Century Electric Co. v. Commissioner, 192 F.2d 155">192 F.2d 155, 159 (8th Cir. 1951), affg. 15 T.C. 581">15 T.C. 581 (1950), cert. denied 342 U.S. 954">342 U.S. 954 (1952).Having identified those factors which we do not consider crucial, the more difficult task is to identify those factors 91 which distinguish an exchange from a sale and immediate reinvestment.In Biggs v. Commissioner, 69 T.C. 905">69 T.C. 905 (1978), the Court stressed the substance rather than the form in its analysis of the transaction. The taxpayer in Biggs owned farmland which he agreed to sell only if he received like-kind property as part of the consideration. We quote the Court's headnote reflecting the steps taken to complete the transaction:T orally agreed to sell his Maryland farm to P for $ 900,000; as part of the consideration, T was to receive like-kind property. Subsequently, T located a Virginia farm which he wished to receive in exchange, arranged for title to the Virginia farm to be transferred to C, and advanced the necessary funds. Later, P contracted to buy the Virginia farm from C. On the follwing day, by written contract, T agreed to transfer the Maryland farm to P, and P assigned his right to purchase the Virginia farm to T. At the closing of these transactions, T conveyed his Maryland farm to P's assigns and received $ 100,000 in cash and an $ 800,000 promissory note. At the same time, C conveyed title to the Virginia farm, subject to mortgages, to T, and T assumed such mortgages. * 92 In rejecting respondent's argument in Biggs that contractual interdependence between taxpayer's transfer and receipt of property was a necessary requirement of an exchange, the Court stated that the transaction would qualify under section 1031 if the taxpayer's transfer and receipt of property "were interdependent parts of an overall plan, the result of which was an 1144 exchange of like-kind properties." Biggs v. Commissioner, supra at 914. Thus, in holding that the particular transaction qualified under section 1031, the Court focused on the parties' intent to effect a qualifying exchange and on the fact that at the closing of the various real estate transfers petitioners conveyed title to real property and received title to real property. Biggs v. Commissioner, supra at 915. Qualification under section 1031 was not precluded in Biggs because the buyer with whom the taxpayer originally intended to exchange properties, never having had legal title, only assigned to the taxpayer a contract right to purchase the exchange property. Biggs v. Commissioner, supra at 915-916. Nor did it matter that the taxpayer had initially helped finance the acquisition of the property which he ultimately 93 received. In essence, the Court looked to the substance of the transaction to determine whether taxpayer in effect conveyed title to his property in consideration for title to the property received. 794 See also Coupe v. Commissioner, supra at 405. Against the background of Biggs, the only reasonable conclusion is that petitioners' transfer of the St. Charles farm and their receipt of the Gasconade farm qualified as an exchange of like-kind property under section 1031. It is clear that the consideration for petitioners' transfer of title to the St. Charles farm to Milor Realty was the receipt of title to the Gasconade farm and 1145 that this transfer and receipt 95 "were interdependent parts of an overall plan." Respondent's arguments that petitioners' receipt of only a contract right from Milor Realty and their endorsement of all the checks used to equalize the various transfers do not, in light of Biggs, preclude section 1031 treatment when it is considered that petitioners also received a warranty deed to the Gasconade farm at the same time. Given, under Biggs, that substance should control, the only reasonable conclusion is that an exchange was effected.The presence of Oney in the transactions does not alter the foregoing conclusion. Oney's role in the instant transaction was similar to that performed in Biggs by the corporation owned by taxpayer's attorney. Biggs v. Commissioner, supra at 917. Based on the record before us, it cannot be said that Oney was acting as petitioners' agent when the purchase agreement was executed for Gasconade farm. See Coupe v. Commissioner, supra at 406-407.We do not believe that a result in this case grounded on Biggs, namely, that the instant transaction qualifies under section 1031, is undercut by the recent case of Barker v. Commissioner, 74 T.C. 555">74 T.C. 555 (1980). In Barker, greater emphasis was placed on form 96 than was the case in Biggs because "the conceptual distinction between an exchange qualifying for section 1031 on the one hand and a sale and reinvestment on the other is largely one of form." Barker v. Commissioner, supra at 566. The taxpayer in Barker owned certain property which a second party wanted to acquire. A third party owned like-kind property which taxpayer wanted to acquire in a nontaxable exchange. Taxpayer, the second party, and an escrow agent entered into a series of interdependent escrow agreements whereby the escrow agent agreed to (1) purchase from the third party the property which taxpayer desired to acquire, (2) exchange this property for the property owned by taxpayer, and (3) sell taxpayer's property to the second party. Pursuant to the escrow agreements, the various transfers occurred.Although the Court held that the transaction at issue in Barker qualified under section 1031, it did so only after noting that the contractual arrangements between the parties were mutually interdependent parts of an integrated plan with each 1146 transaction covered thereunder being contingent on the simultaneous and successful completion of the other transactions. 8 Furthermore, 97 care was taken to see that the taxpayer did not obtain or control cash and that title to the various properties involved passed in accordance with the idea that an exchange was being effected.While the transaction in the instant case was not as artfully done as that in Barker, we do not believe that Barker requires a different result than that engendered under Biggs. The real estate contract between Franz and Oney for sale of the Gasconade farm was "contingent on the trade of the Brauer Farm * * with Milor." Franz's transfer of Gasconade farm to petitioners by warranty deed and the contemporaneous closing of the remaining transfers effectively resulted in an exchange by petitioners of the St. Charles farm for the Gasconade farm. The fact that petitioners did not receive title to the Gasconade farm from Milor Realty is not dispositive. W. D. Haden Co. v. Commissioner, supra.Furthermore, *98 although petitioners may have endorsed all the checks used to equalize the various transfers, it is clear that they never exercised control over them since the circumstances of the closing required that the checks be endorsed to the escrow agent. Petitioners did not withhold from the endorsed checks the amount which they would receive in the transaction. It was only from the escrow agent that petitioners received this amount.In summary, we conclude that petitioners' transfer of the St. Charles farm and their receipt of the Gasconade farm qualifies for nonrecognition treatment under section 1031. Both the substance and form of the transaction were that of a qualifying exchange.Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year in issue, unless otherwise noted.↩2. The term "exchange," as used in the findings of fact, is not intended to indicate the character of the transaction for tax purposes. Rather, it is used solely for purposes of convenience.↩3. In fact, because officers of Franz did not attend the meeting at which took place the closing of the various transfers, this warranty deed was executed prior to both Oney's and Milor Realty's assignment of the contract rights to purchase Gasconade farm.↩1. These sums total $ 275,275.4. Sec. 1031 provides in pertinent part:(a) Nonrecognition of Gain or Loss From Exchanges Solely in Kind. -- No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.(b) Gain From Exchanges Not Solely in Kind. -- If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.5. Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967), vacating and remanding 44 T.C. 549">44 T.C. 549 (1965), cert. denied 389 U.S. 858">389 U.S. 858↩ (1967).6. Initially, we note that, regardless of the application of the rule enunciated in Commissioner v. Danielson, supra, it would not bar consideration of the oral evidence. "We believe the [Danielson] rule involves applying the evidence offered and received to decide whether it meets the standard established to determine whether the terms of the written agreement should or may be varied." T.F.H. Publications, Inc. v. Commissioner, 72 T.C. 623">72 T.C. 623, 637↩ (1979), affd. without opinion (3d Cir., May 27, 1980).7. As noted by the Court in that case, support for its approach can be drawn from the rationale for sec. 1031. Biggs v. Commissioner, 69 T.C. 905">69 T.C. 905, 913 (1978). As we stated in Koch v. Commissioner, 71 T.C. 54">71 T.C. 54, 63-64 (1978):"The basic reason for allowing nonrecognition of gain or loss on the exchange of like-kind property is that the taxpayer's economic situation after the exchange is fundamentally the same as it was before the transaction occurred. "[If] the taxpayer's money is still tied up in the same kind of property as that in which it was originally invested, he is not allowed to compute and deduct his theoretical loss on the exchange, nor is he charged with a tax upon his theoretical profit." H. Rept. 704, 73d Cong., 2d Sess. (1934), 1939-1 C.B. (Part 2) 554, 564; Jordan Marsh Co. v. Commissioner, 269 F.2d 453">269 F.2d 453, 455-456 (2d Cir. 1959), revg. a Memorandum Opinion of this Court on another point; Biggs v. Commissioner, 69 T.C. 905">69 T.C. 905, 913 (1978). The rules of section 1031 apply automatically; they are not elective. Cf. Horne v. Commissioner, 5 T.C. 250">5 T.C. 250, 256 (1945). The underlying assumption of section 1031(a) is that the new property is substantially a continuation of the old investment still unliquidated. Commissioner v. P.G. Lake, Inc., 356 U.S. 260">356 U.S. 260, 268 (1958)."Cf. Starker v. United States, 602 F.2d 1341">602 F.2d 1341, 1352 (9th Cir. 1979). The Eighth Circuit Court of Appeals, the circuit court to which this case would normally be appealable, has also emphasized substance over form in sec. 1031 cases. See Smith v. Commissioner, 537 F.2d 972 (8th Cir. 1976), affg. a Memorandum Opinion of this Court; Century Electric Co. v. Commissioner, 192 F.2d 155">192 F.2d 155 (8th Cir. 1951), affg. 15 T.C. 581">15 T.C. 581 (1950), cert. denied 342 U.S. 954">342 U.S. 954↩ (1952).8. The Court noted, however, in note 5, that contractual interdependence was not required as a condition to the finding that an exchange has taken place, citing Biggs↩. The Court did note that the existence of contractual interdependence supported its conclusion that a qualifying exchange had occurred.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624277/	JAMES L. and CARYL A. OSTERHUS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentOsterhus v. CommissionerDocket No. 19292-90United States Tax CourtT.C. Memo 1992-574; 1992 Tax Ct. Memo LEXIS 596; 64 T.C.M. (CCH) 919; September 28, 1992, Filed 596 Decision will be entered for respondent. For James L. Osterhus, pro se. For Respondent: Roderick H. Fillinger. GALLOWAYGALLOWAYMEMORANDUM OPINION GALLOWAY, Special Trial Judge: This case was assigned pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 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. Respondent determined deficiencies in petitioners' 1985 and 1986 Federal income taxes in the respective amounts of $ 959 and $ 4,391. The issues to be decided are: (1) Whether petitioners are liable for deficiencies in taxes for the years 1985 and 1986 as a result of respondent's disallowance of a claimed 1984 net operating loss carried forward to these years; and (2) whether petitioners are entitled to deductions for home office expenses under section 280A in the taxable years in issue. Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioners resided in Cincinnati, Ohio, when they filed their petition. 1. Net Operating Loss Carryovers597 to 1985 and 1986a. BackgroundDuring the years 1984-86, James L. Osterhus (petitioner) worked full-time as a cost engineer for Procter and Gamble (P&G) in Cincinnati. Petitioner's office was in downtown Cincinnati at One Procter & Gamble Plaza. Petitioner earned salary from P&G in 1984, 1985, and 1986, in the respective amounts of $ 61,626.45, $ 64,069.84, and $ 66,046. Petitioner also owned 3 separate apartment complexes containing 74 units, which were located in various parts of Cincinnati. Petitioner received substantial gross rental receipts and incurred net losses from the operation of these rental complexes in 1984-86. The rental properties were managed during 1984-86 by petitioner with the assistance of petitioner Caryl Osterhus, who was the office manager of the apartment complexes. Mrs. Osterhus was an employee of Woodfield Enterprises, Inc. (Woodfield). Woodfield is a corporation wholly owned by petitioners, who were also its officers and directors. Caryl Osterhus earned wages of $ 6,600, $ 7,320, and $ 8,400, in the respective 1984-86 years. Petitioner drew no salary from Woodfield in the above years. Woodfield was organized primarily to employ workers598 who perform maintenance service on the apartments. The offices of Woodfield were located in petitioner's residence on Reily Road in Cincinnati. Petitioner filed tax returns for the 1984, 1985, and 1986, years with the Cincinnati Service Center, Cincinnati, Ohio. On his 1984 tax return, petitioner reported adjusted gross income of $ 16,459.97. This amount included a loss reported from the operation of petitioner's rental properties in the amount of $ 66,629.43 (gross rentals of $ 457,581.94 less operating expenses and depreciation of $ 524,211.37). Petitioner reported nonbusiness deductions (before exemptions) totaling $ 36,491.31, resulting in a loss of $ 20,031.34. After deducting exemptions totaling $ 6,000, petitioner reported zero taxable income. Petitioner filed a timely 1985 return, on which he attached a Form 1045 (Application For Tentative Refund). Petitioner claimed a net operating loss carryover from 1984 in the amount of $ 23,431 on the Form 1045, and indicated that he was applying $ 7,337 of the claimed 1984 carryover to his 1985 return, and that the balance of the carryover amounting to $ 16,094 was being carried over to later years. Petitioner reported the balance599 of his claimed net operating loss carryover on his 1986 tax return. Respondent disallowed the carryovers and determined deficiencies in the years 1985 and 1986, by notice of deficiency dated May 25, 1990. b. DiscussionIn general, section 172 allows a deduction for an amount equal to the aggregate of the net operating loss carryovers to a taxable year plus the net operating loss carrybacks to that year. Sec. 172(a). Section 172(b), as in effect for the 1984 year, required that a net operating loss first be carried back to each of the 3 previous taxable years and, if unabsorbed by those years, that the remaining portion be carried forward to the 15 following taxable years. Sec. 172(b)(1) and (2); sec. 1.172-4(a)(1)(ii), Income Tax Regs.Section 172(b)(3)(C), however, provides that a taxpayer may elect to relinquish the entire carryback period and carry forward the loss to the taxable years following the loss year. The parties have stipulated that no statement was attached to petitioner's 1984 return indicating an election under section 172(b)(3)(C) and section 7.0(b)(1), Temporary Income Tax Regs., 42 Fed. Reg. 1469 (Jan. 7, 1977), to relinquish600 the carryback period with respect to a 1984 net operating loss. Notwithstanding petitioner's apparent failure to elect to forgo the carryback period, respondent first argues that, as a threshold matter, petitioner is not entitled to carryover any loss from 1984 to other tax years since he failed to establish that he incurred a net operating loss for 1984. Petitioner bears the burden of proof on this issue. Rule 142(a). Section 172(c) defines the term "net operating loss" as follows: For purposes of this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income. Such expenses shall be computed with the modifications specified in subsection (d). Section 172(d)(4) requires that the net operating loss amount be modified so that nonbusiness deductions of an individual taxpayer not attributable to the taxpayer's trade or business shall be allowed only to the extent of the amount of gross income not derived from such trade or business. In her notice of deficiency, respondent determined that petitioner incurred no 1984 net operating loss. Respondent's calculation is as follows: Loss per 1984 return before exemptions$ (20,031.34)Zero bracket amount(3,400.00)Exemptions(6,000.00)Loss before modifications(29,431.34)Section 172(d) modifications:Exemptions6,000.00 Total nonbusiness deductions per 1984return or as adjusted by respondent:$ 39,230.08Less total nonbusiness income perreturn 15,522.89Unallowable nonbusiness deductions23,707.19 Total modifications29,707.19 Statutory gain$ 275.85 Net operating lossNone 601 Respondent agrees that petitioner correctly computed the loss reported of $ 29,431.34. However, respondent argues that petitioner failed to limit his reported loss by the section 172(d) modification limiting the claiming of nonbusiness deductions to the amount of reported nonbusiness income. Petitioner offered no explanation for failing to make this adjustment nor any statutory authority supporting his calculation. Petitioner also argues that his salary earned at P&G is not business income and that he incorrectly offset that salary against his rental loss in calculating the 1984 net operating loss on Form 1045. Petitioner claims that a correction of this alleged calculation error would substantially increase his $ 23,431 net operating loss reported on Form 1045. Petitioner relies on Luton v. Commissioner, 18 T.C. 1153">18 T.C. 1153 (1952) to support his contention that P&G salary need not reduce his net operating loss generated from the rental business. In Luton this Court held that in calculating a net operating loss, salary was considered nonbusiness income. However, Luton was overruled by the Court in Lagreide v. Commissioner, 23 T.C. 508">23 T.C. 508, 513 (1954),602 where we held that the salary received by a teacher was derived from the operation of a trade or business carried on regularly by her, which must be applied in full against her husband's net operating loss for carryback purposes. We have since affirmed this holding in Weinstein v. Commissioner, 29 T.C. 142">29 T.C. 142, 146 (1957), and Hayman v. Commissioner, T.C. Memo. 1968-103, affd. without published opinion 69-1 USTC par. 9350, 23 AFTR 2d 69-1027 (D.C. Cir. 1969), in which we stated "We are not disposed to reach a different result in this case which would entail the overruling of both the Lagreide and Weinstein cases." Accordingly, we conclude that petitioner incurred no 1984 net operating loss to be carried back or forward under section 172. In view of our holding, we find it unnecessary to discuss respondent's alternate contention that no net operating loss deduction is allowable in either of the years 1985 and 1986 since petitioner failed to elect to forgo applying the alleged 1984 loss to the carryback years before carrying the loss forward to years after 1984. Respondent's603 disallowance of the net operating loss carryovers to 1985 and 1986 must be sustained. 2. Home Office ExpenseDuring 1985 and 1986, petitioner used a portion of his residence in connection with his apartment rental business. Petitioner's large residence contains over 4,000 square feet on 3 floors with 11 rooms. The first floor contains about 1,660 square feet: A kitchen, dining room, living room, and library/reception room, the last of which comprises about 700 square feet of the first floor area. The second floor contains 4 bedrooms of undisclosed dimensions. The third floor area includes a family room (over one-half of the 1,070 square footage), a small office, and a computer room. Petitioner claims that three rooms -- the first floor library/reception room, the third floor office, and the computer room were used exclusively for business. Petitioner divided the 3 claimed home office rooms by 11, and seeks to deduct 27 percent of the residence utilities, water, telephone, and insurance costs, totaling $ 11,450 and $ 11,163, respectively, in the years 1985 and 1986. Respondent claims that petitioner may not deduct the amounts claimed because he has failed to show that604 any portion of petitioner's residence was used exclusively for business purposes. Section 280A establishes the general rule that no deduction is allowed with respect to business use of a taxpayer's personal residence. Section 280A(c)(1)(A), 1 however, provides that section 280A(a) shall not apply if a portion of the taxpayer's personal residence is exclusively used on a regular basis as the principal place of business for any trade or business of the taxpayer. Goldberger, Inc. v. Commissioner, 88 T.C. 1532">88 T.C. 1532, 1556-1557 (1987); Lewis v. Commissioner, T.C. Memo. 1989-78, affd. without published opinion 928 F.2d 404">928 F.2d 404 (6th Cir. 1991). 605 Petitioner used his residence as the principal place of business for his rental operations. However, petitioner's testimony and other evidence fails to establish that petitioner used any portion of the questioned three rooms in his residence exclusively for business purposes. Petitioner testified that the library/reception room was "a regular library". It contained income tax and personal books as well as some of petitioner's P&G cost engineering books. The third floor small office, and computer room were used, among other things, to prepare handwritten income tax returns, which in 1985 and 1986 included numerous computer-generated supplemental schedules. The legislative history of section 280A dealing with exclusive use explains: Exclusive use of a portion of a taxpayer's dwelling unit means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business. The use of a portion of a dwelling unit for both personal purposes and for the carrying on of a trade or business does not meet the exclusive use test. Thus, for example, a taxpayer who uses a den in his dwelling unit to write legal briefs, prepare tax returns, or606 engage in similar activities as well [as] for personal purposes, will be denied a deduction for the expenses paid or incurred in connection with the use of the residence which are allocable to these activities. * * [S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 186; H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 853]. Petitioner also argues that an Internal Revenue auditor for the 1987 tax year allowed him to deduct 27 percent of his agreed residence expenses as a home office deduction. However, whether similar deductions were allowed in other years is not relevant. See Weischadle v. Commissioner, T.C. Memo. 1988-47. Because no portion of petitioner's residence was used exclusively for business purposes, petitioner may not deduct any expenses with respect to the use of his residence. Decision will be entered for respondent. Footnotes1. Section 280A(c)(1) provides in part: (1) Certain business use. -- Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis --(A) [as] the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624278/	DAVID L. WIKSELL AND MARGARET WIKSELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWiksell v. CommissionerDocket No. 11752-91United States Tax CourtT.C. Memo 1994-99; 1994 Tax Ct. Memo LEXIS 100; 67 T.C.M. (CCH) 2360; T.C.M. (RIA) 94099; March 9, 1994, Filed 100 An appropriate Order of Dismissal and Decision will be entered as to petitioner David L. Wiksell. Decision will be entered under Rule 155 as to petitioner Margaret Wiksell. 1. R asserted increased deficiencies for 1984 and 1985 and fraud on the part of D in the filing of the returns for those years. The allegations of fraud were well pleaded. In the face of repeated notices, D failed to participate in the preparation for trial, nor did he appear in person or by counsel at trial. Held: R's increased deficiencies and additions to tax for fraud sustained as to D. 2. M, D's spouse, claimed the innocent spouse protection of sec. 6013(e), I.R.C., and also claimed that no valid joint tax returns were filed because 1984 and 1985 returns were signed by her under duress. Held: (1) M has not established that in signing the returns she neither knew nor had reason to know that the returns contained substantial understatements of tax; and (2) the diagnosis of abused spouse by M's clinical psychologist is insufficient to prove that (1) M signed the 1984 and 1985 returns under duress, since petitioners have failed to establish a nexus between spousal abuse generally and duress in the101 specific circumstances under which the returns were signed. It has not been shown that M was unable to resist her abusive spouse's demands that she sign the returns; and (2) that she would not have signed the returns except to the constraints applied to her will. Brown v. Commissioner, 51 T.C. 116">51 T.C. 116 (1968); Stanley v. Commissioner, 45 T.C. 555">45 T.C. 555 (1966), applied. David L. Wiksell, pro se. For Margaret Wiksell, petitioner: Bruce I. Hochman. For respondent: Glorianne Gooding-Jones. NIMSNIMSMEMORANDUM FINDINGS OF FACT AND OPINION NIMS, Judge: Respondent determined the following deficiencies in, and additions to, petitioners' Federal income taxes: Additions to TaxYearIncome TaxSec. 6653(a)(1)(A)Sec. 6653(a)(1)(B)Sec. 66611984$ 153,739$ 7,687 $ 38,4351985692,75034,638 173,188* 50 percent of the interest computed on the income tax deficiency at the time of assessment or payment of the tax.By Amended Answer, respondent asserted deficiencies and additions to tax as follows: Additions to TaxYearIncome TaxSec. 6653(b)(1) Sec. 6653(b)(2)Sec. 66611984$ 221,294$ 110,647 * $ 55,3241985789,919394,960 197,480Alternative Additions to TaxYearSec. 6653(a)(1) Sec. 6653(a)(2)1984$ 11,065 * 198539,496 *** 50 percent of the interest on $ 221,294. 50 percent of the interest on $ 789,919.* 50 percent of the interest on $ 221,294.** 50 percent of the interest on $ 789,919.102 Unless otherwise indicated, all section references are to sections of 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. Respondent has conceded all additions to tax as to petitioner Margaret Wiksell (Margaret). Margaret has conceded the income tax deficiencies asserted by respondent in the Amended Answer. The issues remaining for decision are: (1) Whether respondent's Motion to Dismiss for Lack of Prosecution as to David L. Wiksell (David) should be granted. (2) Whether Margaret is an innocent spouse as defined in section 6013(e). FINDINGS OF FACT Some of the facts have been stipulated by Margaret and respondent and are so found. Petitioners resided in Newhall, California, when they filed their petition. Petitioners were married in 1960, legally separated in 1988 and divorced in December, 1992. With the exception of the times David was imprisoned, petitioners continuously resided together from the inception of their marriage to the date of the trial of their case. Petitioners had three children. Margaret completed five years of college, graduating as a registered nurse in 1979. She103 worked part-time as a registered nurse during 1984 and 1985. During the course of petitioners' marriage, David was at various times employed as a stockbroker. Also at various times he began a company called Espuma dealing with polyurethane, began a real estate and/or investment company called Wiksell Ginzmer, sold encyclopedias, was a real estate salesman, repossessed water softeners, was a real estate investment adviser, and was an officer and vice president for investments of Comstock Financial Services, Inc. (Comstock Financial). In 1962 he was convicted of perjury. In 1973 he was charged with the criminal offense of writing bad checks. In 1980 he pleaded guilty and was imprisoned for selling unregistered securities in the Bubble-Up soft drink company. On January 13, 1988, he pleaded guilty to various criminal counts of fraud involving the sale of unregistered securities related to his participation in a fraudulent investment scheme involving Comstock Financial. During 1984 and 1985, Margaret simultaneously maintained checking accounts at Security Pacific National Bank and Santa Clarita Bank. David had no signature authority over these accounts. With the exception of 104 the times David was imprisoned, either he or Margaret retrieved the family mail from the mail box, but generally only the respective addressee opened the envelopes. During the years in issue Margaret paid all household expenses. David maintained a business checking account under the name of Hitech Recovery System, Inc. (Hitech), and periodically gave Margaret money to put into her separate checking accounts. In each instance, David issued a Hitech check made payable to "Margaret Wiksell", which she then deposited into one of the checking accounts she maintained at Security Pacific National Bank and Santa Clarita Bank. Petitioners' 1984 and 1985 Federal income tax returns were prepared by professional accountants. Their 1984 return was signed by Margaret and David on June 16, 1987, and filed on June 22, 1987. Their 1985 return was signed by Margaret and David on November 9, 1987, and filed on November 12, 1987. The record contains no explanation for the late filings, nor facts surrounding the preparation of the returns by the accountants. No extension of time to file either the 1984 or 1985 return was secured. Petitioners' 1984 Federal income tax return was filed with the Internal105 Revenue Service while David was in county jail. The record does not disclose the circumstances under which the 1985 return was signed or filed. David never threatened petitioner with physical harm or separation from her children if she refused to sign any income tax return. Sometime in 1982 or 1983 David told Margaret about starting Hitech. He told her that the business of the company was to be the extraction of oil from old oil wells. Hitech's Articles of Incorporation were filed with the California Secretary of State on February 18, 1983, and Margaret was designated as an officer and director. On March 25, 1985, Margaret signed as Secretary of Hitech on a document filed with the California Division of Oil & Gas. Hitech issued no stock certificates, kept no minutes of stockholders or directors meetings, maintained no business address, kept no books and records, and filed no income tax returns. David was at all times the controlling person, director and chief executive officer of Hitech. Sometime before or during 1985 David took Margaret to see an oil field purportedly operated by Hitech. David ran Hitech out of the Wiksells' residence but nobody came to the house to transact106 business. During 1985 Margaret wrote checks on her personal checking account to pay for business supplies for David. From January 1984, through November 1984, Margaret received 23 Hitech checks totaling $ 54,500. From January 1985, through October 1985, Margaret received 15 Hitech checks totaling $ 140,500. Sometime before the spring of 1984 David went to work for Comstock Financial as a real estate investment adviser. From the spring of 1984 through the fall of 1985, David was employed by Comstock Financial as a corporate officer and Vice President of Investments. During the spring of 1984 David told Margaret that Comstock Financial was investing in Hitech. During 1984 and 1985 David and Margaret maintained an ongoing social relationship with Roy L. Comstock (Comstock), the President of Comstock Financial, and his wife, attended social gatherings with the Comstocks and other company employees, and attended company functions at restaurants, the Comstocks' home and the Comstock Financial business offices. Based on her attendance at the gatherings in the offices of Comstock Financial, Margaret concluded from the ambiance of the offices that Comstock Financial was doing very 107 well. During 1984 and 1985 Margaret knew that David had the use of a Comstock Financial credit card for business purposes. During 1984 and 1985 Margaret knew that David frequently used a Comstock Financial limousine to take Margaret, the Wiksell children, and business associates to social events. Sometime between the spring of 1984 and the fall of 1984 Margaret accompanied David on a trip to Hawaii that was financed by Comstock Financial for its officers as a reward for business they had done. During the years in issue, Margaret heard the term "managed investment account" but didn't know what it meant although she and David talked about it. Margaret saw Comstock Financial and Managed Investment Account brochures and observed that the brochures referred to David's 20 years of investment experience, a fact which Margaret knew was untrue. In October, 1985, David told Margaret that the Securities and Exchange Commission (SEC) had recently issued a temporary restraining order against Wiksell and others to prevent them from engaging in the solicitation of investment funds. At or about the time of this occurrence, Margaret knew that on November 5, 1985, David's deposition was taken108 by the SEC, and David told her that his testimony involved things that had gone on at Comstock Financial. David moved his business furniture and belongings out of the Comstock offices and into the family room of the Wiksell residence in the fall of 1985. A newspaper article, including David's photograph, appeared in the Los Angeles Times on March 3, 1986, reporting in detail a scam perpetrated by Comstock, Abraham Boldt and David wherein the sum of at least $ 2 million, fraudulently obtained from unsuspecting investors of Comstock Financial, was diverted to Hitech, David's oil company. Margaret read the newspaper article on or about March 3, 1986, the date of its publication. In January or February, 1987, David was arrested by law enforcement authorities and charged with fraud in connection with the Comstock/Wiksell scam reported in the newspaper article. Margaret knew the details of these events prior to June of 1987 when she signed the 1984 return. There were many times during petitioners' marriage when they did not have enough money to pay their living expenses. During 1982 and 1983 petitioners were able to maintain a moderate standard of living only due to Margaret's working109 long hours to pay the family's expenses. To Margaret's knowledge, during 1983 the Wiksell family's only substantial source of income was from her employment. In January, 1984, Margaret received the first Hitech check from David. The check was in the amount of $ 4,000. Margaret questioned David regarding the source of the check. David told her that the money came from investments. During 1984 and 1985 petitioners experienced no trouble in paying their living expenses. In 1984 Margaret wrote checks on her separate checking account to various charitable organizations totaling $ 10,580. In 1984 Margaret wrote three checks on her separate checking account totaling $ 2,750 as contributions to a political candidate running for Congress. Petitioners' 1984 Federal income tax return reported a total of $ 10,525 in gross income. Petitioners' 1985 Federal income tax return reported a total of $ 4,298 in gross income. The Wiksells' Federal income tax returns for 1984 and 1985 reported no wages or earnings attributable to David. In 1985 Margaret wrote checks on her separate checking account to various charitable organizations totaling $ 14,510. At the time she was making these donations110 Margaret thought it was "odd, to say the least," that petitioners were donating such large sums of money to charity. David was imprisoned in county jail for 8 months, from January or February to September or October of 1987; he was then released on bail for 3 or 4 months, and after pleading guilty to the felonies charged, was imprisoned in State prison. Shortly after David's arrest in January or February of 1987, and while he was in county jail, Margaret gained access to his filing cabinets, desk and briefcases located in the family room of the Wiksell residence, and also located his business heckbook. Margaret observed envelopes from Security Pacific and Merrill Lynch addressed to Hitech which were delivered each month to her home. While David was in county jail, Margaret went to the office of the couples' accountant to pick up the 1984 joint income tax return, but had no discussion with the accountant relative to the contents of the return. In June, 1987, while David was incarcerated, Margaret took the 1984 Federal return to him to sign. At the time she signed the 1984 and 1985 returns, Margaret questioned David about why the returns contained no income reflecting the money111 that he gave her. She suspected from past experience that David wasn't telling her the truth regarding why the returns reflected no income earned by him. She would not, in any event, have contradicted what he was telling her. During 1984 David received and retained $ 465,400 in illegally diverted funds from investors of Comstock Financial. During 1985 David received and retained $ 1,572,018 in illegally diverted funds from investors of Comstock Financial. Beginning at the end of 1983 and continuing throughout 1984 and 1985, a substantial portion of the illegal funds received by David from Comstock Financial investors were used to purchase various real properties and oil and gas rights. The aforementioned real properties, including a large tract of land known as Towsley Canyon, as well as various oil, gas, and mineral rights, were acquired in the names of David Wiksell and Margaret Wiksell. A one-sixth interest in a 111-acre parcel of Towsley Canyon was originally titled and at the time of trial was held in Margaret's name only. The Towsley Canyon property at the time of trial was in escrow for sale to the Santa Monica Mountains Conservancy. On November 11, 1983, Margaret 112 entered into an oil, gas, and mineral lease with regard to property acquired with the illegally transferred funds, by signing her name thereto, both in her individual capacity and as a representative of Hitech. In 1991 Margaret received $ 5,000 in royalty payments on account of oil, gas, and mineral lease rights acquired by her with the illegally diverted funds. Margaret signed the documents necessary to take title to the various properties of her own free will and without coercion or duress. Margaret did not question where the money came from to acquire the property in 1983. During 1984 and 1985 petitioners were members of a private country club. Margaret paid country club expenses totaling $ 4,003 in 1984 and $ 4,430 in 1985, with Hitech funds deposited into one of her separate checking accounts. During 1984 and 1985 petitioners and their children went to the country club for Sunday dinner approximately once a month. During 1984 and 1985 petitioners maintained two horses for pleasure. Margaret paid maintenance expenses for the horses, totaling $ 2,489 in 1984 and $ 3,960 in 1985, with Hitech funds deposited into one of her separate checking accounts. Petitioners and their113 daughter Wendy each rode the horses. During 1984 Margaret purchased furniture costing $ 3,200 with Hitech funds deposited into one of her separate checking accounts. During 1985 she purchased furniture costing $ 3,605.18 and spent the sum of $ 15,145 substantially for home improvements with Hitech funds deposited into one of her separate checking accounts. David subjected petitioner to physical abuse on one occasion, and to intimidation and threats throughout their marriage. OPINION We first address respondent's Motion to Dismiss for Lack of Prosecution as to Petitioner David L. Wiksell (Motion) on the ground that he failed to proceed as provided by Rule 123. Although he was provided with more than ample notice of the pendency of the trial of this case, David declined to participate in pretrial preparation, and failed to appear in person or by counsel at the trial. Respondent's Motion, in detailed numbered paragraphs, sets out each step by which David was kept advised of actions required to be taken by him to participate in the preparation for trial, and of the date certain set by the Court for the commencement of the trial. The Motion recites that David failed to respond 114 to respondent's so-called Branerton letter (see Branerton Corp. v. Commissioner, 691">61 T.C. 691 (1974)) requesting that David attend an informal meeting to discuss stipulating facts; failed to respond to a written request by Margaret's counsel that David contact such counsel regarding respondent's Branerton letter; refused to serve upon respondent's counsel and the Court a trial memorandum as required by the Court's Standing Pre-Trial Order, although David had been served with respondent's trial memorandum; refused to respond to respondent's proposed stipulation of facts which was sent to David by respondent; and refused to notify respondent's counsel or the Court that he, David, intended to concede his case and not appear at the trial, although he had so advised Margaret's counsel of his intentions. On December 4, 1992, when respondent's proposed stipulation of facts was sent to David by respondent, David was also notified that the Court had set Monday, December 14, 1992, as the date certain for the commencement of the trial. Respondent's Motion was filed at the beginning of the trial on December 14, 1992. Since David did not attend the trial115 he did not, of course, respond to the Motion. Rule 123(b) provides, among other things, that for failure of a petitioner properly to prosecute the Court may dismiss a case and enter a decision against the petitioner. We therefore hold that petitioner David L. Wiksell is liable for the income tax deficiencies determined in the notice of deficiency. Respondent bears the burden of proving that David is liable for the increased income tax deficiencies asserted by respondent in an Amended Answer, and for the addition to tax for fraud. Rule 142(b). On January 16, 1992, respondent filed as a matter of course under Rule 41 an Amended Answer containing a number of affirmative allegations, a responsive pleading not having been served by petitioners as of that date. On March 30, 1992, petitioners filed a Reply containing a general denial of the allegations contained in respondent's Amended Answer. Notwithstanding the general denial contained in petitioners' Reply, we deem David's intentional failure to participate in the trial of this case to constitute an admission of the truthfulness of respondent's affirmative allegations, and we so hold. In situations where respondent has the burden116 of proof, and where a taxpayer fails to appear at trial, entry of decision against the taxpayer is justified without trial where the issues are well-pleaded. Smith v. Commissioner, 91 T.C. 1049">91 T.C. 1049 (1988), affd. 926 F.2d 1470">926 F.2d 1470 (6th Cir. 1991). The facts alleged in respondent's Amended Answer may be summarized as follows: On their 1984 and 1985 returns petitioners reported only Margaret's income from wages, plus partnership income of $ 524 and royalties of $ 200 in 1984. David was a principal participant in an investment scam through which he diverted substantial amounts to petitioners in 1984 and 1985. He also received income from oil sales and interest income in those years. The total of these amounts was as follows: 1984Net income from Comstock$ 465,400Income from oil sales3,899Total income469,2991985 Net income from Comstock/Preferred1,537,019Income from oil sales63,128Interest income6,944Total income1,607,091Petitioners reported none of these amounts on their 1984 and 1985 returns. In 1987 David was tried, convicted, and imprisoned for a California securities law violation. See Cal. 117 Corp. Code sec. 25540 (West 1977). With respect to the addition to tax for fraud, respondent must establish by clear and convincing evidence that: (1) An underpayment exists for the year in issue; and (2) that some portion of the underpayment is due to fraud. Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 698-699 (1989); Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983); Habersham-Bey v. Commissioner, 78 T.C. 304">78 T.C. 304, 311 (1982). To meet this burden respondent must show that a taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983). Indicia of fraud include understated income, inadequate records, implausible or inconsistent explanations of behavior, concealment of assets, and failure to cooperate with tax authorities. Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Coninck v. Commissioner, 100 T.C. 495">100 T.C. 495, 499 (1993).118 The facts recited in respondent's Amended Answer, which David is deemed to have admitted by reason of his default, abundantly establish that David intentionally concealed and failed to report large amounts of income in both of the years in question. Respondent's allegations set forth facts sufficient to sustain a finding of fraud for each of the years in issue attributable to the entire underpayment as asserted by respondent in the Amended Answer, and we so hold. By reason of his default David is also liable for the increased deficiencies asserted by respondent in the Amended Answer for 1984 and 1985. We turn now to Margaret's innocent spouse claim. The relevant part of section 6013(e) provides: (e) SPOUSE RELIEVED OF LIABILITY IN CERTAIN CASES. -- (1) In General. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, (C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and119 (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement. (2) Grossly Erroneous Items. -- For purposes of this subsection, the term "grossly erroneous items" means, with respect to any spouse -- (A) any item of gross income attributable to such spouse which is omitted from gross income, and (B) any claim of a deduction, credit, or basis by such spouse in an amount for which there is no basis in fact or law.Thus, an "innocent spouse" is relieved of liability if such person establishes that, even though a joint return has been filed, the return contained a substantial understatement of tax attributable to grossly erroneous items attributable to the putatively culpable spouse (culpable spouse); the innocent spouse, in signing the return did not know, or have reason to know, that there was such substantial understatement; 120 and taking into account all the facts and circumstances, it would be inequitable to hold the innocent spouse liable for the deficiency attributable to the substantial understatement. Petitioners bear the burden of proving that each of the requirements of section 6013(e) has been satisfied, and failure to prove any one of the controverted statutory requirements will prevent Margaret from qualifying for relief. Bokum v. Commissioner, 94 T.C. 126">94 T.C. 126, 138 (1990), affd. 992 F.2d 432">992 F.2d 432 (11th Cir. 1993). "Grossly erroneous items" are defined in section 6013(e)(2)(A) to include "any item of gross income attributable to * * [the culpable] spouse which is omitted from gross income". Substantial understatement, for purposes of the innocent spouse provisions, "means any understatement * * * which exceeds $ 500." Section 6013(e)(3). Margaret and respondent have stipulated that David omitted from the 1984 and 1985 returns the income he diverted to himself from Comstock, as well as the income he received from the sale of oil and the interest income received from Merrill Lynch. It is undisputed that such omissions are grossly erroneous 121 items attributable to David and that they produced a substantial understatement in tax. Thus, these prerequisites for innocent spouse protection have been met. The parties' disagreement commences with whether petitioners have established that Margaret neither knew nor had reason to know of the substantial understatements, and whether it would be inequitable to hold her liable for the resultant deficiencies and additions thereto. A would-be innocent spouse has "reason to know" of a substantial understatement if a reasonably prudent taxpayer in the same position as the spouse at the time of signing the return could be expected to know that the return contained the substantial understatement. Guth v. Commissioner, 897 F.2d 441">897 F.2d 441, 443-444 (9th Cir. 1990), affg. T.C. Memo. 1987-522. This rule is particularly applicable in cases such as the one before us involving understatements attributable to omissions of income and not deduction errors. See 897 F.2d at 444. We do not believe it necessary to repeat all of our findings of fact to demonstrate our reasons for concluding that Margaret not only had reason122 to know, but actually had knowledge, that the returns contained substantial understatements. Her actual knowledge is established by the simple fact that Margaret admitted that she asked David why there was no income on the returns reflecting the money that had been coming to her through him from Hitech, and which the family had been living on during the years in issue. This admission effectively contradicts her other testimony that she didn't look at the returns before signing them. Margaret also had reason to know of the substantial understatements. She was well aware of David's involvement in Hitech, and during 1984 she received 23 Hitech checks from David totaling $ 54,500, which she deposited into her separate checking accounts. During 1985, she received 15 Hitech checks from David totaling $ 140,500 which she deposited into her separate checking accounts. Throughout these years Margaret wrote large checks on her individual account to charities, political candidates, and for home improvements. She had to know that her own meager earnings from nursing were vastly insufficient to provide these funds. In early 1987, Margaret gained access for the first time to David's "business123 things". While David was in county jail in mid-1987, Margaret went to the office of the couple's accountant, picked up the 1984 return and took it to the jail to get David's signature. Margaret testified that she had no discussion with the accountant about the 1984 return. We think this is likely true, but we view this testimony in a different light than that in which petitioners would have us cast it. The threnody which sounds throughout petitioners' case is that Margaret was always too intimidated by David to act independently. Thus her position appears to be that she meekly went to the accountant's office, picked up the 1984 return without saying a word to him about it, and left. But knowing what she did about David's affairs after rummaging through his business papers so that, in her words, "I could find information and get things together to get him out [of jail]," she obviously had discovered quite a lot about the family's newfound sources of income before she went to the accountant's office. To have discussed any of this with the accountant would have invited a flood of questions which it is safe to assume Margaret would not have cared to answer. We also note that, 124 well before she signed either the 1984 or the 1985 return, Margaret had read a long newspaper article (featuring David's picture, among others) which detailed a scam in which David was alleged to have participated with Comstock and Abraham Boldt, and by which they bilked a number of individuals out of millions of dollars from their personal savings and other sources. While the details recited in the newspaper article are hearsay insofar as the truth of the matters contained therein is concerned, the article itself is admissable evidence that Margaret was on notice before she signed the 1984 and 1985 returns that she should make inquiry as to possible sources of income required to be reported. Margaret testified that David told her "that he had investments in Hitech that had been lost and this was * * * money being returned back * * * it just didn't make sense to me and, so, I just stopped questioning him." But ignorance of the tax consequences of the items which give rise to a deficiency is of itself an insufficient defense for one seeking innocent spouse relief. Purcell v. Commissioner, 826 F.2d 470">826 F.2d 470, 474 (6th Cir. 1987), affg. 86 T.C. 228">86 T.C. 228 (1986).125 The Court of Appeals for the Ninth Circuit has stated that Factors to consider in analyzing whether the alleged innocent spouse had "reason to know" of the substantial understatement include: (1) the spouse's level of education; (2) the spouse's involvement in the family's business and financial affairs; (3) the presence of expenditures that appear lavish or unusual when compared to the family's past levels of income, standard of living, and spending patterns; and (4) the culpable spouse's evasiveness and deceit concerning the couple's finances. * * [Price v. Commissioner, 887 F.2d 959">887 F.2d 959, 965 (9th Cir. 1989), revg. T.C. Bench Op. Dkt. No. 15475-85; see 887 F.2d at 966 n.12.]Applying these four factors, it is obvious that regardless of Margaret's level of education (she was admittedly not versed in financial matters), and the question of her involvement in the family's business and financial affairs, there were many expenditures that appear lavish or unusual when compared to the family's past levels of income, standard of living, and spending 'patterns, and David's evasiveness and deceit concerning the couple's126 finances were manifest. We conclude that in signing the returns Margaret both knew and had reason to know that there was a substantial understatement of tax. Having reached the above conclusion, we need not unduly dwell on the question of whether it would be inequitable to hold Margaret liable for the deficiencies. Our findings of fact demonstrate that Margaret received substantial benefits from the omissions from income. We pointed out in Purcell v. Commissioner, supra, 86 T.C. at 241, that even though section 6013(e) does not expressly refer to specifically received benefits from the income omission, it would not be inequitable to hold the would-be innocent spouse liable for the deficiency if substantial benefits were received. Section 1.6013-5(b), Income Tax Regs., provides in relevant part: (b) Inequitable defined. Whether it is inequitable to hold a person liable for the deficiency in tax, within the meaning of paragraph (a)(4) of this section, is to be determined on the basis of all the facts and circumstances. In making such a determination a factor to be considered is whether the person seeking relief significantly benefitted, directly127 or indirectly, from the items omitted from gross income. * * * Evidence of direct or indirect benefit may consist of transfers of property, * * During 1984 and 1985 David received and retained, through Hitech, a total of $ 2,037,418 in illegally diverted funds from investors of Comstock Financial. During each of these years a substantial portion of the illegal funds was used to purchase and make additional payments on various real properties and oil, gas, and mineral rights. These real properties, including a large tract of land known as Towsley Canyon, and various oil, gas, and mineral rights, were acquired in the names of David and Margaret Wiksell. A one-sixth interest in a 111-acre parcel of Towsley Canyon was originally titled and at the time of trial was held in Margaret Wiksell's name alone. In addition, beginning in late 1983 and continuing through 1984 and 1985, Margaret entered into oil, gas, and mineral leases with regard to property acquired with the illegally diverted funds. She executed the agreements in her individual capacity as well as a representative of Hitech. The record reflects that in 1984 Margaret received a royalty payment of $ 200 with regard128 to one lease and in 1991 received $ 5,000 with regard to another lease. During 1984 Margaret accompanied David on a Hawaiian vacation financed by Comstock for its officers as a reward for business they had done. During 1984 and 1985 the Wiksells maintained a membership in a country club. Margaret and their children used the club on a monthly basis. During the same years the Wiksells maintained two pleasure horses which David, Margaret, and their daughter rode. These activities stand in sharp contrast to the life of penury endured by Margaret in the prior years of her marriage to David. Pathetic though that life undoubtedly was, it does not render it inequitable to hold her liable for the deficiencies in tax brought about by her signing returns that were manifestly incorrect insofar as the omissions from gross income are concerned, and by which Margaret munificently benefitted. Notwithstanding the question of Margaret's status as an innocent spouse under section 6013(e)(1)(B), (C), and (D), petitioners argue that Margaret's signatures on the two returns in question were obtained by duress, so that consequently the returns do not constitute true joint returns. Section 6013(e)(1)(A)129 requires, of course, that to set the innocent spouse wheels in motion a joint return must have been made. Margaret's testimony recounts a woeful tale of David's systematic abuse of her and their children over 32 years of married life (the marriage terminated at about the time this case was tried). David and Margaret lived together this entire time, except when David was imprisoned or living in a halfway house. Until the years of his adventures with Hitech and Comstock, David never adequately supported his family, and the family life included a long history of bounced checks, evictions, and petty borrowings from other family members to keep the bill collector at bay. During this time David went in and out of marginal jobs and enterprises, and Margaret earned what money she could working part time as a registered nurse. At one time David dragged Margaret out of bed and threw her across the room and against the wall. One of the children, testifying about witnessing this incident, spoke of seeing her father holding her mother by the hair and slamming her head against the wall. Throughout the marriage David consistently intimidated Margaret and the children, and scoffed at, belittled, 130 and tormented Margaret especially, but also the children. Margaret's attempts to discuss money matters with David were almost always met with anger and responses such as "leave me alone, I'm working." Petitioners offered the testimony of Dr. Leonard W. Sushinsky to establish that Margaret is a victim of an abusive relationship with a power wielding spouse. At the time of trial Margaret was seeing Dr. Sushinsky occasionally and participating in a support group sponsored by the Association to Aid Victims of Domestic Violence. Dr. Sushinsky holds a Ph.D. degree in psychology from Northwestern University, and completed a postdoctoral internship while on the faculty of the University of Illinois in Chicago. At the time of trial he had worked on the staff of Kaiser Permanente as a clinical psychologist for 13 years. He first saw Margaret as a patient in May, 1992 (more than four years after the tax returns in question were signed and filed). He had seen her professionally approximately 10 times by the time of trial on December 14, 1992. Dr. Sushinsky had never previously testified in Court and appeared only because Margaret is his patient. For his appearance in court he expected131 to be paid only his regular hourly salary and expenses. Dr. Sushinsky defined the abusive relationship in which Margaret found herself as "a relationship in which one party punishes or in some way physically or non-physically intimidates the other member of the relationship to the point where the second person will say and do almost anything in order to continue to survive in the relationship." Dr. Sushinsky testified: THE COURT: Are there degrees of power wielding in cases that you see? I mean, some are worse -- some are more -- THE WITNESS: Oh, sure. * * Sometimes a wife won't go along with some things but will go along with many other things. Sure. THE COURT: And what about this case? THE WITNESS: Well, this case it seems to me [is] like one where the relationship developed slowly over the years until she was pretty much into the role, and the role was to say very little and just go along, question once in a while until he starts yelling, hear the same old threats, and then let go and just go along until I really would suspect she didn't think much, she just wanted to get through the day.Beyond the foregoing colloquy Dr. Sushinsky was not directly confronted with132 the question whether, in his opinion, his diagnosis of spousal abuse was the psychic equivalent of overt threats in the context of Margaret's return signings. But on the record before us, we would not in any event be able to accept the validity of an affirmative answer to the question. We have held that a spouse's liability on a joint return depends upon such person's voluntary execution of the return. Stanley v. Commissioner, 45 T.C. 555">45 T.C. 555, 560 (1966). We recognize that the United States Court of Appeals has stated that "Duress" may exist not only when a gun is held to one's head while a signature is being subscribed to a document. A long continued course of mental intimidation can be equally as effective, and perhaps more so, in constituting duress. * * [Furnish v. Commissioner, 262 F.2d 727">262 F.2d 727, 733 (9th Cir. 1958), affg. in part and remanding in part Funk v. Commissioner, 29 T.C. 279 (1957); fn. ref. omitted.]However, it has also been held that the applicable standard for determining duress is entirely subjective, i.e., "whether the pressure applied did in fact so far affect133 the individual concerned as to deprive such person of contractual volition". Brown v. Commissioner, 51 T.C. 116">51 T.C. 116, 119 (1968). The standard as developed involves two critical elements: (1) Whether the taxpayer was unable to resist demands to sign the tax return; and (2) whether the taxpayer would not have signed the returns except for the constraint applied to his or her will. Brown v. Commissioner, 51 T.C. at 119; Stanley v. Commissioner, 45 T.C. 555">45 T.C. 555, 562 (1966). A United States District Court decision (which analyzes duress in tax return cases in impressive detail) holds that "a taxpayer's showing of a generalized fear toward her domineering spouse is insufficient; the taxpayer must produce specific evidence that he or she was indeed overcome by duress at the precise time when the tax return was signed, and that absent such duress, the taxpayer would not have signed the return." United States v. Kramer, 83-2 USTC par. 9474, at 87,705, 52 AFTR 83-5630, at 83-5634 (D. Md. 1983), affd. by court order (4th Cir., June 26, 1983). We found Dr. Sushinsky's134 testimony to be straightforward and convincing, as far as it goes. Nevertheless, neither the facts nor Dr. Sushinsky's testimony satisfy the test for establishing duress. Petitioners bear the burden of proving duress. Rule 142. Margaret signed the 1984 return at or about the time she took it to the jail for David's signature. The record contains no further details of this event, and is entirely silent as to the circumstances surrounding the signing of the 1985 return later in 1987. The closest Dr. Sushinsky's testimony comes to dealing with duress in these two specific circumstances is that Margaret, in any confrontational circumstance, might be expected to "just go along". But this is a far cry from establishing that in each of these two instances she feared that some harm to herself was imminent. Petitioners' case in this posture stands in stark contrast with that, for example, in Brown v. Commissioner, 51 T.C. at 120. There, the taxpayer was partially paralyzed, in pain, and in bed, yet her domineering spouse threatened to hit her if she did not sign the return. We are simply not convinced that Margaret would not have signed the two returns*135 only because of demands by David. As we have already discussed she was aware of the substantial funds available to the couple in the years in question, she knew they were not mentioned on the returns, and she, David, and their children had substantially benefitted from the funds. None of this points to an involuntary signing by Margaret. In short, petitioners have failed to establish a nexus between spousal abuse generally and duress in specific instances, the specific instances in this case being Margaret's signing of these two tax returns. For the foregoing reasons we hold that Margaret is not an innocent spouse as defined in section 6013(e). An appropriate Order of Dismissal and Decision will be entered as to petitioner David L. Wiksell. Decision will be entered under Rule 155 as to petitioner Margaret Wiksell.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624279/	MARIE HANLIN AND THE UNION TRUST COMPANY OF PITTSBURGH, EXECUTORS OF THE ESTATE OF BELLE C. HERSHMAN MARTINEK, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hanlin v. CommissionerDocket No. 79112.United States Board of Tax Appeals38 B.T.A. 811; 1938 BTA LEXIS 823; October 11, 1938, Promulgated 823 1. Municipal bonds of the same obligor and of the same value, differing only in dates of maturity, the difference in maturity being from four to ten months and maturity being approximately sixteen years in the future, held substantially identical securities under section 118, Revenue Act of 1932. 2. Federal Land Bank bonds of the same value, issued by the same Federal Land Bank and differing only in a difference of two and one-half years in dates of maturity, but redeemable at option of obligor at any time after approximately six months, maturity being approximately from twenty and one-half to twenty-three years in the future, held substantially identical securities under section 118, Revenue Act of 1932. 3. Federal Land Bank bonds differing only six months as to maturity, approximately twenty-one years in the future, but issued by different Federal Land Banks, held not substantially identical securities under section 118, Revenue Act of 1932. Joseph G. Robinson, Esq., for the petitioners. Harold D. Thomas, Esq., for the respondent. DISNEY812 OPINION. DISNEY: The Commissioner determined a deficiency of $7,983.19 in824 income tax of the estate of Belle C. Hershman Martinek, deceased, for 1932. He disallowed the deduction of an ordinary loss from the sale of bonds of the city of Philadelphia and of a capital loss from the sale of Federal Land Bank bonds, with the following explanation: These disallowances are based upon section 118(a) of the Revenue Act of 1932, which provides that no loss shall be allowed from the sale of securities where, within a period of thirty days, substantially the same kind and character of securities were repurchased by the taxpayer. The facts are in general not in dispute. The decedent died on March 13, 1933. On February 7, 1931, she created a revocable trust. On November 27, 1931, she transferred to the trustee $125,000 par value city of Philadelphia 4 1/2 percent bonds which had, by distribution dated October 30, 1931, been received by her from the residuary estate of Oliver C. Hershman, who died July 9, 1930. All of these bonds were issued in 1918, pursuant to a city ordinance of June 29, 1916; $60,000 were to mature on May 1, 1948, and the remaining $65,000 on November 1, 1948. On December 8, 1932, the trustee sold $50,000 par value of these bonds at a unit825 price of 89; on December 14, he sold $25,000 par value at 88; and on December 28, he sold $50,000 par value at 86 1/2. The net sales proceeds aggregated $109,437.50, and the trust thereby sustained a loss of $10,723.50. On the same dates and at the same unit prices, the trustee purchased bonds of the city of Philadelphia of the same respective par values, authorized by the same city ordinance, bearing the same rate of interest, and to mature on March 1, 1949. On November 27, 1931, the decedent transferred to the trustee bonds of the Federal Land Bank of Omaha, purchased by her on July 18, 1923, of a par value of $100,000, which bore 4 1/2 percent interest, were to mature on July 1, 1953, and were redeemable on or after July 1, 1933. On December 14, 1932, the trustee sold them at a unit price of 87 1/2, the net proceeds being $87,500 and the loss $12,750. On the same date and at the same unit price, he purchased $100,000 par value 4 1/2 percent bonds of the Federal Land Bank of Omaha, maturing on January 1, 1956. On November 27, 1931, the decedent transferred to the trustee bonds of the Federal Land Bank of Louisville, which bonds had been purchased by her on November 26, 1923. 826 The Louisville bonds had a par value of $50,000, bore 4 3/4 percent interest, were to mature on July 1, 1953, but were redeemable on or after July 1, 1933. On December 14, 1932, the trustee sold them at a unit price of 89 3/4, the 813 net proceeds being $44,875 and the loss $5,000. On the same date and at the same unit price he purchased $50,000 par value 4 3/4 percent Federal Land Bank bonds, maturing on January 1, 1954, $19,000 par value thereof having been issued by the Federal Land Bank of St. Louis and $31,000 par value thereof having been issued by the Federal Land Bank of Wichita. Of the St. Louis bonds $10,000 par value were redeemable at any time after January 1, 1934. All of the St. Louis and Wichita bonds had been issued not later than July 1, 1932 (as shown by computation of interest from that date). The language of section i18(a) of the Revenue Act of 1932, is set forth in the margin. 1827 The losses upon the sales in December 1932 were capital losses, some of the bonds having been purchased in 1923, and the remainder having been "held", under section 101(c)(8) of the Revenue Act of 1932, since July 9, 1930, the date of death of Oliver C. Hershman, and not merely from October 30, 1931, the date of distribution by his estate. McFeely v. Commissioner,296 U.S. 102">296 U.S. 102. The Philadelphia Bonds.The only dispute as to the facts as to the Philadelphia bonds is as to difference in interest dates and as to dates of issuance of the bonds purchased. The petitioner argues that the bonds sold and those purchased differed as to interest dates, likewise as to dates of issue, in that the bonds purchased were issued in 1919, whereas it is agreed that the bonds sold were issued in 1918. The record fails to show either that there was difference in interest dates or that the bonds purchased were issued in 1919, and since there was no agreement in regard to these points, we are confined to a consideration of a difference only in maturity, respondent's determination of substantial identity being presumed correctly to negative any other differences. The question828 to be decided is whether the sale of Philadelphia 4 1/2 percent bonds issued in 1918 under a certain ordinance of June 29, 1916, and maturing in 1948, and the purchase within 30 days thereafter of Philadelphia 4 1/2 percent bonds issued under the same ordinance, maturing four or ten months later in 1949, but otherwise 814 identical, was a statutory wash sale which prevents the deduction of a loss - and this depends on whether, for the purpose of the statute, the bonds purchased and the bonds sold were substantially identical. They were not identical; but were they substantially identical? The statutory expression, and not that used by respondent in the notice of deficiency, is of course to be construed. The statute is not as such ambiguous. The difficulty lies in its application to particular facts due to the indefiniteness of the expression "substantially identical." Interpretation calls therefore for an application of the rule that the legislature must be presumed to use words in their known and ordinary signification. Levy's Lessee v. McCartee,6 Pet. 102, 110; 829 Old Colony Railroad Co. v. Commissioner,284 U.S. 552">284 U.S. 552. If the wash sale provision had contained the word identical without qualification, it could have been literally applied without much difficulty; because its meaning is clear in common usage, in law generally, and in revenue law. This was the form in which the wash sale provision first appeared in the draft of the 1921 House bill. 2 As to it, the House Committee on Ways and Means said in its report: Section 214 would limit the deductions for losses by providing that no deduction shall be allowed for losses sustained in the sale of securities where the taxpayer at or about the time of such sale purchases identical securities. This change will, if adopted, prevent evasion of the tax through the medium of wash sales. [H.R. Rept. No. 350, 67th Cong., 1st sess., p. 11.] 830 The Senate bill incorporated the word substantially, although the Finance Committee report says nothing about it. 3 The Conference Committee adopted the change without comment. The Revenue Act of 1921, as enacted, used the words substantially identical, and succeeding statutes have made no change. There is no aid to construction available in the legislative reports. The word "substantially" must be construed in the light of the intendment of the whole provision. The term "substantially identical" is looser than "identical", and was unquestionably so intended; but the retention of the word 815 "identical" and the testimony before the Senate Finance Committee clearly indicates that approximation to identity, and not mere similarity, was the controlling thought. The word substantially was added to prevent an emasculation of the provision. Thus a sale of common shares and the purchase of certificates immediately convertible into such common shares might have escaped the wash sale restriction if tested by identity, but not if tested by substantial identity. See 831 Margaret E. Kidder,30 B.T.A. 59">30 B.T.A. 59; I.T. 2292, C.B. V-1, p. 12 (1926). On the other hand, there would have been no identity of shares of one corporation with the shares of another corporation holding them, Seymour H. Knox,33 B.T.A. 972">33 B.T.A. 972. The petitioner refers to I.T. 1365, C.B. I-1, p. 151, as to Liberty bonds of the second and fourth issues. Therein appeared difference in market value and date of issuance, in addition to difference in maturity. What differences, if any, cause the difference in market value, does not appear. I.T. 2585, C.B. X-2, p. 182, also cited, involved the generally recognized difference between voting stock and nonvoting stock in the same corporation. I.T. 2672, C.B. XII-1, p. 72, likewise relied upon, involved832 different interest dates, different values, and different dates of issuance, in addition to different dates of maturity. I.T. 2778, C.B. XIII-1, p. 79, cited as involving an example of bonds clearly identical, shows differences in date of issue and in amount redeemable annually, though date of maturity and rate and dates of payment of interest were the same; also, the bonds received in exchange were issued under a supplement to the indenture under which those exchanged were issued. It thus appears that none of the above situations is parallel with the instant matter, wherein difference only in date of maturity must be relied upon as negating substantial identity. The present question has not heretofore been clearly met. The regulations promulgated by the Commissioner do not assist. Difference in maturity date of bonds is clearly an element in the construction of the term "substantial identity." It does not, however, constitute per se a negation of substantial identity; that would be to allow any difference whatever in maturity, e.g., one day, to be effective and patently to vitiate the statute and defeat its essential purpose. 833 Nor can a rule consonant with the remedy sought by the statute be established upon a concept that substantial identity does not exist unless the difference in maturity is negligibly slight. To do so would be to disregard the rationale of our opinions in various cases involving consideration of the expression "substantially all" applied to the amount of stock necessary for control of corporations, and to the amount of property involved in reorganizations, wherein we have construed "substantially all" not to be negatived by a merely negligible quantity as to stock or property. 816 Among other cases, in Brownsville Ice & Storage Co.,18 B.T.A. 439">18 B.T.A. 439, we considered "substantially all" not avoided by 8 percent of stock necessary for control of a corporation under section 240(c), Revenue Act of 1921, and in Western Industries Co. v. Helvering, 82 Fed.(2d) 461, it was held that absence of what the Board had found was not less than 15 percent of property did not prevent application of "substantially all" under section 203(h)(1)(A) of the Revenue Act of 1926. In 834 Arctic Ice Machine Co.,23 B.T.A. 1223">23 B.T.A. 1223, 1228, we relied upon the analogy between the expressions in the two statutes. There is the same analogy here. Two things which are identical are 100 percent the same. "Substantially identical" plainly means identical in "substantially all" respects, i.e., substantially 100 percent the same. "All" is no more an absolute than is "identical." "Identical is the strictest term for entire and absolute agreement or negation of difference." - Webster's New International Dictionary. Yet above we see that we have plainly considered that a substantial approximation to the absolute "all" was satisfied when there was considerably more than a mere negligibility in difference. What amount of difference prevents substantial identity? An elastic term has been used by Congress as to stock control, as to property in reorganization, and here as to identity of securities, and "the very use of elastic terms indicates an intent to have them construed flexibly in the light of the peculilar circumstances in each particular case." 835 Rishell Phonograph Co.,2 B.T.A. 229">2 B.T.A. 229. In Great Lakes Hotel Co. v. Commissioner, 30 Fed.(2d) 1, it is said: "Substantially all the stock" is a lax, indefinite expression, which, under the rulings of the board, is equivalent to "a large majority." Its limitations cannot be defined with exactness or certainty. * * * In United States v. Whyel, 19 Fed.(2d) 260, it is held: The term "substantially all the stock" clearly indicates, not a definitely fixed amount of percentage, but is a somewhat elastic term, which must be construed according to the facts of the particular case. * * * To the same effect are Brownsville Ice & Storage Co., supra, and Commissioner v.Hirsch & Co., 30, Fed.(2d) 645. "Substantially" has perhaps no better definition than "in the main", as given by the New Century Dictionary and Encyclopedia. In Gibson v. Glos,111 N.E. 123">111 N.E. 123, there was considered the question of a statutory expression, "substantially the same chain of title." Just as here the statute has been amended by the addition of "substantially" to "identical", there it had been amended by addition836 of "substantially" to "the same chain of title." Under the previous statute it had been held in Culver v. Waters,93 N.E. 747">93 N.E. 747, that "same" meant "identical." Holding that it was "evident that by the amendment the Legislature intended to relax the strict requirement of the former statute" the court also defines substantially as "in the main." Applying 817 such definition generally, it is plain that the Philadelphia bonds herein involved were in the main identical, being so identical in par value, unit selling price, interest rate, date of issuance and authorizing ordinance, and lacking identity in only one characteristic out of several. Under such circumstances and within the above definition, difference in maturity standing alone, might, regardless of amount of difference, be considered so relatively unimportant as to be disregarded in considering substantial identity. But assuming that the nonidentical characteristic, maturity date, could of itself be regarded, as a generality, of such comparative importance as to prevent application of the above general definition "in the main", and therefore further examining that element of difference here, we837 are still constrained to examine it as to whether the amount of difference in maturity here involved effects a difference substantially or in the main in the bonds. The distinction between the bonds is patently not substantial as a matter of mathematical comparison of duration of life of bonds and amount of difference in maturities, for the percentage or proportion of difference in duration between the bonds is much less than the difference in percentage in amounts of stock or property allowed as a deviation from 100 percent involved in the statutes and cases referred to above. Upon the authority of those cases, we conclude that there was no substantial abstract mathematical difference in mere life duration of the bonds, i.e., in their maturity. If, however, we consider the matter other than quantitatively, it seems plain that examination must be from the standpoint of normal investor and normal obligor. We are unable to discern any interest on the part of any other, but if such interest could be conceived, it would be so inconsequential as not to affect our consideration here, and we shall confine our thought to obligor and obligee of the bond as the norm to be regarded. In838 what do the bonds here being considered differ substantially for either obligor or obligee as to maturity (other than mere amount of difference above discussed)? The maturities are remote, that is one bond has a life or permanence differing from the other bond only in a longer duration, but both still running for a long period of time. We think that consideration of a difference in remote maturities does not substantially affect the normal investor in bonds, otherwise identical. Plainly, such remote maturity is much less important to him than rate of interest or return on his investment, certainty of payment, value, and the other characteristics identical in the bonds herein considered. All other things being equal, the only consideration reasonably important or practical to the normal investor seems the permanence of his investment, and there is, we think, no substantial difference in permanence 818 of investments of approximately sixteen years life, to be found only in a difference of four or ten months in length of life of bonds. Indeed the particular investor here was obviously not materially or substantially affected by the difference in maturity, since he paid839 the same unit price for bonds as received by him for bonds of a different maturity, and otherwise identical. As to the obligor, it is apparent that the difference in maturities is of importance analogous to that to the investor, and that such difference in remote maturities is not substantially important in comparison with the other characteristics such as interest rate and amount to be paid - the identical features in the bonds here; yet it is easily conceivable that circumstances might, from obligor's standpoint, make material difference between bonds differing not greatly in their duration. For example, the maturity of other onerous bonds between the two dates of maturity being considered might render obligor less able to meet the bonds last maturing. Such events or circumstances, however, and not the mere difference in maturity dates, would effect the difference in the bonds, and the certainty or immeinence of such concrete events has not been shown by the petitioner herein. We are therefore as to position of both obligor and obligee, in the absence of other proof, left to consider only the abstraction as to difference in maturity dates, a mathematical and quantitative element840 as above seen, and one which in amount, by parity of reasoning in the cases above noted, has been found insufficient to overcome a determination of substantial identity. Such slight and remote disparity in maturity as here appears can not be said alone to negative the fact that in the main the bonds possess identity. We conclude under the facts herein that petitioner has not shown that the Philadelphia bonds in question were not substantially identical and in that respect respondent's determination is approved. The Omaha Land Bank Bonds.Here again we consider sale and purchase of bonds issued by the same obligor. Those sold matured July 1, 1953, with privilege of redemption on or after July 1, 1933; those purchased matured January 1, 1956. The record does not indicate as to whether they contained the same provision as to redemption after July 1, 1933, nor does it contain the dates of issuance of either the bonds sold or those purchased. Therefore, respondent's determination of substantial identity being presumed correct, we assume the bonds to be identical in all particulars except date of maturity, petitioner not having shown to the contrary, and having in fact suggested841 no other difference in the bonds other than difference in maturity date. The bonds sold had approximately twenty and one-half years yet to run; those purchased had approximately twenty-three years yet to run, a 819 difference in maturity dates of two and one-half years; but both, we must assume, were subject to redemption at any time on or after July 1, 1933, at the option of the issuing Land Bank. They were issued pursuant to the same statutory authority, which provides for redeemability after not more than ten years from issuance (Sec. 861, ch. 7, Title 12, U.S. Code Annotated), and the officials issuing the bonds are presumed to have obeyed the statute. Were the bonds purchased "substantially identical" with those sold on December 14, 1932? If there was an unconditional positive difference of two and one-half years in the maturity or redeemability of the bonds a more difficult question as to the substantiality of the difference might arise, but here, on December 14, 1932, there were sold and purchased, for the same unit price, bonds all of which were subject to redemption after July 1, 1933, and in all respects identical except that if not redeemed at any time after842 July 1, 1933, those sold would be payable July 1, 1953, those purchased payable January 1, 1956. Was there, applying the definition above approved, because of a difference of two and one-half years in ultimate maturity of the bonds, a difference "in the main" or substantially? In our opinion the element of redeemability after July 1, 1933 - only six months, approximately, from date of sale and purchase - was much more important to the orginary purchaser of these bonds and to the obligor than the date of ultimate maturity. So far as life or duration of the bonds was concerned, to the ordinary investor and obligor, we believe the main characteristic was the possibility of redemption, at any time after a few months after the sale and purchase here concerned. Payment is obviously the prime and most important element of a bond. An obligation which may be paid at any time within the option of the obligor is treated and valued accordingly, and when such option is exercisable at any time within almost the entire period of twenty and one-half or twenty-three years the bonds have yet to run, the bonds are plainly in their most important aspect, in the same category - they are, in the main, 843 or substantially, identical. We conclude, therefore, that the Omaha Land Bank bonds sold and those purchased were substantially identical, within the purview of section 118(c) of the Revenue Act of 1932. Louisville Federal Land Bank Bonds Sold; St. Louis and Wichita Federal Land Bank Bonds Purchased.Here a third situation is to be considered. The bonds of one Federal Land Bank were sold and on the same day purchase was made of the same par value amount of Federal Land Bank bonds, at the same unit price and bearing the same rate of interest as the bonds sold, but issued by two other Federal Land Banks. 820 We think that fact establishes essential and substantial difference. Respondent argues that all Federal Land Banks are alike liable upon the bonds of each. If such liability were essentially or substantially the same as to each Land Bank, regardless as to which issued the bonds in question, such contention would no doubt be sound. But under the statutes providing for such bonds such liability does not appear. Indeed the very fact that the twelve Land Banks may issue consolidated bonds (sec. 875-879, ch. 7, Title 12, U.S. Code Annotated) which shall be the844 "joint and several obligation of the twelve Federal Land Banks" indicates that the liability of other banks than the issuing bank, as to other than consolidated bonds, is not substantially identical. These are not consolidated bonds. Other statutes show that as to the bonds here involved the liability of other banks is not joint and several, but is contingent only and not essentially the same as that of the issuing bank. Section 872 provides that the issuing bank is primarily liable, and that the other Federal Land Banks are liable only for interest payable by the issuing bank only in case of its default, and for the portion of the principal unpaid after application of the assets of the issuing bank; such liability of the other banks, however, to be only in proportion to the amount of farm loan bonds which each may have outstanding at the time of assessment of liability against it by the Farm Credit Administration, because of the liability above described through the default of the issuing bank. It is plain that such liability of other banks is not by any means the primary liability borne by the issuing bank, but that it is essentially and substantially different. We therefore845 conclude and hold that the bonds of the St. Louis and Wichita Federal Land Banks were not substantially identical with those of the Louisville Federal Land Bank, and therefore that deductible capital loss was suffered by petitioner as to the sale of the Louisville Federal Land Bank bonds; but that the losses incurred in sale of the Philadelphia and Omaha Federal Land Bank bonds are not deductible, under the provisions of section 118(a) of the Revenue Act of 1932. Reviewed by the Board. Decision will be entered under Rule 50.STERNHAGEN STERNHAGEN, dissenting: While it can not be seriously denied that the bonds sold and the bonds purchased were in several respects similar, it seems to me that this does not bring them within the statutory denial of deduction. The dominant word underlying the denial is the word "identical", and I think this may not be overridden by emphasizing the qualifying word "substantially." When words of 821 such plain meaning are used in legislation in order to restrict deductions which are otherwise allowable, I think they should not be interpreted so as to give them a meaning which they do not have. Throughout the revenue acts846 Congress has chosen to use the words "similar", "like", and "equivalent" 1 frequently enough to indicate that the use of the word "identical" in this instance was not inadvertent. In the statement of the Treasury's representative, Adams, before the Senate Finance Committee, preceding the enactment of the Revenue Act of 1921, in which the provision first appears, he said that if a taxpayer "changes from one form of Liberty bonds to another form of Liberty bonds, or sells United States Steel and buys New York Central, he can take his loss under this provision." (Hearings before Committee on Finance on H.R. 8245, 67th Cong., 1st sess., p. 52). The rulings of the Bureau from that time on seem to me to indicate a consistent administration of the statute which treats a difference in maturity date of bonds as disproving that they were "substantially identical." To hold otherwise, as the present decision does, is to adopt such an elusive, impressionistic rule as to be practically impossible of the undiscriminatory uniformity with which a tax law should be administered. The present opinion seems to provide a caveat if the disparity between maturity dates of otherwise similar bonds is wide847 enough, but it supplies no satisfactory standard which will enable either taxpayers or administrators to say with any assurance whether the loss in any case is deductible or not. BLACK and LEECH agree with this dissent. Footnotes1. SEC. 118. LOSS FROM WASH SALES OF STOCK OF SECURITIES. (a) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under section 23(e)(2); nor shall such deduction be allowed under section 23(f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business. ↩2. SEC. 214. Paragraphs (5), (6), and (7) of subdivision (a) of section 214 of the Revenue Act of 1918 are amended to read as follows: "(5) * * No deduction shall be allowed under paragraphs (4) and (5) for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of the Revenue Act of 1921 where it appears that at or about the date of such sale or other disposition the taxpayer has acquired identical property in the same or substantially the same amount as the property sold or disposed of. If such new acquisition is to the extent of part only of identical property, then the amount of loss deductible shall be in proportion as the total amount of the property sold or disposed of bears to the property acquired;" [H.R. 8245, 67th Cong., 1st sess. (Aug. 15, 1921), p. 17.] ↩3. Section 214 allows substantially the same deductions in computing net income as are authorized under existing law, but adds the following provision: * * * (3) to prevent evasion through the medium of wash sales, it is provided that no deduction shall be allowed for losses sustained in the sale of securities where it appears that within 30 days after such sale the taxpayer purchases identical securities; * * * ↩1. Revenue Act of 1913, sec. E; Revenue Act of 1916, sec. 13(e); Revenue Act of 1917, sec. 1208; Revenue Act of 1921, secs. 202(c), 214(a)(12); Revenue Act of 1932, secs. 112(b)(1), (5), 115(g) g 143, 212(b), 231(b). ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624281/	NATIONAL PRODUCTS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.National Prods. Co. v. CommissionerDocket No. 12120.United States Board of Tax Appeals11 B.T.A. 511; 1928 BTA LEXIS 3795; April 11, 1928, Promulgated 3795 Invested capital for the year 1918 should not be reduced by the amount of an alleged deficiency for the year 1917, which under a prior proceeding was held to be barred by the statute of limitations, and the liability therefor extinguished under section 1106 of the Revenue Act of 1926. Ewing Laporte, Esq., for the petitioner. Alva C. Baird, Esq., for the respondent. MORRIS511 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar years 1918, 1919 and 1920, amounting to $30,017.58. The sole question presented by this proceeding is whether the respondent has unwarrantably reduced the invested capital of the company in the years 1918, 1919 and 1920 by the amount of income and profits taxes computed by him for the preceding year. At the hearing of this proceeding the issue involved was submitted for consideration on the pleadings, no evidence being offered with respect thereto. FINDINGS OF FACT. The petitioner is a corporation, organized and incorporated under the laws of West Virginia, with its principal office in Pittsburgh, Pa. The respondent in his deficiency notice dated December 22, 1925, has3796 reduced the petitioner's invested capital for the year 1918 by $106,953.77, representing the pro rata portion of the petitioner's alleged income and profits tax liability for 1917 of $195,190.62. The respondent made an additional assessment in March 1924, on account of the year 1917, which brought the total alleged tax liability for 1917 to $195,190.62. He has also reduced invested capital in said deficiency notice, for the year 1919, $13,734.11, representing the pro rata portion of its alleged income and profits tax liability of 512 $32,499.09 for 1918; and he has also reduced the petitioner's invested capital $11,667.49 for 1920, representing the pro rata portion of alleged income and profits-tax liability of $27,687.44 for 1919. The petitioner's income and profits-tax liability for 1917 was considered by this Board in the , in which proceeding we held: "Under section 1106 of the Revenue Act of 1926 the statute of limitations not only bars the remedy but extinguishes the liability. There is no deficiency." OPINION. MORRIS: While the taxes for three years are in controversy, we are concerned primarily3797 with the taxes for the year 1918, as affected by our prior ruling that the proposed deficiency for 1917 was barred by the statute and that section 1106 of the Revenue Act of 1926 extinguished the liability. The petitioner contends in this proceeding that since the deficiency for 1917 was found to be outlawed the invested capital for 1918 should not be reduced by any portion of that amount. The respondent in his brief contends that the petitioner has failed to overcome the presumption of correctness with respect to his determination in that (1) there is nothing in the record to establish that the Board has ever made any prior determination of facts essential to a decision in the instant case, and (2) even though the Board takes judicial notice of the findings of fact and decision of a prior case it does not, under the circumstances in this appeal, have any effect on the decision to be made thereon. Without dwelling to any great extent upon the contention urged by the respondent, there is in the record a clear and undisputed showing that the petitioner's 1918 invested capital has been decreased by the amount of the alleged income and profits-tax liability for 1917. With that3798 knowledge and with the further knowledge that the deficiency for 1917 has been heretofore adjudicated by this Board and found to be outlawed by the statute of limitations, we would place ourselves in an anomalous situation if we failed to make use thereof in determining the rights of the parties in the instant proceeding. In referring to the former proceeding it is not as though we were about to make use of facts found in the record for use in this proceeding, which we have held in the , are only prima facie evidence when offered in a subsequent proceeding. We are simply relying on our decision in the former proceeding, and in doing so we regard it as our duty where the substantive rights of the parties must be properly determined. We are of the opinion that the admitted facts in the pleadings are sufficient and that the allegation of error set forth by the petitioner 513 is sufficiently broad to place directly in controversy the question urged by the petitioner. The question is therefore presented whether the petitioner's invested capital for 1918 should be reduced by the amount of the deficiency for 19173799 found by this Board to have been outlawed. The respondent relies strongly upon the language used in a memorandum, dated September 27, 1927, on settlement under Rule 50, in the Appeal of J. S. Hoskins Lumber Co. In that proceeding the petitioner raised the same contention at the hearing on final determination as is now before us, but we could not determine, due to the lack of evidence, whether or not the 1917 tax was barred by the statute of limitations. On that ground the conclusion in that memorandum that the reduction of invested capital by the amount of the 1917 tax was proper, is correct, and the language subsequently used must be read in connection with the facts of record therein. The identical question presented for consideration in the instant case was considered and disposed of in the . In that case the petitioner contended that the deficiency for 1918 was outlawed and that the respondent erred in reducing invested capital for 1919 by the amount of the outlawed deficiency for 1918 prorated in accordance with the regulations. The Board there held that the deficiency for 1918 was barred by the running of3800 the statute, and having so held, it ordered that the deficiency for 1919 be redetermined by restoring to invested capital for 1919 the amount by which invested capital was reduced by reason of the outlawed deficiency for 1918. In view of the , we are of the opinion that the deficiency for 1918 should be redetermined by restoring to invested capital the amount by which said invested capital was reduced by reason of the outlawed deficiency for 1917. Since the petitioner has offered no testimony as to the incorrectness of the respondent's adjustments of invested capital for 1919 and 1920 by the amount of the deficiencies found for the years immediately preceding, and since it does not appear that those adjustments are contrary to the regulations in force during those years, section 1207 of the Revenue Act of 1926 is controlling, and we, therefore, approve the respondent's determination as to those years, except in so far as the invested capital may be affected by our decision herein that the invested capital for 1918 should not be reduced by the outlawed deficiency for 1917. Judgment will be entered on 15 days' notice, under3801 Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624282/	R. J. BAUER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBauer v. CommissionerDocket No. 3609-71.United States Tax CourtT.C. Memo 1973-111; 1973 Tax Ct. Memo LEXIS 176; 32 T.C.M. (CCH) 496; T.C.M. (RIA) 73111; May 17, 1973, Filed R. J. Bauer, pro se. Clarence F. Frazier, Jr., for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, Judge: The respondent determined a deficiency of $2,140.42 in the petitioner's Federal income tax for 1966. The issues to be decided in this case are178 whether the petitioner, a worker on construction projects, was away from home for tax purposes, how much per diem he received during the year, and whether he is entitled to deduct any unreimbursed automobile expenses. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioner, R. J. Bauer, was a resident of Fort Collins, Colorado, at the time his petition was filed in this case. He filed a joint Federal income tax return for the year 1966 with the director of international operations, Washington, D.C. On such return, the petitioner set forth as his address the address of his father which he used as his mailing address. Also, on such return, he signed the name "Sandra L. Bauer," intending it to be the signature of his purported second wife, and not that of his first wife, who filed an individual income tax return for the year 1966 solely in her own name. The petitioner married Sandra L. Bauer in 1959, and one daughter, Tracey L. Bauer, was born from this marriage. From 1961 to 1963, the petitioner and his family resided in Canoga Park, California, where he worked as an x-ray technician-film processor. In 1963, the petitioner179 and his family moved to Daytona Beach, Florida, where he began working for the United States Testing Company at Cape Kennedy. In 1964, the petitioner and his family moved to Coral Gables, Florida, where he was engaged by Pittsburgh Testing as a nondestructive test supervisor in the construction of power plants being erected in Cocoa and Fort Lauderdale, Florida. A nondestructive tester tests castings and fittings through the use of radioactive isotopes and special film. As a result of such procedure, an object tested is not destroyed in the course of an examination. In March 1965, the petitioner moved to the Baltimore, Maryland, area and began working for Ebasco Services, Incorporated (Ebasco), on a power plant project nearby. However, his family did not accompany him, as 2 weeks prior to such move, the petitioner and his wife, Sandra L. Bauer, separated by mutual consent. She and Tracey moved to Eugene, Oregon, where they continued to reside through 1966. The petitioner sent no money for the support of his wife and did not conhabit with her during their separation. On January 9, 1967, Sandra L. Bauer obtained a divorce from the petitioner. The petitioner worked at the project180 as a nondestructive test supervisor until March 15, 1966. Upon completion of such project, he moved to Colorado City, Texas, to work as a nondestructive test supervisor at another power plant being constructed by Ebasco. In Colorado City, the petitioner lived in a hotel which was located approximately 6 miles from the jobsite. At the jobsite, the petitioner's work trailer, in which the radioactive isotopes were stored, was approximately three-quarters of a mile from the most distant spot at which tests were conducted. It was the petitioner's practice to use his automobile to transport the radioactive isotope, which was inside a 75-pound lead container, and the film, which measured 17 feet in length, from his work trailer to the test site. He generally conducted 2 or 3 tests in an afternoon, and accordingly, made 2 to 3 trips from his trailer.On occasion, he was required to conduct additional tests during off hours, and so he made additional trips from the hotel to the jobsite. The petitioner's employer did not require use of an automobile for the onsite trips from the work trailer to the test site. However, when use of the petitioner's automobile was required for other tasks, 181 the petitioner was reimbursed at the rate of 8 cents per mile. The petitioner also received an allowance of $10 per day in addition to his salary for 82 days while employed at the Colorado City project. In late March 1966, the petitioner met Sandra L. Baker, with whom he began cohabiting mostly on weekends. She and her two sons by a previous marriage lived with her mother in Dallas, Texas. In 1966, the older son was approximately 4 years old, and the younger son was under 2 years old.Either the petitioner left Colorado City on Friday evenings to visit Sandra L. Baker in Dallas, or when he was required to work on Saturday, she visited him in Colorado City. On such weekends, he gave her money to reimburse her mother for rent and groceries and to help out with the children. At the completion of the Colorado City project in June 1966, Ebasco transferred the petitioner to a project in Dallas. While in Dallas, he resided in the home of Sandra L. Baker's mother along with Sandra and her two sons. Within approximately 2 weeks of his arrival in Dallas, the petitioner left for a 2-week trip to New York City, at his employer's request, in connection with a reassignment to Japan. He182 drove to and from New York. Upon his return to Dallas, the petitioner hired and trained his replacement on the Dallas project for for his employer. At the end of 2 weeks, he drove to Los Angeles, California, the point of embarkation for Japan, and while there, vacationed for 2 weeks with his father. From Los Angeles, the petitioner flew to Tokyo, Japan, and arrived on August 13, 1966. The petitioner contracted to work in Japan for 3 years as a welding engineer at a jobsite in Tsuruga, Japan. Under such contract, he was to receive an annual salary of $10,000, a premium for overseas service, and certain other fringe benefits. Prior to his arrival in Tsuruga, the petitioner was assigned to a project in Tokyo, and during such assignment, which was intended to last 3 months, he was to receive an allowance of $25 per day, payable in yen, in addition to his salary. His assignment in Tokyo lasted longer than expected, and by January 1, 1967, he still had not arrived in Tsuruga. Late in December 1966, Sandra L. Baker and her two sons flew to Japan at the expense of the petitioner's employer. Sandra L. Baker flew at full fare, the elder son flew at half fare, and the younger son183 flew at 10 percent of full fare. Upon her arrival, it was discovered that the petitioner's employer would not assume responsibility for Sandra L. Baker and her sons unless she and the petitioner were formally married. Accordingly, the petitioner and Sandra L. Baker went through a formal ceremony, even though both knew that Sandra L. Bauer had not, at that time, obtained a divorce. Such ceremony was registered with United States authorities. Sandra L. Baker and her two sons returned to the United States in the early part of January 1967, and she divorced the petitioner in March 1967. The petitioner returned to the United States in September 1967. For his services in Japan, the petitioner's salary in 1966 amounted to $4,430.24. In addition, while in Japan, he received a living allowance in the amount of $3,500.00 in 1966. In his notice of deficiency, the respondent determined that the petitioner received $4,430.24 in wages for services in Japan, $3,500.00 of income in the form of per diem allowances while in Japan, $2,120.00 of income in the form of per diem allowances while in the United States, and $720.00 of income representing the value of transportation furnished by the184 petitioner's employer for Sandra L. Baker and her 2 sons. In addition, the respondent denied deductions of $5,175.00 claimed as meals and lodging expense while in Japan and $1,098.00 claimed as automobile expense arising from the petitioner's moves to Colorado City from Baltimore, to Dallas from Colorado City, to and from New York City from Dallas, for transporting his test materials at the Colorado City jobsite, and for the additional trips to the jobsite. Finally, the respondent allowed a deduction of $71.55 representing a moving expense deduction for the move to Los Angeles, the point of embarkation to Japan, which was not claimed by the petitioner. OPINION In this case, we must decide several issues: whether the petitioner was away from home for tax purposes during 1966; how much he received as a per diem allowance while he was working in the United States and while he was working in Japan in 1966; how much he received as wages while he was working in Japan; whether he incurred any unreimbursed automobile expenses which he is entitled to deduct; and whether he is taxable on amounts which his employer paid as air far for Sandra L. Baker and her 2 sons. The petitioner contends185 that throughout 1966 he was away from home, and therefore, he is entitled to a deduction for the per diem allowances received in the United States and Japan and also for the cost of meals and lodging incurred in Tokyo, which was $5,175.00. In his petition, he asserted that while in the Baltimore area, his home was with Sandra L. Bauer on the West Coast; that while in Colorado City, it was with Sandra L. Baker in Dallas; and that while in Tokyo, it was in Tsuruga. He also claims that his 3-year assignment in Japan was for a temporary period. The respondent contends that the petitioner was never away from home and is, therefore entitled to neither deduction. Accordingly, it is the respondent's position that the per diem allowances were merely additional compensation for personal expenses which are not deductible. See sec. 262, Internal Revenue Code of 1954; 1Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946); Darrell Spear Courtney, 32 T.C. 334">32 T.C. 334 (1959). Similarly, he contends the cost of meals and lodging was personal in nature, and therefore, such expense was not deductible under section 262. In addition, the respondent contends that even186 if the petitioner were away from home in Tokyo, the excess of expenses over per diem is not deductible because of the absence of substantiation, as required by section 1.274-5(e) of the Income Tax Regulations. In our view, the petitioner was never away from home in 1966, and therefore, he is entitled to neither deduction.Accordingly, we do not reach the respondent's alternative argument. Personal living expenses are ordinarily nondeductible. Sec. 262. However, section 162(a) (2) allows a taxpayer to deduct certain living expenses paid or incurred while away from home in the pursuit of his trade or business. The purpose of allowing such deduction is "to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional duplicate living expenses." Ronald D. Kroll, 49 T.C. 557">49 T.C. 557, 562 (1968); see Rosenspan v. United States, 438 F. 2d 905, 912 (C.A. 2, 1971), cert. denied 187 404 U.S. 864">404 U.S. 864 (1971); James v. United States, 308 F. 2d 204, 207 (C.A. 9, 1962); Truman C. Tucker, 55 T.C. 783">55 T.C. 783, 786 (1971); Lloyd G. Jones, 54 T.C. 734">54 T.C. 734, 740 (1970), affd. 444 F. 2d 508 (C.A. 5, 1971); Kenneth H. Hicks, 47 T.C. 71">47 T.C. 71 (1969). If a taxpayer cannot show that he had both a permanent and temporary abode in the year at issue, he is not entitled to the deduction.See Rosenspan v. United States, supra; James v. United States, supra; Kenneth H. Hicks, supra; Henry C. Deneke, 42 T.C. 981">42 T.C. 981 (1964); Charles E. Duncan, 17 B.T.A. 1088">17 B.T.A. 1088 (1929) (all of which concerned salesman who had no permanent place of abode); see also Leo M. Verner, 39 T.C. 749">39 T.C. 749 (1963) (engineer who maintained no abode in area from which he was transferred); Wilson John Fisher, 23 T.C. 218">23 T.C. 218 (1954), affd. 230 F. 2d 79 (C.A. 7, 1956) (musician who had no abode other than wherever he worked); Moses Mitnick, 13 T.C. 1">13 T.C. 1 (1949) (manager of traveling theatrical company who had no abode other than wherever a show he managed happened to be). 188 The record clearly indicates that the petitioner maintained no abode in 1966 other than at the place where he happened to be employed. In 1963, 1964, and 1965, the petitioner changed his residence with each new job, and thereafter, maintained no connection with or abode at the place from which he moved. In 1966, when the petitioner maintained his abode in the Baltimore area and was employed at a nearby power plant project, he had no connection, business or otherwise, with any other locality. Although he claimed in his petition that during such time he supported Sandra L. Bauer on the West Coast, the petitioner did not cohabit with her, and at trial, admitted that he did not support her. Accordingly, he incurred no duplicate living expenses while in Baltimore. Similarly, while in Colorado City, the petitioner maintained his abode in a hotel close to the jobsite. Although he visited, or was visited by, Sandra L. Baker on weekends, at which time the two cohabited, and although he gave her money during such visits to reimburse her mother for rent and groceries and to help out with her children, it cannot be said that the petitioner maintained an abode in Dallas. The petitioner's189 claim that Sandra L. Baker was his common law wife is not supported by Texas law. In Texas, common law marital status is not extended to a relationship in which the putative husband has another as his living wife ( Drummond v. Benson, 133 S.W.2d 154">133 S.W. 2d 154, 159 (Tex. Ct. Civ. App. 1939)), or in which the cohabitation is irregularly spaced even though frequent ( Walter v. Walter, 433 S.W.2d 183">433 S.W. 2d 183, 195 (Tex. Ct. Civ. App. 1968)). The petitioner was legally married to Sandra L. Bauer through 1966, and his cohabitation with Sandra L. Baker was not continuous - it occurred mostly on weekends. In these circumstances, the bonds of common law marriage did not exist. Accordingly, the payments made by the petitioner to Sandra L. Baker can only be viewed as gratuitous, and therefore, it cannot be said that any additional or duplicate expense was incurred in maintaining an abode in Colorado City. In his petition, the petitioner claimed that he maintained an abode in Tsuruga at all times while in Japan. Thus, he contends that he was away from home while in Tokyo. At trial and in his brief, the petitioner claimed his home was in the United States and that he was away from190 such home during his entire stay in Japan, which was temporary. Yet, it is of little import whether the petitioner viewed Tsuruga or a place in the United States as his home. In either case, his residency in Tokyo was similar to the earlier residencies in Canoga Park, Daytona Beach, Coral Gables, the Baltimore area, Colorado City, and Dallas. In each instance, the petitioner actually maintained his home in one locale until he received a new job offer or, upon completion of a project, a new assignment in a different city. Moreover, the record does not corroborate the petitioner's claims that in 1966 he maintained a home in Japan at a place other than the location of his assignment in Tokyo. On his Japanese final income tax return for 1966, the petitioner indicated that his adress was in Tokyo, not Tsuruga; and on his Federal income tax return for 1966, the United States address shown was the residence of his father and was used merely as a mailing address. Accordingly, the petitioner has failed to demonstrate that duplicate or additional expenses were incurred while in Tokyo. The respondent determined that the petitioner received $10 per diem allowances to the extent of $2,120191 while in the United States. At trial, the petitioner claimed he received such allowances only for 82 days while in Colorado City. He testified that he did not receive a per diem allowance while working on the Baltimore project or the Dallas project; he stated that the allowance was only paid for work on remote projects when the employer could pass on the cost of the allowance. In view of this testimony, which appears to be altogether credible, we find that the petitioner received the per diem allowance while working in the United States for only 82 days in 1966, or a total of $820. Similarly, the respondent determined that the petitioner received a $25 per diem allowances in yen to the extent of $3,500 while in Tokyo. The petitioner contends that the rate of the per diem was $25 per day until October 1, 1966, then $7 per day until the arrival of Sandra L. Baker in December, and finally $21 per day until December 31, 1966. At trial, the petitioner introduced a portion of a letter for the purposes of corroborating his contention. When questioned as to the contents of the portion not introduced, the petitioner could not or would not testify. On the other hand, the respondent192 directs our attention to the petitioner's Japanese final individual income tax return for the year 1966, in which the petitioner shows total receipts of 1,261,461 yen. This amount was equal to approximately $3,500. The petitioner was in Tokyo from August 13, 1966, through December 31, 1966, or 140 days, and a per diem allowance of $25 per day for such period amounts of $3,500. In these circumstances, the respondent's determination has been corroborated; the petitioner has failed to meet the burden of proof. Accordingly, we uphold the correctness of the respondent's determination as to this issue. The respondent determined that the petitioner received compensation in the amount of $4,430.24 for services rendered in Japan during the year 1966. On a Form 1099 filed by his employer, such amount was shown as wages paid to the petitioner in 1966, and the parties agree in their briefs that this amount represented wages for such year. However, the petitioner contends that such wages were not actually paid to him until he returned to the United States in 1967 and that for such reason, he was not taxable on such amount in 1966. 193 As a general rule, a cash basis taxpayer recognizes and reports income upon the actual receipt of cash or its equivalent. However, a taxpayer may not deliberately turn his back upon income and thus select the year for which he will report it. Hamilton Nat. Bank of Chattanooga, Administrator, 29 B.T.A. 63">29 B.T.A. 63 67 (1933); see also Ernest K. Gann, 31 T.C. 211">31 T.C. 211, 217 (1958). Thus, unless subject to substantial limitations or restrictions, income not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. Sec. 1.451-2(a), Income Tax Regs. Whether there has been "constructive receipt" of income is a question of fact, and the burden of proof is on the petitioner. Hamilton Nat. Bank of Chattanooga, Administrator, supra at 29 B.T.A. 66">29 B.T.A. 66; 194 Rosenberg v. United States, 295 F. Supp. 820">295 F. Supp. 820, 822 (E.D. Mo. 1969), affd. per curiam 422 F. 2d 341 (C.A. 8, 1970). The petitioner has utterly failed to prove that the wages were not available to him. He offered no evidence as to the alleged arrangement with his employer for withholding payment of the funds until he returned to the United States. There is no proof that the funds were not subject to his withdrawal at any time. Under such circumstances, we must sustain the respondent's determination with respect to this issue. The petitioner contends that the deduction for automobile expenses which he claimed on his return for 1966 was to cover the costs of his driving from Dallas to New York City and back, the costs of operating his automobile at the jobsite in Colorado City, and the costs of moving from one jobsite to another. For a traveling expense to be deductible under section 162(a) (2), the taxpayer must substantiate his testimony with adequate records of the amount of such expense, the time and place of travel, and the business purpose of such expense. Sec. 274(d); sec. 1.274-5(b) (2), Income Tax Regs. During his trip to New York City, the195 petitioner may have been in "travel status." However, the petitioner provided no substantiation of the automobile expenses which he claimed to have incurred. At trial, the petitioner testified that the claimed expenditure was merely an approximation. Section 274(d) contemplates that no deduction shall be allowed for a travel expense on the basis of approximations or the unsupported testimony of the taxpayer. Sec. 1.274-5(a), Income Tax Regs. Furthermore, he testified that his employer reimbursed certain automobile expenses incurred while carrying out certain duties of the business. Yet, the petitioner made no allocation as to the expenses which were reimbursed and to those which were not. Since we do not know whether the petitioner received reimbursement for the expenses of operating his automobile at the Colorado City jobsite, we need not decide whether such expenses would be deductible if not reimbursed. Section 217(a) allows a deduction for moving expenses incurred in connection with the commencement of work by the taxpayer as an employee at a new principal place of work. However, section 217(c) (2) provides in part that no deduction shall be allowed unless "during the 12-month196 period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks * ." The petitioner remained in Colorado City from mid-March to approximately mid-June. Similarly, he remained in Dallas for, at most, 6 weeks. In both instances, he failed to remain in the general location of his new principal place of work for the required 39-week period. Thus, it is clear that the petitioner is not entitled to deduct any moving expenses in connection with his moves to Colorado City and Dallas. The petitioner contends that he is entitled to a moving expense deduction in excess of $71.55, as allowed by the respondent, in connection with the drive to Los Angeles, the point of embarkation for Japan. He claims that he should be allowed a deduction for the cost of food and lodging in addition to the automobile expense allowed by the respondent. We disagree. Although the cost of food and lodging is within the definition of moving expense (see sec. 1.217-1(b) (1), Income Tax Regs.), the petitioner introduced no evidence with respect to the amount of such expenditures. The197 record contains no information that would shed light on the number of nights during which lodging was required, the placed at which he slept during such nights, and the food which he ate on the trip. Accordingly, the petitioner has failed to show that he is entitled to any deduction in excess of that allowed by the respondent in connection with his traveling to Los Angeles. The petitioner has also failed to prove that he is entitled to the deduction for automobile expenses which he claimed. The petitioner claims he is not taxable on the air fare provided by his employer for Sandra L. Baker and her 2 sons. He claims that if such amount is includable in his income, he is entitled to deduct it as a moving expense under section 217. He also asserts that the air fares did not constitute income of his since the tickets were given directly to Sandra L. Baker, and that in any event, the respondent has overstated the amount paid as air fare for Sandra L. Baker and her 2 sons. In the year 1966, the deduction provided in section 217(a) also included expenses incurred by an individual other than the taxpayer. Sec. 217(b) (2). However, section 217(b) (2) provided that moving expenses198 were to be deductible only if the individual had both the former residence and the new residence of the taxpayer as his principal place of abode and also was a member of the taxpayer's household. The petitioner has failed to establish that those conditions existed with respect to Sandra L. Baker. No showing has been made that the petitioner, upon moving in with Sandra L. Baker and her mother, assumed primary responsibility for the household. Even if we assume that the petitioner continued the payments he formerly made on weekends to Sandra L. Baker while he worked in Colorado Ctiy, such payments were, at best, minimal. His stay in Dallas was only for two 2-week periods separated by a 2-week trip to New York City. There is no evidence taht the petitioner supported Sandra L. Baker after his departure for Los Angeles and Tokyo, other than when she came to Japan. In short, Sandra L. Baker and her sons appear to have been members of her mother's household for the year 1966. Accordingly, the petitioner is entitled to no deduction for their expenses of traveling to Japan. We reach this conclusion without passing on the effect of the fact that the petitioner and Sandra L. Baker were199 not legally married. The petitioner's alternative argument is equally without merit. Whether or not the petitioner is entitled to a moving expense deduction has no bearing on the issue of whether he received income. From the testimony of the petitioner, it appears that his employer maintained a policy of providing air fare to the location of assignment for the family of its employees. The petitioner wanted Sandra L. Baker and her sons to move to Japan. When the air fare was supplied by the petitioner's employer, it was done because of the employment relationship, and the petitioner was relieved of what would otherwise have been a personal expense. It is of no consequence that those provided with air fare were not members of his household. Accordingly, the fair market value of such air fare is includable in the petitioner's gross income as compensation. Sec. 1.61-2(d), Income Tax Regs.; cf. United States v. Gotcher, 401 F. 2d 118, 124 (C.A. 5, 1968). However, we have found as fact that the cost of air fare provided the younger son of Sandra L. Baker was 10 percent of full fare. The respondent's determination was based on an assumption that the cost of air fare*200 for each son was 50 percent of full fare. Accordingly, the respondent erred in calculating the total fair market value of the fares at issue, and such error should be corrected in the Rule 50 computation. Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624285/	Arthur T. Beckett and Gertrude E. Beckett, et al., * Petitioners, v. Commissioner of Internal Revenue, RespondentBeckett v. CommissionerDocket Nos. 95309, 95310, 95311United States Tax Court41 T.C. 386; 1963 U.S. Tax Ct. LEXIS 3; December 20, 1963, Filed 3 Decisions will be entered under Rule 50. A corporation which had sustained approximately $ 1 million of losses in a hardware business entered into an agreement with two partners engaged in numerous real estate development activities as partners and controlling stockholders of corporations, whereby a real estate department was established to develop a subdivision, the funds therefor being furnished by the two partners through purchases of the preferred stock in the corporation for an amount which was approximately two-fifths of the then value of the common stock of the corporation. The real estate department was operated independently of the other corporate business. The agreement provided that the real estate department should not be discontinued for a period of 6 years, that the preferred stockholders should not sell their stock for this period, and thereafter if the department were discontinued at the option of either the corporation or preferred stockholders, the preferred stock should be redeemed by distribution in kind of 90 percent of the department's assets to the preferred stockholders. A voting trust agreement was established to restrict the control of the common stockholders 4 over the corporation for a period of 5 years. The hardware business was discontinued and the real estate business operated at a profit. From these real estate profits were deducted as loss carryovers the net operating losses which had been previously sustained by the hardware business. The agreement between the corporation and the new preferred stockholders was entered into on October 18, 1954, and was therefore governed by the provisions of Internal Revenue Code of 1954. Held: The principal purpose of the real estate partners in entering into the agreement of October 18, 1954, was to obtain the benefit of the loss carryover of the hardware business against the anticipated profits of the real estate subdivision business. Nevertheless, since the corporation in its corporate entity entered many business arrangements with respect to the real estate subdivision the transaction was not such a sham as to permit disregarding the corporate entity and taxing the profits from the real estate subdivision to the two partners. Held, further, limited strictly to the factual situation here involved, the net operating loss carryover from the hardware business is not allowable as a deduction against 5 the earnings of the real estate subdivision under the principles of the case of Libson Shops, Inc. v. Koehler, 382">353 U.S. 382 (1957), even though the transaction does not fall within any of the changes-in-ownership situations set forth in sections 269 and 382, I.R.C. 1954. George N. Koster, Valentine Brookes, Paul E. Anderson, and Richard A. Wilson, for the petitioners.Charles W. Nyquist, for the respondent. Scott, Judge. SCOTT 387 Respondent determined deficiencies in the income taxes of petitioners for the years and in the amounts as follows:DocketFiscalNo.PetitionersperiodDeficiencyended --95309Arthur T. Beckett and Gertrude E. Beckett12/31/54$ 7,446.2712/31/5558,944.1612/31/5691,259.1112/31/5751,767.7212/31/5898,664.79308,082.0595310Frederick J. Federighi and Mary Helen Federighi12/31/547,479.4512/31/5563,433.8912/31/5691,702.7112/31/5741,520.7112/31/5899,401.00303,537.7695311Maxwell Hardware Co1/31/5747,770.041/31/58102,075.891/31/59111,952.581/31/6064,048.83325,847.34Pursuant to joint motion of the parties after the granting by the Court of a continuance in certain of the cases here involved, a severance of issues in the cases of A. T. Beckett and Gertrude E. Beckett and Frederick 6 J. Federighi and Mary Helen Federighi was granted, and the issues involved in those cases concerning the taxability to the individual petitioners of income reported by petitioner Maxwell Hardware Co. during each of the years involved in each of the individual cases was consolidated for trial with the sole issue involved in the case of Maxwell Hardware Co. Therefore, the issue for decision in the instant case with respect to the individual petitioners is whether income reported by Maxwell Hardware Co. from an operation which it denominated its real estate department should properly have been included in the partnership income of a partnership known as Beckett and Federighi, and thus reported in the returns of the individual petitioners who were partners in that partnership for each of the calendar years 1954, 1955, 1956, 1957, and 1958.388 The issue with respect to the corporate petitioner Maxwell Hardware Co. is whether that company is entitled to carry over against its income from the operations which it denominated its real estate department net operating losses sustained by the corporation prior to its establishment of its real estate department. The issue in the case of the Maxwell 7 Hardware Co. is an alternative issue since respondent recognizes even though no such indication is given in his notice of deficiency, that if in fact the income from the real estate department is the income of the partnership of Beckett and Federighi, this income is not includable in the income of Maxwell Hardware Co., and therefore the issue with respect to Maxwell Hardware Co. becomes moot.FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner Maxwell Hardware Co. (hereinafter referred to as Maxwell Hardware) is a corporation incorporated under the laws of the State of California on March 28, 1922. It filed its Federal income tax returns for its fiscal years ending January 31, 1957, 1958, 1959, and 1960, with the district director of internal revenue at San Francisco, Calif. The returns for each of these years were filed on an accrual method of accounting.Petitioners Arthur T. Beckett and Gertrude E. Beckett, husband and wife residing in Orinda, Calif., filed joint Federal income tax returns for each of the calendar years 1954, 1955, 1956, 1957, and 1958, with the district director of internal revenue at San Francisco, Calif. Each of these 8 returns was filed on the cash method of accounting.Petitioners Frederick J. Federighi and Mary Helen Federighi, husband and wife residing in Orinda, Calif., filed joint Federal income tax returns for each of the calendar years 1954, 1955, 1956, 1957, and 1958 with the district director of internal revenue at San Francisco, Calif. Each of these returns was filed on the cash method of accounting.Arthur T. Beckett (hereinafter referred to as Beckett) and Frederick J. Federighi (hereinafter referred to as Federighi) are and were throughout the years here involved members of a partnership known as Beckett and Federighi. This partnership throughout all the years here involved had its offices at 1441 Franklin Street, Oakland, Calif., and was engaged in a wide variety of business activities including the construction business, the ownership and operation of rental properties, the holding of real estate for investment, the operation of a restaurant, participation in an insurance brokerage business, and providing office space, bookkeeping services, and other services 389 for a number of corporations which were owned or controlled by Beckett and Federighi.Among the corporations owned or controlled 9 by Beckett and Federighi which had their offices at 1441 Franklin Street, Oakland, Calif., were: University Rentals, Inc.; Davis Street Rental, Inc.; Eden Development Co.; 98th & Edes, Inc.; East Bay Mortgage Co.; East Bay Mortgage Service, Inc.; Ashland Building Materials Co.; W. E. Hamby Construction Co.; 1441 Franklin, Inc.; and East Bay Mortgage Realty Co. Beckett and Federighi were officers of each of these corporations, with the exception of 1441 Franklin, Inc., of which the wife of each of them was an officer. East Bay Mortgage Realty Co. of which Federighi was president and Beckett, treasurer, and the two were controlling stockholders in 1954, had during that year an experienced and competent real estate sales organization. Eden Development Co., all of the stock of which was owned by Beckett and Federighi and members of their families in 1954, and of which Beckett was president and Federighi secretary, was a builder and developer of property with a net worth at the close of its fiscal year ended March 31, 1954, of $ 380,166.56.On November 24, 1952, Beckett and Federighi entered into a contract to acquire by trade approximately 308 acres of land (hereinafter referred to as 10 Bay-O-Vista) located in San Leandro, Calif. The provisions of this contract were detailed but in general divided the property into three separate parcels which were to be acquired at various times, the time limitation on the acquisition of the first parcel being July 1, 1953, the second, July 1, 1954, and the last parcel, July 1, 1955. The total agreed valuation of the 308 acres was $ 462,000. Prior to entering into the contract of November 24, 1952, to acquire the Bay-O-Vista property, Beckett and Federighi employed an engineering firm to prepare a boundary survey and tentative sketches of possible usage for the property.By May of 1954, Beckett and Federighi had acquired the first two parcels of the property and filed certain plans for the proposed use of the first parcel with the city planning commissioner of the city of San Leandro, and on May 13, 1954, requested permission to proceed with rough grading of the tract even though final approval had not been given to the plan. This tract of property was very hilly and in fact was sometimes referred to by Beckett and Federighi as the Hill property. It was primarily suitable for subdivision into lots. Because of the hilly nature 11 of the property the development costs would be substantially in excess of the development costs of flat land, and therefore it would be necessary to obtain a substantially higher price for the lots because of the added expense. Development of a subdivision property of this type entails certain risks. It was the general practice of Beckett and Federighi in their subdivision developments to have 390 the development undertaken either in conjunction with a corporate financier or through a corporation in order to limit the risk involved in connection with the subdivision. Beckett and Federighi had less experience in subdivisions that were to be sold as lots only than in developing subdivisions in which they built the houses on the lots and sold the entire package. Also, Beckett and Federighi's experience with subdivisions was primarily with flat land.On June 11, 1954, Beckett and Federighi were advised by the board of education of the city of San Leandro that an adequate elementary school site would have to be provided in their subdivision. Federighi thereafter conducted negotiations with the board of education and in 1957 the San Leandro Unified School District filed a complaint in eminent 12 domain naming Beckett, Federighi, and a number of "Does" as defendants.Prior to the incorporation of Maxwell Hardware in 1922, a company under this name had been operated by John Maxwell as a sole proprietorship. John Maxwell was the grandfather of John Maxwell Bryan and Carleton F. Bryan, the sole stockholders of Maxwell Hardware as of October 17, 1954.At all times from its incorporation up to October 17, 1954, the only stock of Maxwell Hardware had been common stock, and it had been owned by John Maxwell or members of his family including his son-in-law, Carleton F. Bryan, Sr. Maxwell Hardware as the sole proprietorship of John Maxwell and from its incorporation in 1922 until sometime during its fiscal year ended January 31, 1955, was engaged in the retail and wholesale hardware business.Around 1920 John Maxwell had acquired some property which sometime during the late 1920's was developed as a subdivision consisting of approximately 500 houses by a corporation which during the midtwenties was a wholly owned subsidiary of Maxwell Hardware. This subdivision was known as Maxwell Park and was in Oakland, Calif. At various times during its corporate existence Maxwell Hardware has 13 also owned real estate used in its hardware business, certain other rental real estate, and two ranches. Prior to 1954 one of the ranches was sold and the other was placed in a separate corporation, the stock of which was distributed to the stockholders of Maxwell Hardware. Also at various times the real property was in a subsidiary company of Maxwell Hardware known as Maxwell Investment Co., which subsidiary was dissolved in 1953.On its income tax returns for its fiscal years ended January 31, 1951, through January 31, 1955, Maxwell Hardware showed its principal business as "retail hardware." Each of these returns was a consolidated return of Maxwell Hardware and subsidiaries. The return for the fiscal year ended January 31, 1954, showed only one 391 subsidiary, Maxwell Wholesale Hardware Co., whose principal business activity was shown as wholesale hardware and beside this designation was checked the word "inactive." For the fiscal year ended January 31, 1955, the only subsidiary shown likewise was Maxwell Wholesale Hardware Co. Maxwell Hardware's consolidated return for its fiscal year ended January 31, 1953, in addition to showing as a subsidiary Maxwell Wholesale Hardware Co., 14 showed Maxwell Investment Co., and also showed a notation of its dissolution. The consolidated return for the fiscal year ended January 31, 1952, showed as subsidiaries Maxwell Wholesale Hardware Co. and Maxwell Investment Co. and showed the business of Maxwell Investment Co. as real estate investments, and the return of Maxwell Hardware and subsidiaries for its fiscal year ended January 31, 1951, showed in addition to Maxwell Wholesale Hardware Co. and Maxwell Investment Co., Grimmett Sport Shop as a subsidiary with its principal business activity listed as sporting goods.For the fiscal year ended January 31, 1951, the audit report of Maxwell Hardware and subsidiaries shows net income of Maxwell Investment Co. before Federal taxes of $ 46,075.32, the income being derived primarily from two properties referred to as the Isabella Street property and Shattuck Avenue property and from two farm properties consisting of a Butte County ranch and Contra Costa County ranch. The building on Isabella Street was a warehouse building, and the building on Shattuck Avenue was a building with commercial occupants on the first floor and apartments and offices on the higher levels. The audit report 15 for the fiscal year ended January 31, 1952, showed net income of Maxwell Investment Co. in the amount of $ 35,240.50 being derived primarily from the same properties that produced the income for the fiscal year ended January 31, 1951, but showed that the Butte County ranch was sold during that year for $ 500,000 with a profit on the sale of $ 199,209.54. The audit report for the fiscal year ended January 31, 1953, showed net income from farm properties and city properties of $ 30,766.63, and the similar report for the fiscal year ended January 31, 1954, showed included in Maxwell Hardware's income, rents from properties leased to others with a statement "Excess of expense over income -- Property leased to others $ 15,611.83." A notation in this report showed that Maxwell Investment Co. was dissolved on January 29, 1953, and that the farm property in Contra Costa County was transferred as of March 2, 1953, to a new corporation, Bryan Land Co., in return for stock, which stock was distributed to the shareholders of Maxwell Hardware in proportion to their shareholding. The audit report for the fiscal year ended January 31, 1955, showed an excess of income over expense or property leased 16 to others of $ 8,403.77. In its fiscal 392 years ended January 31, 1951 through 1955, Maxwell Hardware sustained net operating losses in the following amounts:Fiscal year ended Jan. 31 --Amounts1951$ 202,461.011952111,995.091953344,413.761954137,824.451955298,067.481,094,761.79 Prior to 1948 the hardware business of Maxwell Hardware had been a successful operation and had resulted in profits. In 1948 Maxwell Hardware began to lose money and continued to do so for several years thereafter.John M. Bryan (hereinafter referred to as Bryan), who was born in 1925, began to work for Maxwell Hardware in 1947 at which time his father was president of the company. His father's health became poor around 1949 and Bryan took on more duties in connection with the business of Maxwell Hardware and in 1951 became president of that company. In 1951 when Bryan became president of Maxwell Hardware it had seven retail hardware outlets. Several of these stores were not modern stores, and its main downtown store was not only not modern but had no parking facilities. Maxwell Hardware also had labor contracts which were more costly than its competitors' contracts, and on its downtown store had a lease which 17 had been negotiated when property values were higher in that location than they had come to be in 1951, and the term of the lease had not yet expired.For a number of years Maxwell Hardware had been a customer of the Central Bank of Oakland, Calif. (hereinafter referred to as Oakland Bank). 1 During the years 1952, 1953, and 1954, Bryan on behalf of Maxwell Hardware frequently discussed the financial position of that company with T. P. Coates (hereinafter referred to as Coates), an officer of the Oakland Bank. Bryan and Coates discussed the causes of the losses which were being sustained by Maxwell Hardware and ways of reversing this trend. Coates advised Bryan to curtail the hardware business of Maxwell Hardware and to undertake some other business in which there would be better prospects of profits.During the years 1952 and 1953, four of the retail hardware outlets of Maxwell Hardware were closed so that as of the beginning of 1954, the company had three retail hardware stores and a wholesale hardware department remaining 18 in operation. Maxwell Hardware had large inventories in relation to its sales and at the time Bryan began considering the curtailment of operations these inventories were overvalued. By December 1954 Maxwell Hardware 393 had closed all its hardware outlets but continued for sometime thereafter to collect outstanding accounts receivable from prior hardware sales and to liquidate its hardware assets.As of January 31, 1954, the books of Maxwell Hardware reflected total capital stock and earned surplus of $ 878,144.40. As of that date it had pledged land and buildings with a net book value of $ 482,200.54 as security for notes payable to insurance companies with unpaid balances totaling $ 431,743.42. The current assets of Maxwell Hardware as of that date consisted of cash of $ 87,720.38, accounts receivable of $ 815,593.26 less allowance for losses thereon of $ 44,000 leaving $ 771,593.26 of which $ 621,786.65 was pledged to secure a bank loan of $ 450,000, merchandise inventory of $ 551,884.78, prepaid expenses and other current assets of $ 33,970.14, and other assets of $ 24,008.29. It had property, plant, and equipment less depreciation thereon of a book value of $ 656,362.74. Its 19 only outstanding stock as of that date was 6,438 shares of common stock of a par value of $ 100 per share.In 1953 or early 1954 the Oakland Bank would not lend further moneys to Maxwell Hardware on an open account basis but would make loans on accounts receivable on a current basis. The financial statements prepared for Maxwell Hardware for its fiscal year ended January 31, 1955, showed a net loss from hardware operations in the amount of $ 369,586.67. The hardware department conditional sales contracts were pledged as security for a $ 250,000 note and the hardware department land and buildings remained pledged as security for notes payable to insurance companies totaling $ 494,685.46. As of this date, the company also had liabilities on unexpired leases on the store premises which it had closed down. The downtown store rental was about $ 80,000 a year and the lease still had a few years to run.Sometime around the middle of 1954, Federighi visited Coates in his office. Federighi was a customer of the Oakland Bank having both partnership and corporate accounts in the bank. At that time Coates discussed with Federighi the fact that Maxwell Hardware had suffered losses and suggested 20 that Federighi contact Bryan. Coates advised Bryan of his talk with Federighi and told Bryan that Federighi might get in touch with him. Subsequently Federighi did contact Bryan and called at Bryan's office. Although previous to this time Federighi had made certain purchases from Maxwell Hardware, he had not known of the ownership or operations of that company and had not met Bryan prior to the date that he called at his office around the middle of 1954. Bryan is not related by blood or marriage to either Beckett or Federighi or the wife of either of them.During the period between the middle of 1954 and October 18, 1954, negotiations were conducted between Bryan and Federighi and various 394 drafts of proposed agreements were prepared by their respective attorneys. Beckett did not participate directly in the negotiations but was kept informed by Federighi. Bryan was not willing to sell any common stock of Maxwell Hardware. Bryan felt that with the tax loss that Maxwell Hardware had, the company was in a very advantageous position to find a profitable business to go into, and he was interested in going into such a business for himself and his brother, the other owner of common stock, 21 and had no interest in selling common stock to anyone else.During the negotiations neither Federighi nor Beckett made any study of the books or financial statement of Maxwell Hardware or of the audit reports of that company. They did make some inquiries of Coates with respect to the company and did have their accountant look at certain financial records of the company, but no employee of Beckett or Federighi made any complete study of the financial data of Maxwell Hardware.Under date of October 18, 1954, Beckett, Federighi, and Bryan as president of Maxwell Hardware, executed a document which stated as follows:This Agreement, made and entered into this 18th day of October 1954, by and between Maxwell Hardware Company, a California corporation, hereinafter called "Corporation" and A. T. Beckett, hereinafter called "Beckett" and F. J. Federighi, hereinafter called "Federighi".WITNESSETH:(a) Corporation, for many years, has owned and held, and now owns and holds for and as investment, property located on Isabella Street, Oakland, California, commonly known as the Isabella Street property, and property located at Shattuck and Addison Streets, Berkeley, California, commonly known as the 22 Francis Shattuck Building;(b) Corporation in the past developed, subdivided into lots a tract of land known as Maxwell Park in the City of Oakland, California, built homes on such lots, sold, financed and arranged for the financing of same;(c) Corporation desires to re-enter into the business of developing, subdividing into lots unimproved tracts of land and to engage in the business of building homes and selling lots with or without homes thereon, and desires to establish a department for the purpose of carrying on such real estate business, which department or business shall be known as "Maxwell's Real Estate Division", and is hereinafter referred to as "Department";(d) Corporation has no one in its employ capable of managing and operating such Department profitably and successfully;(e) Federighi has profitably and successfully managed and operated real estate subdivisions and is capable of managing and operating said Department profitably and successfully. Corporation therefore desires to employ Federighi as manager of such Department;Now, Therefore, in consideration of the premises, and of the promises, covenants and agreements hereinafter set forth and other good and valuable 23 consideration received by each of the parties from the other, It Is Hereby Agreed, as follows:395 1. Corporation, in the conduct of and as a part of its business, will engage in the business of purchasing, selling, and otherwise dealing in real estate, including owning, developing and subdividing into lots undeveloped tracts of land, and building homes thereon, and selling lots with or without homes thereon.2. Corporation does hereby hire and employ Federighi as its manager of said Department from year to year, commencing with the 1st day of October, 1954, at the annual salary of $ 15,000.00, payable in monthly installments.3. Federighi shall bear the title of Vice-President, and shall have complete control and be in full charge of said Department. Corporation will appoint and elect Federighi as such Vice President.4. Federighi accepts employment as such manager and agrees to give such energy, ability and skill as shall be reasonably necessary in the performance of his duties and to perform them in an efficient, trustworthy and businesslike manner. He shall cause all expenses and debts of the Department to be paid when due and should they not be paid when due, any officer of the Corporation24 may withdraw money from the Department's cash balance or use other assets of the Department to pay such obligations. However, he, as Vice-President and manager of the Department, shall have complete authority to initiate or defend in behalf of the Corporation any contest, suit or other form of action or procedure with respect to any claim, charge or debt arising out of the operations of the Department which, in his judgment, should be contested for the best interests of the Corporation, and any and all expenses of such contest shall be an expense of the Department and be paid out of assets of the Department.5. For the purpose of enabling Corporation to effectively watch and supervise the operation of said Department, and to avoid commingling of the affairs of said Department with the affairs of the other departments of Corporation, said Department will maintain records, books of account, and bank accounts separate from the records of account at the Corporation's other departments.6. Corporation will sell to Beckett and Federighi and Beckett and Federighi each will purchase from Corporation 1000 shares of the Preferred stock of Corporation if and when issued, of the par value of $ 25 100.00 each, plus transfer tax. The designations, preferences, voting powers and relative participating optional or other special rights, qualifications, limitations or restrictions of the preferred stock and the common stock of the Corporation shall be as follows:(a) The holders of the Preferred shares shall be entitled, when and as declared by the Board of Directors, to dividends at the annual rate of, but not exceeding, 6% of the par value of such shares, payable in preference and priority to any payment of any dividend on Common shares and payable semiannually or otherwise, as the Board of Directors may from time to time determine. The right to such dividends on preferred shares shall not be cumulative and no rights shall accrue to holders of preferred shares by reason of the fact that dividends on said shares are not declared in any prior period.(b) In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, of this corporation, before any amount shall be paid to the holders of Common shares, the holders of the Preferred shares shall be entitled to receive, out of the assets of this corporationu whether such assets are capital or surplus, an 26 amount equal to the par value of the Preferred shares and the dividends declared and unpaid thereon and, after payment to the holders of Common shares of an amount equal to $ 100.00 per share, the remaining net assets, if any, of the Corporation shall be ratably distributed as follows: 80% thereof among the holders of the Preferred shares, and 20% thereof among the holders of the Common shares.396 (c) Except as otherwise provided by statute, the holders of Preferred shares shall have no voting power, and the voting power for the election of directors and for all other purposes shall be vested in the holders of the Common stock.7. It is recognized by the parties that it will undoubtedly require several years to firmly establish a sound Real Estate Department, and it is understood and agreed that Federighi should have ample time and the full cooperation of the Corporation in his efforts to develop said Department and place same on a stable and successful basis. The parties agree that a reasonable length of time to allow for the establishing of said Department would be at least six (6) years, and the Corporation agrees that it will not attempt to close up said Department for such period, 27 except upon the unanimous vote of the Board of Directors, and the holders of the Preferred stock agree that they will not sell their stock for such period of six years.(a) After the expiration of six (6) years from the date hereof, if the holders of said Preferred stock desire to sell their said stock, they must first offer it to the Corporation, and the Corporation in such event must redeem said stock, upon the following terms:(i) If the book value of all of the net assets of the Department shall be less than the total par value of all of the outstanding preferred shares, then the net assets of the Department shall be ratably distributed among the holders of said shares.(ii) If the book value of all of the net assets of the Department shall be greater than the aggregate par value of all of the outstanding shares of said preferred stock, then the net assets of said Department shall be distributed among the holders of said shares on the basis of the par value per share plus the per share portion of 90% of the book value of the net assets of said Department in excess of the aggregate par value of all of the said Preferred shares outstanding.(iii) The purchase price per share shall be 28 paid, as far as possible, in kind at the book value thereof, from the assets of the Department, and the remainder in cash on hand in said Department.(b) On the other hand, if or from the expiration of six years from the date hereof the Corporation shall desire to close said Department, or for any reason should wish to acquire the said Preferred stock, or if any one of the holders of the Common stock should die prior to the expiration of said six years, the Corporation may redeem in whole, and not in part or parts, all of the said Preferred shares outstanding at the redemption price and upon the terms hereinabove set forth in Subparagraphs (i), (ii), and (iii) hereof, upon giving notice at least twenty (20) days prior to the date fixed for such redemption to the holders of record of said Preferred shares at their addresses appearing on the books of the Corporation.(c) If, after notice of redemption is given and prior to the date fixed for the redemption of said Preferred stock, the Corporation deposits with, conveys, assigns, and transfers to any bank or trust company in the City of Oakland, State of California, the assets of said Department sufficient to redeem said shares as in Paragraphs 29 7(a), (i), (ii) and (iii) above provided, in trust for the purpose of redeeming the shares called for redemption with irrevocable instructions and authority to the bank or trust company to pay, convey, assign, transfer the trust property in payment of the redemption price of the shares to their respective holders upon the surrender of their share certificates, then from and after the date of such transfer, conveyance and deposit, the shares so called shall be deemed to be redeemed. Such deposit, transfer, assignment and conveyance shall 397 be deemed to constitute full payment of the shares to their holders and from and after the date of such deposit, transfer and conveyance, the shares shall be deemed no longer outstanding and the holders thereof shall cease to be shareholders with respect to said shares and shall have no rights with respect thereto except the right to receive from the bank or trust company the redemption price of the shares without interest upon the surrender of their certificates therefor.8. (a) The term "book value", as used in paragraph 7 hereof in reference to assets, means the cost of such assets, less any depreciation reserve against such assets, as recorded 30 on the books and records of the Department.(b) The term "net assets", as used in paragraph 7 hereof, means the depreciated cost of the assets of the Department, less the liabilities of the Department, as shown by the books and records of the Department.[EDITOR'S NOTE: TEXT WITHIN THESE SYMBOLS [O> <O] IS OVERSTRUCK IN THE SOURCE.](c) The assets of the Department shall consist of cash of $ 200,000.00 obtained from the sale of said preference shares of the Corporation, or any property in which such cash, or any part thereof, is invested, plus (1) any assets acquired through investment of money borrowed by the Department, or through investment of net earnings and less (2) any assets actually used to pay any net losses of the Department ([O> and any dividends referred to in paragraph 8 hereof <O].) The liabilities of the Department shall include all liabilities actually incurred by the Department for purchase of assets or for any transaction connected with the conduct of the business of the Department.(d) Net earnings of the Department shall be determined in accordance with sound accounting principles, and shall be the excess of the income of the Department over its expenses. Expenses 31 of the Department shall be all the expenses in connection with the operation of the Department and shall include the following:(1) All expenses of setting up the Department including all attorneys and accounting fees.(2) All interest paid on money borrowed for the operation of the Department, but not including any interest on money borrowed by the Corporation for any other purpose or on loans outstanding at the time said Department is set up.(3) All expenses of operating and carrying on the business of the Department, including manager's salary, salary of employees, accounting and legal expenses, commissions and brokerage, telephone, supplies, insurance and all other expenses whatsoever that are applicable and necessary for carrying on its operations or maintaining the Department. The Department will also be charged for all real estate taxes, personal property taxes and all other taxes directly pertaining to its operations. These expenses shall not include, either in whole or in part, any of the salaries of corporate officers other than the salary of the Department Manager, or any other corporate expense not directly attributable to the operations of the Department.(4) With reference 32 to Federal Taxes on income, it is agreed that, inasmuch as the Hardware business has been in existence for a longer period than the Real Estate Division, it should have the advantage of the lower tax on the first $ 25,000.00 of net earnings, and accordingly the Real Estate Division shall be charged at all times on its net taxable earnings at the maximum tax rate, however, not to exceed the amount of the tax liability.(5) An allowance for depreciation upon the assets of the Department in an amount equal to that which is allowable as a deduction for income tax purposes.(6) As and for the share of the Department's general overhead expense the sum of $ 100.00 per month commencing February 1, 1955, and in addition thereto a sum equal to 20% of the fiscal annual net income of the Department, less income taxes charged to the Department as provided in Paragraph (4) immediately 398 preceding, for the fiscal year beginning February 1, 1957, and a like sum, similarly calculated, for each fiscal year thereafter.(7) All expenses enumerated in subparagraphs (1), (2) and (3) immediately preceding shall be paid out of the assets of the Department; expenses enumerated in subparagraph (4) and subparagraph 33 (6) immediately preceding shall be paid by transfer of assets from the Department to other departments of the Corporation; and the depreciation allowance provided for in paragraph (5) immediately preceding shall be maintained as a reserve against assets of the Department.9. Notwithstanding any provision contained in this Agreement, the Corporation will not purchase any of said Preferred shares until any and all expenses, charges, and liabilities of said Department to date of such purchase shall have been fully paid and satisfied or adequately provided for, and until Corporation shall have adequate security against all claims which might be made against the Corporation after the date of purchase arising out of the operation of the Department.10. The certificates evidencing the shares of the said Preferred stock hereinabove referred to shall contain the following statement:"The stock evidenced by this certificate is subject to the terms, covenants and agreements contained in that certain Agreement dated the day of October, 1954, entered into between Maxwell Hardware Company and certain of its shareholders. A copy of said Agreement is attached hereto and made a part hereof."11. The 34 officers of the Corporation, and the Manager of the Department, without the authorization of Corporation's Board of Directors, shall not, in any manner, obligate the Corporation, and enter into any contracts or indentures, except obligations and transactions in the ordinary course of business.12. This Agreement shall bind the successors and assigns of Corporation and shall bind the heirs, devisees, legatees, executors, administrators and assigns of Beckett and Federighi.In Witness Whereof, the parties hereto have hereunto subscribed their names the day and year first hereinabove written.This document was drafted by the attorney representing Bryan and the attorney representing Federighi and Beckett after these two attorneys consulted with a third attorney.Under date of October 27, 1954, a certificate numbered 502 which stated in part, "This is to certify that F. J. Federighi is the holder of 1,000 shares of the Preferred stock of the par value of $ 100.00 each of Maxwell Hardware Company, transferable on the books of the Corporation upon the surrender of this Certificate properly endorsed," was issued to Federighi. Thereafter were set forth the provisions contained in paragraphs 6 35 (a), (b), and (c) of the agreement of October 18, 1954, heretofore set forth in full. On the same date an identical certificate was issued to Beckett, except for the name appearing thereon. The stock records of the Maxwell Hardware show that immediately thereafter the outstanding stock of Maxwell Hardware stood in the following names:Common stock -- 6,438 shares, $ 100 par value per share issued and outstanding:John M. Bryan3,219 sharesCarleton F. Bryan, Jr3,219 sharesPreferred stock -- 2,000 shares, $ 100 par value per share issued and outstanding:Arthur T. Beckett1,000 sharesFrederick J. Federighi1,000 shares399 The common stock was the only voting stock or security of Maxwell Hardware.Under date of October 18, 1954, Bryan and Carleton Bryan, the only common stockholders of Maxwell Hardware, entered into an agreement with the Oakland Bank whereby they placed their common stock in a voting trust which was to remain in effect until January 31, 1961. Under the terms of the voting trust agreement the trustee, the Oakland Bank, was directed to vote for Coates and Bryan as two of the three directors of Maxwell Hardware. At the time of entry into this agreement on October 18, 1954, it was 36 understood that Federighi would be the third director of Maxwell Hardware. The voting trust was created at the request of Beckett and Federighi. There was also an oral agreement between Bryan, Beckett, and Federighi that Bryan would not be vetoed on any reasonable business investment that he wished to make on behalf of Maxwell Hardware.During the negotiations leading up to the execution of the document dated October 18, 1954, heretofore set forth in full, Federighi had expressed the opinion that the Bay-O-Vista real estate development would produce a profit of about a million dollars. Bryan expected the common stockholders of Maxwell Hardware to profit to the extent of about $ 150,000 if the real estate development made a million dollar profit. Beckett's understanding of the arrangement was that the stockholders' share of the profits which would go to the common stockholders of Maxwell Hardware would be 20 percent and that he and Federighi through their ownership of the preferred stock certificates provided for in the agreement of October 18, 1954, would receive 80 percent of the profits from the Bay-O-Vista real estate development.At the time he executed the document dated October 37 18, 1954, Bryan had no intention of turning over the management of the Isabella Street property or the Shattuck Avenue building to the real estate department of Maxwell Hardware. Neither Bryan nor anyone in the employ of Maxwell Hardware during the year 1954 prior to October 18, had had any experience in the management or operation of any business engaged in the subdivision and development of real estate.Shortly after October 18, 1954, Beckett and Federighi each paid into Maxwell Hardware $ 100,000 and the $ 200,000 so paid in was turned over to the real estate department of Maxwell Hardware. Prior to October 18, 1954, in addition to John M. Bryan, Carleton F. Bryan, Jr., and Henry Irving had been directors of Maxwell Hardware. Shortly after October 18, 1954, both Carleton F. Bryan, Jr., 400 and Henry Irving resigned as directors of Maxwell Hardware and Coates and Federighi were elected to the board of directors. Also, shortly after October 18, 1954, Federighi was appointed a vice president of Maxwell Hardware and was assigned as manager of the real estate department.By deed dated October 26, 1954, 111.81 acres of the Bay-O-Vista property was deeded to Maxwell Hardware by Beckett and 38 Federighi, and Maxwell Hardware drew its check in favor of Beckett and Federighi in the amount of $ 195,667.50, which amount was stated to be in payment of the land transferred to Maxwell Hardware. A policy of title insurance insuring the title to the 111.81 acres of land deeded by Beckett and Federighi to Maxwell Hardware in the amount of $ 195,667.50 was issued to Maxwell Hardware by the Oakland Title Insurance Co. on October 29, 1954.At about the same time that the deed transferring the 111.81 acres from Beckett and Federighi to Maxwell Hardware was delivered to Maxwell Hardware, Beckett and Federighi signed a document entitled "Memorandum of Option Agreement" which stated as follows:This will serve to confirm our oral agreement giving Maxwell Hardware Co. an option to purchase two hundred thirty-five (235) acres of the acreage owned by us south and east of Estudillo Avenue and Foothill Boulevard, San Leandro, California, shown on Drawing No. 5160 prepared by J. Y. Long Co., Engineers, upon the following terms:(a) Said option must be exercised, at least as to Parcels A and D shown on the Drawing not later than November 20, 1954; otherwise this option shall be null and void.(b) Provided 39 such option is exercised upon parcels A and B as specified above, the option covering the whole or any part of the balance of the two hundred thirty-five (235) acres may be exercised at any time or times not later than November 20, 1956.(c) The price per acre for the land shall be computed at the Release Values shown on the aforesaid Drawing plus a gross profit to us of 32.65%.(d) The purchase price of the land upon which such option is exercised shall be paid in cash within ten (10) days after the agreement or purchase same.(e) This option is not transferable in whole or in part.There appears in the minutes of a meeting of the board of directors of Maxwell Hardware held on October 27, 1954, a resolution, "That this corporation develop and subdivide into lots the real property located on San Leandro Boulevard and in connection with same, establish a real estate division."At a meeting of the board of directors held December 3, 1954, the following resolution was adopted:Resolved: That the corporation proceed to improve the land heretofore acquired by it from A. T. Beckett and F. J. Federighi, and that a loan in 401 the sum of $ 132,000.00 for the improvements thereof, being lots 1 to 71 40 inclusive, in Tract No. 1361, be secured from the First Western Bank 2 and that any two of the officers be, and they are hereby authorized to execute the necessary note therefor.During the time that Bryan and Federighi were negotiating prior to entering into the agreement of October 18, 1954, Federighi had discussed financing the Bay-O-Vista subdivision with Coates, and Coates had told him that money would be loaned by the Oakland Bank to develop the property, secured by a deed of trust on the property. On December 3, 1954, a note of Maxwell Hardware signed by Bryan, its president, and Carleton F. Bryan, Jr., its secretary, in the amount of $ 132,000 was executed in favor of the Oakland Bank and this note was secured by a deed of trust which was also executed by Maxwell Hardware by Bryan and Carleton F. Bryan, Jr. The note was payable 1 year after date and bore 5 percent interest, and although secured by a deed of trust had no provision that such security limited the liability of the maker thereon. The note was not endorsed or guaranteed personally by any officer, stockholder, or employee 41 of Maxwell Hardware. Only $ 96,000 of the amount of this note was actually drawn from the bank prior to January 31, 1955.On December 10, 1954, the real estate commissioner of the State of California issued a final subdivision report on tract 1361, San Leandro, Calif., consisting of 19.5 acres divided into 71 parcels in which it was stated that the preliminary report dated November 29, 1954, shows title vested in Maxwell Hardware Co., a corporation. Subsequently, other property out of the Bay-O-Vista subdivision was deeded by Beckett and Federighi to Maxwell Hardware and amounts paid by Maxwell Hardware to Beckett and Federighi therefor, which amounts Federighi determined to represent the fair market value of the property. In each instance the amount paid resulted in a profit over the cost of the property to Beckett and Federighi.Other subdivision plats were filed by Maxwell Hardware and other amounts borrowed on notes of Maxwell Hardware and deeds of trust similar to those described in connection with the first tract of the Bay-O-Vista subdivision were executed, the security in each instance being a deed of trust on the real estate being developed with the amount advanced to Maxwell 42 Hardware on the note. None of the notes was endorsed or guaranteed personally by Bryan, Federighi, Beckett, or any other person. The outstanding balances of the loans payable with respect to these notes secured by the Bay-O-Vista property as of January 31, 1955, 1956, 1957, 1958, 1959, and 1960 402 were $ 21,290, 3 $ 108,046.75, $ 335,375, $ 294,500, $ 208,400, and $ 86,800, respectively.During the years here involved Bryan continued as president of Maxwell Hardware and during these years as lots were sold to various purchasers from the Bay-O-Vista subdivision he executed most of the deeds as president of Maxwell Hardware. During the years here involved in addition to being president of Maxwell Hardware, Bryan was employed as a stockbroker.The books of Maxwell Hardware were divided into two sections, one entitled "The Hardware Department" and the other, "The Real Estate Department," and the records, books of account, and bank accounts were separately kept for the two departments. The real 43 estate department's books were originally kept by Vincent Stack, a certified public accountant with offices at 1441 Franklin Street, Oakland, Calif., who was the accountant for Beckett and Federighi and various corporations in which they were stockholders. Prior to 1958 Stack died and after his death the books of the real estate department of Maxwell Hardware were kept by employees of Beckett and Federighi and a payment was made from the real estate department of Maxwell Hardware to the partnership of Beckett and Federighi for such bookkeeping services.Subsequent to October 18, 1954, most of the documents dealing with the Bay-O-Vista subdivision were in the name of Maxwell Hardware and were signed by Bryan as president of that company. The performance bonds in connection with putting of utilities into the area, the contracts with various companies for grading and other types of work and zoning, and other real estate applications were in most instances signed by Maxwell Hardware by Bryan, its president. Certain bills in connection with the development of the Bay-O-Vista subdivision which came in addressed to Beckett and Federighi were, in accordance with Federighi's instructions to 44 the bookkeeping employees in his office, returned to the sender to be resubmitted in the name of the Maxwell Hardware Co. Some of the correspondence with respect to the Bay-O-Vista subdivision was conducted in the name of Beckett and Federighi. The liability insurance policy issued to Beckett and Federighi also covered Maxwell Hardware, as well as a number of other corporations in which Beckett and Federighi were interested. The salary income to Federighi and Beckett for the years 1954 and 1955 was as follows: 403 SourceBeckettFederighi1954University Rentals, Inc., Oakland, Calif$ 1,012$ 1,012Davis Street Rentals, Inc., Oakland, Calif1,8001,800Eden Developmnet Co., Oakland, Calif17,20017,20098th & Edes, Inc., Oakland, Calif150150East Bay Mortgage Co., Oakland, Calif21,00022,500East Bay Mortgage Service, Inc., Oakland, Calif15,00013,500Ashland Building Material Co., Oakland, Calif6,0006,000W. E. Hamby Construction Co., Oakland, Calif2,7002,70064,86264,8621955University Rentals, Inc., Oakland, Calif608608Davis Street Rentals, Inc., Oakland, Calif1,8001,800Eden Development Co., Oakland, Calif7,2007,200East Bay Mortgage Co., Oakland, Calif6,0006,000East Bay Mortgage Service, Inc., Oakland, Calif12,00012,000Ashland Building Material Co., Oakland, Calif6,0006,000W. E. Hamby Construction Co., Athens, Tenn3,6003,600E. B. M. Realty Co., Oakland, Calif1,2751,275Maxwell Hardware, Oakland, Calif10,00010,00048,48348,48345 Originally sales of lots in the Bay-O-Vista subdivision were handled by independent brokers on a commission basis and in each of the years where this arrangement was followed, there appears as an expense item in the books of the real estate department of Maxwell Hardware, "Commissions paid."In 1959 Maxwell Hardware obtained a real estate broker's license under the name of Bay-O-Vista Realty and employed a salesman to sell lots in Bay-O-Vista. In general the advertising in connection with the Bay-O-Vista subdivision featured the name Bay-O-Vista. However, on one sign at the subdivision, in small letters under the name Bay-O-Vista appeared the name Maxwell Hardware Co. and in some newspaper articles concerning the Bay-O-Vista development the name of the developer appeared as Maxwell Hardware.The cutting, filling, grading, and leveling work on the Bay-O-Vista subdivision which was done to install streets, sidewalks, gutters, and storm sewers and to provide the facilities for water, gas, and electrical services was done under contract by contractors other than the partnership of Beckett and Federighi, the contracts being between the contractor and Maxwell Hardware and in most instances 46 these contracts being signed on behalf of Maxwell Hardware by Bryan, its president.A small portion of the work on the Bay-O-Vista subdivision was done by the partnership of Beckett and Federighi and for this work the partnership billed the real estate department of Maxwell Hardware, and a payment on such billing was made to the partnership.In July 1962 there was an agreement among Bryan, Carleton F. Bryan, Federighi, and Beckett to a plan of liquidation of Maxwell 404 47 Hardware. Prior to this time Maxwell Hardware had paid a total of $ 609,021.45 to Beckett and Federighi for land in the Bay-O-Vista subdivision and had paid a total of $ 1,530,471.74 in costs for grading, installing utilities, and similar work in connection with this subdivision and had prepared for sale in the subdivision 527 lots. Throughout the years here in issue both Beckett and Federighi consistently reported ordinary losses from many of their various business operations and from most of these operations reported capital gain in amounts which more than offset the reported ordinary losses. The transfers of the Bay-O-Vista land to Maxwell Hardware were reported by Beckett and Federighi as capital gains transactions.No funds of the hardware department were transferred to the real estate department of Maxwell Hardware at any time from the formation of the real estate department until the agreement to liquidate Maxwell Hardware in 1962. A total amount of approximately $ 157,000 was transferred from the real estate department to the hardware department during these years and this amount was considered as a loan by the real estate department to the hardware department. There was 48 no repayment by the hardware department to the real estate department of any of this amount, but it was adjusted at the distribution of assets upon liquidation. The agreement of liquidation entered into in July 1962 contained detailed provisions as to the property to be distributed to the Bryans and to Beckett and Federighi, but in general the distribution of the assets of the real estate department went to Beckett and Federighi and the other assets to Bryan and Carleton F. Bryan. The distribution in general was made primarily in kind.After the termination of the voting trust agreement, Bryan and Carleton F. Bryan had control of all of the voting stock of Maxwell Hardware and it was Bryan who was insistent upon liquidation of the company. As part of the agreement of liquidation Beckett and Federighi assumed any income tax liability that might be due by Maxwell Hardware in connection with the deficiencies at issue in this proceeding and neither Bryan nor Carleton F. Bryan have a financial interest in the outcome of the present case of Maxwell Hardware.The common stock of Maxwell Hardware owned by Bryan and Carleton F. Bryan as of October 18, 1954, had a fair market value of $ 500,000. 49 The books and record of Maxwell Hardware show that its various departments operated at the following amounts of profits or losses during the period or years indicated: 405 Period or yearHardwareReal estateOilTotaldepartmentdepartmentdepartmentFeb. 1, 1954, to Sept. 30, 1954($ 151,617.48)($ 151,617.48)Oct. 1, 1954, to Jan. 31, 1955(217,969.15)$ 86,100.79(131,868.36)Fiscal year ended Jan. 31:1955(369,586.63)86,100.791 (283,485.84)1956(54,673.28)80,382.1225,708.84 1957(52,868.77)153,446.45$ 4,088.18 104,665.86 195824,807.92 200,178.5722,513.26 247,499.75 19596,882.89 224,511.738,160.12 239,554.74 1960(14,604.55)174,600.37(12,128.48)147,867.34 Under date of July 30, 1959, a report of an internal revenue agent for the calendar years 1954, 1955, 1956, and 1957 was sent to Federighi, and under date of August 20, 1959, Federighi filed a protest against that report, in which among other things he protested the inclusion in his income of portions of the earnings of Maxwell 50 Hardware and to which was attached a copy of the agreement of October 18, 1954, between Maxwell Hardware and Beckett and Federighi. The statement was made that the entire business relations between Maxwell Hardware and Beckett and Federighi were entered into at arm's length and were detailed in the agreement executed October 18, 1954. The primary purpose of Beckett and Federighi in entering into the agreement of October 18, 1954, with Maxwell Hardware was to enable the profits which they anticipated would be made in the development of the Bay-O-Vista subdivision to be offset by net operating losses which had been sustained by Maxwell Hardware in prior years. There were business reasons for the development of Bay-O-Vista by a corporation instead of by Beckett and Federighi as individuals or partners. The development and sale of lots in the Bay-O-Vista subdivision was not substantially the same business as the business engaged in by Maxwell Hardware prior to October 18, 1954.In the years 1954, 1955, 1956, 1957, and 1958 respondent increased the reported net income of each Beckett and Federighi by amounts which he designated as ordinary income and explained as follows:It has 51 been determined:1) That profits realized from a certain real estate venture known variously as the Real Estate Department and/or Division of the Maxwell Hardware Company, and/or Bay-O-Vista Development, and/or San Leandro properties, in substance were realized by you and Arthur T. Beckett 4 individually and/or in partnership and that, as a consequence, you are taxable for your share of such profits, determined hereinafter, pursuant to the provisions of Sections 61 and 482 of the 1954 Internal Revenue Code.For each of its fiscal years ended January 31, 1957, 1958, 1959, and 1960, respondent increased the reported net income of Maxwell Hardware by the disallowance of a claimed net operating loss deduction, 406 the deduction being disallowed in the amounts of $ 104,640.86, $ 247,474.75, $ 239,529.74, and $ 147,842.34, for these years, respectively. Respondent explained this adjustment for each of these years as follows:It has been determined that the income from which such deduction was claimed was not realized from the same business which incurred such losses and that you are, therefore, not entitled to such deduction. It has been further determined that you acquired the business which 52 sustained such losses primarily for tax avoidance purposes, hence such losses would not in any event be deductible on your returns. Accordingly, the deduction claimed is disallowed and your taxable income is increased in the amount of $ 104,640.86. [1957. For other years the explanation was the same but the amount disallowed differed.]OPINIONSince the record in this case is voluminous and the testimony of the witnesses in many respects confusing and in some respects contradictory, we believe it well to state in summary our view of the reasons which motivated Bryan and Federighi to enter into the agreement of October 18, 1954, and the primary purpose of each of them for making this agreement before proceeding to discuss the issues raised by the parties. As of July 1, 1954, Bryan and his brother owned all the stock of a corporation which was operating primarily a retail and wholesale hardware business. The operation of this business had been unprofitable for many years and by 1954 Bryan had concluded that it was not feasible to make sufficient changes in the hardware business of this corporation to convert 53 it into a profitable operation. For this reason he had decided to liquidate this business of the corporation, Maxwell Hardware, and had begun to take the necessary steps for this liquidation. Bryan wanted to proceed with the liquidation of the retail and wholesale hardware business and the use of any of the other corporate assets in such a manner as to obtain the highest possible value therefrom for himself and his brother as common stockholders of Maxwell Hardware.Although the corporation was pressed for cash because of its unprofitable operations over a period of a number of years, the book value of its assets was such that the corporate book net worth was over $ 800,000. Bryan was aware that by liquidating Maxwell Hardware, its total assets would produce substantially more than the $ 500,000 which he felt to be the fair market value of the common stock of the corporation and therefore had no desire to dispose of that common stock. Since the corporation had a net operating loss carryover of over $ 1 million with no reasonable prospects of earnings over the succeeding 5 years either from the hardware business or any other business in which that corporation had been previously engaged 54 sufficient to enable it to use this net operating loss, Bryan was anxious to find 407 some arrangement to profit from Maxwell Hardware's net operating loss to the advantage of the common stockholders of Maxwell Hardware. The corporation did not have available funds to enter into a new business and therefore needed additional capital for any new business venture. Bryan had discussed his problem with his banker, Coates.Federighi and Beckett owned or had a contract to acquire raw land which they intended shortly to proceed to develop, having taken the preliminary steps to determinue that development into residential lots of the major portion of this real estate was feasible. They had also determined that they desired to develop the property through a corporation in order to limit their personal liability in connection with the development. Because of the hilly nature of the land substantially more in development expenditures would be required over the years during which it was contemplated that the development work would be done than the value of the undeveloped land. Beckett and Federighi were looking into an arrangement for developing this real estate in the most profitable manner 55 feasible with a limitation on their personal liabilities in its development.When Federighi was discussing his problems with his banker, Coates, the latter suggested that Federighi and Bryan might work out some arrangement. Federighi and Bryan decided that an arrangement whereby the development of the Bay-O-Vista land might be done through the corporate form of Maxwell Hardware was feasible, reserving to Federighi the control of the development of this land without unduly restricting Bryan in other activities with respect to Maxwell Hardware, and agreed that for the benefit of the net operating loss carryovers of Maxwell Hardware less whatever portion thereof might be needed to offset earnings of Maxwell Hardware other than from the development of the real estate, Federighi and Beckett were willing to pay 10 percent of the profits from the Bay-O-Vista development. Bryan and Federighi then had lawyers draw up an agreement which was to contain the necessary provisions: (1) To permit Bryan to continue in control of the business of Maxwell Hardware other than the development of the real estate, (2) to give Federighi control of the real estate development limiting the liability of Federighi 56 and Beckett in connection therewith, (3) to provide a time limit after which Bryan could dissolve the corporation if he so desired or Beckett and Federighi could draw out their interest therein, (4) to protect Federighi and Beckett in retaining all but 10 percent of the real estate development profits and in receiving distribution in kind if Bryan decided to dissolve the corporation or close its real estate development operations or they decided to withdraw from the corporation after the agreed period, (5) to leave with the Bryans the equitable interest in the assets of the corporation other than those of 408 the real estate development, and (6) to insure that the manner of handling the transaction would be such that the net operating loss carryovers of Maxwell Hardware would be usable to offset profits from the real estate development in determining Federal income taxes.It is respondent's position with respect to the case involving the individual petitioners that Beckett and Federighi entered into the arrangement with Maxwell Hardware solely for tax avoidance purposes, that the entire transaction was a sham, that in substance the Bay-O-Vista subdivision was owned throughout the years 57 1954 through 1958 by Beckett and Federighi as partners, and the income earned therefrom was in fact their income.It is petitioners' position that the transaction was not a sham, that the facts do not support that it was a sham, that the transaction was entered into for a legitimate business purpose and not primarily for the purpose of avoidance of taxes, that in effect respondent is attempting to ignore the corporate entity of Maxwell Hardware insofar as the operation of its real estate department is concerned, and that the facts do not justify ignoring the corporate entity of Maxwell Hardware. Petitioners argue that the net operating loss deduction which had been sustained by Maxwell Hardware prior to October 18, 1954, was not the motivating fact which influenced Beckett and Federighi to enter into the agreement of October 18, 1954.We have found that the primary purpose of Beckett and Federighi in entering into the agreement with Maxwell Hardware was to obtain the use of the loss carryover against profits from the development of the Bay-O-Vista tract. Federighi and Beckett both testified that they would have entered into this agreement had the net operating loss not been available. 58 Since from the very beginning of negotiations all parties knew of the existence of the net operating loss, it is obvious that a statement by any witness of what he would have done had the net operating loss not been available is at best an opinion, and under the circumstances here involved is pure conjecture. It was the fact of Maxwell Hardware's losses that caused Coates to have Federighi and Bryan meet. Bryan in his testimony stated that he felt because of these losses he had an advantage in going into a profitable business. He did with some reservations state that he probably would have entered into the agreement even if Maxwell Hardware had not had the net operating loss carryover. Federighi never offered any rational explanation of the advantages that he thought resulted from the arrangement with Maxwell Hardware as distinguished from developing the Bay-O-Vista subdivision through one of the corporations which he and Beckett already owned or controlled or a corporation that might be formed by them. The logical explanation of the advantage Federighi expected to obtain was the use of the net operating loss carryover of Maxwell Hardware against expected earnings from the 409 development 59 of the Bay-O-Vista property. Cf. Weyl-Zuckerman & Co., 23 T.C. 841">23 T.C. 841, affd. 232 F. 2d 214 (C.A. 9, 1956).Federighi's statement that the credit of Maxwell Hardware would be valuable in the development of Bay-O-Vista is unconvincing in view of the evidence that Maxwell Hardware was not in a position to borrow on open account, that it was contemplated that the financing of the Bay-O-Vista development would be from the $ 200,000 paid in by Beckett and Federighi plus borrowings on the security of the land, and that Coates had already indicated that the bank would finance the project on such security. The reference to Maxwell Hardware's having once participated in a real estate development as a reason for having that corporation develop the Bay-O-Vista land is unconvincing in view of the remoteness of the time of that participation and the fact that no one in the employ of Maxwell Hardware in October 1954 had any experience in real estate developments.No money from the hardware department of Maxwell Hardware was ever supplied to the real estate department, but the real estate department made transfers to the hardware department. The agreement of October 18, 1954, with respect to how the 60 taxes were to be prorated in allocating the earnings of the hardware department and the real estate department of Maxwell Hardware shows that the parties all had in mind the benefits which would result from the net operating loss. No logical reason why Beckett and Federighi would be willing to let the common stockholders of Maxwell Hardware have 10 percent of the profits of the Bay-O-Vista development, except for the use of the net operating loss carryover, is shown by the record in this case. Cf. Urban Redevelopment Corp. v. Commissioner, 294 F. 2d 328 (C.A. 4, 1961), affirming 34 T.C. 845">34 T.C. 845.The conclusion that the primary reason why Beckett and Federighi entered into the agreement with Maxwell Hardware was to obtain the use of that company's net operating loss to offset the earnings of the Bay-O-Vista development does not dispose of the issue here present. The transfer of the property to Maxwell Hardware was by a legitimate deed, and the notes, though secured by the real estate, were notes of Maxwell Hardware that had the real estate not been sufficient security would have been a call if necessary upon the general assets of that company. The performance bonds were likewise given 61 by Maxwell Hardware and the deeds to the property to the various purchasers were given by Maxwell Hardware. After the agreement of October 18, 1954, was entered into, Federighi acting as a vice president of Maxwell Hardware proceeded to have Bryan as president of the company sign many documents to obligate the company in all respects in the development of the Bay-O-Vista subdivision.It is true as respondent points out that occasional documents appear in the name of Beckett and Federighi, primarily in situations where 410 some third party was mistaken as to the ownership of the Bay-O-Vista subdivision. In most instances Federighi had an employee of the partnership have a correction made on the document. It is also true that Federighi managed the real estate department with very little assistance from Bryan, other than Bryan's signing of various documents. We also recognize as respondent points out that in any case involving a question of whether the form of a transaction differs from its substance, the form of the transactions is likely to be in accordance with a plan to give the appearance of substance.One of the major arguments of respondent centers upon the provision in the agreement 62 of October 18, 1954, contained in paragraph 7, to the effect that the corporation agrees that it will not attempt to close up the real estate department for a 6-year period except upon the unanimous vote of the board of directors and the holders of the preferred stock agree that they will not sell their stock for such 6-year period and after the 6-year period if the holders of the preferred stock desire to sell their stock they must first offer it to the corporation and the "corporation in such event must redeem said stock" upon the terms thereafter set forth. The redemption terms basically are that in the event the net assets of the real estate department are greater than the aggregate par value of the preferred stock, the par value of the preferred stock shall be paid out of these assets and 90 percent of the excess distributed to the holders of the preferred stock, the distribution to be made insofar as possible in kind at book value from the assets of the department and in the remainder in cash on hand in the department. If the book value of all the net assets is less than the par value of all the outstanding preferred stock, then the total assets of the department are to be 63 distributed ratably among the holders of the preferred stock. If after 6 years the corporation desires to close the department or acquire the preferred stock, the corporation may redeem the preferred stock in whole but not in part under the same terms as the holders of the stock are permitted after 6 years to require its redemption. There is in this provision also the exception that if anyone of the holders of the common stock should die prior to the expiration of the 6-year period, the corporation may redeem in whole but not in part. This agreement in effect provided for two businesses to operate as one corporation and 90 percent of the profits of one of those businesses to go to the holders of the preferred stock if that portion of the business were discontinued. In corporations generally upon dissolution all accumulated profits are distributed to the stockholders. Therefore, this provision does not, as respondent contends, show that the transaction was a sham. The provision, with the exception noted, requires the continuance of the real estate department for 6 years but does not provide that it must terminate thereafter.411 Respondent refers to this part of the agreement of October 64 18, 1954, as providing for a "round trip" of the real estate such as was involved in Weyl-Zuckerman & Co., supra. However, the instant case differs from Weyl-Zuckerman & Co., supra, not only because it was contemplated that the real estate department of Maxwell Hardware would in fact develop and sell real estate from the Bay-O-Vista tract, but also because there was a real business purpose to having this development done by a corporation. Cf. Southern Ford Tractor Corporation, 29 T.C. 833 (1958). Under these facts the transfer of the property to Maxwell Hardware was not a sham. In calling this transaction a sham respondent is in effect contending that insofar as the real estate department is concerned, the corporate entity of Maxwell Hardware should be disregarded. It is well settled that taxation is a real matter and that transactions that are sham and unreal may be disregarded so that the income therefrom is taxable to the true earner thereof. National Carbide Corp. v. Commissioner, 336 U.S. 422">336 U.S. 422 (1949), and cases cited in footnote 20 thereof. However, where there is a business purpose in transferring property to a corporation and after the transfer the corporation uses the 65 property in its business, the transaction is not sham or unreal. Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943); John F. Nutt, 39 T.C. 231">39 T.C. 231 (1962), on appeal (C.A. 9, July 11, 1963).In the instant case Maxwell Hardware as a corporate entity entered into contracts for the borrowing of money to finance development of the Bay-O-Vista property. None of the notes was endorsed by any officer or stockholder of Maxwell Hardware. Maxwell Hardware executed deeds transferring property to various individuals. The corporation took other action with respect to the property as we have detailed in our findings. These actions certainly amount to business activity of a real nature. Under the facts here present we conclude that the corporate entity of Maxwell Hardware insofar as its real estate department is concerned cannot be disregarded for tax purposes even though the primary reason that Beckett and Federighi entered the agreement with Maxwell Hardware was to obtain benefits from that corporation's net operating loss carryover.Although respondent in his notice of deficiency referred to section 482 of the Internal Revenue Code of 1954, 5 he does not argue the application of this section 66 and in effect concedes that unless the transfer of the Bay-O-Vista land to Maxwell Hardware is considered a sham, section 482 is inapplicable in this case.Since in our opinion the earnings from the Bay-O-Vista development are taxable to Maxwell Hardware during the years here involved, it is necessary for us to determine whether the net operating losses 412 sustained by Maxwell Hardware prior to the establishment of the real estate department are properly to be used in the fiscal years ended January 31, 1957 to 1960, as a reduction in the taxable income of Maxwell Hardware from that department. In our view, were the provisions of the Internal Revenue Code of 1939 applicable to this case, Maxwell Hardware would not be entitled to deduct the net operating loss carryover. The facts simply stated are that Maxwell Hardware discontinued its hardware business on which it had sustained losses, issued some preferred stock to new stockholders, and with the payment received entered a real estate development business the profits of which were to go primarily to the preferred stockholders. There is no more "continuity 67 of business enterprise" here than in Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382 (1957). In that case a number of corporations all owned by the same interests were merged. Prior to the merger some of the corporations had been operating at losses and others had been operating at profits. After the merger the businesses which had been operated by the corporations which had sustained losses continued to operate at losses and the businesses which had been operated by the corporations which had made profits continued to operate at profits. The court held that to allow the net operating loss carryovers of the businesses which had been loss operations to reduce the taxable income from other businesses which had been and continued to be profitable operations was contrary to the intent of the statute. Certainly if the premerger losses of one business cannot be averaged with the postmerger profits of another as held in Libson Shops, Inc. v. Koehler, supra, the "precombining" losses of a hardware business cannot be averaged with the "postcombining" profits of a real estate development business. Such an averaging does not comply with the intent of Congress to average "the fluctuating income 68 of a single business."In the Libson Shops case the continuing corporation was not the corporation that had sustained the losses. However, as we stated in Julius Garfinckel & Co., 40 T.C. 870">40 T.C. 870, 875 (1963), on appeal (C.A. 2, Nov. 15, 1963), "in many cases decided by this and other courts since the decision in Libson Shops, it has been held the doctrine of Libson Shops prevents the carry-over even though it is the loss corporation that is seeking to carry over its own pre-merger or preacquisition loss." While the precise facts here involved differ from those involved in Julius Garfinckel & Co., supra, and each of the cases cited therein, 6 the principle that the carryover privilege is not available unless there is a "continuity of business enterprise" is equally applicable here. In 413 Huyler's38 T.C. 773">38 T.C. 773 (1962), on appeal (C.A. 7, May 16, 1963), we discussed the development of the "entity concept" in determination of the use of net operating loss carryovers and concluded that such carryovers were not deductible unless there was a continuity of business enterprise even though the corporation seeking the deduction was the same legal entity that sustained the operating losses in the prior 69 years. In Huyler's, supra, we stated at page 781, with respect to the entity concept, that:The result of these earlier cases was to create uncertainty in the application of the statutory provisions relating to net operating loss carryovers, so that neither the Government nor taxpayers could accurately predict the consequences of corporate changes. Survival of tax attributes appeared to depend primarily on the form of the transactions, and on the technical skill with which they were effected. Thus the "entity concept" theory tended to penalize taxpayers who were either poorly advised or who, for nontax reasons, found it necessary to extinguish the loss entity.In the recent case of Federal Cement Tile Co., 40 T.C. 1028 (1963), 70 we sustained respondent's disallowance of loss carryovers where the corporation seeking the carryover was the loss corporation which had acquired by merger the profitable different kind of business of another corporation. In Federal Cement Tile Co., supra, all the stock of the loss corporation had been sold to the owners of the stock of the profitable corporation shortly prior to the merger of the profitable corporation into the loss corporation. This same factual situation of a sale of all the stock of the loss corporation to the owners of a profitable business shortly before the acquisition of the profitable business by the loss corporation is present in a majority of the cases in which net operating loss deductions have been disallowed to the loss corporation because of there being no continuity of business enterprise in the activity which produced the profits. In some cases the owners of the stock of the loss corporation already owned a profitable business or stock of a corporation doing a profitable business and caused the loss corporation to acquire the profitable business. In some cases the owners of the stock of the loss corporation acquired the stock of a profitable business 71 shortly before causing the merger of the profitable corporation into the loss corporation. In the instant case Beckett and Federighi who owned the land which they contemplated developing as a profitable business did not acquire any common stock of Maxwell Hardware. Neither the Bryans who owned all the common stock of Maxwell Hardware nor the corporation acquired the Bay-O-Vista land or any rights therein prior to October 18, 1954. From all the evidence in this case we are convinced that the combination of the potentially profitable business with the loss business was skillfully arranged in this manner in order that there would be no acquisition of control of a corporation by Beckett and Federighi or acquisition 414 by Maxwell Hardware of property of another corporation within the meaning of section 269. We think it clear that the provisions of section 269 are not applicable here because of the absence of the type of acquisition provided for therein. However, there appears to us to be no reason why the method whereby the different and profitable business was acquired by the loss corporation should control the issue of whether under the decision in the Libson Shops, Inc. case, the net 72 operating losses sustained by the hardware business of Maxwell Hardware may properly be used to reduce the taxable income from the real estate subdivision. The holding in the Libson Shops, Inc. case was that the fact that section 129 of the Internal Revenue Code of 1939 (the predecessor of section 269) was inapplicable did not automatically entitle the taxpayer to the claimed carryover. In the Libson Shops, Inc. case the Code provision was inapplicable because the primary purpose of the acquisition was not tax avoidance, whereas in the instant case the provision is inapplicable because the nature of the acquisition does not come within the statute. However, the reason for the lack of applicability of the Code provision does not appear to be controlling. The final sentence of the Court's opinion in the Libson Shops, Inc. case is: "We conclude that petitioner is not entitled to a carry-over since the income against which the offset is claimed was not produced by substantially the same business which incurred the losses." Although only one corporation is involved in the instant case, the two departments are so unrelated as in substance to place two separate business entities into one 73 corporate entity.In the instant case the income against which the offset is claimed was not produced by substantially the same business which incurred the losses. Petitioners argue that the development of the Bay-O-Vista subdivision was not a new business for Maxwell Hardware. From the evidence we have found to the contrary. The evidence does not establish, as petitioners contend, that Maxwell Hardware had previously engaged in a subdivision development. The most favorable interpretation that can be placed on the evidence with respect to the development of Maxwell Park is that it was done by a subsidiary of Maxwell Hardware. However, even if the evidence did support petitioners' contention that Maxwell Hardware had during the late 1920's engaged in developing a subdivision, such a fact would not establish that the subdivision business was not a substantially different business from the hardware business which produced the net operating losses which petitioners claim should be offset against income from the Bay-O-Vista development. The latest year that is mentioned as the end of development of Maxwell Park is 1933, 17 years prior to the first year of a net operating loss here claimed 74 as a carryover. Neither do we consider the fact that a subsidiary corporation of Maxwell Hardware through its fiscal year ended January 31, 1953, and Maxwell Hardware 415 thereafter (having acquired its subsidiary's assets upon the subsidiary's dissolution), engaged in the rental of two properties, shows, as petitioners contend, that the Bay-O-Vista development was substantially similar to the business engaged in by Maxwell Hardware prior to October 18, 1954. Under the facts of this case which we have set forth in some detail, we do not consider the holding of two pieces of property primarily for use in the business of a related corporation, but receiving a small amount of rental income from outside interests, to be substantially the same business as developing the Bay-O-Vista property. It might even be questionable whether the rentals of parts of these properties to outside interests during the period here involved prior to October 18, 1954, were of sufficient importance to constitute a business separate from the rentals for business use by the related corporations, but we need not consider this question. Certainly, this record fails to show that prior to October 18, 1954, outside 75 rentals were other than incidental to the use of the property in the business of related corporations. If this case were governed by the provisions of the Internal Revenue Code of 1939, it is our view that Libson Shops, Inc. v. Koehler, supra, and the many cases which have applied the holding in that case, where there has been no change in the corporate entity claiming the deduction, would dispose of the issue here raised favorably to respondent.Petitioners, however, contend that Libson Shops, Inc. v. Koehler, supra, and cases relying on the principle there announced are inapplicable where the change in the corporate structure or the nature of the corporate business occurred after the enactment of the Internal Revenue Code of 1954. Petitioners point to the statement in Huyler's, supra, that section 382(a) has no applicability to changes in ownership and changes in business occurring before June 22, 1954, and also to the discussion as to the applicability of the provisions of section 382(a)(1)(C) in Goodwyn Crockery Co., 37 T.C. 355">37 T.C. 355 (1961), affd. 315 F. 2d 110 (C.A. 6, 1963). Obviously, the statement in Huyler's, supra, is no indication whether the continuity of business enterprise 76 requirement applied in Libson Shops, Inc. v. Koehler, supra, is inapplicable to corporate changes made after June 22, 1954. Huyler's, supra, merely states that the provisions of section 394(b) expressly provide that the special limitations of section 382 apply only to changes in ownership and business occurring on or after June 22, 1954.In Goodwyn Crockery Co., supra, there is no discussion in either the opinion of this Court or of the Circuit Court of the "continuity of business enterprise principle" as laid down in the Libson Shops, Inc. case. The entire issue discussed in Goodwyn Crockery Co., supra, is whether within the meaning of section 382(a)(1)(C), that corporation after a change of stock ownership continued to carry on a trade or business substantially the same as that conducted before the change 416 of ownership. It may be that the same principles would govern the issue of whether the income against which the net operating loss deduction is claimed was produced by substantially the same business which incurred the losses as required by the holding in the Libson Shops, Inc. case and the issue of whether a corporation is carrying on "a trade or business substantially the same 77 as that conducted before" the change of ownership within the meaning of section 382(a)(1). If such is the case, it might be that where the change in ownership provision of section 382(a)(1)(C) applied, the principle of the Libson Shops, Inc. case would be inapplicable since the statute now specifically provides the extent to which the net operating loss shall be disallowed under such circumstances. However, as petitioners themselves point out, the instant case does not fall within the provisions of either section 381 or 382.We are not persuaded by petitioners' citation to legislative history that since the enactment of sections 381 and 382 the principle laid down in Libson Shops, Inc. v. Koehler, supra, has no application to net operating loss carryovers where all relevant transactions occur after June 22, 1954. In the first place it is to be noted that the Libson Shops, Inc. decision was rendered by the Supreme Court approximately 3 years after the enactment of the Internal Revenue Code of 1954 and even the decision of the District Court was not rendered until 1955. Furthermore, we think it clear as we noted in Huyler's, supra at 781, that the enactment of the detailed provisions 78 of sections 381 and 382 of the Internal Revenue Code of 1954 was to prevent legal forms from controlling where a loss carryover would survive a reorganization and because the legislative attempt to avoid "trafficking" in net operating losses by the provisions of section 129 of the Internal Revenue Code of 1939 had proved ineffectual. In fact the very portion of the committee report quoted in petitioners' brief 779 shows that sections 381 and 382 were intended to remove the uncertainty as to when a net operating loss carryover would survive a corporate reorganization. As petitioners point out, respondent in his own rulings has stated that the principle announced in the Libson Shops, Inc. case does not apply to mergers which come within the provisions of sections 381 (a) and (c). 8417 It appears that the type of statutory merger involved in Libson Shops, Inc., supra, is one of the circumstances in which section 381 specifically provides for survival of the net operating loss carryover. This, however, does not control the issue whether the principle of Libson Shops, Inc. is applicable to a case where no such tax-free reorganization as is referred to in section 381 has occurred.Section 382 provides for the disallowance of the net operating loss deduction to the loss corporation itself in whole or in part in case of purchase of the stock of the loss corporation by unrelated persons in specified amounts or redemption of the stock where after such purchase or redemption the corporation substantially changes its trade or business. 80 In the instant case no useful purpose would be served in discussing the various provisions in detail since it is clear that the issuance of the preferred stock to Beckett and Federighi does not come within any of these provisions. See Fawn Fashions, Inc., 41 T.C. 205">41 T.C. 205 (1963), for discussion of application of sections 269 and 382 to the factual situation there present. The problem is whether by specifying the various circumstances in section 382 in which net operating loss deductions would be disallowed in whole or in part where a change in stock ownership has occurred followed by a change in the corporate business, Congress intended to provide that in all other instances the loss corporation would be entitled to deduct its net operating loss carryover from earnings from a different business enterprise unless such deduction fell within the prohibition of section 269.Certainly this question is not one which is free from doubt. It is further complicated by the fact that the Libson Shops, Inc. case was predicated largely on the fact that even though a corporation, the result of a merger, might technically be the same legal "entity" and to this extent the same "taxpayer" as all the merged 81 constituent corporations, it was not the same "taxpayer" for the purposes of the net operating loss carryover where there was no continuity of business enterprise. In this respect it is to be noted that section 122(b) of the Internal Revenue Code of 1939 provided that if "the taxpayer" has a net operating loss it shall be a net operating loss carryover whereas the comparable section of the 1954 Code, section 172(b)(1)(B), merely provides that a net operating loss "shall be" a net operating loss carryover, the reference to "the taxpayer" being omitted. The omission of reference to "the taxpayer" in section 172(b) of the 1954 Code was mentioned in a footnote to the opinion in the Libson Shops, Inc. case. There is no indication in the committee reports with respect to section 172 of the Internal Revenue Code of 1954 that Congress viewed the wording of section 172 so as to omit the reference to "the taxpayer" to 418 be a substantive change. 982 We do not consider that by this change in wording Congress intended to provide for one of the very evils the provisions of section 382 were intended to remedy, the "trafficking" in loss carryovers. 10Petitioners' theory that only in cases which fall directly within the provisions of section 382 or section 269 would the net operating loss carryover be denied to a taxpayer, would invite the well advised and technically skillful 83 to "traffic" in net operating loss carryovers. Since the provisions of sections 382 and 269 as to ownership changes are precise and definite, all that would be necessary would be to create a relationship such as that provided for in the instant case which brings in new capital, new stockholders, and a new business without falling precisely within any statutory proscription. We cannot credit to Congress the issuance of an invitation to indulge in a practice which the stated purpose of the enactment is to control, the "trafficking" in net operating loss carryovers. We therefore hold that under the particular facts of this case and the principle of the Libson Shops, Inc. case, Maxwell Hardware is not entitled to offset against the earnings of its real estate department in its fiscal years 1957, 1958, 1959, and 1960, the losses which its hardware business had sustained in prior years. In so holding, we do not intend to establish a broad legal principle but merely to apply already established principles to an unusual factual situation.Decisions will be entered under Rule 50. Footnotes. Proceedings of the following petitioners are consolidated herewith: Frederick J. Federighi and Mary Helen Federighi, docket No. 95310, and Maxwell Hardware Co., a corporation, docket No. 95311.↩1. The Central Bank of Oakland, Calif., was merged into the San Francisco Bank on January 30, 1954, and later its name was changed to First Western Bank and Trust Co.↩2. This is the same bank with merely a change in name referred to heretofore as the Oakland Bank.↩3. The record is confusing as to when the balance of the $ 96,000 drawn on the $ 132,000 note was repaid and it is possible that this figure, though apparently agreed to by the parties, is incorrect.↩1. The record does not show the explanation of the difference in this amount and the stipulated net operating loss of Maxwell Hardware for this year of $ 298,067.48, but neither party has raised any issue as to this difference.↩4. The notice to Beckett referred, of course, to "you and Frederick J. Federighi."↩5. All references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩6. Following our statement quoted from Julius Garfinckel & Co., 40 T.C. 870">40 T.C. 870, 875 (1963), are the following cases: Mill Ridge Coal Co. v. Patterson, 264 F. 2d 713; Willingham v. United States, 289 F. 2d 283; Commissioner v. Virginia Metal Products, Inc., 290 F. 2d 675, reversing 33 T.C. 788">33 T.C. 788; J. G. Dudley Co., 36 T.C. 1122">36 T.C. 1122, affd. 298 F. 2d 750; Huyler's, 38 T.C. 773">38 T.C. 773; Norden-Ketay Corp. v. Commissioner, 319 F. 2d 902↩, affirming a Memorandum Opinion of this Court.7. The following is quoted by petitioners from S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 52 (1954):"Present practice rests on court-made law which is uncertain and frequently contradictory. Your committee agrees that whether or not the items carryover should be based upon economic realities rather than upon such artificialities as the legal form of the reorganization."The bill provides for the carryover of these tax attributes or items from one corporation to another in certain tax-free liquidations and reorganizations. * * "The new rules enable the successor corporation to step into the 'tax shoes' of its predecessor corporation without necessarily conforming to artificial legal requirements which now exist under court-made law. * *"↩8. Rev. Rul. 58-603, 2 C.B. 147">1958-2 C.B. 147. Rev. Rul. 59-395, 2 C.B. 475">1959-2 C.B. 475↩.9. See H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. A56 (1954), where reference is made to only two substantive changes neither of which is this change in wording. See also S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., pp. 31-32 (1954), and Conference Rept. No. 2543 to accompany H.R. 8300, pp. 30-31.10. Certainly the following statement in H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 42 (1954), in respect to sec. 382 does not indicate any such intent:"This special limitation on net operating loss carryovers provides an objective standard governing the availability of a major tax benefit which has been abused through trafficking in corporations with operating loss carryovers, the tax benefits of which are exploited by persons other than those who incurred the loss. It treats a business which experiences a substantial change in its ownership, to the extent of such change, as a new entity for such tax purposes."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624286/	Estate of Ethel M. DuVal, Deceased, by Thomas M. Robinson, Jr., and Weston Shattuck Robinson, as Executors of Her Last Will and Testament, Petitioners, v. Commissioner of Internal Revenue, RespondentDu Val v. CommissionerDocket No. 4731United States Tax Court4 T.C. 722; 1945 U.S. Tax Ct. LEXIS 238; February 2, 1945, Promulgated 238 Decision will be entered for the respondent. Where a bank, owner of a claim against decedent as guarantor of notes, consented to distribution of the estate without payment of its claim, reserving, however, a claim against a co-guarantor, and where the estate will never be required to pay the claim, held, such claim is not deductible from the gross estate of decedent, although formally allowed by a court having jurisdiction of the settlement of the estate. M. W. Dobrzensky, Esq., and James H. Anglim, Esq., for the petitioners.Arthur L. Murray, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 722 The respondent determined a deficiency of $ 48,214.31 in estate tax against the estate239 of Ethel M. DuVal.The single issue is whether the sum of $ 175,000 representing the balance due on notes of a corporation, payment of which was guaranteed by the decedent and another, may be deducted from gross estate as a debt of the decedent, where the maker of the notes was financially able to pay them.FINDINGS OF FACT.Ethel M. DuVal, hereinafter referred to as the decedent, died testate on April 9, 1942, and at the time of her death was a resident of Alameda County, California. The petitioners, Thomas M. Robinson, Jr., and Weston Shattuck Robinson, are the duly qualified and acting executors of the decedent's will, which was admitted to probate by the Superior Court of Alameda County. The estate tax return was filed by them on April 15, 1943, with the collector of internal revenue for the first district of California.On August 17, 1937, the M. K. Blake Estate Co., hereinafter called the company, secured a loan from the Bank of America National Trust & Savings Association of Oakland, California, hereinafter called the bank, in the sum of $ 162,000, payable three years thereafter, evidenced by the company's promissory note of the same date and secured by a deed of trust executed240 the same day.723 At the same time, and at the bank's request, the decedent and her sister, Mary J. Robinson, endorsed the note as follows:For value received, I hereby guarantee payment of the within obligation and all renewals or extensions thereof and I hereby waive presentment, demand, protest, notice of protest and notice of nonpayment.[Signed] Ethel M. DuValMary J. Robinson.On November 2, 1941, the company borrowed from the bank an additional $ 20,000, payable August 2, 1944, giving its promissory note therefor. This second obligation was also secured by the deed of trust above referred to. The note was endorsed by the decedent and her sister in the following manner:For value received, I hereby guarantee payment of the within obligation and all renewals or extensions thereof and all taxes and insurance premiums and any other sums that may become due and payable under and by virtue of the provisions of the deed of trust (or mortgage) securing the aforesaid note, and I hereby waive presentment, demand, protest, notice of protest and notice of nonpayment.I also hereby waive (a) the right, if any, to the benefit of, or to direct the application of, any security hypothecated241 to the holder until all indebtedness of the maker to the holder, howsoever arising, shall have been paid; (b) the right to require the holder to proceed against the maker, or to pursue any other remedy in the holder's power; and agree that the holder may proceed against the undersigned directly or independently of the maker, and that cessation of liability of the maker for any reason other than payment, any extension, forbearance, change of rate of interest or acceptance, release or substitution of security or any impairment or suspension of the holder's remedies or rights against the maker, shall not in anywise affect the liability of the undersigned hereunder.At the time the above notes were executed and endorsed the decedent and her sister, Mary J. Robinson, were the owners of a majority of the company's outstanding capital stock. The decedent was president of the company and Mary J. Robinson was its secretary.On August 26, 1941, the company and the bank joined in an agreement extending the maturity date of the note for $ 162,000 to August 2, 1944. The decedent and Mary J. Robinson gave their written consent to the extension.At the decedent's death the unpaid balance of the242 principal of the two notes amounted to $ 175,000. No part of this amount has been paid since her death.After the decedent's death the bank presented its claim for $ 175,000 against her estate, said claim providing that it was made "by virtue of the guaranty of said deceased of two promissory notes of M. K. Blake Estate Co., a corporation, dated August 17, 1937, and November 2, 1941, respectively." The claim was delivered to the executors in June 1942 and allowed by them July 1942 for its full amount.The decedent, by her will, created a residuary trust, naming M. W. 724 Dobrzensky as trustee and as residuary devisee and legatee in trust. Shortly prior to March 15, 1943, a plan was agreed upon between the executors and their attorney (M. W. Dobrzensky) whereby the decedent's estate could be distributed. The plan provided that the entire estate should be distributed to the trustee, subject to the payment of the bank's claim. This plan has never been carried out.In response to a request by the trustee, Dobrzensky, the bank, on March 17, 1943, sent to him a "consent to distribution" providing that the bank "hereby consents to the distribution of the above entitled estate without243 payment of its claim, reserving, however, its claim against Mary J. Robinson, who, with said decedent, guaranteed said promissory note."At the same time, the bank sent to the trustee a "Withdrawal of Request for Special Notice."On April 7, 1943, the claim was approved by the judge of the Superior Court of Alameda County, California.On October 25, 1943, the executors of the decedent's will filed with the probate court their first account, in which they reported the claim for $ 175,000 as an allowed and approved claim. This account was approved by order of the court on November 5, 1943.At the date of the decedent's death, and at all times since, to the date of the hearing herein, both the maker of the notes, the M. K. Blake Estate Co., and the co-guarantor, Mary J. Robinson, have been solvent and fully able to pay the notes in question.At schedule K of the estate tax return the executors of the decedent's will claimed a deduction for the $ 175,000 as a debt of the decedent. The respondent disallowed the deduction and determined the deficiency here in dispute.OPINION.This case involves an alleged claim for $ 175,000 against the estate of decedent. The deduction is sought under244 section 812 (b) (3) of the Internal Revenue Code prior to its amendment by section 405 of the Revenue Act of 1942. 1245 725 The cited section allows a deduction for such claims against the estate as are allowed by the laws of the jurisdiction under which the estate is being administered to the extent that they were contracted bona fide and for an adequate consideration in money or money's worth.The so-called claim grew out of the transactions in which decedent and her sister guaranteed two notes of a corporation, of which decedent was president and the sister was secretary and in which they owned a majority of the stock, the notes being held by a bank. The corporation and the surviving co-guarantor were both solvent and fully able to pay the amount of the claim at all material times. There has been no default on the notes or other event fixing the liability of the guarantor.The bank's claim for $ 175,000 was presented to the executors in June 1942 and approved by them July 1, 1942. On March 17, 1943, the bank (owner of the claim) filed a written "consent to distribution" of the estate without payment of the notes, reserving, however, its claim against decedent's co-guarantor. On the same date the bank withdrew its request for special notice of proceedings in the above entitled estate. 246 On April 7, 1943, the claim was approved by the judge of the Superior Court of Alameda County, California. Although the consent to distribution was in the hands of petitioners' attorney at the time, whether or not the court was advised of the action of the bank in filing such a consent to distribution does not appear. We deem this fact to be significant.On this set of facts petitioners ask us to approve the claim as a deduction from the taxable estate and contend that it is wholly immaterial that the claim will not be paid by the estate. They cite numerous cases in support, all of which we have examined. None of them involves a question of the fact of the existence of a bona fide claim. They involve the question whether a valid existing claim must be paid prior to deduction. Nor does any of them involve a consent to distribution or a waiver of rights, such as are here present. All such cases are distinguishable from the present case.Not every claim which may be presented and allowed by the probate court will be allowed as a deduction under the cited section. Only claims which are enforceable against the estate may be deducted. United States v. Mitchell, 74 Fed. (2d) 571.247 A claim is an assertion of a right. If there be no assertion of a right or if the right to assert has been relinquished or abandoned, there is no claim. Thus, if in fact there was no claim by the bank actually pending when the court purported to approve the claim, then the court's action was a nullity and without legal effect.From the tenor of the "consent to distribution," especially its specific reservation of the claim against the co-guarantor, we conclude 726 that as to petitioners the bank had abandoned its claim and relinquished its right. It follows that the purported approval of the claim by the court was a vain and ineffective action of no legal standing or binding effect. The consequence is that, for Federal tax purposes, there was no valid or bona fide claim outstanding on the part of the bank and no basis for a deduction from the gross estate.That the approval of the petitioners' contention would lead to absurd ends is readily to be seen if it be assumed that there was a third co-guarantor who had also died and whose estate was pressing a claim identical in all respects with that of petitioners. The same facts would require, under petitioners' contention, 248 that we approve as deductions from the estate two claims of $ 175,000, neither of which will ever be paid. The statement of such a situation is its own refutation.The view we take in the instant case makes unnecessary consideration in detail of the several contentions advanced by petitioners. The situation is even stronger for the Government than that before the court in Buck v. Helvering, 73 Fed. (2d) 760, where the court said:* * * In view of this peculiar and unusual liability, a liability that in the case of a solvent and going corporation is not at all likely ever to be enforced where in practical effect the stockholders' liability is rather that of surety than that of a primary debtor, although as a matter of law the liability of the stockholder is primary, we hold that the payment by the corporation of its indebtedness should be considered as satisfying the claim against the estate as of the date of the death of the deceased. If the debt of the corporation is paid by the corporation before it is paid by the stockholder, the liability of the stockholder is extinguished. For purposes of appraisement of the estate for the fixing of the Federal249 estate tax, the stockholders' liability should be considered as a potential claim rather than an actual claim, until it is paid by the estate or it is reasonably certain that it must be paid.In the present case the liability does not attain the dignity of a potential claim. In point of fact, there is no claim at all. The position of petitioners is much weaker than that present in Charles H. Lay, 40 B. T. A. 522, where we said:Of course, if when decedent died, there had been indebtedness to [the creditor] for money borrowed by the decedent, the claim would have been deductible in full. Doubtless, the Commissioner would not contend otherwise, but where an estate is liable only as a surety or endorser, it cannot take any deduction because of such liability where the principal has ample assets to pay the indebtedness. Cf. Buck v. Helvering, supra;Parrott v. Commissioner, 30 Fed. (2d) 792.Upon the facts presented, the respondent's determination is sustained.Decision will be entered for the respondent. Footnotes1. SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -- * * (b) Expenses, Losses Indebtedness, and Taxes. -- Such amounts -- * * (3) for claims against the estate, * * as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624287/	Estate of Robert B. Margrave, Deceased, The United States National Bank, Executor and Trustee of The Robert B. Margrave Revocable Trust, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Margrave v. CommissionerDocket No. 2210-76United States Tax Court71 T.C. 13; 1978 U.S. Tax Ct. LEXIS 44; October 10, 1978, Filed 44 Decision will be entered under Rule 155. Decedent's spouse applied for and owned an insurance policy on the life of the decedent, naming the trustee of a revocable trust created by the decedent as beneficiary. Upon decedent's death, the proceeds were paid to the trustee. Held, decedent did not possess any incident of ownership with respect to such life insurance policy. Held, further, he did not possess a power of appointment over the policy or the proceeds thereof. Jeffrey L. Stoehr, for the petitioner.Wayne B. Henry, for the respondent. Tannenwald, Judge. Goffe, J., concurring. Sterrett, J., agrees with this concurring opinion. Fay, J., dissenting. Dawson, Simpson, Irwin, and Wilbur, JJ., agree with this dissenting opinion. Quealy, J., dissenting. Simpson, J., agrees with this dissenting opinion. Chabot, J., dissenting. Simpson, J., agrees with this dissenting opinion. TANNENWALD14 Respondent determined a deficiency of 47 $ 11,176.45 in the estate tax of petitioner, subject to credit for State death taxes paid. The issue is whether the gross estate of decedent should include the proceeds of an insurance policy on the life of decedent.FINDINGS OF FACTSome of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.Decedent, Robert B. Margrave, died testate on April 29, 1973. At his death, he resided in Omaha, Nebr. His last will and testament, dated June 16, 1966, was admitted to probate by the County Court of Douglas County, Nebr., on June 14, 1973. Petitioner filed its Federal estate tax return with the Internal Revenue Service Center, Ogden, Utah, on January 14, 1974.The United States National Bank of Omaha (the bank), a corporation with its principal place of business in Omaha, Nebr., on the date the petition was filed herein, is the executor of decedent's estate. The bank is also the trustee of the Robert B. Margrave Revocable Trust (the trust), created by decedent on June 16, 1966.Under the terms of the trust, decedent was the income beneficiary and, during his lifetime, had the unqualified right to modify or48 revoke the trust.On January 29, 1970, Glenda Margrave, decedent's wife, applied for a 20-year decreasing term life insurance policy on decedent's life. Decedent, as the insured, signed the application. The policy was issued by Western Life Insurance Co. on March 12, 1970. Under the terms of the policy, the beneficiary was, in the absence of any change, "as designated in the application." 15 The bank, as trustee of the trust, was named beneficiary in the application. 1 The benficiary was never changed. During the term of the policy, i.e., the life of decedent, "all benefits, rights and privileges available or exercisable [under the policy]" were vested in decedent's wife as owner and she paid the premiums with her own funds.49 Upon the decedent's death, the proceeds of the insurance policy in the amount of $ 84,583 were paid to the bank as trustee of the trust.OPINIONThe question before us is whether the proceeds of insurance on the life of a decedent, which are payable to an inter vivos trust established by the decedent, are includable in the gross estate either under section 2042 or section 2041, 2 where (a) the decedent's wife was at all times the owner of all the rights under the policy, and (b) the decedent retained the unqualified right, during his lifetime, to modify or revoke the trust.We turn first to the question of includability of the life insurance proceeds under section 2042, which provides50 in relevant part:SEC. 2042. PROCEEDS OF LIFE INSURANCE.The value of the gross estate shall include the value of all property -- (1) Receivable by the executor. -- To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.(2) Receivable by other beneficiaries. -- To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * Respondent argues that decedent possessed at his death 16 sufficient "incidents of ownership" so as to require includability under section 2042(2) 3 and the regulations thereunder. We disagree.51 The regulations specify that "the term 'incidents of ownership' is not limited in its meaning to ownership of the policy in the technical legal sense," and that the focus is on "the right of the insured or his estate to the economic benefits of the policy." Sec. 20.2042-1(c)(2), Estate Tax Regs.As we see it, the key question is what power did decedent possess during his lifetime to control the disposition of the policy or of the proceeds. See United States v. Rhode Island Hospital Trust Co., 355 F.2d 7">355 F.2d 7, 11 (1st Cir. 1966). Mrs. Margrave was the owner of the policy and as such "all benefits, rights, options and privileges available or exercisable [thereunder] during the lifetime of [decedent]" were vested in her. Those powers could be exercised without decedent's consent. See Morton v. United States, 457 F.2d 750">457 F.2d 750, 754 (4th Cir. 1972). In this respect, the cases where the decedent's right to prevent a change in the beneficiary of a policy (either by way of a requirement of his consent or a veto power) was held to be an incident of ownership are clearly distinguishable. See Commissioner v. Karagheusian's Estate, 233 F.2d 197 (2d Cir. 1956),52 revg. on this issue 23 T.C. 806">23 T.C. 806 (1955); Schwager v. Commissioner, 64 T.C. 781">64 T.C. 781 (1975). Similarly distinguishable are those cases where the policies themselves were part of the corpus of a trust and the decedent-trustee, albeit only in his fiduciary capacity, had limited but irrevocable rights with respect to the policies or the proceeds thereof. Compare Terriberry v. United States, 517 F.2d 286">517 F.2d 286 (5th Cir. 1975), 4Rose v. United States, 511 F.2d 259 (5th Cir. 1975), Estate of Lumpkin v. Commissioner, 474 F.2d 1092 (5th Cir. 1973), revg. 56 T.C. 815">56 T.C. 815 (1971), and Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th 17 Cir. 1970), affg. 50 T.C. 915">50 T.C. 915 (1968), with Estate of Connelly v. United States, 551 F.2d 545">551 F.2d 545 (3d Cir. 1977), and Skifter v. Commissioner, 468 F.2d 699">468 F.2d 699 (2d Cir. 1972), affg. 56 T.C. 1190">56 T.C. 1190 (1971).53 Prior to decedent's death, the designation of the trustee as beneficiary created only an expectancy that it would continue to remain such until the policy became payable. See Farwell v. United States, 243 F.2d 373">243 F.2d 373, 377 (7th Cir. 1957). Thus, decedent's interest in the trust as regards the policy proceeds was merely a power over an expectancy subject to the absolute whim of the policy owner, Mrs. Margrave, 5 and was, by the terms of the trust itself, extinguished at the moment of his death. See Estate of Pyle v. Commissioner, 36 T.C. 1017">36 T.C. 1017, 1020 (1961), affd. 313 F.2d 328">313 F.2d 328 (3d Cir. 1963). This simply does not constitute an incident of ownership.54 Respondent next contends that decedent's power to modify or revoke the trust constituted a general power of appointment with the result that the proceeds of the policy are includable in his gross estate under section 2041. 6 Again, we disagree.55 18 Unquestionably, decedent's unqualified power to modify or revoke the trust falls within the scope of a general power of appointment. Maytag v. United States, 493 F.2d 995">493 F.2d 995 (10th Cir. 1974); sec. 20.2041-1(b)(1), Estate Tax Regs. The question before us is whether, at the moment of decedent's death, there was "any property" to which that power of appointment attached. Thus, we need not concern ourselves with cases, relied upon by respondent, where the property was in existence and the issue was whether the instrument involved constituted a power of appointment ( Keeter v. United States, 461 F.2d 714">461 F.2d 714 (5th Cir. 1972); 7Sheaffer v. Commissioner, 1047">12 T.C. 1047 (1949)), or whether a power of appointment was created on or before October 21, 1942 ( United States v. Turner, 287 F.2d 821">287 F.2d 821 (8th Cir. 1961); United States v. Merchants National Bank of Mobile, 261 F.2d 570">261 F.2d 570 (5th Cir. 1958); Estate of Rosenthal v. Commissioner, 34 T.C. 144 (1960)).56 By the terms of the policy, the trustee had only the right to receive the proceeds and this right was subject to Mrs. Margrave's power, as the owner of the policy, to change the designation of the trustee as beneficiary. The trustee, therefore, did not have an enforceable right to the proceeds, as it might have had if the beneficiary designation had been irrevocable -- a right which could have been treated as "property" subject to the decedent's power of appointment. Clearly, during his lifetime, 19 decedent did not have the ability to "enlarge or shift the beneficial interest" (see sec. 20.2041(b)-(1), Estate Tax Regs.) in "any property." He could not confer any benefit upon anyone, including himself or his creditors. As a consequence, prior to his death, decedent had no more than a power over an expectancy. See our discussion of the "incidents of ownership" issue at pp. 16-17 supra.Nor do we think that decedent's death breathed life into his power of appointment. To be sure, that event terminated Mrs. Margrave's rights in the policy and the proceeds became payable to the trustee to be disposed of pursuant to the trust's terms. That event also terminated decedent's57 power to modify or revoke the trust. The fact is, however, that the right to the proceeds did not become vested in the trustee until death had actually occurred. Until that moment, Mrs. Margrave could have changed the beneficiary designation and destroyed decedent's control of the proceeds via the trust and, therefore, the capacity of the trustee to receive the proceeds.In Johnstone v. Commissioner, 76 F.2d 55 (9th Cir. 1935), affg. 29 B.T.A. 957">29 B.T.A. 957 (1934), the decedent was found to have a taxable general power of appointment with respect to property in trust, although the surviving donor retained a right to alter or modify the trust which terminated at the decedent-donee's death. However, that case is distinguishable since, unlike the situation herein, the trust corpus, i.e., the "property," was in existence at the time of the decedent-donee's death.The situation herein is analogous to that which existed in Connecticut Bank & Trust Co. v. United States, 465 F.2d 760">465 F.2d 760 (2d Cir. 1972). In that case, one of the issues was whether the value of an action for wrongful death was property "with respect58 to which the decedent [had] at the time of his death a general power of appointment." The applicable State law gave the right of action to the executor or administrator and provided that any recovery was to be distributed under the terms of the decedent's will. In holding for the taxpayer, the court stated "at the very least, property subject to a sec. 2041 power of appointment must be in existence prior to the time of the decedent's death." 465 F.2d at 764. See also Lang v. United States, 356 F. Supp. 546">356 F. Supp. 546 (S.D. Iowa 1973); Rev. Rul 75-126, 1 C.B. 296">1975-1 C.B. 296; Rev. Rul. 75-127, 1 C.B. 297">1975-1 C.B. 297.A further analogy can be found in cases involving the question 32 of includability of a death benefit payable by an employer to a beneficiary designated by a deceased employee, who had the right to change the designation, where the employer could modify or terminate the plan at any time prior to the employee's death. In Dimock v. Corwin, 19 F. Supp. 56 (E.D.N.Y. 1937), affd. on other issues 99 F.2d 799">99 F.2d 799 (2d Cir. 1938),59 affd. 306 U.S. 363">306 U.S. 363 (1939), the court concluded that, in such a situation, the employee had "merely a privilege extended to him by his employer, which was subject to withdrawal or modification at any time" (see 19 F. Supp. at 59), with the result that there was no property in which the decedent had an interest at the time of his death and, therefore, the death benefit was not includable in the decedent's gross estate under the provisions of section 302(a) of the Revenue Act of 1926 (the predecessor of section 2033). Subsequent cases recognize that the crucial distinction in this area is whether the decedent had irrevocable rights under the plan (see Estate of Bahen v. Commissioner, 305 F.2d 827">305 F.2d 827, 831 (Ct.Cl. 1962); Estate of Garber v. Commissioner, 271 F.2d 97">271 F.2d 97, 101-102 (3d Cir. 1959), affg. T.C. Memo. 1958-121)) or whether he possessed only a hope or expectancy that the plan would be continued (see Estate of Albright v. Commissioner, 42 T.C. 643">42 T.C. 643 (1964), revd. on another issue 356 F.2d 319">356 F.2d 319 (2d Cir. 1966);60 Estate of Barr v. Commissioner, 40 T.C. 227">40 T.C. 227, 232-234 (1963); Estate of Gamble v. Commissioner, 69 T.C. 942">69 T.C. 942, 947 (1978)). See also Lowndes, Kramer & McCord, Federal Estate and Gift Taxes, pp. 28-30 (3d ed. 1974). The fact that these cases were decided under section 2033 (or its 1939 Code predecessor), rather than section 2041, is not significant since it is necessary, under both sections, to determine whether there was "property" in existence at the decedent's death in which decedent had an interest (sec. 2033) or with respect to which the decedent had a general power of appointment (sec. 2041).In sum, we hold that decedent's power of appointment, with respect to the proceeds of the policy involved herein, covered no more than an expectancy so that there was not "any property" to which it attached. Consequently, such proceeds are not includable in decedent's estate under section 2041.21 Because of other adjustments in the notice of deficiency, which are not in issue herein,Decision will be entered under Rule 155. GOFFEGoffe, J., concurring: I concur with the majority in all respects but, nevertheless, 61 feel that additional explanation is needed as to the lack of existence of a prearranged plan. The trial judge, in his dissenting opinion, concludes that it is clear from the record that there was a prearranged plan to give the decedent the opportunity to direct disposition of the insurance proceeds. The record supports a contrary conclusion.The application for insurance contains the signature of the decedent as insured and Mrs. Margrave as applicant but the record is silent as to when the document was executed by each.The only direct evidence concerning the existence of a prearranged plan is the uncontradicted testimony of Solomon Schwartz, the insurance agent who sold the policy to Mrs. Margrave. He testified that Mrs. Margrave completed the questions on the application and signed it and that decedent signed the application as the insured.On cross examination of Mr. Schwartz by counsel for respondent, the following dialogue is reported:Mr. Henry: Was it ever expressed to you that also one of the reasons for the trust -- naming the trust as beneficiary was a desire on the part of the decedent to control the proceeds?A. No, not at all. Mrs. Margrave was going to be able to62 control her own proceeds and it's just simply that the trust coincided with her wishes. That had been set up by Robert Margrave for his own estate and rather than go through the expense of setting up another one that would be identical in wording, she used that one since he would -- he would have already been gone if it was going to be exercised.Q. And can life insurance be taken out without the insured approval or consent?A. No, the insured must -- the insured must be a party to it unless they're below the age of fourteen and a half, a child. Then a parent can do it for the child. But above fourteen and a half, the insured has to be a party to the contract.Q. The only question I have still on my mind is the decedent -- from the 22 other answer you gave me -- the decedent didn't express any concern of having control over the proceeds at all?A. None whatsoever.Q. He didn't care if -- no matter who was paid the proceeds, he never expressed any concern over that?A. No, on his own policies he cared, but as far as the policy that was owned by his wife, she could have named the children individually if she wanted to. And he would not have cared.Q. Or some distant relative, 63 he never expressed any concern?A. None whatsoever. And he would have no control of it. It wasn't his policy.Q. He was willing to let the insurance be taken out on his life and paid to whoever without any concern of who it was being paid to?A. Quite frankly, I wouldn't be concerned if my wife did it. If there's a deep love, you do what your spouse would want to do. You don't look for any motives.Mr. Henry: Thank you.The Witness: And there was a deep love here.Mr. Henry: Thank you. I don't have any further questions.[Tr. p. 22, line 8 -- p. 23, line 25.]In view of Mr. Schwartz' testimony, it is not difficult to understand why respondent never requested a finding of fact in his brief that decedent and Mrs. Margrave had a prearranged plan for disposition of the insurance proceeds.To conclude, as the trial judge does in his dissenting opinion, that there was a prearranged plan, he must disregard the testimony of Mr. Schwartz. Where evidence which is competent, relevant, and credible is uncontradicted, the Tax Court may not arbitrarily discredit or disregard it. Banks v. Commissioner, 322 F.2d 530">322 F.2d 530, 537 (8th Cir. 1963). In my view, the testimony64 of Mr. Schwartz was not improbable, unreasonable, or questionable. We are, therefore, bound to accept his testimony as true. Banks v. Commissioner, supra;Gilman v. Commissioner, 65 T.C. 296">65 T.C. 296 (1975), affd. per curiam 547 F.2d 32">547 F.2d 32 (2d Cir. 1976). It follows that the record as a whole does not support a finding of fact that a prearranged plan existed. FAY; QUEALY; CHABOTFay, J., dissenting: I respectfully dissent from the majority's conclusion that the proceeds of the insurance policy on decedent's life are not includable in his gross estate under section 23 2041. In my opinion, the decedent herein died possessing a general testamentary power of appointment over such proceeds.As a general rule, section 2041(a) requires the inclusion in the gross estate of the value of any property subject to a general power of appointment. In this regard, a "general power of appointment" is defined as a power under which the donee can appoint the property subject to the power to himself, his estate, or the creditors of either. Sec. 2041(b). The statutory rule of inclusion operates whether the power in65 question is an inter vivos or a testamentary general power. Under the facts of the present case, I believe the decedent had such a general testamentary power with respect to the insurance proceeds.At the outset, I note that it is common knowledge that revocable living trusts of the type created by the decedent herein are heavily laden with testamentary attributes and are oftentimes used as substitutes for a will. For instance, in a typical situation, the settlor of a revocable trust will reserve unto himself a life estate in the trust and upon his death the corpus will thereafter be distributed in accordance with the terms of the trust. As in the case of a will, the terms of a revocable trust are changeable until the moment of the settlor's death. Moreover, many of the dispositive provisions in a revocable trust, like those of a will, take effect at the settlor's death. Indeed, certainly most, if not all, dispositive provisions contained in a will could be provided for in a revocable trust. Specifically, a settlor of a trust, as a testator of a will, could direct through the terms of the instrument that upon his death the corpus is payable to his estate, his creditors, or the66 creditors of his estate. This latter power is as much a general testamentary power as is one exercisable by a will.In the instant case, the decedent's unqualified power to modify his trust's terms was, as the majority correctly concludes, a general power with respect to any property placed in the trust by one other than the decedent. Further, because this power to modify was unqualified, it was necessarily exercisable in an inter vivos and a testamentary fashion. 1In reaching its conclusion with respect to section 2041, the majority reasons that there was no "property" to which the 24 decedent's power attached. From reading the opinion, I am unable to ascertain whether this conclusion is premised on the fact that Mrs. Margrave had the power during the decedent's lifetime to revoke his power of appointment by changing the beneficiary; 67 or whether it is based upon the fact that the actual proceeds were not in existence during the decedent's lifetime; or a combination of these two facts. In any event, to the extent that either of these factors could be considered relevant in deciding this case (and I question whether they are), 2 they would be important only in ascertaining whether the decedent died possessing an inter vivos general power over the proceeds. In other words, because both of these factors, upon which the majority bases its decision, disappeared at the moment of the decedent's death, they have no significance in determining whether he died possessed of a general testamentary power over such property.68 Briefly stated, a general testamentary power is a power under which the decedent has broad control over the devolution of property subject to the power after his death. I believe the decedent herein had such a power. To begin with, upon the decedent's death the policy proceeds were irrevocably part of the trust corpus and thereafter subject to the trust's terms. Until his death, the decedent had the power to modify the terms of the trust directing that the corpus be payable after his death to whomever he chose. Simply put, the decedent's power was no greater and no less than would have existed had the proceeds been payable to his estate and thereafter to whomever he appointed by will. In view of the realities of the situation, the conclusion that the decedent had a general testamentary power over the insurance proceeds is inescapable.In its discussion of this point, the majority states:25 Nor do we think that decedent's death breathed life into his power of appointment. To be sure, that event terminated Mrs. Margrave's rights in the policy and the proceeds became payable to the trustee to be disposed of pursuant to the trust's terms. That event also terminated decedent's69 power to modify or revoke the trust. The fact is, however, that the right to the proceeds did not become vested in the trustee until death had actually occurred. Until that moment, Mrs. Margrave could have changed the beneficiary designation and destroyed decedent's control of the proceeds via the trust and, therefore, the capacity of the trustee to receive the proceeds.Unfortunately, from reading this it is difficult to discern exactly what constitutes the basis of the majority's conclusion. Certainly it cannot be the fact that the decedent's power to modify or revoke the trust terminated at his death. As I noted above, a decedent's power to modify or revoke his will terminates at his death. Surely the majority is not suggesting that this fact has any bearing on the question of whether a testator died possessed of a general testamentary power. Likewise, the fact that the decedent's power was revocable by Mrs. Margrave up until his death does not mean that it did not exist. Had Mrs. Margrave changed the beneficiary before the decedent's death nothing would have been includable in his estate under section 2041. However, that is not what actually occurred. The hard facts70 are that Mrs. Margrave did not revoke the power and consequently such power became irrevocable upon the decedent's death. What Mrs. Margrave might have done with the power is simply of no relevance. Keeter v. United States, 461 F.2d 714">461 F.2d 714, 720 (5th Cir. 1972).Finally, in distinguishing Johnstone v. Commissioner, 76 F.2d 55">76 F.2d 55 (9th Cir. 1935), affg. 29 B.T.A. 957">29 B.T.A. 957 (1934), the majority again makes the misstatement that there was no "property" in existence at the time of the decedent's death. As I have previously noted, the right to receive insurance proceeds is as much an item of "property" as the right to receive payment on a note. The contingent nature of this right during the decedent's lifetime is relevant only, if at all (see n. 2 supra), in determining whether the decedent had an inter vivos general power. In any event, at the moment of death this right became fixed and irrevocable and passed in accordance with the decedent's general testamentary power embodied in the terms of his trust.In enacting section 2041, Congress believed that a broad power to control the disposition71 of property was tantamount to 26 its ownership for estate tax purposes. In the instant case, the decedent had such a power over the proceeds of the insurance.Quealy, J., dissenting: The opinion of the majority produces an absurd result. In order to reach this result, the opinion threads its way through a "mine field" of adverse decisions. 1 Merely to distinguish those cases does not lead to the opposite conclusion. For that the majority relies on Connecticut Bank & Trust Co. v. United States, 465 F.2d 760">465 F.2d 760 (2d Cir. 1972).72 In the Connecticut Bank & Trust Co. case, the "property" sought to be taxed was the proceeds of an action under a wrongful death statute. A claim against a tort-feasor on account of the death of a taxpayer does not arise until the taxpayer dies. On the other hand, a policy of life insurance gives rise to contractual right at the time the policy is taken out. It is "property" with respect to which the decedent may enjoy "incidents of ownership." In the case of life insurance, the death of the taxpayer merely fixes the time of payment, not the right itself. In a wrongful death claim, it is the death of the taxpayer that gives rise to the cause of action. Until that event, there is nothing.If the proceeds of the insurance in question had been payable to the estate of the decedent, such proceeds would have been includable as a part of such estate for purposes of the estate tax, notwithstanding any of the so-called contingencies relied upon by the majority. I find it difficult to reach a different result merely because the proceeds are payable to a revocable trust under the complete control and dominion of the decedent rather than directly to him or to his estate. 273 Furthermore, I fail to see the necessity for reaching an absurd 27 result in this case. If not includable under section 2042(1), the proceeds of insurance would nevertheless be includable under section 2042(2). The phrase "incidents of ownership" for purposes of this section encompasses the right to designate whom shall enjoy the proceeds of the policy. That right need not be vested or absolute. Terriberry v. United States, 517 F.2d 286 (5th Cir. 1975); United States v. Merchants National Bank of Mobile, 261 F.2d 570">261 F.2d 570 (5th Cir. 1958).In recognition of the fact that the estate tax provisions likewise are overlapping in their reach, I also believe that the proceeds would be taxable under section 2041. The designation of the revocable trust as a recipient of the proceeds of the policy, coupled with the power of the decedent over that trust, constituted nothing less than a general power of appointment with respect to the proceeds of the policy. The power was "general" in that it was wholly unrestricted as to whom, how, or where the decedent might direct the proceeds.I am not persuaded by the argument that the decedent74 merely had an "expectancy" or that the right of the decedent to direct the proceeds of the policy could be revoked or terminated by his wife, the owner of the policy. In prescribing the reach of the estate tax, the Congress has not been deterred by such considerations. The real question is whether, at the time of his death, the decedent was possessed of the power to direct the proceeds of the policy. It is clear that he was.Furthermore, there is nothing in this record from which it could be inferred that the decedent's wife would, contrary to decedent's intentions, deprive the decedent of his right to designate to whom would be paid the proceeds of the insurance. In order for her to obtain a policy of insurance on decedent's life, it was necessary for the decedent to consent to and to join in the application for such insurance. The decedent filled out the application form. Logic would lead to the inference that decedent had a voice in the disposition of the proceeds. This was not a plan that could be evolved without the mutual agreement and consent of both the owner of the policy and the insured.It is clear from the record that the designation of the trust as beneficiary75 resulted from a prearranged plan which gave 28 decedent the opportunity to direct the proceeds. 3 If the right to direct such proceeds had been embodied in the mode of settlement, the proceeds would clearly be taxable as part of the estate. To insulate the selection process by setting up a revocable trust which accomplishes the same result does not change the character of the transaction. See Keeter v. United States, 461 F.2d 714">461 F.2d 714 (5th Cir. 1972); contra, Second National Bank of Danville, Illinois v. Dallman, 209 F.2d 321 (7th Cir. 1954).76 Chabot, J., dissenting: The majority conclude that the proceeds of the life insurance policy in question are not includable in the value of decedent's gross estate. I believe that the policy proceeds are includable in the value of decedent's gross estate under section 2042(1), and so I respectfully dissent.Section 2042(1) -- set out in full in the majority opinion -- provides that the value of decedent's gross estate shall include the value of all property receivable by the executor as insurance under policies on the life of the decedent. There being no question that the proceeds were "insurance under policies on the life of the decedent," the critical determination is whether the policy proceeds were "receivable by the executor."In this case, where decedent, "during his lifetime, had the unqualified right to modify or revoke the trust" (see the findings of fact in the majority opinion), the designation of the trustee of the trust as beneficiary of the insurance policy serves the same testamentary purpose as the designation of the executor of decedent's estate as the beneficiary. If life insurance proceeds are not included in the value of the gross estate under these circumstances, 77 then section 2042(1) is a dead letter. Where a policy owner now designates a decedent's estate as beneficiary, in the future the policy owner will substitute as beneficiary a trust wholly controlled by decedent.It is a commonplace that the courts should avoid interpreting 29 a statutory provision in such a manner as to deprive it of meaning.This Court and other courts held that proceeds of insurance policies (1) can properly be treated as receivable by the executor even though they are in fact receivable by another, 178 (2) can properly be treated as receivable by another even though they are in fact receivable by the executor, 2 and (3) can properly be treated as not being "insurance." 3 The courts in all these cases looked to the substance of the situation to give effect to the distinctions drawn by the Congress.The majority opinion, in note 3 thereof, states that there is nothing in the record to indicate that the trust was under a legal obligation to pay taxes, debts, or other charges enforceable against the estate, quoting section 20.2042-1(b)(1), Estate Tax Regs. These regulations merely follow the substance-over-form approach taken by the Morton-Mason line of cases noted above (note 1 of this opinion). The concept of looking to the substance of a situation is not limited to this line of cases or these regulations.The majority's dismissal of the section 2042(1) consideration concludes with a reference to United States v. First Nat. Bank, 133 F.2d 886 (8th Cir. 1943),79 and Freedman v. United States, 382 F.2d 742">382 F.2d 742, 744 n. 5 (5th Cir. 1967).In United States v. First Nat. Bank, supra, the court held that where a Mr. Smedal named as beneficiary of life insurance policies a testamentary trust created by his will for the benefit of his wife and daughter, the policy proceeds were not included in the value of Mr. Smedal's gross estate under section 302(g) of the Revenue Act of 1926 as insurance proceeds "receivable by the executor," but were included in the value of Mr. Smedal's gross estate under that section as insurance proceeds "receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life." The following characteristics of the situation in First Nat. Bank indicate why that case is distinguishable from the instant case.30 (1) Under section 302(g) of the Revenue Act of 1926, a $ 40,000 exclusion applied to insurance proceeds "receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life." The issue in First Nat. Bank was not whether the insurance policy proceeds were includable in80 the value of Mr. Smedal's gross estate. The court there stated, "The narrow question for solution is whether the proceeds of the * * * policies are 'receivable by the executor' of decedent's estate or by 'other beneficiaries' within the meaning of sec. 302(g), supra." 133 F.2d at 887-888. The danger of interpreting section 302(g) of the Revenue Act of 1926 into oblivion did not present itself to the Circuit Court of Appeals. The issue of who is the effective beneficiary of the policy proceeds -- an issue quite appropriate when the only insurance policy proceeds included in the value of a decedent's gross estate under the predecessors of section 2042(1) were those purchased by the decedent on the decedent's life, and when all such policy proceeds were so included (although some subject to an exclusion) -- is not relevant to the issue of whether a decedent has the ability to make a testamentary disposition of the policy proceeds -- the focus of section 2042. 481 (2) The cases relied upon in First Nat. Bank also do not support the majority in the instant case. All of these cases either are substance-over-form cases (which, I suggest, support inclusion in the value of the gross estate) or are distinguishable for the reasons described in the immediately preceding paragraph. In Helvering v. LeGierse, 312 U.S. 531">312 U.S. 531 (1941), the Supreme Court determined that an arrangement which took the form of a life insurance policy was not in substance "insurance," and so the proceeds of the arrangement were not includable in the value of the gross estate under section 302(g) of the Revenue Act of 1926. 5 The decisions in Proutt's Estate v. Commissioner, 125 F.2d 591">125 F.2d 591 (6th Cir. 1942), and Boston Safe Deposit & T. Co. v. Commissioner, 100 F.2d 266 (1st Cir. 1938), involved the same 31 determination of which clause of section 302(g) of the Revenue Act of 1926, applied, as was made in First Nat. Bank. The decisions in Webster v. Commissioner, 120 F.2d 514">120 F.2d 514 (5th Cir. 1941), Commissioner v. Jones, 62 F.2d 496 (6th Cir. 1932),82 and Lucky v. Commissioner, 2 B.T.A. 1268 (1925), were likewise involved with that determination, but also involved the effects of State statutes providing that under certain circumstances life insurance policy proceeds could not be reached by the decedent's creditors. No such statute is involved in the instant case.(3) The insurance policy in the instant case was taken out by Mrs. Margrave. In First Nat. Bank, the policies were taken out by Mr. Smedal, the decedent in that case, who "intended that his wife and daughter should be the beneficiaries, and not the executor." 133 F.2d at 888. The rationale of First Nat. Bank and the cases cited by it with respect to the legislative intent underlying section 302(g) of the Revenue Act of 1926 -- a rationale which83 is based on decedents' motives -- is not in conflict with inclusion under section 2042(1) in the instant case, when that rationale is recast in light of the present state of the law of Federal estate taxation and the context of the facts found in the instant case.The other case cited by the majority on the section 2042(1) point, Freedman v. United States, supra, is similarly unresponsive to the problem presented by the instant case. In Freedman, 382 F.2d at 744 n. 5, the court stated:Since Mr. Freedman was the executor, this case might appear to fall within sec. 2042(1), which makes life insurance proceeds includable in the gross estate to the extent that they are "receivable by the executor." However, the proceeds were not received by Mr. Freedman in his capacity as executor but rather as named beneficiary.I have no difficulty with the court's proposition that policy proceeds receivable by the executor may not be "receivable by the executor" within the meaning of section 2042(1) if they are receivable by the executor in a capacity other than that of executor. It does not follow, however, that policy proceeds not84 receivable by the executor are never "receivable by the executor" within the meaning of section 2042(1). That proposition is inconsistent with the Morton-Mason line of decisions (note 1 of this opinion) and section 20.2042-1(b)(1), Estate Tax Regs.There is no dispute that, if Mrs. Margrave had designated the executor of decedent's estate as the beneficiary, then the 32 proceeds would be included in the value of the gross estate in the instant case. This is so even though decedent appears to have had no ownership interest in the policy and even though the proceeds (as distinguished from the policy itself) were not in existence while decedent lived. The common sense of the situation is that it is property which decedent can dispose of in a testamentary manner.I submit that the substance of what occurred in the instant case is not different from the substance of the above hypothetical. Here, too, decedent was enabled to dispose of the proceeds of the policy in a testamentary manner, because of his "unqualified right to modify or revoke the trust." True, that right could be exercised only during lifetime, but such is equally the case with a will or testament. True, 85 Mrs. Margrave could defeat decedent's disposition by changing the beneficiary, but such is equally the case with a designation of the executor as the beneficiary -- a designation that would produce an inclusion in the gross estate.I would hold that the life insurance policy proceeds receivable by the Robert B. Margrave Revocable Trust, under the circumstances of the instant case, are to be treated as proceeds receivable by the executor, and therefore that these proceeds are includable in the value of decedent's gross estate. Footnotes1. The application further provided that if the beneficiary was not "living," the proceeds would be payable to the estate of the insured. The estate could have become the primary beneficiary of the proceeds if the decedent had, prior to his death, either revoked the trust, i.e., so that it was not "living," or amended it to make his estate the remainderman and↩ Mrs. Margrave had not changed the beneficiary designation. The respondent makes no argument that the proceeds should be includable in decedent's gross estate on account of such contingent designation. The trustee was named as beneficiary of other insurance policies on the life of the decedent which were included in decedent's gross estate because the decedent was the owner.2. All references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect on the date of death. In the notice of deficiency, respondent stated that sec. 2038 provided an alternative basis for his determination. On brief, respondent concedes that sec. 2038 is inapplicable to the proceeds in question.↩3. Respondent does not argue that the proceeds should be included in the gross estate by application of sec. 2042(1), and there is nothing in the record to indicate that the trust was under a legal obligation "to pay taxes, debts, or other charges enforceable against the estate." Sec. 20.2042-1(b)(1), Estate Tax Regs. See also United States v. First National Bank & Trust Co. of Minneapolis, 133 F.2d 886">133 F.2d 886 (8th Cir. 1943); Freedman v. United States, 382 F.2d 742">382 F.2d 742, 744↩ n. 5 (5th Cir. 1967).4. We recognize that, in this case, the decedent's power as trustee was substantively revocable in the sense that the decedent's widow, who was the grantor of the trust, could have removed him as trustee. See Terriberry v. United States, 517 F.2d 286">517 F.2d 286, 289-290 (5th Cir. 1975). The critical fact, however, is that so long as he was the trustee, decedent had direct control of the policies and, thus, could be said to have incidents of ownership in the policies themselves within the meaning of the statute and applicable regulations. See sec. 2042; sec. 20.2042-1(c), Estate Tax Regs. In the instant case, the decedent had no such direct control. Cf. Rose v. United States, 511 F.2d 259">511 F.2d 259, 265↩ n. 14 (5th Cir. 1975).5. Insofar as the record indicates, there was no agreement or understanding between decedent and Mrs. Margrave with respect to the disposition of the policy or of proceeds, and respondent has not made any suggestion along these lines. Any attempt to infer a prearranged agreement or understanding can rest only on an automatic inference based upon the marital relationship, a course which the Court has in the past declined to pursue. Cf. Estate of Gutchess v. Commissioner, 46 T.C. 554↩ (1966).6. Sec. 2041 provides in relevant part:SEC. 2041. POWERS OF APPOINTMENT.(a) In General. -- The value of the gross estate shall include the value of all property -- * * * (2) Powers created after October 21, 1942. -- To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under sections 2035 to 2038, inclusive. For purposes of this paragraph (2), the power of appointment shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised.* * * *(b) Definitions. -- For purposes of subsection (a) -- (1) General power of appointment. -- The term "general power of appointment" means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that -- (A) A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.(B) A power of appointment created on or before October 21, 1942, which is exercisable by the decedent only in conjunction with another person shall not be deemed a general power of appointment.(C) In the case of a power of appointment created after October 21, 1942, which is exercisable by the decedent only in conjunction with another person --(i) If the power is not exercisable by the decedent except in conjunction with the creator of the power -- such power shall not be deemed a general power of appointment.(ii) If the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent -- such power shall not be deemed a general power of appointment. For the purposes of this clause a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power.(iii) If (after the application of clauses (i) and (ii)) the power is a general power of appointment and is exercisable in favor of such other person -- such power shall be deemed a general power of appointment only in respect of a fractional part of the property subject to such power, such part to be determined by dividing the value of such property by the number of such persons (including the decedent) in favor of whom such power is exercisable.For purposes of clauses (ii) and (iii), a power shall be deemed to be exercisable in favor of a person if it is exercisable in favor of such person, his estate, his creditors, or the creditors of his estate.↩7. Contra, Second National Bank of Danville, Illinois v. Dallman, 209 F.2d 321">209 F.2d 321↩ (7th Cir. 1954).1. The term "power of appointment" is broadly defined to include "all powers which are in substance and effect powers of appointment." Sec. 20.2041-1(b)(1), Estate Tax Regs.↩2. Mrs. Margrave's power to change the beneficiary of the policy made decedent's general power revocable during his lifetime. However, the fact that a general power is revocable during a decedent's lifetime by the donor of the power does not affect includability under sec. 2041 so long as such power becomes irrevocable at death. Keeter v. United States, 461 F.2d 714">461 F.2d 714, 720 (5th Cir. 1972); Johnstone v. Commissioner, 29 B.T.A. 957 (1934), affd. 76 F.2d 55">76 F.2d 55 (9th Cir. 1935). In addition, the right to receive insurance proceeds, which right the decedent could appoint under the terms of his trust, is no less an item of property than a note, an account receivable, or a parcel of real estate.Properly viewed, by virtue of Mrs. Margrave's power to change the beneficiary, the decedent during his lifetime had a revocable general power of appointment over certain property, viz., the right to receive the insurance proceeds. This power of appointment became irrevocable upon his death. In my opinion, these facts make the present case indistinguishable from Keeter v. United States, supra, and Johnstone v. Commissioner, supra↩.1. Terriberry v. United States, 517 F.2d 286">517 F.2d 286 (5th Cir. 1975); Rose v. United States, 511 F.2d 259">511 F.2d 259 (5th Cir. 1975); Estate of Lumpkin v. Commissioner, 474 F.2d 1092 (5th Cir. 1973), revg. 56 T.C. 815">56 T.C. 815 (1971); Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970), affg. 50 T.C. 915">50 T.C. 915 (1968); Estate of Connelly v. United States, 551 F.2d 545 (3d Cir. 1977); Estate of Skifter v. Commissioner, 468 F.2d 699 (2d Cir. 1972), affg. 56 T.C. 1190">56 T.C. 1190 (1971); Keeter v. United States, 461 F.2d 714 (5th Cir. 1972); Second National Bank of Danville, Illinois v. Dallman, 209 F.2d 321 (7th Cir. 1954); Estate of Sheaffer v. Commissioner, 12 T.C. 1047">12 T.C. 1047 (1949); Johnstone v. Commissioner, 76 F.2d 55">76 F.2d 55↩ (9th Cir. 1935).2. Under our tax laws, since Helvering v. Clifford, 331">309 U.S. 331↩ (1940), the short-term or revocable trust is regarded as the alter ego of the decedent.3. I have no difficulty reaching this conclusion notwithstanding the testimony of the insurance agent set forth in Judge Goffe↩'s concurring opinion. It is pure hearsay, immaterial to the legal issue presented, and as a substitute for the testimony of Mrs. Margrave, who was not called by petitioner as a witness, has no probative value. Petitioner has the burden, and if Mrs. Margrave's intent is a material fact, has failed to meet that burden. Her absence raises a presumption against the petitioner.1. E.g., Bintliff v. United States, 462 F.2d 403">462 F.2d 403 (5th Cir. 1972); Estate of Matthews v. Commissioner, 3 T.C. 525 (1944); Estate of Mason v. Commissioner, 43 B.T.A. 813">43 B.T.A. 813 (1941); Morton v. Commissioner, 23 B.T.A. 236↩ (1931).2. Proutt's Estate v. Commissioner, 125 F.2d 591">125 F.2d 591 (6th Cir. 1942), revg. 41 B.T.A. 1299">41 B.T.A. 1299 (1940); Commissioner v. Jones, 62 F.2d 496 (6th Cir. 1932), affg. 20 B.T.A. 441">20 B.T.A. 441 (1930); Lucky v. Commissioner, 2 B.T.A. 1268↩ (1925).3. Helvering v. LeGierse, 312 U.S. 531">312 U.S. 531↩ (1941).4. The Revenue Act of 1942, section 404, amended sec. 811(g), I.R.C. 1939 -- a predecessor of sec. 2042 -- by replacing the "purchased by decedent on the life of decedent" test with a triple-pronged "testamentary disposition" test: policy proceeds (1) receivable by the executor or the estate, (2) purchased by premiums paid for by decedent, or (3) in which decedent at death had incidents of ownership, are includable in the value of decedent's gross estate. See S. Rept. 77-1631, pp. 234-235, 2 C.B. 504">1942-2 C.B. 504↩, 676-677.5. The Supreme Court held in LeGierse↩ that the amounts were, however, includable under sec. 302(c), Revenue Act of 1926, as a transfer to take effect in possession or enjoyment at or after death.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624288/	Atlantic Veneer Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentAtlantic Veneer Corp. v. CommissionerDocket No. 2870-83United States Tax Court85 T.C. 1075; 1985 U.S. Tax Ct. LEXIS 1; 85 T.C. No. 63; December 31, 1985, Filed 1 Decision will be entered for the respondent. Petitioner purchased a limited partnership interest in a German partnership, effective Jan. 1, 1973. The German partnership stepped up the basis of its assets, as required by German law, to take into account the amount by which the petitioner's purchase price exceeded the adjusted basis of its allocable share of the German partnership's assets. In its June 30, 1974, fiscal year U.S. tax return, petitioner reported its distributive share of income of the German partnership for calendar year 1973, which was computed by using the stepped-up basis for purposes of depreciation. To that return, petitioner attached a copy of the 1973 German partnership return and schedules without any English translations. Held, the required election was not made which would permit petitioner to have the benefit of the adjustments to basis pursuant to the provisions of secs. 754 and 753, I.R.C. 1954. Dennis I. Meyer, Bertrand M. Harding, Jr., and Thomas A. O'Donnell, for the petitioner.Kristine A. Roth and Marlene Gross, for the respondent. Tannenwald, Judge. TANNENWALD1075 Respondent determined the following deficiencies in petitioner's Federal income taxes: 1076 Taxable yearDeficiency1976$ 102,784.301977115,452.541978145,469.77The sole issue for decision is whether a valid election was filed pursuant to section 754, 1 thus permitting petitioner4 to benefit from an adjustment to the basis of partnership property under section 743(b). 2FINDINGS OF FACTSome of the facts have been stipulated and are so found. This reference incorporates the stipulation of facts and attached exhibits.Petitioner, a North5 Carolina corporation, had its principal place of business in Beaufort, North Carolina, at the time it filed its petition in this case. Petitioner timely filed its Federal corporate income tax returns for the taxable years ending June 30, 1974, through June 30, 1978, with the Internal Revenue Service Center in Memphis, Tennessee. In addition, petitioner filed amended corporate income tax returns for the taxable years ending June 30, 1974, and June 30, 1976.On December 29, 1972, petitioner entered into a contract with two limited partners of K. Heinz Mohring (KG), a limited partnership organized under the laws of the Federal Republic of Germany (the German partnership), to purchase their combined one-third interest in the German partnership, effective January 1, 1973. The purchase price paid by petitioner was approximately $ 5,270,000, which exceeded by approximately $ 3,255,000 the adjusted basis of petitioner's allocable share of the German partnership's assets as of the January 1 acquisition date. Pursuant to German law, on its books and in its tax returns filed with the Federal Republic of Germany, the German partnership increased petitioner's basis in its share of 1077 6 the partnership's assets by the aforementioned $ 3,255,000 and allocated such excess amount among the partnership's assets owned as of January 1, 1973. 3During its taxable years 1973 through 1978, the German partnership carried on no trade or business within the United States and derived no income from sources within the United States. The German partnership filed neither a U.S. partnership return Form 1065 nor a statement electing stepped-up treatment under section 743(b) with the Internal Revenue Service during this period. Under the German partnership's Articles of Partnership, the limited partners were not authorized to represent the partnership without a special power of attorney. No such special power of attorney was ever requested by or granted to petitioner that would have permitted it to file7 a U.S. tax return on behalf of the German partnership.The first taxable year for which petitioner was required to report any distributive share of income or loss from the German partnership was petitioner's taxable year ending June 30, 1974. Petitioner reported on its corporate income tax return Form 1120 for each of its taxable years from 1974 through 1978 its distributive share of income from the German partnership, which was computed using the stepped-up basis in the partnership assets. Petitioner attached to each corporate return a copy of the German tax return of the German partnership, with attached schedules, for the German partnership's year ending December 31 of the preceding year. These partnership returns were in German, and petitioner did not provide translations of any portion of them to the Internal Revenue Service. 4 However, each Form 1120 contained a schedule which clearly identified petitioner's distributive share of the German partnership's income, the exchange rate utilized by petitioner in converting from Deutsche marks to 1078 U.S. dollars and a direct reference to the page in the attached German tax return that evidenced this distributive share.8 Each German partnership tax return included a document entitled "Enclosure to the Profit Assessment Statement." On page 2 of the "Enclosure to the Profit Assessment Statement 1973" was a schedule entitled "Supplementary Balance for Tax Purposes as of December 31, 1973" (enclosure), which pertained only to petitioner and listed as the value of each of the German partnership's assets as of January 1, 1973, the amount by which petitioner's basis in its partnership interest in the German partnership immediately after its acquisition of such interest exceeded petitioner's allocable adjusted basis in each of the German partnership's assets. The return of the German partnership containing said schedule was attached to petitioner's Form 1120 for the taxable year ended June 30, 1974. An English translation of the enclosure 5 revealed that the German partnership did in fact step up the basis of the partnership's assets to reflect the excess of petitioner's purchase price over the allocable adjusted basis in each of the German partnership's assets prior to petitioner's acquisition.9 The corporate tax returns of petitioner filed for the taxable years ending June 30, 1974, and June 30, 1975, were never audited by respondent. Other than requests for statements and information made during the course of the audit leading to the issuance of the statutory notice of deficiency in this case, at no time during the taxable years in question did respondent exercise his authority under section 1.6031-1(d)(2), Income Tax Regs., to require petitioner to render statements or other information to determine whether petitioner was liable for a tax on income from the German partnership, nor has he ever questioned the accuracy or legitimacy of the allocation computations on the partnership returns.OPINIONUnder section 743(b), a partner who acquires a partnership interest at a purchase price in excess of the adjusted basis of his allocable share in the partnership's assets is permitted to step up the basis of these assets if the partnership so elects 1079 under section 754. 6 Pursuant to section 754 --If a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, * * * in the case of 10 a transfer of a partnership interest, in the manner provided in section 743. * In order to make a valid election, the regulations promulgated under section 754 clearly state that "An election * * shall be made in a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs." 7Sec. 1.754-1(b)(1), Income Tax Regs. (emphasis added).11 Turning to the partnership information return requirements of section 6031(a), that section provides that --Every partnership (as defined in section 761(a)) shall make a return for each taxable year, stating specifically the items of gross income and the deductions allowable by subtitle A, and such other information for the purpose of carrying out the provisions of subtitle A as the Secretary may by forms and regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual.This requirement is satisfied by the filing of a Form 1065 by the partnership (see sec. 1.6031-1(a)(1), Income Tax Regs.), but section 1.6031-1(d)(1), Income Tax Regs., stating a general exception, specifies that "A partnership carrying on no business in the United States and deriving no income from sources within the United States need not file a partnership return." However, with respect to such a foreign partnership that has a U.S. citizen or resident as one of its partners, the general exception from filing is modified by the provision that --12 Where a United States citizen or resident is a partner in a partnership described in subparagraph (1) of this paragraph which is not required to file a partnership return, the district director or director of the service center may require such person to render such statements or provide such 1080 information as is necessary to show whether or not such person is liable for tax or income derived from such partnership. In addition, if an election in accordance with the provisions of section 703 (relating to elections affecting the computation of taxable income derived from a partnership) or section 761 * * is to be made by or for the partnership, a return on Form 1065 shall be filed for such partnership. * * * [sec. 1.6031-1(d)(2), Income Tax Reg.; emphasis added.]To complete the delineation of the statutory and regulatory framework, we look to section 703(b) which provides --Any election affecting the computation of taxable income derived from a partnership shall be made by the partnership, except that any election under -- (1) section 57(c) (defining net lease),(2) subsection (b)(5) or (d)(4) of section 108 relating to income from discharge of indebtedness), 13 (3) section 163(d) (relating to limitation of interest on investment indebtedness),(4) section 617 (relating to deduction and recapture of certain mining exploration expenditures), or(5) section 901 (relating to taxes of foreign countries and possessions of the United States), shall be made by each partner separately.[Emphasis added.]Petitioner's initial position is that no section 754 election statement was required to be filed. Its reasoning is as follows: (1) Section 754 specifically requires the statement to be filed with a U.S. partnership return; (2) under section 1.6031-1(d)(1), Income Tax Regs., the German partnership was not required to file a U.S. partnership return because it conducted no U.S. trade or business and had no U.S. source income; (3) moreover, the second sentence of section 1.6031-1(d)(2), Income Tax Regs., requiring a filing if an election under section 703 or 761 is to be made by or for the partnership, is inapplicable because section 703 is simply a catch-all provision directed solely toward those elections where the controlling statute is silent "as to the proper electing party" and thus does not cover the specific election set forth in section 754; 14 and (4) therefore, absent any requirement to file a Form 1065 to which a statement of election must be attached, the German partnership could not make a valid election. Respondent counters with the assertions that: (1) Section 703 is not limited as petitioner contends and covers all elections relating to the computation of a partnership's taxable 1081 income including a section 754 election; (2) therefore the provisions of the second sentence of section 1.6031-1(d)(2), Income Tax Regs., are applicable; and (3) a U.S. partnership return with an attached statement of election was required to be filed for the partnership.We acknowledge that a literal interpretation of section 703 may support petitioner's contention that the provisions of the second sentence of section 1.6031-1(d)(2), Income Tax Regs., do not apply to other statutory provisions which specify who is to make an election. For example, section 703 provides that the elections covered thereby are to be "made by the partnership," which would appear to be unnecessary as far as section 754 is concerned, which provides "if a partnership files an election." On the other hand, it can be argued that it is section 703 which15 provides that the election shall be made by the partnership, and section 754 simply provides for what happens if it does. Indeed, this view is confirmed by the action of the Congress in enacting section 404 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, 669, which presumably moots any future cases of the type involved herein. That section provides --Except as hereafter provided in regulations prescribed by the Secretary of the Treasury or his delegate, nothing in section 6031 of the Internal Revenue Code of 1954 shall be treated as excluding any partnership from the filing requirements of such section for any taxable year if the income tax liability under subtitle A of such Code of any United States person is determined in whole or in part by taking into account (directly or indirectly) partnership items of such partnership for such taxable year. 816 Given the less than clear statutory and regulatory framework, we will assume for the purpose of decision herein that neither the German partnership nor petitioner on its behalf was to file a U.S. partnership return. However, contrary to petitioner's contention that the filing of a section 754 election is inextricably linked to the filing of a Form 1065, we find that while section 1.6031-1(d)(1), Income Tax Regs., relieves the German partnership of any obligation to file a U.S. partnership return, it does not follow that such relief extends to other 1082 types of action (such as a section 754 election) designed to confer a U.S. tax benefit. The legislative history of sections 754 and 743 reveals that when these provisions were enacted, Congress made it crystal clear that the partnership must file a statement of election. H. Rept. 1337, to accompany H.R. 8300, 83d Cong., 2d Sess. A232-233 (1954); S. Rept. 1622, to accompany H.R. 8300, 83d Cong., 2d Sess 406 (1954). To be sure, the legislative committees had in mind U.S. partnerships, but there is no indication that their concerns were so confined. Under the circumstances, we are not inclined to interpret whatever gap there17 may be in respondent's information return regulations so as to relieve a foreign partnership, or a U.S. partner acting on behalf of such a partnership, of the necessity of making an election with respect to the adjustment of basis pursuant to section 743(b). Therefore, we are still left with the question whether petitioner has established "that an election has been made, so that the [German partnership and its members] are bound." Tipps v. Commissioner, 74 T.C. 458">74 T.C. 458, 468 (1980). We conclude that this question should be answered in the negative.We recognize that the German partnership had in fact made the adjustments to basis of the character contemplated by section 743. But, this action standing alone is not enough; an election must be filed under section 754. Estate of Skaggs v. Commissioner, 75 T.C. 191">75 T.C. 191, 206 (1980), affd. per curiam 672 F.2d 756">672 F.2d 756 (9th Cir. 1982). Indeed, petitioner, itself, obviously considered that something more than simply reporting its share of the German partnership loss for 1973 in its fiscal 1974 return was needed and decided to attach the partnership's German tax return. 18 Petitioner's position is that the German tax return revealed sufficient information to put respondent on notice that an adjustment of the character envisaged by section 743(b) had been made and the clear inference to be drawn from the attachment of such return to petitioner's fiscal 1974 return is that it was an election which satisfied the requirements of section 754 and the regulations thereunder. We disagree.We have examined the cases as to what constitutes a statement of election under various provisions of the Internal Revenue Code and have found that, absent a formal election, a submitted return and its attached schedules must evidence an 1083 affirmative intent on taxpayer's part to make the required election and be bound thereby. E.g., American Air Filter Co. v. Commissioner, 81 T.C. 709">81 T.C. 709, 720-723 (1983); Tipps v. Commissioner, supra at 468-471; Hewlett-Packard Co. v. Commissioner, 67 T.C. 736">67 T.C. 736, 747-750 (1977). Failure to manifest such intent has repeatedly resulted in taxpayer's alleged election being rejected. E.g., Knight-Ridder Newspapers v. United States, 743 F.2d 781">743 F.2d 781, 793-797 (11th Cir. 1984);19 Young v. Commissioner, 83 T.C. 831">83 T.C. 831, 839-840 (1984); Estate of Skaggs v. Commissioner, supra at 205-208; Valdes v. Commissioner, 60 T.C. 910">60 T.C. 910, 913-915 (1973).Applying these standards to the instant case, we find that the documents constituting petitioner's fiscal 1974 tax return do not make clear that a valid election was made to step up the basis of the German partnership's assets for U.S. tax purposes. To be sure, the parties have stipulated that the German partnership return "lists as the value of each of the German partnership's assets as of January 1, 1973, the amount by which petitioner's basis in its partnership interest in the German partnership immediately after its acquisition of such interest exceeded petitioner's allocable adjusted basis in each of the German partnership's assets." But, it is extremely difficult to extrapolate this date from the enclosure pertaining to petitioner. This is especially true in light of the fact that the enclosure (and the entire German tax return) is in German and that petitioner did not furnish respondent with a translation as part of its claimed20 election. The difficulty of extrapolation continues to exist, even after the English translation of the enclosure is examined. Concededly, the pertinent figures can be found in the enclosure, but their correlation is far from clear. The hard fact is that petitioner could easily have attached a statement (in English, of course) to its fiscal 1974 return, referring to the attached German partnership return, summarizing what was shown on the return with respect to the adjustments of basis, and affirmatively specifying that it was "electing" to make such adjustments, pursuant to section 754. 9 Such a statement might well, under the circumstances of this case, have been sufficient.21 1084 In the context of resolving the question of whether petitioner made a valid election, the fact that the issue of basis adjustment appears to have been easily discovered by respondent's agent, during the audit of the returns involved herein, is beside the point. "The Commissioner needs to know that an election has been made in order to determine whether an audit is necessary in the first place and what its scope should be." Knight-Ridder Newspapers v. United States, supra at 796. Cf. Commissioner v. Lane-Wells Co., 321 U.S. 219">321 U.S. 219, 223 (1944); Pleasanton Gravel Co. v. Commissioner, 64 T.C. 510">64 T.C. 510, 526-527 (1975), affd. 578 F.2d 827">578 F.2d 827 (9th Cir. 1978). The same is true with respect to petitioner's contention that respondent could have sought further information pursuant to the first sentence of section 1.6031-1(d)(2), Income Tax Regs. (p. 1079 supra).We also reject petitioner's plea that its position in this case be sustained on the general principles of equity and fairness. Even if we were inclined to determine that petitioner was entitled to such equitable22 relief, we would be powerless to grant it, for as we have previously stated, this Court does not have equity jurisdiction. Pesch v. Commissioner, 78 T.C. 100">78 T.C. 100, 130-131 (1982); Lorain Avenue Clinic v. Commissioner, 31 T.C. 141">31 T.C. 141, 164 (1958). 10In sum, we conclude that petitioner, who has the burden of proof (Rule 142(a)), has failed to establish that the required election was made which would permit petitioner to have the benefit of the adjustments to basis pursuant to the provisions of sections 754 and 743. If the tables were turned, and respondent was contending over petitioner's objection that those adjustments should be made, petitioner could argue with impunity that the required election had not been made. See Valdes v. Commissioner, supra at 915.In view of petitioner's concessions of all other issues,Decision will be entered for23 the respondent. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, and all Rule references are to the Rules of Practice and Procedure of this Court.↩2. The statutory notice of deficiency issued to petitioner made several adjustments to petitioner's income for the taxable years in question. Petitioner conceded the correctness of all of these adjustments except the disallowance by respondent of depreciation deductions which were based upon petitioner's use of a stepped-up basis in partnership property. With respect to such use, respondent disallowed depreciation deductions of $ 62,976.48, $ 66,307.27, and $ 282,724.25 for the taxable years 1976, 1977, and 1978, respectively.↩3. Contrary to the optional election available to taxpayers in the United States under sec. 754, German law mandates an automatic step up in basis of partnership assets when a partnership interest is transferred.↩4. There was some question at trial whether petitioner had in fact ever attached to its corporate returns translations of the German partnership's returns. We held the record open for 30 days to give petitioner an opportunity to check its files to see if such translations had actually been provided to the Internal Revenue Service. Petitioner, by letter dated May 18, 1984, advised this Court that a review of its files, and of those of petitioner's certified public accountants, revealed that no English translations had been included with the Form 1120 filed by petitioner in each of the taxable years in question.↩5. During the audit, respondent obtained certified English translations of each of the German partnership's returns from the Language Services Division, U.S. Department of State.↩6. Sec. 743(b) specifically provides, in relevant part --In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect shall -- (1) increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property, * *↩7. The first taxable year of petitioner after the purchase of its partnership interest was the fiscal year ending June 30, 1974.↩8. The reason given for enacting this provision was "The application of the partnership return filing requirements to certain foreign based partnerships with U.S. partners is unclear." H. Rept. 97-760 (Conf.) (1982), 2 C.B. 600">1982-2 C.B. 600↩, 662.9. Due to its limited-partner status, petitioner lacked formal authority to make a binding election for U.S. tax purposes on behalf of the German partnership unless it obtained a power of attorney as called for in the partnership agreement. However, in light of the fact that the German partnership had already stepped up the basis of the partnership's property pursuant to German law at the time petitioner's return was filed, and because Karl Mohring, the general partner of the German partnership, was also the president of petitioner, we doubt that petitioner would have had any difficulty in obtaining such authority. In so stating, we recognize that the German partnership may have been unwilling to authorize petitioner to file a U.S. partnership return (Form 1065) on its behalf (see sec. 1.6031-1(d)(2), Income Tax Regs.↩), although it appears that even this authority would not necessarily have been refused, since the German partnership was not subject to U.S. tax.10. See also Doner v. Commissioner, T.C. Memo. 1984-528↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624290/	Estate of Pauline E. Bullard, Deceased, Victor M. Bullard, Executor, and Victor M. Bullard, Petitioners v. Commissioner of Internal Revenue, RespondentEstate of Bullard v. CommissionerDocket No. 24933-83United States Tax Court87 T.C. 261; 1986 U.S. Tax Ct. LEXIS 70; 87 T.C. No. 17; July 31, 1986, Filed 70 Decision will be entered under Rule 155. Ps sold certain "capital gain property" to a charitable institution for less than fair market value and elected to apply the "appreciation reduction" rules of sec. 170(e)(1), I.R.C. 1954 as amended, to the bargain sale. Held: The amount of Ps' charitable contribution is reduced by 50 percent of the unrealized appreciation of only the "contributed" portion of the property. Sec. 1011(b), I.R.C. 1954, as amended, applies to the "sold" portion of the property. Held, further, to the extent that secs. 1.170A-4(c) and 1.1011-2, Income Tax Regs., provide otherwise, the regulations are invalid. Victor M. Bullard, pro se.Erin Collins, for the respondent. Cohen, Judge. Sterrett, Simpson, Goffe, Chabot, Nims, Korner, Shields, Hamblen, Clapp, Swift, Jacobs, Wright, Parr, and Williams, JJ., agree with the majority opinion. Gerber, J., did not participate in the consideration of this case. Wright, J., concurring. Goffe, Chabot, Hamblen, Cohen, and Williams, JJ., agree with this concurring opinion. Parker, J., concurring and dissenting. Whitaker, J., agrees with this concurring and dissenting opinion. Whitaker, J., concurring and dissenting. Parker, 71 J., agrees with this concurring and dissenting opinion. COHEN262 OPINIONRespondent determined deficiencies in Victor M. and Pauline E. Bullard's Federal income taxes for 1978 and 1979 of $ 2,397 and $ 8,647, respectively. The only issue for decision is the availability of a charitable contribution deduction under section 1701 with respect to the "bargain sale" of certain appreciated capital gain property.The parties submitted this case fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure.Victor M. and Pauline E. Bullard filed joint Federal income tax returns for 1977, 1978, and 1979 with the Internal Revenue Service Center in Fresno, California. Pauline E. Bullard died on April 30, 1982, and Victor M. Bullard, a resident of Palm Desert, California, is executor of her estate. The term "petitioners" herein refers to Victor and Pauline Bullard or to Victor Bullard and the Estate of Pauline Bullard, as appropriate.On May 24, 1977, petitioners sold their interest in Weimar Medical Center (Weimar) to the Hewitt Research 72 Center (Hewitt), a nonprofit corporation affiliated with the Seventh-Day Adventist Church. Weimar included both "capital gain property" as defined in section 170(b)(1)(C)(iv) and "ordinary income property" as defined in section 1.170A-4(b)(1), Income Tax Regs. To reflect the previous transfer of an interest in Weimar from petitioners to Ureeken and Lakeport Hospital, Ureeken and Lakeport Hospital received a portion of the proceeds from the sale of Weimar. The following table summarizes petitioners' sale of Weimar to Hewitt:Capital gainOrdinary incomepropertypropertyTotalFair market value$ 1,325,000Less: Portion attributable toUreeken and Lakeport Hospital 150,000Fair market valuePetitioners' interest $ 1,106,478$ 68,522 1,175,000Sales proceeds$ 1,150,000Less: Portionattributable to Ureeken and Lakeport Hospital 150,000Proceeds from sale ofpetitioners' interest $ 941,684 $ 58,316 1,000,000Contribution portion164,794 10,206 175,000Fair market value1,106,478 68,522 Cost plus improvements698,024 78,727 Depreciation -- per return273 (43,392)(9,841)Adjusted basis654,632 68,886 Total gain451,846 (364)263 In their 1977 Federal income tax return, petitioners elected under section 170(b)(1)(C)(iii) to apply section 170(e)(1) to the contribution portion of the "bargain sale" of the Weimar capital gain property to Hewitt and reported a charitable contribution deduction as a result of the sale. Petitioners applied section 1011(b) to the portion of the property sold and reported the resulting gain under the installment method. Respondent does not contest petitioners' use of the installment method but argues that no contribution deduction is allowable and section 1011(b) is inapplicable.The issue in this case involves the interaction between section 170(e)(1), which limits the deduction for the charitable contribution of certain appreciated property, and section 1011(b), which requires allocation of basis to determine gain resulting from a bargain sale to charity, with respect to the Weimar capital gain property. The treatment of the ordinary income property is not disputed. The deficiencies determined for 1978 and 1979 resulted from carryovers from 1977 to those years under 74 section 170(d).Section 170(a) allows a deduction for any charitable contribution, defined in section 170(c) to include a contribution or gift to certain charitable organizations. Under 264 section 170(b)(1)(C) and (E), the taxpayer's annual deduction for the contribution of capital gain property (i.e., any capital asset the sale of which at fair market would result in long-term capital gain) generally is limited to 30 percent of the taxpayer's adjusted gross income. If the taxpayer elects application of the "appreciated property" rules of section 170(e)(1) to such contributions, however, the annual deduction limitation is instead the general 50-percent standard of section 170(b)(1)(A). Sec. 170(b)(1)(C)(iii).Section 170(e)(1) provides as follows:SEC. 170(e). Certain Contributions of Ordinary Income and Capital Gain Property. -- (1) General rule. -- The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of -- (A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution), 75 and(B) in the case of a charitable contribution --(i) of tangible personal property, if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501 (or, in the case of a governmental unit, to any purpose or function described in subsection (c)), or(ii) to or for the use of a private foundation (as defined in section 509(a)), other than a private foundation described in subsection (b)(1)(D),50 percent (62 1/2 percent, in the case of a corporation) of the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).For purposes of applying this paragraph (other than in the case of gain to which section 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a) applies), property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset.Application of section 170(e)(1) to the contribution of property thus requires that the amount of the charitable contribution be reduced by 50 percent of the gain that would have been long-term capital gain, and 76 100 percent of the gain that would not, if the taxpayer had sold the property at its fair market value. 3265 A taxpayer may make a charitable contribution by selling property to a charity for less than its fair market value. The amount of the charitable contribution resulting from such a "bargain sale" generally is the excess of the fair market value of the property over its sales price. See Stark v. Commissioner, 86 T.C. 243">86 T.C. 243, 255-256 (1986); Knott v. Commissioner, 67 T.C. 681">67 T.C. 681 (1977); Waller v. Commissioner, 39 T.C. 665">39 T.C. 665, 677 (1963). Section 1011(b) provides as follows with respect to bargain sales:SEC 1011(b). Bargain Sale to a Charitable Organization. -- If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio 77 to the adjusted basis as the amount realized bears to the fair market value of the property.In the present case, respondent does not deny that petitioners made a charitable contribution to a qualifying organization through the bargain sale of Weimar to Hewitt. In dispute is the amount by which petitioners' contribution must be reduced under section 170(e)(1). According to respondent, section 170(e)(1) precludes any deduction for the contribution of the Weimar capital gain property. As petitioners admit, this result is prescribed by the regulations under sections 170(e) and 1011(b), which provide in relevant part as follows:Sec. 1.170A-4. Reduction in amount of charitable contributions of certain appreciated property.(c) Allocation of basis and gain -- * * . * * (2) Bargain sale. (i) If there is a bargain sale of property to the charitable organization and if section 1011(b) and sec. 1.1011-2 apply, then for purposes of applying the reduction rules of section 170(e)(1) and this section to the contributed portion of the property there shall be allocated under section 1011(b) to the contributed portion of the property the portion of the adjusted basis which is not allocated under 78 section 1011(b) to the noncontributed portion of the property for purposes of determining gain from the bargain sale. The portion of the adjusted basis which is so allocated to the contributed portion of the property shall be that portion of the adjusted basis of the entire property which bears the same ratio to the total adjusted basis as the fair market value of the 266 contributed portion of the property bears to the fair market value of the entire property. For purposes of applying section 170(e)(1) and paragraph (a) of this section to the contributed portion of the property in such a case, there shall be allocated to the contributed portion the amount of gain which is not recognized on the bargain sale but which would have been recognized as ordinary income or long-term capital gain if such contributed portion had been sold by the donor at its fair market value at the time of its contribution to the charitable organization.(ii) If there is a bargain sale of property to the charitable organization and if section 1011(b) and sec. 1.1011-2 do not apply, the taxpayer's adjusted basis of the entire property shall be allocated to the noncontributed portion of the property in accordance 79 with paragraph (e) of sec. 1.1001-1 for purposes of determining gain from the sale. In such case, no portion of the adjusted basis shall be allocated to the contributed portion of the property.(iii) The term "bargain sale", as used in this subparagraph, means a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution, as defined in section 170(c), of the property.[Emphasis supplied.]Sec. 1.1011-2. Bargain sale to a charitable organization.(a) In general. (1) If for the taxable year a charitable contributions deduction is allowable under section 170 by reason of a sale or exchange of property, the taxpayer's adjusted basis of such property for purposes of determining gain from such sale or exchange must be computed as provided in section 1011(b) and paragraph (b) of this section. If after applying the provisions of section 170 for the taxable year, including the percentage limitations of section 170(b), no deduction is allowable under that section by reason of the sale or exchange of the property, section 1011(b) does not apply and the adjusted basis of the property is not required to be apportioned pursuant to paragraph (b) 80 of this section. In such case the entire adjusted basis of the property is to be taken into account in determining gain from the sale or exchange, as provided in sec. 1.1001-1(e). In ascertaining whether or not a charitable contributions deduction is allowable under section 170 for the taxable year for such purposes, that section is to be applied without regard to this section and the amount by which the contributed portion of the property must be reduced under section 170(e)(1) is the amount determined by taking into account the amount of gain which would have been ordinary income or long-term capital gain if the entire property had been sold by the donor at its fair market value at the time of the sale or exchange. * * (b) Apportionment of adjusted basis. For purposes of determining gain on a sale or exchange to which this paragraph applies, the adjusted basis of the property which is sold or exchanged shall be that portion of the adjusted basis of the entire property which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the entire property. The amount of such gain which shall be treated as 267 ordinary income (or long-term capital 81 gain) shall be that amount which bears the same ratio to the ordinary income (or long-term capital gain) which would have been recognized if the entire property had been sold by the donor at its fair market value at the time of the sale or exchange as the amount realized on the sale or exchange bears to the fair market value of the entire property at such time. The terms "ordinary income" and "long-term capital gain", as used in this section, have the same meaning as they have in paragraph (a) of sec. 1.170A-4. For determining the portion of the adjusted basis, ordinary income, and long-term capital gain allocated to the contributed portion of the property for purposes of applying section 170(e)(1) and paragraph (a) of sec. 1.170A-4 to the contributed portion of the property, and for determining the donee's basis in such contributed portion, see paragraph (c)(2) and (4) of sec. 1.170A-4. For determining the holding period of such contributed portion, see section 1223(2) and the regulations thereunder.[Emphasis supplied.]The regulations thus provide that, in the case of a bargain sale of appreciated property to which section 170(e)(1) applies, no deduction is allowable unless the 82 contribution (i.e., excess of fair market value over sales price) exceeds the "appreciation reduction" (i.e., 50 percent and 100 percent of the inherent capital gain and ordinary income, respectively) for the entire property. Examples in the regulations confirm this rule. See secs. 1.170A-4(d), examples(5)-(6), and 1.1011-2(c), examples (4)-(7), Income Tax Regs.In the present case, the amount of petitioners' contribution resulting from the bargain sale of the Weimar capital gain property before application of section 170(e)(1), $ 164,794, is less than 50 percent of the total inherent gain in such property, $ 451,846. Therefore, petitioners will be entitled to no charitable contribution deduction unless this aspect of the regulations is invalid.In urging invalidation of the regulations, petitioners argue that, under section 170(e)(1), their contribution of the capital gain property should be reduced only by 50 percent of the gain inherent in the contributed portion of such property. Because the contributed portion of the captial gain property possessed a fair market value of $ 164,794 and a basis of $ 97,498 ($ 164,794/$ 1,106,478 X $ 654,632), petitioners' contribution under section 170(e)(1)83 would be the "actual" contribution, $ 164,794, less one-half of $ 67,296 or $ 131,146. As is discussed further below, this method is 268 consistent both with the basis allocation rules of section 1.170A-4(c)(1), Income Tax Regs., which apply in all cases except bargain sales, 484 and with the regulations' allocation provisions for bargain sales where the amount of the contribution exceeds the appreciation reduction under section 170(e)(1).The Supreme Court has articulated the following standard for determining the validity of Treasury regulations:regulations command our respect, for Congress has delegated to the Secretary of the Treasury, not to this Court, the task "of administering the tax laws of the Nation." United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 550 (1973); 85 accord, United States v. Correll, 389 U.S. 299">389 U.S. 299, 307 (1967); see 26 U.S.C. sec. 7805(a). We therefore must defer to Treasury Regulations that "implement the congressional mandate in some reasonable manner." United States v. Correll, supra at 307; accord, National Muffler Dealers Assn. v. United States, 440 U.S. 472">440 U.S. 472, 476-477 (1979). To put the same principle conversely, Treasury Regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 501 (1948); accord, Fulman v. United States, 434 U.S. 528">434 U.S. 528, 533 (1978); Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 749-751 (1969). * * * [Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156">450 U.S. 156, 169 (1981).]Respondent characterizes the regulations in issue as "legislative," i.e., emanating from a specific congressional grant of authority and not merely from the Treasury's general rule-making power under section 7805(a), a characterization which we shall assume correct for purposes of our 269 decision. 587 Moreover, the regulations were issued soon after enactment of the statutory provisions and have survived numerous amendments to section 170(e). Although we have 86 found no indication that Congress subsequently approved, or even considered, the aspect of these long-standing regulations that is in issue herein, the regulations are entitled to the highest standard of deference. See, e.g., United States v. Vogel Fertilizer Co., 455 U.S. 16">455 U.S. 16, 24 (1982) (legislative regulation entitled to greater deference); Watt v. Alaska, 451 U.S. 259">451 U.S. 259, 272-273 (1981) (contemporaneous interpretation by administrative agency that proposed the legislation); United States v. Correll, 389 U.S. 299">389 U.S. 299, 305-306 (1967) (legislative reenactment doctrine).However limited our standard of review, a regulation nevertheless is not valid unless it is reasonable and consistent with the statute's plain language, origin, and purpose. National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472">440 U.S. 472, 477 (1979). As we stated in State of Washington v. Commissioner, 77 T.C. 656">77 T.C. 656, 675-676 (1981), 88 affd. 692 F.2d 128">692 F.2d 128 (D.C. Cir. 1982):even if a regulation is not "technically inconsistent" with the statutory language it seeks to interpret, if it is "manifestly inconsistent" with what Congress "surely * * * intended" to do, then it cannot stand. United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 557 (1973).* * * See Helvering v. Stockholms Enskilda Bank, 293 U.S. 84">293 U.S. 84, 93-94 (1934), where the Supreme Court stated --"The intention of the lawmaker controls in the construction of taxing acts as it does in the construction of other statutes, and that intention is to be ascertained, not by taking the word or clause in question from its 270 setting and viewing it apart, but by considering it in connection with the context, the general purposes of the statute in which it is found, the occasion and circumstances of its use, and other appropriate tests for the ascertainment of the legislative will."I. The Statutory LanguageA. Section 170(e)(1)Virtually the only argument advanced by respondent in support of the regulations is based upon the language of section 170(e). Congress provided in section 170(e)(1) that the amount of any charitable contribution of appreciated property must be reduced by the 89 relevant percentage (i.e., 50 or 100 percent) of "the amount of gain which would * * * [have been realized] if the property contributed had been sold by the taxpayer at its fair market value." (Emphasis supplied.) Respondent argues that "the property contributed" in the case of a bargain sale must refer to the entire property, not merely the contributed portion. He contends that Congress would have used "the contributed portion of the property" or a similar term had it intended the result advocated by petitioners.Consistent with the regulations in issue, respondent's argument requires reduction of a charitable contribution, which in the case of a bargain sale equals the contributed portion of the property, by the gain inherent in the entire property, including the portion sold and not contributed. If "the property contributed" is considered not in isolation but in its proper context, however, section 170(e)(1) does not yield such an anomalous result.The introductory language in section 170(e)(1) provides, "The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by * * ." (Emphasis supplied.) In the case of a bargain sale, 90 only the contributed portion of the property is taken into account under section 170. Indeed, only that portion constitutes a "charitable contribution of property"; the remainder is sold by the taxpayer. Cases involving bargain sales to charity in taxable years before enactment of present section 170(e) confirm this interpretation. See Mason v. United States, 513 F.2d 25">513 F.2d 25, 29 (7th Cir. 1975) ("only the difference between the value of the transferred 271 asset and the value of the consideration received could even arguably be characterized as the 'amount of the gift'"); Waller v. Commissioner, 39 T.C. 665">39 T.C. 665, 677 (1963) ("The amount of the gift is the difference between the fair market value of the property and the amount which the * * [recipient] paid therefor * * .") Thus, in using the term "the property contributed," Congress must have referred to only the contributed portion of bargain sale property.The unreasonableness of the regulations based solely upon the language of section 170(e)(1) is further illustrated by the distinction drawn in section 1.170A-4(c), Income Tax Regs., between bargain sales and the paradigm contributions of "less than the taxpayer's entire interest" in the 91 property. See supra notes 4 & 5. If "the property contributed" in section 170(e)(1) means the entire property, then where the taxpayer contributes a partial interest in property for which a deduction is allowable under section 170(f), the unrealized appreciation on both the contributed and the noncontributed portions should be used in computing the section 170(e)(1) reduction. Unlike the special rules for bargain sales in regulations section 1.170A-4(c)(2), however, the general rules in section 1.170A-4(c)(1), Income Tax Regs., do not prescribe such a result. The statute provides no basis for this distinction between a bargain sale, where the noncontributed portion is sold, and a contribution of a partial interest, where the noncontributed portion is retained by the taxpayer. As is indicated below in our discussion of the purpose behind section 1011(b), Congress provided in that section, not in section 170(e)(1), for the special situation where the noncontributed portion is sold, not retained.An even more fundamental problem with the regulations in light of the language of section 170(e)(1) is that the regulations define "the property contributed" inconsistently even in the sole 92 context of bargain sales. Where, as in the present case, the reduction for appreciation under section 170(e)(1) (computed using the unrealized gain in the entire property) exceeds the contribution element of the bargain sale, "the property contributed" refers to the entire property. Where, however, the amount of the contribution exceeds the section 170(e)(1) amount, the regulations ultimately 272 define the statutory term as only the contributed portion of the property.This result in the latter case is best illustrated by an example from the regulations:Example (4). In 1970, B, a calendar-year individual taxpayer, sells to a church for $ 2,000 stock held for not more than 6 months which has an adjusted basis of $ 4,000 and a fair market value of $ 10,000. B's contribution base for 1970, as defined in section 170(b)(1)(F), is $ 20,000 and during such year B makes no other charitable contributions. Thus, he makes a charitable contribution to the church of $ 8,000 ($ 10,000 value - $ 2,000 amount realized). Since without regard to this section B is allowed a deduction under section 170 of $ 2,000 ($ 8,000 - [$ 10,000 value - $ 4,000 adjusted basis]) for his charitable contribution of 93 $ 8,000 to the church, under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $ 800 ($ 4,000 adjusted basis X $ 2,000 amount realized/$ 10,000 value of stock). Accordingly, B has a recognized short-term capital gain of $ 1,200 ($ 2,000 amount realized - $ 800 adjusted basis) on the bargain sale. After applying section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of sec. 1.170A-4, B is allowed a charitable contributions deduction for 1970 of $ 3,200 ($ 8,000 value of gift - [$ 8,000 - ($ 4,000 adjusted basis of property X $ 8,000 value of gift/$ 10,000 value of property)]). [Sec. 1.1011-2(c), example (4), Income Tax Regs.]In computing an initial deduction of $ 2,000, the example reduces the contribution by the entire inherent gain of $ 6,000 and thus defines "the property contributed" in section 170(e)(1) as the entire property. In ultimately allowing a deduction of $ 3,200, however, the example reduces the contribution only by the gain inherent in the contributed portion and thus defines the statutory term as the contributed portion of the property. (The gain inherent in the contributed portion is $ 6,000 X $ 8,000/$ 10,000 or $ 4,800, 94 which is the difference between the $ 8,000 contribution and the $ 3,200 ultimate deduction.) Thus, the regulations require use of two inconsistent interpretations of "the property contributed" to compute the deduction in such a case, and the ultimate interpretation is inconsistent with that mandated by the regulations in the present case. There exists no indication that Congress intended the term to possess more than one meaning, and only if "the property contributed" means the contributed portion is a uniform definition applicable to all cases. 6273 B. Section 1011(b)Respondent intimates that the introductory clause of section 1011(b), "If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale," supports the methodology prescribed by the regulations. The provisions of section 170, 95 including section 170(e), must, of course, be applied to determine whether a charitable contribution deduction is allowable before application of section 1011(b). Section 1011(b) provides no rules, however, for the manner in which section 170 is to be applied. Thus section 1011(b) does not, as respondent and the regulations apparently assume, require application of section 170(e)(1) using the unrealized gain on the entire property. Petitioners' method of computing the section 170(e)(1) amount based upon the appreciation inherent in only the contributed portion likewise requires application of section 170(e) before section 1011(b). 796 Although petitioners' method results in a charitable contribution deduction, and hence application of section 1011(b), in more cases than do the regulations, this result is mandated by the history and purpose of both section 170(e) and section 1011(b), to which we now turn.II. History and Purpose of the Statutory ProvisionsAs initially codified by the Revenue Act of 1962, Pub. L. 87-834, sec. 13(d), 76 Stat. 960, 1034, section 170(e) simply provided:SEC. 170(e). Special Rule for Charitable Contributions of Section 1245 Property. -- The amount of 97 any charitable contribution 274 taken into account under this section shall be reduced by the amount which would have been treated as gain to which section 1245(a) applies if the property contributed had been sold at its fair market value (determined at the time of such contribution).The scope of the provision was subsequently expanded to include inherent recapture gain under sections 1250(a) and 617(d) by the Revenue Act of 1964, Pub. L. 88-272, sec. 231(b)(1), 78 Stat. 19, 105, and Act Relating to the Income Tax Treatment of Exploration Expenditures in the Case of Mining, Pub. L. 89-570, sec. 1(b)(1), 80 Stat. 759, 762 (1966), respectively. Congress prescribed the present application of section 170(e)(1) to all unrealized non-long-term capital gain and to unrealized long-term capital gain in specified situations as part of the fundamental revision of section 170 in the Tax Reform Act of 1969, Pub. L. 91-172, sec. 201(a), 83 Stat. 487, 549 (hereinafter the 1969 Act).Section 1011(b) was first enacted in section 201(f) of the 1969 Act (83 Stat. 564). Prior to the effective date of section 1011(b), the taxpayer who made a bargain sale to charity realized gain equal to the excess of the 98 amount realized over the entire basis in the property. See, e.g., Potter v. Commissioner, 38 T.C. 951">38 T.C. 951 (1962).Both the expansion of section 170(e) and the enactment of a bargain sale provision like section 1011(b) were initially recommended to Congress by the Treasury Department. The Treasury proposal with respect to section 170(e) would have applied only to potential ordinary income or short-term capital gain and, instead of requiring the taxpayer to reduce the amount of the contribution, would have allowed a deduction for the full value of the property but required recognition of the gain. See 2 U.S. Treasury Dept., Tax Reform Studies and Proposals, 21, 38, 179-182 (Comm. Print of House Ways and Means Comm. and Senate Finance Comm. 1969). The bill initially passed by the House included a bargain sale provision identical to section 1011(b) and allowed the taxpayer who donated appreciated property to elect either recognition of inherent gain (as would be required by the Treasury proposal) or reduction of the contribution (as required by section 170(e)). Under the House bill, the appreciated property rules applied to inherent long-term capital gain in specified situations. See 99 H.R. 275 13270, 91st Cong., 1st Sess., sec. 201(c), (d) (Aug. 2, 1969). The Senate deleted the bargain sale provision from the House bill and eliminated the option of the taxpayer contributing appreciated property to recognize gain instead of reducing his contribution. 8 See H.R. 13270, 91st Cong., 1st Sess., sec. 201(a) (Nov. 21, 1969). As ultimately codified by Congress in the 1969 Act, sections 170(e)(1) and 1011(b) were substantially identical to present law. The Ways and Means Committee report accompanying H.R. 13270 described the purpose and operation of the appreciated property and bargain sale rules as follows:3. Charitable contributions of appreciated property (sec. 201(c) and (d) of the bill and secs. 170 and 83 of the code)Present law. -- Under present law, a taxpayer who contributes property which has appreciated in value to charity generally is allowed a charitable contributions deduction for 100 the fair market value of the property. A special rule (sec. 170(e)) applies, however, to gifts of certain property so that the amount of charitable contribution is reduced by the amount of gain which would have been treated as ordinary income under the recapture rules of sec. 617(d)(1) (certain mining property), sec. 1245(a) (certain depreciable tangible personal property), and sec. 1250(a) (certain depreciable real property) if the property contributed had been sold at its fair market value. Other than these exceptions, a deduction is allowed for the full value of the property and tax is not imposed on the appreciation at the time of the gift.General reasons for change. -- The combined effect, in the case of charitable gifts of appreciated property, of not taxing the appreciation and at the same time allowing a charitable contributions deduction for the appreciation is to produce tax benefits significantly greater than those available with respect to cash contributions. The tax saving which results from not taxing the appreciation in the case of gifts of capital assets is the otherwise applicable capital gains tax which would be paid if the asset were sold. In the case of many 101 other types of assets, this tax saving is at the taxpayer's top marginal rate. Thus, in some cases it actually is possible for a taxpayer to realize a greater after-tax profit by making a gift of appreciated property than by selling the property, paying the tax on the gain, and keeping the proceeds. This is true in the case of gifts of appreciated property, which would result in ordinary income if sold, when the taxpayer is at the high marginal tax brackets and the cost basis of the ordinary income asset is not a substantial percentage of the fair market value. For example, a taxpayer in the 70-percent tax bracket could make a gift of $ 100 of inventory ($ 50 cost 276 basis) and save $ 105 in taxes (70-percent of the $ 50 gain if sold, or $ 35, plus 70-percent of the $ 100 fair market value of the inventory, or $ 70).In addition, if property is sold to a charity at a price less than its fair market value -- a so-called bargain sale -- the proceeds of the sale are treated as a return of the cost and the seller is allowed a charitable contributions deduction for the appreciation in excess of the sale price. If the sale price is above his cost basis, the taxpayer pays a tax on the difference. 102 However, if the sale price is equal to his cost basis, the entire appreciation is taken as a deduction and no tax is paid on the gain. In either case, the taxpayer is not required to allocate the cost basis between the sale part of the transaction and the gift part of the transaction. If this were done, the taxpayer would be required to pay tax on the portion of the gain attributable to the sale part of the transaction.The tax saving available in the case of a bargain sale of property to a charity may be illustrated by the example of a taxpayer in the 70-percent tax bracket who makes a sale of inventory with a value of $ 200 to a charity at its cost of $ 100. The taxpayer in this case would save $ 140 in taxes with respect to his $ 100 charitable gift (70 percent of the $ 100 gain if sold, or $ 70, plus 70 percent of the $ 100 of appreciation taken as a charitable deduction, or $ 70).Your committee does not believe the charitable contributions deduction was intended to provide greater -- or even nearly as great -- tax benefits in the case of gifts of property than would be realized if the property were sold and the proceeds were retained by the taxpayer. In cases where the tax 103 saving is so large, it is not clear how much charitable motivation actually remains. It appears that the Government, in fact, is almost the sole contributor to the charity. Moreover, an unwarranted benefit is allowed these taxpayers, who usually are in the very high income brackets. Your committee, therefore, considers it appropriate to narrow the application of the tax advantages in the case of gifts of certain appreciated property.Explanation of provisions. -- In order to remove some of the present tax advantages of gifts of appreciated property over gifts of cash, the bill provides that taxpayers making contributions of appreciated property are to be required, at their option, either (A) to reduce their charitable contribution deduction to the amount of their cost or other basis in the property or (B) to take a charitable deduction based on the fair market value of the property but to include in their tax base the untaxed appreciation with respect to the property involved. * ** * * (v) Bargain sales. -- In the case of so-called bargain sales to charities -- where a taxpayer sells property to a charitable organization for less than its fair market value (often at its cost 104 to the taxpayer) -- the bill provides that the cost or basis of the property is to be allocated between the portion of the property "sold" and the portion of the property "given" to the charity on the basis of the fair market value of each portion. For example, if a taxpayer sold land with a fair market value of $ 20,000 to a charitable organization (which was not a private foundation) at his cost of 277 $ 12,000, he would be required to allocate 60 percent of the cost ($ 7,200) to the portion "sold" to the charity ($ 12,000) and 40 percent of the cost ($ 4,800) to the portion "given" to the charity ($ 8,000). Thus, this taxpayer would be required to include $ 4,800 as gain from a sale of a capital asset in his tax return, and as under present law would be allowed a charitable contributions deduction of $ 8,000.[H. Rept. 91-413 (1969), 3 C.B. 200">1969-3 C.B. 200, 234-236.]The committee's explanation of the bargain sale rule (i.e., the final paragraph in the above excerpt) does not support the approach of the regulations in issue. The report simply indicates that basis must be allocated between the portion "given" and the portion "sold." It contains no indication that Congress intended a special 105 rule similar to that in the regulations to apply where the property is subject to section 170(e)(1).The Ways and Means Committee nevertheless illustrated the operation of the bargain sale rule using an example to which section 170(e)(1) would not apply, as the taxpayer in the example sold a capital asset to an organization "which was not a private foundation." Indeed, the entire explanation provides almost no explicit guidance with respect to the interaction of section 170(e)(1) and the bargain sale rule but instead describes each rule as if it existed in isolation. The bargain sale example appearing in the "General reasons for change" section states that the taxpayer selling inventory for less than fair market value would, but for the bargain sale rule, avoid taxes on and obtain a deduction with respect to the inherent gain. If the House's appreciated property rule were in effect, however, this presumably would not be the case, as the taxpayer would be required either to reduce his contribution or to recognize gain on the contributed portion.The report also generally indicates that the appreciated property and bargain sale rules possess a common purpose of preventing the taxpayer 106 from obtaining a deduction attributable to untaxed appreciation ("in excess of the sale price," in the case of bargain sales). Such statements do not specify the respective element of appreciation to which the two rules apply. The Finance Committee and Conference reports preserve this ambiguity by describing both the bargain sale rule and the various applications of section 170(e) as "[taking] the appreciation in value into account for 278 tax purposes in gifts of appreciated property." S. Rept. 91-552 (1969), 3 C.B. 423">1969-3 C.B. 423, 476; H. Rept. 91-782 (Conf.) (1969), 3 C.B. 644">1969-3 C.B. 644, 654. Certain language in the legislative history thus blurs the respective parameters of section 170(e)(1) and section 1011(b).Although describing the two rules in isolation, more specific statements of purpose contained in the Ways and Means Committee report nevertheless allow us to infer congressional intention with respect to the interaction of the sections. The report indicates that section 170(e)(1) was designed to prevent a taxpayer from realizing a windfall by giving appreciated property to charity instead of selling the property and donating the proceeds. As illustrated by the election contained in 107 the initial House bill to recognize the appreciation and deduct the full fair market value, reduction of the contribution under section 170(e)(1) is a functional substitute for a deemed sale of the property before contribution of the proceeds. Where a transaction constitutes an actual sale, however, this "deemed sale substitute" of section 170(e)(1) is inappropriate. Moreover, Congress recognized that a bargain sale to charity included an actual sale. This recognition is implicit in the Ways and Means Committee statement that the bargain sale rule requires "the taxpayer * * to pay tax on the portion of the gain attributable to the sale part of the transaction" and explicit in the initial Treasury proposal, which quantifies precisely the element of appreciation taken into account:Present lawUnder existing law a donor may unduly magnify the tax advantages already inherent in giving appreciated property to charity by selling the property to a charity for less than its fair value.For example, an individual in the 50 percent tax bracket owning $ 125,000 worth of stock which cost him $ 25,000 may wish to make a $ 100,000 gift to charity. If he donates $ 100,000 of stock to charity he 108 is entitled to a $ 100,000 deduction against other income and the net cost of his gift is $ 50,000 (50 percent of $ 100,000). He simply ignores the fact that a portion of the value of donated stock ($ 80,000) represents gain which has never been included in income. On the other hand, were he to follow the bargain sale method, he would sell $ 125,000 of stock to the charity for the cost basis of that amount of stock, $ 25,000. Under the present law the $ 25,000 sales proceeds would first be allocated to a return of his cost, or tax basis, and, since that basis is $ 25,000, there would be no tax. His gift to the charity would remain a $ 100,000 gift, 279 and his deduction would remain a $ 100,000 deduction. However, by following this procedure, instead of being left with $ 25,000 of stock with a cost basis of $ 5,000 (which if he later sold would cost him $ 5,000 in tax thus leaving him $ 20,000 in cash) he has $ 25,000 in cash. Thus, his $ 100,000 gift to charity has permitted him to recover his investment in the property while at the same time securing a deduction for the appreciation in value without imposition of tax.The rule permitting the nontaxable donation of appreciated 109 property clearly should not be permitted to shield from tax what is essentially a functionally unrelated sale of an additional amount of stock. The taxpayer intends to benefit the charity only by the net amount of the gift. He should not be allowed to enlist the charity as a buyer of his stock to save him a tax liability.ProposalIn such cases it is recommended that a contributor be required to allocate the basis of the property between the gift element and sale element on the basis of the fair market value of each part. If this rule were applied to the example above, since one-fifth of the total value of the stock is being sold, one-fifth of the taxpayer's basis in the stock would be allocated to the sale element of the transaction. Thus, he would be deemed to have a $ 5,000 basis in the stock sold to the charity for $ 25,000, and would be subject to tax on the resulting $ 20,000 gain. Under the proposal the individual would therefore be in precisely the same position he would have been in had he donated $ 100,000 worth of stock to charity and simultaneously sold $ 25,000 more on the open market.[2 U.S. Treasury Dept., Tax Reform Studies and Proposals 181-182 (Comm. Print of House110 Ways and Means Comm. and Senate Finance Comm. 1969). Emphasis supplied.]Section 1011(b) was thus designed to recognize the sale element of a bargain sale for what it is -- a sale. This section, not section 170(e)(1), ensures that the taxpayer receives no contribution deduction without realizing inherent gain on the portion of the property sold. Most importantly, the mechanism by which section 1011(b) accomplishes this result is realization of such gain, not reduction of the deduction. 9111 280 The regulations therefore understate both the deduction and the realized gain by the amount of the taxpayer's basis in the contributed portion of the property where the section 170(e)(1) amount (computed with respect to the entire property) equals or exceeds the amount of the contribution. If the property is capital gain property, the regulations also improperly reduce the contribution by 100 percent of the gain on the contributed portion. The regulations thus both preclude section 1011(b) from its intended operation and place the taxpayer in a less favorable position than would result if he sold the property at fair market value and then donated the excess over the bargain sales price. The latter effect distorts and unduly extends Congress' manifest purpose in enacting the "deemed sale substitute" through section 170(e)(1). 10112 113 Moreover, this distortion arises immediately and arbitrarily depending upon the bargain sales price. If, for example, the amount of the contribution (excess of fair market value over sales price) is $ 1 more than the section 170(e)(1) amount, the regulations prescribe the proper basis and gain allocations between the contributed and sold portions of the property. If the sales price is increased by $ 1, however (in which case section 170(e)(1) as interpreted by the regulations reduces the contribution to zero), the distortion occurs in full. Certainly this is an "arbitrary and capricious" effect, and Congress could not have intended 281 that such insignificant economic differences would result in such dramatic differences in tax liability.III. ConclusionGiven the respective roles of the Treasury Department in administering the tax laws and of this Court in interpreting such laws, we do not invalidate Treasury regulations unless unreasonable and inconsistent with the language, history, and purpose of the statute. As previously discussed, the regulations in issue in this case are entitled to the highest standard of judicial deference. 114 If the regulations constituted a reasonable interpretation of sections 170(e)(1) and 1011(b), we would be compelled to uphold them, even if petitioners' interpretation were more reasonable. See Long v. United States, 652 F.2d 675">652 F.2d 675, 679 (6th Cir. 1981), and cases cited therein. "The choice among reasonable interpretations is for the * * * [Treasury], not the courts." National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472">440 U.S. 472, 488 (1979). In the present case, however, petitioners' position represents the only rational statutory interpretation. Respondent has not raised, nor have we discovered, a single rational basis for the allocation provisions in issue other than enhancement of tax revenues. That purpose, however, cannot be applied in an arbitrary manner and is inconsistent with both allowance of charitable contribution deductions and reduced effective rates of taxation of capital gain. The disputed regulations conflict with the language and purpose of the statutory provisions and lead to anomalous and inequitable tax results. Cf. State of Washington v. Commissioner, 77 T.C. 656">77 T.C. 656 (1981), affd. 692 F.2d 128">692 F.2d 128 (D.C. Cir. 1982). To the extent inconsistent with our 115 opinion herein, sections 1.170A-4(c) and 1.1011-2, Income Tax Regs., are invalid. 11To reflect concessions by petitioners,Decision will be entered under Rule 155. WRIGHT; PARKER (In Part); WHITAKER (In Part) 282 Wright, J., concurring: While I join in the majority opinion in this case, I choose to write separately in order to address the questions raised by Judge Parker's concurring and dissenting opinion. The concurring and dissenting opinion concludes that the result reached by the majority can also be reached without invalidating the regulations under sections 170(e)(1) and 1011(b). I disagree.The analysis set forth in the concurring and dissenting opinion turns on a distinction between the elective and the mandatory application of section 170(e)(1). The taxpayers in the instant case made an election 116 under section 170(b)(1)(C)(iii) to apply section 170(e)(1) to contributions of capital gain property made in 1977. Section 170(b)(1)(C) provides, in general, that deductions for contributions of capital gain property to which section 170(e)(1)(B) does not apply cannot exceed 30 percent of a taxpayer's contribution base for a taxable year. However, under section 170(b)(1)(C)(iii), the taxpayer may elect to have section 170(e)(1) apply to such contributions if section 170(e)(1)(B) does not otherwise apply (i.e., if the application of section 170(e)(1)(B) is not mandatory). If such an election is made, the contribution is not subject to the 30-percent limitation of section 170(b)(1)(C); however, the amount of the contribution must be reduced in accordance with section 170(e)(1). Under section 170(e)(1)(A), the amount of any charitable contribution must be reduced by the amount of gain which would have been ordinary income or short-term capital gain if the property had been sold by the taxpayer at its fair market value. Section 170(e)(1)(B) provides that the amount of a contribution of tangible personal property which is unrelated to the purpose or function of the donee organization, 117 or a contribution to or for the use of a private foundation which is not described in section 170(b)(1)(E), must be reduced by 50 percent of the amount of gain which 283 would have been long-term capital gain if the property had been sold by the taxpayer at its fair market value. A taxpayer has the option, therefore, when making a contribution of capital gain property (not otherwise subject to section 170(e)(1)(B)), of restricting that contribution to 30 percent of his contribution base for the taxable year under section 170(b)(1)(C), or of taking a deduction of up to 50 percent of his contribution base while being subject to the reduction requirements of section 170(e)(1).Section 170(e)(2) provides that for purposes of section 170(e)(1), if a taxpayer contributes less than his entire interest in the property, the taxpayer's basis in such property shall be allocated between the portion contributed and any portion not contributed in accordance with the regulations. Any gain to the taxpayer on the sale portion of a charitable bargain sale is determined under section 1011(b), which provides that the adjusted basis for determining gain is that portion of the adjusted basis which bears the 118 same ratio to the total adjusted basis as the amount realized bears to the fair market value of the property.The regulations under these sections provide that, for a charitable bargain sale under section 170(e)(1), no charitable contribution deduction is allowable unless the contribution portion of the bargain sale exceeds the amount of the reduction required under section 170(e)(1) for the unrealized appreciation in the entire property. The majority opinion holds that the taxpayers in the instant case are entitled to claim a deduction because these regulations are invalid to the extent that they require reduction of the contribution portion of the bargain sale by a percentage of the unrealized appreciation in the entire property rather than by a percentage of the unrealized appreciation in the contributed portion. The concurring and dissenting opinion, however, attempts to circumvent this reasoning by concluding that, because the taxpayers in the instant case elected to have section 170(e)(1) apply, they are not subject to the mandatory reduction of section 170(e)(1)(B) for purposes of determining whether a deduction is allowable, and that the bargain sale at issue therefore meets 119 the test of the 284 regulations as written. This analysis is not supported by the statute or the regulations. 1If a taxpayer contributes property of the type described in section 170(e)(1)(B)(i) or 170(e)(1)(B)(ii), the charitable contribution must be reduced by 50 percent of the amount of gain which would have been long-term capital gain had the property been sold at its fair market value. The concurring and dissenting opinion concludes that, in the absence of a contribution of property described in these subparagraphs, the 50-percent reduction is not required in order to determine whether a deduction is allowable for such contribution. If section 170(e)(1)(B) does not apply when a taxpayer makes this election, the election has no effect on the determination of the allowability of such deduction because section 170(e)(1)(A) does not apply to long-term capital gain property.Under the analysis in the concurring and dissenting opinion, section 1.1011-2(a)(1), Income Tax Regs., is correctly used to make an initial determination 120 as to whether a charitable contribution deduction is allowable under section 170. The analysis used bifurcates section 170(e)(1) into "mandatory" and "elective" elements. Specifically, the concurring and dissenting opinion treats the application of the reduction provisions of section 170(e)(1)(B) as applying to the determination of allowability only where such reductions are mandatory; i.e., where the taxpayer contributes property of the type described in section 170(e)(1)(B)(i) or (ii). If the taxpayer has elected the application of section 170(e)(1), however, the concurring and dissenting opinion concludes that the reduction under section 170(e)(1)(B) need not be made at this point. In reaching this conclusion, the concurring and dissenting opinion assumes that the language in section 1.1011-2(a)(2), Income Tax Regs., provides a wholesale exclusion of section 170(b) for purposes of determining whether a deduction is allowable under section 1.1011-2(a)(1). Neither the statute nor the regulations at issue herein provide authority for this reasoning.The concurring and dissenting opinion, at note 3, states that the reference to the percentage limitations of section 285 170(b) in section 1.1011-2(a)(1), Income Tax Regs., 121 was intended to apply only with respect to bargain sales to organizations described in section 170(b)(1)(B). Section 1.1011-2(a)(2), Income Tax Regs., provides that basis must be allocated under section 1011(b) for charitable contributions which are carried over under section 170(b)(1)(C)(ii) or section 170(d) to subsequent taxable years. Because section 170(b) contains the annual percentage limitations, and therefore necessitates carryovers, the concurring and dissenting opinion concludes that section 170(b) is irrelevant to the determination of allowability under section 1.1011-2(a)(1), Income Tax Regs., except with respect to contributions of property described in section 170(b)(1)(B). However, the limited exception carved out by section 1.1011-2(a)(2), Income Tax Regs., does not support the conclusion that section 170(b) is to be disregarded entirely, including the provisions for the election to apply section 170(e)(1) contained in section 170(b)(1)(C)(iii). 2122 The election under section 170(b)(1)(C)(iii) requires a reduction of the charitable contribution portion of the bargain sale in the instant case. There is no authority in either the Code or the regulations which permits the type of analysis adopted in the concurring and dissenting opinion. In the absence of such authority, a deduction is unavailable to the petitioners herein unless the regulations which require consideration of the unrealized appreciation in the entire property are invalid. For the reasons stated in the majority opinion, I believe this to be the correct result. Thus, although the concurring and dissenting opinion reaches the correct 123 result, for the reasons stated above, it does so for the wrong reasons. I therefore join in the majority opinion. PARKER (In Part); WHITAKER (In Part) 286 Parker, J., concurring and dissenting: If my choices were between the majority's position (invalidating portions of certain regulations) or Judge Whitaker's dissent (resolving doubts in favor of the regulations), I would simply join in the dissent. However, I do not see the choices as so narrowly restricted. I would follow another route to reach the same result the majority has reached, but without invalidating any portion of the regulations and by merely applying the regulations in a different method and sequence. For the reasons set forth below, I concur in the majority's result only.In a "bargain sale" transaction, 1 petitioners sold capital gain property with a fair market value of $ 1,106,478 to an organization described in section 170(b)(1)(A) for the amount of $ 941,684. Petitioners' adjusted basis in the property at the time of the sale was $ 654,632. In the year of the sale (1977), petitioners elected under section 170(b)(1)(C)(iii) to apply section 170(e)(1) to all contributions of capital gain property to which subsection 124 (e)(1)(B) did not otherwise apply made by petitioners during that year.The parties in this case apparently agree that the regulations under sections 170(e) and 1011(b) preclude petitioners from any charitable contributions deduction in connection with the bargain sale. The majority accepts the parties' litigating position as the correct reading of the regulations, and hence must decide whether or not the regulations are valid. However, I think both parties misread or misapply the regulations. Under an alternative application that I believe to be the correct one, the validity of these regulations is not in issue and petitioners are allowed a charitable contributions deduction of $ 131,146 in connection with the bargain sale, most of which is available as a carryover to the years before the Court.But for petitioners' election under section 170(b)(1)(C)(iii), this case would never have arisen. See, i.e., sec. 1.1011-2(c), example (7), Income Tax Regs. Therefore, 125 I think the appropriate issue presented in this case is whether, in a bargain sale transaction, an election under section 287 170(b)(1)(C)(iii) to apply section 170(e)(1)(B) requires the entire property to be taken into account, as provided in section 1.1011-2(a)(1), Income Tax Regs., in determining the amount of the reduction required under section 170(e)(1)(B). As I see the case, there are two separate steps involving reductions under section 170(e)(1)(B) -- one involving section 1.1011-2(a)(1), Income Tax Regs., and one not involving it. As explained below, I think that the reduction required under section 170(e)(1)(B) resulting from an election by the taxpayer under section 170(b)(1)(C)(iii) has no applicability to section 1.1011-2(a)(1), Income Tax Regs. Consequently, I reach the same result that the majority reaches without addressing the validity of any regulation.In a bargain sale to a charitable organization, part of the transaction is treated as a sale and part is treated as a charitable contribution. Generally, the charitable contribution is the difference between the fair market value of the property at the time of the sale and the amount realized. However, prior to calculating 126 either the amount of gain on the sale or the amount of the deduction allowed under section 170, an initial determination is required under section 1011(b) and section 1.1011-2(a)(1), Income Tax Regs., to decide whether or not basis is to be allocated. This is sometimes called the "allowability test," and if the bargain sale does not pass this initial test, no charitable contribution is allowable and all of the basis remains available to reduce the amount of taxable gain on the sale. 2Section 1011(b) provides that:SEC. 1011(b). Bargain Sale To A Charitable Organization. -- If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.Section 1.1011-2(a)(1), Income Tax Regs., is a specific regulation pertaining only to bargain sales to charitable organizations. This regulation determines whether or 127 not the adjusted basis must be allocated between the property that was sold and the property that was contributed. If no 288 charitable contributions deduction is allowable, the adjusted basis of the property does not have to be allocated, and the entire adjusted basis is used in determining the amount of gain on the sale. However, if it is determined under this regulation that the adjusted basis must be allocated, i.e., if a charitable contributions deduction is allowable, then the amount of gain is determined under section 1011(b) and section 1.1011-2(b), Income Tax Regs. The amount allowed or allowable for the charitable contribution (fair market value - amount realized) is then computed under section 170 and the regulations thereunder in the same manner as though the contribution was an outright gift to a charitable organization. This computation will then be made, in my opinion, without going back to section 1.1011-2(a)(1), Income Tax Regs.Pursuant to section 1.1011-2(a)(1), Income Tax Regs., the adjusted basis of the property must be allocated under section 1011(b) and section 1.1011-2(b), Income Tax Regs., only if after applying the provisions of section 170, including the percentage 128 limitations of section 170(b), 3129 130 a deduction is allowable under section 170. In ascertaining whether or not a charitable contributions deduction is allowable under section 170 for the taxable year "for such purposes" (to determine whether or not the adjusted basis must be allocated pursuant to section 1011(b) and the regulations thereunder), section 170 is to be applied without regard to this regulation and the amount by which the contribution must be reduced under section 170(e)(1) is the amount determined as if the entire property had been sold by the donor at its fair market value at the time of the sale or 289 exchange. In other words, the adjusted basis must be allocated only if the charitable contribution (fair market value - amount realized) is greater than the reductions required under section 170(e)(1) determined by applying such section to the entire property. After satisfying this initial allowability test and determining that the adjusted basis of the property must be allocated, the taxpayer is no longer concerned with section 1.1011-2(a)(1), Income Tax Regs., and that regulation has no further applicability. The majority has accepted the parties' litigating position that the election by petitioners under section 170(b)(1)(C)(iii) requires that the contribution portion of the bargain sale must be reduced under section 170(e)(1)(B) by taking into account the long-term capital gain attributable to the entire property as required by section 1.1011-2(a)(1), Income Tax Regs. I do not see the connection. I think the allowability test in which the entire property is considered is an earlier, preliminary test which petitioners have satisfied and that the reductions under section 170(e)(1)(B) pursuant to their election comes at a later stage and involves only the contributed portion of the property. In other words, the reduction contemplated by section 170(e)(1)(B) pursuant to petitioners' election requires only that portion of the long-term capital gain attributable to the contributed property be taken into account. While the statute and regulations are complex, a logical tracking of the Code and regulations supports my view. The method for computing the amount of long-term capital gain attributable to the contributed property is clearly set forth in section 1.170A-4(c)(3), Income Tax Regs.131 Indeed, an analysis of section 170(b)(1)(C) supports my interpretation.Generally, charitable contributions to organizations described in section 170(b)(1)(A) ("50 percent charities") are allowed in any taxable year to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer's contribution base 4 (adjusted gross income) for such year. However, an additional limitation is provided in section 170(b)(1)(C) with respect to contributions of certain capital gain property. Section 170(b)(1)(C) provides:290 (C) Special limitation with respect to contributions of certain capital gain property. -- (i) In the case of charitable contributions of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into account under subsection (a) for any taxable year shall not exceed 30 percent of the taxpayer's contribution base for such year. For purposes of this subsection, contributions of capital gain property to which this paragraph applies shall be taken into account after all other charitable contributions.(ii) If charitable contributions described in subparagraph (A) of capital gain 132 property to which clause (i) applies exceeds 30 percent of the taxpayer's contribution base for any taxable year, such excess shall be treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time.(iii) At the election of the taxpayer (made at such time and in such manner as the Secretary prescribes by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain property made in any prior contribution year for which an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had applied to such contributions in the year in which made.(iv) For purposes of this subparagraph, the term "capital gain property" means, with respect to 133 any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain. For purposes of the preceding sentence, any property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset.Thus, section 170(b)(1)(C)(i) limits the total amount of contributions of capital gain property to which subsection (e)(1)(B) does not apply that may be taken into account each year to 30 percent of the taxpayer's contribution base (adjusted gross income). Section 170(b)(1)(C)(ii) provides that contributions of capital gain property exceeding that 30-percent limitation are carried over to subsequent years as contributions of capital gain property in a manner consistent with section 170(d). However, in lieu of accepting this 30-percent limitation for contributions of capital gain property, a taxpayer may make an election under section 170(b)(1)(C)(iii) to apply 291 section 170(e)(1)134 to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. 5 If the election is made, the taxpayer must reduce the amount of the charitable contributions deduction otherwise allowable under section 170(b)(1)(C) by 50 percent of the gain that would have been long-term capital gain if the contributed property had been sold by the taxpayer at its fair market value determined at the time of such contribution. 6135 The effect of the election is twofold: First, the election removes the otherwise allowable charitable contribution from the 30-percent limitation under section 170(b)(1)(C) and removes the capital gain property taint from the contribution. 7 With respect to a bargain sale 136 transaction, to accept the position that an election under section 170(b)(1)(C)(iii) requires the application of section 170(e)(1)(B) in accordance with section 1.1011-2(a)(1), Income Tax Regs., is simply, in my opinion, an erroneous application of the statute and the regulations. Both section 170(b)(1)(C)(iii) and section 1011(b) (and section 1.1011-2(a)(1), Income Tax Regs.) require reductions under section 170(e)(1). However, when interpreted and applied in the proper sequence within the entire statutory and regulatory framework, these two reductions operate in different spheres and are, in my opinion, mutually exclusive. I will demonstrate below what I believe to be the proper sequence and proper application of the statute and regulations.292 In a bargain sale transaction, section 170(e)(1) is applied under section 1.1011-2(a)(1), Income Tax Regs., to reduce the amount of the charitable contribution (fair market value - amount realized). The purpose of this initial application is to determine whether or not any charitable contributions deduction is allowable so that the basis of the property must be apportioned as provided in section 1011(b) and section 1.1011-2(b), Income Tax Regs.137 This is what is referred to above as the allowability test for the particular piece of property. Indeed, section 1.1011-2(a)(1), Income Tax Regs., by clear and unambiguous language specifically limits the application of section 170(e)(1)for such purposes. After this initial allowability determination has been made for the particular piece of property, section 1.1011-2(a)(1), Income Tax Regs., has no further applicability. In contrast, the reductions contemplated by section 170(e)(1)(B) pursuant to an election under section 170(b)(1)(C)(iii) apply to all contributions of capital gain property made during the taxable year. The position advanced by the parties as their litigating position and accepted by the majority necessitates a different treatment for contributions of capital gain property to which the election applies depending on whether such contributions were outright gifts or were made in connection with a bargain sale. I do not think that the election under section 170(b)(1)(C)(iii) was ever intended to draw such a distinction. Indeed, in the absence of an election, the amount of the contribution of capital gain property that is not otherwise subject to section 170(e)(1)(B)138 (and the only capital gain property to which an election could apply) is fixed and ascertained and is otherwise allowable under section 170(b)(1)(C) subject only to the percentage limitations contained therein. The interpretation accepted by the majority requires a quantum leap backward from section 170(b)(1)(C)(iii) back to section 1.1011-2(a)(1), Income Tax Regs., which I do not think is mandated either by the statute or the regulations. Having once satisfied section 1011(b) and section 1.1011-2(a)(1), Income Tax Regs., in the initial determination that some charitable contribution is allowable and that basis must be allocated, there is no need to return to section 1.1011-2(a)(1). I think the election under section 170(b)(1)(C)(iii) requires the application 293 of section 170(e)(1)(B) computed under section 1.170A-4(c)(2) and (3), Income Tax Regs., and not under section 1011-2(a)(1), Income Tax Regs. Thus only the property contributed in the bargain sale is taken into account in that computation. Accordingly, I would analyze the instant case in the following manner.Petitioners in the instant case sold capital gain property to a section 170(b)(1)(A) organization for the amount of 139 $ 941,684. The fair market value at the time of the sale was $ 1,106,478, resulting in a charitable contribution of $ 164,794. The taxpayer's basis in the property was $ 654,632 that reflected the potential recapture of depreciation in the amount of $ 43,392. However, since neither the majority opinion nor the parties' briefs otherwise indicate, it is assumed that no portion of this depreciation will be treated as ordinary income on disposition of the property.My analysis begins with section 1.1011-2(a)(1), Income Tax Regs., since the transaction was a bargain sale to a charitable organization. Under section 1.1011-2(a)(1), Income Tax Regs., it must be determined whether or not any charitable contributions deduction is allowable under section 170. If a deduction is allowable under section 170, then the basis of the property must be allocated between the sale portion and the contributed portion of the bargain sale. In making this initial determination, the contribution of property must be reduced under section 170(e)(1), determined as if the entire property had been sold by the donor at its fair market value at the time of the sale. This is the mandatory reduction under section 170(e)(1). 140 The taxpayer made a charitable contribution in the amount of $ 164,794 (1,106,478 fair market value - 941,684 amount realized). If the property had been sold at its fair market value at the time of its contribution, $ 451,846 of gain would have been realized. However, since no part of this gain would have been ordinary income, no mandatory reduction is required under section 170(e)(1)(A). Moreover, at this stage, no mandatory reduction is made under section 170(e)(1)(B) since that section does not otherwise apply. 8141 Accordingly, after applying 294 section 1.1011-2(a)(1), Income Tax Regs., a charitable contributions deduction in the amount of $ 164,794 is allowable under section 170 subject only to the percentage limitations of section 170(b), and the basis of the property must be apportioned. At this point, section 1.1011-2(a)(1), Income Tax Regs., has no further applicability and the provision in regard to the gain on the entire property has served its limited purpose. Petitioners have passed this initial allowability test, and basis of the particular property must now be allocated. Pursuant to section 1011(b) and section 1.1011-2(b), Income Tax Regs., petitioners have an adjusted basis of $ 552,133 for the part of the property constituting the sale (adjusted basis X amount realized/fair market value of entire property) (654,632 X 941,684/1,106,478), resulting in a total gain of $ 384,551 (941,684 - 557,133), all of which is long-term capital gain. Under section 1.170A-4(c)(2)(i), Income Tax Regs., petitioners' adjusted basis for the property contributed is $ 97,498 (adjusted basis X fair market value of contributed property/fair market value of entire property) (654,632 X 164,794/1,106,478). Basis having now been allocated, the next step is to compute the amount of the charitable contributions deduction to be allowed.The charitable contribution of $ 164,794 (fair market value - amount realized) is now treated essentially in the same manner as an outright gift of capital 142 gain property to an organization described in section 170(b)(1)(A). Accordingly, the fair market value of the contributed property must be reduced by the amounts required under section 170(e)(1). If the contributed property had been sold at its fair market value, the taxpayer would have realized a total gain of $ 67,296 (164,794 - 97,498) all of which would have been long-term capital gain. Sec. 1.170A-4(c)(3), Income Tax Regs. Since no part of this gain attributable to the contributed property would have been ordinary income, no reduction is required under section 170(e)(1)(A). Moreover, no reduction is necessary under the express language of section 170(e)(1)(B), since that section does not otherwise apply. At this stage, petitioners are otherwise allowed a 295 charitable contributions deduction of $ 164,794 subject to the 30-percent limitation under section 170(b)(1)(C). However, petitioners have elected to have section 170(e)(1) apply to all of their contributions of capital gain property made in the year 1977, and the only contribution of capital gain property is this amount of $ 164,794.Accordingly, the amount of $ 164,794 is reduced under section 170(e)(1)(B) by 50 percent 143 of the gain that would have been long-term capital gain if the contributed property had been sold at its fair market value at the time of the contribution. However, at this stage we do not go back to section 1.1011-2(a)(1), Income Tax Regs., because basis has already been allocated. Thus, the $ 164,794 is reduced by the amount of $ 33,648 (50 percent of 67,296) (451,846 X 164,794/1,106,478) (long-term capital gain X fair market value of contributed property/fair market value of entire property). This gives petitioners a deduction in the amount of $ 131,146 for the contributed portion of the bargain sale, subject to the percentage limitations of section 170(b)(1)(A). 9144 This charitable contributions deduction can be carried over from the year of the bargain sale (1977) to the years before the Court (1978 and 1979). This would also mean that an adjustment would have to be made to the sale portion since respondent in the statutory notice of deficiency allocated all of the basis to the sale portion, thus decreasing the amount of petitioners' taxable gain.I would hold for petitioners by applying the pertinent statutory and regulatory provisions in the sequence indicated above, thus pretermitting any determination of the validity of the regulations. Accordingly, while I agree with Judge Whitaker's views, I concur with the majority solely as to the result the majority reached. However, since the majority has chosen to invalidate the regulations, I join in Judge Whitaker's dissent.296 Whitaker, J. concurring and dissenting: I agree with Judge Parker's well-reasoned concurrence. The application of the statute and the regulations which she advocates is reasonable, well justified under the ambiguous statute here involved, and responds to our obligation to so interpret regulations as to uphold their validity. See United Telecommunications, Inc. v. Commissioner, 589 F.2d 1383">589 F.2d 1383, 1390 (10th Cir. 1978); 145 Miller v. Commissioner, 84 T.C. 827">84 T.C. 827, 845 (1985), on appeal (10th Cir., Nov. 20, 1985). However, the majority has apparently concluded that Judge Parker's analysis is incorrect. Thus, without, in my judgment, an adequate basis therefor, the Court invalidates these long-standing regulations. I must respectfully dissent from the majority's reasoning. Were it necessary to reach the opposite result in order to avoid invalidation of the regulations, I believe we should do so.When called upon to interpret respondent's regulations, we have been charged by the U.S. Supreme Court time and again to refrain from substituting our judgment as to reasonableness for that of the Secretary. See, e.g., United States v. Correll, 389 U.S. 299">389 U.S. 299 (1967); Bingler v. Johnson, 394 U.S. 741 (1969); National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472">440 U.S. 472 (1979). The majority recognizes that the congressional intent is far from clear, that the regulations were issued "soon after enactment of the statutory provisions" (specifically in 1972) and that Congress has revisited this area on a number of occasions without any adverse comment with respect to the regulations. I have no disagreement with 146 the majority's enunciation of the proper standard to apply; I simply disagree that the majority has correctly applied that standard.In National Muffler Dealers Association, Inc. v. United States, supra at 477, Justice Blackmun said:In determining whether a particular regulation carries out the congressional mandate in a proper manner, we look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its 297 purpose. A regulation may have particular force if it is a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner's interpretation, and the degree of scrutiny Congress has devoted to the regulation during subsequent re-enactments of the statute. [Citations omitted.]The majority's interpretation may well be a more reasonable interpretation of the statute than respondent's, but that is immaterial. In my judgment, since the majority declines 147 to accept Judge Parker's analysis, the Court should exercise judicial restraint and look to Congress for clarification of the statute. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during 1977 through 1979.↩2. The stipulation filed by the parties reported this figure as (34,392). The remainder of the stipulated figures and petitioners' 1977 return indicate that the correct amount is (43,392) as found above.3. As the statutory language indicates, absent the election under sec. 170(b)(1)(C)(iii), sec. 170(e)(1) applies to contributions of capital gain property only if the donee is a private foundation or uses the property in a manner unrelated to its tax-exempt function or purpose. Sec. 170(e)(1)(B)↩.4. Sec. 1.170A-4(c)(1), Income Tax Regs., provides as follows:(c) Allocation of basis and gain -- (1) In general. Except as provided in subparagraph (2) of this paragraph --(i) If a taxpayer makes a charitable contribution of less than his entire interest in appreciated property, whether or not the transfer is made in trust, as, for example, in the case of a transfer of appreciated property to a pooled income fund described in section 642(c)(5) and sec. 1.642(c)-5, and is allowed a deduction under section 170 for a portion of the fair market value of such property, then for purposes of applying the reduction rules of section 170(e)(1) and this section to the contributed portion of the property the taxpayer's adjusted basis in such property at the time of the contribution shall be allocated under section 170(e)(2) between the contributed portion of the property and the noncontributed portion.(ii) The adjusted basis of the contributed portion of the property shall be that portion of the adjusted basis of the entire property which bears the same ratio to the total adjusted basis as the fair market value of the contributed portion of the property bears to the fair market value of the entire property.(iii) The ordinary income and the long-term capital gain which shall be taken into account in applying section 170(e)(1)↩ and paragraph (a) of this section to the contributed portion of the property shall be the amount of gain which would have been recognized as ordinary income and long-term capital gain if such contributed portion had been sold by the donor at its fair market value at the time of its contribution to the charitable organization.5. Sec. 170(e)(2) provides:(2) Allocation of basis. -- For purposes of paragraph (1), in the case of a charitable contribution of less than the taxpayer's entire interest in the property contributed, the taxpayer's adjusted basis in such property shall be allocated between the interest contributed and any interest not contributed in accordance with regulations prescribed by the Secretary.Presumably under this authority, sec. 1.170A-4(c)(2), Income Tax Regs., allocates basis in the case of bargain sales between the "contributed" and "sold" portions of the property by reference to sec. 1.1011-2, Income Tax Regs. It is not clear, however, that Congress intended sec. 170(e)(2) to apply to contributions other than those excepted from the general rule of sec. 170(f) prohibiting any deduction for the contribution of less than the taxpayer's entire interest in the property. The operative language of sec. 170(e)(2) is identical to that used in sec. 170(f)(3)(A), and bargain sales, unlike the typical sec. 170(f) contributions, are the subject of the allocation rule of sec. 1011(b). It similarly is not clear that, but for the exceptions of sec. 170(f)(3)(B), the general rule of sec. 170(f)(3)(A) would apply to bargain sales or that bargain sales fall within one of the exceptions. Because bargain sales are not subject to sec. 170(f)(3)(A), there exists a strong argument that authority for the basis allocation provisions for bargain sales arises under sec. 7805(a) and not sec. 170(e)(2)↩.6. If the term were ultimately defined as the entire property in cases like example (4) in sec. 1.1011-2(c), Income Tax Regs. (and thus the deduction limited to $ 2,000 therein), the taxpayer would be denied a deduction with respect to an element of gain realized under sec. 1011(b)↩. Presumably the drafters of the regulations recognized that this would be unreasonable.7. One commentator suggests that the introductory language of sec. 1011(b) merely reflects congressional intent to exclude from the section bargain sales to noncharitable donees like that in Fincke v. Commissioner, 39 B.T.A. 510">39 B.T.A. 510 (1939). Although this commentator advocates the method used by petitioners, he assumes that application of sec. 170(e)(1) before sec. 1011(b) mandates use of the inherent gain in the entire property for computing the sec. 170(e)(1) reduction. See Taggart, "The Charitable Deduction," 26 Tax L. Rev. 63">26 Tax L. Rev. 63, 130-131 (1970). The bargain sale of zero-basis ordinary income property illustrates, however, that petitioners' approach is consistent with the statutory language. In such a case, sec. 170(e)(1) precludes any deduction and therefore application of sec. 1011(b). Moreover, various other provisions of sec. 170 might prevent a deduction in connection with a bargain sale and thus obviate application of sec. 1011(b).Another commentator, however, interprets the statutory provisions consistently with respondent's position. See Jackson, "The New Rules Governing Bargain Sales to Charitable Organizations under the Tax Reform Act of 1969," 24 Tax Lawyer 279, 283-284↩ (1971).8. In these respects, the Senate bill was consistent with a second Treasury Department proposal. See Technical Explanation of Treasury Department Tax Proposals, reprinted in↩ Hearings Before House Ways and Means Committee on Tax Reform, 91st Cong., 1st Sess. 5069, 5152-5153 (1969).9. Indeed, the regulations generally provide that gain recognition precludes application of sec. 170(e)(1):Sec. 1.170A-4(a). * * Section 170(e)(1) and this paragraph do not apply to reduce the amount of the charitable contribution where, by reason of the transfer of the contributed property, ordinary income or capital gain is recognized by the donor in the same taxable year in which the contribution is made. * * *Requiring immediate recognition of gain on the sold portion of the property arguably would effect Congress' stated intention with respect to bargain sales. Sec. 1011(b), however, only causes realization of such gain; it does not prescribe when the gain is to be recognized. Presumably for this reason, respondent neither challenges petitioner's use of the installment method to report the gain from the Weimar property nor argues that use of such method should affect our decision herein.10. Assume, for example, the sale for $ 900 of capital gain property with a basis of $ 200 and a value of $ 1,000. Under the regulations, the taxpayer would be entitled to no contribution deduction through sec. 170(e)(1) and would realize long-term capital gain of $ 700, thus increasing his taxable income by $ 350. Had the taxpayer sold the property for $ 1,000 and then donated $ 100, he would be entitled to a $ 100 deduction and would realize $ 800 long-term capital gain, resulting in only a $ 300 increase in taxable income. Unlike the regulations, our holding herein yields an equivalent result: The taxpayer would be entitled to a deduction of $ 60 ($ 100 contribution less 50 percent of the $ 80 gain inherent in contributed portion) and would realize $ 720 long-term capital gain ($ 900 sales price less $ 180 basis in sold portion), thus increasing his taxable income by $ 300. The $ 50 disparity between the treatment under the regulations and the correct approach equals the 50-percent capital gain deduction times both the $ 20 basis in the contributed portion (which the regulations mischaracterize as reduced deduction) and the $ 80 gain inherent in such portion (which the regulations reduce by 100 percent).If the property were ordinary income property, the regulations would cause only the $ 20 mischaracterization and, because ordinary income rates would apply, would not affect taxable income.11. The Court of Appeals for the Ninth Circuit recently upheld sec. 1.1011-2(a)(3), Income Tax Regs., which provides that indebtedness on the property transferred must be included in the amount realized. Ebben v. Commissioner, 783 F.2d 906">783 F.2d 906↩ (9th Cir. 1986), affg. in part and revg. in part a Memorandum Opinion of this Court. The present case does not involve that portion of the regulation.1. See also secs. 170A-4(b)(2) and 1.170A-8(d)(2)(i)(a), Income Tax Regs., treating "elective" and "mandatory" reductions under section 170(e)(1)(B)↩ identically.2. The concurring and dissenting opinion reads the term "allowable" in sec.1.1011-2(a)(1), Income Tax Regs., to mean allowable without regard to the percentage limitations of sec. 170(b). The word allowable, however, cannot be so narrowly defined in this context. In drafting sec. 170Congress used the terms "allowed" and "allowable" interchangeably. See sec. 170(a); compare sec. 170(b)(1)(A) (flush language) and sec. 170(b)(1)(B) (introductory language) with sec. 170(b)(1)(B)(ii). Further, as used in sec. 1.1011-2(a)(2), Income Tax Regs., the term "allowable" is used to mean allowable after application of the percentage limitations of sec. 170(b)↩, because only after such limitations are applied could a contribution be carried over to a subsequent year.1. The term "bargain sale" means a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution, as defined in sec. 170(c), of the property. Sec. 1.170A-4(c)(2)(iii), Income Tax Regs.↩2. See Weber & Stevenson, "Charitable Bargain Sales and The Allowability Test -- A Tax Trap," 56 Taxes 101">56 Taxes 101↩ (February 1978).3. Sec. 1.1011-2(a)(2), Income Tax Regs., provides that the basis of the property must be apportioned in the year of the bargain sale if the sale or exchange gives rise to a charitable contribution that is carried over to a subsequent taxable year, whether or not such contribution is allowable as a deduction under sec. 170 in such subsequent taxable year. Since both sec. 170(b)(1)(A) and sec. 170(b)(1)(C) allow carryovers for contributions in excess of the percentage limitations contained therein, the reference to the percentage limitations of sec. 170(b) contained in sec. 1.1011-2(a)(1), Income Tax Regs., was intended to apply with respect to bargain sales made to organizations described in sec. 170(b)(1)(B). See, i.e., sec. 1.1011-2(c), example (3), Income Tax Regs. However, since the Tax Reform Act of 1984, inter alia, extended the applicability of the 5-year carryover deduction under sec. 170(d) to excess contributions by individuals made to sec. 170(b)(1)(B) organizations, it is doubtful whether, under the present law, the percentage limitations of sec. 170(b) would preclude the allocation of basis under sec. 1.1011-2(a)(1), Income Tax Regs., with respect to bargain sales to any charitable organization. See generally Tax Reform Act of 1984, Pub. L. 98-369, sec. 301, 98 Stat. 777.4. The term "contribution base" means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under sec. 172). Sec. 170(b)(1)(E)↩.5. In addition, the election may be made with respect to contributions of 30-percent capital gain property carried over to the taxable year even though the individual has not made any contribution of 30-percent capital gain property in such year. Sec. 1.170A-8(d)(2)(i)(a), Income Tax Regs. Note that the reference in this regulation to the election under sec. 170(b)(1)(iii) bears the old numbering of what is now sec. 170(b)(1)(C)(iii)↩.6. It should be emphasized that an election under sec. 170(b)(1)(C)(iii) applies to all contributions of capital gain property to which subsec. (e)(1)(B) does not otherwise apply made during the year of the election. In addition, in applying the carryover provisions of sec.170(d) for the year of the election with respect to contributions of capital gain property made in any prior contribution year for which an election was not made, such contributions shall be reduced as if subsec. (e)(1) had applied to such contributions in the year in which made. Sec. 170(b)(1)(C)(iii)↩ (last sentence).7. Removing the capital gain property taint from the contribution means that after applying sec. 170(e)(1)(B) as required by the election, clauses (i) and (ii) of sec. 170(b)(1)(C) are no longer applicable to contributions of capital gain property made during the taxable year. In other words, these contributions are then treated as contributions subject to the 50-percent limitation under sec. 170(b)(1)(A), and any amount in excess of this 50-percent limitation is carried over to subsequent years under sec. 170(d) as a sec. 170(b)(1)(A) contribution rather than as a sec. 170(b)(1)(C)↩ contribution.8. Sec. 170(e)(1)(B) does not apply because (1) any part of this contribution that consisted of tangible personal property is not used by the donee in a manner unrelated to the purpose or function constituting the basis for its exemption under sec. 501, and (2) the donee was not a private foundation as defined in sec. 509(a) other than a private foundation described in subsec. (b)(1)(D).9. While I have discussed what I call "the parties' litigating position" (and the basic premise of the majority opinion), I think my position is the same as petitioners' alternative argument which is alluded to but not well articulated in petitioners' brief. I believe my position was also anticipated in an early article discussing what was then the proposed regulations under the 1969 Tax Reform Act. See Whitaker, "Dealing with Outright Gifts to Charity in Kind," 30th Annual N.Y.U. Institute 45, 64-73 (1972).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624291/	Leif J. Sverdrup, Petitioner, v. Commissioner of Internal Revenue, RespondentSverdrup v. CommissionerDocket No. 20065United States Tax Court14 T.C. 859; 1950 U.S. Tax Ct. LEXIS 201; May 16, 1950, Promulgated 201 Decision will be entered under Rule 50. Petitioner, an individual citizen of the United States, was a bona fide nonresident of the United States for more than six months during the taxable year 1942. As a member of an engineering partnership, he received in 1942 the amount of $ 36,279.30 as his distributive share of the net amount derived from four contracts which the partnership entered into with the United States and which were performed by the partnership and another party under a joint venture agreement. He was also paid in 1942 the amount of $ 5,000 by the joint venture as additional compensation because of the nature of the work done by him in the performance of the above contracts. Both these amounts were received from sources without the United States and would have constituted earned income as defined in section 25 (a), Internal Revenue Code (as in effect for the year 1942), had they been received from sources within the United States. Held:(1) The amount of $ 36,279.30 was not excludable from petitioner's gross income in 1942 under section 116 (a), Internal Revenue Code, since it was an "amount paid by the United States" within the meaning and intent of the 202 parenthetical exception to the exemption provided by that section.(2) The amount of $ 5,000 was excludable from petitioner's gross income in 1942 under section 116 (a), Internal Revenue Code. G. W. Marsalek, Esq., and W. E. Moser, Esq., for the petitioner.George E. Gibson, Esq., for the respondent. Johnson, Judge. JOHNSON 859 OPINION.Respondent determined203 a deficiency in income tax and victory tax for the taxable year 1943 in the amount of $ 29,466.79. By virtue of the Current Tax Payment Act of 1943 the deficiency is asserted for 1943, although the controversy involves only the year 1942. The sole question is whether petitioner was entitled to exclude from his gross income in 1942 certain amounts totaling $ 41,279.30 under section 116 (a), Internal Revenue Code, prior to its amendment by section 148 (a) of the Revenue Act of 1942 and by section 107 (b) of the Revenue Act of 1943.The facts are stipulated.Petitioner is now and was during the period here involved an individual citizen of the United States, with offices in St. Louis, Missouri, and he resides in Richmond Heights, St. Louis County, Missouri. The returns for the period here involved were filed with the collector of internal revenue for the first district of Missouri.From prior to January 1, 1942, until May 8, 1942, petitioner was an active member of the engineering partnership of Sverdrup & 860 Parcel (hereinafter referred to as the partnership), composed of petitioner, John I. Parcel, and E. R. Grant. The partnership was originally organized in 1928 and by 204 the terms of a partnership agreement dated April 9, 1935, the net profits of the partnership were shared as follows: Leif J. Sverdrup, 55 per cent; John I. Parcel, 30 per cent, and E. R. Grant, 15 per cent.During the year 1942 the partnership, as one party, and J. Gordon Turnbull, an individual of Cleveland, Ohio, as the other party, were engaged in a joint venture (hereinafter referred to as the joint venture), under an agreement executed July 10, 1941. The joint venture was formed for the purpose of performing contracts which related to the national defense program of the United States. By agreement of the parties, such contracts, if mutually acceptable, entered into either by the partnership or by Turnbull, were to be performed jointly by both parties to the joint venture agreement.Prior to May 8, 1942, the partnership entered into four contracts with the United States of America, each designated "Fixed Fee Contract for Architect-Engineer Services," and numbered DA-W-414-eng-511, DA-W-414-eng-585, DA-W-414-eng-842, and Contract No. 1 (Australia), respectively. These contracts were to be performed in Australia and New Zealand and on islands located in the South and Southwest205 Pacific Ocean, outside the continental United States, Hawaii, and Alaska. Contract No. DA-W-414-eng-511, which may be considered as typical of all the contracts, provided in part:Article VIFixed-Fee and Reimbursement of Expenditures:1. In consideration for his undertakings under the contract, the Architect-Engineer shall be paid the following:a. A fixed fee to be determined and set forth in a supplement to this contract when the preliminary estimated construction cost of the said project has been determined in accordance with the provisions of Paragraph 2 of Article V hereof. The amount of the fee will be based upon the preliminary estimated construction cost of the project and will be determined in conformity with the schedule of approved fees for Architect-Engineer Services as published by the Under Secretary of War. The fee shall constitute complete compensation for the Architect-Engineer's services, including the services of the individual or individuals furnished for full-time resident direction of the project under the provisions of Paragraph 1 of Article II of this contract, and all overhead expenses except as otherwise herein expressly provided. Payment on account206 of the fixed fee shall be made as provided in Article VIII hereof.This contract also provided that, in addition to the payment of the fixed fee, the architect-engineer was to be "reimbursed for such of his actual expenditures as may be approved or ratified by the Contracting Officer," including wages paid to employees of the architect-engineer, subcontracts, social security payments, travel expense, etc.861 The Government also agreed to provide all office and drafting-room space, supplies, and facilities necessary for the proper performance of work under the contract.Prior to their execution, the aforesaid contracts were determined to be mutually acceptable to the parties to the joint venture and, with the knowledge of the contracting officer for the United States of America, were to be performed by the joint venture; but because of emergency conditions then prevailing and the absence of J. Gordon Turnbull, the contracts, which were signed in Hawaii, were executed in the name of the partnership only, but, pursuant to the joint venture agreement, the contracts were performed by the partnership and Turnbull jointly in accordance with the terms of the joint venture agreement. 207 Petitioner was the "field" representative of the joint venture. Except for seven days (February 27 and 28, March 1 and 2, and April 24, 25, and 26) spent in Hawaii, for a period beginning November 2, 1941, to April 27, 1942, petitioner was continuously physically absent from the continental United States, Hawaii, and Alaska, and was actually living upon or traveling between Australia, New Zealand, New Caledonia, Norfolk Islands, and Society Islands, all located in the South Pacific and Southwest Pacific area, in connection with the performance of the contracts above referred to. The specific services rendered by petitioner consisted of (1) selecting sites for the construction of airfields and airdromes on New Caledonia, Norfolk Islands, Society Islands, Penhryn, Christmas Island, the Marquetas Islands, Caroline Island, Cook Island, the Austral Islands, the Tonga Islands, the Kermadee Islands, the Chatham Islands, and New Zealand; this work was done by air and land travel; (2) after selecting the sites, petitioner personally supervised the actual surveys preliminary to construction; (3) there being neither men nor material available from the United States, petitioner negotiated and208 effected arrangements with the Prime Ministers and other officials of Australia and New Zealand for the hiring and shipment of men and materials from those countries and the obtention of necessary ships to enable construction to be performed; (4) after construction began he supervised construction operations on the various islands by air travel until his connection with the work ceased and the uncompleted contracts were terminated and construction was completed by the Corps of Engineers of the United States Army.During 1942 petitioner was not in Alaska; during that year he was within the continental limits of the United States and Hawaii 26 days, having left Palmyra Island on April 23, 1942, and arrived in the United States on April 27, 1942 (having stopped in Hawaii for a period of 3 days). On May 8, 1942, petitioner was commissioned a 862 colonel in the Army of the United States and he remained on active duty with the Army of the United States until April 1946, when, as Major General, Commanding, Engineer Construction Command, Southwest Pacific, he was transferred to reserve duty.On May 8, 1942, under Army orders, he was directed to report to Melbourne, Australia. Pursuant209 to those orders he departed from the United States on May 15, 1942, and, after stopping en route in Hawaii for a period of one day, he spent the entire remainder of the year 1942 in or traveling between Australia and New Guinea, being on continuous active duty with the Army of the United States. Thereafter, petitioner was continuously outside the Americas until December 8, 1945, except for a brief furlough in July, 1945.In addition to the contracts above referred to, during the year 1942 the joint venture also was engaged within the continental United States in engineering work in connection with the construction of Midwest Air Depot, Wright Field Engine Test Stands, Patterson Field Maintenance Command Building, plant of Guiberson Diesel Engine Co., Garland, Texas, Wright Field Wind Tunnel, Mobile Air Depot Groups, Wright Field Administration Buildings, plant of Missouri Shipbuilding Co., St. Louis, Missouri, Modification Center #4, Kansas City, Missouri, and plant of North American Aviation Co., Kansas City, Kansas. All of the foregoing work was done under contracts with the United States, except the work for Missouri Shipbuilding Co., a corporation, which was performed under 210 a subcontract with Missouri Shipbuilding Co., which company had a "Navy Contract" with the United States and the work for Guiberson Diesel Engine Co. and North American Aviation Co., which was performed by the joint venture under contracts between each of those companies, acting for and on behalf of Defense Plant Corporation, a Government agency, and J. Gordon Turnbull, Inc., a corporation, and the partnership. With reference to the Missouri Shipbuilding Co. contract, the joint venture was paid by Missouri Shipbuilding Co. With reference to the Guiberson Diesel Engine Co. and North American Aviation Co. contracts, J. Gordon Turnbull, Inc., and the partnership were paid by Defense Plant Corporation, and all said payments were deposited in the joint venture bank account, referred to below.Separate and distinct from the offices of the partnership, in St. Louis, Missouri, and those of J. Gordon Turnbull, in Cleveland, Ohio, the joint venture, during 1942, maintained offices in Edmonton, Canada; St. Louis, Missouri; Tulsa, Oklahoma; Kansas City, Missouri; Louisville, Kentucky; Fiji; Penhryn; Tongatabu; Noumea, New Caledonia; Auckland, New Zealand; Autitaki and Townsville, Australia. 211 The number of employees at said offices on the pay roll of the joint venture amounted to from 5 in the smallest of the offices to 863 more than 500 in the largest. In addition, during 1942 the joint venture employed construction workers, all of whom were on its pay roll.In addition to $ 410,490.05 paid as reimbursable expenses, the Treasurer of the United States paid the partnership the total amount of $ 156,758.89 for the performance in the year 1942 by the joint venture of the contracts mentioned above, all of which was deposited in a bank account maintained by and to the credit of the joint venture, entitled "J. Gordon Turnbull and Sverdrup & Parcel, Consulting Engineers." There also were deposited in the same bank account amounts derived from all other sources for work done under the joint venture agreement. From the amounts so received, the joint venture paid all expenses of its operations, including nonreimbursable expenses totaling $ 24,834.14 incurred in the performance of the contracts referred to above, and at various times distributed to the partnership its proportionate share of the balance. The amounts so received by the partnership were deposited in its bank212 account entitled "Sverdrup & Parcel," in which were also deposited amounts received by the partnership from all other sources. The partnership paid from said fund all expenses of operation, clerical and engineering salaries and wages, fees for necessary professional services, rent, materials, supplies, office maintenance, etc.After deduction of nonreimbursable expenses, the amount the joint venture derived in the year 1942 from the contracts referred to above was $ 131,924.75, of which the partnership's distributive share (50 per cent) was $ 65,962.37, and the petitioner's distributive share (55 per cent) of the latter amount was $ 36,279.30.During the year 1942 the joint venture paid the petitioner $ 5,000 as additional compensation because of the nature of the work done by him in the performance of the contracts referred to above.During that portion of the year 1942 after he was commissioned in the Army of the United States, and thereafter, petitioner performed no further service for either the joint venture or the partnership.After petitioner was commissioned in the Army of the United States, John I. Parcel and E. R. Grant formed a new partnership, of which petitioner was 213 not a member, and the new partnership formed a new joint venture with J. Gordon Turnbull, of which petitioner likewise was not a member.Petitioner was a bona fide nonresident of the United States for more than six months during the taxable year 1942. The amount of $ 36,279.30, mentioned above, was paid to petitioner by the United States in 1942. The amount of $ 5,000, also mentioned above, was not paid to petitioner by the United States or any agency thereof in 1942. Both these amounts were received from sources without the United States and would have constituted earned income as defined in section 25 (a), 864 Internal Revenue Code (as in effect for the year 1942) had they been received from sources within the United States.Petitioner contends that the amounts of $ 36,279.30 and $ 5,000, referred to in the preceding paragraphs are excludable from his gross income under section 116 (a), Internal Revenue Code, 1 prior to its amendment by section 148 (a) of the Revenue Act of 1942 and by section 107 (b) of the Revenue Act of 1943.214 Respondent has determined that these amounts are not so excludable. It has been stipulated that petitioner is now and was during the period here involved an individual citizen of the United States. Respondent does not dispute that petitioner was a bona fide nonresident of the United States for more than six months during the taxable year 1942 and that the amounts in controversy were received from sources without the United States and would constitute earned income if received from sources within the United States. But it is respondent's position that, even assuming that the above requirements of the statute are met, petitioner is not entitled to the exemption provided by section 116 (a), for the reason that the amounts here in question are within the parenthetical exception to that exemption, having been "paid by the United States or * * * [an] agency thereof."To deal first with the sum of $ 36,279.30, it has been stipulated that this amount was petitioner's distributive share of the net amount after deduction of expenses, derived from four contracts which petitioner and his partners entered into with the United States and which were performed by them and J. Gordon Turnbull under215 a joint venture agreement. It has also been stipulated that the total amount, including expenses, paid to the joint venture by the United States under the contracts was $ 567,248.94. Obviously, then, if the whole, $ 567,248.94, was paid by the United States, then the part, $ 36,279.30, was also paid by the United States.But petitioner points out that it was only after the deduction of expenses by the joint venture that earned income remained to him in the form of his distributive share in the amount of $ 36,279.30. Therefore, he argues, this amount was not paid to him by the United States as earned income and therefore does not fall within the parenthetical 865 exception in question. We see no merit in this contention. Section 116 (a) excludes from gross income "amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income." The sum of $ 36,279.30 was received from sources without the United States, was paid by the United States, and, as petitioner himself agrees, constituted earned income to petitioner. The fact that it was part of a larger sum paid by the United216 States, the other part of which did not constitute earned income to petitioner, is immaterial.Nor does the intervention of the joint venture and the partnership mean that the amount in question was not paid by the United States to petitioner. As said in Craik v. United States (Ct. Cls., 1940), 31 Fed. Supp. 132:An examination of the various income tax Acts, beginning with the first one of 1913, shows that Congress in the enactment of each of them intended to treat partnership income as though the distributive share of each partner therein had been received directly by the partner. * See also Neuberger v. Commissioner, 311 U.S. 83">311 U.S. 83; Randolph Products Co. v. Manning (C. A., 3d Cir., 1949), 176 Fed. (2d) 190; Jennings v. Commissioner (C. C. A., 5th Cir., 1940), 110 Fed. (2d) 945; certiorari denied, 311 U.S. 704">311 U.S. 704. Here, therefore, the amount of $ 36,279.30, petitioner's distributive share of the partnership's income from contracts with the United States should be treated as though petitioner had received this amount217 directly from the United States.It is clear, then, that the amount of $ 36,279.30 was, in the plain words of the statute, "paid by the United States" to petitioner. But petitioner urges that it was not the legislative intent to include under the phrase "amounts paid by the United States" amounts paid under contracts for services, as here, but only amounts paid to employees of the United States. Even assuming, arguendo, in the face of the plain words of the statute, that recourse to legislative history is warranted here, nevertheless, petitioner's contention is not sustained by that legislative history. The phrase "except amounts paid by the United States or any agency thereof" was added to the act in 1932. In that year the Senate amended the revenue bill passed by the House and from that bill eliminated entirely the exemption granted to nonresidents for income from sources without the United States. In Senate Report No. 665, 72d Cong., 1st sess., p. 31, the explanation of the Senate amendment was as follows:Your committee believes there is no reason for the continuance of this exemption in the case of citizens of the United States residing abroad for the reason that under218 other sections of the Act such citizens are granted a credit for income taxes paid foreign countries and should not be further relieved from 866 Federal income taxes. Furthermore, a considerable portion of the individuals previously benefited by this subsection have been employees of the United States who, because of their status as such, were usually exempt from any foreign tax upon their compensation received from the United States; these citizens are not believed by your Committee to be entitled to a complete exemption from the Federal income tax upon such compensation.In conference between representatives of the two houses, the matter was compromised, with the exemption being retained, but with the parenthetical exception here involved being adopted by amendment.It is true that employees of the United States were particularly mentioned by the Senate committee as not being entitled to the exemption of section 116 (a). But the only reason given was that these employees were "usually exempt from any foreign tax upon their compensation received from the United States." It would seem then that the intent of the Senate committee was not to allow exemption from United States219 tax to citizens who because of their status also paid no foreign tax. Undoubtedly the committee meant to include in that group citizens under contract with the United States for services outside the country who may also have paid no foreign tax. At any rate, the failure to mention citizens under contract with the United States specifically in the committee report does not, in our view, indicate a clear legislative purpose to allow such citizens the exemption. It is significant that the words actually adopted in the amendment were broad. Neither the word "employees" nor the word "compensation" was used. Instead, the amendment as passed reads: "except amounts paid by the United States or any agency thereof." (Italics supplied.) Since the sum of $ 36,279.30 here in question was such an amount, we hold that respondent properly determined that that amount was not excludable from petitioner's gross income in 1942.As for the sum of $ 5,000, also included by respondent in petitioner's gross income in 1942, it has been stipulated that this sum was paid to petitioner by the joint venture as additional compensation because of the nature of the work done by him in the performance of220 the contracts referred to above. This sum was not a part of the income of the partnership of which he was a member, but was paid to him as an individual for services rendered to the joint venture. Accordingly, it is not to be considered as his distributive share of income either of the joint venture or the partnership. H. H. Wegener, 41 B. T. A. 857; affd. (C. C. A., 5th Cir., 1941), 119 Fed. (2d) 49; certiorari denied, 314 U.S. 643">314 U.S. 643. Therefore, contrary to respondent's determination, it was compensation paid to petitioner by the joint venture, not by the United States, regardless of whether the joint venture paid him out of funds it originally received from the United States. See Charles F. Bouldin, 8 T. C. 959. Actually, the joint venture apparently paid him out of its general funds, which included amounts 867 received both from the United States and from a subcontract with a private company, but, as we have indicated, the source of the $ 5,000 as to the joint venture is, under the facts, immaterial. All the requirements of section 116 (a) having been met, 221 we hold that the sum of $ 5,000 was properly excludable from petitioner's gross income in 1942 under that section.Decision will be entered under Rule 50. Footnotes1. SEC. 116. EXCLUSIONS FROM GROSS INCOME.In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:(a) Earned Income From Sources Without United States. -- In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income as defined in section 25 (a)↩ if received from sources within the United States; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624293/	Frieda Hempel v. Commissioner.Hempel v. CommissionerDocket No. 30724.United States Tax Court1952 Tax Ct. Memo LEXIS 48; 11 T.C.M. (CCH) 1070; T.C.M. (RIA) 52315; October 30, 195248 John R. Olsen, Esq., for the petitioner. Francis J. Butler, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Respondent determined deficiencies in income tax against petitioner as follows: YearDeficiency1939$ 171.901940643.701941751.2119432,900.5119441,397.3219451,665.51 At the hearing petitioner conceded the correctness of respondent's determination of deficiencies for the years 1939, 1940, 1941, and for 1943 in so far as it affects 1942, 1 and also that some of the assignments of error in the petition were not in issue. The remaining issues involve the amounts of business expenses including depreciation, and charitable contributions and medical expenses, to which petitioner is entitled as deductions for the years 1943, 1944 and 1945. Findings of Fact Petitioner, an individual residing at No. 271 Central Park West, New York City, filed her returns for the periods here involved with the collector for the third district of New York. Petitioner's tax liability for the years49 1937 and 1938 was determined in a prior Memorandum Opinion, Docket No. 7993, entered June 23, 1947. Petitioner was for many years a leading coloratura singer in Germany and at the Metropolitan Opera House in New York. During the years in question, she was engaged in the business of a concert singer and singing teacher. She took the latter up some time after becoming a concert singer. The following schedule shows the amount of petitioner's professional income, business expenses claimed and net loss claimed for the years in question. ProfessionalBusinessYearIncomeExpensesNet Loss1943$3,995.75$16,862.57$12,866.8219443,890.5718,123.4314,232.8619454,146.8615,676.3311,529.47 In each of the above years petitioner used the amount of net business loss as an offset against her other income which included $15,000 annually received in each of the years in question from the August Heckscher Trust. During the years in question, petitioner had the following items of professional income: 1943Fees for teaching and coaching$2,200.00Fred F. Finklehoffe and Paul SmallBig Time Co. for services as vocalistin "Big Time"1,500.00Receipts from Town Hall concert245.75Blue Network, Inc.50.00Total$3,995.751944Vocal lessons$2,010.00Town Hall recital630.57Peekskill concert250.00Chautauqua concert500.00New Orleans & Baton Rouge concerts500.00Total$3,890.571945Vocal lessons$3,000.00Royalties from records312.19Town Hall concert798.67OWI36.00Total$4,146.8650 The following schedule shows the amount of business expenses claimed, the amount allowed and the amount disallowed: BusinessExpensesAmountAmountYearClaimedAllowedDisallowed1943$16,862.57$10,712.67$6,149.90194418,123.4313,093.815,029.62194515,676.3310,498.135,178.20Petitioner spent the following amounts on clothes and personal appearance: 1943Make-up and hair dresser$ 273.19Shoes, gloves, accessories339.90Costumes, headpieces, shoes, etc.1,198.38Total$1,811.471944Afternoon and evening dresses$ 550.00Sportswear35.25Pink crepe coat56.06Shoes, jewelry, etc.142.21Accessories502.43Gold coat and scarf161.60Hat and headpieces273.53Gown289.81Hats and accessories136.96Gowns446.56Accessories137.42Hat34.59Storage of coat25.00Total$2,791.421945Gowns, shoes, gloves, underwear, bras-sieres, headdresses, stockings, jew-elry, accessories and alterations$1,383.56Cleaning wearing apparel128.90Black wool coat388.85Afternoon dresses249.62Alteration of gowns72.52Bags, gloves122.75Gloves, headpieces, make-up74.25Storing and relining mink coat75.00Hats173.22Dresses, headdresses, jewelry, shoesand accessories324.45Shoes, stockings, scarf, etc.211.49Total$3,204.6151 Petitioner also spent the following amounts in 1944 and 1945: 1944Food$ 694.13Food827.65Restaurants71.76Caterer286.86Liquor271.50Cash for maid162.29Butlers26.00Flowers83.57Total$2,423.761945Cash for maid271.92Gratuities16.67Food832.93Food713.66Flowers120.18Candy, nuts, butlers175.80Hotels & restaurants498.84Total$2,630.00In 1943 and 1944, opera tickets were purchased for use by petitioner's students. A maid was employed in 1943 and 1944 to whom payments of wages were made in cash in accordance with the maid's insistence and as required by the New York State Labor Law. The maid cleaned the studio in which petitioner transacted some of her business. In 1943, petitioner employed J. Flanagan, Clara Wachter, L. Lilly, and Sherman & Amsden in secretarial work and paid them $580.13. When petitioner gave concerts during the years in question, she paid all the expenses, including the salary of a manager. It is sometimes possible to arrange a concert where someone else guarantees the expenses but petitioner did not do that. The only person who stood to lose anything if the concerts were unsuccessful52 was petitioner. The vocal lessons were given at 271 Central Park West which is the apartment petitioner lives in. The apartment has about six rooms with three bathrooms. Petitioner often gave lessons for nothing to pupils who were talented but poor. Those who could afford to pay were charged $10 and $15 a lesson. Any poor girl who had talent could get free lessons and music from petitioner. Petitioner looked upon her work of helping poor girls sing as charity. Petitioner entertained managers and other people with professional contracts at her studio apartment. She paid for the catering, food, drinks and flowers and sometimes she invited as many as 75 people to her apartment. In 1944 and 1945, petitioner had total meat bills of $827.65 and $832.93, respectively, and total grocery bills of $694.13 and $713.66, respectively. Where it would be cheaper or more convenient, she sometimes entertained people at hotels and restaurants. Petitioner also gave gratuities to colleagues who had done favors for her. For use on the stage, petitioner bought gowns, shoes, gloves, hats, headpieces, jewelry and other accessories. Such things often required cleaning. At least some of the clothes and53 accessories the cost of which petitioner deducted were adaptable for general usage. Some of the expenses incurred by petitioner were personal expenses. Some of the furniture which petitioner has in the apartment in which she gave singing instruction was acquired seven to ten years previously. Some of the other furniture dates back to 1916, 1917 and 1918. The piano she uses was acquired in 1912 or 1913. The total cost figure used by petitioner in claiming depreciation in the amount of $1,250 included the cost of alterations made in the dining room set seven or eight years previously, the cost of transporting to the United States her piano which she bought in Europe, the cost of studio drapes and the cost of a record cabinet. In her 1943 and 1945 returns, petitioner claimed deductions of $275 and $334, respectively, as charitable contributions. These figures were reduced by respondent by $100 and $150, respectively. In 1945, petitioner gave five to ten dollars to each of the following: the Red Cross, the Saint Paul's Protestant Church, the Lutheran Church, and the A.S.P.C.A. She also gave $15 to a Mrs. Closs for an organization, the name of which she did not recall, and unspecified54 amounts to the poor box in Saint Patrick's Church, the Brooklyn Lutheran Church, the Sisters, and a hospital. Petitioner contributed $175 and $184 during the years 1943 and 1945, respectively, for charitable purposes. Petitioner's medical expense deductions in her 1943 and 1944 returns were disallowed as not substantiated in excess of five per cent of the net income or adjusted gross income, respectively, as corrected by respondent. The deduction in petitioner's 1945 return was reduced solely to reflect respondent's correction of adjusted gross income. Opinion Although this proceeding deals almost entirely with deductions of amounts claimed to have been expended for business purposes, it varies fundamentally from . There respondent allowed nothing for claimed business expenses on the sole ground that the precise amount had not been adequately proved. Here, as our findings show, respondent allowed some 67 per cent of the total deductions. See , appeal dismissed, (C.A. 9) . The present difficulty is of a quite different character. Except for such55 items as secretarial salaries, 2 most of the expenditures in controversy 3 could as well be personal as business in their nature. See . There has been no proof which we consider adequate that the proportions of such expenditures as those for food, clothing, and maid service, attributable to business purposes, were those stated by petitioner. There is no showing that in the entire period she paid anything for food or clothing except the amounts which she now claims were business expenses. Her allocation of the food item, for example, is one-fifth for personal expense representing the amount consumed by herself and her maid. That would mean that although petitioner's gross income was almost $20,000 a year, the amount per person per week expended for food in her household was $2.95. Some of the clothing was obviously of a character that could be given other than merely professional use. 56 Again, while we have no doubt that some part of the expenditures had a business purpose, it strains the credulity to assume that for the seven years presently involved petitioner would year after year spend more than the amount of her professional income for business purposes, sometimes over four times as much. In fact, for each of the years in dispute, respondent allowed an amount of business expenses over three times the income produced by the same expenditures. There is nothing in this record to convince us that any larger amounts than those already allowed by respondent were in fact expended for business purposes by petitioner. Nor are we satisfied that the expenditure for "opera tickets" was a business expense. There is no showing that the tickets were not purchased for those of petitioner's pupils who could not afford to pay for lessons. If so, worthy as the object may have been, donating the opera tickets like the lessons themselves was a charitable act on petitioner's part of a personal and not a business nature. Petitioner also claimed depreciation on her furniture which, according to her contention, was used for business purposes. Omitting the necessity of allocating57 such a deduction between business and personal use since petitioner's apartment was also her personal residence, there has been a complete failure to establish the proper basis for the property. If, on the one hand, it was used for business purposes from its original acquisition dating as far back as 1912 and 1916 to 1918, the amount allowed, or at least allowable, for depreciation in prior years may well have exhausted any basis that the property originally had. . If, on the other hand, its use for business purposes was more recent, then the basis is not its original cost, which is all that appears from petitioner's testimony, but its value at the time it was converted from personal to business use, a figure as to which the record is entirely silent. . We accordingly conclude that petitioner has not sustained her burden of proving that the total amount allowed as business expense by respondent does not adequately cover petitioner's expenditures for business purposes as distinguished from those for her personal use. The deduction for charity is a pure question*58 of fact which has been disposed of in our findings. Giving full effect to petitioner's testimony, no more need have been expended in 1945 for allowable charitable purposes than the amount permitted as a deduction by respondent and there is no evidence whatever as to 1943. No effort was made to introduce evidence on the medical deductions for 1943 and 1944. For 1945, it follows automatically from the properly determined adjusted gross income. The deficiency must likewise be sustained in these respects. Decision will be entered for the respondent. Footnotes1. No deficiency was determined for 1942 due to the forgiveness feature of the Tax Payment Act of 1943.↩2. The disallowance was set up as to specific items but on the whole amount claimed. ↩3. According to statements of petitioner's counsel, disputed items are: ↩AmountsClaimed inReturns194319441945Opera tickets$ 127.90$ 216.70Studio cleaning (maid)572.00476.00Secretaries2,100.00House entertainment2,054.551,245.92$ 1,928.20Wardrobe & wardrobe maintenance2,085.142,957.822,964.64Depreciation1,250.001,250.001,250.00$ 8,189.59$ 6,146.44$ 6,142.84Total amount of business expenses allowed byrespondent$10,712.67$13,093.81$10,498.13	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624294/	W. H. Truschel and Louise Truschel, Husband and Wife, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentTruschel v. CommissionerDocket Nos. 54568, 54569, 54570, 54572, 54687, 54688, 54722, 54723, 55426, 55427United States Tax Court29 T.C. 433; 1957 U.S. Tax Ct. LEXIS 22; December 12, 1957, Filed 22 Decisions will be entered for the petitioners in Docket Nos. 54568, 54570, 54687, 54688, 54722, 55426, and 55427.Decisions will be entered under Rule 50 in Docket Nos. 54569, 54572, and 54723. Petitioners owned less than 50 per cent of the stock of Pocahontas Tanning Company. In 1947, they were approached by representatives of Howes Leather Company, Inc., with an offer to buy their Pocahontas stock, along with that of other stockholders, so that Pocahontas could be merged into Howes. Petitioners agreed to and did sell their stock to Howes, and Pocahontas was merged into Howes on September 19, 1947. Petitioners received short-term notes and 20-year first mortgage bonds in payment for their stock. Respondent determined that petitioners had exchanged their Pocahontas stock pursuant to a plan of reorganization, and that a part of the value of the short-term notes which they received represented their ratable share of Pocahontas's undistributed earnings and profits accumulated since February 28, 1913, and was therefore taxable as a dividend pursuant to section 112 (c) (2), I. R. C. 1939. Held, even though Pocahontas were merged into Howes, the merger was not a "statutory23 merger or consolidation" within the meaning of the Code, since petitioners were only creditors of Howes and retained no proprietary interest therein after the merger; they sold their Pocahontas shares and the entire gain realized on such sale is taxable as a long-term capital gain. C. Lee Spillers, Esq.,24 and John Wiseman, C. P. A., for the petitioners.John C. Calhoun, Esq., for the respondent. Rice, Judge. RICE434 This proceeding involves the following deficiencies in income tax for the year 1947:Docket No.PetitionerDeficiency54568W. H. Truschel and Louise Truschel$ 1,559.0054569Security Trust Company, trustee, Emma F. Hoffman Trust199,259.1754570W. H. Truschel and Rosa M. Truschel5,510.5654572Security Trust Company, trustee, Thomas McKayHearne Trust 3,677.6254687Mary Virginia Paull18,574.9654688Mary Milton Hearne5,485.0154722Louise H. Rownd9,770.0554723Security Trust Company, trustee, Thomas McKayHearne Trust (for Lucy M. Hearne) 3,677.6255426Rita S. Cochran6,295.4355427Daniel W. Cochran44,905.95The issues are: (1) Whether the petitioners received a distribution which was equivalent to a dividend upon the exchange of their stock in an "old" corporation for bonds and short-term notes of a "new" corporation into which the "old" one was merged; (2) if so, the amount of the dividend per share which they received; and (3) whether the statute of limitation bars assessment and collection of the deficiencies25 in issue.Some of the facts were stipulated.FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein by this reference.All of the petitioners were residents of Wheeling, West Virginia, during the year 1947, and filed timely returns for such year on a cash basis with the former collector of internal revenue at Parkersburg.Prior to September 19, 1947, the Pocahontas Tanning Company, hereinafter referred to as Pocahontas, was a West Virginia corporation engaged in the business of manufacturing and selling sole leather for use in the manufacture of shoes. The company was organized in 1903 by members of the Hoffman family, and from that time up to the period here in question had always been managed by members of that family. For many years prior to 1947, Pocahontas purchased the hides which it tanned into sole leather from, and also sold such leather through, Howes Brothers Company, a corporation, whose principal office was in Boston, Massachusetts. Over the years, a friendly relationship had existed between the two companies. Howes Brothers owned 24 per cent of the Pocahontas stock.From the early 1930's until his death on July 10, 1947, John J. Hoffman, 26 3d, was president of Pocahontas. For some time prior to his death he had been unable to perform his duties as president, and his nephew, Daniel W. Cochran, one of the petitioners herein, performed many of those duties.435 Some of the principal officers of Howes Brothers Company attended Hoffman's funeral at Wheeling on July 12, 1947. At that time they asked Cochran to come to a meeting in Boston which was to be held on July 18, 1947. Cochran attended the Boston meeting on that date, at which time he learned that Howes Brothers and certain other corporations affiliated with it were to be merged into a new corporation known as Howes Leather Company, Inc., hereinafter referred to as the Leather Company. The Leather Company was a Delaware corporation, the charter of which provided it was organized exclusively for charitable or educational purposes and that it was incorporated solely for the benefit of New York University. The charter also provided that no part of its income or property could inure to the private benefit of any stockholder, director, or officer. It was not to engage in propaganda or otherwise attempt to influence legislation. It had broad powers to engage 27 in business and to acquire and hold property. It had three classes of directors. The class A and one-third of the class C directors were elected by the stockholders; the class B and one-third of the class C directors were elected by the bondholders; and the remaining one-third of the class C directors were elected by a majority of the stockholders together with a majority of the bondholders. A majority of the class A and class B directors was necessary to constitute a quorum of the directors. The shareholders elected the corporation's officers. The Leather Company's authorized capital stock consisted of 10 shares of $ 100 par value each. The merger of Howes Brothers and the other affiliated corporations into the Leather Company was consummated on August 12, 1947.At the Boston meeting on July 18, officials of Howes Brothers advised Cochran that the stockholders of Pocahontas could sell their stock to the Leather Company if they wished to do so. Cochran agreed to discuss the proposal with other stockholders when he returned to Wheeling. Late in July and again in August, representatives of Howes Brothers and the Leather Company came to Wheeling and discussed the proposed purchase28 of the Pocahontas stock with Cochran and other stockholders. They proposed that the same formula used in the purchase of the stock of Howes Brothers and the other corporations be used in fixing the purchase price per share of the Pocahontas stock, namely, that such price would be based on the appraised value of the real estate owned by Pocahontas and the fair market value of all of its other assets. During the time here material, Pocahontas had outstanding 10,700 shares of stock. The petitioners herein owned 2,986 of such shares.After the August meeting, the Pocahontas stockholders agreed to sell their stock to the Leather Company, and on September 19, 1947, Pocahontas was formally merged into the Leather Company. Based 436 upon the agreed-upon formula, the Pocahontas stockholders received $ 570.88 per share for their stock which was paid by the following obligations:3 1/2 per cent notes of Howes Leather Company, Inc., of the face value of $ 930,909.54 ($ 114.18 per share) dated September 19, 1947, due and paid on October 19, 1947;3 1/2 per cent notes of Howes Leather Company, Inc., of the face value of $ 698,141.39 ($ 85.63 per share) dated September 19, 1947, due and29 paid January 15, 1948;3 1/2 per cent 20-year first mortgage bonds of Howes Leather Company, Inc., of the face value of $ 2,268,979.90 ($ 278.30 per share) delivered to the stockholders of Pocahontas. These bonds were dated August 12, 1947, and are due by August 12, 1967; and3 1/2 per cent 20-year first mortgage bonds of Howes Leather Company, Inc., of the face value of $ 756,353.81 ($ 92.77 per share) delivered to the Old Colony Trust Company, Trustee, of Boston, Massachusetts, in accordance with the instrument of merger.None of the petitioners herein have been officers, directors, or employees of the Leather Company except that Daniel W. Cochran continued as an employee for a period of 19 months after the merger, and in 1956, for the first time, was elected a director of the Leather Company.On September 19, 1947, the undistributed, accumulated earnings of Pocahontas since February 28, 1913, totaled $ 1,312,941.75. Pocahontas owned a minority interest in another corporation which had subsidiaries. All such corporations had undistributed, accumulated earnings on the date of the merger.On September 19, 1947, after the merger of Pocahontas into the Leather Company, the Leather30 Company had outstanding approximately $ 22,663,000 of first mortgage bonds, of which $ 3,025,333.71 in face amount had been issued to and for the account of the Pocahontas stockholders. The Leather Company bonds were due and payable without exception on August 12, 1967, and bore fixed interest at the rate of 3 1/2 per cent per annum, payable semiannually. In the event of default in interest payments, the bonds became due and payable forthwith and resort could be had to the properties of the Leather Company securing the bonds. To the extent of the mortgaged property, the bondholders were prior to all other creditors and were on a parity with all other creditors with respect to any property not subject to the mortgage. The properties securing the bonds consisted of all lands, rights, and interests in lands which the Leather Company owned; all plants, buildings, factories, warehouses, and all machines and machinery which it owned; and all trademarks and trade names.437 On the returns which they filed for 1947, the petitioners reported the exchange of their Pocahontas stock for the notes and bonds of the Leather Company as a sale, and the gain realized as a long-term capital31 gain. They reported the cash actually received during the year on the installment basis, as provided in section 44 (b). 2 The respondent determined that the petitioners had exchanged their Pocahontas stock in a partially nontaxable reorganization, and that $ 161.05 per share of the short-term notes which they received represented a taxable dividend under section 112 (c) (2).32 The petitioners filed timely returns for the year 1947. The deficiency notices were not mailed until the months of June or September, 1954. The petitioners executed waivers extending the time for assessment and collection of deficiencies only if they had omitted from gross income an amount which was properly includible therein in excess of 25 per cent of the amount of gross income which was stated on their returns. An understatement of gross income in an amount in excess of 25 per cent of the amounts reported on the returns occurred only if the petitioners received dividends as determined by the respondent in the deficiency notices.OPINION.The parties here agree that Pocahontas was merged into the Leather Company in September 1947, but they disagree on whether that merger was a "statutory merger or consolidation" within the meaning of section 112 (g) (1) (A). 3 The respondent contends that it was. He argues that petitioners exchanged their Pocahontas stock for bonds and notes of the Leather Company pursuant to the agreed-upon plan for such a reorganization within the meaning of section 112 (b) (3), 4 and that the notes which petitioners received, 438 to the extent of33 $ 161.05 per share of their Pocahontas stock, represented a distribution of earnings and profits accumulated after February 28, 1913, and was therefore taxable as a dividend pursuant to section 112 (c) (1) and (2). 534 While the petitioners concede that there was a merger, they deny that it was a "statutory merger or consolidation" within the meaning of the statute. They contend, under the doctrine of LeTulle v. Scofield, 308 U.S. 415">308 U.S. 415 (1940), and Roebling v. Commissioner, 143 F. 2d 810 (C. A. 3, 1944), affirming a Memorandum Opinion of this Court dated June 30, 1943, certiorari denied 323 U.S. 773">323 U.S. 773 (1944), that in addition to the formal framework of a merger there must also be a continuity of proprietary interests to satisfy the requirements of the statute. They argue that when they exchanged their Pocahontas stock for bonds and notes, their proprietary interests ceased and they were only creditors of the Leather Company, and, hence, that there was no statutory reorganization but a sale on which only a long-term capital gain was realized.We agree with the petitioners that the exchange of their stock for bonds and notes was a sale and not a statutory reorganization. In LeTulle v. Scofield, supra, one corporation exchanged all of its properties for cash and the bonds35 of another corporation and then distributed such cash and bonds to its stockholders. Neither the selling corporation nor its stockholders reported gain on the transaction on the theory that there had been a tax-free statutory reorganization. The Supreme Court held that there was no statutory reorganization because the stockholders of the selling corporation did not continue their proprietary interests in the purchasing corporation. In reaching the same conclusion on similar facts, the Court of Appeals said, in Roebling v. Commissioner, supra at p. 812:though there was * * a "true statutory merger" under [State law] * * , (1) such "true statutory merger" is insufficient without more to qualify as a "reorganization" 439 under the Revenue Act, and (2) that a "continuity of interest" * * * must still be present to establish a true reorganization.The respondent attempts to show the necessary continuity of interest here by arguing that the bonds which petitioners received were the equivalent of stock, and, hence, he contends that the real effect of the transaction was an exchange of stock for stock despite the name which was given to the36 security instruments which the petitioners received. We do not agree with the respondent that the bonds here in question were the equivalent of stock. We think it clear that the bonds which petitioners received were, in fact, evidences of indebtedness and did not represent shares of equity capital. The bonds had a fixed maturity date; they bore a fixed rate of interest; and they gave the holders a preferred position over stockholders and other creditors. Cf. John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521 (1946). The only provision in the bonds which might indicate a proprietary interest in the corporation was that the bondholders were entitled to elect one-half of the corporation's board of directors. But on this record, that one provision, standing alone, does not change the character of these bonds from evidences of a debtor-creditor relationship to evidences of an equity capital investment. Helvering v. Richmond, F. & P. R. Co., 90 F. 2d 971 (C. A. 4, 1937), affirming 33 B. T. A. 895 (1936). See Ohio Furnace Co., 25 T. C. 179 (1955). The respondent37 also, in arguing that the bonds represented an equity capital investment, points to the so-called "thin capitalization" of the Leather Company in that it had outstanding some 22 million dollars of bonds and only $ 1,000 of capital stock. In the circumstances of this particular case, we attach no significance to that fact. In the ordinary thin capitalization case, the alleged bondholders or noteholders and stockholders are the same persons. Colony, Inc., 26 T. C. 30 (1956), affd. 244 F. 2d 75 (C. A. 6, 1957), certiorari granted 355 U.S. 811">355 U.S. 811 (1957); Erard A. Matthiessen, 16 T. C. 781 (1951), affd. 194 F. 2d 659 (C. A. 2, 1952); Isidor Dobkin, 15 T. C. 31 (1950), affd. 192 F. 2d 392 (C. A. 2, 1951). That is not true here. We think it is not unusual to find only a minimum amount of capital stock outstanding when the new corporation into which others have been merged is a nonprofit organization. Ohio Furnace Co., supra.The petitioners became creditors38 of the corporation and not stockholders by exchanging their Pocahontas stock for the Leather Company's bonds and notes. Creditors are not owners, and when petitioners changed their status from stockholders to creditors, their continuity of ownership interest was broken and they ceased to have any proprietary interest in the new company. There was therefore no 440 statutory reorganization but only a sale on which petitioners realized a long-term capital gain. LeTulle v. Scofield, supra;Roebling v. Commissioner, supra.The respondent relies heavily on Emanuel N. ( Manny) Kolkey, 27 T. C. 37 (1956), on appeal (C. A. 7 and C. A. 2, June 12, 1957), in support of his position. That case is so entirely different from the one before us that no purpose would be served by comparing its facts with those here. Suffice it to say that we concluded there that the exchange of stock for notes did not create a bona fide debtor-creditor relationship resulting from a true purchase and sale. We held that the notes, in truth, represented an equity investment by the old stockholders in the39 continuing business. Our findings there showed beyond any doubt that the purported sale was only a sham under which the old stockholders "could masquerade as 'creditors', and withdraw earned surplus and profits in the guise of capital gains." That is not true here.We note that on the date of the merger, Pocahontas had a substantial amount of undistributed earnings which had accumulated since February 28, 1913. That fact, however, does not convert what was truly a sale into a reorganization. Ralph M. Heintz, 25 T. C. 132 (1955).Since there was no statutory reorganization, the petitioners could not have received a dividend when they sold their Pocahontas stock, and it is unnecessary to decide whether the respondent's determination of the amount of the alleged dividend was correct.In determining the deficiencies in Docket No. 54570, the respondent disallowed $ 127 claimed as a medical expense for 1947. The waiver signed by petitioners in that docket gave the respondent the right to assess and collect deficiencies only if they had omitted from gross income an amount properly includible therein which was in excess of 25 per cent of the amount of gross40 income stated in their returns. Since an understatement in excess of 25 per cent could result only if the petitioners had received dividends when they sold their stock, it follows that since they did not receive any dividends, there were no understatements in excess of 25 per cent of reported income. Assessment and collection of any deficiency determined for the year 1947 in that docket is therefore barred by the statute of limitation.Decisions will be entered for the petitioners in Docket Nos. 54568, 54570, 54687, 54688, 54722, 55426, and 55427.Decisions will be entered under Rule 50 in Docket Nos. 54569, 54572, and 54723. Footnotes1. The following proceedings have been consolidated herewith: Security Trust Company, Trustee, Emma F. Hoffman Trust, Docket No. 54569; W. H. Truschel and Rosa M. Truschel, Husband and Wife, Docket No. 54570; Security Trust Company, Trustee, Thomas McKay Hearne Trust, Docket No. 54572; Mary Virginia Paull, Docket No. 54687; Mary Milton Hearne, Docket No. 54688; Louise H. Rownd, Docket No. 54722; Security Trust Company, Trustee, Thomas McKay Hearne Trust (for Lucy M. Hearne), Docket No. 54723; Rita S. Cochran, Docket No. 55426; Daniel W. Cochran, Docket No. 55427. Mary E. Ewing, Docket No. 55425, and Estate of John G. Hoffman, 3rd, Deceased, Earl E. Seabright, Executor, Docket No. 55539, originally consolidated herewith, have been disposed of, pursuant to respondent's concession, by order and decision of no deficiencies entered August 8, 1957.↩2. SEC. 44. INSTALLMENT BASIS.(b) Sales of Realty and Casual Sales of Personality [Personality]. -- In the case (1) of a casual sale or other casual disposition of personal property * * * for a price exceeding $ 1,000 * * * if * * * the initial payments do not exceed 30 per centum of the selling price * * * the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. [A taxpayer may return as income that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.] As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.↩3. SEC. 112. RECOGNITION OF GAIN OR LOSS.(g) Definition of Reorganization. -- * * * (1) The term "reorganization" means (A) a statutory merger or consolidation * * ↩4. SEC. 112. RECOGNITION OF GAIN OR LOSS.(b) Exchanges Solely in Kind. -- * * *(3) Stock for stock on reorganization. -- No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.↩5. SEC. 112. RECOGNITION OF GAIN OR LOSS.(c) Gain from Exchanges Not Solely in Kind. -- (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5), or within the provisions of subsection (1), of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph or by subsection (l) to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624296/	J. Gibson McIlvain v. Commissioner.McIlvain v. CommissionerDocket No. 110569.United States Tax Court1943 Tax Ct. Memo LEXIS 470; 1 T.C.M. (CCH) 558; T.C.M. (RIA) 43059; February 4, 1943470 Frank A. Moorshead, Esq., 1600 Intergrity Bldg., Philadelphia, Pa., for petitioner. Harry L. Brown, Esq., for respondent. HILL Memorandum Findings of Fact and Opinion HILL, J.: This proceeding is for the redetermination of deficiencies in gift tax for the years 1938 and 1939 in the amounts of $1,040.62 and $1,311.54, respectively. The sole issue is whether or not certain gifts in trust made by petitioner during the taxable years were gifts of future interests in property. The facts were stipulated by the parties. Findings of Fact The petitioner is a citizen of the United States, residing at Downingtown, Chester County, Pennsylvania, and the gift tax returns for the years 1938 and 1939 were filed by petitioner with the collector of internal revenue at Philadelphia, Pennsylvania. The deficiency for 1938 arises solely by failure of the Commissioner to allow an exclusion of $5,000 for each of the three sons of donor, Francis H. McIlvain, J. Gibson McIlvain, Jr., and Robert M. McIlvain for the year 1938. The deficiency for 1939 arises solely by failure of the Commissioner to allow an exclusion of $4,000 for each of the three sons of donor for the year 1939. On December 30, 1933, 471 petitioner executed a deed of trust, conveying certain corporate stocks and policies of life insurance to his wife, Isabel Huston McIlvain, and son, Francis H. McIlvain, in trust for the purposes therein stated. The provisions of the trust deed pertinent here are as follows: First - To pay all or such part of said net income to my wife, Isabel Huston McIlvain, for life or for such lesser period as she may desire. That upon the death of my said wife, or if she should decide not to receive said income in whole or part, then to pay the remainder of said income or all of said income, as the case may be, to my three sons, Francis M. McIlvain, H. McIlvain, J. Gibson McIlvain, Jr., and Robert in equal shares and after the death of their mother, Isabel Huston McIlvain, or if their mother has decided not to thereafter receive said income, then as and when each of my said sons respectively attains the age of thirty (30) years he shall have the right to withdraw from said trust that portion of the principal from which he was receiving the income. Second - Subject, as above provided, that after reaching the age of thirty (30) years and desiring to leave said principal in trust, each472 of my said sons shall have the right by his last Will and Testament or other instrument in writing, to dispose of his proportionate share of the principal thereof. Third - That should any of my said sons die before attaining the age of thirty (30) years leaving issue him surviving, the income from his proportionate share of the principal shall, subject to the provisions of the first paragraph hereof, be paid to such issue, per stirpes and not per capita, until they respectively attain the age of twenty-one (21) years when the principal shall be distributed to and among such issue. Fourth - Subject to the provisions of the first paragraph hereof, that should any of my said sons die without leaving issue him surviving or should his issue die before attaining the age of twenty-one (21) years, then the share of income that said deceased son was receiving shall be divided equally between my surviving sons, if living, if either of them be dead leaving issue him surviving then said income shall be divided between the surviving son and the issue of the deceased son. If none of my sons are surviving then said income shall be divided, per stirpes and not per capita,473 among the issue of my deceased sons. Fifth - That should all of my said sons die without issue him surviving before attaining the age of thirty (30) years, then said income shall be paid to my wife, Isabel Huston McIlvain, for life. Sixth - That upon the death of my wife and all of my said sons without issue, during my life, then said income shall be paid to me, J. Gibson McIlvain, the settlor, for life. Seventh - That upon the death of the last survivor of my wife and myself, leaving no lineal descendants, said principal then remaining in trust shall be distributed in accordance with the terms of the last Will and Testament of the survivor. Eighth - That in the event that my said wife, Isabel Huston McIlvain, elects to take all or part of the income from said principal so held in trust and said income is insufficient for her maintenance and support, then I direct that the Trustees snall have the power, in their sole judgment and discretion, to spend such amount as may be necessary from the principal thereof for the support and maintenance of my said wife. Ninth - The income payable under all of the foregoing clauses shall be paid every three (3) months474 if convenient to my Trustees. * * * Eleventh - Trustees shall in their sole discretion apply the income to which any beneficiary shall be entitled hereunder, for the maintenance and support of such beneficiary, should he or she by reason of age, illness, or any other cause, in the opinion of trustees, be incapable of disbursing it. * * * In 1938 the petitioner added to the corpus of the trust the amount of $53,759.40. In 1939 petitioner added to the corpus of the trust the amount of $29,248.11. For the year 1936 the total income from the trust amounted to $3,253. The petitioner's wife elected to take no income, and all but $253 was distributed to petitioner's three sons, each taking $1,000. For the year 1937 the total income from the trust amounted to $1,656.45. Again petitioner's wife elected to take no income and $750 was distributed to petitioner's three sons, each taking $250, leaving $906.45 for future distribution. For the year 1938 the total income from the trust amounted to $6.27. Again petitioner's wife elected to take no income, and the balance of income for the years 1936 and 1937 of $1,159.45 was distributed to petitioner's three sons, two receiving475 $386.48 each and the third $386.49. For the year 1939 the total income from the trust amounted to $6,059.50. Petitioner's wife elected to take $500, and a balance of $5,388 was distributed to petitioner's three sons, each receiving $1,796. Opinion In his return for 1938, petitioner claimed total exclusions of $20,000 from the aggregate gifts made in that year by way of additions to the 1935 trust, that is, an exclusion of $5,000 for each of the four beneficiaries consisting of his wife and three sons. Respondent allowed only one $5,000 exclusion for the wife on the ground that the gifts to the sons were gifts of future interests in property, and hence no exclusion could be allowed in respect of the gifts to the sons under section 504 (b), Revenue Act of 1932, applicable to the year 1938. In his amended return for 1939, petitioner claimed no exclusion from total gifts; respondent allowed one exclusion of $4,000, and petitioner now contends that he is entitled to four exclusions amounting to $16,000. Section 1003 (b) (2), Internal Revenue Code, provides that in the case of gifts (other than gifts in trust or of future interests in property) made during the calendar year 1939, the476 first $4,000 shall not, for purposes of the gift tax, be included in the total amount of gifts made during such year. It would thus appear, on the face of the record, that petitioner would be entitled to no exclusion for 1939, but at the hearing the parties stipulated that for the year 1939 petitioner made a gift to his wife, other than the gift in trust, which was sufficient to support respondent's allowance of the exclusion to her. However, respondent contends that no exclusion is allowable in respect of the three sons for the reason that the gifts of income to them were gifts in trust, and also of future interests in property. There is no contention that the gift of the corpus was not a gift of a future interest, since the sons could not receive their respective portions until the death of their mother and until they had attained the age of 30 years. It follows that the question presented here is whether or not the gifts of income made to the sons were gifts of future interests in property, or in trust. Under the trust instrument, petitioner gave all or part of the net income to his wife for life or for such lesser period as she might desire. Upon the death of his wife, or if 477 she should decide not to receive the income in whole or in part, then the remainder of the income or the whole thereof, as the case might be, was to be paid to the three sons. As to the sons, we think the income constituted gifts of future interests in property for the reason that the possession, use and enjoyment of any part of the income was postponed until the happening of a future and uncertain event, namely, the election of the mother not to receive the income in whole or in part. On principle, the present proceeding is not distinguishable from Ryerson v. United States, 312 U.S. 405">312 U.S. 405 (25 AFTR 1191). There, separate equal shares of the corpus of the 1933 trust were given to the two trustees in the event of their joint request that that trust be terminated. These were held to be gifts of future interests in property because "in any case use and enjoyment of any part of the trust fund by either [trustee] was postponed until such time as both joined in the exercise of the power." Obviously, it was within the discretion of the petitioner's wife, who was one of the trustees and primary beneficiary of income, to cause the income, or any478 part of it, to be paid to the three sons, merely by electing not to receive it herself. But we have repeatedly held that where payment of income or principal to the beneficiary is discretionary with the trustee, what would otherwise be a gift of a future interest in the property is not thereby converted into a present interest within the meaning of the gift tax statute. Annie B. Smith, 45 B.T.A. 948">45 B.T.A. 948; Winston Paul, 46 B.T.A. 920">46 B.T.A. 920; Lillian Seeligson Winterbotham, 46 B.T.A. 972">46 B.T.A. 972; Alma S. Hay, 47 B.T.A. 247">47 B.T.A. 247. See also Welch v. Paine, ( CCA-1) 120 Fed. (2d) 141, (1941 P.H. p. 63189). Petitioner urges most strongly that, because his wife, who was the primary beneficiary of the trust, was the mother of the three sons, the gift of income to the wife should be considered as a gift of income at least in part to the sons; that whatever portion of the income she elected to take, she could be expected to divide with her sons, and any portion she elected not to receive would be distributable to them. We can not agree with petitioner's argument. 479 If the mother elected to take the income and then gave a portion of it to her sons, she herself would have made a gift thereof to the sons, but until the mother elected not to receive the income, the sons had no present interests therein under the father's deed of trust. It may also be noted that in Welch v. Paine, supra, the settlor was the father of the minor children, who were the beneficiaries, and named himself trustee, with discretion to distribute the income to or for the benefit of the children. Yet the court found no diffculty in concluding that the gifts were of future interests. In Lillian Seeligson Winterbotham, supra, where we reached a similar conclusion, the settlors were husband and wife who conveyed to themselves as trustees income interests in certain property for the benefit of their three children. On authority of the cited decisions, we hold that the income interests given by petitioner to his three sons were gifts of future interests in property, and in respect thereof he is not entitled to any exclusion for either taxable year. The deficiencies determined by respondent are approved. Decision*480 will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624297/	VIRGIL M. MARTIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMartin v. CommissionerDocket No. 1735-82.United States Tax CourtT.C. Memo 1985-43; 1985 Tax Ct. Memo LEXIS 590; 49 T.C.M. (CCH) 607; T.C.M. (RIA) 85043; January 28, 1985590 Held, unreported income from sole proprietorship determined and additions to tax for fraud sustained. Virgil M. Martin, pro se. Sergio Garcia-Pages, for respondent. WHITAKER1 MEMORANDUM OF FINDINGS OF FACT AND OPINION WHITAKER, Judge: Respondent determined deficiencies and additions to tax against petitioner for the years and in the amounts as follows: 591 2 Additions to TaxYearTaxunder Sec. 6653(b) 11975$32,262.70$16,131.35197629,694.6314,847.32197731,552.8315,776.42197833,168.9516,584.48The issues before the Court for each of the years are the determination of the net income realized by petitioner from his sole proprietorship and whether or not he is liable for the addition to tax for fraud under section 6653(b). For convenience our findings of fact and opinion are combined. Certain of the facts have been stipulated and to that extent are so found. During the years in issue and on the date of filing of the petition in this case, petitioner was a resident of Cocoa Beach, Florida. During the years in issue, petitioner as a sole proprietor, operated a hardware business under the name of "Brevard Hardware and Paint," located at 1345 West King Street, Cocoa Beach, Florida. 2 The premises were rented from a third party with petitioner being obligated to pay for all utilities592 except water. Prior to the year 1975, petitioner regularly filed Federal income tax returns, reporting thereon the result of operation of this sole proprietorship as well as another similar 3 business during part of this time period. He also filed other state and Federal tax returns, including sales tax returns required under the laws of the State of Florida. Commencing with the calendar year 1975 and continuing at least through the calendar year 1979, petitioner ceased filing proper Federal income tax returns but instead filed (several years after their due dates) protest-type documents purporting to be returns containing no information from which his Federal income tax liability could be determined. Petitioner filed no return for 1980 or 1981. In three of the "returns" for the years at issue, 3 he transposed digits of his social security number in an apparent effort to hinder audit. Attached to all of his purported593 returns for the years at issue were typical protest-type statements asserting fifth amendment rights and that an individual is not required to disclose to the Federal Government facts with respect to this business and similar claims. However, during the same period, petitioner continued to file quarterly Federal withholding tax returns on Forms 941 and yearly returns on Forms 940 with respect to his employees, provided his employees with Forms W-2 and filed sales and use tax reports with the Department of Revenue for the State of Florida. In due course, petitioner was solicited for proper Federal income tax returns. When they were not forthcoming, his books and records were requested but throughout the audit petitioner 4 consistently refused to disclose any facts or to make his books and records available. He also did what he could to delay and interfere with efforts by respondent's agents to secure relevant information from third parties. It is also apparent that petitioner gradually shifted to doing business in cash to the594 extent possible. Respondent issued a report of examination dated January 29, 1981 on Form 950(DO) (Rev. 10-78)--the standard "30-day letter"--which as to gross receipts was based on the sales tax returns filed by petitioner with the State of Florida. In addition to deficiencies, the addition to tax for fraud was proposed. The statutory notice was issued on November 6, 1981. The determinations therein as to gross receipts are identical to those used in the 30-day letter. However, the 30-day letter computed the cost of goods sold by determining the average gross profit percentage from petitioner's tax returns for the years 1972, 1973 and 1974 and applying that percentage (28.85 percent) to the gross receipts so determined for the years in issue. No deductions for expenses such as rent, wages, utilities and the like were allowed in the 30-day letter although apparently respondent had some third party records which reflected certain expenses. The statutory notice, on the other hand, allowed no deductions for cost of goods sold or for other expenses on the grounds that petitioner had declined to provide any records. 5 Since filing his petition with this Court and during595 the pre-trial phase, the trial itself and subsequent to the trial, petitioner has continued his "protester" attitude in his dealings with this Court and with respondent's counsel. Almost all of petitioner's arguments have been frivolous and have served no purpose except to waste our time and resources and those of respondent and its counsel. Petitioner's numerous pointless motions have of course contributed to that result. His attitude has required the Court's attention on a number of occasions in the course of our continuing efforts to obtain facts having a bearing on petitioner's inventory and other costs properly attributable to his business during the years in issue. The only appropriate issue which petitioner raised both in preliminary proceedings and during the trial is that he incurred costs for inventory and for the operation of his business and was entitled to reduce his gross receipts as determined by respondent by amounts for such items. Petitioner has not yet produced any books and records, or satisfactorily explained their absence, although he obviously maintained books and records at one time. Without such books and records, petitioner could not have filed tax596 returns for prior years or continued to file sales tax returns and Federal withholding tax returns. We are convinced, however, that starting with his protest period, petitioner consciously maintained few records and destroyed or concealed those which he had. To the extent feasible, he increasingly did business in 6 cash and paid expenses in cash in order to try to thwart respondent's audit efforts. Thus, although petitioner has complained that the statutory notice was arbitrary in failing to estimate petitioner's cost of goods sold, as was done in the 30-day letter, petitioner declined to furnish respondent prior to the issuance of the statutory notice any information to explain why the profit percentage based on prior years when petitioner was operating two stores should be applicable to the years in issue when petitioner was operating only a single store. 4597 During the course of three separate hearings and a transcript of 165 pages, the gross receipts determined by respondent were deemed admitted and petitioner has not seriously questioned the correctness of those figures. During the somewhat brief periods when we were able to persuade petitioner, testifying under oath, to focus on relevant issues, we found petitioner to be a reliable witness as to his business, and we 7 accept petitioner's testimony that during the years 1975 through 1978 his profit margin (as defined by petitioner) was in the range of 30 to 33 1/3 percent. Applying the rule of Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930), "bearing heavily * * upon the taxpayer whose inexactitude is of his own making," and basing our finding upon the entire record, we find that the average inventory cost for each of these years for petitioner's hardware business is equal to 66 2/3 percent of the gross receipts (as determined by respondent) for each of the years, and that under these circumstances use of average cost is reasonable. We further accept petitioner's testimony that he incurred business expenses for office supplies for each of these years598 in the amount of 1/2 of 1 percent of such gross receipts and that in the years 1977 and 1978 petitioner contributed to a fund under the control of an employee, one Frank Aiken, as additional compensation not less than the sum of $450 per year. Taking all of these adjustments into account, we find that petitioner's net profit from his hardware store proprietorship during these years is as reflected in the following table: 8 Cost of Goods SoldGross(66 2/3% of GrossBusinessYearReceiptsReceiptsExpenses 5Net Profit1975$68,232.50$45,488.56$22,370.15$373.79197664,306.1442,870.9719,963.981,471.19197769,261.4646,174.546 17,020.486,066.44197871,583.2047,722.376 16,395,397,465.44The final issue which we must decide is whether or not respondent's determination of additions to tax under section 6653(b) is to be sustained. 7 Respondent has the burden of proving by clear and convincing evidence that petitioner is liable for the addition to tax under599 section 6653(b). Section 7454(a); Rule 142(b). The fraud addition to tax is designed as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from taxpayer's fraud. Helvering v. Mitchell,303 U.S. 391">303 U.S. 391, 401 (1938). The existence of fraud is a fact which must be determined on the basis of all facts and circumstances. Estate of Pittard v. Commissioner,69 T.C. 391">69 T.C. 391 (1977). Fraud means "actual, intentional wrongdoing, and the intent required is the 9 specific purpose to evade a tax believed to be owing." Mitchell v. Commissioner,118 F.2d 308">118 F.2d 308, 310 (5th Cir. 1941). Fraud is not to be imputed or presumed, Otsuki v. Commissioner,53 T.C. 96">53 T.C. 96, 112 (1969), and the mere failure to report income is not sufficient to establish fraud. Merritt v. Commissioner,301 F.2d 484">301 F.2d 484, 487, (5th Cir. 1962), affg. a Memorandum Opinion of this Court; Otsuki v. Commissioner,supra.The taxpayer's entire course of conduct may be examined. Stone v. Commissioner,56 T.C. 213">56 T.C. 213, 224 (1971). Fraud is600 defined as: A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. [Black's Law Dictionary, p. 594 (rev. 5th ed. 1979).] In this case, the principal indicia of fraud are the failur to file proper returns and to pay tax for the 4-year period, the failure even to file returns for subsequent years, the failure to retain or to produce records of his business which unquestionably the petitioner did maintain for at least a limited period of time, the gradual switching from use of checking accounts to the payment of expenses by cash, the use of an incorrect social security number in a number of instances and the continuous efforts made to confuse and conceal the facts with respect to petitioner's601 sole proprietorship. Petitioner is a well educated man and his conduct throughout this matter reflects a well calculated preconceived plan to do his best to evade the payment of income tax which petitioner well knew was required to be paid. 10 Willfulness (for tax purposes) is a "voluntary, intentional violation of a known legal duty." United States v. Pomponio,429 U.S. 10">429 U.S. 10, 12 (1976) (per curiam) (quoting U.S. v. Bishop,412 U.S. 346">412 U.S. 346, 360 (1973)). "Willfulness" as used in the context of tax crimes includes those elements necessary to sustain civil fraud. Tomlinson v. Lefkowitz,334 F.2d 262">334 F.2d 262, 265 (5th Cir. 1964), cert. denied 379 U.S. 962">379 U.S. 962 (1965); Amos v. Commissioner,43 T.C. 50">43 T.C. 50, 55 (1964), affd. 360 F.2d 358">360 F.2d 358 (4th Cir. 1965). There can be no question in this case that petitioner voluntarily and intentionally violated his known legal duty to file correct Federal income tax returns, which duty his conduct in prior years well demonstrates that he understood. Petitioner intended to do what he did and he did his best to conceal that conduct. Respondent has sustained his burden of showing602 that the additions to tax for fraud are correct in this case. Compare Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1124 (1983), appeal dismissed (2d Cir. April 3, 1984). We come now to the final issue which the Court raises on its own motion, whether or not damages should be awarded under section 6673 for instituting this proceeding primarily for delay. Petitioner's conduct from the filing of the initial petition through the trial and the briefing period has demonstrated that his principal purpose has been to abuse the resources of this Court in every possible way in order to delay the inevitable time of reckoning with respondent. For that reason, we award damages under section 6673 in the amount of $500. We also warn 11 petitioner that we are authorized to impose damages in an amount not in excess of $5,000. 8 Petitioner should bear that fact in mind in connection with any further proceedings which he may institute in this Court. 603 Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.↩2. During prior years, petitioner apparently operated two hardware businesses, one of which was at the West King St. location. There is some indication that in 1975 or earlier this business may have been referred to as "Cape Canaveral Hardware #2."↩3. On the return for the fourth year at issue, petitioner refused to supply his social security number on the ground of "self incrimination."↩4. Among motions filed by petitioner were two based on the alleged arbitrariness of the statutory notice, the first one a "Motion for Nullification of Notice of Deficiency" and the other a "Motion to Shift Burden of Proof to the Commissioner," which we have treated as a motion to shift the burden of going forward with the evidence to respondent. Although there may be some apparent basis for application of the rule of Helvering v. Taylor,293 U.S. 507">293 U.S. 507↩ (1935), we concluded that both motions should be denied. With respondent's assistance and in spite of petitioner's obstinancy, we succeeded in getting into the record sufficient facts to enable us to make a reasonably accurate determination as to petitioner's net profit from his proprietorship during the years in issue. Thus the issue of the arbitrary nature of the statutory notice is irrelevant. However, we think it appropriate to note that in all cases, including protester audits, respondent should utilize all information in his possession in order to redetermine tax liability in the most accurate fashion which is feasible. It was patently impossible for petitioner to have incurred a zero cost of goods in the operation of a hardware store, as respondent well knew.5. Expenses as stipulated plus 1/2 of 1 percent of gross receipts. ↩6. Includes $450 payments made to Frank Aiken for tax years 1977 and 1978.↩7. By an amended answer filed on October 24, 1983, respondent in the alternative seeks additions to tax under the provisions of section 6651(a)(1) and 6653(a). By reason of our decision on the additions to tax under section 6653(b), we do not reach this alternative contention.↩8. Section 292 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 574, increased the amount of damages that may be awarded under section 6673 from $500 to $5,000 for proceedings commenced after December 31, 1982. Section 160 of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 497, further amended section 6673 to provide for damages up to $5,000 in proceedings pending in this Court after November 5, 1984. In light of the fact that this is petitioner's first appearance in this Court and by reason of the facts discussed in footnote 4 above, we choose to limit the award in this proceeding to $500.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624298/	Peoples Translation Service/Newsfront International, a California Non-Profit Corporation, Petitioner v. Commissioner of Internal Revenue, RespondentPeoples Translation Service/Newsfront Int'l v. CommissionerDocket No. 12597-77XUnited States Tax Court72 T.C. 42; 1979 U.S. Tax Ct. LEXIS 143; April 4, 1979, Filed 143 Decision will be entered for the petitioner. Petitioner was organized under the General Nonprofit Corporation Law of the State of California. Its articles of incorporation list as specific and primary purposes increasing international understanding, making available information about world opinion and events by translating information from foreign news media, and providing resources for students and the community. It publishes and sells below cost a biweekly bulletin of translations from the foreign press, maintains a library of translated and untranslated materials which is open to the public, and provides free translations to scholars. Held, respondent erred in denying petitioner's application for exemption under sec. 501(c)(3), I.R.C. 1954. Robert J. Donovan, for the petitioner.Elizabeth D. De Priest and Jeanne P. Daly, for the respondent. Featherston, Judge. FEATHERSTON43 OPINIONRespondent determined that petitioner does not qualify for exemption from Federal income tax under section 501(c)(3). 1144 Petitioner challenges respondent's determination and has invoked the jurisdiction of this Court for a declaratory judgment pursuant to section 7428.The issue presented for decision is whether petitioner is organized and operated exclusively for charitable, educational, religious, or scientific purposes within the meaning of section 501(c)(3).This case was submitted for decision on the stipulated administrative record under Rules 122 and 217, Tax Court Rules of Practice and Procedure.2 For purposes of this proceeding, the facts and representations contained in the administrative record are assumed to be true. Rule 217, Tax Court Rules of Practice and Procedure.Petitioner was incorporated on August 15, 1975, under the General Nonprofit Corporation Law of the State of California. Its principal place of business is Oakland, Calif. On October 1, 1976, the State 145 of California Franchise Tax Board granted petitioner exemption from State franchise and income tax as a charitable and educational organization; the exemption was effective August 15, 1975. Petitioner's articles of incorporation were amended on November 15, 1976.On March 3, 1977, the initial application for recognition of exemption under section 501(c)(3) was filed with the San Francisco District Office of the Internal Revenue Service. On October 28, 1977, respondent issued a final adverse ruling letter which denied petitioner an exemption under section 501(c)(3). The exemption was denied on the grounds that petitioner is not limited to exempt purposes by its articles of incorporation and that its operations are conducted in a manner similar to that of a commercial enterprise.According to the amended articles of incorporation, petitioner's "specific and primary purposes" are:44 (i) To increase understanding between the people of the United States and people of other nations.(ii) To increase the intellectual and other contacts and understanding among the peoples of the world.(iii) To make available information about opinions and events throughout the world by translating information 146 from foreign news agencies and other sources.(iv) To provide readily available resources for students and scholars, and the community in general.As "general purposes and powers," petitioner possesses --all rights and powers conferred on nonprofit corporations under the laws of California, including the power to contract, rent, buy, or sell personal or real property, provided, however, that this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the primary purposes of this corporation.The amended articles further provide that the corporation "does not contemplate pecuniary gain or profit to the members thereof and it is organized for nonprofit purposes" and that "no part of the net income or assets of this organization shall ever inure to the benefit of any director, officer, or member thereof or to the benefit of any private individual." Upon dissolution, assets remaining after payment of debts are to be distributed to a charitable and educational organization exempt under section 501(c)(3).The amended articles also contain the following prohibition:No substantial part of the activities of this corporation 147 shall consist of carrying on propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate or intervene in any political campaign (including the publishing or distribution of statements) on behalf of any candidate for public office.Petitioner's activities consist of publishing a biweekly bulletin of translations from the foreign press, translating individual articles, some of which have been compiled in a pamphlet, and maintaining a library of translated and untranslated materials.Petitioner obtains copies of foreign journals in exchange for its bulletin and from these sources selects items to be translated and printed in the bulletin. A stated criterion for selection is that the material be unavailable in English through commercial publications. Petitioner also considers interest in the material on the part of members and the community as well as availability of translators. The subject matter of the bulletin has been described by petitioner as the "labor movement in Western 45 Europe, national liberation movements, women, soldier, prisoner, and student movements."Issues of the bulletin included in the administrative record contain several 148 articles which consist of statements by individuals or groups. Other articles are interviews, generally in a question-and-answer format. The bulletin also contains conventional journalistic accounts, sometimes compiled from more than one source. Items in the bulletin represent publications from Britain, France, Italy, Mexico, Spain, and West Germany. Two articles are accounts written by the bulletin's own correspondents.Petitioner's officers and directors are each familiar with at least two languages and can perform the clerical work and typing required to publish the bulletin. Translations are undertaken by volunteers. Although at present the office staff serves without pay, petitioner hopes to pay salaries to the staff in the future. The bulletin contains no advertising. Petitioner neither pays nor receives royalties. Since all material is intended for the public domain, it does not obtain copyrights.In 1976, the bulletin had a circulation of 500 issues. It is sold on a subscription basis at the following rates:Individuals$ 6 for 12 issues or $ 12 for 24 issuesNonprofit media$ 30 per yearLibraries andinstitutions$ 35 per year Free copies are given those who state they cannot 149 afford to pay the subscription rates. Individual translations are provided free to serious students. The library is open to the public without charge.During the fiscal year ended August 31, 1976, petitioner's principal sources of financial support were:Subscriptions and sales of translateddocuments$ 4,127.37Grant from University of California,Berkeley Community Projects Office1,802.66Other donations776.486,706.51Petitioner's major expenditures for the fiscal year ended August 31, 1976, were: 46 Cost of production of published materials$ 5,569.52Rent1,110.20Utilities24.42Advertising23.20State Franchise Board application andfiling fees1 215.006,942.34Petitioner summarizes its purposes and policies as follows:PTS does not take any particular position. It strives to preach no particular view. The aim is simply to make 150 available material thought to be important which is not available elsewhere in English. Thus the American people can have a greater opportunity for direct perception of the thoughts and beliefs of people in other parts of the world. PTS believes that by so assisting the flow and interchange of ideas it can increase understanding and harmony among the people of the world. Some of its services primarily serve the academic community around the University of California but this is believed to serve the same goal because it assists students, including future American and foreign leaders, to have a better understanding of the diverse currents of thought which flow in the various countries of the world.An organization is exempt from income tax under section 501(a) and (c)(3) if it is organized and operated exclusively for exempt purposes; if no part of its net earnings inures to the benefit of any shareholder or individual; and if a substantial part of its activities is not devoted to political or lobbying activities. The first requirement, the only one at issue here, is fulfilled only if both the organizational and operational tests are met. Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs.151 The organizational test requires, in pertinent part, that the articles of organization 3 limit the organization to one or more exempt purposes and not expressly authorize it to undertake, except as an insubstantial part of its activities, activities which do not further one or more exempt purposes. Sec. 1.501(c)(3)-1(b)(1), Income Tax Regs. The operational test is satisfied if the organization 47 engages primarily in activities which further one or more of the exempt purposes specified in section 501(c)(3) and if it does not engage, except to an insubstantial degree, in activities which do not accomplish an exempt purpose. Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.The regulations enumerate the following exempt purposes: religious, charitable, scientific, testing for public safety, literary, educational, and prevention of cruelty to children or animals. Sec. 1.501(c)(3)-1(d)(1), Income Tax Regs. "Educational" is defined as relating to the instruction 152 either of the individual to improve his capabilities or of the public on subjects "useful to the individual and beneficial to the community." Sec. 1.501(c)(3)-1(d)(3), Income Tax Regs.In the final ruling letter and on brief, respondent advanced the following grounds for denying petitioner exempt status:You are not organized exclusively for exempt purposes because your Articles of Incorporation do not limit your purposes to one or more exempt purposes within the meaning of section 501(c)(3).Your operations are conducted in a manner that is essentially similar to a commercial enterprise, and, thus, you do not meet the requirements under section 501(c)(3) of the Internal Revenue Code of 1954.To prevail, petitioner must prove respondent's determination incorrect. Hancock Academy of Savannah, Inc. v. Commissioner, 69 T.C. 488">69 T.C. 488, 492 (1977); Rule 217(c)(2)(i), Tax Court Rules of Practice and Procedure. We find that petitioner has sustained its burden.1. The Organizational TestAccording to respondent, petitioner fails the organizational test because its articles of incorporation do not limit it to exempt purposes. On brief, he argues that petitioner's power to publish and distribute a magazine 153 may forward a nonexempt commercial purpose. On reply brief, he instead asserts that petitioner has not shown that its activities further an educational, or any other exempt, purpose.Except to an insubstantial and permissible degree, petitioner's amended articles limit its purposes to the furtherance of its primary purposes. Its "specific and primary purposes" are couched in broad terms. Those of "[making] available information" and "[providing] readily available resources" could be read not to preclude a commercial purpose. Yet the same articles 48 prohibit private gain, one factor indicative of a commercial purpose. E.g., Christian Manner International, Inc. v. Commissioner, 71 T.C. 661">71 T.C. 661 (1979). A fair reading of the articles indicates that the organization is limited to the exempt educational purpose. Compare Elisian Guild, Inc. v. United States, 412 F.2d 121">412 F.2d 121, 122-123 (1st Cir. 1969).It is well settled that:The issue of "organized" * * is primarily a question of fact not to be determined merely by an examination of the certificate of incorporation but by the actual objects motivating the organization and the subsequent conduct of the organization.Taxation With Representation v. United States, 585 F.2d 1219">585 F.2d 1219, 1222 (4th Cir. 1978); 154 Samuel Friedland Foundation v. United States, 144 F. Supp. 74">144 F. Supp. 74, 85 (D. N.J. 1956). Courts have therefore looked outside the articles and held that the mere existence of power to engage in activities other than those set out in section 501(c)(3) does not in itself prevent petitioner from meeting the organizational test. General Conference of the Free Church of America v. Commissioner, 71 T.C. 920 (1979); John Danz Charitable Trust v. Commissioner, 32 T.C. 469">32 T.C. 469, 477 (1959), affd. 284 F.2d 726">284 F.2d 726 (9th Cir. 1960). As we discuss below, there is no evidence of such a purpose in the administrative record.In support of his contention that broad language of the articles disqualifies petitioner, respondent cites Santa Cruz Building Ass'n v. United States, 411 F. Supp. 871">411 F.Supp. 871 (E.D. Mo. 1976). There the Court found the charter too broad because it explicitly provided for the nonexempt purpose of "[promoting] better relations amongst * * [the association's] members, to provide grounds, buildings and equipment for educational, recreational and physical activities for the members." Santa Cruz Building Ass'n v. United States, supra at 882. Petitioner's articles, in contrast, present no such clear contravention 155 of the organizational test.We hold that petitioner's purposes as stated in its amended articles qualify as educational within the meaning of section 501(c)(3).2. Manner of OperationThroughout the administrative process, respondent has denied exempt status, in part, on the ground that petitioner is operated 49 for a substantial commercial purpose. Although conceding that petitioner's operations have been unprofitable to date, respondent contends that they are conducted in an ordinary commercial manner. In support of this argument, he notes that the bulletin charges subscription rates, advertises, and hopes to pay its staff in the future. He also characterizes member loans to the organization as contributions to capital.In reply, petitioner observes that organizations charging for publications have repeatedly been granted exempt status and that its rates are set below cost. Moreover, it points out that it provides free translations on request, maintains a free public library, offers its bulletin free to those who cannot afford the below-cost subscription rate, operates with an unpaid volunteer staff, and depends on contributions and grants to defray operating costs. We agree with 156 petitioner that these factors and others, taken together, distinguish it from organizations denied exempt status as commercial enterprises.As respondent correctly states, petitioner's unprofitable operations in 1976 and 1977 do not constitute a history of nonprofitability sufficient to serve as evidence of lack of commercial purpose. Golden Rule Church Ass'n. v. Commissioner, 41 T.C. 719">41 T.C. 719 (1964). Respondent cannot, however, rely solely on this point to prove the contrary. Respondent has stressed that petitioner, like organizations denied tax-exempt status, sells the bulletin at subscription rates. Yet these nonexempt organizations did not, like petitioner, charge rates set below cost. 4 The American Institute for Economic Research, for example, received fees for periodicals and investment advice services which were well above costs of production. American Institute for Economic Research v. United States, 302 F.2d 934">302 F.2d 934, 938 (Ct. Cl. 1962), cert. denied 372 U.S. 976">372 U.S. 976 (1963). Other organizations sold books at a price set to return a profit. Fides Publishers Ass'n. v. United States, 263 F. Supp. 924">263 F.Supp. 924, 929 (N.D. Ind. 1967); Christian Manner International, Inc. v. Commissioner, 71 T.C. 661">71 T.C. 661 (1979). 157 Relying in part on the factor of fees set to cover costs and yield a 10.8-percent profit, this Court held nonexempt an organization which provided managerial 50 and consulting services to nonprofit organizations. B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352">70 T.C. 352, 359 (1978).Both this Court and the Commissioner have recognized, however, that providing services or publications at prices below cost is a factor to be taken into account. In B.S.W. Group, Inc. v. Commissioner, supra at 359, the Court pointed out that "it does not appear that petitioner ever plans to charge a fee less than 'cost.'" In Rev. Rul. 72-369, 2 C.B. 245">1972-2 C.B. 245, 246, the Commissioner stated that "Furnishing the services at cost lacks the donative element necessary to establish this activity as charitable" and distinguished the case of a similar organization on the ground that its fees were "substantially less than cost."In granting exemptions, respondent has attached significance to the factor of pricing below 158 cost. In Rev. Rul. 68-306, 1 C.B. 257">1968-1 C.B. 257, the Commissioner, ruling exempt an organization which published a newspaper with a religious orientation, mentioned that subscription and advertising revenue did not cover costs of operations. In Rev. Rul. 67-4, 1 C.B. 121">1967-1 C.B. 121, the Commissioner distinguished another organization which sold a journal containing abstracts of articles about physical and mental disorders from an ordinary commercial publisher because the price at which the journal was sold was sufficient to recover only part of the associated expenses. In finding these organizations not commercial, respondent thus made no distinction between them and organizations distributing free publications, such as the journal containing scientific and medical abstracts described in Rev. Rul. 66-147, 1 C.B. 137">1966-1 C.B. 137.Other factors support the conclusion that petitioner does not operate in an ordinary commercial manner. It spent only $ 23.20 on advertising in its fiscal year ended August 31, 1976, and its bulletin sells no advertising space. Compare Fides Publishers Ass'n. v. United States, supra at 930-931. The amount petitioner spends on advertisements is insignificant even in comparison 159 with its small budget. While the sale of advertising space will not automatically disqualify a journal from tax-exempt status (Rev. Rul. 68-306, 1 C.B. 257">1968-1 C.B. 257), the absence of advertisements in the bulletin underscores petitioner's lack of commercial intent. Further, petitioner does not pay or receive royalties or obtain copyrights; these are practices associated with commercial publishing. Fides Publishers Ass'n. v. United States, supra51 (royalties paid). We find that petitioner is not operated as a commercial venture.3. Respondent's New Grounds for Denial of the ExemptionFor the first time in his reply brief, respondent argues that petitioner has not shown that the bulletin is the product of trained educators or that it meets the requirement of the regulation that, on matters of opinion, it must present "a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion." Sec. 1.501(c)(3)-1(d)(3)(i)(b), Income Tax Regs. In this connection, respondent argues that the materials which petitioner translates have a leftist bias and do not present a balanced view of the issues with which they deal.This 160 argument comes too late. Petitioner has had no opportunity to answer it with factual data. Although, as pointed out above, petitioner states that "It strives to preach no particular view," there is nothing in the administrative record to suggest that this issue was raised while the Internal Revenue Service was considering the case. Consequently, petitioner had no occasion to furnish material on the training of its personnel. While the administrative file contains copies of five issues of the bulletin, there is nothing in the administrative record to indicate that these bulletin issues are typical or that the points of view expressed in the articles appearing in them were not counterbalanced in terms of the viewpoints they express by articles in other issues of the bulletin.In such circumstances it would be inappropriate for the Court to consider this new argument. See Schuster's Express, Inc. v. Commissioner, 66 T.C. 588">66 T.C. 588, 593 (1976), affd. 562 F.2d 39">562 F.2d 39 (2d Cir. 1977), and cases cited. 5 Accord, Goodspeed Scholarship Fund v. Commissioner, 70 T.C. 515">70 T.C. 515, 521-525 (1978). Furthermore, the legislative history of section 7428 indicates that Congress intended a court to base its decision 161 only upon theories advanced in the Internal Revenue Service notice or at trial. H. Rept. 94-658, 94th Cong., 1st Sess. (1975), 1976-3 C.B. (Vol. 2) 977.Moreover, even if we should consider the argument, we would 52 hold for petitioner. Rule 217(c)(2)(ii), Tax Court Rules of Practice and Procedure, states that "The burden of proof shall be upon the respondent as to any ground upon which he relies and which is not stated in the notice of determination." Rule 213(a)(2) of those Rules provides that "the answer shall contain a clear and concise statement of every ground, together with the facts in support thereof, on which the Commissioner relies and has the burden of proof."Since the record contains only five issues of the bulletin and the only direct evidence on the question is petitioner's statement that it strives to "preach no particular view," respondent has not, in our opinion, carried his burden 162 of proof on this new position.To reflect the foregoing,Decision will be entered for the petitioner. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.2. On Mar. 2, 1978, after the answer was filed and before the administrative record was stipulated, petitioner filed a motion to invoke discovery under Rule 217, Tax Court Rules of Practice and Procedure.↩ Following a hearing, the Court denied petitioner's motion without prejudice to renew on Apr. 7, 1978. An order to show cause, issued Aug. 18, 1978, was made absolute by an order dated Sept. 20, 1978.1. Respondent claims that petitioner is entitled to deduct only $ 15 for this item. According to petitioner, the State refunded $ 200 after the board granted petitioner exempt status. Since the amount was refunded after the close of the fiscal year, petitioner asserts that it was proper to deduct the full amount of the initial outlay in the fiscal year ended Aug. 31, 1976.↩3. The term "articles of organization" is defined to include "the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created." Sec. 1.501(c)(3)-1(b)(2), Income Tax Regs.↩4. When the commercial aspect is incidental to an exempt purpose, this Court has allowed tax-exempt status to organizations selling a product above cost. Pulpit Resource v. Commissioner, 70 T.C. 594">70 T.C. 594, 611↩ (1978).5. This conclusion is entirely consistent with the rule that, in an appropriate case, the Commissioner's position may be sustained on grounds other than the reasons argued by the parties. See Wilkes-Barre Carriage Co. v. Commissioner, 39 T.C. 839">39 T.C. 839, 845 (1963), affd. 332 F.2d 421">332 F.2d 421↩ (2d Cir. 1964).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624299/	MALLOY & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Malloy & Co. v. CommissionerDocket No. 57906.United States Board of Tax Appeals33 B.T.A. 1130; 1936 BTA LEXIS 776; February 18, 1936, Promulgated 776 1. A contract and agreement of sale entered into by and between petitioner and the Standard Oil Co. of Louisiana in August 1928, held to be a contract for the sale of all the gas to be produced during the life of the field by petitioner under its oil and gas leases covering certain lands and not a sale of the gas in place or an assignment of a portion of petitioner's leasehold rights. 2. The lump-sum consideration received by petitioner in 1928 from the sale of its entire gas production over the life of the field constituted "gross income from the property" for the taxable year and petitioner is, therefore, entitled to a deduction for depletion computed in accordance with the provisions of section 114(b)(3) of the Revenue Act of 1928. 3. Held, that petitioner is not entitled to any deduction from income received in the taxable year for estimated expenses of operation or for anticipated depreciation on its plant and equipment in subsequent years. Phil D. Morelock, Esq., for the petitioner. W. R. Lansford, Esq., for the respondent. MATTHEWS 1130 This proceeding is for the redetermination of a deficiency in income tax for the777 year 1928 in the amount of $5,844.29. The issues for determination are: (1) Whether a contract and agreement of sale executed by and between petitioner and the Standard Oil Co. of Louisiana under which petitioner received $140,000 in the taxable year is for the sale of a capital asset or for the sale of gas to be produced by petitioner; (2) whether the consideration received should be treated as gross income in the year received or spread over the estimated life of the field; (3) whether petitioner is entitled to depletion of 27 1/2 percent on the total sale price received; and (4) whether unexhausted cost of plant and equipment and estimated operating expenses during remaining estimated life of field may be deducted from consideration received. FINDINGS OF FACT. The petitioner is a Delaware corporation, organized in 1924, with its principal office at Tulsa, Oklahoma. Petitioner is engaged in the production of oil and gas, and during the taxable year it held certain leases giving it the right to extract oil and gas and the gas content of the oil from certain lands situated in the south field, Union County, Eldorado, Arkansas. Petitioner owned a 49/64 interest in these leases, 778 there being outstanding in all the leases a 7/64 working interest 1131 and a 1/8 royalty interest. An important product obtained from that field has been casinghead gas, a wet gas containing gasoline, which is produced from oil wells by the application of vacuum. Prior to 1928 petitioner had, under contract, delivered to the Standard Oil Co. of Louisiana all of the casinghead gas produced from these properties, payment therefor having been received on a monthly basis. The contract under which casinghead gas was being sold and delivered to the Standard Oil Co. of Louisiana, prior to 1928, was unsatisfactory to the petitioner because of certain technical provisions which rendered it difficult to compute the amount which the petitioner was entitled to receive thereunder and negotiations were entered into which led to the execution of a new contract and agreement of sale between the parties in August 1928. This contract provides that: For and in consideration of $1 and other valuable considerations, and in consideration of the mutual covenants and agreements herein set out, Malloy & Company does hereby grant, bargain, sell and convey to the Standard Oil Company of Louisiana779 forty-nine sixty-fourths (49/64ths) of all the gas of whatever kind, whether produced from oil wells or otherwise, from the present oil producing horizon, known as the Natchitoches sand, in, under and upon all of the lands described in the list hereto attached and made part hereof * * , said lands being situated in Union County, Arkansas. This grant was the full, undivided interest in the gas held by the petitioner under the oil and gas leases covering said lands. So long as the petitioner operated these leases and the wells drilled on the lands under the leases, the gas therefrom was to be delivered, free of cost, by the petitioner to the grantee. Equipment for receiving the gas was to be furnished and maintained by the grantee. In the event the petitioner should voluntarily abandon the operation of any well or wells, and such abandonment should continue for a period of 20 days, the petitioner agreed to sell and assign to the grantee all of its interest in such well or wells and the oil equipment therewith connected so abandoned. Should the grantee desire to operate such abandoned well or wells it agreed to pay the petitioner the salvage value for the equipment thereon, 780 provided, however, that in the event the petitioner thereafter drilled upon said premises a gas well that did not produce any oil, then the grantee, if it so elected, could take over the operation of said gas well by paying to the petitioner the actual cost of drilling the well; the cost not to include any overhead expense. The petitioner was to furnish all vacuum plants and equipment necessary to maintain vacuum on all wells then drilled, or to be thereafter drilled, on the property, and was to maintain on each and every one of said wells a vacuum of not less than 20 inches. 1132 If the petitioner should fail to maintain the required vacuum for a period of 20 successive days, such failure was to be construed as a voluntary abandonment of the particular well or wells on which said vacuum was not maintained. As an additional consideration of this sale the grantee agreed to return to the petitioner each day residue gas for fuel purposes in an amount exceeding by 25 percent the amount of gas taken from the well or wells on the property. This contract and agreement of sale was to become effective August 1, 1928, and all gas received from the property by the grantee781 after that time was received subject to the terms and conditions set out in the contract. Petitioner received a lump sum consideration of $140,000 in 1928 for the gas sold under the contract. There has been continuous performance of this contract by the parties thereto since the date of its execution. The contract was modified in October 1933 by reducing from 125 percent of production to 70 percent of production the amount of fuel gas to be returned to the petitioner. The properties covered by this contract have been exclusively operated by the petitioner under the direct supervision of its vice president and general manager. All of the gas produced from the Natchitoches sand in that field is casinghead gas. The Standard Oil Co. of Louisiana has had no part in the operation, management, or maintenance of these properties. Petitioner purchased all materials and supplies, employed all labor, and paid all other expenses in connection with the production of the gas. The gas is piped from the oil wells on the properties of the petitioner through pipe lines owned by the Standard Oil co. of Louisiana to the plant of the latter company. The method of producing casinghead gas, 782 the operation of the properties, and the delivery of the gas to the Standard Oil Co. of Louisiana were identical prior and subsequent to the execution of the contract in August 1928. Petitioner's vacuum plants and equipment were necessary to its production of gas and oil. It is not possible to allocate any part of the operating expenses to the production of casinghead gas. Oil may be produced without it but the application of vacuum for the production of casinghead gas results in the increased production of oil. In this particular field vacuum plants are essential to raise the oil, in order to equalize the pressure in petitioner's wells against the wells of other producers. The books of the petitioner are kept on an accrual basis. The sum of $140,000, received by the petitioner from the Standard Oil Co. of Louisiana under the above quoted contract, was entered on its books 1133 and was reported in its income tax return for 1928 as income from the sale of casinghead gas. Depletion was claimed thereon at the rate of 27 1/2 percent, limited to 50 percent of the net income from the properties. The respondent disallowed the deduction claimed for depletion and treated783 the $140,000 as proceeds from the sale of a capital asset. OPINION. MATTHEWS: The respondent has taken the position that the contract executed in August 1928 constituted the sale of a capital asset; that the full amount of $140,000 received by the petitioner in 1928 should be taxed as income in that year, diminished only by that portion of the leasehold costs attributable to the gas leases; that the petitioner is not entitled to any deduction for depletion based on the total sale price of $140,000; and that the petitioner is not entitled to deduct therefrom the unexhausted cost of plant and equipment, or expenses incurred and to be incurred in the performance of the contract. Although the petitioner originally reported the sum of $140,000 as income for 1928, and claimed depletion of 27 1/2 percent, limited to 50 percent of the net income from the property, it is now claiming that the $140,000 should be spread or prorated over a period of 10 years representing the estimated life of profitable production of the gas field from the effective date of the contract, and that the cost of plant and equipment and operating expenses should likewise be prorated and allowed as deductions784 annually over the same period; or if it should be held that the entire amount of $140,000 constituted income for 1928, then such amount should be reduced by the estimated expenses of operation and the unexhausted cost of plant and equipment as of August 1, 1928, plus the sums later expended in constructing additional plants. Regardless of the method by which the net income for 1928 is computed, the petitioner earnestly contends that it is entitled to a deduction for depletion on the total sale price at the rate of 27 1/2 percent, in accordance with the provisions of section 114(b)(3) of the Revenue Act of 1928. We construe the contract of August 1928 to provide for the sale of all the gas to be produced during the life of the field by the petitioner under certain oil and gas leases which it held. Under its leases petitioner had the right to extract gas and oil and the gas content of the oil. Under such leases, petitioner did not become the owner of these products until they were extracted and possessed. ; 785 . Furthermore, petitioner was required under the contract to extract and deliver the gas to the purchaser at its own expense. Since the petitioner was not the owner of the gas in place, the contract 1134 can not be construed to convey any title or interest which did not belong to the petitioner. Under these circumstances we hold that the contract was for the sale of gas to be produced during the life of the field and not a sale of the gas in place or an assignment of a portion of the petitioner's leasehold rights. The petitioner correctly included in its income for 1928 the sum of $140,000 which it received in that year in payment of the gas produced after August 1, 1928, and as an advance payment for the gas to be produced during the life of the field and delivered by it to the Standard Oil Co. of Louisiana. This amount clearly constitutes gross income within the meaning of section 22(a) of the Revenue Act of 1928 and since it was received in 1928, must be included in income for that year, section 42. Under petitioner's method of accounting, it was properly accounted for in the year 1928. In the view we take of the case, it is not necessary786 to determine the life of the field and we have therefore made no finding of fact as to this. If the petitioner had extracted and sold the gas from month to month, as had been its previous practice, there could be no doubt that it would be entitled to deduct percentage depletion, as provided in section 114(b)(3) of the Revenue Act of 1928, set out in the margin.1 So far as its right to a deduction for depletion is concerned, we think it is immaterial that petitioner sold all the gas to be produced for a lump-sum consideration which was paid to the petitioner during the taxable year. The amount thus received by the petitioner is no less "gross income from the property" and it is, therefore, entitled to a deduction for depletion computed in accordance with the provisions of section 114(b)(3). The respondent's action on this issue is reversed. Cf. . 787 There remains for our determination the question whether the petitioner may offset against the total consideration of $140,000 the unexhausted cost of its plants and equipment and operating expenses to be incurred in later years in connection with the performance of the contract. Petitioner continued to own these properties and subsequently constructed two additional plants to be used in the operation of its business. The plants and equipment were used for the production of oil as well as for the production of casinghead gas. It is impossible to allocate any part of the operating 1135 expenses to the production of the gas. In each year of operation, therefore, the petitioner will be entitled to a deduction for depreciation on these physical properties and for operating expenses incurred in that year. Petitioner may not anticipate these deductions but they must be charged against income from the sale of future products derived from the petitioner's wells. The petitioner's contention on this point is denied. Reviewed by the Board. Judgment will be entered under Rule 50.MURDOCK dissents. TRAMMELL TRAMMELL, dissenting 2: I am unable to agree788 that the entire amount of $140,000 is gross income in 1928. The fact is that it can not be determined what part, if any, of said amount constituted gross income, or certainly net income. The petitioner sold the gas output, which it would require several years to produce and deliver, for $140,000, received in advance. If the expenses of production, including the exhaustion of physical equipment used for that purpose, equaled the amount received, there would have been no income at all. If a contractor receives an amount in one year as a contract price for building a house, obviously the total amount received is not income. There must be offset against the amount received what it cost to build the house. The illustration is applicable to this case in that petitioner received $140,000 in 1928 for the production and delivery of gas in future years. What it cost to produce and deliver the gas, certainly, would reduce the profit the taxpayer received. The respondent takes the position that the contract constituted a sale of a capital asset; that the full amount received by petitioner in 1928 should be taxed789 as income for that year, diminished only by that portion of the leasehold cost applicable to the gas leases; that the petitioner is not entitled to any deduction for depletion based on the amount of $140,000 so received; that petitioner is not entitled to deduct the unexhausted cost of plant and equipment nor expenses incurred or to be incurred in the performance of the contract. In my opinion, the amount received should either be spread or prorated over the estimated period representing the life of profitable production from the effective date of the contract. In other words, the amount received should be allocated in accordance with the amount of gas delivered each year, and against that should be deducted expenses of operation, depreciation of plant, etc.; or the determination of the amount of taxable gain should be deferred until it could be determined what the actual amount of the taxable gain was. It is entirely possible that the taxpayer at the expiration 1136 of the contract had no gain whatever from the receipt of $140,000. While the taxpayer reported upon the accrual basis, that method clearly did not reflect income and some method should be used which would790 clearly reflect the income of the taxpayer. I see no objection to the use of the completed contract method in the determination of income in this case. In my opinion, it is immaterial that the respondent's regulations restrict the long term contract method of reporting income to building, installation, or construction contracts. Neither the Commissioner's regulations nor the taxpayer's erroneous method of accounting as to this transaction can operate to nullify the mandatory requirements of the statute that the computation of net income shall be made in accordance with such method as will clearly reflect the income. We applied the long term contract method in the case of . In that case the taxpayer received money for passage and freight in advance of the voyage, which occurred during portions of two accounting periods. We held that the receipts or gross income should be offset by the expenses of the voyage subsequently incurred, and that the net income be reported for the year in which the voyage was completed. This decision was cited with approval in 791 . The same principle is involved in , affirmed on this point, . All receipts obviously do not constitute income. Before income can be received the cost of producing it must be returned. That is not true in this case. MELLOTT agrees with this dissent. Footnotes1. SEC. 114. (b) Basis for depletion. - * * * (3) PERCENTAGE DEPLETION FOR OIL AND GAS WELLS. - In the case of oil and gas wells the allowance for depletion shall be 27 1/2 per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph. ↩2. This dissent was filed during Mr. Trammell's term of office. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624300/	MILTON H. L. SCHWARTZ, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Schwartz v. CommissionerDocket Nos. 6214-70, 6222-70, 6232-70.United States Tax CourtT.C. Memo 1974-245; 1974 Tax Ct. Memo LEXIS 75; 33 T.C.M. (CCH) 1085; T.C.M. (RIA) 74245; September 19, 1974, Filed. 75 For the years 1949 and 1952 through 1956, petitioner-husband consistently underreported taxable income, repeatedly treated compensatory payments as capital transactions, omitted specific items of income, and improperly reported certain transactions on the Federal income tax returns for those years. Held, the underpayments in Federal income taxes for those years were, at least in part, due to fraud on the part of the petitioner-husband. Held, further, the respondent's reconstruction of income based on the bank deposits method, inclusion of gambling winnings and compensation in taxable income, disallowance of loss on the sale of property and certain business expenses, and other adjustments - sustained. Held, further, as petitioner-wife had no independent income in 1949 and 1954, she was not required to file declarations of estimated tax and is not liable for penalties for her failure to so file. Sec. 294(d) (1) (A), I.R.C. 1939. Milton H. L. Schwartz, pro se in docket Nos. 6214-70 and 6232-70. Morris H. Goldman, Ronald M. Wiener, and Dennis L. Cohen, for the petitioner in docket No. 6222-70. Alan E. Cobb, for the respondent. SIMPSONMEMORANDUM FINDINGS OF FACT AND OPINION SIMPSON, 76 Judge: The respondent determined the following deficiencies in, overassessment in, and additions to, the petitioners' Federal income taxes: Additions PetitionerYearDeficiencySec.6653(b) 2Sec. 294(d) (1) (A) 4Over-assessment Posey Schwartz and Milton H. L. Schwartz1949$13,852.16$ 7,193.78 3$1,353.1019545,226.062,981.72 3573.16$144.40195510,572.105,286.05195615,659.357,829.68Milton H. L. Schwartz195234,200.9817,100.49 33,411.7319536,035.623,017.81 3586.36The main issue to be decided is whether, for the years 1949 and 1952 through 1956, underpayments of Federal income taxes were due to fraud on the part of Milton H. L. Schwartz. If so, the amount of deficiencies in Federal income taxes due for those years must be determined. It must also be decided whether the petitioners are liable for penalties 77 for failure to file declarations of estimated tax and whether they are liable for a penalty for the late filing of their 1954 Federal income tax return. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioner, Milton H. L. Schwartz, resided in New York, New York, at the time of filing his petitions herein. The petitioner, Posey Schwartz, resided in Philadelphia, Pennsylvania, at the time of filing her petition herein. Milton and Posey Schwartz were husband and wife during the years 1949 through 1956. They filed joint Federal income tax returns, on the cash method of accounting, for the years 1949 and 1954 through 1956. Milton Schwartz filed separate individual Federal income tax returns, on the cash method of accounting, for the years 1952 and 1953. All such returns were filed with the district director of internal revenue, Philadelphia, Pennsylvania. During the years 1949 and 1952 through 1956, Milton Schwartz was a licensed attorney practicing law in Philadelphia, Pennsylvania. His practice generally consisted of reorganizing and obtaining financing for business enterprises. He also worked in the area of international financing 78 transactions. In 1949, Mr. Schwartz was enrolled to practice before the Treasury Department. On one occasion, he represented clients before the Internal Revenue Service. During the late 1940's or early 1950's, Mr. Schwartz took two tax courses from the Practicing Law Institute of New York. Throughout the years 1949 and 1954 through 1956, Mrs. Schwartz had no independent source of income. On August 10, 1948, Mrs. Schwartz acquired property located on Devereaux Street in Philadelphia, Pennsylvania, for $7,500, and on April 11, 1949, she acquired another parcel located nearby for $28,000. (Together, such properties are referred to as the Frankford properties.) For his own purposes, Mr. Schwartz arranged for the acquisition of the properties, placed title to them in Mrs. Schwartz" name, and arranged for their subsequent transfer. Mrs. Schwartz was a mere nominal owner for Mr. Schwartz with respect to the properties. They transferred the properties to Helene Nathanson on November 3, 1949. The instruments of conveyance stated that the transfers were without consideration and that the grantee was a straw party in the transactions. On July 7, 1950, Miss Nathanson transferred the 79 properties to Evelyn Patterson for a total consideration of $33,500.00. At settlement on that same date, Mr. and Mrs. Schwartz received $6,131.99 of the proceeds. Paul Steiner, the mortgagee, received $23,000.00. Helene Nathanson was paid $30.75. Nine hundred thirty-seven dollars and forty-three cents was disbursed for real estate taxes and revenue stamps. On their joint Federal income tax return for the year 1949, Mr. and Mrs. Schwartz reported a capital loss of $12,000.00 from the sale of the Frankford properties. However, any loss from the sale of such properties occurred in 1950. In May 1946, Mrs. Schwartz acquired a one-third interest in a building located at 13th & Arch Streets (St. George building), Philadelphia, Pennsylvania. Her basis in the building was $3,536.78. Her interest was sold on January 3, 1949, for $28,000.00.The capital gain from the sale was $24,463.22. On their 1949 joint Federal income tax return, Mr. and Mrs. Schwartz reported a capital gain of $24,217.34 from the sale of the building. Mrs. Schwartz paid nothing for her interest in the building; Mr. Schwartz provided the funds to purchase her interest. When her interest was sold, Mr. Schwartz received 80 the proceeds, and she received none. As part of the same transaction, Mrs. Schwartz was paid $3,000 for her interest in assets other than the real estate. Mr. Schwartz was the actual recipient of the proceeds from the sale of her interest.Mr. Schwartz purchased the property on her behalf and never intended her to have any beneficial control over it. Mrs. Schwartz never exercised any control over the property or made any decisions with respect to it; she was a mere nominee for Mr. Schwartz with respect to the property. During 1949, Mr. Schwartz received $30,000 of gambling income, which was not reported on his and Mrs. Schwartz" return for that year. Mr. and Mrs. Schwartz reported a net loss of $1,188.65 on their joint 1949 Federal income tax return. However, for that year, Mr. and Mrs. Schwartz had taxable income of $40,848.14, and in their 1949 return, their taxable income was understated by such amount. In January or February 1952, Alfred L. Laupheimer and Paul Steiner, sole shareholders of American and Foreign Warehouse Co., Inc. (American), retained Mr. Schwartz to act as attorney for American. He was engaged particularly to handle American's impending bankruptcy. American81 managed Cramp Shipyard (Cramp), located in Philadelphia, Pennsylvania, under a lease with the Department of the Navy (Navy). On February 4, 1952, American was placed in involuntary bankruptcy, and on March 12, 1952, the lease with the Navy was terminated by order of the Federal district court which had jurisdiction over the bankruptcy proceedings. Subsequently, Mr. Laupheimer entered into a new agreement with the Navy whereby he agreed to lease the properties of Cramp. In making the agreement, he was acting as trustee for American's successor, General Public Warehouse Co., Inc. (General). On April 18, 1952, Mr. Schwartz, Mr. Laupheimer, and Maurice R. Massey, Jr., entered into an agreement whereby they agreed to go into business together under the name of General. Each of them agreed to subscribe to $10,000 of General's capital stock and to pay such amount on or before April 21, 1952. Mr. Schwartz never made the capital investment required by the agreement. During the period February to August 1952, Mr. Schwartz performed substantial services on behalf of General. He was mainly in charge of its financial affairs. On October 7, 1952, Mr. Schwartz, Mr. Laupheimer, and Mr. Massey 82 entered into a second agreement concerning their participation in General; the new agreement voided the April 1952 agreement and provided for certain payments to be made to Mr. Schwartz as compensation for the services he had rendered in connection with the leasing of Cramp. In the event the Navy entered into a lease with General, he was to receive a $7,000 lump-sum payment, a $3,500 promissory note due March 15, 1953, and $100 a week for the duration of the lease, or 5 years, whichever was the shorter period, commencing with the execution of the lease. A lease with the Navy was ultimately obtained in 1952, to begin in 1953. In 1954, in connection with the lease, the Navy commenced an audit of General's income and disbursements for the period March 17, 1952, to March 14, 1953. The counsel for General at that time was requested to obtain statements in support of General's disbursements. Accordingly, in 1956, he interviewed Mr. Schwartz regarding payments Mr. Schwartz had received from General in 1952; they also discussed the services Mr. Schwartz had performed for General. Based on the interview, the counsel prepared an affidavit for Mr. Schwartz; included in the affidavit was 83 a statement that Mr. Schwartz had received $12,500 from General as compensation. Mr. Schwartz particularly noted this statement and, as he was satisfied with the accuracy of the affidavit, executed it on May 28, 1956. During the years 1952 through 1956, General made the following payments to Mr. Schwartz, or persons on his behalf, as compensation for services performed by him: YearAmount 1952$12,500.0019534,000.0019545,300.0019555,200.00195610,704.45 Mr. Schwartz did not report these payments as professional receipts on any of his Federal income tax returns for the years 1952 through 1956. Instead, he reported the payments on his return for the year 1953, treating them as capital gains from a sale of an interest in General. He reported having a basis of $10,000 for such interest, having received $44,000 for its sale, and realizing a gain of $34,000. However, he also reported a capital loss of $174,800 as a result of a race track venture, and consequently, paid no tax on the reported gain from the sale of the interest in General. Paul Steiner was engaged in the construction business under the name of Paul Steiner & Co. during the years 1954 through 1956. During those years, 84 he had occasion to use Mr. Schwartz" professional services. On May 1, 1954, Mr. Schwartz requested payment from Mr. Steiner for services performed, and later that month, Mr. Steiner paid Mr. Schwartz $10,000 by check. Mr. Schwartz gave Mr. Steiner a receipt for $10,000, dated May 21, 1954, which stated that the payment was for services he had rendered during the period June 1, 1953, to May 3, 1954. Approximately 3 weeks later, Mr. Schwartz and Mr. Steiner went to New York where they met with persons interested in various development activities in Venezuela. At that time, Mr. Schwartz turned over the proceeds of the $10,000 check for investment in such developments; before then, he had sole control over the check. Mr. Schwartz initiated the meeting; Mr. Steiner did not participate in the venture until after the meeting took place. Mr. Steiner was to provide funds and management for the enterprise, although he and Mr. Schwartz had agreed that their relationship was to be a partnership. The association with the other Venezuelan investors was of a short duration since it quickly resulted in a financial loss for Mr. Steiner. Mr. Schwartz did not report the $10,000 payment on the 85 1954 Federal income tax return. On August 15, 1955, Mr. Steiner paid Mr. Schwartz $5,000, and the next day, Mr. Schwartz gave Mr. Steiner a receipt for the payment for services he had rendered and commissions. On the 1955 return, Mr. Schwartz reported only $1,000 of the $5,000 he received from Mr. Steiner during the year. In 1955, Mr. Schwartz and Robert M. Wolf, a real estate broker, participated in the acquisition of the Fretz building by the I.J. Knight Realty Corporation (Knight). On December 15, 1955, Maurice Shorenstein, the president of Knight, drew a check for $15,000 to the order of Mr. Wolf. The check was payment for a broker's commission earned by Mr. Schwartz and Mr. Wolf on the acquisition of the Fretz building by Knight. Mr. Wolf and Mr. Schwartz had agreed to split the commission equally, and consequently, Mr. Schwartz was entitled to $7,500 of the proceeds of the check. After receipt of the check, Mr. Schwartz and Mr. Wolf endorsed it to Knight as part payment for a stock interest in Knight. As a result, Mr. Schwartz obtained a 10-percent stock interest in Knight. Mr. Wolf and Mr. Schwartz invested in Knight upon the request of other investors in the company, 86 including Mr. Shorenstein. There had been allegations of misrepresentations on the part of the sellers of the Fretz building, and the other investors wanted the additional security resulting from an investment in the acquisition by Mr. Schwartz and Mr. Wolf. Had they not invested in Knight, the sale of the Fretz building would not have been consummated. On the 1955 Federal income tax return, Mr. Schwartz reported no commission from Knight. In August 1956, he sold his stock interest in Knight for $9,000. In the 1956 return, he reported a capital gain of $8,250 on the sale, using a basis of $1,750 and a sales price of $10,000. Mr. Schwartz was general counsel for Herman Greenfeld, who owned rights to old movies. Mr. Greenfeld sold his rights in the movies to Masterpiece Productions, Inc. (Masterpiece). United Artists Corporation (United) ran these movies on late-night television. As a result, Masterpiece instituted suit against United, contending that its rights to the movies included the rights to show them on television, and that it was thus entitled to royalties from United. Mr. Schwartz was in charge of the litigation and retained Lemuel Schofield, who also acted as Masterpiece's 87 attorney in the litigation. Masterpiece agreed to pay Mr. Schofield 50 percent of any amount recovered from United as compensation for his services in the suit, and Mr. Schwartz was to be compensated out of that payment. The suit was eventually dismissed, and nothing was paid to Mr. Schofield for his work on the suit. On November 13, 1953, Mr. Schofield assigned whatever interest he might have in a fee from Masterpiece to Mr. Schwartz. Subsequently, Mr. Schwartz brought an action against Masterpiece to recover on his own behalf whatever amount was due Mr. Schofield. The action was settled by a stipulation whereby Masterpiece agreed to pay Mr. Schwartz $5,000. During 1955, Mr. Schwartz received from his attorney $3,687.50 as his share of the settlement. Mr. Schwartz did not report such payment as professional receipts on the 1955 Federal income tax return. Instead, he reported the payment as proceeds received from the sale of an interest in Masterpiece in 1955. He reported a net gain of $3,000, using a sales price of $3,500 and a basis of $500. Mr. Schwartz never owned any stock in Masterpiece, nor any interest in its movies. Mr. and Mrs. Schwartz had the following unexplained 88 bank deposits for the years 1952, 1953, 1955, and 1956: YearAmount 1952$49,157.48195313,506.3719556,825.87195623,865.98In the course of his professional and investment activities, Mr. Schwartz made many trips, including some to foreign countries such as Cuba and Venezuela. He incurred substantial expenses on these journeys, for some of which he was not reimbursed by the parties on whose behalf he was acting. Occasionally, Mr. Schwartz entertained prospective business associates. Over the years, Mr. Schwartz borrowed extensively from various sources, including banks, finance companies, and friends. In transactions where interest was charged, he paid such charges. For the year 1952, Mr. Schwartz understated his taxable income as follows: Taxable income per return$ (96.42)Unreported income48,874.87Unallowable business deductions2,755.50Unallowable itemized deductions 4,829.66Taxable income$56,363.61Understated taxable income$56,363.61For the year 1953, Mr. Schwartz understated his taxable income as follows: Taxable income per return$ (120.49)Unreported income14,431.80Unallowable business deductions700.00Unallowable itemized deductions 880.86Taxable income$15,892.17Understated taxable income$15,892.17For 89 the years 1954, 1955, and 1956, Mr. and Mrs. Schwartz understated their taxable income as follows: 195419551956 Taxable income per return$ 3,686.94$ 1,905.75$ 2,402.33Unreported income12,601.9226,338.9934,339.60Unallowable business deductions5,350.004,750.004,275.00Unallowable itemized deductions625.00Rental expenses(150.00)Standard deduction(190.34)(388.25)Unreported dividends from Knight 750.61Taxable income$21,298.52$32,606.49$42,392.54Understated taxable income$17,611.58$30,700.74$39,990.21 During the course of the IRS investigation of Mr. and Mrs During the course of the IRS investigation of Mr. and Mrs. Schwartz" various income tax returns, a special agent, Dominic Catrambone, made repeated requests to Mr. Schwartz to be allowed to see Mr. Schwartz" financial records. On June 12, 1957, Mr. Catrambone interviewed Mr. Schwartz and under oath, Mr. Schwartz stated that his records were "fairly complete and accurate." On that occasion, Mr. Schwartz did not answer a number of questions posed by Mr. Catrambone on the ground that he wished to refer to his records or that information requested was contained in records possessed by the IRS. During the interview, Mr. Catrambone asked 90 Mr. Schwartz if he could check Mr. Schwartz" records. In response, Mr. Schwartz said that Mr. Catrambone could look at the records any time after September. On September 16, 1957, Mr. Catrambone wrote to Mr. Schwartz confirming arrangements for an inspection on October 4, 1957. On September 30, 1957, Mr. Schwartz replied that the records had been warehoused and that he had not yet had a chance to sort out the records Mr. Catrambone wished to see. He also stated that when he did complete the necessary arrangements, he would set up an appointment with Mr. Catrambone. Mr. Catrambone wrote to Mr. Schwartz on October 16, 1957, agreeing to a delay in order to allow Mr. Schwartz the opportunity to procure the records and setting up an appointment for October 30, 1957. On October 25, 1957, at the request of Mr. Schwartz, the inspection was postponed to November 15, 1957; to that postponement, Mr. Catrambone agreed on November 5, 1957. On January 14, 1958, at Mr. Schwartz" instigation, another interview was postponed, and it was suggested that a date in the early part of February be arranged. On March 20, 1958, Mr. Schwartz confirmed an interview to take place on April 4, 1958. An 91 interview, commenced in June 1957, was continued on June 16, 1958, when Mr. Schwartz" records were still not made available to Mr. Catrambone. On April 10, 1959, Mr. Schwartz requested an appointment with Mr. Catrambone to allow him to inspect the records, and accordingly, one was arranged for April 29, 1959. Following Mr. Schwartz" cancellation of the meeting, and his failure to set up another, on June 2, 1959, Mr. Catrambone scheduled an appointment for June 24, 1959. An interview was held on July 24, 1959, to which Mr. Schwartz did not bring his records, although requested to do so. The interview was devoted primarily to Mr. Schwartz" records and their availability to Mr. Catrambone. Mr. Schwartz refused to make the records freely accessible to Mr. Catrambone and placed unclear and confusing conditions on the inspection. At no time did Mr. Schwartz ever deliver his records to Mr. Catrambone.The respondent has conceded that no part of any alleged underpayment of tax for the years 1949, 1954, 1955, and 1956 was due to fraud on the part of Mrs. Schwartz. The respondent has also conceded that if the Court finds that the amount omitted from gross income for each of the years 1949, 92 1954, 1955, and 1956 exceeded 25 percent of the amount of the gross income stated on the return for each of such years, Mrs. Schwartz is entitled to the benefits of section 6013(e) and is not liable for any deficiency attributable to the omission of such amounts from gross income. For such purposes, the following amounts of gross income were reported in Mr. and Mrs. Schwartz" joint Federal income tax returns: YearGross Income 1949$43,238.22195438,603.50195522,882.50195628,612.50 The respondent has conceded that the following amounts represented omitted income under section 6013(e): YearItemAmount 1949Joint venture$ 3,000.00Gambling income30,000.001954Professional income12,601.921955Professional income22,651.491956Professional income34,339.60Knight dividends750.61For the year 1949, the respondent has conceded that forgiveness of a $5,000 loan was not additional consideration for the sale of the interest in the St. George building. Mr. and Mrs. Schwartz failed to file declarations of estimated tax for the years 1949 and 1954, and Mr. Schwartz failed to so file for the years 1952 and 1953. Mr. and Mrs. Schwartz" joint Federal income tax return for the year 1954 was filed on April 93 16, 1956. In his notices of deficiency, the respondent determined that Mr. and Mrs. Schwartz had unreported income for the years 1949 and 1954 through 1956, that Mr. Schwartz had unreported income for the years 1952 and 1953, and that at least part of the underpayments in Federal income taxes for such years was due to fraud. The respondent also disallowed deductions claimed for certain business and personal expenses and a loss on the sale of certain properties, adjusted the amount of gain realized on the sale of an interest in other property, imposed penalties for failure to file declarations of estimated tax, and proposed an overassessment on a penalty for failure to timely file a return. OPINION It is agreed that the statute of limitations bars any assessment of tax for the years 1949, 1952, 1953, 1954, 1955, and 1956, unless the respondent proves that the returns were fraudulent. Sec. 6501(c); sec. 276(a), I.R.C. 1939. In addition, section 6653(b) and section 293(b) provide that if any part of an underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax due an amount equal to 50 percent of the underpayment. Since the respondent has 94 conceded that Mrs. Schwartz was not a party to any fraud for any of such years, the first issue to be considered is whether Mr. Schwartz" conduct constituted fraud for such years. Fraud consists of intentional evasion of payment of a tax believed owed. Mitchell v. Commissioner, 118 F.2d 308">118 F.2d 308 (C.A. 5, 1941), revg. and remg. 40 B.T.A. 424">40 B.T.A. 424 (1939), supp. opinion 45 B.T.A. 822">45 B.T.A. 822 (1941). The respondent must demonstrate fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b), Tax Court Rules of Practice and Procedure; 5Blaine S. Fox, 61 T.C. 704">61 T.C. 704 (1974). As direct evidence of the requisite intent is often unobtainable, there may be resort to relevant circumstantial evidence. M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518 (1930). We have studied the mass of evidence presented and conclude that at least part of the underpayment of taxes in each year was clearly due to fraud. Mr. Schwartz repeatedly and consistently understated his taxable income by significant amounts over the years at issue: YearAmount of Understatement 1949$ 40,848.14195256,363.61195315,892.17195417,611.58195530,700.741956 39,990.21Total$201,406.45It 95 often has been held that a pattern of underreporting taxable income is evidence of fraud. Schwarzkopf v. Commissioner, 246 F.2d 731">246 F.2d 731 (C.A. 3, 1957), affg. a Memorandum Opinion of this Court; Kathleen C. Vannaman, 54 T.C. 1011">54 T.C. 1011 (1970); Madeline V. Smith, 32 T.C. 985">32 T.C. 985 (1959). In Vannaman, the Court, in finding fraud, relied in part on the fact that over 6 consecutive years a total of $129,197.09 of taxable income has not been reported. In that case, the underreporting ranged from a low of $7,699.98 in 1960 to a high of $47,087.13 in 1958. In the present case, the underreporting ranged from $15,892.17 in 1953 to $56,363.61 in 1952 and reached a total of $201,406.45 for all 6 years. Consequently, Mr. Schwartz" repeated failure to report such income on his returns provides persuasive evidence of fraud. However, there is also a considerable amount of other evidence of fraud. Mr. Schwartz" noncooperation with the IRS investigation is another indication of fraud. He claimed to Mr. Catrambone that he kept "fairly complete and accurate" records and that they were extant during the course of the investigation. Yet, when Mr. Catrambone made many requests over a period of years to inspect 96 them, they were never made available, excuses were given, appointments were not kept, and Mr. Schwartz placed unclear conditions on their availability. Although Mr. Schwartz claimed that the records were always open to Mr. Catrambone, his assertion of cooperation cannot be sustained, in view of his evasiveness, his dilatoriness in keeping interviews with Mr. Catrambone, and his failure to produce such records when interviews were actually held. Obstruction of an IRS investigation has been considered a factor indicating fraud. Mladinich v. United States, 394 F.2d 147">394 F.2d 147 (C.A. 5, 1968); Robert Neaderland, 52 T.C. 532">52 T.C. 532 (1969), affd. 424 F.2d 639">424 F.2d 639 (C.A. 2, 1970), cert. denied 400 U.S. 827">400 U.S. 827 (1970); Lillian Kilpatrick, 22 T.C. 446">22 T.C. 446 (1954), affd. 227 F.2d 240">227 F.2d 240 (C.A. 5, 1955); see Spies v. United States, 317 U.S. 492">317 U.S. 492 (1943); cf. William G. Stratton, 54 T.C. 255">54 T.C. 255 (1970). In view of the long history of Mr. Schwartz" noncooperation with Mr. Catrambone, we must conclude that it was a deliberate effort on his part to hinder the investigation, and that such deliberate obstruction suggests fraud. In addition, certain transactions, reported by Mr. Schwartz as capital gains, were in reality compensatory 97 arrangements, and in our judgment, such misreporting was due to fraud. In Victor A. Dorsey, 33 B.T.A. 295">33 B.T.A. 295 (1935), on his Federal income tax return, the petitioner reported capital gains from the sale of certain stock. The Court determined that the erroneous reporting was clearly due to fraud, since the amounts received were, in actuality, compensation. The stock alleged to have been sold was never owned or sold by the taxpayer; he had no cost basis in the stock although he had claimed such a basis in his return. The taxpayer was aware of these facts and indubitably knew that the payment was compensation for certain sales efforts. From 1952 through 1956, Mr. Schwartz received a total of $37,704.45 from General, which he reported as capital gains of $34,000.00 in 1953, although, in that year, he received only $4,000.00 from General. Mr. Schwartz argued that the sums he received were payment for the sale of his interest in General and hence correctly reported as capital gains. However, Mr. Schwartz never acquired any interest in General which he could have sold later. Although the April 1952 agreement called for him to make an investment, we have found as a fact that he never invested 98 any funds in General. Nor is there any evidence indicating that the other investors transferred parts of their interests to him. Furthermore, there is significant affirmative evidence that the payments were compensatory. The October 1952 agreement voided the April 1952 agreement which provided for Mr. Schwartz to acquire an ownership interest in General and instead called for a series of payments to be made to him which were described as compensation. It did not mention or indicate in any way that the payments were in return for Mr. Schwartz relinquishing an interest in General. In an affidavit prepared in 1956, Mr. Schwartz swore that the payment he had received in 1952 was compensation for services he performed for General. Considering that the payments were intended to be compensatory, that Mr. Schwartz had no ownership interest in General, and that he was aware of the character of the payments, his misreporting raises an inference of fraud. Victor A. Dorsey, supra.An additional indication of fraud, in connection with this transaction, is his reporting of the total amount as received in 1953 - a year in which he had a large capital loss so that the reported gain was not taxable 99 at all - instead of reporting the payments from General as they were received over the years. Meldon v. Commissioner, 225 F.2d 467">225 F.2d 467 (C.A. 3, 1955), affg. on this issue a Memorandum Opinion of this Court. Mr. Schwartz" treatment of the $10,000 he received from Mr. Steiner in 1954 constitutes additional evidence of fraud. Mr. Schwartz argued that he was not the intended recipient of the proceeds of the check but that Mr. Steiner intended for him to be a mere conduit to channel the funds to the investment in the Venezuelan enterprise. However, there was abundant evidence clearly showing that the payment was intended to compensate Mr. Schwartz. It was given in response to a bill from Mr. Schwartz to Mr. Steiner for the same amount, and near the same time, Mr. Schwartz gave Mr. Steiner a receipt for payment for services rendered. Mr. Steiner testified at trial that the payment was compensatory. In addition, the evidence indicated that Mr. Steiner did not intend to use Mr. Schwartz as a conduit for an investment. Mr. Steiner had no concern in the Venezuelan enterprise until Mr. Schwartz introduced him to the other investors. At all times after delivery of the check, Mr. Schwartz had 100 the exclusive interest in it. The respondent argued that Mr. Schwartz received a $7,500 commission from his participation in the sale of the Fretz building, that the payment was compensatory, and that his treatment of the payment was fraudulent. Essentially, Mr. Schwartz took the position that he received nothing in 1955 and realized only capital gains in 1956, when he sold the Knight stock. His position appears to be that the other investors were reluctant to consummate the purchase of the Fretz building unless Mr. Schwartz invested in Knight, and that there were substantial restrictions on the payment made in 1955 which prevented him from realizing any income in that year. Since the respondent did not proffer any evidence which might tend to indicate that he would have earned the commission even if the sale of the Fretz building did not take place or that Mr. Schwartz could have sold the Knight stock before it was actually sold, Mr. Schwartz" failure to report the payment in 1955 does not raise an inference of fraud. However, as the payment, when made, was intended to be compensation, Mr. Schwartz" failure to report at least part of the proceeds of the sale of the stock in 1956 101 raises an inference of fraud for such year. See Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243 (1956), rehrg. denied 352 U.S. 859">352 U.S. 859 (1956); Ford S. Worthy, Jr., 62 T.C. [] (June 12, 1974). Mr. Schwartz" reporting of the payment he received from the Masterpiece settlement was erroneous; as the payment was compensation, it should not have been treated as capital gains. Harry Friedman, 45 B.T.A. 976">45 B.T.A. 976 (1941), affd. 130 F.2d 305">130 F.2d 305 (C.A. 4, 1942). Mr. Schwartz never invested in Masterpiece, nor did he have any interest in its assets. His claim was based on the right to the compensation earned by him and Mr. Schofield through the services they had performed with respect to the original litigation. In these circumstances, treatment of the payment as capital gains was erroneous and suggestive of fraud. Attempting to negate any inference of fraud from these events, Mr. Schwartz argued that proper reporting procedures are a matter of opinion and that he was merely treating these payments in accordance with his interpretation of the applicable law. William G. Stratton, 54 T.C. 255">54 T.C. 255 (1970). Generally speaking, mistakes in law are not indicia of fraudulent intent and are not penalized as such. Spies v. United States, 317 U.S. 492">317 U.S. 492 (1943); 102 Welburn Mayock, 32 T.C. 966">32 T.C. 966 (1959). Yet, for that rule to apply, the circumstances must be such as to allow a reasonable, albeit mistaken, understanding by the taxpayer that his conduct was in accordance with the law. Compare William G. Stratton, supra, with Robert Neaderland, 52 T.C. 532">52 T.C. 532 (1969). Furthermore, any claim of ignorance or honest mistake must be weighed in the light of the petitioner's business knowledge, education, and experience. Robert Neaderland, supra; Chas. F. Long, 12 B.T.A. 488">12 B.T.A. 488 (1928). In the four situations, Mr. Schwartz treated payments he had received in the context of employment relationships as capital transactions. Alone, each transaction does not clearly and convincingly demonstrate fraud. However, consistently treating compensatory payments received in such diverse employment situations as being capital items precludes an inference of honest mistake. Instead, it indicates a willingness to utilize any plausible reason to treat such payments as capital items; it also shows a deliberate, sustained effort to conceal the true character of the payments. Spies v. United States, supra; Victor A. Dorsey, 33 B.T.A. 295">33 B.T.A. 295 (1935). In addition, Mr. Schwartz had years 103 of experience as a lawyer, had taken tax courses, and in his work had specialized in the financial affairs of business enterprises. In view of his knowledge and experience, we can expect Mr. Schwartz to have greater understanding of the proper treatment of these transactions than a man without his background. After weighing all the evidence and considering his experience, we are convinced that Mr. Schwartz" repeated treatment of compensatory arrangements as capital transactions was not due to ignorance but must have been due to a fraudulent purpose. Kathleen C. Vannaman, 54 T.C. 1011">54 T.C. 1011 (1970); Victor A. Dorsey, supra.There are also other acts indicative of fraud during the years at issue. Although each case must be judged on its own facts and a determination reached on the basis of the whole record, the amount of omitted income, and the duration of such practice, have been considered relevant. Lowell F. Bushnell, 49 T.C. 296">49 T.C. 296 (1967); Madeline V. Smith, 32 T.C. 985">32 T.C. 985 (1959). It should also be considered whether negligence or carelessness caused the omissions or misreporting. William H. Parsons, 43 T.C. 378">43 T.C. 378 (1964). In 1949, Mr. Schwartz failed to report $30,000 of gambling winnings. 104 From 1952 through 1956, he failed to report a total of $37,704.45 of compensation from General. In 1954 and 1955, he failed to report $10,000 and $4,000 of compensation he received respectively for each year from Mr. Steiner.For the year 1956, Mr. Schwartz failed to report the commission he received from his participation in the sale of the Fretz building and instead treated the payment as a capital gain. The respondent maintained that Mr. Schwartz" treatment of the sale of the Frankford properties raised a clear inference of fraud for the year 1949. It was his position that the sale occurred in 1950, and taking a loss on the sale in 1949 indicated fraud. The petitioner argued that, for Federal income tax purposes, the sale took place in 1949, since he and Mrs. Schwartz effectively relinquished control over the Frankford properties in that year. Mr. and Mrs. Schwartz acquired the properties for a total price of $35,500.00; in November 1949, they were transferred to Helene Nathanson for no consideration, and in July 1950, they were further transferred for $33,500.00, of which Mr. and Mrs. Schwartz effectively received at least $29,131.99, including proceeds paid to them and the 105 mortgagee. Under these facts, it was not possible for Mr. and Mrs. Schwartz to sustain a capital loss of $12,000 in 1949. They have made no claim that they made a gift of the properties or transferred them for no consideration; thus, their loss was at most $2,000 - their cost less the payment made by Evelyn Patterson. As Mr. Schwartz could have no doubt but that his reporting was erroneous, fraud seems indicated therein also. Robert Neaderland, 52 T.C. 532">52 T.C. 532 (1969). Considering his professional background, Mr. Schwartz" failure to report his gambling income in 1949 and his improper treatment of the sale of the Frankford properties provide additional support for the conclusion that his conduct was fraudulent. For each year at issue, the respondent has clearly and convincingly shown fraud. In 1949, the petitioners failed to report gambling winnings and erroneously reported a capital loss. In 1952 through 1956, Mr. Schwartz failed to report compensation from General. In 1954 and 1955, he failed to report compensation from Mr. Steiner.For 1956, Mr. Schwartz failed to treat some of his gain from the sale of the Knight stock as compensation. For 1956, he failed to treat as compensation 106 the amount he received from the settlement of the Masterpiece litigation. For each year at issue, Mr. Schwartz substantially understated his taxable income. Mr. Schwartz" attempted obstruction of the IRS investigation also indicates fraud. For these reasons, we find and hold that fraud has been shown for each of the years 1949, 1952, 1953, 1954, 1955, and 1956, that the statute of limitations has not run for such years, and that any deficiencies may still be assessed for such years. Sec. 6501(c) (1); sec. 276(c), I.R.C. 1939. Fraud having been established, it must next be considered whether there are deficiencies in income taxes due from the petitioners. The burden of proof shifts to the petitioners on this issue. Rule 142(a); Leonard B. Willits, 36 B.T.A. 294">36 B.T.A. 294 (1937). The respondent reconstructed the petitioners' taxable income through the bank deposits method. This method indicated that for the years 1952, 1953, 1955, and 1956, there were substantial unexplained deposits in the petitioners' various bank accounts. Unless such deposits are shown by the petitioners to represent other than taxable income, they will be treated as taxable income. John Harper, 54 T.C. 1121">54 T.C. 1121 (1970); 107 Emanuel Hollman, 38 T.C. 251">38 T.C. 251 (1962); Herman J. Romer, 28 T.C. 1228">28 T.C. 1228 (1957). In attempting to refute the inference that such deposits represented taxable income, Mr. Schwartz argued that many of them were actually loans or stemmed from churned accounts. While testimony adduced at trial indicated that Mr. Schwartz did a substantial amount of borrowing, no testimony was presented which identified the deposits claimed to be loans. Similarly, there was no evidence concerning which amounts were actually redeposits of amounts deposited elsewhere, and our independent analysis of transcripts of bank records yielded no such information. Consequently, it must be concluded that the full amount of the unexplained bank deposits is taxable income. Henry M. Rodney, 53 T.C. 287">53 T.C. 287 (1969); compare Robert M. Brittingham, 57 T.C. 91">57 T.C. 91 (1971). There are three disputed items concerning the reconstruction of income for the year 1949: The gambling winnings, the loss on the sale of the Frankford properties, and the sale price of the interest in the St. George building. Mr. Schwartz argued that the inclusion of the $30,000 gambling winnings in his income for the year 1949 was erroneous. He maintained that his 108 gambling winnings were never as high as his losses. However, beyond making that assertion at trial and at an interview with Mr. Catrambone in 1959, he presented no other evidence which might support his assertion, and consequently, it cannot be upheld. Stein v. Commissioner, 322 F.2d 78">322 F.2d 78 (C.A. 5, 1963), affg. a Memorandum Opinion of this Court. Furthermore, sufficient reliable evidence was adduced on which the finding of gambling winnings was based. At the 1958 interview with Mr. Catrambone, Mr. Schwartz stated that he gambled extensively during a period including the year 1949. He also stated that he gambled in Miami, Florida, the city where the alleged payor of the winnings was located. The payor was also a known gambler, known to be such to Mr. Catrambone who testified to that effect at trial. In the light of these facts, and considering that Mr. Schwartz had the burden of proving that he did not receive the gambling income, it must be concluded that the payment represented gambling winnings. In support of his claim that a loss of $12,000 was sustained from the sale of the Frankford properties in 1949, Mr. Schwartz argued that 1949 was the correct year in which to report the 109 transaction because the transfer to Helene Nathanson extinguished his and Mrs. Schwartz" interest in the properties. At trial, he introduced a letter written by an Oscar Brown to him on December 13, 1949. The letter detailed distributions made pursuant to a "Laupheimer, Steiner and Posey Schwartz transaction." According to the letter, Mr. Brown was forwarding $87.88 to Mr. Schwartz, having already disbursed the following amounts: $500.00 to Mr. Schwartz, $11,465.20 to satisfy a "Wolf, Esquire - Potamkin Judgment," and $696.92 for various sums due pursuant to the transfer of real estate. The date of sale, the sellers and purchasers, and the location of the property were not identified. At trial, Mr. Brown testified that he could not remember the transaction and attempted to reconstruct it. He concluded that the letter could have been describing the Frankford properties sale because of the similarity of two names in the two transactions. However, a comparison of the amounts disbursed in the transaction described in the letter and the settlement occurring in July 1950 shows no similarities; in every respect they are different. Considering Mr. Brown's failure to identify the transaction 110 recounted in the letter and its own failure to coincide with the 1950 settlement, it must be concluded that the letter has no probative effect on the issue of when the sale of the Frankford properties took place. Mr. Schwartz also argued that a transfer to a "straw party" without consideration triggers realization for Federal income tax purposes. However, the circumstances of the 1949 and 1950 transfers clearly show that the 1949 transfer must be disregarded for Federal income tax purposes. Mr. and Mrs. Schwartz acquired the properties for $35,500 and, within 7 and 15 months of their respective acquisitions, transferred them to Helene Nathanson without consideration. There was no indication that the properties became worthless in 1949 and that Mr. Schwartz intended to transfer them without receiving consideration therefor at some time. To the contrary, the 1950 transfer for $33,500 indicates that their value did not decrease so substantially. The failure of the petitioners to receive anything in exchange for the properties in 1949, when the properties had some market value, implies that such transfer lacked susbstance. Clarence L. Hook, 58 T.C. 267">58 T.C. 267 (1972). Belying Mr. Schwartz" 111 contention that he and Mrs. Schwartz relinquished their interests in the properties in 1949 is the fact that they received part of the proceeds from the 1950 transfer. Such fact indicates that they had a continuing interest in the properties until 1950 and that Helene Nathanson was a mere conduit for the properties to be transferred later. James M. Hallowell, 56 T.C. 600">56 T.C. 600 (1971). Since the 1949 transfer did not constitute a sale for Federal income tax purposes, it must be disregarded for such purposes. The respondent also proposed an adjustment in the sales price of the interest in the St. George building. The statutory notice stated that: Gain on the sale of property at 1301 Arch St. has been adjusted as follows: Selling price, for your interest $31,000.00 At the trial, he attempted to show that $28,000 was paid for Mrs. Schwartz" interest in the building and that $3,000 was paid for her interest in assets other than the building. Mrs. Schwartz contended that the issue of gain from these "other assets" is a new issue raised at trial, not indicated on the statutory notice, and consequently, the respondent bears the burden of proof on this question. Rule 142(a). The issue therefore 112 raised is whether Mrs. Schwartz was put on notice that the respondent would attempt to show that there was gain from the sale of something other than real estate. The notice specifically referred to property located at 1301 Arch St.; it did not mention any other assets. In view of the notice's failure to specify the "other assets," it must be concluded that the respondent's attempted proof of payment made for such "other assets" constituted a new issue raised at trial on which the respondent must bear the burden of proof. The settlement sheet made pursuant to the transfer of the interest in the real estate was introduced at trial and indicated a total purchase price of $28,000 for the interest in the building. Also admitted was an affidavit concerning the transaction prepared in 1959 by one of the purchasers of the interest, Samuel Frankel. Included in the affidavit was the statement that: In addition to the purchase price of $28,000.00 for the building, Posey Schwartz was also to receive $3,000.00 from the Joint Venture in consideration of assigning all of her interest in the Assets of the Joint Venture, except the real estate. Mr. Frankel's testimony revealed that, at the time 113 of the trial, he was uncertain as to what was paid for the interest in the building and what other interests may have been transferred at the same time. However, he believed that at the time he made the affidavit in 1959 he was still familiar with those facts and that the affidavit was correct. It is clear that at the time of making the affidavit, his memory was much more likely to be correct, and for that reason, we have concluded that the facts set forth in the affidavit are more reliable than his testimony given 14 years later. Consequently, we hold that the respondent has carried his burden of proof and has established that Mrs. Schwartz sold her interest in the St. George building for $28,000 and her interest in other assets of the joint venture for $3,000. The petitioners presented no arguments concerning the respondent's treatment of the payments from General, Mr. Steiner, and Masterpiece as compensation beyond what has been discussed previously. Since we have found that those payments were not capital gains, the respondent's determinations are accepted. In addition, the petitioners did not contest the inclusion of dividends on the Knight stock in income for 1956, and 114 therefore, the respondent's determination as to their inclusion must be accepted also. The $7,500 payment from Knight was taxable in 1956 because until then there were apparently conditions and restrictions on Mr. Schwartz" right to it. In computing Mr. Schwartz" professional and business income for purposes of the trial, the respondent proposed, for the years 1952 through 1956, to add Mr. Schwartz" unexplained bank deposits, his identified but unreported income, and his reported income. There is an obvious question as to whether the reported income was in addition to the unexplained bank deposits or whether there might be some duplication between the unexplained bank deposits and the reported income. However, Mr. Schwartz offered no evidence as to whether there was any duplication in those items of income. In addition, the respondent, in his notices of deficiency, had arrived at smaller amounts of professional and business income, and he conceded that those lesser amounts should be used for purposes of computing the deficiencies in this case. Under the circumstances, we have, in our findings, relied upon the lesser amounts of business and professional income used in the notices 115 of deficiency. For each year at issue, the respondent made certain adjustments in the petitioners' taxable income based on the disallowance of various deductions. The petitioners disputed some of the disallowances for the years 1952 through 1956, although they agreed to those made for the year 1949 prior to the issuance of the statutory notice for that year. Of the deductions disallowed for the years 1952 through 1956, the petitioners presented evidence and arguments concerning only three items: interest expenses, travel expenses, and entertainment expenses. Consequently, they must be considered as having conceded the other disallowances. 6116 At the trial of this case, no records supporting these deductions were introduced, and recognizing this fact, Mrs. Schwartz argued that Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (C.A. 2, 1930), ought to be applied here. A significant amount of testimony was presented from which it could be inferred that Mr. Schwartz had spent sums on business trips, paid interest charged on loans, and incurred entertainment expenses. In part, Mrs. Schwartz relied on several bills and invoices as showing payment for some hotel and stenographic expenses, but since none of them indicated whether they were paid in the course of business activities, they have no evidentiary value. No other testimony or evidence was presented from which the amount, nature, and year of travel, entertainment, and interest expenditures might be inferred. The evidence as to the amount of money borrowed and the interest paid is so vague that we are unable to conclude that for any particular year any amount should be allowed as a deduction for such interest. John T. Steen, 61 T.C. 298">61 T.C. 298 (1973), on appeal (C.A. 5, May 2, 1974). However, we are satisfied 117 that in the course of his practice of law and other business activities, Mr. Schwartz did incur expenses for travel and entertainment and that some deduction should be allowed as a result of such e-penditures,. In view of the paucity of the evidence, it is difficult to conclude what amounts should be deductible, and in such circumstances, the ambiguity must be resolved against the claimed deduction. Cohan v. Commissioner, supra; Sidney Merians, 60 T.C. 187">60 T.C. 187 (1973). Accordingly, we hold that Mr. Schwartz may deduct $500 a year for each of the years 1952, 1953, 1954, 1955, and 1956 to cover his business travel and entertainment expenses. Although the respondent has conceded that Mrs. Schwartz is not liable for any fraud penalties for the years 1949 and 1954 through 1956, she is liable for deficiencies for those years, except to the extent section 6013(e) relieves her of such liability. Nathaniel M. Stone, 56 T.C. 213">56 T.C. 213 (1971). Under that provision, an innocent spouse who signs a joint return is relieved of liability for a deficiency in tax attributable to the omission of income of the other spouse, if the omitted income exceeds 25 percent of the income stated on the return, if the innocent 118 spouse did not know of the omission (and had no reason to know of it), and if it would be inequitable to hold the innocent spouse liable for the deficiency. The respondent has conceded that Mrs. Schwartz is an innocent spouse under section 6013(e). Since, for each year, the amounts omitted were significantly in excess of 25 percent of the amounts of gross income reported, Mrs. Schwartz is entitled to the benefits of section 6013(e) for the amounts so omitted. In our findings of fact, we have set forth the amounts of omitted income for this purpose. The next issue posed herein is the petitioners' liability for failure to file declarations of estimated tax for the years 1949 and 1954 and Mr. Schwartz" individual liability for his failure to so file for the years 1952 and 1953. Sec. 294(d) (1) (A). Under that provision, an addition to tax is imposed on a taxpayer who fails to make a timely declaration of estimated tax, unless the failure is due to reasonable cause. When, as here, the respondent determines that such addition to tax is due, the petitioners have the burden of proving either that they did make a timely declaration or that the failure to file was due to reasonable cause. 119 Rene R. Bouche, 18 T.C. 144">18 T.C. 144 (1952). No evidence was presented concerning whether such declarations were actually filed, and thus, it must be concluded that they were not filed. Moreover, although in his petition and reply, Mr. Schwartz implicitly denied liability for such penalties, his failure to present any evidence and his failure to make any arguments in his brief on the issue warrants a conclusion that he has conceded that he is liable for such penalties. Paula Construction Co., 58 T.C. 1055">58 T.C. 1055 (1972), affd. without published opinion 474 F.2d 1345">474 F.2d 1345 (C.A. 5, 1973). Under section 58(a), I.R.C. 1939, Mrs. Schwartz was not required to file such declarations and is consequently not liable for any penalties imposed under section 294(d) (1) (A). During the years 1949 and 1954, she had no independent income of her own. Although she was named the owner of an interest in the St. George building, the respondent conceded, and we have found, that she was a mere nominee for Mr. Schwartz with respect to it. As such, the income from the sale was not heres, but Mr. Schwartz", and thus, she need not have filed the declaration on the basis of receiving any income from the sale of the St. George *120 building. Solomon v. Commissioner, 204 F.2d 562">204 F.2d 562 (C.A. 4, 1953), affg. a Memorandum Opinion of this Court; Edwin B. Michael, Administrator, 16 B.T.A. 1365">16 B.T.A. 1365 (1929). On brief, the respondent also argued that the petitioners are liable for additions to tax for failure to timely file their 1954 joint Federal income tax return. Sec. 6651(a). The only mention made of this penalty in the statutory notice was that there was an overassessment with respect to it. Consequently, we hold that the issue was not properly raised by the notice of deficiency and that we cannot consider such an issue when first raised in a brief. Aubrey S. Nash, 31 T.C. 569">31 T.C. 569 (1958). Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: Posey Schwartz, docket No. 6222-70; and Milton H. L. Schwartz, docket No. 6232-70. ↩2. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated. ↩4. Any reference to sec. 294(d) (1) (A)↩ is to that section of the Internal Revenue Code of 1939. 3. The addition to tax for fraud for the years subject to the Internal Revenue Code of 1939 were assessed under sec. 293(b) of that Code. Any reference to such section is to that section of that Code. ↩5. All references to Rules are to the Tax Court Rules of Practice and Procedure. ↩6. No interest or accident expense was deducted in 1955 nor was any $1,000 figure deducted. However, the respondent's deficiency notice disallowed a $1,000 interest deduction for the year 1955. Since Mr. Schwartz never mentioned the disallowance and since Mrs. Schwartz particularly argued for the deductibility of such expense in 1955, a $1,000 interest expense shall be treated as having been deducted in and disallowed for 1955. However, on their 1956 joint Federal income tax return, the petitioners took a deduction for $1,000 pursuant to an expense labeled "accident"; such deduction was not disallowed by the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624301/	Earl L. Lester and Mary Gray Lester, Petitioners, v. Commissioner of Internal Revenue, RespondentLester v. CommissionerDocket No. 60074United States Tax Court32 T.C. 711; 1959 U.S. Tax Ct. LEXIS 144; June 17, 1959, Filed 144 Decision will be entered under Rule 50. 1. Petitioner Earl L. Lester was a member of a partnership engaged in the business of renting and selling air specialty equipment and other equipment. Its primary business was the renting of the equipment to customers. The rental contracts provided an option that the customer might purchase the equipment rented during the time of its use and if he did so, the rents theretofore paid would be applied as part of the purchase price. Held, the rentals paid the partnership were ordinary income until the time of purchase under the option and the Commissioner is sustained in so treating them in his determination of the deficiencies.2. Petitioners raise an alternative issue to the effect that if the Court finds on the primary issue that the rental payments made in prior years cannot be considered, then petitioners contend that the rental payments made in the current years should not be taxed until their correct nature as rental income or as sales proceeds can be determined in a future year when the option to purchase is either exercised or forfeited by the rental purchaser. Held, petitioners' alternative contention is denied. It is 145 held that it was the intention of the parties that the rental payments under the contracts were intended as rental payments for the use of the equipment and are ordinary income in the year when received, as the Commissioner has determined. John G. Heard, Esq., and Marvin K. Collie, Esq., for the petitioners.John J. King, Esq., for the respondent. Black, Judge. BLACK 712 The Commissioner has determined deficiencies in petitioners' income tax and an addition thereto under section 294(d)(1)(A), 1 as follows:Addition to tax,YearDeficiencysec. 294(d)(1)(A)1952$ 7,544.12$ 2,618.7919535,625.26The deficiency for 1952 is due to the addition to the net income reported by petitioners on their return of "(a) Ordinary income $ 15,994.09" and to an additional deduction allowed petitioners of "(b) Capital gains $ 7,996.89." These adjustments are explained in the deficiency notice as follows:(a) It is held that ordinary146 income is properly increased in the amount of $ 15,994.09 from the partnership of E. L. Lester & Company in that a portion of the gain from the sale of rental equipment is ordinary income to the extent rental payments were included in the sale price of the equipment.(b) Due to the inclusion in ordinary income of rental payments reported as capital gains, capital gains reported are herein decreased in the amount of $ 7,996.89.The deficiency for 1953 is due to similar adjustments to those described above and are explained in the deficiency notice in a similar manner as were the adjustments for 1952. The only difference is as to the amounts of the adjustments.Petitioners assigned error as to these adjustments made by the Commissioner. As to the addition to the tax for the year 1952 imposed by the Commissioner under section 294(d)(1)(A), petitioners in their brief state as follows:Petitioners concede the correctness of such penalty, if any, as may be computed on their 1952 income tax as determined by the Court in this proceeding pursuant to the provisions of para. 294(d)(1)(A) of the Internal Revenue Code of 1939, as amended. * * Effect will be given to this concession under147 Rule 50.FINDINGS OF FACT.Some of the facts were stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by reference.The petitioners, Earl L. Lester, hereinafter sometimes referred to as petitioner or Lester, and Mary Gray Lester, are husband and wife and reside in Houston, Texas. The petitioners own, under the community property laws of the State of Texas, a community interest in the partnership of E. L. Lester & Company, hereinafter referred to as the company.The petitioners filed joint income tax returns for the taxable years 1952 and 1953 with the director of internal revenue at Austin, Texas, 713 and filed a declaration of estimated tax for 1952 on September 9, 1952, with the collector of internal revenue, Austin.The partnership, the company, filed partnership tax returns for the fiscal years ended January 31, 1950, through January 31, 1954, with the director of internal revenue at Austin.Since 1949, the company has been in the business of renting and selling air specialty equipment such as air compressors, air tools, and sandblasting equipment. It also rents and sells spider staging equipment, pumps, concrete148 equipment, and small hoses. The company has been engaged primarily in the rental business.During the fiscal years ended January 31, 1952, and January 31, 1953, the company sold 90 units of rental equipment which are the subject of this controversy. These units of rental equipment were being used under rental agreements executed by the company and the lessee of the equipment. The 90 units of rental equipment forming the basis of the dispute, hereinafter referred to as the 90 units, were rented by final lessees. A "final lessee" means the user of the equipment who, during the rental period, purchased the unit of equipment. The period of use while in the possession of the final lessee is designated as the final rental period. The company maintained a repair shop for the maintenance of its equipment and paid the insurance premiums on its equipment.The company maintained its books of account and filed its tax returns on the basis of a fiscal year accounting period, such accounting period ending on January 31. The company maintained its books and filed its tax returns under an accrual method of accounting. A journal was maintained by the company in which one section was denominated149 "Sales Journal." The columns in the sales journal were captioned as follows: Date; Name of Customer; Invoice Number; Sales Credit; Rental Credit; Spider Sales; Spider Rental; Accounts Receivable -- Debit and Credit; Cash Sales -- Debit; Sundries -- Debit and Credit.The company maintained two classifications for its equipment. The equipment was classified either as merchandise inventory, which comprised equipment held for sale to customers in the ordinary course of business, or rental equipment. The company maintained cards on all its equipment and the card was denominated as either merchandise or rental equipment depending upon expected use of the equipment when the unit was acquired by the company.The company maintained the following records in connection with its rental equipment: (a) Rental equipment cards, hereinafter referred to as rental cards, (b) order tickets, (c) delivery tickets, (d) contracts, (e) correspondence, (f) monthly rental invoices, and (g) "final billing" invoices. All of the documents, with the exception of 714 the monthly rental invoices, were maintained in the company's rental equipment files.Each rental card had typed at the top an appropriate150 description of the unit of equipment. The columns in the rental card referred to the date of the invoice, the invoice number, the customer to whom the invoice was issued, the beginning date that the rental equipment was delivered and thereafter refers to the beginning period of each monthly invoice, the date to which the invoice covered payments, the rental period covered by the invoice, the amount charged, and the accrued rentals received on the unit of equipment to date.On some occasions the company executed an order ticket when it received an order for the rental of a unit of rental equipment. The order ticket contained the following: The date the unit of equipment was required to be delivered, the customer's name, the place where the unit was to be shipped, the terms of the agreement as either rental or purchase, the number of units ordered, the description of the unit, and the price.The company prepared a delivery ticket at the time a unit of rental equipment was delivered to the customer. This delivery ticket contained essentially the same information as described in the order ticket in the paragraph above. A place was provided at the bottom of the delivery ticket where151 the person receiving the equipment could sign the delivery ticket and acknowledge receipt of the equipment. Above the space provided for the receipt of the equipment were the words "General conditions of rental on reverse side." On the reverse side of the delivery ticket the following was printed:GENERAL CONDITIONS OF RENTALThe Contractor or Lessee of listed rental equipment agrees:To accept full responsibility and liability for any and all damages to listed equipment due to improper operation, maintenance, and/or lubrication, freezing, fire, theft, windstorm, hailstorm, flood, riot, insurrection, strike, explosion, collision, upset, damages while being transported, loaded, or unloaded, or for any causes whatsoever other than ordinary wear and tear.To return all equipment and accessories to E. L. Lester & Co. warehouse, in as good condition as when received, ordinary wear and tear excepted.To pay for repairs or replacements of all parts damaged by misuse, or for all other extraordinary damage done.To notify E. L. Lester & Co. if this equipment, or any portion thereof, is in use for more than 8 hours in one day, 56 hours in one week, or 240 hours in one month, and to pay to 152 E. L. Lester & Co. a pro rata portion of the applicable rental rate for the extra use of the equipment.To hold E. L. Lester & Co. free and harmless for all liability or damages to persons or property while equipment is in his or their possession.Not to assign, transfer, sublet, or part with the possession of listed equipment either directly or indirectly.Not to commit or permit any act whereby listed equipment or any part thereof shall or may be seized, taken in execution, attached, removed, destroyed or injured.715 In case of default of any of the terms of this agreement, E. L. Lester & Co., their agents or servants, may at its option enter the premises where listed equipment is used or any premises where said equipment may be found and remove same therefrom, without notice, or demand, and without being guilty of any trespass or wrong. E. L. Lester & Co. is not liable for any damage because of such removal of equipment, and the Contractor or Lessee agrees to pay all expenses incidental to said removal, and to pay an additional 15% as a collection charge in cause of any default in payment whereby it becomes necessary for E. L. Lester & Co. to place the account in the hands153 of an attorney for collection.After the unit of rental equipment was delivered to the final lessee, the company issued invoices covering a period of use designated in the invoice. The invoices stated that the charges were for "Rental From-To" or, in other words, the specific period covered by the invoices which was usually monthly periods. The data on the monthly rental invoices was transcribed to the rental cards by the company's employees.The rentals charged under the invoices covering the 90 units were the fair rental value of the units of equipment. The rentals charged a final lessee using a unit of equipment under a straight rental agreement and the final lessee using the same type of equipment under a rental-purchase agreement were the same.The monthly rental invoices on the 90 units were recorded in numerical sequence in the sales journal. The income shown on the monthly rental invoices was credited to the rental income account.At the end of each month, each of the columns in the sales journal, which included the rental income column, was totaled and posted to the appropriate ledger sheets in the general ledger maintained by the company. All of the monthly payments154 received by the issuance of the monthly rental invoices for the 90 units were credited to the rental income account.When the company sold a unit of equipment it issued a "final billing" invoice. The amount stated in this invoice was credited to either the "Rental Cr." account or the "Sales Cr." account in the sales journal.The 90 units of rental equipment here involved were in the possession of the final lessees under either straight rental agreements, or rental agreements in which the final lessees had the option to purchase the units of equipment. In the case of straight rental agreements, there was an implied option to purchase because of the trade practice in Houston and adjacent territory. The customers were aware of that practice when they rented the equipment from the company.The documents, letters, and contracts executed contemporaneously with the delivery of equipment show that the company entered into the following types of agreements with the final lessees: 716 Year ended Jan. 31 --19521953Straight rental with no written option to purchase2523Rental-purchase agreements16264149The following schedule summarizes the pertinent155 data contained in the above-stated documents, letters, and contracts:Fiscal yearsendedJan. 31,1952 and 1953Number of units of rental equipment in dispute90Number of units rented 1 or more times prior to final rental59Number of units with no rental prior to final rental31Number of units where equipment card showed monthly rental rate74Monthly rental charged final lessee:Same as monthly rental rate on equipment card61Less than monthly rental rate on equipment card9More than monthly rental rate on equipment card4Number of units where all or a portion of cost of 90 units ofrental equipment recovered through depreciation deduction:100 per cent depreciated2975 per cent-99 per cent depreciated650 per cent-75 per cent depreciated1325 per cent-49 per cent depreciated290 per cent-24 per cent depreciated3Information pertaining to agreements set forth on deliverytickets covering some of the disputed unitsStraight rental agreements:Rental block checked55Words "On Rental" written on delivery ticket in addition torental block checked24Rental-purchase agreements:Rental and purchase blocks checked or the word "purchase"written in rental block28Terms of rental-purchase agreement written on face ofdelivery ticket but rental and purchase blocksnot checked4Delivery tickets containing terms of rental-purchaseagreement15Sale of 90 unitsYear ended Jan. 31, 195241Year ended Jan. 31, 195349156 The rental agreements applicable to 88 of the 90 units of rental equipment contained no requirements for a minimum or maximum rental period. Two of the rental agreements specified minimum rental periods which were guaranteed by the final lessees.717 On the straight rental agreements executed by the company which did not contain any express option to purchase, there was a possibility, though not a part of the rental agreement, that the final lessee could purchase the unit of equipment he was using under the rental agreement. The company allowed him to do so if he wished.When the renter-purchaser decided to exercise his option to purchase, the company sent a final billing showing the agreed purchase price and allowing credit for all of the periodic "rental" payments received by the company. Until that time, generally the company did not know whether the renter-purchaser would exercise his option or not but it was understood that the periodic "rental" payments received by the company would be retained by it in all events, either as rentals, if the option was not exercised, or as a part of the sales proceeds, if the option was exercised.On all 90 units of rental equipment, 157 whether they were used under straight rental agreements or rental-purchase agreements, when they were subsequently sold the company treated all payments received during the final rental as part of the purchase price (except as to two items). In order that the sales of the 90 units could be classified as sales of depreciable property, the company, during the fiscal years of actual sale (January 31, 1952, and January 31, 1953), made adjusting journal entries to remove from the equipment rental income account and the sales account the amounts which had been credited to those accounts during the entire final rental period. The rental income account and the sales account were debited with the collections which have been credited to those accounts previously from the date of final rental and the account designated "Gains on Sale of Depreciable Property" was credited with a like amount.The account designated "Gains on Sale of Depreciable Property" was a compound account and takes into account the proceeds received and the adjusted cost of the property. The company debited this account with the adjusted cost basis of the 90 units of equipment.The company's rental income in the years 158 ended January 31, 1952, and January 31, 1953, according to its books and returns, was as follows:Year ended Jan. 31 --19521953Rental income per books prior to reclassificationof rentals$ 358,695.26 $ 324,890.92 Rental income reclassified as proceeds from saleof depreciable property(36,717.20)(26,944.59)321,978.06 297,946.33 Other adjustments(186.60)(2,225.40)Rental income per books and returns321,791.46 295,720.93 718 The company's Federal tax returns for the years ended January 31, 1952, and January 31, 1953, reported net long-term capital gains from the sale of depreciable property in the amounts of $ 31,987.57 and $ 30,139.45, respectively. In determining whether each unit of equipment was held longer than 6 months, the company used the date of final billing in respect to each unit of equipment as the date the company's holding period terminated. The date of the final billing was considered by the company, for the purpose of depreciation, as the date each unit of equipment was sold.During the fiscal years ended January 31, 1952, and January 31, 1953, the company claimed depreciation until the final billing date on 41 159 units and 49 units, respectively.During the fiscal years ended January 31, 1950, and January 31, 1951, the 2 fiscal years prior to the ones which we have before us, the company sold rental equipment which it had out on rental agreements. All the income received from the rental of these units of rental equipment during those fiscal years was reported as rental income and the gains realized from the sale of the rental equipment were reported as sales income. No capital gains or losses were reported by the company on its partnership returns for those years.For the taxable years 1952 and 1953, the petitioners reported on their joint income tax returns their percentage of profit from the company, as reported by the company on its partnership returns for the fiscal years ended January 31, 1952, and January 31, 1953. Petitioners listed as their percentage of net long-term capital gains $ 15,993.79 and $ 15,069.72 for the taxable years 1952 and 1953, respectively.In his determination of the deficiency, respondent determined: (a) That the partnership income for the fiscal years ended January 31, 1952, and January 31, 1953, was understated, in that all payments made by the final lessees160 to the company which were credited to the rental income account prior to the final billing were rental income, and not proceeds of the purchase price of the equipment, thus, for the fiscal years ended January 31, 1952, and January 31, 1953, the respondent increased the rental income of the partnership $ 36,717.20 and $ 26,944.59, respectively; and (b) that the amount paid under the final billing was the purchase price of the 90 units and computed the gain or loss from the sale of the rental equipment by deducting from this price the adjusted cost of the equipment as shown by the company on its tax returns for the fiscal years involved. For the fiscal year ended January 31, 1952, respondent determined that there was a loss on the sale of the rental equipment and allowed $ 4,729.03 as an ordinary loss. For the fiscal year ended January 31, 1953, the respondent determined that there was a long-term capital gain of $ 3,194.84. Thus, the respondent disallowed $ 31,987.57 and $ 26,944.59 as long-term 719 capital gains for the fiscal years January 31, 1952, and January 31, 1953, respectively, and held against petitioner's contention in that respect.OPINION.The primary issue in161 this case is whether certain rental payments received by the company, a partnership, during its fiscal years ending January 31, 1952 and 1953, which were allowed as a credit against the option (purchase) price of rental equipment are section 117(j) proceeds from the sale of such rental equipment, as the petitioners contend, or are merely rental income from such equipment prior to its sale, as the Commissioner has determined in his deficiency notice. The respondent concedes that the final payment made when the option to purchase was exercised (but only that amount) constitutes section 117(j) 2 proceeds.162 The partnership of E. L. Lester & Co. kept complete records of its receipts and disbursements. As to that the Commissioner makes no complaint. The Commissioner's complaint arises as to the company's manner of treating the rental payments which it received. The partnership of which petitioner was a member was in the business of renting machinery and equipment to others. It also was in the business of selling machinery and equipment. However, its main business was that of renting machinery and equipment to others. As to that both parties seem to agree.During the taxable years 1952 and 1953, the company sold some machinery and equipment which it was holding primarily for sale. As to these sales there is no dispute. The dispute arises as to the treatment by the company of rental payments received. That treatment may be summarized as follows:At the end of the fiscal years ended January 31, 1952 and 1953, the amounts received by the company on the units of equipment not sold during the year were reported as rental income. The company, on all units of equipment sold, treated all payments received from the lessees, from the date of the rental agreement, as part of the purchase163 price on the sale of depreciable property. The company reduced the rental income account in each of the fiscal years ended January 31, 1952 and 1953, by the amounts credited to the rental 720 income account from the 90 units of equipment prior to their sale. The company, on its tax returns, claimed depreciation on the 90 units of equipment up to the date of the "final billing." In determining whether the company had held the units of equipment more than 6 months for the purpose of determining long-term capital gains, the "final billing" date was considered as the date the company's holding period terminated. This date was listed on the company's tax returns as the date the unit of equipment was sold.The company reported long-term capital gains on the 90 units of equipment sold during the fiscal years ended January 31, 1952 and 1953, in the amounts of $ 31,987.57 and $ 30,139.45, respectively.The respondent's position is that the sale of the units of rental equipment took place when the option to purchase was exercised under rental-purchase agreements, or when negotiations produced a sale under straight rental agreements. The amounts received up to the date of the "final164 billing" are rental income and not part of the purchase price. Respondent contends this was the intention of the parties and that the company is now seeking to rewrite its contracts. Respondent made his adjustments shown in the deficiency notice in accordance with the foregoing contentions.To begin with, it may be pointed out, as we understand it, that in prior years the company treated the payments received on its rental contracts pretty much the same as the Commissioner contends they should be treated in the taxable years which we have before us. But in its fiscal year ending January 31, 1952, the company changed its method of handling these transactions and adopted the method for which it now contends and it has followed that method down to the present time. Undoubtedly, if the method used by the company in years prior to the ones we have before us was wrong, it had the right to change it. The Commissioner does not contend otherwise. But was the company's prior method wrong and is its present method correct? That is the question which we must decide based on the facts which we have before us and the applicable law.Petitioner had as one of his witnesses at the hearing an165 accountant of long training and experience. The substance of his testimony was that if the method used by the company in the 2 years which we have before us is used consistently over a period of years, it will correctly reflect the income of the company. But methods of accounting do not solve the problem taxwise which we have before us. Cf. Curtis R. Andrews, 23 T.C. 1026">23 T.C. 1026. It is rather the agreement and intention of the parties that determine the nature and character of the payments in question. It is true, of course, that all the proceeds of the company's business were reported by the method of accounting adopted by it, but the question before our Court is whether these rental payments received prior to the exercise of the option to purchase are to be reported 721 as rents and therefore ordinary income as the Commissioner contends, or as capital payments as the petitioner contends. The answer to this question depends upon applicable law and regulations rather than on what some might term "good accounting practice."In Chicago Stoker Corporation, 14 T.C. 441">14 T.C. 441, where we held that payments made during each of166 the taxable years were purchase price of a business in which the taxpayer was acquiring an equity and were not expenses deductible as made, we said:Cases like this, where payments at the time they are made have dual potentialities, i.e., they may turn out to be payments of purchase price or rent for the use of property, have always been difficult to catalogue for income tax purposes. A fixed rule for guidance of taxpayers and the Commissioner is highly desirable, and it is also desirable that the rule, whatever it is, be as fair as possible, both to the taxpayer and the tax collector. * * In their respective briefs both parties cite and discuss many cases which have dealt with one phase or the other of the problem. We do not think it would be helpful to take up and discuss these various cases and undertake to decide on which side of the line they fall. We think it is sufficient to say that, in our opinion, a study of these cases discloses that the principle extending through them is that where the "lessee," as a result of the "rental" payment, acquires something of value in relation to the overall transaction other than the mere use of the property, he is building up an equity167 in the property and the payments do not therefore come within the definition of rent contained in section 23(a)(1)(A). D. M. Haggard, 24 T.C. 1124">24 T.C. 1124. On the other hand, if the parties actually intend to enter into a lease contract containing an option to purchase, with normal rentals to be paid thereunder, then the lessee, up until the time he exercises his option to purchase, acquires no title to or equity in the property. What he has paid as rent up until he exercises his option to purchase is rent and should be treated as such in dealing with his tax liability. Benton v. Commissioner, 197 F.2d 745">197 F. 2d 745.We have carefully examined and considered the evidence in the instant case and it seems to us to show that the customers who rented the equipment from the company in the taxable years intended to rent it. What they paid the company prior to the exercise of the option to purchase was rent and was so understood by the parties. In some cases the rental contract contained an express provision permitting the lessee an option to purchase and when the option to purchase was exercised, to have the rentals theretofore paid 168 apply as a part of the purchase price. In other cases there was no express option to purchase but a mere rental contract. However, the testimony as to these latter-described contracts is to the effect that there was an implied right in all of them of the lessee to purchase and have the rentals apply to the purchase price.722 Therefore, in our decision on the primary issue here involved we shall treat the rentals under both classes of contracts in the same manner. But we do not think that the company, in computing its income from these transactions, has any legal right to treat the rental payments as part of the purchase price until the option to purchase has been exercised. When that event takes place, the final payment is, of course, a capital payment and the Commissioner has so treated it. We agree with the Commissioner, however, that, although under the terms of the agreement, when the option to purchase was exercised, the rental payments theretofore made were treated as payments on the purchase price, this fact does not convert the rental payments theretofore made into capital payments for tax purposes.We sustain the Commissioner in his manner of treating these rental169 payments.Alternative Contention.In the event that we should decide the primary issue against them, the petitioners raised an alternative issue which is to the effect that the rental payments made to the company in the current taxable years should not be taxed until their correct nature as rental income or sales proceeds can be determined in a future year when the option to purchase is either exercised or forfeited by the renter-purchasers. We think this alternative contention is without merit. What we have held in deciding the primary issue is that the rental payments were ordinary income when received by the company and are income in the year when received. Their character was not changed when the lessee exercised his option to purchase. That is the very essence of our holding.The principle is well established that each taxable year is a separate unit for tax-accounting purposes. United States v. Lewis, 340 U.S. 590">340 U.S. 590; North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417; Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359. Petitioners' alternative contention is not sustained. 170 Lengthy schedules are attached to the stipulation of facts which show relevant data with respect to each of the 90 units of equipment which are involved in the controversy between the parties. We have not set out these schedules in our findings because to do so would lengthen the findings and we do not think it is necessary. The schedules have been incorporated in our Findings of Fact by reference. What we have held as to rental payments and purchase price payments as to the 90 units of equipment included in these schedules should be given effect in a recomputation under Rule 50. Also, depreciation should be computed to the date of sale, which date was the date when the option to purchase was exercised. Up until that 723 time the company was the owner of the equipment -- we do not understand that respondent contends otherwise.Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1939.↩2. SEC. 117. CAPITAL GAINS AND LOSSES.(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. -- (1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624302/	HERBERT J. BLUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FRANK E. ALSTRIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BENJAMIN F. STEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. L. MONTEFIORE STEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Blum v. CommissionerDocket Nos. 39629-39632.United States Board of Tax Appeals27 B.T.A. 1033; 1933 BTA LEXIS 1261; March 27, 1933, Promulgated 1261 S. Sidney Stein, Esq., for the petitioners. Chester A. Gwinn, Esq., for the respondent. TRAMMELL 1034 This is a proceeding for the redetermination of deficiencies in income tax for 1924 as follows: Herbert J. Blum$2,727.32Frank E. Alstrin3,896.30Benjamin F. Stein11,909.44L. Montefiore Stein10,308.93The proceedings were consolidated for hearing. The question involved is whether the transaction in 1924, whereby the partnership of which the petitioners were members earned income, was closed in 1924, or whether the two contracts together constitute one transaction which was not closed and resulted in no gain or loss until 1925. FINDINGS OF FACT. The petitioners were partners of the firm of Stein, Alstrin & Company for the year 1924, and were entitled to the following proportions of the net income of said firm for that year: Per centL. Montefiore Stein45.2Benjamin F. Stein27.0Herbert J. Blum13.0Frank E. Alstrin10.8Stein, Alstrin & Company was a stock and bond brokerage concern, being members of the New York and Chicago Stock Exchanges, and the New York Curb Market. On September 23, 1924, a1262 preliminary underwriting agreement was entered into between Stein, Alstrin & Company, as bankers, and one Sidney C. Anschell, as owner of substantially all of the capital stock of Universal Theatres Concession Company, which contract provided that the bankers would undertake an investigation of the legal, financial and physical conditions of the company and if found satisfactory would notify said Anschell to that effect and thereupon he would cause the company to be reorganized, as provided therein and would cause to be sold to said bankers 40,000 shares of Class "A" stock at $20 per share. It was further provided in the preliminary contract that the bankers were not obligated to carry out any of the undertakings with respect to the purchase of said stock unless (1) certain attorneys mentioned therein should furnish their approving legal opinion as to the organization, titles, etc., of the company; (2) the stock were qualified for sale in the State of Illinois; and (3) the bankers 1035 satisfied themselves that they would succeed in having said shares of stock regularly listed on the Chicago Stock Exchange. Under date of September 23, 1924, and at the same time as the1263 aforesaid preliminary contract was executed, it was also agreed between said Stein, Alstrin & Company and said Sidney C. Anschell as follows: SEPTEMBER 23, 1924. Mr. SIDNEY C. ANSCHELL: In connection with the contract between you and ourselves of even date herewith, it is understood that we will conduct and operate a trading pool or syndicate for the purpose of establishing and protecting a free and open market for the Class A shares of the new "company," mentioned in said contract. It is further understood that you will contribute $50,000.00 toward the capital of said pool and that we will contribute such additional amounts as may be required for the proper operation and conduct of said pool, up to an additional amount of $50,000.00. You will receive fifty percent of any profits which may be earned by the operations of the pool, and you shall be chargeable with fifty percent of any loss which may be incurred in the operation of said pool. The above capital contribution to be paid by you, shall be held by us in the account of said pool or syndicate for a period of ninety days from date of payment, and we shall have the right to retain same in said account for a further1264 period of ninety days in case we deem same necessary. We are to have exclusive management and control of the operations of the pool and shall determine in our own discretion at what times and in what manner payments shall be made therefrom. Upon termination of the pool, all monies or shares of stock remaining therein shall be equally divided between you and ourselves. STEIN, ALSTRIN & Co., By BENJAMIN F. STEIN. Approved and accepted by: SIDNEY C. ANSCHELL (Seal) On October 7, 1924, the aforesaid preliminary agreement was consummated by two final contracts: (1) Agreement between Sidney C. Anschell and his associates, who owned or controlled all of the capital stock of the Universal Theatres Concession Company, thereinafter referred to as the "Concession Company," and Stein, Alstrin & Company, a partnership, thereinafter referred to as "Bankers," which contract provided in part as follows: C. It is understood that of its authorized capitalization the New Company will issue to the stockholders of the Concession Company forty thousand (40,000) shares of Class "A" Stock and forty thousand (40,000) shares of Class "B" stock, and that said stockholders will sell to1265 the Bankers, and the Bankers will purchase from said stockholders, forty thousand (40,000) shares of Class "A" stock at Twenty ($20.00) Dollars per share, delivery of said shares and payment therefor to be made at the office of the Bankers in the 1036 City of Chicago, Illinois, on or before (at the option of the Bankers) ninety (90) days from the date hereof. * * * E. Notwithstanding anything hereinbefore contained, it is expressly understood and agreed that the Bankers shall not be obligated to carry out any of the undertakings herein contained with respect to the purchase of said stock of the New Company unless 1. Moses, Rosenthal & Kennedy, counsel for the Bankers, shall furnish their approving legal opinion as to the organization of the New Company, its title to its properties and assets, including trade-names, trade brands, etc., the validity and due issuance of the stock to be purchased by the Bankers hereunder and all other pertinent legal matters, and 2. The New Company shall have taken such steps that the shares of stock to be purchased by the Bankers may legally be sold under the Illinois Securities Law in at least as favorable a class as class "C" securities, 1266 and 3. The Bankers shall have satisfied themselves that they will succeed in having such shares of stock regularly listed on the Chicago Stock Exchange (the Bankers to sponsor said stock and use all reasonable efforts to have same listed), it being understood that the New Company will make and submit all necessary papers to enable such stock to be listed and will duly appoint a Registrar and Transfer Agent of its capital stock as provided by the rules of said Exchange. (2) Agreement as follows: Memorandum of Agreement, Made and entered into this Seventh Day of October, 1924, by and between Sidney C. Anschell of Chicago, Illinois, and Stein, Alstrin & Co., a copartnership of Chicago, Illinois. Witnesseth: In consideration of the execution of a contract of even date herewith between Sidney C. Anschell (and the other stockholders of the Universal Theatres Concession Company) and Stein, Alstrin & Co., the parties hereto hereby agree with each other as follows: In order to facilitate and increase the sales from time to time upon the open market of the Class "A" shares of stock mentioned in said contract of even date herewith, and to maintain an active, free and open market1267 for said shares, Sidney C. Anschell hereby agrees to contribute Fifty Thousand ($50,000) Dollars towards the capital of a trading account to be conducted through Stein, Alstrin & Co., by a trading group, which account shall be maintained for a period not to exceed six (6) months from the date that said Class "A" shares shall be admitted to trading on the Chicago Stock Exchange. Stein, Alstrin & Co. or its nominee shall act as manager for said trading group and said firm of Stein, Alstrin & Co. (or such other broker as may by said firm be appointed in writing) shall act as exclusive and sole broker for said group. The members of said trading group shall be Sidney C. Anschell and Stein, Alstrin & Co. (or the nominee of Stein, Alstrin & Co.). Stein, Alstrin & Co. shall from time to time contribute such additional amounts toward the capital of said trading account as in its discretion may be required for the proper operation and conduct of said account, provided that the aggregate of such additional contributions shall not exceed the sum of Fifty Thousand ($50,000) Dollars. Said Manager of said trading group shall have full power to use all or any part of said capital fund for1268 the purpose of buying or selling the said Class "A" 1037 shares of stock and shall have full discretion as to the management of said account and of the times when and the prices at which to buy and sell said shares; and shall have the right to charge against said account all commissions, interest, expenses and losses, if any, incurred as a result of trading in behalf of said trading group. Said account shall be continued in operation for such period of time as may from time to time be determined by said Manager, provided, however, that the same shall not continue longer than six months from the date said Class "A" shares shall be admitted to trading upon the Chicago Stock Exchange without the written consent of the members of said trading group. Upon the termination of the operations of said trading group, all of the assets remaining in or belonging to said trading account, whether the same be cash or stock, shall be distributed in two equal parts among the aforesaid members of said trading group. In case of ultimate loss in said account, each member of said group shall pay one-half thereof. Pursuant to the above two contracts, the Class "A" stock of the Universal1269 Theatres Concession Company was qualified under the Illinois Securities Act on or about October 25, 1924, and application to list the stock on the Chicago Stock Exchange was filed on or about November 1, 1924, and hearings were had before the Stock List Committee on the 3rd day of November, 1924. During the hearings before the Stock List Committee, inquiry was had as to what arrangements had been made to take care of the "market" for the stock or the "secondary distribution" thereof after it was listed for trading on the exchange. The exchange would not permit the listing of new stock for trading unless there was (1) a satisfactory primary distribution of the stock, and also (2) the assurance of proper "sponsorship" for the "secondary distribution" to create an active market for the stock in order to insure a "bid" and "ask." The aforesaid two requirements were ordinarily and customarily insisted upon as a prerequisite to the listing of new stock. The aforesaid syndicate or trading group contract, dated October 7, 1924, was then disclosed and explained to the committee. The committee was thereupon satisfied that the market operations would have sufficient "sponsorship" and recommended1270 the stock for listing. Thereafter, the recommendation of the committee was approved by the Board of Governors of the Chicago Stock Exchange. The stock was duly listed and admitted to trading on the Chicago Stock Exchange as of November 7, 1924. Prior to this date, Stein, Alstrin & Company had allotted the 40,000 shares of stock referred to in the above contract to several hundred subscribers and the proceeds from this transaction were in the amount of $280,209.21. The bookkeeper, without instructions from any of the partners of Stein, Alstrin & Company, entered this amount on the books, and 1038 the same was included in arriving at the net income of the partnership for the year 1924. Stein, Alstrin & Company kept its books and made its income tax returns on the accrual basis. On the same day that the stock of the Universal Theatres Concession Company was listed (November 7, 1924) the trading group or syndicate account commenced operations pursuant to the above syndicate contract. Stock was purchased and sold in said account from day to day during the balance of the year 1924 and thereafter during the year 1925. The syndicate operations were carried on continuously1271 from the inception of the account until the end of 1925, when the account was closed out and the resulting loss was charged off on the books. There was carried in said syndicate account the following shares on the dates set forth below: December 31, 1924, "long"3,800 sharesJanuary 30, 1925, "long"2,800 sharesFebruary 28, 1925, "long"7,900 sharesApril 30, 1925, "long"8,395 sharesDecember 21, 1925, "long"10,295 sharesPrior to the expiration of the six-month period mentioned in the syndicate agreement (May 7, 1925) the capital of the syndicate account was entirely exhausted and thereafter the partnership continued to conduct the transactions on its own account, resulting in a loss to the partnership from the operations of said account during the year 1925 in the amount of $434,173. It was at that time and still is a customary and usual requirement of the Chicago Stock Exchange, before allowing any new stock issue to be listed, that arrangements satisfactory to it be made to insure free and open trading in the market. The purpose of such requirement is to insure a market for the sale of stock when holders desire to sell and a reasonable offering1272 of stock when purchasers desire to acquire stock in the open market. The maintenance of such free and open trading is also required in order to foster a broad public interest in the stock. Inactive stocks (and stocks in which there is no broad public interest) are not as valuable as collateral in loans as are stocks which enjoy active trading and a broad public interest. Therefore, when listing new stocks, the stock exchange requires such arrangements as will result in creating a broad public interest and active trading in such stock. The syndicate or trading group operations are usual and customary immediately following the listing of new issues and are commonly called the "secondary distribution." These secondary distribution operations are for the purpose of "seasoning" or stabilizing the quotations for such stocks after they have become listed. 1039 The usual and customary accounting practice employed by bankers and brokers, when they not only underwrite or purchase new issues of stock but also participate in the syndicate operations with regard to the secondary distribution thereof, is to return the loss or profit from the entire transaction (both the original1273 underwriting and the secondary distribution) after the syndicate operations with regard to the secondary distribution have been completed. Stein, Alstrin & Company would not have purchased the 40,000 shares, and under the terms of the agreement of October 7, 1924, need not have purchased said stock, if the same had not been listed and admitted to trading on the Chicago Stock Exchange. The Chicago Stock Exchange would have refused to list said stock and admit same to trading unless it was assured that proper arrangements had been made for the secondary distribution or syndicate operations in the market. In computing the distributable income of the partnership for the year 1924, the Commissioner has included the sum of $280,209.21, being the proceeds from the original underwriting or primary distribution of the above stock issue; and, in computing the taxable net income of each of the petitioners upon which the alleged deficiencies have been determined, he has included the proportionate share of each petitioner of said proceeds derived from the original underwriting operation or primary distribution of the stock. It was stipulated that, should the Board hold in determining1274 the distributable income of the partnership for the year 1924 that the aforesaid proceeds derived from the primary distribution of the 40,000 shares of stock should not be included in the distributable income of the partnership for that year, then the correct partnership income for the year 1924 would be $569,982.71, and the distributable share of the respective partners therein would be their respective proportions thereof as set forth in paragraph one of the stipulation. OPINION. TRAMMELL: It is the contention of the petitioners that the stock transaction was not completed in 1924 so as to be taxable in that year; that the "secondary distribution" of the stock was only a part of the underwriting scheme; and that it is necessary to look to the 1924 transaction as well as the 1925 transaction in order to determine whether there is a profit. The petitioners' brief states their contention as follows: The agreement to purchase the stock and the undertaking with respect to the "secondary distribution" thereof constituted a single transaction. 1040 We do not understand that the Commissioner has determined a tax for the year 1924 based upon the purchase of stock alone. 1275 The fact is that the petitioners acquired the stock and sold it in 1924 and the partnership realized, according to the Commissioner's determination, $280,209.21 as profit, which it prorated to the individual partners. In 1925, in order to support the market and afford a secondary distribution of the stock, the partnership lost money. We agree that pursuant to the obligation of the partnership it was necessary for it to continue to deal in stock in 1925 for the purpose of supporting the market and afford the secondary distribution, which obligation it was necessary to assume in order to put the stock upon the stock exchange and to carry out its original obligation in connection with the underwriting. However, we see nothing in this transaction or undertaking inconsistent with the Commissioner's theory that the profit made in 1924 should be subject to tax in that year, and that any profit or loss in 1925, as the result of buying and selling stock in that year in order to bolster up the market, should be treated for tax purposes separately. If a profit was made in 1925 it should be taxed in that year and any loss sustained in that year would be deductible in computing income, if1276 any, for that year. Even considering the underwriting agreement and the agreement with respect to the secondary distribution of the stock in order to protect the market as one transaction, in our opinion, it would be governed by the rule laid down by the Board in the case of , where we said: It is quite true that not all amounts received constitute income; but when a taxable corporation in the course of its business of making profits receives contractual compensation for work done and material furnished, it cannot contend that a part of the amount received is not income because the taxpayer is subject to a collateral obligation, the fulfillment of which may require it to spend some of the amount. The petitioners rely on our decision in . In that case two individuals named Kinne and Lyon, in 1919, approached the partnership of Colgate, Parker & Company with a proposition to acquire the stock of the Mercer Motors Company and sell the same through a syndicate. The partnership agreed to the arrangement on the basis of dividing the profits, one-half to the partnership and one-half1277 to Kinne and Lyon. Thereupon, the partnership and Kinne and Lyon (purchase group) purchased 89,000 shares of Mercer Motors stock and at the same time it entered into an agreement with Kinne and Lyon to form a syndicate (selling group) to sell the stock. The partnership was to be the manager of the syndicate, with power to purchase and sell said stock at such time or times and upon such terms as the partnership should determine. 1041 The principal function of this selling group was to make secondary distribution of the stock. The purchase group, after purchasing the stock went through the form of selling it to the same individuals as the selling group and erroneously entered on their books a profit from this transaction. This so-called profit we held was not income. The question there was whether the transfer from the purchasing group to the selling group was a closed transaction resulting in gain or loss. The partnership and Kinne and Lyon were working together. When the transfer was made from the purchase group to the selling group no profit actually resulted, because it was agreed that it was merely turned over for sale and no sale to outsiders had actually occurred. 1278 It could not be determined what the profit would be until there were some actual sales. The selling group which received the stock was to sell the stock and profits to be derived from sales were to be divided. We held in that case that there was no gain or loss until the transaction was completed. But here we have a different situation. In this case profit was actually realized in 1924. The partnership received the cash in that year from the purchase and sale of the stock. The agreement to protect the market for a reasonable time after 1924, although it may be held to be in substance and effect a part of the original agreement, does not prevent what was received as income in 1924 from being taxed as income in that year. This case is in some respects similar to the case of ; affd., . In that case two individuals sold one-half of the corporation's stock and made a collateral agreement to do other things. It was contended that no gain should be reported upon the sale of the stock until the collateral agreement had been complied with. The court rejected this theory and held that there was gain or loss1279 on the sale of the stock, notwithstanding the fact that the sellers were obligated to do other things in the future. The court said: They (the sellers) received and receipted for the cash payment, and the notes representing the balance of the purchase money were payable to them. The proceeds were deposited by them in bank to their own credit. The written agreement to help build a theatre in the future did not require that any particular money be used; and, if it had, it would not prevent the gain from the sale which produced the money being taxable, there being merely an investment provided for it in advance of its receipt. ; ; . * * There was a completed sale of the stock by Gordon and Clemmons in 1925 resulting in gain; in nowise defeated by the collateral agreement to make future contribution to or for the use of the corporation, or by the pledge of 1042 the purchase price to secure this being done, or by the actual use of part of it in making the contribution. 1280 The case at bar is even stronger on its facts than the Clemmons case, supra. In this case the petitioners bought and sold stock in 1924 and realized a profit therefrom. In 1925 the partnership of which the petitioners were members bought and sold stock resulting in a loss. The money received in 1924 was not deposited for the purpose of securing the carrying out of the contract to protect stock. Even if we should hold that the two contracts involved in this case are tied up together and each mutually dependent upon the other, it does not follow that the determination of gain or loss from the purchases and sales of one contract is dependent upon the amount of gain or loss from the purchases and sales under the other contract. Even if there had been one contract and not two, which ran over from one year into the next and involved purchases and sales, the gain or loss in one year should not be postponed until the gain or loss in the subsequent year is determined. On the petitioners' theory, if gain had been realized in 1925 out of the dealings in stock to protect the market, all of the gain in 1924 should be added to the gain in 1925 and taxed in that year. We think1281 this is inconsistent with the theory of taxation, which is based upon an annual accounting. The gains should be taxed in the year in which received. Each year is on a separate basis. This contract does not involve one single transaction even though we consider the two contracts as one. Even if it were one which involves several transactions, it would not be necessary to wait until all the transactions had been completed to determine the gain. If this were true, a person who secured a contract for a term of years to sell stock on a commission basis and agreed to pay his own expenses would have to wait until the expiration of his contract to determine his gain or loss. We think the more correct method would be to determine the gain or loss on a contract involving separate transactions computed on an annual basis. The sales made in 1924 by the partnership were fully completed and closed in 1924. Title to the stock passed to the purchasers and payment therefor was received. The partnership was not under obligation to the purchasers to buy this stock back at any time or at any price. The partnership's participation in the syndicate formed to trade in stock, and the fact that1282 it did trade in stock in the following year, does not prevent the gain received in a previous year from buying and selling stock being taxable in that year. It is our opinion, therefore, that the Commissioner properly determined the tax upon the 1924 gains and that those gains should not be offset by 1925 losses in dealings in stock. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624303/	JULIET P. HAMILTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hamilton v. CommissionerDocket No. 45790.United States Board of Tax Appeals25 B.T.A. 1317; 1932 BTA LEXIS 1396; April 27, 1932, Promulgated 1396 The taxpayer acquired a valuable painting from her deceased father by a specific bequest in his will. More than two years later she sold the painting for less than its value at her father's death. She was not entitled to deduct the loss under section 208(c) of the Revenue Act of 1926. L. A. Keyes, Esq., for the petitioner. N. Gammon, Esq., for the respondent. MURDOCK 1317 OPINION. MURDOCK: The present controversy arises over an alleged loss sustained upon the sale of a picture painted in oil by the famous English artist of the eighteenth century, Thomas Gainsborough. The petitioner, on her return, had computed her tax upon the basis of ordinary net income and deducted therefrom, to comply with the provisions of section 208(c), $3,337.50 representing 12 1/2 per cent of an alleged capital net loss amounting to $26,700. The Commissioner decided that section 208 did not apply, since there was no deductible loss under section 214(a), and determined a deficiency of $3,337.50. The parties filed a stipulation of facts as follows: It is hereby stipulated and agreed by and between the parties to the above-entitled proceeding, through their1397 respective attorneys of record, that the following are the facts which form the basis for the above-entitled proceeding: That petitioner is an individual residing at Sterlington, New York. That on March 31, 1916 petitioner acquired a Gainsborough Painting as a personal, specific bequest from her father, the late J. Pierpont Morgan, and that said painting was listed on the inventory of the estate of said J. Pierpont Morgan at a value of $100,000.00. That thereafter this painting was kept by petitioner in her home, except that, on several occasions, without pecuniary profit to petitioner, it was placed on exhibition where it was made available for inspection 1318 by art students and lovers of art; and while in petitioner's home it was, by specific arrangement, in certain instances, made available for free inspection. That petitioner kept said painting until April 28, 1926 on which date it was sold for $73,300.00. That in her income tax return for 1926, petitioner subtracted $3,337.50 from the total tax for that year, which amount is 12 1/2 per cent of $26,700.00 which is claimed as a capital loss on the sale of said painting. That said deduction was disallowed by the Commissioner1398 of Internal Revenue. The facts hereinbefore stipulated constitute the entire evidence to be submitted to the Board of Tax Appeals by the parties hereto. Despite the last sentence of the stipulation, we take cognizance of certain other facts important to the petitioner's case which are in evidence through the respondent's admissions and concessions. The fair market value of the painting in question, at the date of the death of J. Pierpont Morgan, was $100,000. The price obtained for it on April 28, 1926, was a fair price obtained in an arm's length transaction. If the petitioner is entitled to deduct, under section 208(c), 12 1/2 per cent of the loss on the sale of the picture, her tax liability was properly computed on her return and was not less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of section 208. The Commissioner has denied that the loss was a "capital loss" within the meaning of the Revenue Act of 1926. The rational of his brief is that the words of the statute are ambiguous, but similar words in previous acts have been interpreted by him as applying only to losses in transactions entered into for profit, and since1399 Congress has continuously reenacted the provision without substantial change, the departmental construction has received the Congressional stamp of approval and is controlling. This argument does not carry conviction in the present case. It is opposed by the rule that doubts in a revenue statute are to be resolved in favor of the taxpayers. Furthermore, there has been no long continued executive construction of a provision reenacted by Congress without substantial change. There was substantial change in the Revenue Act of 1924, and the executive construction relied upon may not be considered to antedate the regulations first published under that act in October, 1924. His determination, however, is correct. The Revenue Act of 1921, in section 206, had given the taxpayer an election to have capital net gain taxed under the special method therein provided. It made no provision for capital net loss. In defining capital assets it required that they be property acquired and held by the taxpayer for profit or investment. The Revenue Act of 1924, in section 208, contained a somewhat similar provision for taxing a capital net gain, but also contained a new provision limiting the1400 amount by which the tax might be reduced on account of a capital net loss. In the definition of capital assets contained in this section, that part of the definition 1319 contained in the 1921 Act above referred to was dropped. The reason for this change was to permit taxpayers, at their election, to have a gain from the sale of residence property taxed under the capital net gain provision. The definition of capital loss is the same in the 1921 Act, 1924 Act, and 1926 Act. There is nothing in the legislative history of the 1924 and 1926 Acts which would indicate that Congress intended to be any more generous in allowing deductions for losses than it had been in the past. A contrary intent appears, since the mandatory provisions relating to capital net loss restricted rather than enlarged the benefits granted taxpayers. See . In our opinion there is no ambiguity in the statute. Section 208 deals with capital gain and losses. The term in controversy "capital loss" is defined in section 208(a)(2) as follows: "The term 'capital loss' means deductible loss resulting from the sale or exchange of capital assets." This1401 definition requires three things: (1) There must be a loss; (2) it must be a deductible loss; and (3) it must result from the sale or exchange of capital assets. In the present case there has been a loss. This loss resulted from the sale of a capital asset. But was the loss a deductible one? Had the statute read "'capital loss' means loss resulting from the sale or exchange of capital assets," her case would have come within the definition. But Congress used the adjective "deductible" to modify the noun "loss," and the adjective may not be disregarded. Its presence in the definition indicates that Congress intended the capital loss provisions to apply only where the loss is the kind of a loss which would otherwise be deductible under the other provisions of the statute. This is the position taken by the Commissioner in his notice of deficiency. Section 214 allows individuals to deduct three kinds of losses, but one kind could have no relation to section 208, since it consists of losses arising from fires, storms, shipwrecks or other casualty, or from theft, whereas section 208(a)(2) is concerned only with loss resulting from a sale or an exchange. The petitioner does not1402 contend that her loss was incurred in any trade or business; therefore, section 214(a)(4) has no relation to this case. This brings us to section 214(a)(5), which allows the deduction, under certain circumstances, of losses incurred in any transaction entered into for profit. The petitioner makes the contention that "the ownership of an object of art representing an investment of $100,000 which is a 'capital asset' even though acquired by gift, is nevertheless a transaction entered into for profit." We do not agree that there is any general rule of this kind. Furthermore, what facts are 1320 there in this case which indicate that in acquiring the picture this petitioner was entering into a transaction for profit or that the possibility of future profit or loss was of any significance in the transaction? We know that she acquired this picture worth $100,000 from her father at his death, in accordance with a specific direction of his will. Why it was given or what the petitioner had in mind in accepting it we do not know. We have not heard that she then had any thought of the ultimate disposition of the painting. She retained the picture for about ten years without ever1403 attempting to derive any money profit from it. Then she sold it for less than its former value. The acquisition of a work of art by an individual is usually for the purpose of realizing benefits of ownership not measurable in money. A probability of money loss may be of little or no importance. No deduction is allowed for loss on property acquired primarily for personal use or enjoyment unless the loss arises from casualty or theft. We need not concern ourselves with its reason for limiting the deduction for losses; the fact is that Congress has not permitted all losses to be deducted from income. Here, there may be no deduction under the law, for the record does not show a loss in a transaction entered into for profit. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624304/	KENT T. EVANS AND GLORIA F. EVANS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEvans v. CommissionerDocket No. 17150-88United States Tax CourtT.C. Memo 1992-276; 1992 Tax Ct. Memo LEXIS 298; 63 T.C.M. (CCH) 3001; May 13, 1992, Filed 298 Decision will be entered under Rule 155. Towner Leeper and John E. Leeper, for petitioners. Steven B. Bass, for respondent. COHENCOHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined deficiencies of $ 1,043 and $ 2,258 in petitioners' Federal income tax for 1980 and 1981, respectively. In the First Amendment to Answer, respondent asserted an additional deficiency of $ 1,369 and an addition to tax under section 6653(a) of $ 121 for 1980 and additions to tax of $ 113 and 50 percent of the interest due on $ 2,258 under section 6653(a)(1) and (2) for 1981. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The issues for decision are: (1) Whether petitioners properly included in income the value of barter exchange trade units received in 1980 and 1981; (2) whether petitioners completed a sale of stock in 1980 and, if so, the amount of gain that they should have reported on their Federal income tax return and, if not, whether they should have reported any income from the transaction; and (3) whether petitioners299 are liable for additions to tax for negligence pursuant to sections 6653(a) and 6653(a)(1) and (2) for 1980 and 1981, respectively. FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Kent T. and Gloria F. Evans (petitioners) resided in El Paso, Texas, at the time they filed their petition. Petitioners were shareholders and employees of Barter Systems, Inc. of Wichita (Barter Systems) during 1980 and 1981. Barter Systems operated as a barter exchange and was a vehicle for the exchange of goods and services among its members. Barter Systems' unit of exchange was a "trade unit". Trade units were book entries. They could not be used in the same manner as cash. Merchandise could be purchased with trade units only at full retail price. The stated value of a trade unit was one dollar. Members' exchange accounts were credited or debited with trade units to keep track of barter transactions. Barter Systems offered to all of its employees the choice of having trade units credited to their exchange accounts in lieu of receiving part of their salaries in cash. For each dollar of salary, employees had300 the choice of receiving one dollar in cash or of having two trade units credited to their exchange accounts. Employees could receive up to 50 percent of their salaries in trade units. This offer was not connected to stock ownership. In 1980, 10,564 trade units were credited to petitioners' exchange account in lieu of $ 5,282 of their salaries. In 1981, 18,370 trade units were credited to petitioners' exchange account in lieu of $ 9,185 of their salaries. Petitioners did not value trade units at one dollar each. They did not believe that the receipt of trade units constituted taxable income in excess of the amount of salary owed to them by Barter Systems. Petitioners' accountant advised them that the receipt of trade units in lieu of salary did not constitute taxable income in an amount greater than the amount of salary owed to them by Barter Systems. On their Federal income tax returns for 1980 and 1981, petitioners included in income only the amount of salary owed to them by Barter Systems, whether paid to them in cash or in trade units. In 1980, petitioners agreed to sell 4,500 shares of their stock in Barter Systems to Michael Land (Land) for $ 30,000. Petitioners' basis301 in the 4,500 shares of stock was $ 12,600. Land executed an installment note dated June 1, 1980, payable to Kent T. Evans in the amount of $ 30,000 plus interest (the note). Petitioners were concerned about Land's financial situation and his ability to complete the transaction. Petitioners therefore retained possession of the stock certificates and the right to vote the stock. Petitioners did not consider the sale complete unless and until they received all of the payments due under the note. In 1980, petitioners received from Land a single payment of $ 2,500 of principal and $ 250 of interest pursuant to the note. Land made no further payments. Petitioners' attorney advised them not to pursue collection against Land because they had no reasonable prospect of recovery. Petitioners' accountant advised them to reduce their basis in the 4,500 shares of stock by the $ 2,500 principal payment that they had received from Land. Petitioners did not report the receipt of principal or interest on their Federal income tax return for 1980. In the notice of deficiency, respondent determined that petitioners' receipt of trade units from Barter Systems constituted dividend income in 1980302 and 1981 to the extent that the fair market value of the trade units received exceeded the amount that petitioners had included in income. She also determined that petitioners had completed a sale of the 4,500 shares of stock to Land in 1980 and that petitioners did not report income from an installment payment that they had received pursuant to that sale. In the First Amendment to Answer, respondent asserted that the sale did not qualify as an installment sale and that the full amount of gain on the sale should have been reported in 1980, thereby increasing the deficiency. Respondent also asserted additions to tax for negligence. OPINION Income from Trade UnitsRespondent contends that, upon the receipt of trade units from Barter Systems, petitioners realized dividend income in the amount of 50 cents per trade unit. Petitioners argue that their receipt of trade units from Barter Systems did not constitute dividend income because they did not receive the trade units "with respect to" their stock. Petitioners have the burden of proof. Rule 142(a). Section 301(a) provides that "a distribution of property * * made by a corporation to a shareholder with respect to its303 stock shall be treated in the manner provided in subsection (c)." Section 301(c)(1) provides that "That portion of the distribution which is a dividend * * shall be included in gross income." Respondent, relying on Palmer v. Commissioner, 302 U.S. 63 (1937); Dellinger v. Commissioner, 32 T.C. 1178">32 T.C. 1178 (1959); Nelson v. Commissioner, T.C. Memo. 1982-361, affd. 767 F.2d 667">767 F.2d 667 (10th Cir. 1985); and section 1.301-1(j), Income Tax Regs., asserts that a bargain sale by a corporation to its shareholder is a distribution to the shareholder that is subject to section 301 and that the shareholder has income in the amount of the difference between the amount paid for the property and its fair market value. Section 1.301-1(c), Income Tax Regs., however, provides that "Section 301 is not applicable to an amount paid by a corporation to a shareholder unless the amount is paid to the shareholder in his capacity as such." Thus, if petitioners did not receive the trade units in their capacity as shareholders of Barter Systems, they did not realize dividend income. During the years in issue, Barter Systems offered to its employees304 the choice of receiving trade units in lieu of monetary compensation at the rate of 50 cents per trade unit. This offer was open to all employees regardless of whether or not they owned stock in Barter Systems. The maximum number of trade units employees could receive was determined by the employee's salary and was unrelated to the employee's stock ownership, if any. Petitioners were employees of Barter Systems during the years in issue and accepted this offer in the same manner and subject to the same rules as did other employees of the corporation. We conclude that petitioners received the trade units from Barter Systems in their capacity as employees of Barter Systems rather than in their capacity as shareholders. The receipt of the trade units from Barter Systems, therefore, did not constitute dividend income. Respondent also contends that, if the receipt of trade units did not constitute dividend income, the deficiency should nevertheless be sustained because the receipt of trade units represented additional compensation income in the amount of 50 cents per trade unit. Petitioners assert that this theory is a new issue first raised by respondent in her brief. They argue305 that they would be prejudiced by our consideration of this theory and that, therefore, the Court should not address it. The Court will not address theories raised for the first time in a party's brief if consideration of the theory will result in prejudice to the opposing party. Seligman v. Commissioner, 84 T.C. 191">84 T.C. 191, 198 (1985), affd. 796 F.2d 116">796 F.2d 116 (5th Cir. 1986). "Of key importance in evaluating the existence of prejudice is the amount of surprise and the need for additional evidence on behalf of the party in opposition to the new position." Leahy v. Commissioner, 87 T.C. 56">87 T.C. 56, 64 (1986). On their Federal income tax returns, petitioners reported the receipt of trade units as compensation. Only the amount of income represented by the trade units is disputed. We therefore conclude that petitioners would not be prejudiced by our consideration of respondent's theory that petitioners failed to include in income the full value of the trade units they received from Barter Systems, and we will consider it. In the notice of deficiency, respondent determined that petitioners' receipt of trade units from Barter Systems constituted306 additional income to them to the extent that the fair market value of the trade units received exceeded the amount that petitioners had included in income pursuant to the theory that such amounts were dividends. Petitioners have established that they did not receive dividend income from Barter Systems. Petitioners were not required to prove the fair market value of the trade units received in order to meet their burden of proof. Respondent now contends that petitioners' receipt of the trade units constituted additional compensation income to the extent that the fair market value of the trade units received exceeded the amount that petitioners had included in income. "The two theories are mutually exclusive; if * * [petitioners] received the * * * [trade units for less than their fair market value] as dividends * * * [they] did not receive them as compensation for services, and vice versa. Different kinds of evidence are required to refute each theory." Drew v. Commissioner, T.C. Memo 1972-40">T.C. Memo. 1972-40. Because respondent has proposed a new theory different from and inconsistent with her determination of the deficiency, respondent bears the burden of proof. Rule307 142(a); Tauber v. Commissioner, 24 T.C. 179">24 T.C. 179, 185 (1955). Respondent, relying on Barter Systems, Inc. of Wichita v. Commissioner, T.C. Memo. 1990-125, contends that the fair market value of the trade units petitioners received was one dollar each. The parties, however, did not stipulate that this case should be governed by Barter Systems, Inc. of Wichita v. Commissioner, supra. Furthermore, that case did not establish the fair market value of a trade unit and even suggested that the fair market value of a trade unit was less than one dollar. The evidence suggests that the fair market value of the trade units petitioners received was less than one dollar each. The trade units could not be used in the same manner as cash. Merchandise could be purchased with trade units only at full retail price. Petitioners were able to receive trade units for 50 cents each and did not value them at one dollar each. Respondent has presented no evidence to support her contention that the fair market value of the trade units was one dollar each and therefore has failed to meet her burden of proof. We conclude that petitioners did 308 not have compensation income in addition to that which they reported from the receipt of trade units in 1980 and 1981. Sale of StockRespondent contends that petitioners failed to report the gain from the sale of 4,500 shares of their stock in Barter Systems in 1980. Petitioners argue that there was not a completed sale for tax purposes in 1980 and that therefore they were not required to recognize gain. "The question of when a sale is complete is essentially a question of fact. * * * The test to be applied is a practical test, taking into account all the facts and circumstances and viewing the transaction in its entirety." TennesseeNatural Gas Lines v. Commissioner, 71 T.C. 74">71 T.C. 74, 83 (1978). A completed sale has occurred when "the greater bundle of rights and attributes of ownership, including title, possession and management, and the burdens and benefits accompanying same" pass to the purchaser. Lowe v. Commissioner, 44 T.C. 363">44 T.C. 363, 369 (1965). In this case, petitioners had investigated Land's financial situation and were concerned that he may not have the means to complete the sale. Petitioners therefore retained the stock certificates309 and voting rights associated with them. Petitioners retained the attributes of ownership with respect to the stock in Barter Systems. We conclude that petitioners did not complete a sale of 4,500 shares of their stock in Barter Systems in 1980 and that petitioners did not realize capital gain in 1980. Petitioners did, however, receive from Land a payment of $ 2,750 in 1980 pursuant to the note. Although the sale was never completed, petitioners kept the money that Land had paid to them. The undisputed evidence establishes that petitioners received income in the amount of $ 2,750 in 1980. In their brief, petitioners admit that "at the end of 1980 petitioners owned the same stock plus $ 2,750 cash". Payments received pursuant to an uncompleted sales agreement constitute ordinary income. Doyle v. Commissioner, 110 F.2d 157">110 F.2d 157, 158 (2d Cir. 1940), affg. 39 B.T.A. 940">39 B.T.A. 940 (1939); Johnson v. Commissioner, 32 B.T.A. 156">32 B.T.A. 156, 161 (1935). Land's payment of $ 2,750, therefore, constituted ordinary income to petitioners in 1980, the year in which they received the payment but in which it became evident that the sale would not be completed. 310 NegligenceRespondent contends that petitioners were negligent in not reporting as income the amount that they received from Land. Because the additions to tax for negligence were not determined until respondent's First Amendment to Answer, respondent bears the burden of proof. Rule 142(a). Negligence is defined as the lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under similar circumstances. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Good faith reliance on the advice of a professional negates a finding of negligence. Woodbury v. Commissioner, 49 T.C. 180">49 T.C. 180, 200 (1967). Petitioners consulted with their accountant concerning how this transaction should be treated on their Federal income tax return. Petitioners followed their accountant's advice regarding the treatment of the payment by Land. Respondent has not persuaded us that such reliance by petitioners was unreasonable. We therefore conclude that petitioners were not negligent in their treatment of this transaction on their Federal income tax return. To reflect the foregoing, Decision will be entered under Rule 155*311 .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624306/	BUREN S. REGISTER, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRegister v. CommissionerDocket Nos. 5251-90, 5252-90United States Tax CourtT.C. Memo 1990-576; 1990 Tax Ct. Memo LEXIS 647; 60 T.C.M. (CCH) 1200; T.C.M. (RIA) 90576; November 5, 1990, Filed 647 An appropriate order will be issued denying petitioner's motion. Brian F. D. Lavelle and Paul W. Horrell, for the petitioner. Frank McClanahan, III, for the respondent. SWIFT, Judge. GERBERMEMORANDUM OPINION On December 21, 1989, respondent mailed a notice of deficiency to petitioner, which, in part, determined that petitioner was liable for an addition to tax for fraud under section 6653(b) 1 for the years 1977 and 1978. Petitioner, in a petition filed March 21, 1990, alleged that respondent erred with respect to the addition to tax, and respondent, in his answer filed May 21, 1990, affirmatively alleged that the addition to tax was due in both taxable years. In support of his determination that the addition to tax for fraud was due in both years, respondent648 made certain factual allegations. By a motion filed June 18, 1990, petitioner seeks to strike certain of the allegations contained in respondent's answer as being "impertinent and immaterial." We must consider whether petitioner's grounds for striking are appropriate, and, if appropriate, which of respondent's allegations should be stricken. The allegations in question are as follows: (1) Respondent alleged that petitioner used two corporations he owned and controlled to divert funds for personal use while the corporation continued to take deductions for such amounts as business expenses. Petitioner contends these facts, if true, are immaterial because the corporations and their deductions are not before the Court. (2) Respondent alleged that petitioner failed to cooperate with the649 agents during the examination of his 1977 and 1978 returns. Petitioner contends that this allegation is too vague. (3) Respondent alleged that petitioner was indicted and pled guilty to violation of section 7201 with respect to his 1979 taxable year. Petitioner contends that this allegation is immaterial and irrelevant because the years 1977 and 1978 are before the Court. Respondent, in a Notice of Objection filed July 9, 1990, contends that petitioner has not shown that the alleged activities have no possible relationship to the controversy. Petitioner submitted a written statement in lieu of appearance at the hearing scheduled at the trial session of this Court on September 10, 1990, at Winston-Salem, North Carolina. In that document, petitioner argued that the allegations concerning the corporate diversions were technically incorrect and may only be treated as dividends where respondent has shown a direct economic benefit to petitioner. Further, petitioner argued with respect to his alleged failure to cooperate with the examining agent, that petitioner was under criminal investigation at the time and that failure to cooperate is appropriate and should only be considered650 as a "badge of fraud" where the failure occurred in a purely civil examination. Finally, petitioner argued that conviction under section 7201 for a later year (1979) is irrelevant because it involves subsequent conduct of petitioner. In addition, one of petitioner's attorneys appeared and presented further argument concerning the Motion to Strike. Rule 52 permits a party, within certain time limits, to move to strike "any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter." Rule 52 was derived from Rule 12(f), Federal Rules of Civil Procedure (FRCP) and the FRCP will be considered in applying Rule 52. See Note to Tax Court Rule 52, 60 T.C. at 1093 (1973); Estate of Jephson v. Commissioner , 81 T.C. 999">81 T.C. 999, 1000-1001 (1983). In Estate of Jephson v. Commissioner, supra at 1001, we set forth various principles, along with citations (omitted here), to be followed in connection with motions to strike, as follows: Motions to strike under FRCP 12(f) have not been favored by the Federal courts. 'Matter651 will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation.' 'A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt whether under any contingency the matter may raise an issue, the motion should be denied.' If the matter that is the subject of the motion involves disputed and substantial questions of law, the motion should be denied and the allegations should be determined on the merits. In addition, a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party. [Citations omitted.]As it relates to section 6653(b), the ultimate question we will have to decide is whether petitioner fraudulently underpaid his tax for 1977 and/or 1978. Petitioner's grounds for striking as to immateriality are premature as they relate to the alleged diversion of corporate funds or property and the failure to cooperate with respondent's agents. It is apparent from the arguments advanced by the parties regarding this motion that it is not clear at this point that these allegations "can have652 no possible bearing upon the subject matter of the litigation." With respect to petitioner's contention that the conviction under section 7201 for 1979 is immaterial and irrelevant, we must give that matter closer scrutiny. Respondent's allegation regarding this aspect is as follows: Petitioner was indicted on November 26, 1985 and charged with two counts of violating I.R.C. [section] 7201 (for attempting to evade or defeat tax). He was convicted of violating I.R.C. [section] 7201 for 1979. He was sentenced on July 10, 1986 to five years probation and a $ 10,000.00 fine.Respondent relied upon that allegation, in part, to support his affirmative allegation that "the deficiency in income taxes for the taxable years 1977 and 1978 are due in whole or in part to fraud, with intent on the part of the petitioner to evade tax * * ." Respondent is not seeking to estop petitioner from denying that he is liable for an addition to tax under section 6653(b). Respondent argues that the criminal tax fraud conviction for a year immediately following those under consideration in connection with civil tax fraud is both material653 and relevant. Petitioner counters that "One subsequent act, however, can hardly establish a pattern of fraudulent conduct." Courts have considered criminal tax convictions regarding prior taxable years in connection with proof that was part of a prolonged course of conduct. See, for example, Armstrong v. United States, 173 Ct. Cl. 944">173 Ct.Cl. 944, 354 F.2d 274">354 F.2d 274, 290 (1965), where the court considered prior years' convictions in connection with their evaluation of a matter concerning collateral estoppel. Also, when the ultimate determination involves the question of fraud in a year not covered by a prior criminal conviction, the question of fraudulent intent for the year covered by the conviction can be commented upon and explained by a witness insofar as it involves a claimed fraudulent intent sought to be imputed to other years. See Wittenberg v. United States, 304 F. Supp. 744">304 F. Supp. 744 (D. Minn. 1969).Additionally, in Wilson v. United States, 5 AFTR 2d 1653, 60-2 USTC par. 9500 (D. Minn. 1960), it was held that the conviction of a taxpayer for willfully attempting to evade his income for one year is evidence of intent or motive and like conduct*654 at or near the same time and, accordingly, is admissible to show motive or intent in prior and subsequent years. Therefore, evidence of a conviction for criminal tax fraud for a later taxable year may be relevant to the consideration of civil tax fraud. To reflect the foregoing, An appropriate order will be issued denying petitioner's motion.Footnotes1. Section references are to the Internal Revenue Code of 1954, as amended and in effect for the years under consideration. Unless otherwise specified, "Rule" references are to this Court's Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624307/	Mark B. Deitsch and Dorothy M. Deitsch, Petitioners, v. Commissioner of Internal Revenue, RespondentDeitsch v. CommissionerDocket No. 48148United States Tax Court26 T.C. 751; 1956 U.S. Tax Ct. LEXIS 131; June 29, 1956, Filed 131 Decision will be entered under Rule 50. Petitioner was divorced from his former wife in 1949 pursuant to a decree which incorporated a separation agreement, which provided, among other things, that petitioner pay $ 250 per month or $ 3,000 per year to his former wife for her support and maintenance and for the support, maintenance, and education of their two minor children. Upon the death, emancipation, or attainment of age 18 of either of the children, petitioner was required to pay only one-half of such payments and on the death, emancipation, or attainment of age 18 of both of the children, such payments were to cease entirely. In 1950, petitioner deducted $ 3,000 from his gross income under section 23 (u) of the Internal Revenue Code of 1939, which deduction was disallowed in its entirety by the Commissioner. Held, the entire $ 3,000 paid by the petitioner to his former wife in 1950 was solely for the support of his minor children and was not deductible by him. Stanley Schwartz, Jr., Esq., for the petitioners.John J. Larkin, Esq., for the respondent. Tietjens, Judge. TIETJENS752 The Commissioner determined a deficiency in income tax for the year 132 ended December 31, 1950, in the amount of $ 2,707.98. That part of the deficiency at issue here arises by reason of the Commissioner's determination that $ 3,000 deducted by petitioner as alimony payments was not an allowable deduction under the provisions of sections 23 (u) and 22 (k) of the Internal Revenue Code of 1939. Other adjustments have been agreed upon and can be reflected in a Rule 50 computation.FINDINGS OF FACT.The stipulated facts are so found and are incorporated herein by this reference.The petitioners are husband and wife and are residents of Columbus, Ohio. They filed their income tax return for the year 1950 with the collector of internal revenue for the eleventh district of Ohio.The petitioner, Mark B. Deitsch, married Virginia Deitsch in June 1940 at Union, Missouri. During this marriage two children were adopted, Gary Evan Deitsch, whose date of birth was December 1, 1945, and Rita Jeannine Deitsch, whose date of birth was March 17, 1947.Pursuant to a decree of divorce granted on October 2, 1949, effective as of October 7, 1949, by the Court of Common Pleas, Division of Domestic Relations, Franklin County, Ohio, the marriage of Mark B. Deitsch and Virginia133 Deitsch was dissolved. A separation agreement was entered into by the aforesaid parties under date of October 4, 1949, which agreement was approved by the court and made a part of the decree of the divorce. The separation agreement contained the following provisions, inter alia:This agreement is made at Columbus, Ohio, this 4th day of October, 1949, by and betweeen Mark B. Deitsch, herein referred to as "Husband", and Virginia M. Deitsch, herein referred to as "wife."* * * The parties hereby declare that the express purpose and intent of this contract is to finally and conclusively settle all rights and claims of every possible kind between the parties, including a division of their property, and to settle and adjust all differences between them which relate to alimony and support of said Wife and their two minor children, Gary Evan and Rita Jeannine.The promises of each of the parties to this contract are expressly made and declared to be in consideration of those made by the other party; and each party hereby covenants and warrants that this contract is entered into without reliance 753 on or claim of any promises or representations made by the other party, excepting134 only those promises, covenants and agreements which are contained in and specifically set forth in this contract. * * 4. Husband agrees to pay wife for her support and maintenance and the support, maintenance and education of said minor children the sum of $ 10,000.00, which sum shall be payable $ 5,000.00 on the date of the execution of this agreement and $ 5,000.00 on or before thirty days after the date of the execution of this agreement; and it is mutually agreed and understood that Wife shall not be required to account to Husband for the expenditure of said sum and she shall not be required to hold said sum in trust. Husband agrees to pledge as collateral security for the payment of said balance of $ 5,000.00 all of his shares of stock in Prima, Inc., an Ohio corporation.5. Husband agrees to convey by quit claim deed to Wife all of Husband's right, title and interest in the real estate located at No. 230 West Royal Forest Boulevard in the City of Columbus, Ohio, being the residence in which the Wife now resides; and Husband agrees to pay and discharge the present mortgage loan on said residence as the same falls due.6. Husband agrees to execute a Bill of Sale transferring135 to the Wife all of Husband's right, title and interest in the furniture, equipment and household effects located in said residence, and all jewelry now in the possession or custody of the Wife.7. Husband agrees, during his lifetime, to pay Wife for the support and maintenance of the Wife and for the support, maintenance and education of said minor children the sum of $ 250.00 a month until said oldest child reaches the age of 18 years, and $ 125.00 per month thereafter until said youngest child reaches the age of 18 years, provided, however, that if the parties are divorced and if Wife remarried Husband agrees to pay Wife for herself and the support, maintenance and education of said children the sum of $ 150.00 per month until said oldest child reaches the age of 18 years, and $ 75.00 per month thereafter until said youngest child reaches the age of 18 years; and provided further that if either of said children should die or become emancipated before reaching the age of 18 years the amounts which the Husband agrees to pay thereafter shall be reduced one-half; and provided further that if both of said children die or are emancipated before the youngest reaches the age of 18 years136 said payments shall then cease and end.8. It is mutually agreed that the provisions of this contract for the support, maintenance and education of said children are adequate and sufficient; and Wife covenants and agrees that she will not seek or request an increase in the payments herein provided, in consideration of which Husband covenants and agrees that he will not seek or request a decrease in the payments herein provided. * * 11. In the event that a divorce decree is granted to either of the parties it is mutually understood and agreed that this contract, and the provisions thereof, shall be incorporated in and made a part of said decree and the same shall be in lieu of any other provisions for child support and maintenance, division of property, settlement of property rights and alimony; and the court shall have and retain continuing jurisdiction for the enforcement of this contract; * During the year 1950, pursuant to paragraph 7 of the separation agreement, petitioner, Mark, paid to his divorced wife, Virginia, $ 250 per month or $ 3,000, which payments were deducted by the petitioners in the determination of their net income for such year.754 In the notice137 of deficiency, the Commissioner disallowed the entire $ 3,000 payment made in 1950.In their income tax return filed for the taxable year 1950, petitioners Mark and Dorothy Deitsch claimed both minor children of Mark and Virginia Deitsch as dependent relatives and took exemptions therefor.The monthly payments of $ 250 totaling $ 3,000 made by petitioner, Mark, to his former wife, Virginia Deitsch, in the taxable year 1950 were amounts paid solely for support of the minor children.OPINION.The only question presented here is whether the $ 3,000 paid by Mark to Virginia in 1950, pursuant to the terms of paragraph 7 of the separation agreement, is a sum which is payable for the support of Mark's minor children within the meaning of section 22 (k) of the Internal Revenue Code of 1939. If it is, then the Commissioner's disallowance of the deduction as an alimony payment under section 23 (u) of the Internal Revenue Code of 1939 is correct.Section 23 (u) allows as a deduction from gross income the amount of alimony payments paid by a husband to his former wife if such payments are includible in the gross income of the wife under section 22 (k). The relevant provisions of section 22138 (k) are set out in the margin. 1It has been held in previously decided cases on this issue that "any adequate consideration of the problem here presented requires a construction of the agreement as a whole, and the reading 139 of each paragraph in the light of all the other paragraphs thereof." Robert W. Budd, 7 T. C. 413 (1946), affd. (C. A. 6, 1947) 177 F.2d 198">177 F. 2d 198.When paragraph 7 is read in the light of the entire separation agreement it is apparent to us that the payments of $ 250 per month were intended to be solely for the support of the minor children of Mark and Virginia Deitsch, even though the separation agreement specifically states that the payments are for the support and maintenance of the wife as well as the support, maintenance, and education of the minor children.We see no element of alimony in these payments in view of the fact that the payments are cut in half on the death, emancipation, or attainment 755 of age 18 of one of the children and the payments are entirely eliminated on the death, emancipation, or attainment of age 18 of both of the children. Thus, if both children were to die tomorrow, then petitioner would not be obligated to make any further monthly payments to his former wife.Further indication that the monthly payments were not intended as alimony is derived from the other provisions of the separation agreement140 which provided that Virginia was otherwise to receive a substantial amount of property upon entering into the separation agreement, namely, the family residence free and clear of the mortgage then existing on the home, the furniture, equipment, and other household effects located in the residence, all jewelry then in the possession or custody of Virginia, and $ 10,000 in cash which she could do with as she pleased.The division of the payment on the stated contingencies sufficiently earmarks the payments as being made solely for the support of the children and thus not deductible by the petitioner in computing his net income. Warren Leslie, Jr., 10 T. C. 807 (1948); Harold M. Fleming, 1308">14 T. C. 1308 (1950); Saxe Perry Gantz, 23 T. C. 576 (1954).Decision will be entered under Rule 50. Footnotes1. SEC. 22. GROSS INCOME.(k) Alimony, Etc., Income. -- In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments * * received subsequent to such decree in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife * * * This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624308/	Bush Terminal Buildings Company, Petitioner, v. Commissioner of Internal Revenue, RespondentBush Terminal Bldgs. Co. v. CommissionerDocket No. 24012United States Tax Court17 T.C. 485; 1951 U.S. Tax Ct. LEXIS 72; September 28, 1951, Promulgated 72 Decision will be entered under Rule 50. 1. The petitioner was involved in a 77-B reorganization in the United States District Court for the Eastern District of New York for the period 1936 to 1945. In 1950 the judge of that court, who had presided over the reorganization proceeding, delivered to petitioner's attorney a letter addressed to the Commissioner of Internal Revenue stating that in 1940 and 1941 petitioner was in an "unsound financial condition." The letter was mailed to the Commissioner by one of its officers 3 days before the hearing in this proceeding. Held, that such letter was not a certification to the Commissioner by a "Federal agency authorized to exercise regulatory power over such corporation [petitioner]" that petitioner was in an unsound financial condition in 1941, such as contemplated by sec. 22 (b) (9), I. R. C. (amended by the Revenue Act of 1942).2. Held, further, following our prior decision in a proceeding brought by petitioner for the year 1940 (7 T.C. 793">7 T. C. 793), that petitioner was not in an unsound financial condition in 1941, and therefore realized taxable gain on the purchase of its own bonds in that year at less73 than issue value.3. Held, further, following 7 T. C. 793, that certain additions which petitioner made in 1941 to a reserve for reorganization expenses are not deductible as business expenses of that year. Holt S. McKinney, Esq., for the petitioner. 74 Scott A. Dahlquist, Esq., for the respondent. LeMire, Judge. Turner and Raum, JJ., concur in the result. LeMIRE 485 This proceeding involves a deficiency of $ 17,198.40 in income tax for 1941. Some of the issues raised by the pleadings have been either withdrawn or canceled or otherwise settled by agreement of the parties. The concessions made by the respondent are said to eliminate all but an insignificant portion of the deficiency. The petitioner contends, however, that it has overpaid its taxes for 1941 by the amount of $ 29,682.77 which it is entitled to have refunded.The issues remaining for our determination are as follows:486 1. Did the petitioner realize taxable gain in 1941 of $ 158,706.55 on the purchase of its own bonds at less than par value?2. Is petitioner entitled to a deduction of $ 26,426.13, representing charges made to a "Reserve for Reorganization Expenses" in connection with its 77-B reorganization?3. Is petitioner entitled to an interest deduction of $ 132,613.67 in connection with the payment to its trustee, in satisfaction of deferred sinking fund installments, of bonds which it purchased from its bondholders at a discount?4. 75 Is petitioner entitled to an increase in its net operating loss carry-over from 1939 and 1940 over the amounts determined by this Court in an earlier proceeding involving the taxable year 1940?5. Is our prior determination res judicata as to the specific issues in this proceeding?FINDINGS OF FACT.Most of the facts are contained in a written stipulation of facts reading in material part as follows:2. In 1941 petitioner had its principal office in New York City and filed its income tax, declared value excess profits tax, and defense tax returns with the collector of internal revenue for the second district of New York. It kept its books on an accrual basis of accounting. Petitioner owns and operates sixteen loft buildings in Brooklyn, renting space to manufacturing and industrial concerns, and furnishing steam, electricity, and freight-handling services to its tenants. The buildings are multiple story buildings of steel and concrete construction, approximately 75% of which were constructed prior to 1913. They are located on land adjacent to the Brooklyn-New York waterfront, and adjoin the property of Bush Terminal Company.In addition to these sixteen buildings in Brooklyn, 76 petitioner in 1941 also owned an office building at 100 Broad Street in New York City, and an office building in London, England, called Bush House which latter building represented in 1941 an investment of $ 1,925,498.94.In 1941 approximately 75% of petitioner's gross income consisted of rents, and approximately 25% consisted of payments for services to tenants.In 1941 the Bush Terminal Company, then a separate and independent company from petitioner, owned and operated terminal facilities, consisting of piers and warehouses, and rental space for manufacturing and industrial concerns located adjacent to petitioner's property. In 1940 and 1941 the Bush Terminal Company was an active competititor of petitioner for tenants of industrial space.From 1910 to 1926, petitioner issued first mortgage 5% sinking fund bonds due in 1960, secured by a lien on all its properties, in a total face amount of $ 12,000,000, for $ 10,984,000. On January 1, 1941, there were outstanding bonds in the principal amount of $ 6,880,000. During 1941, petitioner purchased, in the open market, on the New York Stock Exchange, its bonds in the principal amount of $ 749,000. for a price of $ 563,812.50. The77 highest price at which these bonds were listed on the New York Stock Exchange in 1941 was $ 785. per $ 1,000 principal amount. Petitioner paid prices in 1941 ranging from $ 660. to $ 785. per $ 1,000 principal amount for the bonds which it purchased in 1941. The 487 average price paid by petitioner for these bonds in 1941 was 75% plus of face value. The unamortized discount on the bonds purchased in 1941 was, as of January 1, 1941, $ 26,480.95. The difference between the par value of the bonds purchased in 1941 and the amount paid for them, plus unamortized discount, amounted to $ 158,706.55.The bonds were at all times guaranteed as to payment of principal and interest by the Bush Terminal Company. The interest has always been paid by petitioner when due. The highest and lowest price at which these bonds were listed on the New York Stock Exchange during 1941 were as follows:YearHighLow194178 1/266In November of 1934, Bush Terminal Company, then owner of petitioner's common stock (10,000 shares of the par value of $ 5. each), the only stock then having voting rights, filed in the District Court of the United States for the Eastern District of New York78 its petition for reorganization under section 77B of the Bankruptcy Act. On or about October 1, 1936, petitioner filed in the same cause its petition for reorganization under section 77B, in which it stated that petitioner was not insolvent in a bankruptcy sense, but was unable to meet its debts as they matured. By an order of the Court approving the filing of the petition, petitioner was continued in possession of its properties and assets with the powers of a trustee, subject to the control of the Court, and no other trustee was ever appointed for petitioner.A plan of reorganization was thereafter proposed by Bush Terminal Company and a Protective Committee representing the holders of petitioner's 7% preferred stock, which was approved with modifications, as of April 21, 1937, as a result of which petitioner was restored to full possession of its properties, but the carrying out of the plan of reorganization was placed in the hands of "Reorganization Managers" appointed by the Court.The reorganization plan did not result in a reduction of petitioner's liabilities or obligations but did defer the due dates of sinking fund installments due under petitioner's mortgage, and increased79 the requirements for the sinking fund payments by adding interest at the rate of 5% to the deferred installments. These modifications were embodied in a supplemental mortgage given by petitioner to Irving Trust Company, Trustee, on April 21, 1937. By the terms of this supplemental mortgage the due dates of the sinking fund installments originally due on November 1, of each of the years 1935 to 1939, inclusive, were extended to April 1, 1940, and provided that they should become due, with 5% interest, on April 1, 1940, but only to the extent of 80% of petitioner's net income for the period January 1, 1937 to December 31, 1939, as therein defined. Subject to this limitation, the total principal amount of the sinking fund installments due in each of the years 1935 to 1939, inclusive, and payable April 1, 1940, was $ 990,000. and the interest thereon as of that date was $ 119,625. The sinking fund installments due November 1, 1940, November 1, 1941, and November 1, 1942, amounted to $ 231,000. in each of said years. Petitioner had no net income for the period 1937-1939 as defined in the supplemental mortgage. Petitioner could at its option deliver bonds to the trustee in lieu of80 the installments, and be credited with the cost of the bonds to it. Until all the sinking fund installments were paid petitioner could not pay any dividends on its common or preferred stock.* * * As of January 1, 1941, petitioner's investment in its wholly-owned English subsidiary, Bush House, Ltd., was $ 1,925,498.94. All of petitioner's stock in 488 Bush House, Ltd., except for qualifying shares, was pledged with Irving Trust Company, trustee under the mortgage, under the supplemental mortgage as security for payment of the deferred sinking fund installments. From 1935 through 1940 Bush House, Ltd., had annual operating profits in excess of $ 85,000. The office building which was Bush House, Ltd.'s, principal asset and was the largest office building in England, was in danger of damage by bombing during 1941, but it was covered by war risk insurance. It was damaged by a bomb in 1944.Petitioner paid no dividends on its 7% cumulative preferred stock in 1940 or 1941, and had not paid any dividends on its said preferred stock since 1933. Bush Terminal Company, which had guaranteed the dividends on petitioner's 7% cumulative preferred stock, issued as a part of the plan81 of reorganization approved in its bankruptcy proceedings 14,000 shares of Bush Terminal Company's 6% preferred stock to the holders of petitioner's 7% preferred stock in satisfaction of its said guarantee.3. At the time of filing its income tax return for each of the calendar years 1940 and 1941, petitioner filed with each of said returns, in the manner prescribed by the Commissioner's regulations then in effect, its consent on Form 982 to the adjustment of the basis of its property under Section 113 (b) (3) of the Internal Revenue Code. * * 5. Pursuant to the amendment to the petition, filed in this proceeding on March 20, 1950, respondent concedes: (1) That the additional or increase in "Net operating loss deduction" of $ 101,192.48, shown in respondent's Notice of Deficiency * , should be increased in the amount of $ 22,259.40, representing net additional repair and maintenance expenses for 1939 and 1940; and that said increase ($ 22,259.40) is an additional deduction from petitioner's taxable income in 1941; and(2) That petitioner had further and additional repair and maintenance expenses, due to be deducted from its taxable income in 1941, of $ 33,202.82, -- which82 said amount represents repair and maintenance expenses for 1941 not heretofore allowed as a deduction for that year.6. The parties agree that they do not intend by the use of the words "Interest on the unpaid sinking fund installments of $ 990,000, as of April 1, 1940", as set forth herein above, to stipulate that the term "interest" constitutes interest on indebtedness within the meaning of Sec. 23 (b) of the Internal Revenue Code.The parties have further stipulated that:The entire record and findings of fact pertaining to the "Bond Purchase Issue" set forth in the prior proceeding of this Court in the case of Bush Terminal Buildings Company v. Commissioner, Docket No. 6806, and reported in 7 T. C. 793-819, are herein stipulated as true and are incorporated herein by reference as a part of this proceeding, -- except that: (a) The Interest on the unpaid sinking fund installments of $ 990,000. as of April 1, 1940, was $ 119,625, instead of $ 107,250 as set forth in the findings of fact in Bush Terminal Buildings Company, supra; and(b) The office building owned by petitioner in New York City is located at83 100 Broad Street in said city instead of 100 Broadway as shown in said findings of fact; and(c) In 1940 the Bush Terminal Company was not the "parent" of the Bush Terminal Buildings Company; and(d) Bush Terminal Company's ownership of the common stock of petitioner (10,000 shares of the par value of $ 5. each) was at all times after 489 March 1940 conditional, and all but 100 shares of said stock was subject to surrender and retransfer to petitioner in the event petitioner's preferred stockholders voted on or before March 15, 1942, not to merge with the Bush Terminal Company. Said preferred stockholders did so vote, and accordingly said common stock was surrendered and retransferred to petitioner in 1943, -- except 100 shares thereof which the Bush Terminal Company had previously pledged as part security for payment of one of its bond issues; and(e) In 1940 the common stock of petitioner was not the only stock which carried voting rights. In 1940 the holders of the preferred stock of petitioner were in voting control and were entitled to elect five (5) of petitioner's seven (7) Directors. The common stock was entitled to elect only two (2) of such Directors in 1940.84 The facts found by this Court in 7 T. C. 793 are incorporated herein by reference and will not be repeated in this proceeding.During all the years 1940 and 1941 the petitioner was in bankruptcy under section 77-B of the Bankruptcy Act under the jurisdiction of the United States District Court for the Eastern District of New York. The bankruptcy proceedings were terminated December 27, 1945.On September 15, 1950, petitioner's attorney gave one of its officers, Malcolm B. Varney, assistant treasurer, a letter dated September 12, 1950, addressed to the Commissioner of Internal Revenue and signed by Chief Judge Robert A. Inch, of the United States District Court for the Eastern District of New York, reading as follows:Pursuant to the provisions of Section 22 (b) (9) of the Internal Revenue Code prior to its amendment by the Revenue Act of 1942, this is to CERTIFY that during all of the years 1940 and 1941 the Bush Terminal Buildings Company, a New York corporation, with offices at 100 Broad Street in New York City, was in bankruptcy under Section 77B of the Bankruptcy Act, and was in an unsound financial condition; and that during all of said years the United85 States District Court for the Eastern District of New York had jurisdiction of and exercised regulatory power and control over the said Bush Terminal Buildings Company.Varney mailed the letter to the Commissioner by registered mail on September 16, 1950.OPINION.We will first consider the question of res judicata. In the prior proceeding, Bush Terminal Buildings Co., 7 T.C. 793">7 T. C. 793, involving the year 1940, we found certain facts either identical with or closely related to facts upon which some of the issues now before us must be decided. For instance, as to the bond purchases, we found that petitioner was not in an unsound financial condition in 1940, and therefore realized taxable gain on the purchase of its bonds at less than par value in that year. We now have the same question for 1941. As to reorganization expenses, we determined in the prior proceeding that certain expenses incurred in 1940, in connection with the 77-B reorganization, were capital expenditures not deductible in that year 490 as business expenses. The same question is presented in this proceeding as to 1941 expenditures. In the prior proceeding we sustained the Commissioner's86 determination of the amount of the 1939 net operating loss carry-over to 1940, disallowing the petitioner's claim to an additional deduction in 1939 on account of certain interest payments. We now have the question of the amount of 1939, as well as 1940, net loss carry-over available for 1941.First, petitioner argues that the doctrine of res judicata, or collateral estoppel, does not apply here because we have before us a different tax year from the one previously under consideration.Gain on Bond PurchasesThe first issue on the merits is whether petitioner realized taxable gain on the purchase of its own bonds for less than par value in 1941. That question depends upon the facts as they existed in 1941. The bond purchases under consideration in the prior case were those made in 1940. Since the conditions then existing may have changed and, in in fact, did change in 1941, the doctrine of res judicata does not apply.In holding that the bond purchases in 1940 resulted in taxable gain we made a careful study of petitioner's financial situation and concluded that the evidence did not show that petitioner was "in an unsound financial condition," within the meaning of section87 22 (b) (9) of the Internal Revenue Code, as amended by section 215 of the Revenue Act of 1939. We pointed out that although the petitioner was then undergoing a 77-B reorganization under the Bankruptcy Act it was not insolvent; that it had a net worth in 1940 in excess of $ 9,000,000 and a gross income of two and a quarter million; that the real estate securing its outstanding bonds of $ 7,000,000 at the end of 1940 had a value in excess of $ 12,000,000; that there were other assets of a value of more than $ 3,800,000, and that petitioner's purchases of bonds in 1940 far exceeded its current obligations under the sinking fund agreement.The evidence now shows that petitioner was in an even better financial condition in 1941 than in 1940. Its surplus as shown in its balance sheets increased from $ 1,399,110.66 in 1940 to $ 1,806,871.04 in 1941; its funded indebtedness was reduced from $ 6,880,000 in 1940 to $ 6,131,000 on December 31, 1941; and the average price at which petitioner purchased its bonds increased from approximately sixty-four per cent of the face value in 1940 to approximately seventy-five per cent of the face value in 1941.Thus, on the evidence, we must conclude 88 on authority of our prior decision for 1940 that the petitioner was not in an unsound financial condition in 1941. Our prior decision was not appealed and has now become final.491 Petitioner has raised a new question in this proceeding upon which it seems to place considerable reliance. It claims that there was a certification to the Commissioner by a Federal agency having regulatory powers over petitioner that petitioner was in an unsound financial condition in 1941, in compliance with section 22 (b) (9), 1 added to the Code by section 215 (a) of the Revenue Act of 1939. This claim is based on the letter which Judge Inch, of the United States District Court for the Eastern District of New York, allegedly wrote to the Commissioner of Internal Revenue regarding petitioner's financial condition in 1941. This letter is quoted in full in our findings of fact. A copy of the letter, duly signed by Judge Inch and certified by the clerk of his court, was offered in evidence by counsel for the petitioner but was strenuously objected to by counsel for the respondent. Respondent's chief objection to the admission of the letter was based on the "best evidence" rule and on the fact89 that petitioner's counsel did not make a demand on the respondent to procure the original of the letter until the hearing on September 19, 1950, whereas, the letter, although dated September 12, 1950, was not mailed until September 16, and could not have been received by the respondent in Washington until September 18.90 The letter was identified by petitioner's assistant treasurer, who testified it was given to him by petitioner's counsel and that he mailed the original to the Commissioner of Internal Revenue, Washington, D. C., by registered mail. The witness further testified that he had no authorization from the writer of the letter to mail it. Petitioner's attorney stated at the hearing that he got the letter on the 12th or 13th, had it certified by the clerk of the court on September 15, and gave it to the assistant treasurer for mailing to the Commissioner 492 on September 16. The letter was received in evidence. That is not to say, however, that we regard the letter as foreclosing the issue against the respondent. We do not believe that the letter meets the statutory requirement for a certification to the Commissioner of petitioner's unsound financial condition by a "Federal agency authorized to exercise regulatory power over such corporation." Sec. 22 (b) (9) (B), I. R. C.In the first place, there is a serious doubt, we think, that the term "Federal agency," as used in the statute, was intended to include the Federal judiciary. See report of Senate Finance Committee (1939-2 C. B., p. 527),91 set out in part below:Many corporations (such as railroads) that will endeavor to bring themselves under the provisions of the new paragraph (9) are corporations that have had, and continue to have, considerable dealings with the Federal Government, where the financial condition of such corporations is an important factor in such dealings. It seems desirable to utilize information obtained by various agencies of the Government and thus relieve the Commissioner of Internal Revenue from the necessity of making an independent finding in each case as to the financial condition of the corporate taxpayer. To carry out this policy, a committee amendment to this section provides that a corporation may obtain the benefits of the new paragraph (9) if it can establish that it was in an unsound financial condition at the time of the discharge of its indebtedness, by the presentation of a certification to the Commissioner by any Federal agency which is authorized to make loans on behalf of the United States to such corporation, or by any Federal agency authorized to exercise regulatory power over such corporation.Although Federal courts may in a literal sense fall under the classification92 of agencies of the Government they are not commonly referred to as such. As usually employed the term agency means an agency in the administrative branch of the Government, such as the Interstate Commerce Commission, the Reconstruction Finance Corporation, and the Securities and Exchange Commission. The statute refers to Federal agencies "authorized to exercise regulatory power over such corporation." At the time the letter in question was written the United States District Court was not authorized to exercise regulatory power over the petitioner. The bankruptcy proceeding under which it may have exercised such powers had been terminated approximately five years previously. In the meantime, this Court had ruled that petitioner was not in an unsound financial condition in 1940.The time for the petitioner to have made or to have procured a certification to the Commissioner of its unsound financial condition was when it filed its return, or, at the latest, when the matter was subject to administrative disposition by the Commissioner. This was clearly the intent of the statute, its purpose being to relieve the Commissioner of the burden of making an independent investigation of 93 the financial condition of taxpayers seeking to bring themselves under the section. See report of Senate Finance Committee, supra. The taxpayer took 493 no such steps until long after the Commissioner had closed his action on the 1941 return and on the eve of the trial before this Court. The petitioner, or its attorney, must have been fully aware that the letter which the United States District Court was asked to provide would, if serving the purpose for which it was intended, stand as a complete contradiction of the determination already made by this Court that petitioner was not in an unsound financial condition in 1940. The petitioner was under the jurisdiction of that court in both years and its financial condition in 1941 had improved over 1940.In view of our prior determination that petitioner was not in an unsound financial condition in 1940, and the fact that it was in a still better financial condition in 1941, we must conclude that it was not in an unsound financial condition in 1941 and that it is not entitled to relief from tax under section 22 (b) (9) upon the gain which it derived from the purchase of its bonds in 1941.The petitioner further contends that94 the amendments made to section 22 (b) (9) of the Code by section 114 of the Revenue Act of 1942, removing the "unsound financial condition" as a requirement for exclusion of the gain from the discharge of such indebtedness, are retroactive to 1940 and 1941. This identical question was considered in the prior proceeding and was decided against petitioner's contention. We said in that case:We think section 29.22 (b) (9)-1 of Regulations 111 correctly interpreted the amendments to apply only to taxable years beginning after December 31, 1941.It is our conclusion, therefore, that that provision of section 22 (b) (9) of the code, before the 1942 amendment, required petitioner to establish the unsoundness of its financial condition in 1940.Reorganization ExpensesPetitioner claims the deduction of $ 26,426.13 which it charged to a reserve for reorganization expenses in connection with the 77-B reorganization. In the prior proceeding we disallowed deductions for 1939 and 1940 additions made to this same reserve for the same type of expenditures. We said that the expenses of reorganization were capital expenditures and were not deductible as business expenses, citing a number of95 authorities for that proposition. Following our ruling in that case we must disallow the similar deductions now claimed for 1941.Interest on Deferred Sinking Fund ObligationsBy an amendment to its petition, petitioner claims a deduction of $ 119,812.50 as interest paid on its deferred sinking fund installments. Respondent contends that no such interest was paid and therefore none is deductible.Under the terms of the reorganization agreement, and the supplemental mortgage, interest was payable at the rate of 5 per cent on 494 petitioner's deferred sinking fund installments. This interest was payable to the trustee along with the principal amount due on the sinking fund installments. It was also provided in the reorganization and mortgage agreements that petitioner might at its option deliver its own bonds to the trustee in payment of its sinking fund installments and receive credit therefor equal to the cost of such bonds. During 1941 petitioner turned in to the trustee bonds which it had purchased at a discount at a cost of $ 911,812.50 and received credit for that amount on its sinking fund obligations. The trustee in its accounts credited $ 779,198.83 of that 96 amount to principal and $ 132,613.67 to interest. The bonds were canceled by the trustee.Petitioner does not contend that it paid any interest to the bondholders from whom it purchased the bonds, and the facts do not show that it did. Cf. Helvering v. Midland Mutual Life Insurance Co., 300 U.S. 216">300 U.S. 216; Harold M. Blossom, 38 B. T. A. 1136. Petitioner claims that it paid the interest by turning over the bonds to the trustee. This might be said to raise the question as to whether petitioner's obligation to pay the trustee interest on the deferred sinking fund installments was an "indebtedness" within the meaning of section 23 (b), Internal Revenue Code. It was with this question in mind that the parties have stipulated, as set out in paragraph (6) of the stipulation above, that they did not intend to stipulate that the term "interest," as used in connection with the sinking fund installments, means "interest on indebtedness within the meaning of Sec. 23 (b) of the Internal Revenue Code."That question, we think, need not be decided here. In determining petitioner's gain on the purchase of the bonds at less than the issue97 price the respondent allowed as cost the full amount which petitioner paid for them. If petitioner is now permitted to treat a part of that cost as interest paid, there must be a corresponding reduction in the cost of the bonds to petitioner and a like increase in petitioner's gain on their purchase. Thus, in the end, petitioner's tax liability would not be affected.Net Loss Carry-OverThe adjustments sought in the net loss carry-over from 1939 and 1940 involve the same questions of the deduction of reorganization expenses and gain on the purchase of bonds already decided adversely to petitioner's contention both in the prior proceeding and in connection with the year now before us. Accordingly, no adjustment of the net loss carry-over as determined by the respondent is required except as may be effected by the above stipulation.Decision will be entered under Rule 50. Footnotes1. SEC. 22 (b) (9), I. R. C.:(9) Income from discharge of indebtedness. -- In the case of a corporation, the amount of any income of the taxpayer attributable to the discharge, within the taxable year, of any indebtedness of the taxpayer or for which the taxpayer is liable evidenced by a security (as hereinafter in this paragraph defined) if -- * * *(B) it is certified to the Commissioner by any Federal agency authorized to make loans on behalf of the United States to such corporation or by any Federal agency authorized to exercise regulatory power over such corporation.that at the time of such discharge the taxpayer was in an unsound financial condition, and if the taxpayer makes and files at the time of filing the return, in such manner as the Commissioner, with the approval of the Secretary, by regulations prescribes, its consent to the regulations prescribed under section 113 (b) (3)↩ then in effect. In such case the amount of any income of the taxpayer attributable to any unamortized premium (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction. As used in this paragraph the term "security" means any bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation, in existence on June 1, 1939. This paragraph shall not apply to any discharge occurring before the date of the enactment of the Revenue Act of 1939, or in a taxable year beginning after December 31, 1942.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624309/	Woodmont Corporation v. Commissioner.Woodmont Corp. v. CommissionerDocket No. 3675.United States Tax Court1946 Tax Ct. Memo LEXIS 218; 5 T.C.M. (CCH) 291; T.C.M. (RIA) 46085; April 12, 1946John McCullough, Esq., for the petitioner. A. J. Friedman, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: Respondent has determined deficiencies in income tax for the years 1939, 1940, and 1941 in the respective amounts of $5,565.19; $4,731.13, and $10,166.01; total $20,462.33. Petitioner filed its returns with the collector for the district of Michigan. In determining the deficiencies for 1939 and 1941 respondent made certain adjustments which are not contested. Respondent has determined that the basis to petitioner of certain property was the fair market value of the property on January 23, 1939, the date of acquisition under a reorganization under section 77-B of the Bankruptcy Act as amended, rather than the cost of the property in the hands of the transferor. As219 a result of that determination, which reduced the basis of the property, respondent has not allowed petitioner deductions for depreciation of the property in 1939, 1940, and 1941, in amounts which were claimed on the income tax returns of the petitioner. He has allowed parts of the amounts of the allowances for depreciation which were claimed; he has disallowed $112,761.40 in 1939; $116,306.81 in 1940; and $115,799.80 in 1941. This proceeding has been submitted under a stipulation of all of the facts, together with exhibits. Findings of Fact We adopt as our findings of fact the facts which have been stipulated. The material facts which it is necessary to set forth to give an understanding of the question presented are as follows: Colwood Company, the taxpayer's transferor, was a corporation organized and existing under the laws of the State of Michigan. Prior to 1931, this corporation owned and leased land in the city of Detroit upon which was located the building known as the Fox Theatre and Fox Theatre Office Building. This building was constructed for the use, occupation and management of the Fox Theatres Corporation which leased the property from Colwood Company for a period220 extending from on or about June 1, 1928 to April 1, 1947. The fee and the leasehold interest owned by Colwood Company were mortgaged to secure an issue of First Mortgage Fee and Leasehold 6 percent Sinking Fund Gold Bonds in the amount of $6,193,600 with interest at the rate of 6 percent from April 1, 1931. That amount of bonds was outstanding. In 1931, Fox Theatres Corporation ceased all payments under its lease which resulted in the failure of Colwood Company to pay interest and sinking fund charges on the bonds on and after October 1, 1931. On October 27, 1931, Union Guardian Trust Company as trustee under the mortgage, declared the principal of all the outstanding bonds due and payable, and filed a petition in the Circuit Court of the County of Wayne, State of Michigan, in Chancery, to foreclose said mortgage, pursuant to which said Union Guardian Trust Company was appointed receiver of the mortgaged assets. On May 20, 1936 Colwood Company filed in the District Court of the United States for the eastern district of Michigan, southern division, a petition under section 77-B of the National Bankruptcy Act, as amended, for its reorganization. The said court entered an order221 on May 25, 1936 approving the voluntary petition of Colwood Company and appointed temporary trustees. On January 23, 1939, the District Court of the United States for the eastern district of Michigan, southern division, approved a plan of reorganization. The plan provided as follows: (a) The transfer of the entire assets of Colwood Company to a new company. (b) The transfer by the new company of (1) 61,936 shares of preferred stock, no par, stated value $5 per share, $3 cumulative dividends after January 1, 1945, with voting rights and redemption and liquidation value of $100 per share, and (2) 61,936 shares of common stock, no par, stated value $5 per share, with voting rights - to holders of bonds aggregating $6,193,600 in exchange for their bonds and accrued but unpaid interest. This exchange was, therefore, to be on the basis of 10 shares of preferred and 10 shares of common stock for each bond of $1,000 together with all accumulated and unpaid interest. The petitioner, Woodmont Corporation, was organized and incorporated under the laws of the State of Michigan, on January 26, 1939. The petitioner, Woodmont Corporation, issued its preferred and common stock as outlined222 above, and on January 30, 1939 acquired all the property of Colwood Company. The unadjusted basis of the property in question on January 23, 1939 and January 30, 1939, in the hands of Colwood Company, the transferor, was $7,966,842.96. Depreciation and amortization allowed or allowable up to January 30, 1939 was $1,353,350.41, making the adjusted basis, $6,613,492.55. The fair market value of the property on January 23, 1939, the date of the entry of the court's order confirming the plan of reorganization was $1,391,004.90. Opinion In this proceeding we are asked to redetermine petitioner's basis for depreciation. The facts are, briefly, that upon the confirmation of a plan of reorganization of Colwood Company by the District Court for the eastern district of Michigan, in a 77-B proceeding, the mortgaged property of Colwood, securing bondholders, was transferred to petitioner corporation, in exchange for which petitioner issued to bondholders 61,936 shares of preferred, no par, stock, and 61,936 shares of common stock. The holders of the outstanding bonds, in the principal amount of $6,193,600, received in exchange for $1,000 principal amount of bonds, and all accumulated223 and unpaid interest thereon, 10 shares of preferred and 10 shares of common stock. Respondent does not argue that petitioner did not acquire the property in question in pursuance of a plan of reorganization, but he contends that the carry over basis of the property must be reduced to its fair market value on January 23, 1939, in accordance with section 270 of the Bankruptcy Act, as amended, the effective date of the amendment being September 22, 1938. Respondent contends that the bond indebtedness was cancelled in part by the exchange of stock for bonds, and that therefore, under section 270, the basis of the property in question is the fair market value of the property. Respondent argues that the instant case differs from Motor Mart Trust, 4 T.C. 931">4 T.C. 931, because in that case the order of the court, confirming the plan of reorganization of the debtor, was entered before September 22, 1938, the effective date of the amendment to the original section 270 of the Bankruptcy Act; whereas, in this case the order of the court confirming the plan was entered on January 23, 1939, after the effective date. Petitioner contends that the question presented has already been passed224 upon by the Tax Court, in its favor. In support of that contention petitioner cites Alcasar Hotel, Inc., 1 T.C. 872">1 T.C. 872: Motor Mart Trust, supra. Recently, and since the filing of the briefs herein, in Tower Building Company, 6 T.C. 125">6 T.C. 125, promulgated January 25, 1946, the same question which is presented here was considered. In the above case, we had the opportunity to again consider the question whether the exchange or substitution of stock for mortgage bonds in accordance with a plan approved in a 77-B proceeding amounted to a cancellation or reduction of indebtedness under section 270 of the Bankruptcy Act, as amended. We reviewed earlier decisions. We held, following Motor Mart Trust, supra, that such exchange of stock for mortgage bonds did not amount to cancellation or reduction of indebtedness. Tower Building Company, Motor Mart Trust, and Alcazar Hotel, Inc., supra, are controlling of the question presented in this case. As was said in Motor Mart Trust, supra, the substitution of stock for bonds in a reorganization proceeding did not bring about a cancellation of indebtedness within the rule of Kirby Lumber Co. v. United States, 284 U.S. 1">284 U.S. 1.*225 The obligation owing to those who originally held bonds was continued in another form. It follows that no adjustment is to be made to petitioner's cost basis under section 113(b)(4) of the Code, and respondent's determinations in reducing the allowances for depreciation are reversed. This issue presented is decided in petitioner's favor, but recomputations of the deficiencies for the years 1939 and 1941 must be made. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624311/	CLARENCE W. DAUGETTE, JR., and FLORENCE T. DAUGETTE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDaugette v. CommissionerDocket No. 10716-75.United States Tax CourtT.C. Memo 1977-56; 1977 Tax Ct. Memo LEXIS 386; 36 T.C.M. (CCH) 252; T.C.M. (RIA) 770056; March 7, 1977, Filed J. Richard Carr, for the petitioners. Vallie C. Brooks, for the respondent. QUEALYMEMORANDUM FINDINGS OF FACT AND OPINION QUEALY, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1972 of $5,519.25. In the Answer to the Amended Petition, respondent has asked for an increased deficiency in the amount of $3,378.31. The issues remaining387 for decision are as follows: (1) Whether petitioners are entitled to a deduction for a casualty loss under section 165(c) (3) 1 due to the death of their horse Rock-A-Bye Lady in 1972. (2) Whether petitioners' horse Suns Chapparel was used in a trade or busines so as to entitle petitioners to a deduction under section 165(c) (1), for the loss sustained upon the sale of such horse in 1972. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. At the time of the filing of the petition herein, petitioners resided in Gadsden, Alabama. Petitioners filed their 1972 joint Federal income tax return with the Director of Internal Revenue Service at Chamblee, Georgia. About 15 years ago, petitioners developed an interest in Tennessee Walking Horses after horses ridden by their children had won championships in several horse show competitions. Petitioners purchased a few Tennessee Walking Horses and entered them in horse show competitions. A few years later, after388 various individuals expressed a desire to obtain colts from horses owned by petitioners, petitioners started a Tennessee Walking Horse breeding operation with three of their mares. In their breeding horse business, petitioners made a distinction between a horse that was being bred and a horse that was being entered in competition. A horse that was being entered in competition was considered a personal horse and a horse that was being bred was considered a business horse. The business horse was depreciated as an expense of the horse breeding business. Petitioners did not breed any of the horses they entered in competition until after the horse was retired from the show circuit. Neither Rock-A-Bye Lady nor Suns Chapparel was bred and petitioners did not claim any depreciation with respect to either horse in any year. In each of the years 1964 through 1974, petitioners reported a loss from their horse breeding business. The price petitioners received for a colt would depend upon the reputation of the mare and stud which produced the colt. The reputation of the mare and the stud is based on their performance in horse shows, the horses' conformation and the records of the colts produced389 by such horses. A Tennessee Walking Horse establishes its show record through competition in local and state shows and the National Celebration show at which the world championship title is awarded. In the usual Tennessee Walking Horse show there is an amateur and a professional division. All of the Tennessee Walking Horses owned by petitioners during the years involved herein were shown in the amateur division and were ridden by petitioners' children or trainer. Petitioners purchased Rock-A-Bye Lady on September 18, 1967. Prior to this date she had won a world championship title at the National Celebration show. Before her death Rock-A-Bye Lady had won a total of nine world championship titles and numerous blue ribbons at local and state shows. Her performance record in horse show competition had established her as the best living Tennessee Walking Horse mare. Petitioners had planned on entering her in competition for the last time at the 1972 National Celebration and then were going to retire her from the show circuit for breeding purposes. Rock-A-Bye Lady died on August 8, 1972, of an intestinal malfunction known in the trade as colic. She was between eight and nine390 years old at death. Petitioners received recovery of $10,000 under an insurance policy carried on the horse. On March 26, 1970, petitioners purchased Suns Chapparel for $18,000 for their daughter to ride in the amateur class at the horse shows. Petitioners purchased Suns Chapparel thinking they could develop him into another championship horse. However, after petitioners' daughter and the trainers had ridden the horse in several shows, petitioners decided to sell Suns Chapparel, which they did on April 15, 1972, for $12,500. On their 1972 income tax return, petitioners claimed a loss from the sale of Suns Chapparel and the death of Rock-A-Bye Lady, claiming both horses were used in their trade or business. In the statutory notice of deficiency, the respondent determined that the deductions claimed as losses from the sale of Suns Chapparel and the death of Rock-A-Bye Lady should be decreased for depreciation allowable. In their original petition, petitioners alleged that both horses were used in their horse breeding business and did not depreciate them because they claimed the horses' market values did not decrease. Petitioners' amended petition alleged that Rock-A-Bye391 Lady was not used in the trade or business, but was a personal horse. Respondent's Answer to the Amendment to the Petition alleged that both horses were personal horses and the death of Rock-A-Bye Lady was not due to a casualty. Respondent asked the Court to redetermine the deficiency or in the alternative, approve, in all respects, the deficiency as set forth in the notice of deficiency. OPINION Petitioners owned several Tennessee Walking Horses and in 1961 started a small breeding business. In each of the years 1964 through 1974, petitioners reported a loss from breeding horses. The price petitioners received for a colt would depend upon the reputation of the mare and stud that produced the colt. The reputation of the horse was based, among other things, on its performance in horse shows. In 1967 petitioners purchased Rock-A-Bye Lady. Rock-A-Bye Lady was entered in the amateur division of many horse shows and won numerous championships and ribbons, thereby establishing herself as the best living Tennessee Walking Horse mare. Just prior to her death petitioners planned to retire Rock-A-Bye Lady from the show circuit for breeding purposes. Rock-A-Bye Lady became ill on392 August 8, 1972, with an intestinal malfunction known as colic and died the next day. Petitioners received $10,000 from an insurance policy. On March 26, 1970, petitioners purchased Suns Chapparel at a price of $18,000 for their daughter to ride in the amateur class. Petitioners purchased Suns Chapparel thinking they could develop him into a championship horse, but after their daughter and their trainer had ridden the horse in several shows, petitioners realized they had made a mistake and decided to sell Suns Chapparel which they did on April 15, 1972, for $12,500. Petitioners contend that they are entitled to a casualty loss deduction on their 1972 income tax return under section 165 (c) (3) due to the death of Rock-A-Bye Lady. Respondent admits that Rock-A-Bye Lady was a personal horse, but contends that petitioners are not entitled to a casualty loss deduction with respect to their loss upon the death of the horse. Petitioners further contend that Suns Chapparel was a business horse and they are entitled to a deduction for the loss sustained upon the sale of Suns Chapparel. Respondent argues that both horses should be treated consistently, either as personal horses or393 as business horses, and in his view, the record supports the finding that both were personal horses. Section 165 (c) (3) authorizes a deduction for an uncompensated loss of property not used in trade or business if such loss arises from a fire, storm, shipwreck, or other casualty or from theft. In order for the death of Rock-A-Bye Lady to qualify as a casualty loss under this section, her death must fit within the term "other casualty." In numerous cases the courts have stated the term "other casualty" must be restricted to mean events of the same kind or the same characteristics as those specifically enumerated in the statute. The casualties enumerated are unusual, and unexpected events which are caused by a sudden or destructive force. See , cert. denied . The facts in this case indicate that Rock-A-Bye Lady's death did not have the necessary characteristics to qualify it as a casualty within the meaning of section 165 (c) (3). The veterinarian who attended Rock-A-Bye Lady during her colic attack stated that the horse's death was due to her own inherent physical weakness. A394 professional trainer of Tennessee Walking Horses testified that over the past five years, eight or nine of the horses he had been training had died of colic, and that colic is a common cause of death in horses. This evidence clearly indicates that the horse's death was not due to a sudden or destructive force and the cause of death was not an unexpected or unusual occurrence in horses. Accordingly, the Court finds that the death of Rock-A-Bye Lady was not a casualty within the meaning of section 165 (c) (3) and therefore her death does not entitle petitioners to a casualty loss deduction. The record indicates that Suns Chapparel was purchased by petitioners for their daughter to ride in horse shows and that after entering the horse in a few shows, they decided to sell him. The Court cannot distinguish between the petitioners' use of Rock-A-Bye Lady and their use of Suns Chapparel. Both horses were ridden by petitioners' children in the amateur division of horse shows; neither horse was bred and neither horse was depreciated on petitioners' business return. These facts, coupled with the fact that petitioners' themselves did not consider a horse a business horse until it was*395 retired from the show circuit to the breeding business, lead inescapably to the conclusion that Suns Chapparel, like Rock-A-Bye Lady, was a personal horse of petitioners. Petitioners therefore are not entitled to a deduction of their loss on the sale of Suns Chapparel in 1972. Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624312/	Cocheco Woolen Manufacturing Company v. Commissioner.Cocheco Woolen Mfg. Co. v. Comm'rDocket No. 4175. United States Tax Court1945 Tax Ct. Memo LEXIS 139; 4 T.C.M. (CCH) 753; T.C.M. (RIA) 45234; June 28, 1945139 Erwin N. Griswold, Esq., and E. Barton Chapin, Esq., 84 State Street, Boston, Mass., for the petitioner. Carl A. Statsman, Jr., Esq., for the respondent. ARNOLD Memorandum Findings of Fact and Opinion ARNOLD, Judge: This case involves a deficiency in income tax for the fiscal year ended November 30, 1940, in the amount of $23,558.95, and deficiencies in income tax, declared value excess profits tax, and excess profits tax, for the fiscal year ended November 30, 1941, in the respective amounts of $19,779.82, $825.37, and $24,083.07. The issue is whether the petitioner realized taxable income in the fiscal year ended November 30, 1940, in the amount of $222,353.97 through the settlement by the payment of $162,403.24 of its liability of $384,757.21 on a note payable. Except for certain minor adjustments made by the Commissioner and not complained of by the petitioner, the deficiencies for the fiscal year ended November 30, 1941, arise from the refusal of the Commissioner to allow as a deduction from income a net operating loss carry-over from the previous year of $79,422.38. The correctness of the deficiencies in issue for the latter fiscal year depends upon the determination140 in respect of the former year. The facts are stipulated and incorporate by reference the memorandum findings of fact and opinion of this Court in the case of George A. Adam, Docket No. 1720, entered June 28, 1944, [3 TCM 649], which involved the same transaction. The findings of fact are stated to the extent deemed necessary to present the issue. Findings of Fact The petitioner is a corporation organized under the laws of New Hampshire, having its usual place of business at Rochester, New Hampshire. It filed its Federal income, declared value excess profits, and excess profits tax returns for the fiscal years ended November 30, 1940, and November 30, 1941, with the collector of internal revenue at Boston, Massachusetts. The petitioner was engaged in the business of manufacturing woolen products. Parker, Wilder & Co., a partnership, was a factor engaged in the disposal of products manufactured by various woolen mills, including petitioner. On November 25, 1925, petitioner gave its demand promissory note in the amount of $385,257.21 to Parker, Wilder & Co. in settlement of an open account for advances previously made. Prior to 1940 the sum of $500 was paid on this141 note. In 1940 this note was held through mesne endorsements by E. Barton Chapin, as agent for George A. Adam, William D. Judson and the estates of Samuel Rindge, Wellington Rindge and S. Parker Bremer, all owners of proportionate interests, which had been acquired in 1925 through the membership of the individuals and decedents in the firm of Parker, Wilder & Co. In 1940 the estates of Samuel Rindge, Wellington Rindge, and S. Parker Bremer had no interest in the partnership. Petitioner had been relying on advances from Parker, Wilder & Co. in order to carry on business, and on July 8, 1940, the partnership notified petitioner that no further advances would be made. As a result of the notice, petitioner ceased operations on July 29, 1940. On August 8, 1940, George A. Adam and William D. Judson demanded payment of the note in the then outstanding principal amount of $384,757.21. At a meeting of the stockholders of petitioner on August 21, 1940, resolutions were adopted to liquidate the corporation, to sell the business as a going concern at auction on September 3, 1940, and to authorize the corporation's treasurer to offer in compromise of the outstanding liability on the note 25 percent142 of the balance due. If the offer was accepted, the note was to be cancelled upon the payment of the 25 percent and surrendered to the treasurer of petitioner. The offer was accepted by four of the owners of proportionate interests and rejected by the remaining owner, the New England Trust Co., one of the executors and trustees under the will of S. Parker Bremer. On August 28, 1940, the New England Trust Co., after investigation of the possibilities of realizing more on its interest in the note through the liquidation of petitioner, offered to settle its interest for one-third of the face amount, plus the net quick assets of petitioner, the amount thereof to be determined by an independent accounting firm. The proposed plan for liquidating the note was agreed to by Fulton Rindge, treasurer of petitioner and owner of more than one-third of its stock, and on August 29, 1940, he advised Chapin of his willingness to pay for the note, $128,252.40, (which amount was equal to one-third of the principal due) plus an amount equal to the net quick assets of petitioner. Chapin submitted the offer to the owners and further negotiations were held. The items to be included in "net quick assets" 143 were the subject of dispute and agreement was finally reached as to the scope of the term for the purposes of the offer. The holders of interests in the note accepted the offer of Rindge and on September 9, 1940, Rindge transmitted to Chapin his personal check for $128,252.40, representing one-third of the unpaid amount of the note. The net quick assets of petitioner were determ&ned to be $34,150.84. The personal check of Rindge for the amount was transmitted to Chapin on October 24, 1940. The note, endorsed by Chapin to the order of Rindge, was delivered to Rindge on or about October 24, 1940, with an instrument assigning the note to Rindge without recourse. Thereafter Rindge canceled the note and immediately delivered it to petitioner by depositing it in petitioner's safe. On October 25, 1940, petitioner reimbursed Rindge for the amount he had paid to Chapin. The transaction involved herein constituted a gratuitous forgiveness of the balance due on the note. George A. Adam and William D. Judson, holders of interests in this note, filed income tax returns for the year 1940 in which each claimed a bad debt deduction for the amount of his loss sustained in respect of his interest144 in this petitioner's note by reason of the settlement thereof for less than the amount due. The Commissioner disallowed the bad debt deduction and allowed a long-term capital loss deduction of one-half of the amount of the loss. A petition to review the determination in his case was filed with this Court by Adam. This Court held that the loss to Adam resulting from the settlement of his proportionate interest in the note was deductible as a bad debt. Opinion The sole issue is whether petitioner derived income in the fiscal year ended November 30, 1940, from the discharge of its obligation on its note by the payment of less than the amount due. The petitioner contends that the decision of the Supreme Court in Helvering v. American Dental Co., 318 U.S. 322">318 U.S. 322, is controlling. In that case the Court sustained the reversal by the Circuit Court of Appeals for the Seventh Circuit, 128 Fed. (2d) 254, of the decision of the Board of Tax Appeals, 44 B.T.A. 425">44 B.T.A. 425, and held that where creditors of the taxpayer agreed to cancel certain interest due on notes and a lessor agreed to accept a part payment of back rent and cancel the rest of the obligation the145 cancellations were excludible from income under section 22 (b) (3) of the Revenue Act of 1936. This Court has followed that decision in a number of cases. Cf. Shellabarger Grain Products Co., 2 T.C. 75">2 T.C. 75, affirmed on this point by the Circuit Court of Appeals for the Seventh Circuit, 146 Fed. (2d) 177; George Hall Corporation, 2 T.C. 146">2 T.C. 146; Pancoast Hotel Company, 2 T.C. 362">2 T.C. 362; McConway & Torley Corporation, 2 T.C. 593">2 T.C. 593; and Liberty Mirror Works, 3 T.C. 1018">3 T.C. 1018. The respondent contends that income was realized under the rule in the case of United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1, holding that gain from the purchase by a corporation of its own securities in the open market at less than the issue price is taxable income. Respondent further contends that section 22 (b) (9) of the Internal Revenue Code, relating to income from the discharge of indebtedness by a corporation, applies and that, therefore, petitioner may not treat the cancellation as a gift deductible under section 22 (b) (3) of the Code; and that as petitioner has not complied with the requirements of section 22146 (b) (9) it may not claim the benefit of the exclusion authorized under that section. The petitioner did not purchase its securities in the open market, but negotiated with its creditors who ultimately waived a portion of their claim in order to conclude a settlement of the debt. In this vital respect this case differs from the Kirby Lumber Co. case, supra. We think the essential facts here can not be distinguished from those in the case of American Dental Co., supra, and that the amount of the debt cancelled was gratuitously forgiven by petitioner's creditors. In accordance with the rule of that case the amount gratuitously forgiven is excludible from gross income by reason of section 22 (b) (3) of the Internal Revenue Code, and is exempt from taxation under Chapter 1 of the Code. Therefore section 22 (b) (9) does not control as the respondent contends. We conclude that the amount of the forgiveness in the fiscal year ended November 30, 1940, was excludible under section 22 (b) (3) and that petitioner had a net operating loss carry-over in the succeeding fiscal year. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624313/	Daniel G. Cary, Petitioner v. Commissioner of Internal Revenue, RespondentCary v. CommissionerDocket No. 4835-64United States Tax Court48 T.C. 754; 1967 U.S. Tax Ct. LEXIS 48; August 29, 1967, Filed 48 Decision will be entered for petitioner as to the year 1957.Decision will be entered in accordance with the stipulation of the parties for the year 1958. Petitioner on advice of his accountant, concurred in by his attorney, signed on Mar. 24, 1961, and submitted to respondent a Form 872 purporting to extend the statute of limitations with respect to any income tax due under any return made by him for the taxable year ended "6-30-62." This form was submitted at a time when petitioner's income tax return filed Apr. 15, 1958, for the calendar year 1957 was under investigation. After receipt of the Form 872 and at least 15 days prior to the expiration of the statute of limitations for the calendar year 1957, someone in respondent's office altered the Form 872 signed by petitioner by striking out the figures "6-30-62" and inserting the figures "12-31-57" thus making the Form 872 appear to be an extension of the statute of limitations for the calendar year 1957. This change in the Form 872 was not discussed by representatives of respondent with petitioner or his representatives. A copy of the form as altered was mailed to petitioner's accountant with no letter of transmittal49 or other notation directing attention to the alteration in the form or requesting consent to the alteration. Held, the Form 872 signed by petitioner and altered in respondent's office after being so signed was not effective to extend the statute of limitations for the calendar year 1957. Robert R. Veach, for the petitioner.Ronald M. Frykberg, for the respondent. Scott, Judge. SCOTT 755 Respondent determined deficiencies in petitioner's income taxes for the calendar years 1957 and50 1958 in the amounts of $ 25,985.95 and $ 10,119.09, respectively.At the trial the parties stipulated that there was an overpayment in petitioner's income tax for the taxable year 1958 and that a decision might be entered in accordance with that stipulation at the time of entry of decision in this case, and further stipulated that there is a deficiency in income tax due from petitioner for the taxable year 1957 in the amount of $ 10,240.73 if the assessment and collection of income tax for the taxable year 1957 are not barred by the statute of limitations. In view of these stipulations the sole issue for decision in this case is whether the assessment and collection of an income tax deficiency for the taxable year 1957 are barred by the statute of limitations. Whether the assessment and collection of income tax from petitioner for the calendar year 1957 are barred by the statute of limitations depends upon whether petitioner and respondent executed a valid waiver of the statute for that year prior to the expiration of the 3-year statutory period for assessment provided for in section 6501, I.R.C. 1954. 151 FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioner, an individual whose legal residence at the time of the filing of the petition in this case was Omaha, Nebr., filed a joint Federal income tax return for the taxable year 1957 with the district director of internal revenue, Omaha, Nebr., on or before April 15, 1958. Petitioner's wife, Cornelia S. Cary, died in 1958 subsequent to the date of the filing of the joint return.Petitioner, who at the time of the trial of this case was 84 years old, has been engaged in the real estate business in Omaha, Nebr., for over 50 years.Beginning sometime in 1956 petitioner engaged the firm of certified public accountants, Haskins & Sells, to do his accounting and income tax work. This work was done for petitioner by or under the supervision of Lawrence F. Chandler, hereinafter referred to as Chandler. Chandler is a certified public accountant, being certified in the States 756 of Nebraska, Iowa, and Louisiana. At the time of the trial of this case he had been a certified public accountant with Haskins & Sells for 19 years. He is a member of the American Institute of Certified Public Accountants52 and also a member and past president of the Nebraska Society of the American Society of Certified Accountants.Petitioner's joint Federal income tax return for the calendar year 1957 was prepared by Chandler, and when the Internal Revenue Service began an audit of this return, Chandler was representing petitioner in connection with that audit. During the years 1960 and 1961 Chandler had conferences with the examining revenue agent with respect to petitioner's 1957 income tax return.In the early part of 1961 the examining agent Louis Sefranek, in connection with his investigation of certain of petitioner's income tax returns, discussed with Chandler the execution by petitioner of a consent extending the period of limitations for assessment and collection of income taxes. The revenue agent telephoned Chandler and told him he was sending up to him a consent form which he wanted him to have petitioner sign. Chandler at that time was aware of the fact that petitioner's income tax return for the year 1957 was under audit and that the 3-year statute of limitations for assessment of tax with respect to that year would expire in April 1961. Following the conversations between Chandler53 and the revenue agent who was examining certain of petitioner's income tax returns, U.S. Treasury Department Form 872 entitled, "Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax," was mailed to Chandler. The body of the form as mailed to Chandler in triplicate was as follows (the portions inserted by typewriter, one ribbon and the others carbon, being indicated by double underscoring and the blank spaces by a single line):In pursuance of the provisions of existing Internal Revenue Laws, Daniel G. & Cornelia S. Cary a taxpayer (or taxpayers) of 2302 South 90th Street/(Street address) Omaha,/(City) Nebraska,/(State) and the District Director of Internal Revenue (or Assistant Regional Commissioner-Appellate) hereby consent and agree as follows:That the amount of any income, excess-profits, or war-profits taxes due under any return (or returns) made by or on behalf of the above-named taxpayer (or taxpayers) for the taxable year ended 6-30-62, under existing acts, or under prior revenue acts, may be assessed at any time on or before ,/(Date)except that if a notice of a deficiency in tax is sent to said taxpayer (or taxpayers) 54 by certified mail or registered mail on or before said date, then the time for making any assessment as aforesaid shall be extended beyond the said date by the number of days during which the making of an assessment is prohibited and for sixty days thereafter.After receiving the form Chandler reviewed it and noticed that there had been inserted as the year for which the extension was being 757 granted "6-30-62." Upon receiving the form Chandler called the Internal Revenue Service and asked for the internal revenue agent assigned to the investigation of petitioner's returns and upon being informed that he was out called the supply office of the Internal Revenue Service and asked for blank Forms 872. Chandler was advised that such forms were released only to persons associated with the Treasury Department.Chandler then called petitioner's attorney and informed him of the contents of the form which had been sent to him and that he intended to send the form as he had received it to petitioner and after explaining to him that it was a meaningless document, suggested that petitioner sign it without change. Petitioner's counsel agreed with that procedure. Chandler then telephoned55 petitioner and stated to him that he was sending the document which he had received for signature. Chandler further stated to petitioner that the form meant nothing but that since petitioner had been requested to sign it, he should do so and mail it back to Chandler.Petitioner signed the Form 872 in duplicate with his own name and also in the name of "Estate of Cornelia S. Cary by Daniel G. Cary Administrator," dated the one with the typing in ribbon March 24, 1961, and returned both to Chandler. Petitioner made no change in either the printed or typewritten portions of the Forms 872 before signing the forms and mailing them back to Chandler. After Chandler received the signed Forms 872 from petitioner he wrote in pencil on the top of the one that was dated "Original file copy" and took several pictures of the document. He then placed the Forms 872 with no changes made in either the printed or the typewritten portions in an envelope and mailed them to the Internal Revenue Service on March 28, 1961. On this same date he mailed one of the photostat copies he had made of the Form 872 signed by petitioner and a copy of a Form 56 signed by petitioner to petitioner's attorney with56 a handwritten note dated March 28, 1961, which read, "Bob: Attached are photostats of the forms signed by Mr. Cary as requested by Lou Safranek. Larry."On March 31, 1961, the Forms 872 which had been mailed by Chandler to the Internal Revenue Service were signed in the name of the district director of internal revenue by S. B. Comley, Chief, Audit Division, and dated March 31, 1961. When these forms were signed on behalf of the district director of internal revenue, they read as follows (the portions appearing typewritten in ribbon on the form dated, next to petitioner's signature, "March 24, 1961" and in carbon on the other form being indicated by double underscoring):In pursuance of the provisions of existing Internal Revenue Laws, Daniel G & Cornelia S. Cary, a taxpayer (or taxpayers) of 2302 South 90th Street/(Street address) Omaha,/(City) 758 Nebraska,/(State) and the District Director of Internal Revenue (or Assistant Regional Commissioner-Appellate) hereby consent and agree as follows:[EDITOR'S NOTE: TEXT WITHIN THESE SYMBOLS [O> <O] IS OVERSTRUCK IN THE SOURCE.]That the amount of any income, excess-profits, or war-profits taxes due under any return57 (or returns) made by or on behalf of the above-named taxpayer (or taxpayers) for the taxable year ended [O> 6-30-62 <O] 12-31-57, under existing acts, or under prior revenue acts, may be assessed at any time on or before 6-30-62,/(Date) except that if a notice of a deficiency in tax is sent to said taxpayer or taxpayers) by certified mail or registered mail on or before said date, then the time for making any assessment as aforesaid shall be extended beyond the said date by the number of days during which the making of an assessment is prohibited and for sixty days thereafter.(S) Daniel G. Cary/(Signature) [footnote omitted] (Date)[seal] [footnote omitted](S) Estate of Cornelia S. Cary/(Signature) [foonote omitted] (Date)By Daniel G. Cary Administrator/(Title)Mar. 24, 1961/(Date)[Name stamped here]/District Director of Internal Revenue[O> Assistant Regional Commissioner Appellate <O]By (S) S. B. Comley CHIEF, AUDIT DIVISION/(Title)Mar. 31, 1961/(Date)Sometime after the Forms 872 signed by petitioner were received by the Internal Revenue Service, the following handwritten in ink notation was made in the margin on the58 righthand side of the form marked in pencil at the top, "Original file copy": "Letters Testamentary" attached to 1955 return authorizes Mr. Daniel G. Cary to sign for Estate of Cornelia C.K. 3/31/61.Under date of March 27, 1961, petitioner executed a U.S. Treasury Department-Internal Revenue Service Form 56 entitled, "Notice to the District Director of Internal Revenue of Fiduciary Relationship." This form was prepared by Chandler and submitted to petitioner for signature. It stated in part (the typewritten portion being indicated by double underscoring): This notice is given with respect to the liabilities of income tax for the year ended 12-31-57 under the Internal Revenue Code. * Petitioner signed the Form 56 and gave it to Chandler who mailed this form as executed by petitioner to the Internal Revenue Service on March 28, 1961.Both the Forms 872 and the Form 56 bear a stamp reading: "Received Mar. 28 1961 Dist. Dir. Int. Rev. Omaha, Nebr. Audit Div."759 The Form 872 executed by petitioner but not dated which was mailed by Chandler to the Internal Revenue Service along with the executed and dated Form 872 was returned by the Internal Revenue Service59 to Chandler signed in the name of the district director of internal revenue by S. B. Comley, Chief, Audit Division under date of March 31, 1961, with the typewritten portions in carbon as they appeared when the form was signed on behalf of the district director of internal revenue. This copy which was returned by the Internal Revenue Service to Chandler was received by Chandler on April 3, 1961. At the time of the receipt of this copy of the Form 872, Chandler looked over the copy and advised petitioner's attorney of its return and of its contents as returned. He then placed this Form 872 in his file.There is a printed notation on the Forms 872 signed by petitioner to the effect that if the form is executed by a person acting in a fiduciary capacity, such person must submit Form 56, "Notice to the District Director of Internal Revenue of Fiduciary Relationship," together with a certified copy of letters of administration or other listed documents showing the right of the person to act as fiduciary. In the Form 56 signed by petitioner and submitted to the Internal Revenue Service on March 28, 1961, the statement was that letters testamentary were now on file with the district 60 director of internal revenue.A U.S. Treasury Form 872, "Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax" for the taxable year 1957 was executed by petitioner on April 18, 1962, and was executed on behalf of the district director of internal revenue on May 23, 1962. A similar form for the taxable year 1957 was executed by petitioner on April 16, 1963, and by the district director of internal revenue on June 10, 1963.The first of these Forms 872 stated that any income tax for the year might be assessed at any time before June 30, 1963, and the second stated that such tax might be assessed at any time before June 30, 1964.The statutory notice of deficiency reflecting respondent's determination of a deficiency in petitioner's income tax for the taxable year 1957 was mailed to petitioner on June 26, 1964.At no time during the year 1961 did petitioner or Chandler or petitioner's attorney state orally or in writing any objections to the validity or effectiveness of the Form 872 which was mailed to Chandler, signed by petitioner on March 24, 1961, and returned to the Internal Revenue Service. Chandler had no discussions during 1961 with representatives of61 the Internal Revenue Service with respect to the Form 872 after that form was received by him from the Internal Revenue Service. The form mailed to Chandler was not accompanied by a transmittal letter, Chandler returned the signed form without a transmittal letter, and the executed copy of the form received by 760 Chandler from the Internal Revenue Service on April 3, 1961, was not accompanied by a transmittal letter.Petitioner in his petition alleged that the assessment of a deficiency for the taxable year 1957 was barred by the statute of limitations. Respondent in his answer to the petition affirmatively alleged as one of his defenses to petitioner's claim of the bar of the statute to the assessment of a deficiency in income tax for the taxable year 1957 that "Consents were executed by petitioner on March 24, 1961, April 18, 1962 and April 16, 1963 and accepted by the respondent on March 31, 1961, May 23, 1962 and June 10, 1963 extending the period within which an assessment for the taxable year 1957 could be made to June 30, 1964."OPINIONBoth parties recognize that since the notice of deficiency for petitioner's taxable year 1957 was mailed more than 3 years after petitioner's62 return for that year was filed, assessment and collection of a deficiency for that year are barred by section 6501(a) unless the Form 872 signed by petitioner on March 24, 1961, is a valid extension of the statute of limitations. Section 6501(c)(4)2 provides that the taxpayer and the Secretary or his delegate may consent in writing before the expiration of the period provided by statute for assessment and collection of income tax to an extension of that period and that further extensions may be made by subsequent written agreements entered into before the expiration of the period previously agreed upon. Under this statute, the Forms 872 executed by petitioner in 1962 and 1963 are ineffective if the Form 872 executed by petitioner on March 24, 1961, was not an effective consent to an extension of the statute of limitations for the taxable year 1957.63 The narrow question here, therefore, is whether the Form 872 executed by petitioner on March 24, 1961, and on behalf of the district director of internal revenue on March 31, 1961, is effective to extend the period for the assessment and collection of income tax against petitioner for the calendar year 1957 to June 30, 1962.It is petitioner's position that he executed no document providing for the extension of the statute of limitations for the taxable year 1957 since the document he signed and returned to the Internal Revenue 761 Service stated that "the amount of any income tax * * due under any return (or returns) made by [him] * * * for the taxable year ended 6-30-62 * * * may be assessed at any time on or before ." It is petitioner's position that respondent cannot claim to have been misled by the document which he signed and returned to the Internal Revenue Service since someone in respondent's employ changed the document after it was signed by petitioner by striking out the "6-30-62" as the year for which the extension was given and putting in its stead "12-31-57" and by inserting in the blank for the date to which the statute was extended the figures "6-30-62." 64 Petitioner in his brief states with respect to the change in the form after it had been received in the Internal Revenue Service:Whether such action be referred to as forgery, which it constitutes by definition, [n1] or merely as an alteration by some misguided person in the Revenue office, the conclusion remains that such alteration is not binding upon the Petitioner. [Footnote omitted.]Respondent contends that the "correction of a date and the filling in of a blank" on the consent after it was signed by petitioner on March 24, 1961, and before it was signed on behalf of the district director of internal revenue on March 31, 1961, were pursuant to authorization impliedly given by or on behalf of petitioner and in accordance with the true intent of the parties to extend the period of limitation for assessment of the tax for the taxable year 1957. Respondent further contends that the changes in the document were approved, adopted, and ratified on behalf of petitioner when Chandler, who was petitioner's accountant and represented him in income tax matters before the Internal Revenue Service, received a copy of the Form 872 containing these changes and made no objection to the changes. 65 If there was implied consent by petitioner to the changes in the Form 872, it must arise solely from the fact that at the time the Form 872 was signed, petitioner's income tax liability for the calendar year 1957 was under investigation and the statute of limitations for assessment and collection of a deficiency in tax for that year would expire on April 15, 1961. The evidence shows that neither petitioner, Chandler, nor petitioner's attorney had any discussion during 1961 with respect to the Form 872 with representatives of the Internal Revenue Service after the Form 872 was mailed by the Internal Revenue Service to Chandler. Certainly "implied consent" to a change in a written document cannot be gleaned from a conversation between a revenue agent and a representative of a taxpayer regarding the mailing by the former to the latter of a form for the signature of the taxpayer. "Implied consent" to a change in a form cannot be found to exist because a taxpayer signs a form which obviously has an incorrect assertion in a blank space without himself correcting the form. In order to find an implied consent to alteration in a written agreement, 762 the implication must be plain66 and unambiguous. United States v. Reinking, 172 F. Supp. 131">172 F. Supp. 131, 140 (W.D. Mo. 1958). Respondent's argument with respect to "implied consent" is in substance an argument that petitioner gave "implied consent" to the extension of the statute of limitations for assessment of income tax for the calendar year 1957 and not that petitioner gave "implied consent" to the change in the Form 872. However, in order to be effective, petitioner's consent to such an extension of the statute must be in writing. Any consent by petitioner or his agent to the extension of the statute whether stated or implied which is not in writing is not a valid waiver of the statute under section 6501(c)(4).Respondent in his argument relies on cases such as Mulford v. Commissioner, 66 F. 2d 296 (C.A. 3, 1933), affirming 25 B.T.A. 238">25 B.T.A. 238 (1932), in which it was held that a waiver which referred to no year was an effective waiver of the statute for the year 1917. In that case the waiver was given at a time when the only contested tax matter between the taxpayer and the Commissioner was the year 1917 and the other evidence67 of record in that case indicated that both the taxpayer and the Commissioner had in mind the year 1917 when the waiver was executed.The waiver in the instant case as signed by petitioner did not omit the year for which it was given. Petitioner states that in the instant case if respondent's employee had merely filled in a blank this action might not be considered strictly an alteration, but that the evidence showed that he struck out a date which was in the form as signed by petitioner and inserted a different date thus clearly altering the instrument. Respondent in no way requested petitioner's permission to make this change or petitioner's agreement to the change after it was made. Petitioner takes the position that since it is clear that a representative of respondent noticed that the Form 872 was not for the year 1957 prior to the running of the statute of limitations for that year, respondent had ample opportunity to obtain petitioner's expressed consent to the change but did not do so.Respondent further argues, based on such cases as United States v. Vassallo, Inc., 274 F. 2d 791 (C.A. 3, 1960), and Crown Willamette Paper Co. v. McLaughlin, 81 F. 2d 36568 (C.A. 9, 1936), that a defective waiver may be ratified by the subsequent actions of a taxpayer. These cases deal with the authority of the individual signing the waiver on behalf of the taxpayer and not with the question of alterations in a document. Respondent also argues that since petitioner made no objection to the Form 872 as altered after Chandler had knowledge of the changes until such time as it became necessary to enforce the instrument, such lack of action may be viewed as an acquiescence which constitutes a ratification of the changed instrument. Respondent states 763 that petitioner permitted action to be taken with reference to the Form 872 which implied a recognition by him of the validity of the instrument when he signed further waivers for the year 1957. Respondent argues that since a deficiency notice could have been mailed to petitioner prior to the expiration of the statute of limitations at the time the Form 872 as altered was returned to Chandler, petitioner's action in not objecting to the alteration imports the recognition by petitioner of the Form 872 as valid or estops petitioner from denying its validity. Respondent cites in support of this argument69 Stearns Co. v. United States, 291 U.S. 54">291 U.S. 54 (1934); Concrete Engineering Co. v. Commissioner, 566">58 F. 2d 566 (C.A. 8, 1932), affirming an order of this Court dated July 23, 1931; Jaffee v. Commissioner, 45 F. 2d 679 (C.A. 2, 1930), affirming 17 B.T.A. 675">17 B.T.A. 675 (1929), certiorari denied 283 U.S. 853">283 U.S. 853; and Ralston Purina Co. v. United States, 58 F. 2d 1065 (Ct. Cl. 1932). In Stearns Co. v. United States, supra, the taxpayer, after receipt of notice and demand for a deficiency in tax for 1917 prior to the expiration of the statute of limitations for collection of such tax, had requested that collection be by way of a credit from a proposed overpayment for the year 1918. The credit was made after the expiration of the statute for collection of the tax for 1917. The Court held that the taxpayer was estopped by his actions from relying on the expiration of the statute for collection when the credit was made. Concrete Engineering Co. v. Commissioner, supra,70 involved the authority of a secretary-treasurer of a corporation to sign a waiver, and Ralston Purina Co. v. United States, supra, like the Stearns case, involved a request to stay collection and offset the amount due against a claimed overpayment for another year. The Jaffee case involved the authority of a corporate officer to sign a waiver. None of these cases is comparable to the instant case.Generally an agreement by a taxpayer and the Commissioner to an extension of the statute of limitations is to enable the respondent to more carefully investigate some phases of the taxpayer's tax liability and the allowance of additional time should be in the best interests of both parties. A waiver proper on its face, relied on by the Commissioner, cannot be later repudiated by the taxpayer. As stated in Liberty Baking Co. v. Heiner, 37 F. 2d 703, 704 (C.A. 3, 1930), affirming 6 B.T.A. 1270">6 B.T.A. 1270 (1927), "The statute requires nothing but 'consent,' and it would be unconscionable to allow the taxpayer to afterwards repudiate a consent upon which the Commissioner has acted and relied." However, 71 the "consent" required by the statute must be written. We have held that in order to be effective the waiver must be signed before the expiration of the statutory period for assessment by both the taxpayer and the Commissioner. General Lead Batteries Co., 20 T.C. 685">20 T.C. 685 (1953). We recognized that the waiver is "not a contract in the true sense" but 764 considered the language requiring both signatures to be unambiguous. In Holbrook v. United States, 284 F. 2d 747 (C.A. 9, 1960), the Court held that the requirement of the Commissioner's signature was directory and not mandatory discussing numerous cases some reaching an opposite conclusion. In Holbrook v. United States, supra at 750, the Court stated with reference to Commissioner v. United States Ref. Corp., 69">64 F. 2d 69 (C.A. 3, 1933), affirming 23 B.T.A. 872">23 B.T.A. 872, affirmed per curiam 290 U.S. 591">290 U.S. 591:The court conceded that a waiver even when signed by both taxpayer and Commissioner did not constitute a contract between them. Even so, the requirement72 that the Commissioner consent in writing was made for some purpose. This purpose, said the court, might well be to prove that the terms of a waiver are those to which both taxpayer and Commissioner agreed. Or perhaps Congress may have wished to protect the Commissioner from falling prey unknowingly to the terms which a taxpayer might impose in a waiver, the taxpayer's ability to impose such terms arising from the fact that, in the court's eyes, he could force the Commissioner to bargain for an extension of the limitation period. The Commissioner's consent thus prevents the execution by taxpayers of waivers which waive nothing and precludes the combination of the Commissioner's delay in collection and his ignorance of the terms of a waiver from resulting in the loss of the tax to the government. On these grounds and despite its awareness of our decision in Hind, the court held that a waiver without the Commissioner's written agreement is void and ineffective.The waiver in the instant case as signed by petitioner was not the same document as signed by respondent. There had been the changes we have noted made in the document. It is petitioner's position that the situation in this73 respect is comparable to a waiver not signed by the Commissioner even if by some form of "implication" petitioner could be held to have signed a waiver extending the statute as to the taxable year 1957.The only two income tax cases to which our attention has been directed which involve questions of alterations of instruments are F. A. Gillespie, 20 B.T.A. 1068">20 B.T.A. 1068 (1930), and E. M. Pringle Naval Stores Co., 23 B.T.A. 1328 (1931). The issue in the Gillespie case was whether the alteration on the document had been made by the taxpayer before the document was signed and forwarded to the Internal Revenue Service or whether the alteration was made after the document was received by the Internal Revenue Service. On the basis of the facts there present, we concluded that the alteration had been made by petitioner prior to signing the waiver and forwarding it to the Internal Revenue Service. The alteration there involved was a change of a printed date "December 31, 1926" by striking out the figure "6" and inserting in ink the figure "7." In our discussion of the issue we stated at page 1084:If the alteration was made before74 the instrument was signed by the petitioner it is undoubtedly good for the purpose claimed by the respondent; if altered after 765 petitioner's signature was affixed it does not extend the time beyond December 31, 1926, and the notice of deficiency was mailed too late.The other case in which the question of an altered document was raised was E. M. Pringle Naval Stores Co., supra, which involved a change made by the accountant for the taxpayer after the document was signed by the taxpayer but before it was submitted to the Internal Revenue Service. After making the change in the document the accountant as "attorney" signed the taxpayer's name thereto. There was no question in that case of an alteration made by any person in the Internal Revenue Service. In that case we held that the accountant who was representing the taxpayer before the Treasury Department under a broad power of attorney had authority under that power of attorney to sign a waiver on behalf of the taxpayer and therefore had the authority to alter such a waiver on behalf of the taxpayer before it was submitted to the Internal Revenue Service. Neither of these cases is factually75 similar to the instant case.Here the facts show that petitioner on the advice of his accountant concurred in by his attorney deliberately sent a document to the Internal Revenue Service which he and his representatives knew contained an error which he and his representatives considered material. Neither petitioner nor his representatives directed the attention of the Internal Revenue Service to the error in the instrument. Had no change been made in the instrument in the Internal Revenue Service, these facts might justify the conclusion that petitioner was estopped to deny that the document he submitted to the Internal Revenue Service was an extension of the statute of limitations on assessment for the year 1957 because of petitioner's misleading the respondent to respondent's detriment. However under the facts of the present case we are not required to decide such an issue. It is clear from the evidence here that the error in the Form 872 was not overlooked by respondent. Not only was the error noticed but the instrument was changed by respondent's employee after petitioner had signed the instrument without any consultation with petitioner or his representatives in an attempt76 to obtain their agreement to the change or a new instrument with the right date inserted in the appropriate blank space. The Form 872 was apparently signed by representatives of the Commissioner authorized to sign the name of the district director of internal revenue to such a document with figures struck out and others inserted without inquiry as to whether the alteration was made prior to signature by petitioner, or if made after petitioner's signature had been called to the attention of petitioner or his representatives. At the time this document was altered in the Internal Revenue Service and signed on behalf of the Commissioner, there still remained at least 15 days to obtain a proper Form 766 872 extending the statute of limitations on assessment for the year 1957.Under these circumstances it can hardly be said that the Commissioner was misled by petitioner. In this case respondent is relying on a document which was altered by his agents or employees without the consent of petitioner. No notice of the alteration was given to petitioner other than the sending of a copy of the altered document to petitioner's representative. Such notice cannot be considered the equivalent77 of obtaining petitioner's consent to the alteration. We recognize that since neither petitioner nor his representatives discussed with representatives of respondent the change made in the Form 872 in respondent's office, petitioner was in a position to contend after respondent determined a deficiency that the form was not a valid waiver of the statute of limitations but in the event of an overpayment in his tax for the taxable year 1957, to contend that the form was a valid waiver. Cf. Glenshaw Glass Company, Inc., 25 T.C. 1178">25 T.C. 1178 (1956). We, nevertheless, cannot overlook the fact that the evidence shows and respondent does not deny that the alteration in the Form 872 as signed by petitioner was made in respondent's office. Not only was petitioner's attention never specifically directed to the alteration but at the trial no person from respondent's office was called to testify about the making of the change. Except for the fact that petitioner's accountant kept a copy of the Form 872 as it was when forwarded to the Internal Revenue Service and sent a copy of the form as it then appeared to petitioner's attorney, we would find it difficult to believe78 that the alteration in the Form 872 was made by a government employee without the consent of petitioner after the waiver had been signed by petitioner. See F. A. Gillespie, supra at 1087. The same physical document, a Form 872, was signed by the petitioner and on behalf of the respondent but the document as signed by petitioner had been changed before being signed on behalf of the respondent. Such a document did not constitute a consent in writing by both the taxpayer and the Commissioner.The question here is not whether the action of the participants who created the present factual situation is commendable. The question is whether at the time of the mailing of the notice of deficiency in this case the statute of limitations on assessment and collection of income tax for petitioner's taxable year 1957 had expired. We hold under the facts here present that assessment and collection of the deficiency in tax for the year 1957 are barred by the statute of limitations.Decision will be entered for petitioner as to the year 1957.Decision will be entered in accordance with the stipulation of the parties for the year 1958. Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. SEC. 6501. [I.R.C. 1954.] LIMITATIONS ON ASSESSMENT AND COLLECTION.(c) Exceptions. --* * * * (4) Extension by agreement. -- Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary or his delegate and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624314/	Estate of Carl C. Gunland, Deceased, R. Elaine Gunland, Executrix, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Gunland v. CommissionerDocket No. 968-85United States Tax Court88 T.C. 1453; 1987 U.S. Tax Ct. LEXIS 82; 88 T.C. No. 81; June 4, 1987. June 4, 1987, Filed 82 Decision will be entered under rule 155. Petitioner attempted to elect sec. 2032A, I.R.C. 1954, special use valuation. An agreement of the type referred to in sec. 2032A(d)(2) was not attached to petitioner's original estate tax return. Such an agreement was attached to petitioner's late-filed amended return. Held, petitioner's failure to attach an agreement of the type referred to in sec. 2032A(d)(2) to its original estate tax return defeated petitioner's attempted election of sec. 2032A special use valuation. James H. Perkins and Walter S. Moeller, for the petitioner.Steven Mather, for the respondent. Cohen, Judge. COHEN1453 OPINIONRespondent determined a deficiency of $ 325,094 in petitioner's estate tax. After concessions, the issues for decision are: (1) Whether petitioner's failure to attach a recapture agreement of the type referred to in section 2032A(d)(2)1 to its original estate tax return defeats petitioner's attempted election of section 2032A special use valuation and, if not, (2) whether petitioner also may claim a minority or marketability discount in the valuation of certain stock.83 BackgroundCarl C. Gunland (decedent) died testate on February 10, 1981. R. Elaine Gunland, decedent's widow and executrix of 1454 his estate, resided in Fresno, California, when the petition was filed. This case was submitted fully stipulated, and the facts set forth in the stipulation are incorporated by reference as our findings.On November 9, 1981, respondent received an application for extension of time to file petitioner's estate tax return. Respondent granted an extension to May 10, 1982, and on that date petitioner mailed its estate tax return (the original return).The original return made reference to and contained computations reflecting section 2032A special use valuations. For example, petitioner typed an "X" in the "Yes" block on page 2 of the return in response to the question: "Do you elect the special valuation described in instruction 13?" Fair market valuations and section 2032A valuations of decedent's interests in certain property were attached to the return. Included on the return were the names, identifying numbers, relationships, and addresses of the parties receiving any interest in the specially valued property.An agreement of the type referred84 to in section 2032A(d)(2) was not, however, attached to the return. On September 23, 1982, respondent received petitioner's amended return. The amended return contained revised fair market valuations and section 2032A valuations. An agreement dated April 14, 1982, was attached to the amended return. The parties agree that except as to timeliness, the agreement filed with the amended return meets the requirements of section 2032A(d)(2).DiscussionThe pertinent provisions of section 2032A were adopted as a part of the Tax Reform Act of 1976, sec. 2003(a), Pub. L. 94-455, 90 Stat. 1856, in order to encourage the continued use of property for farming and other small business purposes. H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 755-756; S. Rept. 94-938 (Part 2) (1976), 1976-3 C.B. (Vol. 3) 657. Section 2032A permits special valuation of property on the basis of actual use, rather than the fair market value, for estate tax purposes.Section 2032A provides limited tax relief. The decedent must have been a citizen or a resident of the United States, 1455 and the subject property must be located in the United States. 85 The real property must have been used as a farm or in a trade or business by the decedent or by a member of the decedent's family, and the decedent or a member of the decedent's family must have materially participated in the operation of the farm or the business. The property qualifies for special use valuation only if it passes to a qualified heir, who must also be a member of the decedent's family. Ownership and use requirements set forth in the statute must be satisfied for 15 years after the decedent's death to avoid recapture of part of the tax savings resulting from special use valuation.The limited tax relief provided by section 2032A is not automatically available. Section 2032A(a)(1)(B) provides that an estate may obtain the benefits of special use valuation only by electing application of section 2032A and by filing the agreement referred to in section 2032A(d)(2) (the recapture agreement). Section 2032A(d)(2) describes the agreement as a written agreement signed by each person who has an interest in the qualified property consenting to personal liability for any recapture tax imposed by section 2032A(c).The statute controls the timing of the estate's election. 86 Section 2032A(d)(1), as applicable to this case, provides that a valid election shall be made not later than the time prescribed by section 6075(a) for filing an estate tax return, including extensions. 2Section 6075(a) states that an estate tax return shall be filed within 9 months after the decedent's death, and section 6081 provides that respondent generally may grant an extension no longer than 6 months.Regulations prescribe the election's contents. Section 2032A(d)(1) provides that a valid election "shall be made in such manner as the Secretary shall by regulations prescribe." Section 20.2032A-8(a)(3), Estate Tax Regs., states that an election under section87 2032A is made by attaching to a timely filed estate tax return a notice of election containing 14 items of information and the agreement described in section 2032A(d)(2). The regulations provide 1456 that "If neither an election nor a protective election is timely made, special use valuation is not available to the estate. See sections 2032A(d)(1), 6075(a), and 6081(a)." Sec. 20.2032A-8(a)(3), Estate Tax Regs. 3Respondent argues that because a recapture agreement was not attached to petitioner's original return, petitioner did not properly elect special use valuation. Petitioner contends that: (1) Section 20.2032A-8(a)(3), Estate Tax Regs., is invalid to the extent that it requires attachment of the recapture agreement to a timely filed return, (2) the District Director abused his discretion in refusing to accept the agreement filed with the amended return, and (3) the88 timely filed original return contained a valid protective election pursuant to section 20.2032A-8(b), Estate Tax Regs. We will discuss each of petitioner's contentions in turn.Section 20.2032A-8(a)(3), Estate Tax Regs.Petitioner argues that section 20.2032A-8(a)(3), Estate Tax Regs., must be set aside as unreasonable and overly restrictive. Petitioner notes that the provisions of section 2032A appear to draw a distinction between the act of election and the filing of an agreement. Section 2032A(a)(1)(B) provides that special use valuation is available when "the executor elects the application of this section and files the agreement referred to in subsection (d)(2)." (Emphasis supplied.) Section 2032A(d)(1) provides that the election "shall be made in such manner as the Secretary shall by regulations prescribe," but does not explicitly refer to regulations governing the filing of the agreement. Section 2032A(d)(2) also does not specify when the agreement must be filed. Petitioner thus maintains that the regulation's specification of when the agreement must be filed is without authorization in the statute.We disagree. Section 2032A(a)(1)(B) provides that special89 use valuation is available when the executor makes an election and files the required agreement. The election alone is not sufficient to obtain the benefits of section 2032A. Section 2032A(d)(1), which specifies when the election must 1457 be made, of course refers only to valid and effective elections. Without the agreement, an election is neither valid nor effective. Section 2032A(d)(1) consequently authorizes the Secretary to prescribe regulations governing the filing of the agreement as one of the components of a valid election. Section 20.2032A-8(a)(3), Estate Tax Regs., is thus a "legislative" regulation expressly authorized by the statute."Legislative" regulations are entitled to greater weight and deference than are accorded to interpretive regulations. See United States v. Vogel Fertilizer Co., 455 U.S. 16">455 U.S. 16 (1982); Rowan Companies, Inc. v. United States, 452 U.S. 247">452 U.S. 247 (1981); Estate of Clinard v. Commissioner, 86 T.C. 1180">86 T.C. 1180, 1188-1189 (1986). Such legislative regulations must be sustained unless unreasonable and plainly inconsistent with the statute they are designed to90 implement. Commissioner v. South Texas Lumber Co., 333 U.S. 496 (1948); Olson v. Commissioner, 81 T.C. 318">81 T.C. 318, 323 (1983). In this case, the result would be the same if section 20.2032A-8(a)(3) were an "interpretive" regulation.We conclude that section 20.2032A-8(a)(3) is neither unreasonable nor inconsistent with the statute it is designed to implement. Recapture of tax benefits pursuant to section 2032A(c) is a limitation designed to ensure continued use of specially valued property as a family farm or business. In the absence of the recapture agreement, it is not clear that qualified heirs without possessory interests in the specially valued property are on notice of the recapture tax provisions and thus subject to recapture tax under section 2032A(c). Section 2032A(a)(1)(B) and section 20.2032A-8(a)(3), Estate Tax Regs., consequently provide that the filing of the recapture agreement is a necessary prerequisite to special use valuation. Respondent's regulation recognizes that the timely filing of the agreement is, in effect, one component of a valid election under section 2032A. The House Committee on Way and91 Means stated:Under your committee's bill the election to use this special use valuation may be made not later than the time for filing the estate tax return, including extensions.One of the requirements for making a valid election is the filing with the estate tax return of a written agreement signed by each person in 1458 being who has an interest (whether or not in possession) in any qualified real property with respect to which the use valuation is elected. This agreement must evidence the consent of each of these parties to the application of the recapture tax provisions to the property. As noted above, such a consent also amounts to a consent to be personally liable for any recapture tax imposed with respect to the qualified heir's interest in the qualified property. Your committee feels that each person receiving an interest subject to potential recapture should agree to this potential liability, especially since that person may not have received the tax benefits from the special use valuation (because the estate tax is to be paid by a residuary legatee who did not receive farm property, for example). [H. Rept. 94-1380, 1976-3 C.B. (Vol. 3) 735, 761.92 Emphasis supplied.]Section 20.2032A-8(a)(3), Estate Tax Regs., is not invalid.Substantial CompliancePetitioner next argues that it is nevertheless entitled to the benefits of special use valuation because it substantially complied with the regulation's requirements. Petitioner maintains that respondent's District Director consequently abused his discretion in rejecting the agreement filed with the amended return. Petitioner relies on a line of cases interpreting regulations issued pursuant to section 302(c)(2)(A)(iii). These cases hold that a regulation which prescribes the time and manner for filing an agreement relating to stock redemptions does not deprive respondent's District Director of the discretionary authority to accept a late-filed agreement. United States v. Van Keppel, 321 F.2d 717">321 F.2d 717 (10th Cir. 1963); Cary v. Commissioner, 41 T.C. 214">41 T.C. 214 (1963). In each of these cases, the taxpayer's election was allowed because the taxpayer had "substantially complied" with respondent's regulations.Petitioner's reliance is misplaced. In Taylor v. Commissioner, 67 T.C. 1071">67 T.C. 1071, 1077-1078 (1977),93 we observed that:The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. The critical question to be answered is whether the requirements relate "to the substance or essence of the statute." Fred J. Sperapani, 42 T.C. 308">42 T.C. 308, 331 (1964). If so, strict adherence to all statutory and regulatory requirements is a precondition to an effective election. Lee R. Dunavant, 63 T.C. 316">63 T.C. 316 (1974). On the other hand, if the requirements are procedural or directory in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by 1459 substantial, if not strict, compliance. See Lee R. Dunavant, supra;Georgie S. Cary, 41 T.C. 214">41 T.C. 214 (1963); Columbia Iron & Metal Co., 61 T.C. 5">61 T.C. 5 (1973). * In the cases cited by petitioner and in similar cases decided by this Court, the regulations in issue were held "procedural" or "directory" in nature. See, e.g., Taylor v. Commissioner, supra;94 Hewlett-Packard Co. v. Commissioner, 67 T.C. 736">67 T.C. 736 (1977); Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5 (1973); but see Valdes v. Commissioner, 60 T.C. 910 (1973); Fehr Finance Co. v. Commissioner, 58 T.C. 174 (1972), affd. 487 F.2d 184">487 F.2d 184 (8th Cir. 1973); National Western Life Insurance Co. v. Commissioner, 54 T.C. 33 (1970). Section 20.2032A-8(a)(3), Estate Tax Regs., is not such a "procedural" or "directory" regulation. The requisite agreement is an integral part of the statutory scheme in that it subjects all qualified heirs to potential recapture tax liability. Moreover, the substantial compliance doctrine is not applicable where, as here, the statute or regulation provides with detailed specificity the manner in which an election is to be made. Taylor v. Commissioner, 67 T.C. at 1080; Thorrez v. Commissioner, 31 T.C. 655">31 T.C. 655 (1958), affd. 272 F.2d 945">272 F.2d 945 (6th Cir. 1959). Substantial compliance is therefore insufficient95 to secure the benefits of special use valuation. 4Protective ElectionFinally, petitioner maintains that the original return contained the elements of a "protective election" 96 under section 20.2032A-8(b), Estate Tax Regs. Petitioner is mistaken. A protective election may be made when an appraisal of specially valued property is pending when the return is filed. Such an election is contingent upon the subsequent determination of values meeting the requirements of section 2032A. Section 20.2032A-8(b), Estate Tax Regs., explicitly provides that "The protective election is to be made by a notice of election filed with a timely estate tax return stating that a protective election under section 2032A is 1460 being made pending final determination of values." (Emphasis supplied.) Nowhere on its return did petitioner state that an appraisal of the specially valued property was in progress or that it wished to file a protective election.ConclusionWe have considered each of the arguments advanced by the parties. We hold that petitioner's failure to attach a recapture agreement to its original return defeats its attempted election of section 2032A special use valuation. Because of our resolution of this first issue, we need not address the second issue presented for decision in this case. To reflect the concessions of the parties,Decision97 will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect at decedent's date of death.↩2. The Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172, amended sec. 2032A to provide that a valid election shall be made on the decedent's estate tax return, rather than by the due date of that return. Sec. 2032A↩ as amended is applicable only to the estates of decedents dying after Dec. 31, 1981. Here, decedent died on Feb. 10, 1981.3. Sec. 20.2032A-8, Estate Tax Regs., does not reflect changes made by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172.↩4. Several cases stand for the general proposition that the strict requirements of sec. 2032A must be met in order for taxpayers to receive the statutory relief. Estate of Cowser v. Commissioner, 736 F.2d 1168 (7th Cir. 1984), affg. 80 T.C. 783">80 T.C. 783 (1983); Estate of Abell v. Commissioner, 83 T.C. 696 (1984); Estate of Coon v. Commissioner, 81 T.C. 602">81 T.C. 602 (1983); Estate of Geiger v. Commissioner, 80 T.C. 484">80 T.C. 484 (1983). We have held that even reasonable cause does not excuse noncompliance with the sec. 2032A filing requirements. Estate of Williams v. Commissioner, T.C. Memo. 1984-178; Estate of Boyd v. Commissioner, T.C. Memo. 1983-316↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562847/	Filed 9/3/20 In re K.M. CA2/8 NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION EIGHT In re K.M., a Person Coming B300629 Under the Juvenile Court Law. LOS ANGELES COUNTY (Los Angeles County DEPARTMENT OF CHILDREN Super. Ct. No. 18LJJP00476E) AND FAMILY SERVICES, Plaintiff and Respondent, v. STEWART M., Defendant and Appellant. APPEAL from an order of the Superior Court of Los Angeles County. Robin R. Kesler, Judge Pro Tempore. Affirmed. Jaime A. Moran, under appointment by the Court of Appeal, for Defendant and Appellant. Mary C. Wickham, County Counsel, Kim Nemoy, Assistant County Counsel, and John C. Savittieri, Deputy County Counsel, for Plaintiff and Respondent. ___________________________ Stewart M. (Father) appeals from the juvenile court’s refusal to release his son K.M. to his custody at the disposition hearing. Substantial evidence supports the juvenile court’s dispositional finding by clear and convincing evidence that there would be a substantial danger to K.M.’s physical health, safety, protection, physical or emotional well-being, and special needs and that there are no reasonable means by which K.M.’s physical health can be protected if K.M. were released to Father. We affirm. FACTS On July 15, 2018, five-year-old K.M. was found alone approximately a mile from his home in the Antelope Valley. K.M. was not wearing a shirt or shoes. His maternal grandmother found him shortly after the police arrived. She and A.S. (Mother) had been searching for K.M. in the neighborhood but did not report him missing because he often ran away from home. The maternal grandmother told officers he would leave whenever a door was left open so they kept the doors locked. She believed he left through a window that day. The officers escorted K.M. and the maternal grandmother home. They called the paramedics when K.M. fell unconscious after he arrived home. The maternal grandmother speculated he was unwell because it was very hot. The paramedics determined K.M. had low blood pressure and a low pulse. They gave K.M. a dose of Narcan, which is used to combat drug overdose, on the way to the hospital. He did not respond to the Narcan and he later tested negative for narcotics at Antelope Valley Hospital. Because medical personnel at Antelope Valley Hospital were unable to diagnose him, K.M. was transferred to Children’s Hospital of Los Angeles where he spent several days under 2 observation. Children’s Hospital diagnosed K.M. with an unspecified neuro-developmental disorder, which could be associated with neglect or trauma, and childhood disintegrative disorder, which is included in autism spectrum disorder. He also exhibited altered mental status and developmental regression. The Los Angeles County Department of Children and Family Services (DCFS) filed a petition pursuant to Welfare and Institutions Code section 300, subdivisions (b) and (j),1 on behalf of K.M. and his half-siblings, John S., P.S., D.S., and L.G.2 The petition alleged K.M. and his half-siblings were at substantial risk of harm due to Mother’s failure to provide the children with appropriate parental care, supervision, and a secure home environment, as evidenced by the incident involving K.M. running away from home on July 15, 2018. A first amended petition added an allegation under section 300, subdivision (b), that Mother’s history of substance abuse and alcohol abuse rendered her incapable of providing regular care for the children. DCFS located Father in Las Vegas and he contacted DCFS on September 13, 2018. He confirmed he was living with his mother in Las Vegas. When the children’s social worker advised Father of the allegation against Mother, he stated, “I’m not surprised that she had her kids taken. She is always drunk.” He related an incident in which Mother was detained in Nevada with K.M. because she was intoxicated and the maternal grandmother had to travel there to retrieve K.M. 1 All further section references are to the Welfare and Institutions Code. 2 Neither Mother nor the half-siblings are parties in this appeal. As a result, we need not discuss the facts of the dependency proceedings that relate solely to them. 3 Father also told the social worker he visited K.M. at the maternal grandmother’s house before he moved to Las Vegas approximately three to four months ago. Mother was drunk and had locked herself in a room. K.M. was knocking and screaming to get in the room with her. He was so upset, he had a seizure. Father, who also had seizures, put him on his side and wiped his face with a warm rag. Father stated neither Mother nor the maternal grandmother knew what to do. Additionally, they failed to obtain anti-seizure medication for K.M. Father expressed concern for K.M.’s safety and believed he could better care for K.M. He planned to seek custody of K.M. in family court but “wanted to get [him]self together first.” Father indicated he had applied for a housing voucher for a four-bedroom apartment in Las Vegas for himself, K.M., and his two other sons who stay with him during the summer. Father described the maternal grandmother as “a cold piece of work” who spanked K.M., but not her other grandchildren. The children were ordered removed from Mother’s custody at the September 25, 2018 detention hearing. Father appeared at the detention hearing and requested custody of K.M. Father acknowledged he had a criminal history but was working toward turning his life around. While he was incarcerated, he completed a parenting course, a Hope for Prisoners program and received numerous certificates of recognition. Father advised the court he had two other children who were in his care and he was pursuing low income housing for all of them. He complained to the juvenile court he had not had visits with K.M. due to the maternal grandmother’s lack of support. The children were placed in foster care. 4 K.M.’s counsel advised she had no objection to releasing K.M. to Father if K.M. showed familiarity with Father and did not have an adverse reaction to him. DCFS counseled against moving “too fast” in releasing K.M. to Father since he currently lived in a small apartment with his mother and his two other children. Additionally, DCFS observed Father did not have a relationship with K.M. Mother joined in DCFS’s position. The juvenile court ordered DCFS to use its best efforts to conduct an assessment of Father’s housing in Las Vegas. It also allowed DCFS discretion to release K.M. to Father, but stated it wanted Father to visit with K.M. first. DCFS later reported it was unable to conduct an assessment of Father’s home without making a request to the local child welfare agency in Nevada through the Interstate Compact on the Placement of Children. In its jurisdiction/disposition report, DCFS recommended the juvenile court sustain the allegations against Mother. The social worker surmised Mother was intoxicated or under the influence of drugs at the time K.M. was found on July 15, 2018. The family reported K.M. was speaking, knew his letters, numbers, and name, and was potty trained by the age of three or four. He regressed after his maternal grandfather died last year, however. At age five, he stopped speaking and reverted to bedwetting. Despite this regression, Mother failed to seek any developmental or medical services for him. DCFS also questioned Father’s ability to care for K.M. DCFS noted Father moved to Las Vegas even though he had concerns about K.M.’s safety. In addition, Father had an extensive criminal history, including convictions for domestic violence and a possible outstanding warrant. As a result, the juvenile court ordered DCFS to address Father’s warrant and 5 parole standing and any safety obstacles to releasing K.M. to him. DCFS later reported Father did not have any active arrest warrants and his parole had been terminated. It continued to question Father’s ability to care for K.M., however. The juvenile court ordered an assessment of the maternal grandmother’s home as well as the maternal great-aunt’s home for the children. DCFS opposed placement with the maternal grandmother, noting K.M. ran away while he was at the maternal grandmother’s home and questioning whether the maternal grandmother had the ability to care for all of the children. The children were subsequently placed with the maternal great-aunt. On January 2, 2019, a second amended petition was filed to include failure-to-protect allegations against Father. By April 9, 2019, Father had yet to visit with K.M. despite the juvenile court’s concern that he lacked a relationship with K.M. The children’s social worker reported he did not have a visitation plan and DCFS had no contact with Father since January 2019. At the jurisdictional hearing, the juvenile court sustained an allegation under section 300, subdivision (b) that Mother was under the influence of alcohol when she failed to adequately supervise K.M., who was found alone a mile from home on July 15, 2018. The court further found Father knew of Mother’s failure to provide adequate supervision, and his failure to protect K.M. placed him at substantial risk of serious physical harm. The dispositional hearing was continued to August 29, 2019, to allow notice to be made to the father of John S., P.S., and D.S. 6 In a last-minute information, DCFS informed the juvenile court it alerted Father by letter dated June 3, 2019, that he could call K.M. on Monday, Wednesday, and Friday of each week at 4:30 p.m. However, Father failed to make contact with K.M. At the dispositional hearing, Father again requested K.M. be released to him. K.M.’s attorney opposed releasing K.M. to Father because he had failed to keep contact with K.M. or DCFS during the proceedings. K.M.’s attorney expressed concern regarding Father’s commitment to parenting K.M. DCFS argued Father was aware K.M. did not have anti-seizure medication and was apprehensive about his safety in Mother’s care, yet decided to move to Las Vegas without notifying the authorities about his concerns. The juvenile court found by clear and convincing evidence under section 361, subdivisions (c) and (d), that a substantial danger existed to the physical health, safety, protection, physical or emotional well-being, and special needs of K.M. and there are no reasonable means by which K.M.’s physical health can be protected if K.M. were released to Father or returned to Mother. The court declined to liberalize Father’s visits to unmonitored visits, noting Father had no visitation with K.M. during the entirety of the proceedings. However, it maintained its order to allow DCFS discretion to release K.M. to Father. Father appealed. 7 DISCUSSION On appeal, Father does not challenge the court’s jurisdictional finding that he failed to protect K.M. from Mother’s neglect. He instead argues there was not clear and convincing evidence to support removing K.M. from his custody. We conclude substantial evidence supports the juvenile court’s dispositional findings. I. Standard of Review Section 361, subdivision (d), decrees: “A dependent child shall not be taken from the physical custody of his or her parents . . . with whom the child did not reside at the time the petition was initiated, unless the juvenile court finds clear and convincing evidence that there would be a substantial danger to the physical health, safety, protection, or physical or emotional well-being of the child for the parent . . . to live with the child or otherwise exercise the parent’s . . . right to physical custody, and there are no reasonable means by which the child’s physical and emotional health can be protected without removing the child from the child’s parent’s . . . physical custody.” If the court orders that a child be removed from parental custody at the dispositional hearing, it must determine “whether reasonable efforts were made to prevent or to eliminate the need for removal of the minor from his or her home . . . .” (§ 361, subd. (e).) “ ‘ “The focus of the statute is on averting harm to the child,” ’ ” and the court “ ‘may consider a parent’s past conduct as well as present circumstances.’ ” (In re A.S. (2011) 202 Cal. App. 4th 237, 247, disapproved on other grounds by Conservatorship of O.B. (2020) 9 Cal. 5th 989, 1010, fn. 7.) 8 We review the dispositional findings for substantial evidence. (In re T.W. (2013) 214 Cal. App. 4th 1154, 1161, 1163– 1164; In re A.R. (2015) 235 Cal. App. 4th 1102, 1115–1116.) The California Supreme Court has recently explained that “when reviewing a finding that a fact has been proved by clear and convincing evidence, the question before the appellate court is whether the record as a whole contains substantial evidence from which a reasonable factfinder could have found it highly probable that the fact was true. Consistent with well-established principles governing review for sufficiency of the evidence, in making this assessment the appellate court must view the record in the light most favorable to the prevailing party below and give due deference to how the trier of fact may have evaluated the credibility of witnesses, resolved conflicts in the evidence, and drawn reasonable inferences from the evidence.” (Conservatorship of O.B., supra, 9 Cal.5th at pp. 995–996.) II. Substantial Evidence Supports the Dispositional Findings Here, the record as a whole contains substantial evidence from which a reasonable factfinder could have found it highly probable that there would be a substantial danger to K.M.’s physical health, safety, protection, physical or emotional well- being, and special needs if he were released to Father’s custody, and that there are no reasonable means by which K.M.’s physical health can be protected if Father gained custody. (Conservatorship of O.B., supra, 9 Cal.5th at pp. 995–996.) The record discloses Father admitted he knew Mother “is always drunk” and that she was detained in Nevada on one occasion with K.M. because she was intoxicated. He also witnessed K.M. suffer from a seizure during a visit and knew 9 Mother had failed to obtain anti-seizure medication for K.M. He believed the maternal grandmother singled K.M. out for harsher punishment than his half-siblings. As a result, Father had concerns about K.M.’s safety while in Mother’s custody. Yet, Father moved to Nevada without addressing any of the issues he perceived K.M. faced while in Mother’s care. Father did not confront Mother about her alcohol abuse. He failed to obtain anti-seizure medication for K.M. or remind Mother to get it. He also failed to raise the issue of the maternal grandmother’s treatment of K.M. with Mother or the maternal grandmother. Although Father indicates his decision to move was not frivolous and was the result of family or economic circumstances, he fails to explain why he did not report his concerns to authorities or address them with Mother before he left. Moreover, Father failed to visit K.M. during the year-long dependency proceedings. —Father first contacted DCFS on September 13, 2018, and the court made its dispositional orders on August 29, 2019. Although Father reported at the detention hearing that the maternal grandmother did not support his visits, he still failed to visit when K.M. was placed elsewhere. Indeed, Father never called K.M. even when the children’s social worker advised him she had set up thrice-weekly telephonic visits in June 2019. The only documented interaction between Father and K.M. in the record is Father’s visit with him three or four months prior to his move to Nevada. Further, the record discloses K.M. had special needs. His family reported he had regressed substantially in the past year; he no longer spoke and he wet himself despite having previously been successfully potty trained. He was diagnosed with an unspecified neuro-developmental disorder and autism spectrum 10 disorder. There is no indication Father has educated himself about K.M.’s diagnoses or worked to ensure he could properly care for K.M. Indeed, Father failed to maintain regular contact with DCFS to discuss K.M.’s progress, indicating an unwillingness or inability to care for K.M. The record contains substantial evidence supporting the juvenile court’s dispositional findings. Father asserts he has demonstrated his ability to care for K.M. because he was out of legal trouble, had no outstanding warrants, completed programs, including a parenting education class in connection with his parole, and attained appropriate housing for K.M. and his other children. While it is apparent Father is trying to turn his life around and we presume Father’s housing is appropriate for K.M., none of these facts override the substantial evidence cited above. There simply is no evidence Father has the ability to care for K.M. and his special needs, has ever tried to care for K.M., or has actually provided care for K.M. in a parental capacity. Father argues removal is not warranted because his is not an “extreme” case of abuse or neglect as set forth in section 361, subdivision (c). Father, however, acknowledges that removal of a child from a noncustodial parent is governed by subdivision (d) of section 361, not subdivision (c), which focuses on removal of a child from a custodial parent. Father is a noncustodial parent because K.M. did not live with him at the time of the proceedings. In any case, both subdivision (c) and (d) of section 361 permit removal where “[t]here would be a substantial danger to the physical health, safety, protection, or physical or emotional well-being” of the minor and “there are no reasonable means by which [his or her] physical health can be protected” without 11 removal. As discussed above, substantial evidence supports the juvenile court’s finding by clear and convincing evidence that there would be a substantial danger to K.M.’s physical health, safety, physical or emotional well-being, and special needs if he is released to Father’s custody. Substantial evidence also supports the finding that there are no reasonable means by which his physical health can be protected if he is released to Father. Finally, Father contends the juvenile court’s removal order was based on speculative concerns over future occurrences of past behavior, citing to In re Jasmine G. (2000) 82 Cal. App. 4th 282 (Jasmine G.). According to Father, his decision to move to Las Vegas was the past behavior which led to the speculative concerns about his ability to care for K.M. We do not agree the juvenile court’s concerns were speculative. In Jasmine G., the juvenile court ordered a teenager removed from her parents, who were separated and shared custody, because they each used corporal punishment to discipline their daughter. (Jasmine G., supra, 82 Cal.App.4th at p. 288.) The appellate court reversed the removal order because there was no evidence the daughter would be at risk of physical harm if returned to her parents. Both parents had forsworn corporal punishment, expressed remorse for their actions, attended parenting classes, and undergone therapy to improve their parenting skills. The daughter stated she did not fear her parents and wanted to return home. One therapist opined it was totally safe to return the child and the other simply had no recommendation. (Id. at pp. 288–289.) Here, Father has not similarly demonstrated he regrets his failure to protect K.M. or that he has learned from his failures and will do better. Indeed, Father has not visited K.M. to 12 establish a relationship with him despite the juvenile court’s admonishment that it would like to see some visits between Father and K.M. to ensure K.M. did not have an adverse reaction to Father. Unlike Jasmine G., the juvenile court’s removal order in this case was not based on speculation. DISPOSITION The challenged dispositional order is affirmed. BIGELOW, P. J. We Concur: STRATTON, J. WILEY, J. 13	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4562849/	Filed 9/3/20 In re Christopher G. CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. COURT OF APPEAL, FOURTH APPELLATE DISTRICT DIVISION ONE STATE OF CALIFORNIA In re CHRISTOPHER G., a Person Coming Under the Juvenile Court Law. D077061 THE PEOPLE, Plaintiff and Respondent, (Super. Ct. No. J242345) v. CHRISTOPHER G., Defendant and Appellant. APPEAL from an order of the Superior Court of San Diego County, Richard R. Monroy, Judge. Affirmed and remanded with directions. Elisabeth R. Cannon, under appointment by the Court of Appeal, for Defendant and Appellant. Xavier Becerra, Attorney General, Lance E. Winters, Chief Assistant Attorney General, Julie L. Garland, Assistant Attorney General, Melissa Mandel and A. Natasha Cortina, Deputy Attorneys General, for Plaintiff and Respondent. In response to two juvenile court petitions filed under Welfare and Institutions Code section 602, Christopher G. (the Minor) admitted one count of robbery (Pen. Code,1 § 211) and one count of assault with force likely to cause great bodily injury (§ 245, subd. (a)(4)). The remaining count and allegations were dismissed with a Harvey waiver.2 Following a disposition hearing, the Minor was declared a ward of the court and placed on probation. Two months later, the Minor admitted violating his probation. He was committed to Urban Camp for a period not to exceed 85 days. The court held a restitution hearing and ultimately ordered restitution to victim M.S. in the amount of $295. As to victim J.W., the court ordered restitution in the amount of $160. The Minor appeals raising two sets of issues. First, he contends the juvenile court erred in failing to expressly state whether the assault count is to be a felony or a misdemeanor. The People concede the record does not contain an express determination by the court and therefore remand is necessary to allow the juvenile court to decide and state it on the record. (In re Manzy W. (1997) 14 Cal. 4th 1199, 1210-1211.) We will accept the People’s concession and remand the matter to the juvenile court for compliance with Welfare and Institutions Code section 702. The principal contention on appeal is that the court abused its discretion in awarding restitution to two victims because their claims were not adequately documented. We will reject the latter contention and find there is an adequate basis in this record to support the court’s decision. 1 All further statutory references are to the Penal Code unless otherwise specified. 2 People v. Harvey (1979) 25 Cal. 3d 754. 2 STATEMENT OF FACTS The Minor does not challenge his true findings. Therefore, we will adopt the factual summary from the respondent’s brief to provide background for the later discussion of restitution. In the beginning of 2019, the Minor, who did not have a juvenile record at the time, became increasingly violent, including committing assaults and robberies.3 His first juvenile petition, JDA No. H5078, arose from an incident in which the Minor and several friends attacked a fellow high school student, M.S., near a school bus stop. According to M.S., on February 12, 2019, prior to the start of school, the Minor walked by and stared at him. M.S. said he asked why the Minor was staring at him, and it angered the Minor. The Minor challenged M.S. to fight after school but M.S. said he did not want to fight. Throughout the day, however, students told M.S. that the Minor and his friends were going to fight him and they did. The fight was captured on video. The Minor’s friend started the fight and the Minor and his companions eventually joined in. The Minor punched M.S. and kicked him in the head while he was on the ground. A teacher and other students were able to eventually break up the fight. M.S. suffered a concussion as a result of the fight. The second juvenile petition arose following another assault and two robberies, JDA No. H5005. On May 12, 2019, the Minor challenged J.W. to a fight at the Olive Grove Park. When J.W. told the Minor that he would not fight him, the Minor shoved J.W. off his skateboard. J.W., however, was able to get back on his skateboard and skate to the backside of the park but the 3 Probation did not locate any juvenile record for the Minor prior to the incident underlying this appeal but the Minor advised that in 2017, when he was in 7th grade, he completed diversion for a battery. 3 Minor pursued him in a car with two friends. While the Minor’s two friends exited the car and approached J.W., the Minor came up from behind and pulled J.W. to the ground. He then punched J.W. in the back of the head approximately seven to eight times. J.W.’s skateboard was then taken and placed inside the car that the Minor had been in. A passerby scared the Minor and the two other males away. J.W. sustained bruising and cuts to the right side of his head, left ribcage, both knees, and elbows. On May 24, 2019, the Minor and two companions approached two other minors who were riding an electric scooter and a bike. The Minor threatened them, “We from Luni Mob nigga. We will bring back the big homies to sock you up if you don’t give up the scooter.” The Minor, in turn, grabbed the scooter and fled with his companions. The Minor admitted to a probation officer that he associates with Luni Mob gang members and the TOEK tagging crew, although he denied a desire to join the gang. He also admitted that he does sometimes carry a gun or a knife on his person. DISCUSSION The Restitution Order The Minor challenges the amounts of restitution ordered for two of the three victims of his unlawful behavior. We will briefly summarize the restitution hearing and then discuss the Minor’s contentions. A. The restitution hearing The evidence used at the hearing was two sworn victim restitution requests attached to the probation officer’s report. Victim, M.S. requested $581, consisting of $195 for prepaid boxing lessons, which the victim missed due to injuries from the offense. The request also included $100 for gasoline for travel to the various medical and therapy appointments, plus $286 for 4 employment wages. The court disallowed the claim for employment wages as not justified but granted the remainder of $295. The victim, J.W. requested $160 for loss of a custom skateboard, Bluetooth earbuds and the deductible paid to Kaiser for his medical treatment. The trial court granted J.W.’s request. The Minor did not offer any rebuttal evidence but did object to all of the award as not sufficiently documented. B. Legal Principles The California Constitution guarantees victims the right to receive restitution from persons convicted of crimes which caused the victim’s losses. (Cal. Const., art. I, § 28, subd. (b)(13)(A).) The guarantee of restitution also applies to juvenile delinquency cases. (Luis M. v. Superior Court (2014) 59 Cal. 4th 300, 304-305.) When a crime victim makes prima facie showing of entitlement to restitution, the burden of proof shifts to the defendant to disprove the amount of loss claimed by the victim. (People v. Superior Court (Lauren M.) (2011) 196 Cal. App. 4th 1221, 1226.) The decision to grant or deny is one vested in the sound discretion of the trial court. The burden of proof is preponderance of the evidence and the court’s decision will not be disturbed absent a clear showing of abuse. (Luis M. v. Superior Court, supra, 59 Cal.4th at p. 305; People v. Fortune (2005) 129 Cal. App. 4th 790, 794.) In People v. Gemelli (2008) 161 Cal. App. 4th 1539, 1544, Division Two of this court addressed the quantum of detail required to support a victim’s request for restitution. The court there found the victim’s handwritten note detailing the losses, which had been incurred, to be sufficient. There the probation officer did not attempt to verify the amount of each loss. (Id. at 5 pp. 1541-1542.) The court rejected various court of appeal decisions requiring more extensive detail from crime victims requesting restitution. (See People v. Foster (1993) 14 Cal. App. 4th 939, 946-947.) C. Analysis The victim claims for small amounts of restitution were contained in sworn statements attached to the probation report. They identified the nature and amount of the losses for relatively small amounts of money. The trial court believed the statements, except for “employment wages” which the court struck from the requests. The defense did not offer any rebuttal evidence but simply argued there should have been more detail, particularly the amounts of gasoline and dates of gasoline purchases. The defense also complained about the need for more detail in J.W.’s request for $160. Certainly, there could have been more detail, as is likely always the case. However, here the court received testimony of minor amounts, which were tethered to the injuries and treatment requirements resulting from the Minor’s unlawful behavior. The court carefully considered the requests and denied the one the court deemed unjustified. On this record, we cannot say the court abused its discretion or that there was not sufficient evidence to support the court’s decision. 6 DISPOSITION The Disposition and Restitution orders are affirmed. The matter is remanded to the juvenile court to determine whether the assault count is a felony or a misdemeanor and state the finding on the record. HUFFMAN, J. WE CONCUR: BENKE, Acting P. J. GUERRERO, J. 7	01-04-2023	09-03-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624353/	C. C. PARTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Partee v. CommissionerDocket No. 81214.United States Board of Tax Appeals37 B.T.A. 1112; 1938 BTA LEXIS 938; June 24, 1938, Promulgated 938 Sections 47(c) and (d) and 101(b) of the Revenue Act of 1932 apply where there is a capital net loss in excess of ordinary net income for a short period resulting from a change in accounting periods, and require that both the partial tax on ordinary net income and capital net loss for the short period be placed upon the same basis for the purpose of computing the tax under 101(b). John D. Martin, Jr., Esq., and Oliver P. Cobb, C.P.A., for the petitioner. Harry R. Horrow, Esq., for the respondent. MURDOCK 1112 OPINION. MURDOCK: The Commissioner determined a deficiency in income tax in the amount of $4,537.31 for the period January 1 to July 31, 1932. The only issue is whether the Commissioner erred in computing 1113 the deficiency pursuant to the provisions of sections 47 and 101 of the Revenue Act of 1932. All of the material facts have been stipulated by the parties and the stipulation is hereby adopted for all purposes of this proceeding. The petitioner kept his records and made his Federal income tax return upon a calendar year basis for the years up to and including 1931. He made a timely application for permission939 to change his accounting period thereafter to a fiscal year ending July 31 and the Commissioner granted the permission. He then filed a return for the period of seven months from January 1 to July 31, 1932. That short period and that return were in accordance with the permission granted to change the accounting period. The correct items of income and deductions for the period of seven months are as follows: 1. Cotton business (loss)($6,625.16) 2. Fruit business16,840.48 3. Interest3,150.18 7. Rents1,168.83 8. Ordinary gains on stock sales$26,436.05 10. Dividends3,417.19 11. Profit Commodities2,857.80 12. Total47,245.37 19. Deduction of taxes1,998.12 Loss from sale of shares of stock, which were capital assets, as defined by Section 101(c)(8), and which loss was a deduction from gross income within the meaning of Section 23(e)(2), of the Revenue Act of 193249,758.21 20. Net Loss(4,510.96)The petitioner contends that the provisions of section 47(c) and (d) of the Revenue Act of 1932 have no application, or, if they are applicable, at least they have no application to the capital net loss sustained by the petitioner. 940 The Commissioner applied those provisions in computing the deficiency. Section 47 is entitled "Returns for a period of less than twelve months." Subsection (a) provides, inter alia, that if a taxpayer, with the approval of the Commissioner, changes from a calendar year to a fiscal year, a separate return shall be made for the short period between the close of the last calendar year and the date designated as the close of the fiscal year. Subsection (b) provides that the income shall be computed on the basis of the period for which the separate return is made. Subsections (c) and (d) are as follows: (c) INCOME PLACED ON ANNUAL BASIS. - If a separate return is made under subsection (a) on account of a change in the accounting period, the net income, computed on the basis of the period for which separate return is made, shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in the period for which the separate 1114 return is made. The tax shall be such part of the tax computed on such annual basis as the number of months in such period is of twelve months. (d) CAPITAL NET GAINS AND LOSSES. - EARNED941 INCOME. - The Commissioner with the approval of the Secretary shall by regulations prescribe the method of applying the provisions of subsections (b) and (c) (relating to computing income on the basis of a short period, and placing such income on an annual basis) to cases where the taxpayer makes a separate return under subsection (a) on account of a change in the accounting period, and it appears that for the period for which the return is so made he has derived a capital net gain, or sustained a capital net loss, or received earned income. The Commissioner did not promulgate any regulations under subsection (d). He filed no brief in this case. Subsections (c) and (d) of section 47, when read with section 101(b), clearly require the computation which the Commissioner has made. The provisions of section 47(c) and (d) are made to apply in every case where a separate return must be made on account of a change in the accounting period. There is no justification for failing to apply them in cases involving capital net gains, capital net losses, or where earned income has been received. The petitioner changed his accounting period. A return was filed for the short period. That942 is the period before the Board. Subsection (c) requires that the "net income" for that period shall be placed upon an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in the short period. "Net income" is defined in section 21 as the gross income computed under section 22, less the deductions allowed by section 23. The net income of this petitioner for the short period thus computed was a minus quantity, that is, a loss of $4,510.96. Obviously no tax would be due upon the petitioner's "net income" and no consideration need be given to the question of whether "net income", as used in (c), could include a minus quantity. Cf. ; . Here the loss of $4,510.96 is not used in any way in the computation of the deficiency. The tax results from the computation required under section 101(b). One of the deductions allowed by section 23 was an amount of $49,758.21, which was a capital net loss within the meaning of section 101. Section 101(b) provides that, in the case of a taxpayer who sustains a capital net loss, the tax943 in lieu of all other taxes shall be determined as follows: A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minue 12 1/2 per centum of the capital net loss; * * "Ordinary net income" is "net income" computed after excluding all items of capital gain, capital loss, and capital deductions. The 1115 ordinary net income of this petitioner for the short period amounted to $45,247.25. Since section 101 provides that a partial tax shall be computed upon the basis of the ordinary net income at the rates and in the manner as if section 101 had not been enacted, "ordinary net income" for the purpose of that computation becomes "net income." That net income must be placed upon an annual basis under the provisions of section 47(c) in order to find the tax on it "at the rates and in the manner as if" section 101 had not been enacted. Section 101(b) provides that 12 1/2 percent of the capital net loss shall be deducted from the tax on the income thus computed. Here a question of detail might arise, in the absence of regulations, which, however, 944 will not affect the result. If the partial tax on the ordinary net income is first reduced from that for the annual period to that for the shorter period by multiplying by 7/12, then 12 1/2 percent of the actual capital net loss should be deducted. But the same amount of tax would be determined by deducting from the partial tax on an annual basis, 12 1/2 percent of the capital net loss on an annual basis and reducing the result to the actual tax for the short period basis by multiplying by 7/12. It is apparent that Congress has been logical in this connection, for section 47(d) clearly indicates that a capital net loss must be placed upon the same basis as the tax before the 12 1/2 percent is deducted. This is clear from a reading of section 47(d), which section would have no meaning otherwise. The provisions of section 47(c) and (d) and the provisions of section 101(b) must be read together. They then leave no doubt that the partial tax on the ordinary net income and the capital net loss must be placed upon the same basis before 12 1/2 percent of the latter is deducted from the former. The Commissioner has proceeded in accordance with the principles above discussed. He has945 placed all factors upon an annual basis by multiplying each by the fraction 7/12. 1 Thus actual ordinary net income for the short period became $77,566.72 upon an annual basis and the capital net loss of $49,758.21 became $85,299.79 upon an annual basis. He then made the computation of tax upon the item of $77,566.72. It was necessary in that connection for him to place dividends upon an annual basis and also to use the full personal exemption of $2,500. See section 47(e). He deducted 12 1/2 percent of $85,299.79 from the tax thus computed, leaving $7,778.24 as the total tax upon an annual basis. He took 7/12 of that tax as the tax for the short period of seven months and thus determined the deficiency of $4,537.31. That method complies with the provisions of section 47(c) and (d) and with the provisions of section 101(b). 1116 Consequently, there is no reason to disturb the Commissioner's determination. The conclusion thus reached is in946 accordance with, rather than contrary to, the purpose which Congress had in mind in enacting provisions like those contained in section 47(c) and (d). A provision similar to that contained in (c) first appeared as section 226(c) of the Revenue Act of 1921. The provision corresponding to (d) first appeared as section 226(d) of the Revenue Act of 1924. Similar provisions were retained in all subsequent acts until the Revenue Act of 1934. Congress then changed the entire scheme of capital gains and losses and the provisions of (d) were dropped because in that new scheme they were no longer necessary or appropriate. House Rept. 704, 73d Cong., 2d sess., pp. 9, 10, 24. Senate Report 558, 73d Cong., 2d sess., pp. 12, 29. The purpose of the provisions was to prevent taxpayers from avoiding tax through the use of a short period. Ways and Means Committee, House Report 350, 67th Cong., 1st sess., p. 13; Senate Finance Committee, Senate Rept. 275, 67th Cong., 1st sess., p. 17; Conference Report 486, 67th Cong., 1st sess., p. 31; Ways and Means Committee, House Report 179, 68th Cong., 1st sess., p. 23; Senate Finance Committee, Senate Report 398, 68th Cong., 1st sess., p. 27. The tax947 rates were calculated to produce the desired revenue if applied to the income of taxpayers for a full period of 12 months. They would produce much less revenue if the full period could be divided in any way into shorter periods, or if a short period could be inserted between two full periods. The reduction in tax would result from the fact that the taxes were graduated and increased in percentage as the income of a taxpayer increased. The method adopted by Congress to prevent avoidance was to require (through the provisions above discussed) that the tax be computed on an annual basis (by placing the income for the short period upon an annual basis) and then taking the proportion of the tax for the full period which would be properly allocable to the short period. The taxpayer would thus be required to pay for the short period a proportionate part of the tax which he otherwise would have been required to pay for the full period of twelve months, assuming that his income for the full period had been in proportion to his income for the short period. The computation of the Commissioner in this case has carried out exactly the intent of Congress, whereas the contentions made by the948 petitioner would result in the very avoidance which Congress intended to prohibit. The petitioner, by completely ignoring the provisions of section 47(c) and (d), contends that the correct tax for the period of seven months is $799.42. 2 Yet the computation made by the Commissioner in accordance 1117 with the statute, shows that, had the petitioner's earnings and losses proceeded for a full year in exact proportion to the way they did occur during the first seven months of the year, his income tax for the year would have been $7,778.24. Seven-twelfths of the latter amount, or $4,537.31, is the portion applicable to the short period. The interpretation sought by the petitioner would thus enable him to avoid tax to the extent of the difference between the improper figure of $799.42 and the correct tax liability of $4,537.31, as determined by the Commissioner. Reviewed by the Board. Decision will be entered for the respondent.HILL concurs only in the result. Footnotes1. The notice of deficiency shows that he also placed the loss of $4,510.96 upon an annual basis, but the resulting figure of $7,733.07 was not used in any way in computing the tax upon the annual basis or the deficiency. ↩2. The taxpayer seeks to pay for 7/12 of a year only a little more than 1/10 of the tax for a year. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624354/	Leroy Bloomberg and Sally Bloomberg, Petitioners v. Commissioner of Internal Revenue, RespondentBloomberg v. CommissionerDocket No. 2977-78United States Tax Court74 T.C. 1368; 1980 U.S. Tax Ct. LEXIS 56; September 23, 1980, Filed 56 Decision will be entered under Rule 155. 1. Petitioner purchased medical equipment and furnishings in 1974 which he immediately leased to a corporation of which he was an employee under a written lease dated Aug. 1, 1974, with a term of 5 years. The property had estimated useful lives of 5 to 7 years. The lease was purportedly canceled on June 10, 1977, prior to the expiration of 50 percent of the useful lives of the property. Held, cancellation of the lease does not permit petitioner to meet the conditions of sec. 46(e)(3), I.R.C. 1954, for allowance of an investment credit with respect to the property.2. Petitioner purchased two automobiles in 1974 which he purportedly used in his business of being an employee of the corporation. Held, petitioner failed to prove the business usage of the automobiles and is not entitled to an investment credit with respect thereto in excess of the amount conceded by respondent. David M. Buda, for the petitioners.Charles M. Layton, for the respondent. Drennen, Judge58 . DRENNEN1368 Respondent determined a deficiency in petitioners' income tax for the year 1974 in the amount of $ 6,849.33. Due to concessions of the parties, the only issues for decision are (1) whether petitioners are entitled to an investment credit under sections 38 and 46, I.R.C. 1954, for equipment owned by petitioners and leased to petitioners' professional corporation, Leroy Bloomberg, M.D., Inc., and (2) whether 1369 petitioners are entitled to an investment credit in excess of $ 65.86 for two automobiles owned by them and purportedly used by them in their business as employees of Leroy Bloomberg, M.D., Inc.FINDINGS OF FACTThe stipulated facts are incorporated herein by this reference.Petitioners Leroy and Sally Bloomberg, husband and wife, resided in Newark, Ohio, when they filed their petition herein. They filed a joint Federal income tax return for the year 1974 with the District Director of Internal Revenue, Cincinnati, Ohio.Leroy Bloomberg (herein petitioner) is an ophthalmologist and is employed as a physician by a professional corporation known as Leroy Bloomberg, M.D., Inc., in Newark, Ohio (hereinafter referred to as the corporation). Leroy was 59 president of the corporation during 1974. On August 1, 1974, the corporation leased certain medical equipment and office furniture and fixtures from petitioner under a written lease agreement. The equipment and furnishings were purchased by petitioner in 1974 and were transferred to and first placed in service by the corporation in 1974.The lease agreement between petitioner and the corporation was for a period of 5 years commencing on August 1, 1974, and provided that the lessee should pay lessor an aggregate rental of $ 40,954.20 over the term of the lease, payable in monthly installments. Title to the equipment was to remain in lessor's name and, upon termination, the equipment was to be returned to the lessor in the same condition as when received by lessee, reasonable wear and tear excepted. Upon default by the lessee, the lease could be terminated by lessor by written notice, but there was no provision for termination by the lessee.The furnishings and equipment leased were purchased by petitioner for an aggregate cost of $ 35,979.56, were reported on the depreciation schedule attached to petitioners' 1974 return at that cost, and depreciation deductions on the furnishings60 and equipment were claimed on the return, based on estimated useful lives of 7 years for all items except one, which used a useful life of 5 years. Petitioners also reported the rent received from the corporation as income on their 1974 return.Thomas E. Brock, Jr., is president of Medical Management, Inc., of Columbus, Ohio. The business of Medical Management, 1370 Inc., is to render accounting and tax service to physicians and dentists, which it did for the corporation and petitioners. Brock was secretary of the Bloomberg corporation in 1974.On June 10, 1977, Brock, as president of Medical Management, Inc., wrote a letter to petitioners, advising "Effective date of this letter, all equipment leases between you, shareholder, and the corporation will be terminated. You will receive a monthly office equipment and/or office furniture allowance in the amount of $ 232.42, to commence 7/1/77." This letter also advised petitioner not to pay himself any further lease payments from the corporation.Petitioner purchased a 1974 Chrysler Imperial automobile on September 25, 1974, at a cost of $ 5,638, and a 1974 Mercedes Benz automobile on August 26, 1974, at a cost of $ 16,939. 61 Petitioner did not lease these automobiles to the corporation but was paid an automobile allowance by the corporation which he included in taxable income. On the depreciation schedule attached to petitioner's 1974 return, an estimated life of 3 years was claimed for the Imperial, depreciation of $ 930.21 was claimed, and also an investment credit of $ 131.55. The Mercedes was also listed on the depreciation schedule with an estimated useful life of 7 years; depreciation in the amount of $ 1,580.92, and an investment credit of $ 1,185.73 was claimed.In the notice of deficiency, respondent disallowed the entire investment credit claimed on the return, which included the credit claimed on the leased equipment and furnishings, and on the automobiles. On brief, respondent concedes that petitioner is entitled to 5 percent of the investment credit, or $ 65.86, on the automobiles.OPINIONSection 38, I.R.C. 1954, provides for a credit against tax for investments in certain depreciable property, in an amount determined under section 46. Section 46(a)(2) provides that the amount of the credit shall be certain specified percentages of the qualified investment in the property. Section 46(c)62 defines "qualified investment" to mean the aggregate of the applicable percentages of the basis of new and used section 38 property placed in service by the taxpayer during the taxable year. Section 46(e)(3) provides:1371 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 --* * * * (B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 * * * exceeds 15 percent of the rental income produced by such property.Section 48(a) defines the term "section 38 property" as including tangible personal property (among other things). Section 48(b) defines "new section 38 property" as including section 38 property acquired after December 31, 1961, if the original use of such property commences with the taxpayer and commences after such date. Section 48(d) provides that a person 63 who is a lessor of property may (in accordance with regulations) elect with respect to new section 38 property to treat the lessee as having acquired such property.With regard to the equipment, furniture, and fixtures purchased by petitioner in 1974 and leased to the corporation on August 1, 1974, there is no question that petitioner qualifies for the applicable investment credit on that property, or the amount thereof, if he meets the requirements of section 46(e)(3) quoted above. 1 The issue is whether the term of the lease is less than 50 percent of the useful life of the property, and whether the section 162 allowable deductions, with respect to the property, exceed 15 percent of the rental income produced by the property.On its face, the term of the lease, 5 years, exceeded 50 percent of the estimated useful lives of the assets claimed on petitioner's depreciation schedule, being 5 to 7 years. Petitioner claims, however, 64 that the lease was effectively canceled by Brock's letter of June 10, 1977, which was prior to the expiration of 50 percent of the useful lives of any of the leased assets, and that the cancellation made the lease null and void ab initio so the property should be considered as first placed in service by petitioner in 1974. We disagree.First, there is considerable doubt in our minds that Brock's letter of June 10, 1977, could have effectively canceled the lease. His letter was written in his capacity as adviser to the 1372 corporation-lessee, and there was no provision in the lease for the lessee to cancel even if Brock had authority to act for the lessee. But be that as it may, there is nothing in the letter to even suggest that it was intended to be retroactive. Its terms are prospective only. In addition, there is no evidence that the parties adjusted their accounts to return the rentals previously received to the lessor.Second, it is clear that the determination of entitlement to the investment credit must be made under the conditions that existed in 1974, the year the equipment was first placed in service ( World Airways, Inc. v. Commissioner, 62 T.C. 786">62 T.C. 786, 809 (1974)),65 and that petitioner could not retroactively change the circumstances to meet those conditions for tax purposes. See Gordon v. Commissioner, 70 T.C. 525">70 T.C. 525, 530-531 (1978).The entire thrust of the investment credit provisions relates to the taxable year the property is first placed in service. The credit is allowable only for that year. Sec. 1.46-3(d)(4), Income Tax Regs.Section 48(a)(1), defining section 38 property, states that the term includes only property with respect to which depreciation is allowable and having a useful life (determined as of the time such property is placed in service) of 3 years or more. Section 1.46-3(d)(1) provides that section 38 property shall be considered placed in service in the taxable year in which the period for depreciation with respect to such property begins (petitioner claimed depreciation on these assets for 1974). And section 46(e)(3) of the Code refers to "the term of the lease (taking into account options to renew)" which would require a determination as of the date the lease is effective. It also refers, with reference to the section 162 deductions, to the first 12 months after the date on which 66 the property is transferred to the lessee.Looking at the circumstances existing in 1974 at the time petitioner purchased the assets and transferred them to the lessee who first placed them in service at that time, the term of the lease clearly exceeded 50 percent of the useful life of the assets, so petitioners do not qualify for the investment credit with respect to those assets under section 46(e)(3) or any other section of the Code. Furthermore, petitioner, who has the burden of proof, offered no evidence that the section 162 deductions allowable with respect to the property exceeded 15 percent of 1373 the rentals from such property, another requirement of section 46(e)(3).With regard to the two automobiles, they were not leased to the corporation but were purportedly used by petitioner in his business of being an employee of the corporation. Suffice it to say that petitioner offered no evidence regarding either his general use of the cars or the percentage of business usage of the cars. If the cars were not used in petitioner's trade or business or in the production of income, petitioner would not be entitled to depreciation on them. Sec. 167(a). And if depreciation*67 on the cars was not allowable to petitioners, the cars do not qualify as section 38 property ( sec. 1.48-1(a)(1), Income Tax Regs.), and no investment credit would be allowable with respect to them. Respondent concedes on brief that petitioners are entitled to an investment credit equal to 5 percent of the credit allowable if the cars met all the requirements of sections 38, 46, and 48. This is apparently because the parties stipulated that petitioner is entitled to deduct 5 percent of the amounts allowed by the corporation to petitioner for business use of the cars. We will accept this concession by respondent but must affirm respondent in his disallowance of any additional investment credit with respect to the automobiles.Decision will be entered under Rule 155. Footnotes1. Petitioner did not elect to pass thru the investment credit to the lessee under sec. 48(d)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624355/	APPEAL OF FLINT RIVER BRICK CO.Flint River Brick Co. v. CommissionerDocket No. 746.United States Board of Tax Appeals2 B.T.A. 31; 1925 BTA LEXIS 2568; June 11, 1925, Decided Submitted April 30, 1925. 2568 1. When taxpayer computes depreciation for 1919 and 1920 on the basis of its then book value of plant and equipment acquired prior to March 1, 1913, and such basis is adopted by the Commissioner, it may not set up a claim to a computation based upon the March 1, 1913, value of such assets, where the only evidence offered by it was an appraisal made in 1913 which substantiated the correctness of the book value at that time and the books were not changed as a result of such appraisal. 2. Taxpayer corporation acquired for stock assets of two competing concerns, which were carried on its plant account at a specified valuation, and utilized a portion of such assets in the construction of a new plant. In the absence of evidence that the book value of plant account did not include the assets used in the new construction, held, that taxpayer's book value of assets for depreciation and invested capital purposes was properly reduced to the extent of the value of the assets used in constructing the new plant. 3. Additional compensation, paid to an officer of a corporation in 1919, for services rendered in prior years, upon the understanding that additional compensation for those2569 years would be paid if and when the business proved successful, is properly deductible from gross income of the corporation for 1919. 4. Salaries paid in 1920 to officers and stockholders of a corporation, who rendered it valuable services during years prior to 1920 without compensation, and also during that year, held, deductible as ordinary and necessary expenses and not a distribution of profits to stockholders. Harry Friedman, Esq., for the taxpayer. Arthur H. Fast, Esq., for the Commissioner. SMITH 32 Before SMITH, LITTLETON, and TRUSSELL. The taxpayer appeals from determinations of deficiencies in income and profits taxes for 1919 and 1920 in the respective amounts of $3,915.94 and $5,568.55 - total $9,484.49. FINDINGS OF FACT. 1. The taxpayer is a Georgia corporation incorporated in 1910, with an authorized capital stock of $50,000, which was issued for the assets of two competing brick manufacturing plants known as Albany Brick Co. and Cruger & Pace. At the time of organization a new plant was built to take the place of the two competing plants, and much of the machinery, equipment, and assets of the old plants was2570 utilized in the building of the new one. Among the assets so utilized were bricks from the yards of the old plants of a value of $4,360. As of June 1, 1910, three individuals representing, respectively, the Albany Brick Co., Cruger & Pace, and the taxpayer, made an appraisal of the then completed plant and entered in an inventory book the estimated value of the different items of plant and equipment. The total of the inventory was $82,899.28, included in which amount is $11,245.60, the estimated value of clay lands acquired. 2. As of May 30, 1913, the plant of the Flint River Brick Co. was appraised by the American Appraisal Co. This company found that the sound value of buildings, equipment, railroad equipment, and dwellings was $91,293.86. These values were based on the cost of reproduction new "according to the present market conditions for materials and labor, less deductions for accrued depreciation due to wear, tear, etc., resulting from age and service and are in accordance with the actual physical condition of the property at the date of the appraisal." In its income-tax returns for 1919 and 1920, the taxpayer deducted from gross income as depreciation $5,449.282571 and $4,999.28, respectively, and for depletion $600 for each year. The depreciation claimed for 1920 was approximately the same in amount as that claimed for each of the years 1916 and 1917 and represented approximately 5 per cent of the book value of the plant and equipment, $99,985.59. 3. In the audit of the taxpayer's returns for 1919 and 1920, the Commissioner has disallowed $947.38 of the depreciation claimed for 1919 and $295.43 of that claimed for 1920. He has also disallowed the deduction from gross income of 1919 of $7,000 of the salary paid to Paul J. Brown, general manager of the company, during that year, and from the gross income of 1920 the deduction 33 of a salary of $5,000 paid to the vice president and of a like amount paid to the chairman of the board of directors. 4. In its income-tax return for 1919 the taxpayer claimed invested capital of $65,535.76. This was admittedly in error to the extent of $10,000, which represented treasury stock. In the deficiency letter from which this appeal is taken the adjusted invested capital is shown to be $40,000. 5. Prior to 1919, Paul J. Brown was paid a salary of $1,500 per year. At the time that Brown2572 assumed the position of general manager of the company he was promised by the officers of the company that when it made sufficient headway to pay off at least a large part of the then indebtedness he would receive more compensation. The additional amount of $7,000 paid to him in 1919 represented $3,500 additional compensation for 1917 and a like amount of additional compensation for 1918. Neither the president nor the chairman of the board of directors of the company was paid any salary prior to 1920. The president financed the corporation through his banks and by personal indorsements of the taxpayer's notes. He was instrumental in securing large orders for brick for enterprises in which he was interested. The chairman of the board of directors was also a man of large business affairs and was instrumental in "helping to secure orders." He also jointly indorsed with the president all notes of the company for the purpose of borrowing money. fn6. The stockholders of the taxpayer in 1919 and 1920 were as follows: SharesP. J. Brown50C. M. Shackleford169S. B. Brown181Total400DECISION. The deficiencies should be determined in accordance2573 with the following opinion. Final determination of the Board will be settled on consent or on 10 days' notice, in accordance with Rule 50. OPINION. SMITH: This appeal comes before the Board on the following assignments of error: 1. Failure to compute depreciation on the basis of the March 1, 1913, value of the plant. 2. Reduction of the book value of the plant for the purpose of depreciation by the amount of $4,360, representing the value of "bricks from old yards." 34 3. Reduction of the book value of assets for the purpose of invested capital by the following items: (a) Bricks from old yards. (b) Alleged depreciation sustained in excess of the amount charged off on the books of the taxpayer. 4. Disallowance of a deduction for salaries paid in 1919 to officers for services rendered and to retain said services. 5. Disallowance of salaries paid to officers in 1920 for services rendered in 1920. 6. Failure to compute the profits tax for the years 1919 and 1920 under the provisions of section 328 of the Revenue Act of 1918. The only evidence which has been offered by the taxpayer to the effect that the fair value of its depreciable assets was2574 in excess of the book value thereof is an appraisal made by the American Appraisal Co. as of date May 30, 1913, which showed a fair value of $91,293.86. The book value of the plant at January 2, 1912, was $87,479.73. The books of account do not appear to have been changed as a result of the appraisal. At most, the appraisal substantiated the correctness of the book value of the plant at the time that it was taken. The taxpayer did not claim the deduction of depreciation for the years 1919 and 1920 in amounts based upon the appraised value of the assets and we do not think that any error was made by the Commissioner in computing the depreciation upon the same basis as was used by the taxpayer. The total plant account of the taxpayer, as shown by its books of account at December 31, 1918, was $99,985.59; the cost of depreciable assets included therein was $87,746.99, which amount is determined by deducting from the total book value the items of land, $2,238.60, and good will, $10,000. As a basis for computing depreciation for the years 1919 and 1920, the Commissioner reduced the cost of depreciable assets, as shown by its books of account at December 31, 1918 ($87,746.99), by2575 $4,360, which represented the value of bricks from the old yards used in the construction of the new plant. This adjustment was made upon the theory that the value of the bricks from the old yards had already been included in the invested capital, since the plant account, as shown by the ledger, shows that on May 1, 1909, the assets of the Albany Brick Co. and of Cruger & Pace were turned over to the taxpayer at a value of $25,000 each, total $50,000. No evidence has been submitted to the effect that these values did not include bricks from the old yards at an estimated value of $4,360. The value of bricks from the old yards was placed upon the taxpayer's books of account in its plant account at February 28, 1910. A copy of the revenue agent's report showing the basis of his action has not been put in evidence by the taxpayer. 35 In the light of the evidence before us we must affirm the Commissioner's action in reducing the book value of the plant for purposes of depreciation by $4,360, representing the value of "bricks from old yards." The third assignment of error is to the effect that the Commissioner has erroneously reduced claimed invested capital by the above mentioned2576 amount of $4,360, representing the value of bricks from the old yards, and further that he has also reduced invested capital by alleged depreciation sustained in excess of the amount charged off on the books of the taxpayer. The reduction in invested capital of $4,360 is approved for reasons above stated. No evidence has been submitted in support of the allegation that the Commissioner has reduced invested capital by alleged depreciation in excess of that charged off on the books of account. In its brief the taxpayer states that the Commissioner has reduced the invested capital of the taxpayer by amounts of $16,045.90 and $15,548.52 for the years 1919 and 1920, respectively, "which he terms insufficient depreciation for the years prior to the taxable years." The revenue agent's report, as above indicated, has not been put in evidence and there is no proof of the allegation made by the taxpayer. The deficiency letter from which the appeal is taken shows an adjusted invested capital of only $40,000 but the reason for making the adjustment has not been shown. The claim of the taxpayer must therefore be denied for lack of proof. In its income-tax return for 1919 the taxpayer deducted2577 from gross income $12,000 for compensation of officers. This salary was paid to P. J. Brown, who executed the return as president and treasurer and who claimed in the return to have been president, secretary, and treasurer. Prior to 1919, Brown had received a salary of only $1,500. The taxpayer had had only moderate success prior to the war period and any earnings of the company in excess of actual expenses had been applied to reduce outstanding indebtedness. The stockholders of the company had agreed with Brown that if the business was a success he would be paid an amount in addition to the $1,500 which had theretofore been paid him. In 1919 he was paid $12,000. There is some evidence to the effect that $3,500 of this amount was to represent additional compensation for 1917, and a like amount additional compensation for 1918. The Commissioner has disallowed the deduction of $7,000 of the $12,000 paid Brown in 1919 upon the ground that this amount was not an expense for the year 1919. It was a legal deduction from the gross income of 1919. See 2578 . For the year 1920 the taxpayer paid P. J. Brown a salary of $6,000; S. B. Brown, who owned 181 shares of stock, $5,000; and 36 C. M. Shackleford, who owned 169 shares, $5,000. These amounts were deducted from gross income in the tax return as salaries paid to these individuals. It was the first time that any salaries had been paid to S. B. Brown and Shackleford. The return represents that Shackleford was vice president and that S. B. Brown was chairman of the board of directors. These individuals had rendered services of great value to the corporation over a series of years and had received no compensation therefor. They had also rendered valuable services during the year 1920. We are of the opinion that the amounts are allowable deductions from gross income as ordinary and necessary expenses and that they are not simply a distribution of profits to the stockholders.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624356/	ALFORD J. WILLIAMS, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Williams v. CommissionerDocket No. 66915.United States Board of Tax Appeals29 B.T.A. 892; 1934 BTA LEXIS 1461; January 24, 1934, Promulgated 1461 Kenneth N. Parkinson, Esq., for the petitioner. George D. Brabson, Esq., for the respondent. TRAMMELL 892 OPINION. TRAMMELL: This proceeding is for the redetermination of a deficiency in income tax in the amount of $9,175.55 for the calendar year 1929. The questions involved are (1) whether an amount of $35,000 paid to the petitioner was a gift or was part of compensation due him for the sale of real estate, and (2) whether the petitioner is entitled to a deduction of $7,600 as expenses paid by him in promoting the sale. The petitioner is an individual, residing in Garden City, Long Island, New York. During the years 1926 to 1929, inclusive, he was a lieutenant in the aviation branch of the Navy, being assigned to experimental flying, particularly racing, and being financed to a considerable extent by private capital. During 1929 and for some years prior thereto he was stationed in Washington, D.C. But during that period and particularly during 1928 he made numerous flights back and forth between Washington and New York City, principally to supervise and inspect the construction of a plane to be used for competition in the Schneider Cup1462 races, and also to consult his backers. The petitioner, in the course of his flights, became interested in the possibility of a location for landing or aviation fields within the New York area. There came to his attention a tract of land 893 situated on Long Island, owned by the Lannin Realty Corporation of Garden City, which tract later became known as Roosevelt Field. Petitioner considered that this tract would be an excellent airport and believed that he could secure buyers therefor and developers thereof for such purpose. He received authorization from J. J. Lannin, the then president of the corporation, to negotiate for the sale of the property. No agreement was entered into or existed, however, between the corporation or its president and the petitioner, either as to the terms of sale or as to any specific amount of commission. However, petitioner was promised that he would be paid for negotiating the sale, Lannin, the then president of the corporation, stating that he would be amply compensated if he were successful. Lannin died in 1928. Following his death the stock of the corporation was owned in equal proportions by his widow, Hannah Lannin, his daughter, 1463 Dorothy Tunstall, and a son, Paul J. Lannin, the latter becoming president of the corporation and having control of its affairs, although he consulted the corporation attorney and also the general manager with respect to the corporation's business affairs. Neither the attorney nor the general manager owned any stock in the corporation. Upon the authorization and assurance with respect to the compensation as above mentioned, the petitioner devoted considerable time and incurred expenses due to the promotion and sale. After death of J. J. Lannin the petitioner received further assurances from Paul J. Lannin, his son and successor in office, the latter being a schoolmate and an intimate friend of the petitioner, that any arrangements that his father had made would be carried out. However, nothing was agreed in writing with respect thereto. As a result of the petitioner's efforts he succeeded in interesting prospective purchasers who finally negotiated the purchase of the property in 1929 at the price of $1,900,000. Petitioner was not advised of the completion of the sale, but, learning that the sale had been consummated, petitioner approached Paul J. Lannin, the then president1464 of the corporation, with the object of securing from him a commission for the sale. He demanded $95,000. The usual commission was 5 percent on the sale of such properties. This was a custom recognized in that territory. Lannin told petitioner that his counsel did not recommend the payment of more than $55,000 and that he would not pay more. The petitioner considered this inadequate and unreasonable. He "immediately rejected and decided that it was going to be a question of fight." He also said that he would not stand for it. Finally, after talking for some time, Lannin gave petitioner a check on one bank for $55,000 and at the same time handed the petitioner another check for $35,000 on another bank, both being corporation checks. When the petitioner 894 received his $55,000 check he signed a receipt in full for commissions due. The total amount of $90,000 was compensation for services in the sale of the property. The petitioner expended at least the sum of $3,000 in connection with the making of the sale, which amount should be deducted from the total amount of commissions received. The question in this case is purely a question of fact. The testimony is somewhat1465 conflicting. The petitioner testified that he received the $35,000 as a gift, while Lannin, the president of the company, who gave the petitioner the check, testified that it was not a gift but was drawn upon different banks for convenience and was all a part of a commission of $90,000 which they finally agreed was a reasonable amount. There is some conflict, however, even in Lannin's testimony. He wrote an acknowledgment on the bottom of a letter which petitioner had prepared in which the petitioner recited the facts substantially as he testified to them at the hearing, to the effect that those facts were correct. His entire testimony, however, is to the contrary. We have to resolve all the conflicts in the testimony and give such weight to the testimony as we think it is entitled to, and from all the testimony in the record we are convinced that the whole $90,000 was commission paid to the petitioner for his services in negotiating the sale. It would not seem reasonable to say that a person who is making a demand upon another for money could receive a portion of that money to satisfy his claim and then say that the balance of the amount was a gift, when he was claiming even*1466 more than the total amount as being actually due him for services. The petitioner claimed that the corporation owed him $95,000, and $90,000 was actually paid him. Lannin, the president of the corporation, testified that they finally agreed upon $90,000 as being the amount to be paid. The other feature of the case with respect to the expenses incurred by the petitioner in completing the sale is not without difficulty. The petitioner kept no records of account and testified that he expended approximately $7,600. However, he was engaged in other work at the time and it is difficult to make an allocation of to determine what part of the money expended was really for personal living expenses, what part for business expenses and what part if any should be allocated to the other venture. There is considerable indefiniteness also as to the actual amounts expended. From all the testimony. however, in this regard we have determined that $3,000 was expended in connection with negotiations for this sale. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624358/	SHIGEKO RAKOSI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRakosi v. CommissionerDocket No. 21459-85.United States Tax CourtT.C. Memo 1988-149; 1988 Tax Ct. Memo LEXIS 177; 55 T.C.M. (CCH) 578; T.C.M. (RIA) 88149; April 12, 1988. Shigeko Rakosi, pro se. David W.178 Otto, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: This case was assigned to Special Trial Judge Marvin F. Peterson pursuant to section 7456(d) (redesignated as section 7443A(b) by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755), and Rules 180, 181 and 183. 1 The Court agrees with and adopts his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE PETERSON, Special Trial Judge: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows: Additions to TaxI.R.C. 1954YearDeficiencySec. 6651(a)6653(a)(1)6653(a)(2)1981$ 8,397$ 1,236.75$ 419.8519829,6731,368.00483.65 *The issues for determination are: (1) whether petitioner is taxable on wages assigned to179 Church of the Saved; or in the alternative, whether petitioner is entitled to a charitable contribution deduction for such amounts; (2) whether petitioner is entitled to certain itemized deductions in excess of those conceded by respondent; (3) whether petitioner is entitled to a deduction for additional personal exemptions; (4) whether petitioner may calculate her income tax liability under the joint income tax rates; (5) whether petitioner is liable for the additions to tax for delinquency; and (6) whether petitioner is liable for the additions to tax for negligence. FINDINGS OF FACT Some of the facts have been stipulated and are so found. When petitioner filed her petition in this case she resided in Phoenix, Arizona. During the years 1981 and 1982 petitioner was married to Attila Rakosi. Petitioner lived with her husband, their two children and her mother in Phoenix during the years at issue. Petitioner was employed as a computer programmer by the Maricopa County Board of Supervisors in Phoenix, Arizona. During 1981 and 1982 she received wages in the amounts of $ 28,259 and $ 32,696, respectively. Petitioner's employer issued Forms W-2 for the years involved180 which reflected her income from wages. Petitioner did not file an income tax return for either 1981 or 1982. Petitioner filed a Form 843 for the years 1981 and 1982 seeking a refund of withheld taxes in the amounts of $ 3,450.27 and $ 4,201.14, respectively. Petitioner also sought a refund of Federal Insurance Contribution Act taxes which were withheld from petitioner's wages for 1981 and 1982 in the amounts of $ 1,879.29 and $ 2,170.80, respectively. Petitioner filed the claims for refund on the ground that her wages were not taxable under the Internal Revenue Code. On October 5, 1978, petitioner and her husband executed a document entitled "Constitution of Church of the Saved." Under the constitution, Church of the Saved was organized for religious purposes. Petitioner and her husband were co-pastors of Church of the Saved. Petitioner and her husband were the only ministers of Church of the Saved and had full control of all of its activities. Church of the Saved had no formal membership, no scheduled services, and no formal place for holding religious services. Church of the Saved did not maintain any formal financial records or maintain a separate bank account. Its181 only source of funds came from petitioner, who cashed her salary check and turned the cash over to her husband. Petitioner's husband was primarily responsible for disbursing the funds petitioner received from her employer. The funds were used to pay all of petitioner's personal expenses and those of her family. As a pastor of Church of the Saved petitioner was required to take a vow of poverty. On October 5, 1978, petitioner executed a vow of poverty. The vow of poverty provided as follows: [petitioner] being a duly ordained minister and official of the Church of the Saved and a Member of said Church's Sacerdotal Order, do hereby divest myself as a person of all my worldly possessions and income whatsoever -- and all income from whatever source derived, including income from employment outside the confines of the monastery when directed by my Order to perform such labors as its agent for the benefit of religion and support of the Church * * .Petitioner endorsed her salary checks by signing her name followed by the words, "agent of Church of the Saved." During the years involved herein, the community property laws of the State of Arizona applied to petitioner's earned182 income and to the expenditures made. Petitioner's husband did not earn any income during 1981 and 1982. Petitioner's income from wages was the sole source of support for her and her family. At the trial of this case, and in respondent's opening brief, respondent conceded that for the years 1981 and 1982 petitioner was entitled to certain itemized deductions in the amounts of $ 5,781.96 and $ 4,692.08, respectively, and two additional personal exemptions, one each for one of her sons and for her mother. Based on this record, petitioner has failed to show that she is entitled to any deductions or personal exemptions in addition to those allowed by respondent. Petitioner relied on her husband to handle most of the financial matters concerning family finances and other expenditures. She also allowed her husband to determine whether or not she was liable for filing income tax returns. For the years at issue petitioner did not file income tax returns since her husband decided that her wage income was received as an agent of Church of Saved based on the vow of poverty she had executed, and, accordingly, was not taxable to petitioner. OPINION Petitioner's primary argument is183 that she is not taxable on her wage income since she executed a vow of poverty in favor of Church of the Saved. Petitioner's wages were received by her for services performed as a computer programmer for Maricopa County, Arizona. Petitioner received her wages in the form of a check made payable to her. Petitioner cashed the checks by endorsing her name. She also added the words "as agent for the Church of the Saved," presumably to recognize the vow of poverty she executed on behalf of Church of the Saved. Maricopa County had no contract or other agreement with Church of the Saved regarding petitioner's employment. Petitioner performed all of the duties required by her employer and she received all of the benefits of such employment, including medical and life insurance and participation in the retirement plan of Maricopa County. There is no dispute that there was no employment contract or any other contract between Maricopa County and Church of the Saved. Petitioner's only argument to support her contention that her wage income is not taxable to her is the fact that she executed the vow of poverty in favor of Church of the Saved. Respondent contends that petitioner earned184 the income and that the vow of poverty was ineffective to shift the income to Church of the Saved. We agree with respondent. It has long been established that when an agent receives income for the principal, it is the income of the principal, not the agent. However, where the income is not received on behalf of a separate and distinct principal, but is received by a person in his individual capacity, the income is taxed to such individual. , affd. without published opinion . Also see , affd. . Further, it is well established that income must be taxed to the one who earns it. . Here is is clear that petitioner's wages were paid to her in her individual capacity and not as an agent for Church of the Saved. Accordingly, the vow of poverty was not effective to relieve petitioner of her duty to report her income from wages. See . Petitioner argues, in the alternative, 185 that if she is taxable on her wages, then she is entitled to a charitable contribution deduction in the amount of her wage income that was given to Church of the Saved. Petitioner has the burden of proof to show that Church of the Saved qualifies as an organization for which contributions are deductible under section 170(c)(2). . Based on the constitution of Church of the Saved, it is clear that it was formed to perform religious functions. However, the fact that the stated purposes and activities of an organization are religious in nature does not, by itself, establish the organization is a church. We stated in , as follows: A church is a coherent group of individuals and families that join together to accomplish the religious purposes of mutually held beliefs. In other words, a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith. * * Church of the Saved fails to meet the above test. Church of the Saved had no members, other than petitioner186 and her husband, did not hold regularly scheduled religious services, and had no regular place of service. Based on these facts it can only be concluded that Church of the Saved was not established to serve any associational role for purposes of worship. Accordingly, we hold that Church of the Saved was not a church during the years at issue. . Respondent also argues that the income given or assigned to Church of the Saved are not charitable contributions deductible under section 170(a). Respondent contends that Church of the Saved was not operated exclusively for religious purposes in that undetermined amounts of monies given to Church of the Saved were used for the personal benefit of petitioner and her family. Section 170(c)(2) defines a charitable contribution as a contribution or gift to or for the use of a corporation, trust, or community chest, fund or foundation which is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, provided that none of the net earnings inure to the benefit of any private shareholder or individual. Petitioner bears187 the burden of proving that she is entitled to the deduction she claims. . Here, the record shows that the alleged charitable contribution to Church of the Saved was used for personal living expenses of petitioner and her family. In addition, petitioner was unable to account for other amounts of the contribution since Church of the Saved failed to keep financial records which would account for its expenditures. Accordingly, petitioner is not entitled to a charitable contribution deduction for any amounts purportedly given to Church of the Saved. , affd. without published opinion ; , affd. ; Respondent allowed one dependency exemption for petitioner in the statutory notice of deficiency. The record shows that petitioner was the sole source of support for her family. At the trial of this case the parties agreed that petitioner's husband was entitled to one-half of her income188 under the community property laws of Arizona and that petitioner and her husband would each be entitled to divide the dependency exemptions. The parties agreed that petitioner is entitled to a dependency exemption for herself, one of her sons and for her mother. Accordingly, petitioner is entitled to three dependency exemptions for each of the years at issue. At the trial petitioner claimed her income tax liability should be calculated by use of the joint income tax rates. Respondent contends that the joint rates are not available to petitioner since no joint income tax return or joint return election was ever filed. We agree. In the instant case petitioner failed to file a return for either 1981 or 1982. A joint return must be filed in order to elect joint return treatment. . Cf. . Since petitioner did not file an income tax return, it follows that petitioner's tax liability may not be calculated by using the joint income tax rates. Respondent has also determined that petitioner is liable for the additions to tax for delinquency and189 negligence under sections 6651 and 6653(a) for each of the years 1981 and 1982. Petitioner bears the burden of proof to show that her failure to file returns was due to reasonable cause. ; . Petitioner failed to file returns for each of the years involved solely on the advice of her husband. However, petitioner cannot avoid the addition to tax for delinquency on this ground unless she can show that her reliance was reasonable. Petitioner failed to seek the advice of a competent tax advisor who was fully informed of all relevant facts to determine whether her husband's advice was correct. Under these circumstances petitioner did not exercise ordinary business care and prudence and we can only conclude that her failure to file returns was not due to reasonable cause. Petitioner also has the burden of proof to show that she is not liable for the additions to tax under section 6653(a) due to negligence or intentional disregard of rules and regulations. .190 Petitioner's failure to specifically address the issue of negligence justifies the addition for negligence as determined by respondent. More importantly, however, petitioner has failed to explain her inconsistent action of treating her wage income as belonging to Church of the Saved under her vow of poverty, while at the same time, she continued to use these funds for personal and family expenses. See . Accordingly, we sustain respondent's determination on this issue. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted. All Rule references are to the Tax Court Rules of Practice and Procedure unless otherwise noted. ↩. 50 percent of the interest due on $ 8,397. ** 50 percent of the interest due on $ 9,673. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624359/	James R. Winnek and Carmen Winnek v. Commissioner.Winnek v. CommissionerDocket No. 3439-64.United States Tax CourtT.C. Memo 1965-258; 1965 Tax Ct. Memo LEXIS 72; 24 T.C.M. (CCH) 1400; T.C.M. (RIA) 65258; September 29, 196572 Held, that where during the taxable year an indebtedness of $17,500 that was owned by the principal petitioner to a corporation of which he held most of the voting stock issued and outstanding, was cancelled by said corporation in connection with its redemption of 250 of said petitioner's 1,450 shares therein, such cancellation constituted a distribution to said petitioner that is taxable as a dividend under section 301 of the 1954 Code. G. Douglas Fox and James M. Sturdivant, for the petitioners. Walter O. Johnson, for the respondent. PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: Respondent determined a deficiency of $5,173.80 in the income tax of the petitioners for their taxable calendar year 1962. The issue for decision is: Where during the taxable year an indebtedness of $17,500 that was owed by petitioner James R. Winnek to a corporation named Jim Winnek, Inc. which he operated and controlled, was cancelled by said corporation in connection with its redemption of 250 out of 1,450 of said petitioner's shares of capital stock - does such cancellation constitute a distribution to said petitioner that is taxable as a dividend? Findings of Fact Some of the facts 73 have been stipulated. The stipulation of facts and all exhibits identified therein are incorporated herein by reference. The petitioners, James R. Winnek (also known as J. R. Winnek and Jim R. Winnek) and Carmen Winnek, are husband and wife with residence at Tulsa, Oklahoma. They filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue at Oklahoma City. The issue here involved concerns only the husband James R. Winnek, whom we will hereinafter refer to as the "petitioner." In 1948 petitioner participated in the organization of a Texas corporation named The Dayton Exploration Company (hereinafter called the "Dayton Company"). The purpose of this corporation was to engage in exploring for oil and gas deposits through use of an instrument known as a seismograph. Upon incorporation this company issued 1,000 shares of capital stock, of which 250 shares were issued to the petitioner at a total cost to him of approximately $10,000. Thereafter in 1953, petitioner purchased 250 additional shares of said stock from another stockholder named Frank W. Borman, for a total price of $17,500. And subsequently in 1958, the corporation redeemed 74 from a third stockholder, all the other 500 shares of its outstanding stock. The result of all this was, that at all times thereafter until September 30, 1960 (when said Dayton Company was merged into another corporation named Jim Winnek, Inc. in the manner hereinafter more particularly described), petitioner owned and held 100 percent of the total issued and outstanding shares of the capital stock of the Dayton Company. In 1952 petitioner organized under the laws of Oklahoma, the above-mentioned corporation named Jim Winnek,inc. (hereinafter called the "Winnek Corporation"). This company was created for the purpose of engaging in "shot hole" drilling. Upon incorporation, it issued a total of 1,000 shares of capital stock, of which 850 shares were issued to petitioner at a cost which is not established by the evidence; and the remaining 150 shares were issued to three employees of the corporation in amounts of 50 shares each, at a cost to them of $1 per share as an "incentive." At all times thereafter, petitioner was the controlling stockholder, the president and a director. As such, he selected the other directors; decided what jobs the corporation would perform; negotiated and signed 75 all contracts; hired and fired employees; and also borrowed money for the corporation, and pledged his personal assets for the latter's secured loans. Subsequently on September 30, 1960, the above-mentioned Dayton Company (which then had an earned surplus deficit) was merged into the Winnek Corporation. The Winnek Corporation thereupon took over all of the Dayton Company's assets; issued to petitioner 600 new shares of its own capital stock in exchange for his 500 shares of the Dayton Company (being all of the shares of that company outstanding); and the Dayton Company then was dissolved. The result of this was: That the Winnek Corporation thereupon became the surviving corporation; that all of petitioner's previous shareholdings in the Dayton Company were eliminated; and that petitioner's shareholdings in the Winnek Corporation were increased from 850 shares to 1,450 shares - representing 90.63 percent of the total 1,600 shares of the Winnek Corporation then issued and outstanding. Subsequently in late 1961 or early 1962, 150 new shares of the Winnek Corporation were issued to an employee named Gordon Flanery, as a bonus for his taking care of the affairs of the corporation during 76 a period when petitioner was absent. From that time until November 2, 1962 (being the date on which 250 of petitioner's shares were redeemed in the manner hereinafter described), the Winnek Corporation had 1,750 shares of capital stock issued and outstanding, of which petitioner owned 1,450 shares - being 82.85 percent thereof. All of said shares were voting shares. Prior to the above-mentioned merger of the Dayton Company into the Winnek Corporation, petitioner had from time to time received from the Dayton Company, various cash advances in addition to his salary; and also both prior and subsequent to said merger, petitioner had received similar cash advances from the Winnek Corporation. All these advances were received without consideration; and each of said corporations debited all the advances made by it, to an asset account on its books of account, designated "Cash Advances - J. R. Winnek" - which represented an account receivable owed to it by petitioner. No instrument was executed by petitioner to evidence any of such indebtedness to either corporation; no collateral was pledged by petitioner to secure such indebtedness; and no interest was either charged to or paid by petitioner 77 on any of said cash advances. Also, petitioner did not report on any of his Federal income tax returns, any of the cash advances made to him by either corporation as being a taxable dividend. At the time of the above-mentioned merger on September 30, 1960, the net unpaid amount of the Dayton Company account receivable from petitioner in respect of such cash advances was $10,982.91. And in connection with the merger, all of this account receivable was transferred by the Dayton Company to the surviving Winnek Corporation, and was thereupon included by said surviving corporation as one of its assets. As regards the Winnek Corporation's account receivable from petitioner for cash advances, a summary of this account for the period from January 1, 1957, to November 2, 1962 - which reflects all repayments made by petitioner, and which also includes the amount of the cash-advances account of the Dayton Company that was taken over in the 1960 merger - is as follows: AmountBalance due on January 1, 1957$ 7,330.76Advances in 19576,726.08Amount due on December 31, 1957$14,056.84Advances in 19585,737.43Amount due on December 31, 1958$19,794.27Repayments in 1959(1,022.75)Amount due on December 31, 1959$18,771.52Journal entry reductions in 1960: 11957 advances taxed topetitioners as divi-dends in 1957($6,726.08)1958 advances taxed topetitioners as divi-dends in 1958( 5,737.43)($12,463.51)Amount due prior to merger on9-30-60$ 6,308.01Dayton account addition on 9-30-6010,982.91Advances in 19601,471.93Amount due on December 31, 1960$18,762.85Repayments in 1961(82.31)Amount due on December 31, 1961$18,680.54Advances in 1962539.71Amount due on November 2, 1962$19,220.2578 During the period from about 1960 to 1962, the Winnek Corporation had difficulty in making a profit; and in an effort to remedy this situation, it attempted to obtain some drilling contracts related to a Federal Government project. In order to qualify for such contracts it was necessary to obtain a performance bond; but the financial statement of the Winnek Corporation was not sufficiently satisfactory to enable it to obtain such a bond. At about this same time, an insurance agent named Stroud Stacy suggested to petitioner that it would be advisable for the Winnek Corporation to eliminate from its financial statements the account receivable from petitioner for the above-mentioned cash advances - stating that while this would 79 not cause the corporation to be worth any more, such elimination would make the financial statements look better. Petitioner agreed with this suggestion; and he thereupon advised W. J. Chronos, who was an attorney and certified public accountant for the Winnek Corporation, that action should be taken to get the account receivable off the corporate books in some manner or other. Thereafter on November 2, 1962, a special meeting of the board of directors of the Winnek Corporation was held. All directors, including the petitioner, were present; and also in attendance by invitation was the above-mentioned W. J. Chronos. The minutes of this directors' meeting may be summarized as follows: Petitioner, acting as president of the Winnek Corporation, stated that the purpose of calling the meeting was to discuss and improve the financial condition of the company. More specifically, he stated that "there was an account receivable on the Company's books, due from himself, which had a balance of $17,852.63 at May 31, 1962"; 2 and that it was imperative that this account be removed from the books so that the balance sheet of the corporation would be "cleaned up." He then asked for suggestions as 80 to how this might be accomplished. Chronos suggested that "the obvious method would be for Mr. Winnek [the petitioner] to repay the money which had gone from the corporation to him"; and he further said that if petitioner had any savings accounts, life insurance, contracts or other assets which could be transferred, they should be assigned to the corporation in repayment. Petitioner replied, however, that he had "no assets other than his stock ownership in Jim Winnek, Incorporated, and his homestead, which being exempt property he would not consider conveying." 381 Chronos then stated that three other possible methods for eliminating the corporation's account receivable from petitioner, were: (1) Distribution of a dividend by the Winnek Corporation 82 to all stockholders (including petitioner); (2) payment of a bonus to petitioner by the Winnek Corporation; or (3) redemption by the Winnek Corporation of part of petitioner's stockholdings therein, although it was possible that this latter method might be construed by the Federal tax authorities to constitute a taxable dividend. Regarding these three methods, petitioner replied: That the declaration of a dividend by the corporation to all stockholders would not be in accord with sound business judgment; that as regards the payment of a bonus to him, he did not believe that this was a sound idea; but that as to redemption of part of his stockholdings, this would be acceptable to him, if the same would not be construed for income tax purposes to effect the payment of a taxable dividend to him. Petitioner then offered to "sell" 250 shares of his Winnek Corporation stock to the corporation for a price of $17,500 (which was the price that he had paid to Frank Borman in 1953 for 250 shares of the Dayton Company stock - all of which shares were thereafter eliminated when the Dayton Company was dissolved after it had been merged into the Winnek Corporation); and petitioner then further stated 83 that such "sale" would be subject to an option in him to declare the same null and void at any time prior to April 15, 1966, "in the event of an unfavorable ruling in the matter [by the Internal Revenue Service]." Thereupon, the board of directors of the Winnek Corporation unanimously approved a plan under which: (1) That corporation would "purchase" from petitioner, 250 shares of the latter's total holdings of 1,450 shares of the capital stock of said corporation, for a consideration of $17,500; and also that, in connection therewith, the corporation's account receivable from petitioner for cash advances, would be credited and cancelled in the same amount of $17,500. Thereupon the Winnek Corporation, acting pursuant to the above action of its board of directors, redeemed from petitioner as of November 2, 1962, 250 shares of petitioner's total holdings of said corporation's capital stock; and it also, as of the same date, cancelled $17,500 of petitioner's total indebtedness to the corporation for unpaid cash advances. Such actions were reflected on the books of account of the Winnek Corporation: (1) By making a debit to treasury stock in the amount of $17,500; and (2) by making a credit 84 of $17,500 to its account receivable from petitioner for cash advances. The Winnek Corporation, at all times material, kept its books of account in accordance with a fiscal year ended on May 31. At the beginning of its fiscal year strarting on June 1, 1962 (which is the fiscal year during which said redemption of shares and the cancellation of said indebtedness occurred), said corporation had an accumulated earned surplus of $43,150.11. For said year it had a net operating loss per books of $16,395.51. And as of the close of said fiscal year, following said redemption and cancellation of indebtedness, the amount of its accumulated earned surplus was $28,963.93. The parties have stipulated that for each of Winnek Corporation's fiscal years ended on May 31, 1961, 1962 and 1963, the corporation had an earned surplus in an amount that was in excess of the $17,500 indebtedness of petitioner which was cancelled as aforesaid on November 2, 1962. The Winnek Corporation at no time ever formally declared and paid any dividend. At the time of the above-mentioned cancellation of indebtedness, petitioner intended to repay to the corporation the remaining uncancelled portion of his indebtedness 85 to the corporation for cash advances made to him. The petitioner, on the joint Federal income tax return which he and his wife filed for the year 1962, treated the amount of said cancelled indebtedness of $17,500 as proceeds from sale to the Winnek Corporation of the 250 shares of Dayton Company stock which he had acquired from Frank W. Borman in 1953; and he reported no gain as having been realized. The respondent however, in his notice of deficiency herein, determined that the above-mentioned cancellation of indebtedness owned by petitioner to the Winnek Corporation, constituted a distribution to him by said corporation, which is taxable as a dividend under section 301 of the Internal Revenue Code of 1954. Opinion As a general rule, where a corporation makes a distribution to a non-corporate stockholder out of either its earnings and profits accumulated after February 28, 1913, or out of its earnings and profits of the taxable year in which such distribution is made, the amount of such distribution is includable in the gross income of the stockholder as a taxable dividend. Sections 301 and 316 of the 1954 Code. Also the same is generally true, regardless of whether the corporation 86 makes the distribution directly to the stockholder and the latter then uses all or part of the same to repay an indebtedness owing by him to the corporation; or whether the corporation directly applies all or part of the distribution in repayment or cancellation of such indebtedness. See Income Tax Regs., sec. 1.317-1; Bradbury v. Commissioner, (C.A. 1) 298 F.2d 111">298 F. 2d 111, affirming a Memorandum Opinion of this Court. In the instant case however, the cancellation of indebtedness occurred in connection with the redemption of a portion of petitioner's shares of capital stock of Winnek Corporation to which such indebtedness was owed. Under section 302 of the 1954 Code, where a corporation redeems its stock, such redemption will be treated as a distribution in part or full payment in exchange for the stock, if any of paragraphs (1), (2), (3), or (4) of section 302(b) applies. Accordingly, it is necessary for us to here consider the possible applicability of each of these paragraphs which, in pertinent part, may be summarized as follows: Paragraph (1) provides, in substance, that the redemption will be treated as a distribution in payment for the stock, if the distribution is not essentially 87 equivalent to a dividend. Paragraph (2) provides, in substance, that the distribution in redemption shall be treated as a payment in exchange for the stock, if the distribution is substantially disproportionate with respect to the stockholder; provided however, that this paragraph shall not apply unless after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. Paragraph (3) provides, in substance, that the distribution in redemption shall be treated as a payment in exchange for the stock, if the redemption is in complete redemption of all of the stock of the corporation owned by the stockholder. Paragraph (4) provides, in substance, that the distribution in redemption shall be treated as a payment in exchange for the stock, if the redemption is of stock issued by a railroad corporation pursuant to a plan of reorganization under section 77 of the Bankruptcy Act. It will be observed that each of said paragraphs, in effect, provides an exception to the previously stated general rule as to when corporate distributions to stockholders will constitute taxable dividends. In the instant case, it is obvious 88 that the only one of the above-mentioned paragraphs of section 302(b) which could possibly be here applicable is paragraph (1), for the following reasons: As regards paragraph (2), it is clearly inapplicable because immediately after the redemption petitioner continued to own 1,200 out of the total 1,500 shares (being more than 50 percent) of the Winnek Corporation's capital stock then issued and outstanding; and all of said shares were voting shares, since the corporation had only one class of stock. As regards paragraph (3), it is clearly inapplicable because the redemption was not in complete redemption of all of the stock of the corporation owned by petitioner. And as regards paragraph (4), it also is clearly inapplicable because the redemption is not of stock issued by a railroad corporation pursuant to a plan of reorganization under section 77 of the Bankruptcy Act. Thus our consideration is here limited to whether paragraph (1) has any application under the facts of the instant case. Petitioner, in his briefs herein, appears to have tacitly agreed with the foregoing conclusion, for he has centered his position solely upon a contention that the redemption of his 250 shares of 89 stock and the related cancellation of $17,500 of his indebtedness to the Winnek Corporation, is not essentially equivalent to a taxable dividend. And, since the Commissioner has made a determination contrary to such contention, petitioner of course has the burden of establishing error in that determination. It is our opinion that he has failed to bear such burden. It should be observed at the outset, that the Winnek Corporation carried said amount of petitioner's indebtedness (and more) on its books of account as an asset in the nature of an account receivable owing to it by petitioner. Also, during the above-mentioned special meeting of said corporation's board of directors on November 2, 1962, petitioner stated to the directors (and thereby conceded) that: "[There] was an account receivable on the Company's books, due from himself, which had a balance of [at least] $17,852.63 at May 31, 1962"; and that W. J. Chronos who was the corporation's attorney and certified public accountant, thereupon advised him that "the obvious method [for eliminating such account from the corporation's accounts] would be for him to repay the money which had gone from the corporation to him." Moreover, 90 there is no dispute that the petitioner actually did receive the amount of said $17,500 indebtedness, either from the Dayton Company prior to the time when that company's account receivable from him was taken over by the Winnek Corporation as an asset in connection with the 1960 merger, or from the Winnek Corporation itself in years both before and after said merger. In addition, it is undisputed that petitioner did not, on any of his various Federal income tax returns, report or treat any of the cash advances which he received from the abovementioned corporations, as being a taxable dividend. Finally, as was pointed out in Kerr v. Commissioner, (C.A. 9, 1964) 326 F. 2d 225, affirming 38 T.C. 723">38 T.C. 723, certiorari denied 377 U.S. 963">377 U.S. 963, Congress in enacting section 302(b)(1) of the 1954 Code, intended that the tests for determining whether a redemption is "essentially equivalent to a dividend" should be the same as those utilized in interpreting and applying the same words in section 115(g)(1) of the 1939 Code; that the question in each case is "one of equivalents," and is primarily a question of fact; that most if not all the Courts of Appeals have considered the most important consideration 91 to be the "net effect" of the transaction; and that the Tax Court, in its opinion in said Kerr case, had "adequately listed" the following criteria as being there relevant: Did the corporation adopt any plan of contraction of its business activities; did the transaction actually result in a contraction of the corporation business; did the initiative for the corporate distribution come from the corporation or the shareholders; was the proportionate ownership of stock by the shareholders changed; what were the amounts, frequency, and significance of dividends in the past; was there a sufficient accumulation of earned surplus to cover distribution or was it partly from capital; and was there a bona fide corporate business purpose for the distribution?… To the same effect, see also Flanagan v. Helvering, (C.A.D.C.) 116 F. 2d 937, 939, affirming a Memorandum Opinion of this Court; United States v. Fewell, (C.A. 5) 255 F. 2d 496, 500; Earle v. Woodlaw, (C.A. 9) 245 F. 2d 119, certiorari denied, 354 U.S. 942">354 U.S. 942; and Ferro v. Commissioner, (C.A. 3) 242 F. 2d 838, affirming a Memorandum Opinion of this Court. We are satisfied, after considering and weighing all the evidence herein, that none 92 of the above-stated tests (or indeed any other test that we regard to be relevant) has here been met. (1) The Winnek Corporation did not adopt any plan for contraction of its business activities; for at the above-mentioned special meeting of said corporation's board of directors at which the plan for redemption of part of petitioner's shares of stock was considered and adopted, no mention was made of any contraction of the corporation's business affairs; and the evidence herein establishes that, to the contrary, the corporation actually was endeavoring to expand its business by attempting to acquire additional drilling contracts. (2) The initiative for cancellation of petitioner's indebtedness came from the petitioner, as is shown by the minutes of the above-mentioned special meeting of the corporation's board of directors; and petitioner's principal concern at said meeting was whether such cancellation would be treated by the Internal Revenue Service as a taxable dividend to him. (3) The proportionate ownership of stock by the shareholders was not substantially changed; for before the redemption petitioner owned 82.85 percent of the total issued and outstanding shares of stock, while 93 immediately after the redemption he owned 80 percent; and under the particular facts here present, it is our opinion that such change was not substantial. See Bradbury v. Commissioner, supra.(4) The corporation had never formally declared and paid any dividend to its stockholders. (5) Both before and after the redemption, there was a sufficient accumulation of earned surplus to cover the distribution. And (6), the distribution served no bona fide corporate purposes; for as petitioner recognized in his testimony, it did not "make the company worth any more"; and instead, it actually reduced the corporation's assets, as would also have been the case if the corporation had, in accordance with W. J. Chronos' second and third suggestions at the special board of directors' meeting, either formally paid a dividend or had paid a bonus to petitioner - as a means through which he could have repaid the amounts which he had theretofore received without consideration, and which had caused the creation of the account receivable from him that is here involved. We approve the Commissioner's determination that the cancellation of $17,500 of petitioner's indebtedness to the Winnek Corporation, obtained *94 in redemption of 250 of his 1,450 shares of stock in that corporation, is a distribution to him which is taxable as a dividend under section 301 of the 1954 Code. Decision will be entered for the respondent. Footnotes1. During 1960 an internal revenue agent examined the 1957 and 1958 income tax returns of petitioner and his wife; and he then proposed to increase the taxable incomes reflected on these returns, by including as constructive dividends the respective amounts of the 1957 and 1958 advances which petitioner had received from the Winnek Corporation. Petitioner and his wife consented to the agent's proposed adjustments, and paid the resulting additional taxes and interest.↩2. This amount is less than that which, as we have hereinabove found, was reflected in the corporation's books of account. However, such difference is not important for present purposes, because even the above amount which petitioner conceded to be owing by him is in excess of the portion of his indebtedness which, as hereinafter shown, was cancelled on November 2, 1962.↩3. The evidence herein indicates that this statement of petitioner was not wholly correct. The parties have stipulated that the following is a statement of petitioner's financial condition on March 15, 1963, and that this statement also substantially represents his financial condition at or about the time of the cancellation of indebtedness on November 2, 1962, which is here involved: AssetsCash$ 750.001,000 shs. of Winnek Corporation26,000.00Producing leases and royalties287.00Nonproducing leases and royalties1,200.00City real estate26,000.00Cash value of personal life insur-ance21,988.51Total$76,225.51LiabilitiesCurrent bills$ 255.00Mortgage on city real estate12,987.75Total debt$13,242.75Net Worth$62,982.76 [It should be observed that immediately prior to the stock redemption and cancellation of indebtedness on November 2, 1962, petitioner owned 1,450 rather than 1,000 shares of stock of the Winnek Corporation; and that such additional 450 shares, if accorded the above-stated value of $26 per share, would represent an additional asset of $11,700. Also as of said date, petitioner had an additional liability of $17,500, representing his account payable to the Winnek Corporation for cash advances received, which as hereinafter shown was cancelled on said date.]↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624360/	Dawson-Spatz Packing Company (Formerly Dawson Packing Company), Petitioner, v. Commissioner of Internal Revenue, RespondentDawson-Spatz Packing Co. v. CommissionerDocket Nos. 63803, 69583United States Tax Court34 T.C. 507; 1960 U.S. Tax Ct. LEXIS 129; June 16, 1960, Filed 129 Decisions will be entered under Rule 50. Petitioner leased certain property for 1 year commencing on October 15, 1945, with an option to renew or extend his lease from year to year for up to 9 additional years. In addition, petitioner was given the option to purchase the leased property at any time during the initial term of the lease, or any extension thereof. Petitioner completed certain capital improvements to the leased property in 1948, 1952, and 1953, and amortized the cost of said improvements over the remaining term of the lease as fully extended. Held, petitioner intended to exercise its option to purchase the leased property by January 1, 1953, and must depreciate said improvements accordingly. Held, further, the remaining useful lives of said improvements determined. Clarence E. Schindler, Esq., and J. Bernard Brown, Esq., for the petitioner.Arthur Clark, Jr., Esq., for the respondent. Forrester, Judge. FORRESTER507 Respondent has determined deficiencies in the income tax of the petitioner as follows:YearDeficiency19521 $ 2,860.7719538,501.3319544,668.8119554,436.82130 The sole issue is whether the cost of certain leasehold improvements made by petitioner should be amortized over the remaining term of the lease or over the useful lives of the improvements; and, if the latter, to determine the remaining useful life of each of said improvements.FINDINGS OF FACT.Some of the facts have been stipulated and are so found.Petitioner is a corporation organized on October 3, 1945, under the laws of Kentucky to engage in the business of buying, slaughtering, processing, packing, storing, and selling meat and meat products. Petitioner was originally organized under the name of Dawson Packing Company, which name was changed to Dawson-Spatz Packing Company by amendment to the articles of incorporation on October 17, 1955. Petitioner's principal place of business is located at 1227 (rear) Lexington Road, Louisville, Kentucky.For the taxable years 1952 to 1955, inclusive, petitioner employed an accrual method of accounting and filed requisite tax returns, on a 508 calendar year basis, with the district director of internal revenue for the district of Kentucky.On October 5, 1945, petitioner entered into a lease agreement, hereinafter referred to as 131 the lease agreement, with the owners of the real estate located at 1227 (rear) Lexington Road, hereinafter referred to as the Lexington Road property.The lease agreement provided, inter alia, for a term of 1 year from October 15, 1945, to October 15, 1946; that the leased premises were to be used by petitioner only for the purpose of conducting a slaughter and packing business; that petitioner accepted the premises and equipment leased to it in their present state of repair; and that petitioner was to comply with the city laws and ordinances in regard to nuisances. The lease further provided as follows:As one of the further considerations of the within Lease and Agreement the Lessors do hereby grant to the Lessee an option to renew the within Lease from year to year for an additional period of time not to exceed nine (9) years after the termination of the within Lease. In the event that in any of said years should Lessee desire to renew the within Lease, Lessee shall notify Lessors of his desire to exercise such option during the eleventh month of the year preceding the year for which such option is exercised. Time is to be considered of the essence. In the event that Lessee132 shall exercise his option to renew the within Lease Lessee agrees and promises to pay to the Lessors in advance the full amount of the annual rental in the amount of Eighteen Hundred ($ 1,800.00) Dollars per annum.As a further consideration for the within Lease and Agreement Lessors grant unto the Lessee an option to purchase the premises herein leased at any time during the term of this Lease or any extension thereof for and in consideration of the payment by the Lessee to the Lessors of the sum of Fifteen Thousand ($ 15,000.00) Dollars in cash. Said payment to be made on delivery of Deed.Simultaneously with the execution of the lease agreement, petitioner entered into a supplemental agreement (hereinafter referred to as such) with the lessors. The supplemental agreement provided that the rental provisions and the option privileges described in the lease agreement were to also apply to a lot located at the rear of the Lexington Road property.The Lexington Road property had been used for the operation of a slaughterhouse and related business activities for approximately 100 years prior to the negotiation of the lease and supplemental agreement, and it was one of the few locations133 in and around Louisville where a slaughterhouse could be operated.The written renewal agreement dated October 5, 1950, and extending the lease and supplemental agreement up to and including October 15, 1951, also modified them to include the rental and option to purchase a lot described therein and set the total option price of the property covered by all of the above-mentioned agreements at $ 15,400.509 At the time petitioner entered into the lease and supplemental agreement, the Lexington Road property was in very poor condition. Petitioner wanted to commence operation with as little capital as possible, and it made no material improvements in 1945, except for installing a secondhand upright boiler. Later, petitioner was compelled to make certain improvements.Pursuant to the insistence of the Louisville and Jefferson County Health Department, petitioner constructed a cooler building, which was completed in 1948 at a cost of $ 32,044.20. This cooler was approximately 26 feet by 60 feet, and 20 feet high. It had a concrete foundation, 8-inch concrete block walls, cork insulation, electric wiring, plumbing, and a roof constructed of steel beams spaced 12 or 14 feet apart, 134 wood roof rafters, wood sheathing, and also what is referred to as an inexpensive, 10-year, built-up roof. Inside the cooler, structural steel members were put across the ceiling to carry slaughtered cattle to various locations. The cooler was equipped with a refrigerating device and it had two loading docks.On December 27, 1950, petitioner had surveyed the Lexington Road property and contiguous tract, and obtained exact legal descriptions.In 1952, petitioner installed a knocking pen, hog-scalding tank, and dehairing machine on the Lexington Road property at an aggregate cost of $ 1,030.59. This installation was necessary because the old pen and tank, which were located on the Lexington Road property at the time petitioner leased the premises, had become worn out and obsolete. The knocking pen was constructed of wood and the scalding tank was made out of steel. Lime water is used in scalding hogs, and it takes between 3 to 5 years for the lime to eat through the steel.In 1952, petitioner started construction of a "new building" (hereinafter referred to as such) on the Lexington Road property. The new building was actually the repaired second floor of a preexisting structure135 that had been shored up, and a first floor built beneath it. In addition, an old stable or garage was torn down and new office space was created. The new building was constructed of concrete block, steel sash, cement floor, and wood roof, with a 10-year, built-up roof thereon over the section of the first floor that extended beyond the second floor. It was completed in 1953 at a cost of $ 21,578.44, and contained a new boiler, shower rooms, washrooms, and office space.Petitioner had to install the new boiler because its insurance company refused to continue coverage on the old one. The shower rooms and washrooms were constructed at the request or demand of the aforementioned health department.510 Petitioner reported net sales and net income in its income tax returns for the years 1946 to 1955, inclusive, in the following amounts:YearNet salesTaxablenet income1946$ 1,094,534.32$ 30,293.7019471,297,915.0715,269.8219481,603,140.6818,801.4719491,644,756.7523,434.0019501,781,526.1130,074.5419511,990,258.221 15,971.3119521,975,762.611 53,892.0419531,938,328.5958,249.5919541,881,914.0546,015.5719551,822,089.4835,644.18136 On September 30, 1955, petitioner notified the lessors in writing that it was exercising the option to purchase. On October 31, 1955, the lessors conveyed the Lexington Road property to the petitioner by deed of general warranty, and within about 1 year thereafter petitioner had expended an additional $ 150,000 to $ 160,000 improving the property.Respondent examined petitioner's income tax returns for the years 1950 to 1952, inclusive. He allowed petitioner's amortization of the cost of the cooler over the remaining term of the lease agreement as extended. In addition, respondent determined that the cost of the scalding tank and knocking pen constructed in 1952 was to be capitalized and amortized on the same basis, and not treated as an expense of 1952.On its 1953, 1954, and 1955 income tax returns, petitioner claimed deductions for amortization of the cooler, the scalding tank and knocking pen, and the new building also on the basis of dividing the unrecovered cost by the remaining maximum extended term of the lease agreement. Based on respondent's examination of 137 these returns and his reexamination of petitioner's return for 1952, respondent determined that the unamortized cost of the cooler as of December 31, 1951, should be depreciated over its remaining useful life, which was determined to be 16 years. Respondent also determined that the cost of the scalding tank and knocking pen and of the new building should be depreciated over the respective useful lives of these assets, and that their useful lives were 10 and 30 years, respectively.By January 1, 1953, but not before that time, petitioner intended to exercise its option to purchase the Lexington Road property.As of January 1, 1953, the useful life of the cooler was 15 years and the useful life of the scalding tank and knocking pen was 3 years. The new building and new boiler completed and installed in 1953 had a useful life of 20 years.511 OPINION.Petitioner contends that the cost of the leasehold improvements made to the Lexington Road property should be amortized over the remaining period of the lease, as extended to the maximum by its renewal provisions, and not over the respective useful lives of said improvements. In support of this contention, petitioner cites the case138 of , and quotes the following passage from that case on brief:Ordinarily a taxpayer who makes improvements of a capital nature on property that is used in his trade or business is allowed a deduction for depreciation based on the useful life of the improvements. As an exception to this rule, if a taxpayer makes improvements on property of a capital nature in a situation where he will lose the ownership or control of that property before the usefulness of the assets is exhausted, he will be allowed to amortize the cost of the improvements over the period during which he has the ownership or control of the property. Such a situation arises when a lessee for a term of years makes capital improvements to the leasehold, having a longer economic life than the term of the lease, which will pass to the lessor at the end of the lease period. * * This exception to the general rule is justified because otherwise the taxpayer would either be unable to recover his basis or would be forced to take disproportionate loss at the time when he loses the improvements.However, in the Fort Wharf Ice Co. case we then stated139 that a "lessee is not always entitled to amortize the cost of such capital improvements," and in the case of , we said that --where it is apparently certain that the option to purchase leased land will be exercised, depreciation rates for assets located on such land should be based on their estimated physical lives. As was said in , it is only necessary that it appear the lessee's use or occupancy will exceed the life of the improvement. If that requirement is met, then the depreciation should be spread over the full life of the asset.In support of petitioner's contention is the self-serving testimony of one of petitioner's officer-stockholders. He testified that petitioner did not intend to exercise its option to purchase the Lexington Road property until early October of 1955 because it knew that to keep the slaughterhouse in operation it would have to spend about $ 150,000 to $ 160,000 on additional improvements. However, in view of the permanent capital improvements petitioner had constructed, or was committed to construct, 140 by early in 1953, petitioner's successful operations prior to that time, and other uncontroverted facts set forth below, this testimony alone is insufficient to overcome petitioner's burden of proof.While petitioner could purchase the Lexington Road property and the additional lots for $ 15,400, it had, by early in 1953, started construction on the new building, knowing that the useful life of this 512 capital improvement would extend far beyond the termination date of the lease agreement. Part of the new building consisted of office space, construction of which was purely voluntary on the part of petitioner. In addition, the Lexington Road property was one of the few locations in and around Louisville where a slaughterhouse could be operated.Thus, considering the circumstance at the start of 1953, it appears that petitioner would certainly exercise its option to purchase, and we have found that, by that time, petitioner did in fact intend to purchase said property.We view the constructions of 1948 and 1952 differently. The 1952 construction cost only $ 1,030.59 and was admittedly short-lived. The 1948 construction was early in the lease term, and all of it was required141 if petitioner was to stay in business at this location.We must now determine the useful lives of the improvements in question. Respondent has conceded that the life expectancy of the scalding tank and knocking pen installed by petitioner in 1952 was 4 years. We have found its remaining useful life at January 1, 1953, as 3 years.Since petitioner and respondent have treated the cooler as one unit, we must consider it as such in determining its useful life. Petitioner's sole expert witness testified only that the cooler had a useful life of 15 years as of the date of its completion in 1948. Furthermore, his estimate of the useful life of the cooler seems to be limited or based upon the useful life of one part of the cooler, i.e., its wooden, 10-year, built-up roof. Said expert also testified that the useful life of the wooden, 10-year, built-up roof could be extended by proper maintenance and repair, and that the concrete elements of the cooler would have a useful life in excess of 15 years. Thus, we cannot find that petitioner has overcome the prima facie correctness of respondent's determination that the cooler had a useful life of 16 years as of January 1, 1952, and we have*142 found its useful life at 15 years on January 1, 1953.We have determined the useful lives of the new building and the new boiler as one unit. The aforementioned witness testified that in his opinion the useful life of the new building, except for the boiler, was 15 years. He testified that the life of the new boiler was less than that, but his testimony in this regard was very weak. It seems that his estimate as to the building is largely based upon the useful life of one element, i.e., its wooden, 10-year, built-up roof.Considering all the record evidence, including the intended function of said improvement, we have found that the new building and boiler had a useful life of 20 years.Decisions will be entered under Rule 50. Footnotes1. Some excess profits tax is included in this figure.↩1. Inclusive of adjustments determined in an audit by the Internal Revenue Service dated February 26, 1954.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624361/	Eli Abolafia v. Commissioner. Norman Ochs and Betty Ochs v. Commissioner.Abolafia v. CommissionerDocket Nos. 2005-64, 2014-64.United States Tax CourtT.C. Memo 1966-56; 1966 Tax Ct. Memo LEXIS 226; 25 T.C.M. (CCH) 316; T.C.M. (RIA) 66056; March 17, 1966Leonard J. Fassler, 33 West 42nd St., New York, N. Y., for the petitioner in Docket No. 2005-64. Harry Seiden, for the petitioners in Docket No. 2014-64. Paul H. Frankel and Eugene L. Wilpon, for the respondent. FORRESTERMemorandum Findings of Fact and Opinion FORRESTER, Judge: The cases have been consolidated for trial. The respondent has determined deficiencies in the income tax of the petitioners for the year 1959 in the following amounts: DocketDefi-No.Petitionerciency2005-64Eli Abolafia$264.002014-64Norman and Betty Ochs354.77Some of the respondent's adjustments in each docket number are uncontested. The remaining issue, common to both dockets, is whether the petitioner Eli Abolafia or the petitioners Norman and Betty Ochs are entitled227 to dependency exemptions for Joseph and for Elisa Abolafia. A second issue, dependent on our resolution of the first, concerns the right of petitioners Norman and Betty Ochs to claimed deductions of $206.25 as to each child for child care expenses under section 214 of the Internal Revenue Code of 1954. 1Petitioner Eli Abolafia (hereinafter sometimes referred to as Eli) is an individual residing at 305 East 72 Street, New York, New York. He filed an individual income tax return for 1959 with the district director of internal revenue, Manhattan, New York. Petitioners Norman Ochs and Betty Ochs (hereinafter sometimes referred to as Norman and Betty) are228 husband and wife, and they reside at 80 Woodbine Avenue, Merrick, Long Island, New York. They filed a joint return for 1959 with the district director of internal revenue, Manhattan, New York. Elisa Abolafia and Joseph Abolafia (hereinafter referred to as Elisa and Joseph) are children of the marriage of Eli and Betty who were divorced in 1957. Betty and Norman were married on August 30, 1959. Elisa and Joseph were five and three years old respectively during 1959. Eli claimed exemptions for both children on his 1959 return, as did Norman and Betty on their 1959 joint return. Norman and Betty also claimed a total deduction of $412.50 for child care expenses. Pursuant to a separation agreement dated May 3, 1957, Eli paid Betty $1,200 during 1959 for the support of Elisa and Joseph. This amount was paid at the rate of $50 per month for each child. During 1959 Eli also maintained a family Blue Cross hospital insurance policy, as was required by the terms of the separation agreement. The cost of the entire policy was $120, and the part allocable to the support of each child was $40. The children resided with Betty for the first eight months of 1959 in a two and one-half room apartment229 in Far Rockaway, New York. The rent was $90.50 per month and the portion fairly allocable to the support of each child was $241. After her marriage on August 30 to Norman, Betty and the children moved to Long Beach, New York and lived there in a house with Norman for the rest of the year. The rent on this house was $110 per month and the portion fairly allocable to the support of each child for this 4-month period was $110. Until she married Norman on August 30, 1959, Betty was gainfully employed. This required her to send the children to a nursery school and the expense of this, paid by her in 1959, was $206.25 as to each child. Neither Eli nor Betty kept any records of the amounts claimed by each to have been spent for the support of the children, over and above the amounts detailed above. Both testified at great length and in exaggerated detail and amounts as to such expenditures. We do not wholly believe either Eli or Betty as to the totals of such claimed expenditures, but we are convinced that the entire support of each child for the year in issue was paid for by them. We have spent considerable time evaluating the above claims of the parents, and have finally concluded230 that in 1959 Joseph's support cost $1,610, paid $820 by Eli and $790 by Betty; and that Elisa's support cost $1,670, paid $820 by Eli and $850 by Betty. Joseph was taken to the barber more often than Elisa, but being younger he was not required to pay any bus fare journeying to the nursery school. Elisa did have to pay bus fare, and in addition, she required expensive corrective shoes. Respondent would have us deny the claimed dependency exemptions of both Eliand Betty on the theory that a large part of the support of each child was paid by Betty's parents. We consider this an extremely unfair evaluation of Betty's testimony, and have found otherwise. It follows from the above that Eli was entitled to claim Joseph as an exemption while Betty and Norman were entitled to claim Elisa. (Section 151 of the Internal Revenue Code of 1954). It also follows that Betty and Norman are entitled to the child care deduction for Elisa only. (Section 214, supra). Decisions will be entered under Rule 50. Footnotes1. SEC. 214. EXPENSES FOR CARE OF CERTAIN DEPENDENTS. (a) General Rule. - There shall be allowed as a deduction expenses paid during the taxable year by a taxpayer who is a woman * * * for the care of one or more dependents (as defined in subsection (d)(1), but only if such care is for the purpose of enabling the taxpayer to be gainfully employed. * * *(d)(1) DEPENDENT - The term "dependent" means a person with respect to whom the taxpayer is entitled to an exemption under section 151(e)(1)↩ -	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624316/	James Davis Protiva v. Commissioner.Protiva v. CommissionerDocket No. 5903-69 SC.United States Tax CourtT.C. Memo 1970-282; 1970 Tax Ct. Memo LEXIS 76; 29 T.C.M. (CCH) 1318; T.C.M. (RIA) 70282; October 5, 1970, Filed James Davis Protiva, pro se, 570 Cap-Au-Guis, Troy, Mo., Charles B. Tetrick, for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The Commissioner determined a deficiency in petitioner's income tax for the year 1967 in the amount of $324.14. The issues for decision are: 1. whether petitioner is entitled to dependency exemption deductions for Christine and Steven Jahoda under sections 151(e) and 152(a) (9) of the Internal Revenue Code of 1954; 12. whether petitioner is entitled to a child care expense deduction in the amount of $900 for his three children under section 214; and 3. whether78 the amounts petitioner paid for "job wanted" advertisements are deductible under section 162 or section 212. Findings of Fact Some of the facts have been stipulated. The stipulations and the exhibits attached thereto are incorporated herein by reference. 1319 James Davis Protiva (hereinafter referred to as petitioner) resided in Troy, Mo., at the time of the filing of the petition in this case. He filed his individual Federal income tax return for the calendar year 1967 with the district director of internal revenue at St. Louis, Mo. Respondent, in his notice of deficiency to petitioner, disallowed the following deductions claimed by the taxpayer on his 1967 tax return: 1. dependency exemptions claimed for Christine Elizabeth Jahoda and Steven Paul Jahoda totaling $1,200; 2. expenses for care of petitioner's three children totaling $900; and 3. expense of $4.89 attributable to placing "job wanted" advertisements in a local newspaper. Petitioner and his wife, Hattie Pearl Protiva, who died in July 1964, had three children. The names and birth dates of these children are as follows: NameBirth DateJames Davis Protiva, Jr.November 8, 1959Franklin Reed ProtivaMay 11, 1961Susan Elizabeth ProtivaNovember 26, 196279 Petitioner never remarried and he found it extremely difficult to find suitable persons to care for his children while he was working. From July 1964 until the latter part of 1966, petitioner's relatives took care of his children while he was away at work. In the fall or winter of 1966, petitioner answered an advertisement placed in the St. Louis Post-Dispatch by Penina Jahoda (hereinafter Penina), a divorcee, who desired to obtain employment as a babysitter under an arrangement whereby she and her two children would live in th employer's home. The names and birth dates of the two Jahoda children are: NameBirth DateChristine Elizabeth (hereinafter Christine)December 28, 1962Steven Paul (hereinafter Steven)July 26, 1960Late in 1966, petitioner agreed to employ Penina, who resided with Christine and Steven in the taxpayer's home throughout all of 1967. Their employment agreement provided that petitioner would furnish food, lodging, and incidental items, such as utilities, to Penina and her two children as well as pay her $100 per month, in return for her services as a babysitter for petitioner's three children. Penina never received the $100 per month, 80 although petitioner did give her a check for $359 in September 1967, which was intended to serve as wages. However, Penina spent this sum for groceries for the entire household. Although Penina performed household duties other than babysitting during 1967, such as cleaning house and washing clothes, such activities were not a condition of her employment. Penina regarded her relationship with petitioner as one of employer and employee. After she terminated her employment with petitioner and left his home in 1969, he no longer furnished food and lodging to the two Jahoda children and their mother. Petitioner never arranged or planned to adopt Christine and Steven, who did not consider him as their father. Victor Jahoda, Christine and Steven's father, provided $175 to each of the children during 1967, which Penina spent primarily for their clothing. Petitioner's home in Troy, Mo., housed seven persons in 1967, viz., petitioner, his three children, Penina, and her two children. This house, which had originally been purchased for $10,500, had 12 rooms and two baths. During the period that petitioner has been living there, he has made some improvements to the house, such as roofing, 81 painting, rewiring it, as well as sanding the floors. Petitioner had three employers during the year at issue. There were periods in that year during which he was unemployed. While the exact nature of these jobs was nots disclosed, it appears that none of these jobs entailed grade school or high school teaching. In September 1967, during a period when petitioner was not employed, he advertised at a cost of $4.89 in the St. Louis Post-Dispatch as follows: Teaching position wanted, six years' experience, junior high science or elementary. Petitioner did not obtain employment as a result of these advertisements. Penina prepared petitioner's 1967 income tax return, on which her two children were claimed by petitioner as dependents. She claimed that petitioner furnished $1,040 ($20 per week) support to each of her children, as well as to herself. In addition, petitioner deducted $900 as child care expenses in connection with Penina's babysitting services. 1320 The following is a list of expenses allocable to the seven members of petitioner's household for the taxable year 1967: 10 ItemTotal for YearMinimumMaximumFair rental value of lodging ($150 to $175 per month)$1,800.00$2,100.00Groceries (checks to Penina Jahoda)1,074.001,074.00Dairy products288.12288.12Groceries (checks to cash)500.00500.00Utilities622.95622.95Miscellaneous101.60101.60TOTAL$4,386.6782 OpinionPetitioner claimed dependency exemption deductions on his 1967 income tax return for the two minor children of Penina Jahoda, an unmarried woman employed by petitioner to babysit for his three children while he was working. In accord with their original employment agreement, petitioner provided food, lodging, and incidental items to Penina and her children in return for her services as a babysitter.The primary issue for our determination concerns these dependency exemptions. The resolution of that issue will, in turn, aid in determining the amount of child care expenses allowable to petitioner under section 214.A third issue is the deductibility of $4. as a business expense under section 162 or section 212.1. Dependency Exemptions Under section 151(e), 2 a taxpayer is entitled to an exemption of $600 for each dependent as defined by section 152(a). Since Christine and Steven Jahoda were unrelated to petitioner and do not fit within any of the degrees of relationship specified in section 152(a) (1) through (8) or (10), we must whether they are to be considered as petitioner's dependents thereunder. 83 In discussing the purpose underlying the enactment of section 152(a) (9) in Leon Turnipseed, 27 T.C. 758">27 T.C. 758 (1957), we stated:The legislative history furnishes little assistance as to the congressional intent in enacting paragraph (9). The Senate Committee Report * * sets forth the following example of its application:For example, under paragraph (9) the taxpayer will be entitled to claim a foster child (who is not legally adopted) as a dependent (assuming the support and earnings tests are met) provided the foster child is a member of the taxpayer's household and lives in the taxpayer's home for the entire taxable year, except for vacations or time away at school. Furthermore, in Wililam Thomas Hamilton, 34 T.C. 927">34 T.C. 927 (1960), we said: In such cases the support would be gratuitous and given to the recipient from motives of charity, affection, or moral obligation without thought of receiving in return a quid pro quo. In the instant case it is clear to us on the record that petitioner's primary purpose in furnishing board and lodging to Rachel during the taxable year, and making other expenditures for her benefit, was to obtain her services either84 immediately or in the future. It is our opinion that what Rachel received from petitioner during the taxable year was remuneration for her services, either present or future, and was not "support" as that term is used in section 152(a)(9) Cf. concurring opinion of Judge Withey in Leon Turnipseed, supra at 761. We feel that this case is clearly within the rule of William Thomas Hamilton, supra. Petitioner and Penina both admitted at trial that the items of support furnished to 1321 Christine and Steven Jahoda were provided in accordance with their employment agreement. Although we do not intend to pass judgment on petitioner's personal feelings toward those children, we feel that it is clear from the record herein that petitioner did not provide a home to the Jahoda children out of charity, affection, or moral obligation. Rather, the sole purpose for these expenditures was to compensate Penina for her babysitting services. Accordingly, we hold that compensation for services paid to Penina in the form of lodging and food to her and her children does not constitute support within the meaning of section 152 (a)(9), and therefore, petitioner is not entitled85 to dependency exemptions for the Jahoda children. 2. Child Care Expenses Section 214 permits a deduction incurred by a widower for the care of children under 13 years of age where the care is for the purpose of enabling the taxpayer to be gainfully employed. Respondent conceded on brief that petitioner is entitled to a child care expense deduction, but disputes the amount thereof. His position was stated as follows: If respondent's position [with respect to dependency exemptions for the two Jahoda children] is sustained by the Court, it follows that petitioner would be entitled to the entire $900 deduction. * * Since we have sustained respondent and held herein that petitioner is not entitled to dependency exemptions for the two Jahoda children, we hold that petitioner is entitled to a deduction in the amount of $900 for child care. 3. Employment Advertisement Expense Respondent contends that the $4.89 paid to place "job wanted" advertisements in the St. Louis Post-Dispatch is not deductible as an ordinary and necessary expense under either section 162 or section 212. We agree with respondent. In incurring this expenditure in advertising for a teaching position, 86 petitioner was in no way carrying on a trade or business of being a teacher since he was not in that trade or business at any time during the year at issue. See David J. Primuth, 54 T.C. 374">54 T.C. 374 (1970). Moreover, the advertisements did not result in petitioner's securing a position in that year. See Eugene A. Carter, 51 T.C. 932">51 T.C. 932 (1969). Accordingly, we hold that petitioner is not entitled to a deduction therefor. To reflect the conclusions reached herein, and the concessions made by the parties, Decision will be entered under Rule 50. Footnotes1. All statutory references hereinafter are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. * * (E) Additional Exemption for Dependents. -(1) In general. - An exemption of $600 for each dependent (as defined in section 152) -(A) whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $600, or(B) who is a child of the taxpayer and who (i) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student. N 3 SEC. 152. DEPENDENT DEFINED. (A) General Definition. - For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) or (e) as received from the taxpayer): * (9) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 153, of the taxpayer) who, for the taxable year of the taxpayer, has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624317/	Daniel French v. Commissioner.French v. CommissionerDocket No. 6406-67.United States Tax CourtT.C. Memo 1970-322; 1970 Tax Ct. Memo LEXIS 36; 29 T.C.M. (CCH) 1473; T.C.M. (RIA) 70322; November 23, 1970, Filed. Benjamin F. Kivnik, 711 Western Saving Fund Bldg., Philadelphia, Pa., for the petitioner. Mary Ann Hagan, for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The Commissioner determined a deficiency37 in the amount of $4,320.42 in petitioner's income tax for the calendar year 1964. Due to concessions made by the parties at trial and on brief, the issues remaining for consideration are: 1. Whether expenditures in the amount of $5,082.76 claimed by petitioner as entertainment expenses for the taxable year 1964 are deductible under sections 162 and 274 of the Internal Revenue Code of 1954; 12. Whether lodging expenditures in the amount of $938.61 incurred during 1964 at Laurel, Md., are deductible as "away from home" expenses under section 162; 3. Whether expenditures in the amount of $890 claimed by petitioner for the year at issue as traveling expenses while "away 1474 from home" are deductible under sections 162 and 274; 4. Whether expenses in the amount of $336.60 for automobile repairs and $413 for automobile insurance are deductible in 1964 under sections 162 and 274; and 5. Whether respondent properly disallowed the $2,000 claimed by petitioner as automobile depreciation for 1964. Findings of Fact The parties stipulated38 some facts and they, together with the exhibits attached thereto, are incorporated herein by this reference. Daniel French (hereinafter referred to as petitioner) timely filed an individual Federal income tax return for the calendar year 1964 with the district director of internal revenue at Phoenix, Ariz. At the time of the filing of the petition herein, he resided in Laurel, Md. Petitioner, who is single, was born on November 13, 1940, at College Point, New York, N. Y. He is a jockey by profession. His first professional race took place at Aqueduct in New York City on July 11, 1960. At that time, petitioner was a resident of New York, N. Y.While petitioner was still in school and prior to the time that he began racing in New York, he had spent about one year in Arizona on his doctor's advice. During the years 1961 and 1962, petitioner worked as a jockey apprentice in Monkton, Md., for Frank Christmas At the time of the trial herein, petitioner was the owner of record of a three bedroom, ranch style house located in Phoenix, Ariz., for which he paid $17,500. The house was financed by a realty mortgage dated January 4, 1962, in the amount of $14,500. During the year at issue, 39 petitioner's mother lived in this house. Petitioner, who had some clothing and other personal belongings at the Phoenix address, actually spent only approximately one month there during 1964 because of the fact that he was racing on the East Coast in Maryland, Delaware, New Jersey, and New York. Petitioner did not race in Arizona or any other western state during the year in question. He had started his career in racing on the East Coast and had become successful there. At the time of the trial herein, petitioner still had not raced in Arizona, nor does it appear that he has raced in any other western state. Petitioner's whole life revolved around the racing world. At the time of the trial, his friends were all from the racing field and he knew many persons who had been involved in racing in the Maryland area for a considerable length of time. Petitioner's racing schedule for 1963 was substantially the same as his schedule for the year at issue. The following is petitioner's schedule for 1964, indicating the tracks at which he raced, the location of each track, and his place of abode during the period he spent at each racetrack: TRACKLOCATION OF TRACKDATES SPENT AT EACHTRACKPLACE OF ABODEBowieBowie, Md.1-17 to 3-21Laurel, Md.LaurelLaurel, Md.3-28 to 4-22Laurel,md.Garden State ParkCherry Hill, N. J.4-23 to 5-30Cherry Hill, N. J.AqueductNew York, N. Y.6-1West Long Branch, N. J.Delaware ParkStanton, Del.6-4West Long Branch, N. J.Monmouth ParkOceanport, N. J.6-5 to 7-6West Long Branch, N. J.AqueductNew York, N. Y.7-7West Long Branch, N. J.Monmouth ParkOceanport, N. J.7-8 to 8-8West Long Branch, N. J.Atlantic CityPleasantville, N. J.8-10 to 10-10Pleasantville, N. J.Garden State ParkCherry Hill, N. J.10-20Cherry Hill, N. J.LaurelLaurel, Md.10-21 to 11-12Laurel, Md.PimlicoBaltimore, Md.11-13 to 12-4Laurel, Md.AqueductNew York, N. Y.12-5Laurel,md.PimlicoBaltimore, Md.12-6 to 12-15Laurel, Md.40 The following is a table of distances between various cities from and to which petitioner traveled during 1964: FromToNumber ofMilesBowie, Md.Laurel, Md.8Laurel, Md.Cherry Hill, N. J123Cherry Hill, N. J.New York, N. Y.87New York, N. Y.Oceanport, N. J.48Oceanport, N. J.Atlantic City, N. J.80Atlantic City, N. J.Cherry Hill, N. J.62Laurel, Md.New York, N. Y.226Bowie, Md.Baltimore, Md.15Laurel, Md.Baltimore, Md.12Laurel, Md.Phoenix, Ariz.2,277New York, N. Y.Stanton, Del.135Stanton, Del.Oceanport, N. J.104Baltimore, Md.New York, N. Y.199 1475 The parties have stipulated that petitioner's total lodging 2 expenditures in 1964 were in the amount of $2,473.45. Of this total amount, the expenses incurred at Laurel, Md., viz. $938.61, are at issue, the respondent having conceded the deductibility of the remaining lodging expenses. 41 Petitioner did not keep a diary or detailed ledger of his alleged $5,082.76 in entertainment expenses; nor did he produce any documentary evidence supporting these claimed expenses. Petitioner purchased a 1963 Buick Riviera in April 1963 for $4,800. He also owned a 1961 Volkswagen. However, he drove only the Biick while he was working and living on the East Coast; the Volkswagen remained in Phoenix. Petitioner deducted the following amounts with respect to the Buick on his Federal income tax return for 1964: AmountClaimed Basis for Deduction$ 890.00Gas and oil2,000.00Depreciation 3413.00Insurance485.70Repairs and maintenanceThe parties have stipulated that the amount for auto repairs should be reduced to $336.60. Petitioner did not keep any records of the total mileage on the Buick in 1964. He arrived at a figure of 33,000 miles driven in that year by reading the speedometer at the end of the year. Based upon this speedometer reading, petitioner's accountant estimated that petitioner incurred $890 in gas and oil expenses in 1964. Petitioner filed a Maryland state resident income42 tax return for 1963, and a Maryland nonresident return for 1964. He did not file an Arizona state income tax return as a resident or nonresident for calendar or fiscal years 1963 through 1967. Opinion Petitioner deducted on his tax return for 1964 $5,082.76 as entertainment expenses, $4,470.14 as traveling expenses (including amounts expended for lodging), and $2,000 as automobile depreciation. Respondent disallowed these deductions in their entirety; however, due to certain concessions made by the parties at trial and on brief, the amounts of some of the deductions which are in issue have been reduced. At the outset, we note that the deductibility of the various expenses involved herein is essentially a question of fact, Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467 (1943), Harry G. LaForge, 53 T.C. 41">53 T.C. 41 (1969); and the burden of proof is on petitioner, Harry G. LaForge, supra.1. Entertainment Expenses Respondent contends that petitioner has failed to prove that the claimed $5,082.76 in entertainment expenses were ordinary and necessary business expenses under section 162, 4 and, furthermore, that petitioner has not substantiated these43 alleged expenditures in accord with the strict requirements of section 274. 544 Despite respondent's position in his notice of deficiency, his answer to the petition, his opening remarks and his briefs that petitioner had failed to prove that the entertainment expenses were ordinary and necessary, petitioner stated on brief the following: 1476 The Respondent does not appear to deny that the entertainment expenses were directly related to the business of taxpayer. Rather, the deduction is contested because of the claimed lack of substantiation under section 274(d) IRC.While it is clear that the requirement for substantiation in section 274(d), and the accompanying regulations, 6 is an overriding requirement, it is equally clear that claimed business expenses must otherwise be deductible in the first instance under section 162. 45 We cannot understand petitioner's failure to acknowledge respondent's basic position on the deductibility of the expenditures in question. However, we feel this will not be a detriment to him since we hold that, in any event, he did not meet the substantiation requirements. With respect to the manner in which petitioner recorded his entertainment expenses, he testified: What I would do, I would cash a check made payable to cash and sign it on the bottom for the purpose of what I was using it for and then I would cash the check and use that for dining. Despite this testimony, no such checks were introduced into evidence. Furthermore, petitioner kept no diary or detailed ledger of any type relating to these expenses. He admitted at trial that he could not give a "breakdown by date and time or place of the amounts deducted for entertainment." Although he listed some names, he could not recall names of many of the persons he entertained because, as he stated: Names. I couldn't recall names. A lot of people I come across every day, a lot of people I'm around every day. There's a lot of owners and trainers on the race track. It's not easy to remember them all. It is clear that46 petitioner has not met the substantiation requirements of section 274(d) and the regulations therunder which have been held valid by this Court. William F. Sanford, 50 T.C. 822">50 T.C. 822 (1968), affd. per curiam 412 F. 2d 201 (C.A. 2, 1969), certiorari denied 396 U.S. 841">396 U.S. 841 (1969). Section 274(d) was designed to insure that no deduction for entertainment and other specified expenses is allowed solely on the basis of the taxpayer's own unsupported self-serving testimony. H. Rept. No. 1447, 87th Cong., 2d Sess., 63 C.B. 405">1962-63 C.B. 405, 427; 1477 S. Rept. No. 1881, 87th Cong., 2d Sess., 3 C.B. 707">1962-3 C.B. 707, 741. In the case of entertainment expenditures of $25 or more, documentary evidence is required to support a deduction therefor. Section 1.274-5(c)(2)(iii), Income Tax Regs. Moreover, the taxpayer must maintain an account book, diary, statement of expense or similar record. Section 1.274-5(c)(2)(i). These two, in combination, are sufficient to establish each element required for substantiation under section 274(d). Documentary evidence is not, however, required to support entertainment expenditures47 of less than $25. This is not to say, as petitioner contends, that the stringent and detailed records required by the regulations under section 274(d) do not apply to expenditures under $25. Sections 1.274-5(c) (1) and (2) of the regulations still require that the taxpayer maintain an account book, diary, statement of expense or similar record, or that he present sufficient evidence corroborating his own statement. Petitioner has done neither. Therefore, it is clear from the record before us that petitioner has not satisfied the substantiation requirements for expenditures of $25 or more, nor for expenditures of less than $25. Accordingly, the claimed entertainment expense deduction of $5,082.76 was properly disallowed. See Harry G. LaForge, supra; Wm. Andress, Jr., 51 T.C. 863">51 T.C. 863 (1969), affd. 423 F. 2d 679 (C.A. 5, 1970); John L. Ashby, 50 T.C. 409">50 T.C. 409 (1968); Robert H. Alter, 50 T.C. 833">50 T.C. 833 (1968); William F. Sanford, supra.2. Lodging Expenses In order to be entitled to a deduction for lodging expenses under48 section 162(a)(2) petitioner must prove: (1) the expenses incurred were reasonable and necessary; (2) the expenses were incurred while "away from home"; and (3) the expenses were incurred in pursuit of a trade or business. Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465 (1946). It appears that respondent has conceded the issue of substantiation with respect to $938.61 7 in lodging expenses incurred by petitioner in Laurel. The basis for the disallowance of this deduction has been narrowed by respondent to the following: Petitioner's tax home for the year 1964 was in Laurel, Maryland, and, therefore, lodging expenditures incurred at Laurel are not traveling expenses incurred while away from home within the meaning of section 162(a)(2) * * . Petitioner, on the other hand, contends that his "home" for tax purposes was Phoenix, Ariz., where he purchased49 a house, and that, therefore, his lodging expenses in Laurel were incurred "away from home." We agree with respondent on this issue. We note first that the record was not at all satisfactory as to certain facts which we feel are important to the resolution of this issue. It was never adduced at trial exactly how much money petitioner expended to maintain the house he owned in Phoenix, Ariz. Nor do we know specifically what personal effects he kept there. Petitioner testified as follows: Q. Do you have clothes at that residence? A. Yes, I do. Q. Do you have any other belongings there? A. Yes. This testimony is far more elusive than elucidating. Furthermore, we do not know whether petitioner maintained any bank or store accounts in Phoenix nor whether he was registered to vote there. We do know that he did not file an Arizona state income tax return as a resident or nonresident for calendar or fiscal years 1963 through 1967, that he spent only about four weeks there in 1964, and that he was never employed there. An examination of the entire record leads us to conclude that petitioner's connections with Phoenix were more tenuous than real, and accordingly, we hold that50 Phoenix was not his home in any sense of the word in 1964. See Carmen Chimento, 52 T.C. 1067">52 T.C. 1067 (1969). Assuming arguendo that Phoenix was petitioner's home in the ordinary and usual sense of the word, this finding would not trigger the allowance of all traveling expenses incurred while away from Phoenix. The objective of section 162(a)(2), commonly known as the "away from home" provision, is to mitigate the burden of a taxpayer who must incur certain traveling expenses because of the exigencies of 1478 business. Ronald D. Kroll, 49 T.C. 557">49 T.C. 557, 562 (1968). A fundamental question in determining whether a particular expense is dictated by the exigencies of business is "whether it would be reasonable to expect the particular taxpayer to move his home nearer to the place where he is working." Wright v. Hartsell, 305 F.2d 221">305 F. 2d 221, 225 (C.A. 9, 1962). See also Ronald D. Kroll, supra.In the situation where a taxpayer has a permanent place of employment, it is reasonable to expect him to move his residence to that vicinity. If he does not51 so choose, the additional expenses resulting therefrom are the consequence of his personal desires and are not due to business needs. Ronald D. Kroll, supra. On the other hand, it is not reasonable to expect a taxpayer to move his residence to the situs of a temporary work assignment. See Peurifoy v. Commissioner, 358 U.S. 59">358 U.S. 59 (1958); E. G. Leach, 12 T.C. 20">12 T.C. 20 (1949). Therefore, living expenses incurred at the temporary post of business are deductible since they are incurred in pursuit of business rather than as a result of personal choice. Ronald D. Kroll, supra; Leo M. Verner, 39 T.C. 749">39 T.C. 749 (1963). However, we must be careful lest we be led down the primrose path with respect to the temporary employment exception which has been engrafted onto the tax home doctrine. The question whether a taxpayer's employment is temporary entails a factual determination. Leo M. Verner, supra. However, a determination that a taxpayer's business is "the sort of employment in which termination within a short period [of time] 52 could be foreseen," Beatrice H. Albert, 13 T.C. 129">13 T.C. 129, 131 (1949), does not necessarily warrant the deductibility of expenses incurred at such a "temporary" post. The basic issue is the point at which temporary employment becomes substantial, indefinite, indeterminate, or permanent. Although this is not always easily decipherable, it is precisely at that time that the situs of the temporary employment becomes a taxpayer's home within section 162(a)(2). Leo M. Verner, supra. Turning to the case before us, one might hastily conclude that because of the very nature of a jockey's work, his place of employment is temporary and, therefore, his residence in the usual sense of the word remains his home for tax purposes. See Hollie T. Dean, 54 T.C. 663">54 T.C. 663 (1970). However, as to the petitioner before us, the facts elicited at trial lead us to conclude that Laurel, Md., was more than a temporary situs of employment for him. First of all, it is important to remember that petitioner first started racing in July 1960 at Aqueduct in New York City. Almost immediately thereafter, during the years 1961 and 1962, he worked as a jockey apprentice in Monkton, 53 Md.Moreover, petitioner's racing schedule for 1963 was substantially the same as his schedule for 1964, the year at issue, which means that he raced at Laurel, Bowie and Pimlico racetracks (each track being within a 15-mile radius of the others) for a period of approximately five months each year. During this period, he resided in Laurel. Petitioner stated at trial that his friends were all from the racing field and that he had known for a considerable length of time many persons who were involved in racing in the Maryland area. Although petitioner did not have, so far as we know, any formal contracts of employment with any trainers or owners who entered horses at the Maryland tracks in question, nevertheless he was successful there and could reasonably foresee that his pattern of racing at those tracks would continue for an indefinite or indeterminate number of racing seasons. In this sense, we can say that petitioner's employment in the vicinity of Laurel was seasonal and recurring annually. Petitioner testified that he bought the house in Phoenix because he intended to ride out there. However, he also admitted that the Arizona climate was beneficial to his mother's health, 54 as well as to his own. Although petitioner claimed that he "couldn't get started out there" in Arizona, we remain ignorant as to the precise nature of the efforts, if any, petitioner made to pursue his career as a jockey in Arizona or any other western state. Moreover, petitioner testified that he knew he could not earn as much money in Arizona because race tracks operate only four days a week there. Petitioner did not race in Arizona or any other western state during 1964. Furthermore, at the time of the trial herein, petitioner still had not raced in Arizona. It 1479 also appears that, as of January 1969, he had never raced in any other western state. For the benefit of those who may feel we are adopting a hindsight test, we shall add the following comments. Petitioner established substantial connections with the racing world in and around Laurel, Md. He had established a pattern of racing there over a period of four years, from the time he began his jockey apprenticeship in 1961 through 1964, the year in question. We feel there is a point in time at which hindsight meshes with foresight and in fact becomes foresight. We are convinced that that stage has been reached in the55 case before us. It would be entirely reasonable to expect petitioner to move his residence to the vicinity of Laurel, Md., where he could foresee he would be working during subsequent racing seasons. Petitioner's selection of a residence at a place which was not near any of his claimed places of employment was unreasonable. See Dyer v. Bookwalter, 230 F. Supp. 521">230 F. Supp. 521 (W.D. Mo. 1964). One further note is in order. We are mindful that respondent has conceded the deductibility of all lodging expenses incurred away from Laurel and, therefore, we do not feel it appropriate to disturb that concession. Accordingly, we hold petitioner's tax home for 1964 was Laurel, Md. 856 3. Automobile Expenses Petitioner deducted $890 in gas and oil expenses, $413 in car insurance expenses, $485.70 9 in automobile repair expenses, and $2,000 for auto depreciation on his 1964 income tax return with respect to his 1963 Buick. Respondent disallowed in full these deductions. Because of his failure to comply with the substantiation requirements of section 274(d) and the regulations thereunder (see footnotes 5 and 6), we must sustain respondent's disallowance of these deductions, except as noted, infra. As to the manner in which he arrived at a figure of $890 in gas and oil expenses, petitioner testified: When I had my income tax made out I told the accountant that I drove 33,000 miles and I didn't exactly - or I didn't have any idea how much I had spent for oil and gas and I guess he arrived at it through the figures of 33,000 miles. He figured it out. The figure of 33,000 miles was determined from a speedometer reading at the end of the year. At first, petitioner testified that the 33,000 miles57 represented travel from track to track. However, he later admitted some personal use and estimated that his personal use totaled three or four thousand miles. We cannot accept these approximations as sustaining petitioner's deduction with respect to the business use of the Buick in 1964. Section 274(d). We also cannot resort to the simplified method for computation of deductible costs per mile of operating a car for business purposes, as set forth in Rev. Proc. 64-10, 1964-1 C.B. (Part 1) 667, because that ruling specifically provides as follows: To make use of this method of computing automobile cost, [an] * * * individual * * * is required to establish his business mileage * * * for * * * travel, in accordance with regulations section 1.274-5. Petitioner made no attempt whatsoever to comply with those regulations. The only way which we could arrive at the total business mileage driven by petitioner in 1964 would be to take petitioner's vague and general testimony at face value and 1480 accept his approximations. We do not feel that this procedure would be in accord58 with the thrust of section 274(d). However, the parties did stipulate petitioner's racing schedule for 1964, as well as the distances from track to track. An examination of the table of distances, coupled with the knowledge that petitioner drove to the racing sites, discloses that petitioner's business mileage while away from Laurel totaled a minimum of 1,262 miles. Accordingly, we hold that he is entitled to deduct $126.20 (1,262 miles X 10 cents) in transportation expenses. Rev. Proc. 64-10, 1964-1 C.B. (Part 1) 667. The disallowance of the remaining claimed gas and oil expenses is sustained. Section 274(d). We also sustain respondent as to the remaining auto-related deductions because, not knowing how much of the use of the Buick in 1964 was for business purposes, we have no way of reasonably allocating a proportion of the expense of insurance and of depreciation to business purposes. 10 To reflect the concessions made by the parties and the59 conclusions reached herein, Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. Although expenditures incurred while away from home for meals may be deductible under section 162 (a) (2)↩, it appears that only "lodging" expenses are at issue in this case since the parties referred only to "lodging" expenditures at trial and on brief, as did the notice of deficiency.3. Salvage value was computed by petitioner as $800.↩4. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General. - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including - * * * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business * * . ↩5. SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. * * (d) Substantiation Required. - No deduction shall be allowed - (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home). (2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense * * , (B) the time and place of the travel, entertainment, * * (C) the business purpose of the expense * * , and (D) the business relationship to the taxpayer of persons entertained * . The Secretary or his delegate may be regulations provide that some of all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations.↩6. § 1.274-5. Substantiation requirements. (a) In general. No deduction shall be allowed for any expenditure with respect to - (1) Traveling away from home (including meals and lodging) deductible under section 162 or 212, (2) Any activity which is of a type generally considered to constitute entertainment, * * * * * unless the taxpayer substantiates such expenditure as provided in paragraph (c) of this section. This limitation supersedes with respect to any such expenditure the doctrine of Cohan v. Commissioner (C.C.A. 2d, 1930) [2 USTC 489] 39 F.2d 540">39 F. 2d 540. * * * Section 274(d) contemplates that no deduction shall be allowed a taxpayer for such expenditures on the basis of * * * approximations or unsupported testimony of the taxpayer. * * * (b) Elements of an expenditure - (1) In general. Section 274(d) and this section contemplate that no deduction shall be allowed for any expenditure for travel, entertainment, * * * unless the taxpayer substantiates the following elements for each such expenditure: (i) Amount; (ii) Time and place of travel or entertainment * * ; (iii) Business purpose; and (iv) Business relationship to the taxpayer of each person entertained, * * * * * (c) Rules for substantiation - (1) In general. A taxpayer must substantiate each element of an expenditure (described in paragraph (b) of this section) by adequate records or by sufficient evidence corroborating his own statement except as otherwise provided in this section. * * * (2) Substantiation by adequate records - (i) In general. To meet the "adequate records" requirements of section 274(d), a taxpayer shall maintain an account book, diary, statement of expense or similar record (as provided in subdivision (ii) of this subparagraph) and documentalry evidence (as provided in subdivision (iii) of this subparagraph) which, in combination, are sufficient to establish each element of an expenditure specified in paragraph (b) of this section. * * * (iii) Documentary evidence. Documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure shall be required for - (a) Any expenditure for lodging while [traveling] away from home, and (b) Any other expenditure of $25 or more, except, for transportation charges, documentary evidence will not be required if not readily available, provided, however, that the Commissioner, in his discretion, may prescribe rules waiving such requirements in circumstances where he determines it is impracticable for such documentary evidence to be required. Ordinarily, documentary evidence will be considered adequate to support an expenditure if it includes sufficient information to establish the amount, date, place, and the essential character of the expenditure. * * * [A] cancelled check drawn payable to a named payee would not by itself support a business expenditure without other evidence showing that the check was used for a certain business purpose.↩7. The parties stipulated that petitioner's total lodging expenditures in 1964 were $2,473.45. This includes $938.61 of such expenses incurred at Laurel, Md., which are at issue herein since respondent alleges that Laurel is petitioner's tax home. Respondent conceded the deductibility of the remaining lodging expenses.↩8. We need not pass on the location of petitioner's tax home if he had established a bona fide residence at one of the other sites at which he raced during 1964. Furthermore, this case is factually distinguishable from the following cases where courts have allowed deductions for lodging and food expenses incurred away from the taxpayer's residence. In these cases there was some work or history of work performed in the vicinity of the taxpayer's residence. Alois Joseph Weidekamp, 29 T.C. 16">29 T.C. 16 (1957) (parimutuel calculator); Curtis Leon Ralston, T.C. Memo. 1968-248 (exercise jockey); Nat Glogowski, T.C. Memo. 1967-236 (racetrack auditor); Pierce v. United States, 271 F. Supp. 165">271 F. Supp. 165 (W.D. Ark. 1967) (racetrack steward). Although the taxpayers in Patricia A. Ruby Hall, T.C. Memo. 1964-157; Judy L. Gooderham, T.C. Memo. 1964-158↩, who were professional ice skaters for the Ice Follies, were allowed deductions for food and lodging expenses while away from their home towns, these cases are distinguishable in that the employment contracts for these taxpayers specifically provided that each employee-taxpayer's home city was the "point of engagement" and that the employer would pay for the employee's rail transportation from the point of engagement, the home city, to the place where the ice show opens and back to the home city when the show closes.9. Petitioner deducted $485.70 on his tax return, but the petitioner conceded that $336.60 was the total amount of automobile repair expenses incurred in 1964.↩10. The $126.20 deduction is in lieu of all operating and fixed costs of the car allocable to business purposes, such as oil, repairs, license tags, insurance, and depreciation. Rev. Proc. 64-10↩, supra.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624319/	Estate of Wallace Caswell, Deceased, Jennie J. Caswell, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Charles Henry Caswell, Deceased, Earl W. Caswell, Administrator, Petitioner, v. Commissioner of Internal Revenue, RespondentCaswell v. CommissionerDocket Nos. 27017, 27018United States Tax Court17 T.C. 1190; 1952 U.S. Tax Ct. LEXIS 290; January 18, 1952, Promulgated 290 Decisions will be entered under Rule 50. The petitioners were members of a cooperative growers association through which they marketed their peaches. Under the marketing plan, the peaches were placed in a pool with peaches of like kind, grade, and classification produced by other members. When the peaches were sold and the pool was closed, the net proceeds, less an association charge, were distributed to the members on the basis of participation. The association charge, after payment of general organization and association expenses, was carried into a capital reserve and, in addition to the cash distributed, the members also received on the basis of participation in the selling pool, interest-bearing certificates representing their interests in the capital reserve, which certificates they were free to sell, exchange, and assign. Held, that the petitioners, upon receipt of certificates, received and realized income to the extent of the fair market value of the certificates received. Held, further, that the fair market value of the certificates was equal to face. Wareham C. Seaman, Esq., for the petitioners.Charles W. Nyquist, Esq., for the respondent. Turner, Judge. TURNER 1190 OPINION.The proceeding at Docket No. 27017, the Estate of Wallace Caswell, involves a deficiency in income tax for 1945 of $ 7,828.97, and that at Docket No. 27018, the Estate of Charles Henry Caswell, a deficiency for the same year, of $ 5,278.10.1191 The primary issue presented is whether income292 was realized by the taxpayers in 1945 upon the receipt of certificates issued by a cooperative association upon its commercial reserve fund, and if income was so realized, the question arises as to the fair market value of the certificates at the time they were received by the Caswells. Other issues raised in the pleadings have been adjusted between the parties and effect will be given to the adjustments made under Rule 50.The facts have been stipulated and are found as stipulated.Wallace Caswell, until his death on December 3, 1949, and for the years material hereto, was a resident of Ceres, California. He filed his income tax return for the taxable year 1945 with the collector of internal revenue for the first district of California. After his death, his wife, Jennie J. Caswell, was duly appointed and qualified as administratrix for her husband's estate. In the year 1945, Wallace Caswell filed his return on a cash receipts and disbursements basis and reported all income as the community income of himself and wife, to whom he was married at all times material hereto.Charles Henry Caswell, until his death on June 26, 1949, and for the years material hereto, was a resident of293 Ceres, California. He filed his income tax return for the taxable year 1945 with the collector of internal revenue for the first district of California. After his death, Earl W. Caswell was duly appointed and qualified as administrator of the estate of Charles Henry Caswell, deceased. In the year 1945, Charles Henry Caswell filed his return on the cash receipts and disbursements basis and reported all income as community income of himself and wife, Helen C. Caswell, to whom he was married at all times material hereto.Wallace and Charles Henry Caswell each had a one-half interest in the partnership, Caswell Brothers, of Ceres, California. This partnership was engaged in growing peaches which it marketed through the Turlock Cooperative Growers Association of which it was a member.The Turlock Cooperative Growers Association, sometimes referred to herein as The Co-op, or Turlock, is a California farmers' cooperative marketing association located at Modesto, California. During 1945, and so far as appears during all other years, Turlock was exempt from income tax under section 101 of the Internal Revenue Code.The Co-op conducted business with its members pursuant to a crop contract. 294 The contract in form was a contract of purchase. It covered all of the crop or crops to be produced for designated years on specified land. "Terms and Conditions" 4, 5, and 6 were as follows:4. The Association shall pool the commodities of the Grower with commodities of like kind, grade and classification purchased by the Association under contracts similar to this, and the price to be paid to the Grower therefor shall be 1192 based on the average price per pound at which all commodities of like kind, grade and classification shall have been sold by the Association.5. The Association, if market and financial conditions in its judgment justify, may make advances on account of payment on the commodities purchased by it hereunder, the amount of such advances being based on market and financial conditions and the quality of the commodities.6. The Association agrees to sell said commodities in bulk in its natural state as delivered, or at its option, to can, preserve, manufacture, process and pack said commodities, or to procure the same to be done, and thereafter sell the same as rapidly as possible and pay the proceeds over to the Grower, named in this and similar contracts, 295 first deducting any advances made the Grower, and each Grower's pro rata share of the cost of receiving, handling, manufacturing, canning, storing, selling, advertising, and other expenses of the Association, and an Association charge, to and in such an amount as shall be determined by the Board of Directors of the Association. From this Association charge, organization and other general Association expenses shall be deducted, and with the balance a commercial reserve shall be created.Whenever any commercial reserve is no longer needed for Association purposes, the Association shall distribute it among the Growers in the proportions to which they are entitled, determined on the basis of the amount retained from each Grower to create such a reserve.By section 3 of article XII of Turlock's by-laws it was provided that a nonassignable Certificate of Membership should be issued to "each member" who has signed a marketing agreement in the required form. By section 5 it was provided that each member should have one vote. A membership fee of $ 10 was payable under section 8 and the fees so paid were to be retained as a membership fund in cash or in specified assets and by section 6 296 it was provided that the property rights and interest of the members in the membership fund so established should be equal, each member having "one unit of property right and interest." All other rights, interests and participations were to be according to the patronage or participation of the member in the crop marketing program.The association charge which under provision 6 of the crop contract was to be deducted by the Co-op when making payment to the member for his crop was covered by section 9 of article XII of the by-laws and reads as follows:From the Association charge provided for in the marketing agreement, organization and other general association expenses shall be deducted and commercial reserves created, and deductions made for the interest on or retirement of the advance fund in the discretion of the Association.During the taxable year and up to March 8, 1949, the provision of the by-laws covering the creation and maintenance of the commercial reserve also dealt with in provision 6 of the marketing contract was as follows:The association shall create and maintain a commercial reserve. This reserve shall be deducted from the Association charge and shall be used 297 to purchase necessary 1193 equipment and property, to provide working capital and for other uses of the Association, including the purchase of stock of any corporation organized for the purpose among other things of manufacturing or selling the products of this Association, and with whom this Association shall contract for the manufacturing of such products.Certificates shall be issued bearing interest at the rate of six per cent per annum for and on account of the respective interest herein of the members of the Association. If the members do not elect to continue co-operative marketing to the end of the period provided in the marketing agreement, the directors shall sell the assets of the Association, and after deducting and retaining the entire membership fund for distribution equal to memberships, shall distribute the proceeds proportionately to the owners of the certificates then unredeemed.During 1945, Turlock issued the partnership, Caswell Brothers, two certificates "for and on account of" its interest in the Commercial Reserve Fund. Certificate 1110 in the amount of $ 2,731.86 was issued February 1, 1945, and was for the 1943 crop. Certificate 1229 in the amount298 of $ 4,389.92 was for the 1944 crop. Up to the date of the trial herein neither certificate had been redeemed. The certificates bore interest at 6 per cent per annum and in form were as follows:Incorporated March 2, 1929TURLOCK CO-OPERATIVE GROWERSAn Incorporated Co-operative Association OrganizedUnder the Laws of the State of California.THIS CERTIFIES That is the owner of Dollars of the Commercial Reserve Fund of theTURLOCK CO-OPERATIVE GROWERSSaid Commercial Reserve Fund and the interest therein represented by thisCOMMERCIAL RESERVE FUND CERTIFICATEis subject to the provisions of the Articles of Incorporation and By-Laws of this Association and shall be distributed only in accordance with the provisions thereof.Interest at the rate of per annum shall be paid upon the face value represented by this certificate from date first issued, until called for redemption.This certificate is transferable upon the books of the Association by the owner or by duly authorized agent upon surrender of this certificate properly endorsed.Series Date first issued WITNESS the seal of the Association and the signatures of its duly authorized officers. 299 Dated Secretary-TreasurerPresident1194 Wallace Caswell, as an individual was also a member of Turlock, and during 1945 three certificates were issued to him reflecting his interest in the Commercial Reserve Fund. Certificate 1111 in the amount of $ 140.38 and Certificate 1112 in the amount of $ 789.72 were issued on February 1, 1945, and were for the 1943 crop. Certificate 1230 in the amount of $ 1,418.82 was issued on November 1, 1945, and was for the 1944 crop. Up to the date of the trial herein none of these certificates had been redeemed. These certificates bore 6 per cent interest per annum and were in the form set out above.The Co-op operates on the basis of a fiscal year ending January 31. Its balance sheet as of January 31, 1946, was as follows:ASSETSCURRENT ASSETS:Cash on Hand and in Bank$ 82,201.38Accounts Receivable -- General$ 316,364.26Accounts Receivable -- Growers9,819.33Subsidy Receivable10,469.67Total336,653.26Less: Reserve for Bad Debts16,828.08319,825.18Inventories:Canned Goods -- NetRealizable Value173,596.12 Materials and Supplies191,085.16364,681.28Total Current Assets$ 766,707.84PREPAID EXPENSES:Taxes and Insurance$ 16,576.39Plant Reconditioning48,617.30 Sundry Prepaid Expenses2,867.95 Total Prepaid Expenses68,061.6Reserve forNet BookFIXED ASSETS:CostDepreciationValueLand$ 9,500.00$ 9,500.00Buildings253,212.46$ 41,232.22211,980.24Machinery &Equipment324,023.89134,750.73189,273.16Autos and Trucks18,095.2013,843.564,251.64Furniture andFixtures5,633.514,023.071,610.44Lub Boxes and Crates61,852.4135,261.5526,590.86Field and OrchardEquipment5,524.552,544.712,979.84Total Fixed Assets677,842.02231,655.84446,186.18446,186.18OTHER ASSETS: Stock in Berkeley Bank for Cooperatives$ 12,100.00 Investment -- Central Cooperative, Inc750.95Trade Marks330.00 Investment -- Canners Service, Inc10,000.00 Advances to Fruit Machinery13,500.00Total Other Assets36,680.95Total Assets$ 1,317,636.61LIABILITIES AND MEMBERS' EQUITIESCURRENT LIABILITIES: Notes Payable -- Berkeley Bank forCooperatives$ 181,915.27 Current Installment -- Facility Loan15,000.00Contracts Payable5,738.00 Accounts Payable -- Trade66,011.33 Accounts Payable -- Brokers13,829.23 Amount due on Sales and Management Contract4,832.61 Called Certificates -- Not Paid980.78Sundry Accruals: Provision to Ship Goods Billed$ 28,269.37Payroll1,878.51Interest16,581.04Payroll Taxes1,980.85Sundry Accruals617.6549,327.42 Total Current Liabilities$ 337,634.64DUE GROWERS: Total Pool Proceeds -- Tentative --Exhibit "C"$ 769,191.79Less: Advances to January 31, 1946$ 417,869.89 Retains (Tentative) 10% ofProceeds76,919.18494,789.07 Balance due Growers$ 274,402.72 Facility Loan -- Berkeley Bank forCooperatives150,000.00 Less: Current Installment shown above15,000.00135,000.00MEMBERS' EQUITY ACCOUNTS:Membership Fees760.00 Retains -- 1944 and Prior Pools(Schedule "A-1")492,920.07 Retains -- 1945 Pools (10% of Net Proceeds -- Tentative)76,919.18 Total Members' Equity Accounts570,599.25 Total Liabilities and Members' Equities$ 1,317,636.61300 1195 Turlock renders a financial statement to each of its members at the end of each of its fiscal years but the statement given to members is not broken down into details to the extent shown above.During a crop year but before harvesting, the Co-op makes advances to its members. When the crop is harvested and delivered to it, the Co-op pays its members in cash as it in turn sells the crop or goods canned from the crop, after deducting for the advances made, less a percentage, usually at 10 per cent, which is withheld by the Co-op and which ultimately is represented by the issuance of certificates. Upon receipt by the Co-op, the crop produced by a member is mixed with similar crops produced by other members and becomes part of one of the pools for that year. As these pools are liquidated by the Co-op, the above-mentioned payments are made. After a pool is liquidated to the extent of 90 per cent or 95 per cent, the pool is closed and certificates are issued for the amounts withheld plus an estimated 10 per cent of the sales price on the remaining 5 per cent or 10 per cent of the pool unsold at the time of its closing. This unsold portion of the pool is carried over to following301 years and sold without burden of any further 1196 expense, the actual expenses of sale being carried entirely by the current year pools.At the conclusion of the distribution of each commodity pool, a statement is rendered to each of the growers showing the total amount received for the commodity marketed, less any charges that might have been made to him, also less the Reserve Fund Certificate which up to this time had been issued on the basis of 10 per cent of the net return of the commodity marketed.The Co-op, from time to time, purchases certain quantities of raw materials from non-members in order to complete pack orders with respect to certain commodities, but the quantities so purchased are small in comparison to the materials supplied by the grower members.If the financial condition of the Co-op is such that the board of directors concludes that a redemption can be made of outstanding certificates, a call is made for the oldest outstanding certificates. Prior to the amendment of article XIII of the association's by-laws in 1949, certificates were issued and redeemed on the basis of their individual dates of issuance; the amendment requires that they now be issued 302 and redeemed in yearly series. For all times material hereto the Co-op has paid those certificates which it redeemed on the basis of 100 cents on the dollar. In 1941 the Co-op redeemed the certificates which it issued in 1935 and 1936, and a portion of those issued in 1937. In 1943 it redeemed the remainder of the certificates issued in 1937 and also those issued in 1938 and a portion of those issued in 1939. In 1944 it redeemed the remainder of the certificates issued in 1939 and all of those issued in 1940. In 1945 no certificates were redeemed. In 1946 the Co-op redeemed the certificates issued during the first eight months of 1941. In 1947 it redeemed the remainder of the certificates issued in 1941 and all of those issued in 1942. In 1948 it redeemed certificates issued during the first five months of 1943. No certificates have been redeemed since 1948.According to the books of Turlock six transfers of certificates were made in 1944 and thirteen in 1945. The circumstances, reasons or considerations for these transfers are not shown of record and do not appear on the books of the Co-op.Interest rates on the certificates are now fixed by the board of directors of the303 Co-op. Certificates issued currently carry interest at 3 per cent, whereas earlier certificates, including those for the year 1945, carried an interest rate of 6 per cent.All of the assets of Wallace Caswell and Charles Henry Caswell were inherited by them from their father, prior to 1945, or were the proceeds of rents, profits or increments from such assets. Their interest in Caswell Brothers, a partnership, produced distributive income to each of them in 1945 in the amount of $ 14,870.79 which included 1197 their interest in the issuance of Turlock Growers Association Certificates in the amount of $ 7,121.78 during that year. Personal services were also rendered by them in the production of said income. Another asset, their interest in the partnership of W. & C. H. Caswell produced distributive income to each of them in 1945 in the amount of $ 1,091.57, and to the production of such income they contributed personal services. Wallace Caswell and Charles Henry Caswell were members of a partnership, Caswell Manufacturing Company of Cherokee, Iowa, to which they rendered no personal services, and in 1945 they each had distributive income in the amount of $ 10,000 from said304 partnership which was separate, as distinguished from community income. During the year 1945, Wallace Caswell also received as income, the amount of $ 7,598.17 from the operation of a farm to which he contributed personal services, and Charles Henry Caswell received income in the amount of $ 1,975.91 from the operation of a farm to which he contributed personal services. All of said personal services were in the conduct of farming operations.The fair market value of the certificates issued by Turlock in 1945 on its Commercial Reserve Fund to Wallace Caswell and to the partnership, Caswell Brothers, was equal to the face value of the respective certificates.In his determination of the deficiencies herein the respondent included in gross income the face amount of the certificates issued in the taxable year. In his notices of deficiency the amounts so included in gross income were shown as representing the fair market value of the said certificates.The argument of the petitioners is twofold, the first contention being that since they reported their income on the cash basis and since at no time during the taxable year did they actually receive or become unqualifiedly entitled to305 receive payment of the moneys in the commercial reserve covered by the certificates issued, they did not constructively, or otherwise, receive or realize income by reason of their receipt of the certificates. Their second contention is that in any event the certificates had no fair market value when issued and accordingly there was upon their receipt no realization of gain under section 111 (b) of the Internal Revenue Code1 as determined and claimed by the respondent.As to the argument on constructive receipt, it is to be noted that there are statements in some of the decided cases which may well be 1198 regarded as authority for the proposition that moneys carried to capital reserves by cooperative associations under comparable306 terms and conditions have already been constructively received by the members of the Co-op since it is said that such funds in reality belong to the members and not the Co-op. San Joaquin Valley Poultry Producers Association v. Commissioner, 136 F. 2d 382; Colony Farms Cooperative Dairy, Inc., 17 T. C. 688; George Bradshaw, 14 T.C. 162">14 T. C. 162; and Harbor Plywood Corporation, 14 T. C. 158. And, there might even be stronger reasons for applying such a rule in this case since for 1945, at least, Turlock was exempt from income tax under section 101 of the Internal Revenue Code, whereas some, if not all, of the co-ops involved in the cases cited were not exempt. In Dr. P. Phillips Cooperative, 1002">17 T. C. 1002, however, a cooperative which was subject to tax, we declined to extend the conduit theory to cover the moneys carried into a reserve where it was not shown that the certificates issued against the reserve were issued "pursuant to a pre-existing obligation or liability," and in George Bradshaw, supra,307 after acknowledging the conduit doctrine, we held that it was the issuance of the notes by the Co-op which fixed the rights of the patrons in the moneys covered thereby and not the closing by the Co-op of the transactions from which the moneys in question were derived.In the instant cases the respondent does not rely on the conduit theory nor on any other variation of the theory of constructive receipt but has determined and contends that the Caswells in payment for their peaches, and in addition to the cash distributed, received other property, namely, the certificates, and under section 111 (b)supra, received and realized income to the extent of the fair market value of the certificates at the time of issue, and further that the fair market value of the certificates was equal to face. It is thus apparent that no issue has been joined here involving any question of constructive receipt of the moneys in the commercial reserve.The decision, in our opinion, must be for the respondent. Whether the certificates received be likened to debentures or evidences of indebtedness or to shares of preferred stock or be said to evidence a more direct ownership of the designated amount 308 of the commercial reserve, they were none the less securities evidencing valuable rights or interest in the commercial reserve which belonged to the Caswells and which without restriction, other than that the transfers thereof be recorded on Turlock's books, could be sold, traded in or assigned and not only could such certificates be assigned and transferred but the record indicates that transfers thereof were usual and customary, six of such transfers having been recorded in 1944 and thirteen during 1945, the taxable year herein. And, while they had no specified due date or dates they bore interest at 6 per cent per annum on the face amount and there is no showing or claim that the interest was not 1199 regularly paid when due. Furthermore, the record also indicates a practice on the part of Turlock of retiring or redeeming outstanding certificates at face before too many years had elapsed. Presumably, subsequent additions to the commercial reserve from the proceeds of later crop pools would adequately provide for the capital needs of the association and thereby permit the prior certificates to be retired or redeemed. It is our opinion, and we conclude, that the certificates309 meet the requirements of section 111 (b), supra, and that they represented income to the petitioners at the time of issue to the extent of their fair market value.As to the fair market value the decision also must be for the respondent. The petitioners rest their claim of no fair market value on three things (1) that the certificates had no specified due date, (2) that although assignable, they were not negotiable instruments, and (3) that two local bankers, if called as witnesses, would have testified that from a banking standpoint the certificates were not classified as marketable, that their purchase would have been on a speculative basis and in instances where they were accepted as collateral for loans they were accepted as "additional collateral" only.To the contrary, Turlock's balance sheet gives every indication that the value back of the certificates covered them at face. The interest provided was at a very attractive rate. There was no indication that Turlock had ever defaulted on interest payments and it has an apparent record of redemption of such certificates without undue delay. Furthermore, in light of the transfers of certificates recorded on Turlock's books310 in 1944 and 1945, we think it reasonable to assume that the certificates were traded and exchanged even though the consideration or occasion for the transfers recorded is not shown. It is shown also that Turlock was known in the community as being in sound condition and well managed. In such circumstances we think it clear that the certificates from the date of their issuance not only had fair market value but the record gives no leeway for saying that such fair market value was less than face. See and compare George Bradshaw, supra, and P. Phillips, 1027">17 T. C. 1027.Decisions will be entered under Rule 50. Footnotes1. SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.* * * *(b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624321/	Samuel Mendelsohn v. Commissioner. Hannah Mendelsohn v. Commissioner.Mendelsohn v. CommissionerDocket Nos. 16177, 16178.United States Tax Court1950 Tax Ct. Memo LEXIS 262; 9 T.C.M. (CCH) 148; T.C.M. (RIA) 50057; February 28, 1950Murray M. Weinstein, Esq., Samuel J. Warms, Esq., and Edward Baumgarten, Esq., for the petitioners. John E. Mahoney, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: Petitioners assail respondent's determination of deficiencies in income tax for the years 1944 and 1945 in the respective amounts of $45,767.60 and $37,055.33 for Samuel Mendelsohn, and $45,789.85 and $37,134.44 for Hannah Mendelsohn. The proceedings were consolidated. Petitioners failed to offer proof or argument regarding one issue and it will be deemed abandoned. The only remaining issue is whether Ruth Paula Mendelsohn, petitioners' minor daughter, was a partner with them in the Mendelsohn Speedgun Company, or whether the business income credited to her is properly attributable to petitioners. Findings of Fact 263 Petitioners are residents of New Jersey and filed their returns with the collector for the fifth district of New Jersey. Petitioners are husband and wife. In 1938 they entered into partnership under the name of S. Mendelsohn for the manufacture and sale of photographic equipment, particularly a photographic speedgun or photoflash synchronizer invented by Samuel which synchronized the light of a photoflash bulb with the opening of a camera shutter. On June 3, 1941, petitioners executed a written partnership agreement forming Mendelsohn Speedgun Company. That agreement provided, among other matters, that the capital of the copartnership might be reduced at any time upon mutual consent of both partners; that the partners were to give all of their time, attention and skill to the business; that profits were to be shared and losses sustained equally by the partners., that either partner could sign checks; and that regular books of account were to be kept, and net profits or losses were to be determined at the end of each calendar year and to be credited or charged to the partners on the books. The partnership earned the following net profits between the respective years 1938 to 1942, 264 inclusive: $23,739.77, $7,044.40, $23,918.10, $17,410.83, $75,949.46. A substantial portion of the earnings for 1942 was derived from the salvage and sale of scrap materials in the factory which were exhausted in that year and could not serve as a source of income in later years. The manufacture of synchronizers decreased sharply during 1942. Business prospects were highly uncertain in January 1943, due to the shortage of critical materials and the difficulty of obtaining war orders which would give the business priority ratings for purchasing materials. Ruth Paula Mendelsohn, daughter of petitioners, was born on July 22, 1930, and was 12 1/2 years of age on January 4, 1943. On that date petitioners executed an assignment which stated that "in consideration of natural love and affection" for their daughter, each of them transferred to her a one-sixth interest in the business. On the same day petitioners and Ruth executed a purported copartnership agreement which stated that it incorporated the provisions of the agreement of June 3, 1941. Petitioners filed gift tax returns and Ruth filed donee's information returns. Each of those returns estimated the value of a one-sixth interest265 in the business to be $13,168.68. A certificate of partnership business name was filed with the Essex County Clerk, stating that petitioners and Ruth were partners in Mendelsohn Speedgun Company. Petitioners informed the Social Security Administration, the Unemployment Compensation Commission, their insurance companies and bank, that Ruth had become a partner. Petitioners sent no formal notification to the firms for whom they did subcontracting work, although Ruth's name subsequently appeared on legal papers. Firms dealing with the business were not informed of Ruth's age. During the year 1943, in accordance with petitioners' suggestion, Ruth withdrew from a savings bank account the sum of $3,000 which she had received as a gift from petitioners during the previous year. The money was placed in the business as a loan. No written evidence of the debt was ever made, and the money was never repaid. Subsequently, at an undisclosed date, it was agreed that the sum should remain in the business. During 1943 Ruth attended Montclair Junior High School. During 1944 and 1945 she was 14 and 15 years of age, and attended Montclair High School. She engaged in many school extra-curricular266 activities, serving as chairman of the Red Cross, a member of the Stamps and Bond Savings Committees, and chairman of the football program, which entailed soliciting advertisements and dealing with the printers. During these years Ruth often came to the place of business on afternoons, and occasionally she did some filing or typing. Frequently she listened to business discussions by petitioners and on one occasion she made a suggestion regarding advertising which was adopted. She never exercised any dominion or control over partnership affairs, funds or bank account; she could not sign checks; she did not participate in purchasing or selling, manufacturing, or hiring and discharging employees; she had no voice in management and took no part in the conduct of the business. Throughout the periods here involved petitioner Hannah had general supervision of the records and the office and managed routine business, while petitioner Samuel was in charge of technical development and operations and obtaining business. It was due solely to the knowledge and efforts of petitioner Samuel that the business was able to procure war contracts and convert successfully to the war work which was responsible267 for its financial prosperity in 1944 and 1945. The firm became devoted largely to the manufacture of electronic equipment as a subcontractor for other large companies. The business earned the following net income in the years 1943, 1944, and 1945, respectively: $131,225.82, $382,448.70, and $245,877.70. The partnership returns for those years reported that the income was shared equally between petitioners and Ruth. The tax return of each petitioner for each year here involved reported as taxable income one-third of the net profits of Mendelsohn Speedgun Company. The drawing account of Ruth on the books of the business shows withdrawals during these periods directed to the following purposes: TotalSavings BankYearWithdrawalsTaxesBondsAccountsPersonalRealtyCharity1943$35,517.86$31,000.00$ 931.25 $ 3,150.00$436.61194432,082.0716,842.443,712.45 10,700.00752.18$75.00194528,361.382,325.963,175.00 17,860.42$5,000.00The bonds purchased for Ruth in her name were kept in a safe in the office of the partnership. The combination of the safe was not known to Ruth and she would have been268 compelled to ask petitioners or their office bookkeeper in order to obtain physical possession of the bonds. Records purporting to contain contemporaneous entries regularly made by petitioner Hannah of all bond purchases for Ruth show purchase prices aggregating the following amounts in the specified years with the source of payment being gifts by petitioners or drawing from the business as indicated: With-Total Pur-YearGiftsdrawalschase Price1936$ 375.00$ 375.001937900.00900.001938900.00900.001939900.00900.001940900.00900.001941918.75918.7519427,390.007,390.0019431,237.50$ 900.00 2,137.5019445,343.753,562.50 8,906.251945243.757,987.50 8,231.25The savings bank accounts in which deposits were made were in Ruth's name and the bank books were in her possession. Withdrawals against Ruth's account in the business were usually deposited directly by petitioners in the savings accounts and petitioner Hannah guided and directed Ruth regarding withdrawals of funds from those accounts. Ruth had also a checking account269 which usually had a balance of approximately five hundred dollars during 1944 and 1945, and which she used for personal expenditures. During these years and until September 1947, when she entered Northwestern University, Ruth lived at home with petitioners. Some portion of her withdrawals from the business was used for her support. The following are the capital accounts of petitioners and Ruth shown on the books of the business at annual intervals: Total CapitalSamuelHannahRuthDec. 31, 1942$ 79,012.08$35,640.36$43,371.70Jan. 4, 194379,012.0822,471.6830,203.02$26,337.36Dec. 31, 194399,838.7928,389.4234,296.7237,152.65Dec. 31, 1944134,996.2236,490.7843,459.0954,746.35Dec. 31, 1945155,482.4745,397.1150,206.7959,878.57In 1946 the partnership was dissolved and two new corporations were formed to take over all of the assets of the business. Ruth received one-third of the stock in each of the two corporations. Petitioners did not actually intend, acting in good faith and with a business purpose, to join together with Ruth to carry on business in partnership. Opinion Petitioners' attempt to show that270 their true intention was to enter into a partnership with their twelve-year-old daughter must we think be viewed as unsucessful. All of the aspects emphasized in , and other authorities dealing with the subject, indicate the contrary, with one possible exception. The daughter admittedly rendered no services, had no voice in partnership affairs, and could not affect the control or disposition of the partnership income. While she may have been entitled to share in the profits, it is improbable in the extreme that she could have been held for any share in losses because of her minority throughout the period in controversy. Mechem, Elements of Partnership (1920), section 49. The partnership income was largely the product of the personal services of the two petitioners, particularly of the husband, although it is noteworthy that the respondent does not here contest the validity of the partnership as far as it affects the petitioner wife. There was no change in the operation of the business before and after the "partnership" agreement, and such business purpose as is advanced deals with a hopeful anticipation for future years, rather271 than the present. (Dec. 22, 1949). The fact that petitioners may have intended to assign to their daughter a portion of the capital of the business is not by itself sufficient. (Jan. 11, 1950). Yet that is the sole indication that a true partnership could have been contemplated. Even as to this, the function which the capital performed is questionable, and its necessity at the time of the assignment extremely doubtful in the light of petitioners' testimony. Such control as the daughter may have exercised, even over her distribution of profits, is qualified by the influence her mother understandably exerted over her conduct. See . And to some degree at least the daughter's distributions from the business were used to pay personal expenses for which petitioners were liable and would otherwise have had to pay. See . Whether a true business partnership could have existed under the circumstances we need not here decide, although a court in the state of petitioners' domicile has said: " * * It passes belief that272 a mother would enter into a partnership with her own children (the eldest of whom, a girl, was 16 years, and the youngest of whom was one month old), and would agree that each should have an equal share of the profits, while she, so far as they allege, was alone responsible for all the losses. "Furthermore, there was no possible consideration for such an agreement. The mother was entitled to the earnings of her children, during their minority. * * And if they worked for her under her direction and control, they but did their duty to her, and there is therefore no possibility of importing any consideration into any such agreement as they allege was made." [.] However that may be, we think it clear that in the present case there was no actual intention on the part of petitioners to join together in a real business relationship with their minor daughter, and our finding to this effect disposes of the proceeding. , affirmed (C.C.A., 2nd Cir.), . Decision will be entered for the respondent. Footnotes*. The discrepancies in the figures are not explained.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624322/	SAMUEL LEROY BOSTIAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBostian v. CommissionerDocket No. 30759-88United States Tax CourtT.C. Memo 1991-589; 1991 Tax Ct. Memo LEXIS 639; 62 T.C.M. (CCH) 1337; T.C.M. (RIA) 91589; December 2, 1991, Filed 639 Samuel Leroy Bostian, pro se. James R. Rich, for the respondent. SWIFT, Judge. SWIFTMEMORANDUM OPINION This matter is before us on respondent's motion for summary judgment under Rule 121. 1Respondent determined deficiencies in and additions to tax with respect to petitioner's 1984, 1985, and 1986 Federal income tax as follows: Additions to Tax, Secs.YearDeficiency6651(a)(1)6653(a)(1)6653(a)(2)6653(a)(1)(A)1984$ 2,856$ 714$ 143640 $ -- 198530,0117,5031,501-- 198620,8115,203-- --1,041Additions to Tax, Secs.Year6653(a)(1)(B)6654(a)66611984--$ 180$ -- 1985--1,7207,5031986*1,0075,203In an amended answer, respondent increased the amount of the deficiency for 1984 to $ 14,680. Petitioner resided in Salisbury, North Carolina, at the time he filed his petition in this case. On April 15, 1987, petitioner filed a voluntary bankruptcy petition for the reorganization of his debts with the United States Bankruptcy Court for the Middle District of North Carolina (Bankruptcy Court). On August 6, 1987, respondent filed a proof of claim and on October 21, 1987, respondent filed an amended proof of claim in petitioner's bankruptcy proceeding on behalf of the United States reflecting respondent's determination of petitioner's Federal income tax liabilities for the years in issue and some of the additions to tax set forth above. On August 12, 1987, petitioner filed with the Bankruptcy Court an objection to respondent's proof of claim, and petitioner also filed a complaint with the Bankruptcy Court for an adversary hearing regarding respondent's proof of641 claim. On February 4, 1988, the Bankruptcy Court held an adversarial hearing on petitioner's objection to respondent's proof of claim. Testimony by respondent's witnesses was heard, and exhibits were admitted concerning petitioner's Federal income tax liabilities. Petitioner was present at the hearing, but petitioner was not represented by counsel, and petitioner did not question any witnesses. On March 1, 1988, based on the evidence submitted to the Bankruptcy Court at the February 4, 1988, hearing, the Bankruptcy Court entered an order overruling petitioner's objection to respondent's proof of claim and determining petitioner's Federal income tax liabilities for 1977 through 1986. In its order, the Bankruptcy Court concluded with respect to the years in issue herein, as follows: The claim of the United States for income taxes, penalties and interest for the years 1984 through 1986 is allowed in the amounts which were proven during the hearing held before the Court on February 4, 1988. The Court hereby finds that the United States, Internal Revenue Service has proven at the hearing held on February 4, 1988 and accordingly it is found that the income tax liabilities of642 the debtor, Samuel Leroy Bostian, are as follows, plus interest and other additions thereto according to law:YearIncome Tax * 1984$ 14,6801985$ 30,0111986$ 20,811The March 1, 1988, order of the Bankruptcy Court did not make any other specific findings regarding the additions to tax. On March 3, 1988, the Bankruptcy Court held a hearing on another motion filed by petitioner for entry of a default judgment against the United States. At the conclusion of this hearing, the Bankruptcy Court judge made certain general comments to the effect that he did not believe that petitioner's bankruptcy proceeding was a reorganization case and that the proceeding should be before the Tax Court. By order dated March 16, 1988, however, the Bankruptcy Court simply denied petitioner's motion for default against the United States. On March 14, 1988, petitioner filed with the United States District Court for the Middle District of North Carolina (the District Court) an appeal of the Bankruptcy Court's March 1, 1988, order sustaining respondent's determination of petitioner's Federal income tax liabilities. On June 13, 1988, petitioner filed a motion for voluntary643 dismissal of this appeal, and on June 21, 1988, petitioner's motion to dismiss was granted. On July 22, 1988, the Bankruptcy Court ordered petitioner to file a plan of reorganization on or before September 12, 1988. Petitioner did not comply with the Bankruptcy Court's July 22, 1988, order, and by order dated September 13, 1988, the Bankruptcy Court dismissed petitioner's bankruptcy proceeding. Summary judgment is proper when the record shows "that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b). On the record before us, there appears to be no genuine issue as to any material fact, and respondent argues that summary judgment should be granted on the grounds of res judicata. 2The Supreme Court in Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 597, 92 L. Ed. 898">92 L. Ed. 898, 68 S. Ct. 715">68 S. Ct. 715 (1948), explained the doctrine of res judicata as one of judicial economy644 that, in general, prevents parties involved in prior litigation from relitigating a cause of action once a final judgment on the merits of the cause of action is rendered by a court of competent jurisdiction. See also Florida Peach Corp. v. Commissioner, 90 T.C. 678">90 T.C. 678, 681-682 (1988). Petitioner and respondent both were parties in the litigation before the Bankruptcy Court. The Bankruptcy Court had jurisdiction to determine petitioner's Federal income tax liabilities for the years in issue under section 505(a)(1) of the Bankruptcy Code, 11 U.S.C. (1982), and it did so. The Bankruptcy Court order, dated March 1, 1988, allowing respondent's claims and setting out the specific amounts of Federal income taxes owed by petitioner for each year in issue, constituted a final and appealable judgment. In re Saco Local Development Corp., 711 F.2d 441 (1st Cir. 1983); Florida Peach Corp. v. Commissioner, supra at 682-683. Petitioner's appeal to the District Court and the dismissal of the appeal, rendered the decision of the Bankruptcy Court final for essentially all purposes. McQuade v. Commissioner, 84 T.C. 137">84 T.C. 137, 140 (1985).645 Once the order of the Bankruptcy Court became final with respect to respondent's tax claims, generally neither the amount, nor the validity of the Bankruptcy Court's order is subject to review or reconsideration by this Court, McQuade v. Commissioner, supra at 145; Comas, Inc. v. Commissioner, 23 T.C. 8">23 T.C. 8, 12 (1954). As stated, upon dismissal of petitioner's appeal, the Bankruptcy Court's March 1, 1988, order became a final judgment rendered by a court of competent jurisdiction, and petitioner and respondent are the same parties that were involved in the bankruptcy proceedings. The doctrine of res judicata is controlling, and respondent's motion for summary judgment will be granted. Petitioner makes very general allegations that fraud and perjury were committed by witnesses who testified at the February 4, 1988, hearing in the Bankruptcy Court, and that such allegations of fraud raise material allegations of fact that require a denial of respondent's motion for summary judgment and that, if established, would nullify the finality otherwise given to the March 1, 1988, order of the Bankruptcy Court. Petitioner raises only very general conclusory646 allegations of fraud and perjury in connection with the bankruptcy proceeding. Such conclusory allegations, without any corroborating evidence of fraud, perjury, or other wrongdoing, do not raise a legitimate question of fact concerning the validity or res judicata effect of the bankruptcy order. Rule 121(d); First Nat. Bank v. Cities Service, 391 U.S. 253">391 U.S. 253, 288-290, 20 L. Ed. 2d 569">20 L. Ed. 2d 569, 88 S. Ct. 1575">88 S. Ct. 1575 (1968). Petitioner also argues that the general comments made by the Bankruptcy Court judge at the March 3, 1988, hearing (concerning the nature of the case and the propriety of the case pending before the Bankruptcy Court as distinguished from the Tax Court) indicate that the Bankruptcy Court judge had no intention of rendering a final order as to petitioner's Federal income tax liabilities. We disagree. The Bankruptcy Court clearly had jurisdiction over petitioner's bankruptcy petition, and the Bankruptcy Court continued to issue orders in the case after the March 3, 1988, hearing. Petitioner's bankruptcy case was not dismissed until September 13, 1988, after petitioner failed to comply with the Bankruptcy Court's order of July 22, 1988. Significantly, the Bankruptcy Court did not take any action647 to vacate its March 1, 1988, order determining petitioner's Federal income tax liabilities for the years in issue. For the reasons stated, 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 payable under section 6601 with respect to the portion of the underpayment attributable to negligence or intentional disregard of the rules or regulations.↩*. 50 percent of the interest payable under section 6601 with respect to the portion of the underpayment attributable to negligence. ↩2. Respondent concedes all additions to tax if we find that res judicata applies to the Bankruptcy Court judgment.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624323/	EVELYN H. DAVIDSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Davidson v. CommissionerDocket No. 7096-74United States Tax CourtT.C. Memo 1977-232; 1977 Tax Ct. Memo LEXIS 208; 36 T.C.M. (CCH) 962; T.C.M. (RIA) 770232; July 25, 1977, Filed Evelyn H. Davidson, pro se. Peter Matwiczyk, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1972 in the amount of $81. The two issues presented for our determination are: (1) Whether petitioner is entitled to compute her 1972 Federal income tax using the head of the household rates, and (2) whether the dual rate structure for married and unmarried taxpayers is constitutional. All of the facts have been stipulated and are found accordingly. Petitioner, 209 Evelyn H. Davidson, resided in Bayside, New York, at the time the petition was filed in this case. Petitioner filed her 1972 Federal income tax return with the Internal Revenue Service Center in Andover, Massachusetts. During 1972, petitioner lived alone with at least 15 dogs and cats. She computed her Federal income tax for that year using the head of household rates. Respondent determined that petitioner was not entitled to use the head of household rates but was required to use the rates for unmarried individuals, and issued a deficiency notice based upon that conclusion. In order to qualify for the use of the head of household rates, section 2(b) 1 requires, inter alia, that the individual maintain a household which qualifies as the principal abode for the taxable year of someone who either falls within a designated class of relatives or who is a dependent for whom the taxpayer is entitled to a deduction under section 152. Petitioner was not entitled to use the head of household rates for 1972 since she lived alone, and neither her dogs nor her cats can qualify as "dependents" under section 152. Schoen v. Commissioner,T.C. Memo. 1975-167. 210 Petitioner contends that the dual rate structure for married and unmarried taxpayers constitutes a penalty imposed upon her for not marrying in violation of her rights under the Fifth, Ninth, Fourteenth and Sixteenth Amendments and Article One of the Constitution. She cites in support of her argument statements made by several wellknown individuals criticizing the present rate structure. However, every court which has been confronted with this issue has found the rate structure constitutional. Shinder v. Commissioner,395 F. 2d 222 (9th Cir. 1968), affg. a Memorandum Opinion of this Court; Faraco v. Commissioner,261 F. 2d 387 (4th Cir. 1958), affg. 29 T.C. 674">29 T.C. 674 (1958), cert. denied 359 U.S. 925">359 U.S. 925 (1959); Kellems v. Commissioner,58 T.C. 556">58 T.C. 556 (1972), affd. per curiam 474 F. 2d 1399 (2d Cir. 1973), cert. denied 414 U.S. 831">414 U.S. 831 (1973); Jansen v. United States, F. Supp. (D. Minn. 1977); Johnson v. United States,422 F. Supp. 958">422 F. Supp. 958 (N.D. Ind. 1976). As some of petitioner's authorities imply, the "dual rate" structure may have been born in confusion, reared211 in error, and multiplied in inequity (the "dual" structure is now a quadruple structure), but the Courts have uniformly held the system has a sufficiently rational basis to survive constitutional challenge. 2212 Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the period in issue, unless otherwise stated.↩2. "Until 1948 there was a marked discrimination within the upper brackets. Married couples in the community property states paid substantially less than those in the common law states. In 1947 the Special Study Tax Committee described the distinction as 'perhaps the most important inequity now in need of correction.' A year later this vexing problem was happily resolved. Those who were aggrieved became entitled to pay equally less." Eisenstein, The Ideologies of Taxation, 161-62 (Ronald Press 1961). Subsequent history is a classic example of Eisenstein's later comment that "Since equity is the fair distribution of dispensations," Congress sometimes resolves the differences between contending groups by dispassionately declaring "Everybody has won and all must have prizes." Id. at 177. Subsequent distributions have resulted in four rate structures, leaving both married and unmarried unhappy, encouraging sham divorces, and enticing individuals with approximately the same income to live in sin. Changes based on the present assumptions involve something of a zero sum game, since the circumstances of the principal contending forces cannot be improved without disturbing the existing balance of benefits. For an excellent statement revealing the complexity of the problems see remarks of Hon. Edwin S. Cohen, Hearings on the Tax Treatment of Single Persons and Married Persons before the Comm. on Ways and Means, H.R. 92nd Cong., 2d Sess. 73, 78 (1972). See also Bittker, Federal Income Taxation and the Family, 27 Stan. L. Rev. 1389">27 Stan. L. Rev. 1389, 1416-1443↩ (1974). But if we are to adopt a different set of assumptions by returning to step one, the step will have to be taken by Congress. Petitioner must address her arguments to that forum.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624324/	WILLIAM T. and JANET D. BRODHEAD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrodhead v. CommissionerDocket No. 5934-77.United States Tax CourtT.C. Memo 1979-113; 1979 Tax Ct. Memo LEXIS 416; 38 T.C.M. (CCH) 519; T.C.M. (RIA) 79113; March 27, 1979, Filed Frank A. Ross, Jr., for the petitioners. Robert E. Dallman, for the respondent. SCOTT MEMORANDUM OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' income tax for the calendar year 1973 in the amount of $13,573.62. Some of the issues raised by the pleadings have been been disposed of by agreement of the parties, leaving for our decision the following: (1) Whether a second examination of petitioners' books was conducted by agents of the Internal Revenue Service within the meaning of section 7605(b), I.R.C. 1954, 1 and if so, whether for this reason the notice of deficiency is rendered invalid; and (2) whether petitioners realized taxable income upon the assumption of the liability of William T. Brodhead by a trust for petitioners' children to which Dr. Brodhead417 transferred certain automobiles which were the security for the liability assumed by the trust. The parties stipulated that the decision in the case of Teofilo and Frances Evangelista (Docket No. 3808-76), would be determinative of the second issue in this case. However, the parties were unable to agree on the computation and stipulated facts with respect to that issue with the request that these facts be found by the Court. All of the facts have been stipulated and are found accordingly. William T. and Janet D. Brodhead, husband and wife, who resided in Wisconsin at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1973 with the District Director of Internal Revenue, Milwaukee, Wisconsin. On April 30, 1975, an examination of petitioners' records was held by an office auditor of the Internal Revenue Service, Mr. Gary Schmuhl. Petitioners were represented at that conference by their attorney and their certified public accountant. These representatives418 of petitioners were prepared to produce information to substantiate the items reported on petitioners' tax return, but no issue was raised at the conference with respect to the depreciation deduction for vehicles in he amount of $34,489 claimed on petitioners' tax return. The appearance of petitioners' representatives at the conference was in accordance with a request by the District Director made under date of March 13, 1975, which request specifically required information to be furnished to support various items reported on petitioners' tax return and its schedules, one of the items listed as requiring substantiation being "Auto depreciation (73)." As a result of the office audit examination of petitioners' return, a 30-day letter was issued by the District Director to petitioners under date of May 5, 1975. This 30-day letter proposed the disallowance of certain partnership losses. The case was forwarded by Office Auditor Schmuhl to the Review Staff in the Office Audit Division of the Internal Revenue Service in Milwaukee, Wisconsin. In December of 1975, the file with respect to petitioners' calendar year 1973 was returned from the Review Staff to the auditor for minor report419 changes. In the early part of 1976, the file with respect to petitioners' 1973 calendar year was assigned to Internal Revenue Agent Joseph E. Frattinger, who was attached to the Madison, Wisconsin, office of the Internal Revenue Service. Based on his inspection of petitioner's 1973 income tax return and his experience with other returns filed by taxpayers in the Madison, Wisconsin, area, Revenue Agent Frattinger requested a transfer of petitioners' file for the year 1973 from the Milwaukee District Office to the Madison District Office for review to determine the tax effects of petitioner's investment in certain automobile leases. Shortly prior to February 6, 1976, Revenue Agent Frattinger contacted petitioners personally in respect to the production of their books and records for the year 1973. When such production was refused, Revenue Agent Frattinger issued a subpoena for production of these books and records under date of February 6, 1976. The issuance of this summons was done with the knowledge and approval of Revenue Agent Frattinger's Group Supervisor. Petitioners did not comply with this summons. Their attorney wrote a letter to a representative of the Internal Revenue420 Service explaining the reason for petitioners' refusal to comply with the summons. In this letter, the attorney stated, in part: It is our position that the attempt to summon the items listed in your summons is contrary to the provisions of Section 7605(b) of the Internal Revenue Code which provides for only one inspection of a taxpayer's books of account for each taxable year unless the taxpayer requests otherwise or unless the Secretary of the Treasury or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.The taxpayers' books of account were inspected for the year in question on May 5, 1975 by an agent of the Secretary of the Treasury. No steps were taken by any representatives of the Internal Revenue Service to enforce the summons issued and Revenue Agent Frattinger did not receive any documents from petitioners or their agents subsequent to the transfer of the file to the Madison, Wisconsin, office. Revenue Agent Frattinger, in his report, recommended disallowance in full of the depreciation deduction for vehicles taken by petitioners on their return for the calendar year 1973. This421 recommendation was made by Agent Frattinger based upon all documents in the file with respect to petitioners' 1973 return at the time the file was submitted to him and information and documents which had been obtained by him from the files of other taxpayers relating to trust agreements between those other taxpayers for the benefit of their children and upon contract purchase orders, leases and repurchase agreements of other taxpayers with GOMA Corporation of Madison, Wisconsin, and upon the loan records of the Park Bank, Madison, Wisconsin. Copies of these various documents were included by Agent Frattinger as a part of his report. As a result of recommendations of Revenue Agent Frattinger, a 90-day statutory notice of deficiency was mailed to petitioners under date of March 15, 1977. One of the adjustments in that notice of deficiency was a disallowance of all depreciation for vehicles claimed by petitioners for the calendar year 1973. The total amount of depreciation disallowed was $34,489. At no time did Revenue Agent Frattinger attempt to obtain written approval or oral approval from the District Director, Milwaukee, Wisconsin, for the conduct of a second examination422 by him of the 1973 tax return of petitioners. In June 1972, William T. Brodhead (petitioner) purchased certain vehicles at a cost of $102,983 from the GOMA Corporation, Madison, Wisconsin. These vehicles were subject to an existing lease with an agency of the United States Government. In June 1972, petitioner executed a promissory note payable to the Park Bank, Madison, Wisconsin, in the approximate amount of $102,983. Petitioner was personally liable to the Park Bank for the payment of this promissory note. As security for payment of the promissory note the Park Bank held a purchase money consensual security interest in the vehicles purchased by petitioner from the GOMA Corporation. Petitioners, on their 1972 and 1973 Federal income tax returns, claimed depreciation on the vehicles purchased from GOMA Corporation in the amounts of $40,049 and $34,489, respectively. The depreciation expense as claimed was computed under the double-declining balance method using a 3-year useful life for the vehicles. Petitioners' adjusted basis in the vehicles was $28,445 in June 1973. In June 1973 petitioner irrevocably transferred all his right, title and interest in the vehicles and423 related lease to a trust for the sole benefit of his children. Petitioner, Janet D. Brodhead, was the sole trustee of the trust at the time of the transfer. In June 1973, Janet D. Brodhead, as trustee for the trust, assumed primary liability for the payment of the balance of the note owed to Park Bank, Madison, Wisconsin, secured by the vehicles. In June 1973, the remaining balance of the original indebtedness to the Park Bank, Madison, Wisconsin, assumed by Janet D. Brodhead as trustee was in the amount of $62,603.16. Subsequently, the $62,603.16 was paid by the trustee for the trust. With the exception of the assumption of primary liability and subsequent payment of the $62,603.16 encumbrance on the vehicles transferred to the trust by the trustee, petitioner did not receive cash or any other property in exchange for the transfer of his right, title and interest in the vehicles and related lease to the trust in June 1973. In the notice of deficiency, respondent, as heretofore stated, disallowed the entire depreciation claimed by petitioner in 1973 with respect to the vehicles purchased by petitioner from GOMA Corporation. Pursuant to leave previously granted, respondent424 on March 9, 1978, filed an amendment to answer in which he alleged that petitioner realized a gain of $34,158.16 as a result of the assumption of his personal liability by the trust at the time of his transfer of the vehicles to the trust. The following is respondent's allegation with respect to the computation of petitioners' income from the assumption of the liability by the trust: Cost of Vehicles$102,983.00Depreciation per return74,538.00Adjusted Basis:$ 28,445.00Indebtedness Realized$ 62,603.16Adjusted Basis28,445.00Gain:$ 34,158.16The said $34,158.16 gain is ordinary income as the result of the depreciation recapture pursuant to I.R.C. § 1245. In this amendment to answer, respondent alleged that the correct deficiency in income tax due from petitioners for the year 1973 was in the amount of $13,409.33 rather than $13,573.62, as determined in the notice of deficiency. Section 7605(b)2 provides that no taxpayer shall be subject to unnecessary examination or investigations, and that only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise425 or after investigation the taxpayer is notified in writing that an additional inspection is necessary. Petitioners, relying on Reineman v. United States, 301 F.2d 267 (7th Cir. 1962), argue that the deficiency notice issued by respondent should be held to be invalid since it was based on a second inspection of their books. Petitioners further argue that respondent violated section 7605(b) in that he subjected petitioners to unnecessary examination and investigations. In support of this argument, petitioners rely on a statement contained in the transmittal letter of the report of Revenue Agent Frattinger that because of petitioners' refusal to permit him to examine their records or to comply with the subpoena the entire426 claimed depreciatio6 expense had been disallowed since other than court proceedings to enforce the summons this "procedure is only a device to force taxpayers to produce records for examination." We do not agree with petitioners that this statement contained in the transmittal of Revenue Agent Frattinger's report taken in the context of the entire report shows harassment of petitioners or that petitioners were subjected to unnecessary examinations or investigation. This statement is one portion of an explanation of why disallowance in full of the claimed depreciation on the vehicles was recommended. The further explanation is that the agent had available information from audits of other taxpayers who had entered into substantially the same type of transaction with respect to the purchase of automobiles from GOMA Corporation which were under lease to the Government from which he had concluded that the useful life of the automobiles was not 3 years for the purpose of determining depreciation. The agent explained that on the basis of the information available from third party sources he had concluded that the salvage value of the vehicles at the end of their economic useful life to427 petitioner was sufficiently high to require a reduction in the amount of the depreciation claimed on the vehicles by petitioners based on a 3-year useful life and a double-declining balance method of computation and that development of "that issue would hopefully have produced substantially the same tax results." Revenue Agent Frattinger explained in this transmittal letter that a revenue agent's report prepared for another audit would be adaptable in determining depreciation allowable to petitioners on the vehicles if petitioners decided to furnish the necessary records for determining the useful life and proper salvage value of the vehicles. In our view, when read in context, the statement in the transmittal letter of the revenue agent's report totally fails to support petitioners' contention that they were subjected to harassment or unnecessary examinations or investigation within the meaning of section 7605(b). In view of the nature of the transaction which Revenue Agent Frattinger was considering and the action which had been taken in connection with depreciation deductions claimed by other taxpayers who had purchased vehicles from GOMA Corporation under agreements similar428 to the agreement petitioner had made with GOMA Corporation, the agent's only reasonable alternative to permitting petitioners a deduction which had been disallowed in part to other taxpayers was either to examine petitioners' records or to disallow the depreciation deduction claimed on the vehicles in full. Certainly Revenue Agent Frattinger's examination of petitioners' return, in light of information obtained from third parties, was not unreasonable under these circumstances. See United States v. Powell, 379 U.S. 48, 55 (1964). Petitioners' position is tantamount to challenging the Commissioner's authority to conduct proper investigations when information has come to his attention from sources other than a taxpayer's own records. See Collins v. Commissioner, 61 T.C. 693">61 T.C. 693, 699, 700 (1974). Certainly section 7605(b) was not intended to prohibit the Commissioner from using information in his possession from other sources to correct a taxpayer's reported income because of having previously examined that taxpayer's records. There is no indication from the action taken by Revenue Agent Frattinger of any form of harassment of petitioners.On the basis429 of this record, we conclude that no second examination was made of petitioners' books and records. When Revenue Agent Frattinger asked to make an examination of petitioners' records, petitioners refused to permit the examination and refused to produce their books and records when a summons for them was issued. It is stipulated by the parties that Revenue Agent Frattinger received no documents from petitioners or their agent. A second examination of a taxpayer's "books of account" means an examination of the taxpayer's books and records and not merely a reconsideration and redetermination of a taxpayer's tax liability from information already available to respondent. Hall v. Commissioner, 50 T.C. 186">50 T.C. 186, 201, 202 (1968), affd. 406 F.2d 706">406 F.2d 706 (5th Cir. 1969); United States Holding Co. v. Commissioner, 44 T.C. 323">44 T.C. 323, 327 (1965); Geurkink v. United States, 354 F.2d 629">354 F.2d 629 (7th Cir. 1965). In the Geurkink case, at 631, the Court pointed out that in Reineman v. United States, supra, a second inspection of the taxpayers' books of account for the year involved had been made without the giving of written notice430 and distinguished that case from the case there under consideration with the following statement: However, in the case at bar it has been stipulated that the action complained of did not result from any examination of plaintiffs' books and records and the district court found that it had not been asserted that there was more than one examination of the corporation's books. We reject the contention that an office audit of a taxpayer's return constitutes an examination of his books and records. Hence, plaintiffs have not demonstrated that a re-examination of their tax return in the possession of the Commissioner constituted a second inspection of "books of account" under § 7605(b). We emphasize that § 7605(b) relates to a second examination of books of account of a taxpayer and does not apply to an examination of books of account of a third person. That section has been so construed in DeMasters v. Arend, 9 Cir., 313 F.2d 79">313 F.2d 79, 86 (1963); Bouschor v. United States, 8 Cir., 316 F.2d 451">316 F.2d 451, 457 (1963); Application of Magnus, 196 F. Supp. 127">196 F.Supp. 127 (S.D.N.Y.) (1961), affirmed, 2 Cir., 299 F.2d 335">299 F.2d 335, 336 (1962), cert. denied, 370 U.S. 918">370 U.S. 918, 82 S. Ct. 1556">82 S.Ct. 1556, 8 L. Ed. 2d 499">8 L.Ed.2d 499.*431 There is no distinction in the action taken by Revenue Agent Frattinger in revising the adjustments to be made in petitioners' tax liability in this case and the action taken by the agent in the Geurkink case. We, therefore, conclude that respondent has not made an unnecessary examination or investigation of petitioners' tax liability for the year 1973 or more than one inspection of petitioners' books of account for that year. It follows that respondent has in no way acted contrary to the provisions of section 7605(b) with respect to petitioners' tax liability for 1973. Our decision in Evangelista v. Commissioner, 71 T.C. (1979), has been filed this date. On the basis of our holding in the Evangelista case, we sustain respondent's determination of deficiency in this case as set forth in his amendment to answer filed March 9, 1978. Since certain issues raised by the pleadings were settled by agreement of the parties, 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 here involved, unless otherwise indicated.↩2. SEC. 7605. TIME AND PLACE OF EXAMINATION. (b) Restrictions on Examination of Taxpayer.--No taxpayer shall be subjected to unnecessary examination or investigations, and 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.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624325/	REDLANDS SECURITY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Redlands Sec. Co. v. CommissionerDocket No. 5703.United States Board of Tax Appeals5 B.T.A. 956; 1926 BTA LEXIS 2723; December 30, 1926, Promulgated 2723 Rates of depreciation to be used or to be considered in determining gain resulting from sale of orange orchards determined. Halsey W. Allen, Esq., for the petitioner. D. D. Shepard, Esq., for the respondent. LANSDON 956 The Commissioner has found a deficiency in income and profits tax for the year 1920 in the amount of $308.57. The controversy arises from the Commissioner's computation of profits realized by the petitioner in the sale of certain lands with orange groves thereon. The questions at issue are (1) the correct method of computing gain or loss on the sale of depreciable property acquired before March 1, 1913, and sold subsequently thereto, and (2) the reasonableness 957 of the rate of annual depreciation on orange groves used by the Commissioner in computing the petitioner's tax liability. FINDINGS OF FACT. The petitioner is a California corporation, with its principal office at Redlands. In 1910, at a cost of $75,000, it acquired an orange grove, consisting of 60 acres fully planted with trees, which at that time were three years old. The maturity of these trees was retarded two years by a freeze that occurred2724 in January, 1913. The parties agree that the value of such orange grove at March 1, 1913, was $48,000, which the Board finds was its value at January 1, 1914. In the year 1915 the petitioner acquired 400 acres of land at a cost of $70,000. Included in this land was an orange grove of 10 acres, which was three years old at that date. The grove had a value at date of acquisition of $800 per acre. In the year 1920 the petitioner sold both tracts, the first for $72,000, and the second for $70,000. In its income and profits-tax return for 1920 the petitioner reported no gain from these transactions. Upon the audit of such return, the Commissioner computed accrued depreciation on the 60-acre grove from March 1, 1913, to the date of sale in the amount of $9,840, which he added to the sale price for the purpose of computing the gain on the transaction, and thereby determined a profit from the sale of such grove in the amount of $6,840. In the same audit he determined that the value of the 10-acre grove was $8,000 at the date of its acquisition in 1915, and computed accrued depreciation thereon to the date of sale in the amount of $1,080, which he added to the sale price of the2725 entire tract of 400 acres, and thereby determined a profit from the second transaction in the amount of $1,080. The parties agree that the average producing life of this orange grove is 30 years. The average time between planting and production is 6 years. OPINION. LANSDON: The parties agree that this orange grove is a depreciable asset. It follows, therefore, that the owner of such a grove is entitled to deduct annually from gross income a reasonable allowance on account of depreciation, which must also be included as a factor in computing the gain or loss resulting from the sale of such property. The Commissioner properly considered accrued depreciation of the petitioner's orange groves at the date of sale as an element in computing gain or loss resulting from such sale. ; ; . 958 In the instant proceeding the Commissioner holds that the useful life of an orange grove is 30 years, and computes depreciation on the grove of 60 acres acquired by the petitioner in 1910 and sold in 1920 by applying an annual depreciation2726 rate of 3 1/3 per cent to the value of such property at March 1, 1913, which was $48,000, and, in the same manner, determines accrued depreciation at date of sale of the 10-acre grove acquired in 1915 and sold in 1920. Obviously, these computations are based on the theory that each of the groves had reached the point where it was producing income at the basic dates. The petitioner agrees that the useful life of an orange grove is 30 years, but contends that such useful life begins at the date when the grove becomes an income-producing property. The parties appear to agree that after planting there is a period of some years during which there is no depreciation. The Commissioner contends that this period is not more than 3 or 4 years from the date of planting the trees in the grove. The petitioner introduced evidence that convinces us that this development period is not less than 6 years. The grove of 60 acres acquired in 1910 was seven years old at March 1, 1913, but the evidence discloses that its maturity had been delayed for at least two years by a heavy frost or freeze that occurred in January of 1913. We are of the opinion that this grove was not a depreciable asset prior2727 to the crop year of 1915, and that computation of gain or loss resulting from the sale thereof at February 1, 1920, should include depreciation from that year. The grove of three-year old trees acquired in 1915, which, we have found, had a value at that date of $8,000, could not have become a depreciable asset prior to 1918. The rate of exhaustion on both orchards was 3 1/3 per cent per annum. Judgment will be entered on 20 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624326/	J. CLARK AKERS, III and ELEANOR M. AKERS, ET AL., 1 petitioners, v. COMMISSIONER OF INTERNAL REVENUE, respondent AkersDocket Nos. 6717-77, 6729-77, 6734-78, 6759-78, 5874-80, 5875-80, 5876-80United States Tax CourtT.C. Memo 1992-476; 1992 Tax Ct. Memo LEXIS 498; 64 T.C.M. (CCH) 546; August 20, 1992, Filed 498 Decisions will be entered under Rule 155. For Petitioners: Mark H. Westlake. For Respondent: Vallie C. Brooks and Robert B. Nadler. DAWSONDAWSONSUPPLEMENTAL MEMORANDUM OPINION DAWSON, Judge: After remand by the United States Court of Appeals for the Sixth Circuit, these cases were reassigned to Special Trial Judge Lee M. Galloway pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 2 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE GALLOWAY, Special Trial Judge: These cases are before us on remand from the United States Court of Appeals for the Sixth Circuit. Akers v. Commissioner, 798 F.2d 894">798 F.2d 894 (6th Cir. 1986), reversing and remanding T.C. Memo. 1984-208. 3499 The Court of Appeals has directed us to (1) revalue a charitable donation of equipment and spare parts to Vanderbilt University claimed by J. Clark Akers, III and William B. Akers (hereinafter referred to as petitioners) on their Federal income tax returns for 1975 and 1976; and (2) reconsider the tax consequences pertaining to a bargain rental by James and Estelle Akers of a house owned by a corporation controlled and operated by their sons, Clark and William, and the subsequent purchase of the house by Estelle Akers, pursuant to an option granted in 1959 and exercised in 1976. In this Court's opinion, T.C. Memo. 1984-208, it was held that, as of December 31, 1975, the fair market value of certain equipment and spare parts donated by petitioners to Vanderbilt University, an eligible charitable donee under section 170(c)(2), was $ 75,000, rather than $ 201,000, as claimed by petitioners on their 1975 Federal income tax returns. The donated equipment consisted of two "pilot" wastewater treatment plants mounted on conventional flatbed trailers and accompanied by two crates (weighing 9,000 pounds) of spare pumps, pipes, and laboratory equipment. In so holding, we 500 valued the property using a cost approach and accounting for depreciation or wear and tear. On appeal, the Sixth Circuit reversed our valuation as being unsupported and unexplained. Consequently, our decision was "remanded for revaluation of the donated equipment". The issue involving the bargain rental and purchase of the house, which is explained in the first footnote in the Sixth Circuit's Opinion, 798 F.2d at 894-895, was addressed by the Court of Appeals in an unpublished opinion. Estate of Akers v. Commissioner, 798 F.2d 469">798 F.2d 469 (6th Cir. 1986). 4 Our decision was reversed and remanded with respect to its treatment of the Akers family corporation's bargain rental and sale of the house as additional compensation to James C. Akers, petitioners' father. The Sixth Circuit directed us to reconsider, under a controlling regulation, whether the value of the bargain rental and purchase by Estelle Akers should be treated as additional compensation to petitioner-estate in 1976, and, if we decide that it is not, whether it should be treated as constructive dividends to petitioners 5 in that year. 501 The findings of fact set out in our prior opinion are incorporated herein by this reference, as hereinafter modified and augmented. The stipulations and exhibits are also incorporated herein by this reference. Respondent determined deficiencies in petitioners' Federal income taxes as follows: DocketPetitionersNos. YearDeficiencyJ. Clark Akers, III6734-781974$ 15,704.93and Eleanor M. Akers197547,603.88 William B. Akers and6759-781974$ 14,927.70Jo Ann Akers197553,713.62 Estate of James C.5874-80197612,929.62 Akers, Estelle L. AkersExecutrix, and EstelleL. AkersJ. Clark Akers, III and1 5875-80 197656,089.00 Eleanor M. AkersWilliam B. Akers and Jo1 5876-80 197656,186.00 Ann Akers1. Valuation of Donated Equipment and Spare PartsDetailed findings of fact are contained in our prior opinion, T.C. Memo. 1984-208, and in the Court of Appeals' decision, 798 F.2d 894">798 F.2d 894. But, as background, we will briefly summarize certain pertinent facts. In the early 1970s, two portable502 "pilot" wastewater treatment plants (herein referred to as the plants or equipment) were built for use in experimenting with different types of biological and chemical wastewater treatment processes. The plants were mounted on conventional flatbed trailers and accompanied by two crates of spare pumps, pipes, and laboratory equipment (herein referred to as spare parts). Between October 1972, and August 1973, the original owner of the plants paid third-party materialmen and fabricators approximately $ 165,000 for building and furnishing the two plants. This amount did not include the cost of the trailers or the owner's engineering, design and overhead costs. Of the $ 165,000 paid, approximately $ 54,000 was for refurbishing the equipment in July and August of 1973. When the original owner experienced financial difficulties, a secured creditor offered the two plants for sale in a form letter distributed mainly to equipment manufacturers. The bid solicitation letter contained a representation that over $ 300,000 was spent to equip the trailers. Of the two bids that were submitted, petitioners' $ 17,500 bid was accepted in early 1974. An inventory of the equipment, which was located503 at Albany, California, near San Francisco, was made on April 9, 1974, in conjunction with the sale. The inventory stated, in pertinent part, that although "the general overall condition of the equipment was * * * good * * * since the equipment is stored out of doors, fairly near the bay, it * * * will need maintenance in the not too distant future if it is to retain its value". Petitioners took title to the equipment on July 17, 1974, and had the two plants and spare parts transported to Tennessee. The plants were inspected by Professor Jack Roth, a chemical and environmental engineer at Vanderbilt University, upon their arrival in Nashville. Professor Roth determined that the plants were not in operating condition at that time. After discussions with both Vanderbilt University and the Nashville Metropolitan Government (Metro), petitioners allowed Metro to use the equipment for design studies on a major expansion of its own wastewater treatment facilities during the fall of 1974 and winter of 1975. Metro made the plants operational at a cost of approximately $ 14,000. Vanderbilt University also conducted experiments using one of the plants during 1975 and 1976 as part of a 504 biological treatment study funded by the Environmental Protection Agency. On December 31, 1975, petitioners conveyed title to the plants and spare parts to Vanderbilt University as a charitable contribution to further the educational purpose of the Vanderbilt School of Engineering. Several months prior to the transfer date, Vanderbilt had the plants appraised by two well qualified professional engineers. The first appraiser, Gerry Shell, provided a cost estimate of the two plants based on his judgment of the present condition of the plants and their replacement cost as of October 16, 1975. Mr. Shell's estimated value of the equipment, not including the spare parts, was $ 184,861. The second appraisal, dated December 29, 1975, was provided by Col. William F. Brandes, Director of the Water Resource Center at the University of Tennessee, based on his inspection of the equipment some time in the fall of 1975. His appraisal estimated the value of the equipment and the spare parts, using the April 9, 1974, inventory direct costs as a starting point. Col. Brandes' method of appraisal involved a cost approach where the values of the equipment and the spare parts were estimated separately. 505 The equipment was valued at $ 164,510 and the two crates of spare parts (original cost $ 35,000) were valued at $ 46,000, for a total value of $ 210,510. 6 Col. Brandes also used a second method by which he estimated present worth based on a projected reasonable rental fee, including repair and maintenance. Five years later, in December 1980, petitioners asked Dr. John H. Koon, another well qualified civil and sanitary engineer, to appraise the plants. Dr. Koon had seen the equipment in use when visiting the American Enka Plant site at Enka, North Carolina, in July 1973. Although Dr. Koon did not appraise the equipment at that time, he learned that the equipment was in working order in July 1973, with no operational problems noted by the AmericanEnka environmental engineers. It was Dr. Koon's opinion that the equipment (exclusive of the spare parts) had been worth $ 130,290 on site in California in April 1974. 506 In arriving at that figure, Dr. Koon considered the unique value of the equipment as a research tool. Upon being informed that the date of appraisal of the equipment should have been December 1975 rather than April 1974, Dr. Koon increased his replacement cost appraisal to $ 243,155 by using the Engineering News Record Construction Cost Index. In January 1982, respondent had a staff engineer, Stephen A. Wilgus, who appraised the plants and estimated their worth in 1975. Mr. Wilgus, who had no experience with pilot wastewater treatment plants, made an on-site inspection of the two plants in January 1982. After considering the cost, market, and income approaches to valuation, Mr. Wilgus concluded that the fair market value of the two plants on December 31, 1975, was $ 20,500. He ignored the unique value of the plants as a research tool and did not include the spare parts in his valuation estimate. Mr. Wilgus also ignored the fact that Metro rehabilitated the plants prior to December 31, 1975. In its prior opinion this Court noted "various weaknesses" in Mr. Wilgus' method of valuation and rejected respondent's use of the "winning bid price" as the best indicator of the value507 of the equipment in this case. This Court has recognized that some Courts of Appeals, including the Sixth Circuit, prefer that, in valuing donated property, we "set forth the underpinnings for our ultimate determination so as to provide * * * a trail for the appellate court to follow". Estate of Gilford v. Commissioner, 88 T.C. 38">88 T.C. 38, 50 (1987); Symington v. Commissioner, 87 T.C. 892">87 T.C. 892, 904 (1986). Upon reconsideration of the record and the opinions of petitioners' expert witnesses, we have revalued the donated property as directed by the Court of Appeals. In our judgment the valuation report, testimony, methodology, and opinion of Col. Brandes correctly determined the reproduction cost new (RCN) of the equipment to be $ 164,000. He was the only expert witness who separately appraised the unused spare parts to be $ 46,000. For reasons to be discussed, we conclude that the donated equipment should be valued by using the reproduction cost new less depreciation (RCNLD) method. This method yields fair market value by first determining reproduction cost new (RCN) and then subtracting estimated depreciation therefrom. Reproduction cost new less508 depreciation (RCNLD) is an acceptable method of valuation under certain circumstances. In Estate of Palmer v. Commissioner, 839 F.2d 420">839 F.2d 420, 424 (8th Cir. 1988), revg. 86 T.C. 66">86 T.C. 66 (1986), the Court of Appeals for the Eighth Circuit stated: Reproduction cost is a relevant measure of fair market value when the property to be valued is unique, its market limited, and when there is no evidence of sales of comparable properties. [Citations omitted.] See also Waranch v. Commissioner, T.C. Memo. 1989-596, where we stated "that while reproduction cost may be in excess of fair market value, that is why depreciation is taken into account. The depreciation takes into consideration actual physical loss in value of the properties as well as any degree of technical obsolescence". The American Institute of Real Estate Appraisers 7 describes the circumstances where RCNLD may be a useful indicator of value as follows: The cost approach is also used to estimate the market value of * * special-purpose properties, and other properties that are not frequently exchanged in the market. Buyers of these properties often measure the price they509 will pay * * against the cost to build a replacement, minus accrued depreciation, * * . If comparable sales are not available, they cannot be analyzed to estimate the market value of such properties. Therefore, the currently accepted market indications of depreciated cost, * * are the best reflections of market thinking and, thus, of market value. * * * The cost approach is particularly important when a lack of market activity limits the use of the sales comparison approach and when the proprieties to be appraised * * * are not amenable to valuation by the income capitalization approach. * * * [American Institute of Real Estate Appraisers, Appraisal of Real Estate, 349-351 (9th ed. 1987)]. We agree with Col. Brandes that the reproduction cost new of the equipment was $ 164,000 on December 31, 1975, and the spare parts was $ 46,000, or a total value of $ 210,000510 before depreciation. We consider next the appropriate depreciation adjustments necessary to the total RCN valuation of the equipment and spare parts in order to arrive at RCNLD. In Waranch v. Commissioner, supra, it was stated that: We have held that the RCNLD method is important evidence of value and has therein important elements to prove either market value or actual value. However, we have recognized that depreciation is to be concretely determined by inspection and that factors such as actual use, condition, and age are all relevant in arriving at an appropriate rate of depreciation. Kinsman Transit Co. v. Commissioner, 1 B.T.A. 552">1 B.T.A. 552 (1925); Rockford Malleable Iron Works v. Commissioner, 2 B.T.A. 817">2 B.T.A. 817 (1925). * * Petitioners contend that the actual condition of the wastewater treatment plants at the time the equipment was donated to Vanderbilt University was reflected in the expert reports of Mr. Shell, Col. Brandes, and Dr. Koon. But we note that neither Mr. Shell's nor Col. Brandes' report contained sufficient detail to enable us to tell the extent to which they may have considered the amount of depreciation511 that should reduce their valuations. Although the reports of these appraisers included schedules valuing equipment items individually, or summarized by trailer, there is no indication that the valuations were arrived at by the RCNLD method. Mr. Shell's estimate of RCN was based on "my judgment of the present conditions (sic) of the equipment and replacement cost". Cf. Waranch v. Commissioner, supra.Col. Brandes' report comments only on the RCN value of the equipment he inspected at the Metro plant, using the April 9, 1974, inventory direct costs as a starting point in calculating his estimate of value. Dr. Koon's later report discusses only the equipment inspected in 1980, although he had seen the equipment in operation in Enka, North Carolina, in 1973. Accordingly, contrary to petitioners' contention, some adjustment must be made for depreciation of the equipment and spare parts, which apparently were placed in service by the original owner on or about October 1972. We agree with respondent that a determination of the fair market value of the donated property based on the RCNLD method requires us to estimate depreciation of the equipment accrued during512 its estimated useful life. We otherwise disagree with respondent. For the purpose of calculating the depreciation adjustment necessary to arrive at RCNLD, we think depreciation should be measured from the date the equipment first became available for service regardless of who owned it. See Consumers Power Co. v. Commissioner, 89 T.C. 710">89 T.C. 710, 724-726 (1987); Oglethorpe Power Corporation v. Commissioner, T.C. Memo 1990-505">T.C. Memo 1990-505. Based on this record, we conclude that construction of the equipment was completed and the equipment was placed in service in October 1972 -- the date the original owner of the equipment began payments for fabrication and furnishing of the plants. Accordingly, the equipment was subject to depreciation of approximately 3 years from October 1972, until October 1975, when Mr. Shell and Col. Brandes appraised the property. Dr. Koon estimated the useful life of the equipment to be "at least 12 years". He based his opinion on this observation of the operating condition of the equipment when in North Carolina in 1973 and upon his knowledge of and familiarity with similar equipment located at the University of California research513 station in Richmond, California. Dr. Koon constructed and worked on the University of California equipment, which had design and construction features similar to the plants in issue. The University of California equipment was used regularly and was basically in good working condition after 12 years. According to Dr. Koon, the plants in issue would have a shorter useful life if they were actively used. Here the plants in issue were used by the original owners on three occasions, twice in California, and once in North Carolina, a total of 8 months before the equipment was sold to petitioners. During the fall of 1974 and the winter of 1975, the plants were repaired, maintained, and used by Metro to study a proposed nitrification plan. The plants were also used by Vanderbilt University to conduct experiments in 1975 and 1976 in connection with Vanderbilt's extensive environmental engineering program and were valuable research tools to Vanderbilt, one of the leading universities in the industrial wastewater treatment field at the time of the donation. The fact that the equipment was of a specialized nature is not a factor limiting the useful life of the property. Dr. Koon testified514 that research activity in the wastewater treatment field was at its height in 1974 and 1975 because the Clean Water Act required municipalities and industries to have defined levels of wastewater treatment in place in 1977. Based on the actual use, condition, and maintenance of the equipment, we conclude that the useful life, for computing depreciation on the equipment from October 1972 to December 1975, was 12 years. Accordingly, the previously calculated RCN, totaling $ 210,000, is reduced by depreciation of 25 percent, totaling $ 52,500. The resulting RCNLD of the donated property is computed as follows: Reproduction Cost New$ 210,000Less Depreciation52,500TOTAL$ 157,500Therefore, we find as a fact and hold that the fair market value of the donated property on December 31, 1975, was $ 157,500. 2. Bargain Rental and Purchase of Housea. BackgroundJames C. Akers (also known as J. Clark Akers, Jr.) was the first Director and Engineer for the Davidson County, Tennessee, Highway Department, a position he held until his retirement in 1955. While there he pioneered the use of modern emulsified asphalt on highways in place of traditional hot asphalt. 515 Prior to his retirement, his sons, J. Clark Akers III and William formed Globe Company, Inc., (Globe) a company that manufactured emulsified asphalt. James Akers joined this company as an officer-employee on his retirement. On May 4, 1959, the company purchased a residence at 248 Harding Place, Nashville, Tennessee, for $ 21,500. On or about the same date, the company granted an option to James Akers and his wife, Estelle. By the terms of the option, James and Estelle Akers were permitted to rent the house for their joint lives at a cost of $ 100 per month plus maintenance expenses. Paragraph 2 of the option provided that: So long as said property is occupied by the said J. Clark Akers, Jr. and wife Estelle L. Akers, they or the survivor of them shall have the right and option to acquire said property for the cash purchase price of Twenty-One Thousand Five Hundred Dollars ($ 21,500.00) plus One Thousand Dollars ($ 1,000.00). The purchase price was $ 1,000 more than the company's initial cost, and the option further provided that James and Estelle Akers would be given credit for one-half of all rentals previously made. James Akers died in 1976. A qualified real estate516 appraiser for his estate found that the fair market value of the house on December 7, 1976, was $ 43,000. On December 31, 1976, Estelle Akers exercised the option to purchase the house from Asphalt Products Company, Inc., the successor corporation to Globe. The option price of $ 22,500 was reduced by a credit of $ 10,500, which represented one-half of the rental payments previously made by the Akers. The sum of $ 11,896 was paid in cash by Estelle Akers for the house. The Estate of James C. Akers and Estelle Akers reported no income from this transaction on their Federal income tax return for 1976. In the notice of deficiency sent to the Estate of James C. Akers and Estelle Akers, respondent determined that they received additional income of $ 3,300 in 1976 as a result of their rental of the house from Asphalt at less than fair market value of $ 375 per month, rather than the $ 100 per month they paid. Respondent also determined that they received additional income of $ 31,014 in 1976 as a result of the purchase of the house from Asphalt at less than fair market value. These two adjustments to income resulted in a deficiency of $ 12,929.62 for 1976. Taking a protective and517 alternative position, respondent determined that Clark and William Akers, the sons of James and Estelle Akers and controlling shareholders of Asphalt, received constructive dividends in 1976 as a result of the bargain rental and purchase of the house. Both parties agreed at the trial and in their briefs that the bargain rental and purchase of the house, if taxable at all, constituted additional compensation to James C. Akers for his services to Asphalt and its predecessor corporation, Globe. The Akers' primary argument, which we rejected, was that fair consideration was given in exchange for the option. The parties disagreed as to the year in which the bargain element of the option is taxable. James and Estelle Akers contended that the compensation was taxable in 1959 when the option was granted, and respondent contended that it was taxable in 1976 when the option was exercised. Initially, respondent's primary position was that Clark and William realized constructive dividends in 1974, 1975, and 1976 in the amount of the difference between the fair rental value and the amounts paid, and that they also received constructive dividends when the property was sold to Estelle for the518 difference between the fair market value of the residence and the amount paid. Alternatively, respondent asserted that the transactions resulted in additional compensation to James C. Akers under section 61. In T.C. Memo 1984-208">T.C. Memo 1984-208, we found as a fact, based on the record, that Clark and William "did not receive constructive dividends in the Harding Place residence transaction". We concluded that the economic benefit received by James and Estelle Akers from the bargain rental and purchase of the house was taxable as compensation under section 61. In its unpublished decision in Estate of Akers v. Commissioner, 798 F.2d 469">798 F.2d 469 (6th Cir. 1986), the Court of Appeals reversed and remanded this case with direction that we apply section 1.421-6, Income Tax Regs., "to determine the tax consequences of the option". In doing so, the Court of Appeals commented as follows: The tax court made none of the findings required under this regulation or the case law on which it is based because the court ruled that the option was unenforceable under Tennessee state law. The Commissioner now concedes that this ruling was in error but urges us to hold that Mrs. Akers519 has failed to meet her burden of proving the facts listed in the regulation as a matter of law. We decline to so hold on the basis of the record before us. It is important and more appropriate, we think, for the tax court to make these complex factual determinations in the first instance. We note, for example, that at oral argument, counsel for the government could not say with certainty that the option was or was not transferable by the Akers. This and other uncertainties should be considered first by the trial court. The fact that, inexplicably, neither party argued the applicability of section 1.421-6 until the question was raised by this court at oral argument also impels us to remand. Mrs. Akers argues that the regulation exceeds the reach of existing case law and the Secretary's authority. This issue should be considered first by the tax court as well. The Court of Appeals also commented in Akers v. Commissioner, 798 F.2d 894">798 F.2d 894, 895 n.1 (6th Cir. 1986), that "we asked the Tax Court to take another look at the compensation question, and it is therefore appropriate that we ask the Tax Court to take another look at the constructive dividend question 520 if it changes its mind on the compensation issue". (Emphasis added.) b. Compensation or Constructive DividendsWe have again considered the compensation issue, and, after a review of the record, we are persuaded that our prior conclusion is fully supported by the facts and the evidence. Consequently, we reiterate our holding that the economic benefit received by James and Estelle Akers from the rental and purchase of the house is taxable as compensation under section 61, and that Clark and William Akers did not receive constructive dividends in the transactions. See Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243 (1956); Commissioner v. Smith, 324 U.S. 177">324 U.S. 177, 181 (1945). The pertinent facts support this conclusion. James Akers was a valuable officer-employee, but not a shareholder, of Globe and later of Asphalt Products. Although he was a respected authority in the road paving and highway construction business, he received rather modest cash compensation from Globe and Asphalt Products for his consulting services. He was always treated as an employee by his sons. By providing him with a bargain rental for the Harding Place residence and 521 granting him and his wife an option to acquire it at bargain price if the property later increased in value, the corporations were simply providing James Akers a reasonable form of additional compensation to supplement the relatively small amounts paid to him as cash compensation for his valuable services. Thus the narrow issue remaining is whether the compensation resulting from the bargain rental and purchase of the house is taxable to James and Estelle Akers in 1976, when the option was exercised, or in 1959, when the option was granted. c. Existing Case Law and Validity of Section 1.421-6, Income Tax Regs. The Court of Appeals requested that we consider on remand petitioner-estate's argument that section 1.421-6, Income Tax Regs., exceeds the reach of existing case law and the Secretary's authority. Petitioner-estate argues that section 1.421-6, Income Tax Regs., is not a proper restatement of the law in Commissioner v. Smith, supra. It contends that the regulation demands conditions, i.e., free transferability, immediate exercisability and the absence of certain restrictions or conditions, which were not required in Smith, and that these conditions522 were "simply factors to be considered". To the contrary, respondent contends that section 1.421-6, Income Tax Regs., is no more stringent than the conditions laid down in Smith. It is argued that "such case specifically stated that the factors set forth in the regulations were to be considered in determining whether or not an option has a readily ascertainable value". We agree with respondent. Section 1.421-6, Income Tax Regs., attempts to codify Commissioner v. Smith, supra and Commissioner v. LoBue, supra. The opinions of the Supreme Court in Smith and LoBue make it clear that the option in this case should be taxed at the time it was exercised and not at the time it was granted. The option here was not traded on an established market. It was subject to the restriction that James and/or Estelle Akers occupy the property, which restriction had a significant effect on the value of the option. In Commissioner v. Smith, supra, an employer gave to its employee as compensation for his services an option to purchase shares of stock at a price not less than the then value of the stock. The option523 had no value at that time, and the compensation contemplated by the parties was the transfer to the employee of the shares of stock after their value had increased to more than the option price. In taxing the option on the date it was exercised, and not on the date it was granted, the Supreme Court stated, 324 U.S. at 181-182: When the option price is less than the market price of the property for the purchase of which the option is given, it may have present value and may be found to be itself compensation for services rendered. But it is plain that in the circumstances of the present case, the option when given did not operate to transfer any of the shares of stock from the employer to the employee * . And as the option was not found to have any market value when given, it could not itself operate to compensate respondent. It could do so only as it might be the means of securing the transfer of the shares of stock from the employer to the employee at a price less than the market value, or possibly, which we do not decide, as the option might be sold when that disparity in value existed. Hence the compensation for respondent's services, which the parties524 contemplated, plainly was not confined to the mere delivery to respondent of an option of no present value, but included the compensation obtainable by the exercise of the option given for that purpose. It of course does not follow that in other circumstances not here present the option itself, rather than the proceeds of its exercise, could not be found to be the only intended compensation. In LoBue v. Commissioner, supra, the Supreme Court found that untransferable stock options, which were contingent upon continued employment, should not be taxed until they were exercised. The Supreme Court stated, 351 U.S. at 249: It is of course possible for the recipient of a stock option to realize an immediate taxable gain. See Commissioner v. Smith, 324 U.S. 177">324 U.S. 177, 181-182. The option might have a readily ascertainable market value and the recipient might be free to sell his option. But this is not such a case. These three options were not transferable and LoBue's right to buy stock under them was contingent upon his remaining an employee * * * until they were exercised. * * * The test thus established by the Supreme Court is whether525 the option had a readily ascertainable market value on the date it was granted. See LeVant v. Commissioner, 45 T.C. 185">45 T.C. 185 (1965), revd. and remanded on another issue 376 F.2d 434">376 F.2d 434 (7th Cir. 1967); Wanvig v. United States, 295 F. Supp. 882 (E.D. Wis. 1969), affd. on other grounds 423 F.2d 769">423 F.2d 769 (7th Cir. 1970). If the option did not have a readily ascertainable market value on the date it was granted, then taxation takes place on the date the option was exercised. We reject petitioner-estate's contention that section 1.421-6, Income Tax Regs., is unauthorized and invalid. In Weigl v. Commissioner, 84 T.C. 1192 (1985), albeit in a different context, this Court upheld the validity of section 1.421-6, Income Tax Regs. We stated (84 T.C. at 1213-1214 and 1217): Treasury regulations are not to be rejected unless they are found to be unreasonable and plainly inconsistent with the statute, Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 501 (1948). Treasury regulations, "should not be overruled except for weighty reasons" ( Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 750 (1969);526 Edward L. Stephenson Trust v. Commissioner, 81 T.C. 283">81 T.C. 283, 287 (1983)); and "the choice among reasonable alternatives is for the Commissioner, not the Courts." National Muffler Dealers Association v. United States, 440 U.S. 472">440 U.S. 472, 488 (1979); Allen Oil Co. v. Commissioner, 614 F.2d 336">614 F.2d 336, 340 (2d Cir. 1980). A significant factor in considering the validity of Treasury regulations is the length of time the regulations have been outstanding. United States v. Correll, 389 U.S. 299">389 U.S. 299, 305-306 (1967); Commissioner v. Estate of Sternberger, 348 U.S. 187">348 U.S. 187, 190 (1955). An application of the above standards to section 1.61-15, and to section 1.421-6, Income Tax Regs., requires a decision upholding the validity of those regulations. * * * The application of the valuation rules of section 1.421-6, Income Tax Regs., in numerous additional court decisions further supports the validity of those valuation rules, as set forth in the regulation. See, for example, Shamburger v. Commissioner, 508 F.2d 883">508 F.2d 883 (8th Cir. 1975), affg. 61 T.C. 85">61 T.C. 85 (1973); Mitchell v. Commissioner, 590 F.2d 312 (9th Cir. 1979),527 affg. 65 T.C. 1099">65 T.C. 1099 (1976); Wanvig v. United States, 295 F. Supp. 882">295 F. Supp. 882 (E.D. Wis. 1969), affd. on other grounds 423 F.2d 769">423 F.2d 769 (7th Cir. 1970). d. Section 1.421-6, Income Tax Regs.Section 1.421-6, Income Tax Regs. (options to which section 421 does not apply), applies generally to employee options to purchase stock of the employer or other property that was granted between February 26, 1945, and July 1, 1969. The option in this case is governed by the regulation since: (1) It was issued on or after February 26, 1945, and before July 1, 1969; (2) the option to purchase "other property"of the employer was granted to James Akers, an officer-employee of the employer-company; and (3) neither of the exceptions to the applicability of section 1.421-6(a)(2), Income Tax Regs., is present herein. Under section 1.421-6, Income Tax Regs., if an option had a "readily ascertainable fair market value" when granted, any bargain realized on the exercise of the option is not taxable even if no taxable income was reported in the year the option was granted. Sec. 1.421-6(a)(3), Income Tax Regs. Conversely, if the option did not have a readily528 ascertainable fair market value when granted, the employee is taxed on the difference between fair market value of the property and the option price paid when the option is exercised. Sec. 1.421-6(d), Income Tax Regs. The regulation provides that the value of an option "is ordinarily not readily ascertainable unless the option is actively traded on an established market." Sec. 1.421-6(c)(2), Income Tax Regs.Since the option in question is not a stock option and is not traded on an established market, we must decide whether the fair market value of the option granted to James and Estelle Akers can be determined with "reasonable accuracy", using the test of section 1.421-6(c), Income Tax Regs. See Mitchell v. Commissioner, 65 T.C. 1099">65 T.C. 1099, 1111-1112 (1976), affd. 590 F.2d 312">590 F.2d 312 (9th Cir. 1979). Section 1.421-6(c)(3)(i), Income Tax Regs., provides: (3)(i) When an option is not actively traded on an established market, the fair market value of the option is not readily ascertainable unless the fair market value of the option can be measured with reasonable accuracy. For purposes of this section, if an option is not actively traded on an established529 market, the option does not have a readily ascertainable fair market value when granted unless the taxpayer can show that all of the following conditions exist: (a) The option is freely transferable by the optionee; (b) The option is exercisable immediately in full by the optionee; (c) The option or the property subject to the option is not subject to any restriction or condition (other than a lien or other condition to secure the payment of the purchase price) which has a significant effect upon the fair market value of the option or such property; and (d) The fair market value of the option privilege is readily ascertainable in accordance with subdivision (ii) of this subparagraph. Assuming arguendo that the first two conditions of the regulation are satisfied, we turn to the third condition -- restrictions or conditions bearing on the value of the option or the property subject thereto. The option agreement reveals the disqualifying condition. The right to exercise the option was limited in time to that period during which either James or Estelle Akers remained alive, and when one or both occupied the property. A prospective purchaser's rights would be subject530 to the actions of James or Estelle Akers because if either moved off the premises, a purchaser's rights would be valueless. We think this significant restriction contained in the option agreement has not been taken into consideration by petitioner-estate and does not support its claim that "the options (sic) granted to Mr. and Mrs. Akers had a readily ascertainable fair market value when issued." Other than its stated conclusion, petitioner-estate has failed to provide any evidence of the option's value when granted, including testimony, expert or lay, of the value amount petitioner-estate would assign to the option. Thus, the third condition of section 1.421-6(c)(3)(i), Income Tax Regs., is not satisfied. Respondent also argues that petitioner-estate has failed to establish that the fair market value of the option privilege is readily ascertainable. The "option privilege" in the case of an option to buy, as specified in subparagraph (d) above, is defined as the "opportunity to benefit * * * from any increase in the value of property" during the option period, "without risking any capital." Sec. 1.421-6(c)(3)(ii), Income Tax Regs. Three factors must be considered in determining531 whether the option privilege has a readily ascertainable fair market value: (a) Whether the value of the property subject to the option can be ascertained; (b) The probability of any ascertainable value of such property increasing or decreasing; and (c) The length of the period during which the option can be exercised. Sec. 1.421-6(c)(3)(ii), Income Tax Regs.Here petitioner-estate did not provide evidence in the form of expert testimony or otherwise to show that the option privilege had a readily ascertainable fair market value at the time it was granted. See Mitchell v. Commissioner, 65 T.C. at 1112-1113; Swenson v. Commissioner, T.C. Memo 1971-88">T.C. Memo. 1971-88. We therefore conclude that the fair market value of the option was not readily ascertainable under section 1.421-6(c)(3)(i), Income Tax Regs., when the option was granted, but only when it was exercised. e. ConclusionAccordingly, with respect to this issue, we hold that the bargain rental and purchase of the house constituted taxable compensation under section 61 to the Estate of James C. Akers and Estelle Akers in 1976 when the option was exercised. Specifically, they received532 $ 3,300 in additional income resulting from their rental of the house in that year for less than fair market value, and they received additional income of $ 31,014 in 1976 as a result of the purchase of the house by Estelle Akers from Asphalt Products for less than fair market value ($ 43,000 less $ 11,986 cash paid). To reflect our conclusions on the remanded issues, Decisions will be entered under Rule 155. Footnotes1. The following cases are consolidated herewith: William B. Akers and Jo Ann Akers, docket Nos. 6729-77, 6759-78, and 5876-80; J. Clark Akers, III and Eleanor M. Akers, docket Nos. 6734-78 and 5875-80; and Estate of James C. Akers, Estelle L. Akers, Executrix, and Estelle L. Akers, docket No. 5874-80.↩2. Unless otherwise indicated, 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.↩3. These cases have had a long and tortuous history. For several years counsel for the parties have attempted to settle the cases in order to implement the mandates issued by the Court of Appeals. To this end, after lengthy and extended negotiations, the parties finally agreed in a stipulation filed with this Court on January 31, 1992, that the decisions entered on September 27, 1984, in J. Clark Akers III and Eleanor M. Akers, docket No. 6717-77, and William B. Akers and Jo Ann Akers, docket No. 6729-77, are no longer contested by petitioners and "should be affirmed on remand". Also in the stipulation filed on January 31, 1992, the parties requested this Court to proceed to decide the two issues remanded to us by the Court of Appeals for reconsideration.↩4. The Estate of James C. Akers and Estelle L. Akers will sometimes be referred to as petitioner-estate. ↩5. We had held that petitioners Clark and William Akers did not receive constructive dividends as a result of the bargain rental and purchase transactions. See T.C. Memo. 1984-208↩.1. The deficiencies in docket Nos. 5875-80 and 5876-80 are due to disallowed carryover charitable contribution deductions.↩6. In the final sentence of his report, Col. Brandes rounded off his $ 210,510 appraisal to $ 210,000.↩7. RCNLD may be useful in appraising properties other than real estate. See, e.g., Cupler v. Commissioner, 64 T.C. 946">64 T.C. 946, 955↩ (1975).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624328/	Consolidated Goldacres Company, Petitioner, v. Commissioner of Internal Revenue, RespondentConsolidated Goldacres Co. v. CommissionerDocket No. 9248United States Tax Court8 T.C. 87; 1947 U.S. Tax Ct. LEXIS 313; January 21, 1947, Promulgated 313 Decision will be entered for the respondent. Petitioner, a Nevada corporation, entered into contracts for erection of mining machinery and plant. Title was retained by the seller until payment, in general dependent upon the amount of ore processed. Held, the contracts did not comprise a "note" or "mortgage" within the intendment of section 719 (a) (1), Internal Revenue Code, as to definition of borrowed invested capital. Frazer Arnold, Esq., for the petitioner.Felix Atwood, Esq., for the respondent. Disney, Judge. DISNEY87 This proceeding involves a deficiency in excess profits tax liability for the taxable year ended November 30, 1942, in the amount of $ 9,038.13.The issue presented is, whether an agreement between petitioner and Western-Knapp Engineering Co. of July 26, 1941, constitutes an outstanding indebtedness314 as is intended by section 719 (a) (1) of the Internal Revenue Code.Respondent concedes that if the agreement does come within the ambit of section 719 (a) (1), then the average balance due on the agreement for the year ended November 30, 1942, would be $ 221,476.59.88 FINDINGS OF FACT.A stipulation of all facts involved was filed. We adopt same by reference and find the facts therein set forth. Such parts as are considered necessary are here set forth.The petitioner, Consolidatd Goldacres Co., is a Nevada corporation, with its principal office located in Denver, Colorado. The tax returns for the period involved herein were filed with the collector of internal revenue for the district of Colorado on an accrual basis.On or about July 26, 1941, petitioner entered into a contract entitled "Contract of Conditional Sale" with the Western-Knapp Engineering Co. (referred to hereinafter as Western-Knapp, or seller) and under the same date petitioner and seller entered into an agreement entitled "Supplemental Agreement on Conditional Sale" which was made a part of the above mentioned contract by reference.The contract provided that Western-Knapp agreed to sell and petitioner 315 agreed to buy certain listed personal property; that the seller would construct and/or install the property, pursuant to the terms of the supplemental agreement, on the premises of the petitioner located in Lander County, Nevada; that in consideration of the performance by the seller under the contract and supplemental agreement, the petitioner would pay the seller the sums at the time and in the manner specified in the supplemental agreement; that petitioner, at its option, might pay sums in addition to the monthly installments provided in the supplemental agreements. It was further provided in the contract that all cost of collecting any amount or enforcing any of the seller's rights should be paid by petitioner; that title to and ownership in each and all of the personal property "are, and shall continue to be vested in Seller," until payment of the purchase price and the performance of all the covenants and conditions on the part of petitioner, and after payment in full of the purchase price and the performance of all the conditions by the petitioner, the seller agreed to execute and deliver to petitioner a bill of sale to all the personal property. If the petitioner's indebtedness, 316 including any of the installments of the purchase price, or interest due thereon, or any insurance premium, or any other indebtedness which might be payable by petitioner to the seller, should become due and remain unpaid or if there should be a default by the petitioner in the performance of the terms and conditions of the agreement, then the full amount unpaid on all indebtedness should become due and payable by the petitioner unless the petitioner in 90 days corrected the default; and the seller might take possession and dispose of the personal property and all payments theretofore made by the petitioner should be retained by the seller in consideration of the use of the personal property while in 89 the petitioner's possession and not as a penalty; or the personal property might be sold without notice at public or private sale and the proceeds credited upon the amount unpaid. Buyer was to pay forthwith any balance unpaid. All equipment and other things which were placed on any of the personal property, described in the agreement, should at once become a component part thereof and belong to the seller. The seller might inspect the personal property at any reasonable time. 317 The seller should be relieved from all damages, from whatever cause, arising from the personal property. The personal property, while in the buyer's possession, or under its control, was to be held at the risk of the buyer (except for insurance to be carried by the seller, as set forth in the supplemental agreement, as hereinafter stated), and its loss destruction or injury should not release the buyer from the agreement. Time was of the essence of the agreement, both to the petitioner and the seller.Attached to the contract was a list of items which the seller agreed to furnish.The supplemental agreement, 1 which was executed the same day as the contract and made a part of the contract, stated that the parties had entered into a contract of conditional sale covering the complete erection of a cyanide plant and a diesel electric plant on certain property owned by petitioner in the State of Nevada. The contractor agreed to furnish all labor, materials, and equipment necessary to construct and install the plant on petitioner's property. Contractor was given five months from date of the agreement to complete, in every detail, the construction, erection, and installation of the318 equipment. The supplemental agreement contained the following conditions pertaining to "payments":Payments: As consideration for the performance by the Contractor of the terms of this Agreement and of said Contract of Conditional Sale between the respective parties hereto, and of even date herewith, Owner agrees to pay to Contractor the total sum of Four Hundred Seventy-Five Thousand Dollars ($ 475,000.00) lawful money of the United States, which said sum is to be paid by Owner to Contractor in the following manner, viz: A sum in cash equal to One and 50/100 Dollars ($ 1.50) per ton for all ore and/or concentrates milled in said plant, until an aggregate of one hundred fifty thousand (150,000) tons shall have been so milled in said plant, and thereafter, at the rate of One and 00/100 ($ 1.00) in cash for each such ton so milled in said plant, and, at all times, as much additional in cash as owner will then be able to pay to Contractor; said payments by Owner to Contractor shall be made monthly on or before the 15th day of each and every month, commencing on the 15th day of the month next following the date of the completion and acceptance of said plant by Owner, and such monthly319 payments shall cover the amount so due to Contractor for the number of tons milled in said plant during the calendar month next preceding 90 the said due date of said installment; said monthly payments to continue until the total purchase price above specified shall have been paid by Owner to Contractor, without interest, except that any installments of said purchase price which shall become delinquent hereunder shall bear interest at the rate of six per cent per annum from and after the due date thereof, if not so paid, and until paid.Until all obligations of Owner to Contractor hereunder and under said Contract of Conditional Sale shall have been fully paid, the operations of said properties and plant of Owner shall be under the direct personal management of a managing operator to be employed by Owner but selected by Contractor, and who shall remain so in charge only so long as his said employment shall continue to be approved by Contractor, and to which such managing operator Owner shall pay compensation (or salary) amount to at least Five Hundred Dollars ($ 500.00) per month; andLikewise, until all such obligations of Owner to Contractor shall have been fully paid, Owner320 undertakes that all ore taken from the lode mining claims of Owner above-described, shall be delivered to and milled in said cyanide plant, and the above-mentioned payments shall be measured upon all tonnage milled in said plant, whether or not such ore and/or concentrates so milled in said plant shall be taken and/or mined from the premises of Owner and/or of other persons; and until such full payment of said Owner's obligations to Contractor, Owner will, from and after the date possession of said plant is turned over to Owner, continuously and without interruption, mine said properties, and will operate said plant to the maximum possible operating capacity of said plant; and until such full payment of said Owner's obligations to Contractor, Contractor shall have access to the mill and/or office records, books and accounts of Owner is [sic] so far as they relate to and/or for the purposes of verifying the tonnage milled in said plant during any calendar month after the completion and acceptance of said plant and equipment, as hereinabove provided.321 The contractor made certain warranties as to the work and material. Petitioner agreed to continue to maintain clear and merchantable title to the lode mining claims and properties on which the plant was to be built. The contractor agreed to carry and pay for fire insurance upon the building and equipment in an amount equivalent to the full insurance value thereof and not less than one-third of the outstanding and unpaid balance owing to the contractor. The contractor agreed to pay all personal property taxes assessed or levied by Lander County for the taxable year of 1942. In the event of default by petitioner, the contractor had the right to take possession of the properties and claims of the petitioner and the right, at its option, to exclusive management and control of said properties, as additional security for performance. If by operation the contractor obtained sums sufficient to discharge the contract, any surplus from such operations was to belong to the owner, and the property was to be redelivered to it. The contractor could sublet, but could not assign the whole or any part of its obligation without petitioner's written consent.Both the contract and supplemental 322 agreement were signed for the respective companies by their officials.91 The method of payment, as provided in the above contract and supplemental agreement was changed as is indicated in a memorandum dated December 10, 1942, which provides in material part as follows:December 10, 1942.RE: GOLDACRES OPERATIONSMemorandum of discussion between Mr. Harby C. Bishop of Consolidated Goldacres Company and Messrs. Brown, Stewart, and Cooper of Willow Creek Mines, Inc., acting in their dual position as operators of the property and as partners of Western-Knapp Engineering Company.1. Under date of December 4, 1942, Mr. Ernest C. Kanzeler, Director General of Operations, War Production Board, notified Consolidated Goldacres Company that permission was granted for the treatment of not to exceed 3,000 tons of ore monthly for a period of six months, beginning December 8, 1942. * * 4. It was recognized that there would inevitably be some increase in the per ton operating costs because of the reduced scale of operations, and to enable both companies to participate in earnings, it was suggested that Mr. Bishop and accepted by Willow Creek Mines, Inc., representatives that the operating323 profits be divided 40% to Consolidated Goldacres Company and 60% to Western-Knapp Engineering Company. Western-Knapp Engineering Company's share of operating profits would be applied to payment on the master contracts between Consolidated Goldacres Company and Western-Knapp Engineering Company, dated July 26, 1941.It was further agreed that the management fee to Willow Creek Mines, Inc. would be increased to 15 cents per ton in lieu of the 10 cents, as provided for in the contract dated July 26, 1941.5. The arrangements, as above, to continue during such period of reduced operations until such time, if any, when the tonnage milled is in excess of 6,000 tons per month. Should the relief granted by the War Production Board be increased to such a point that the tonnage milled would reach a figure in excess of 6,000 tons per month, then the basis of settlement would revert to that of the original contracts unless adjusted by mutual agreement.Willow Creek Mines, Inc., andWestern-Knapp Engineering Co.By [signed] Walter Lyman BrownBy [signed] Corwin A. CooperConsolidated Goldacres CompanyBy [signed] Harry C. BishopUp to July 31, 1945, the following payments were made by petitioner324 to Western-Knapp pursuant to the contract of conditional sale, supplemental agreement on conditional sale, and the memorandum of December 10, 1942:During the year ended November 30, 1942$ 129,384.00During the year ended November 30, 194373,427.01During the year ended November 30, 1944108,258.91From November 30, 1944 to July 31, 194553,057.30Total 364,127.2292 No additional sums were paid by the petitioner over and above those required to be paid under said agreements and memorandum.OPINION.Under the facts above set forth, is the petitioner entitled to include $ 221,476.59 as borrowed invested capital, in computing excess profits, within the intendment of section 719 (a) (1) of the Internal Revenue Code? 2 That section, in short, provides for such inclusion if the amount is (1) indebtedness and (2) if it is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust. Both elements must appear, that is, indebtedness, and the requisite form thereof. If either is lacking, obviously the amount is not borrowed capital, within the purview of the statute. We first consider whether the alleged indebtedness325 was evidenced as by statute required.The petitioner relies only upon the amount being evidenced by note, or, in substance, a mortgage, and does not contend that there was a bond, bill of exchange, debenture, certificate of indebtedness, or deed of trust. We agree that no claim could be well based that such forms were used, and proceed to consider the contentions as to note and mortgage.First, as to note: Extended discussion is not necessary to state our view that a note is not shown. Recognizing fully that no particular form of note is required, nevertheless, we consider that we are presented here326 with no form of note, in any ordinary and accepted sense. The instruments here involved and relied on are not notes, but bilateral contracts; not a unilateral promise to pay, for a previous consideration recognized, but executory contracts carrying obligations on both parties. The petitioner cites and relies on Aetna Oil Co. v. Glenn, 53 Fed. Supp. 961, but that case not only involved a clear, absolute promise to pay $ 120,000, subject to no contractual obligation on the part of the payee, but in the opinion the court expressly, and in our view soundly, points out the essential nature of a note, as follows:* * * It is also distinguished from the usual type of bilateral executory contract in that it is executory on one side only, with the entire consideration having been passed and executed by the party who is entitled to call for the performance. * * Such is not the nature of the "Contract of Conditional Sale," "Supplemental 93 Agreement on Conditional Sale," and "Memorandum" herein before us, for various and sundry mutual obligations of the parties are set forth therein and the consideration was performance by both. There was no "written327 promise to pay a certain sum of money at a future time unconditionally," within the definitions from Black's Law Dictionary and that of Bouvier, quoted by us on this point in Journal Publishing Co., 3 T. C. 518 (523), in holding that the word "note" in the section here being construed was not satisfied by a bilateral contract. We conclude and hold that the amount here involved was not represented by a note, within the meaning of section 719 (a) (1).Do the contracts compromise "in substance" a "mortgage," as petitioner contends, within the intendment of that section? The original and supplemental contracts are denominated "Contracts of Conditional Sale," and later "Memorandum" effects no modification in that regard. The terminology is, of course, not conclusive, but is to be given consideration with all other terms of the instruments. Petitioner recognzes that the form is not that of mortgage, the expression used by the statute, but contends that there was, in effect, a mortgage, retention of title being by way of security only. We said in Journal Publishing Co., supra, that borrowed capital must be evidenced by the328 specific types of instruments set forth in section 719 (a) (1); and in Economy Savings & Loan Co., 543">5 T. C. 543, that section 719 is to be given strict construction.Though in some states there are decisions, in effect, erasing to some degree the distinction between conditional sales, or title retention contracts, and mortgages, the petitioner argues, and the respondent appears to agree, that the only state law here applicable is that of Nevada, the situs of the property involved and the state of petitioner's incorporation. Nothing of record indicates applicability of the law of any other state. The contracts here presented very carefully provided for retention of title by the seller until performance by the buyer, the petitioner. Section 6735, Nevada Compiled Laws 1929, provides: "A contract to sell or a sale may be absolute or conditional." And section 6752 provides:Property in Specific Goods Passes When Parties So Intend. § 18. (1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.(2) For the purpose of ascertaining329 the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of the case.Reading the above provisions, it would appear that the statutes recognize that the parties could enter into conditional sales contracts and that they could provide in the contract when title to the property 94 should pass. This viewpoint was announced in Studebaker Bros. Co. v. Witcher (1921), 44 Nev. 442">44 Nev. 442; 195 Pac. 334, where the court states, at page 338:There seems to be little difficulty in determining from the terms of the contract that the parties intended it to operate as a conditional sales contract and not by way of mortgage. Its distinguishing feature in this respect is the retention of the title to the property in the seller until the full payment of the price is made by the buyer. This condition precedent to the transfer of title is contemplated by the Uniform Sales Act. Subdivision 1 of section 20 of this act reads:"Where there is a contract to sell specific goods, or where goods are subsequently appropriated to the contract, the seller330 may, by the terms of the contract or appropriation, reserve the right of possession or property in the goods until certain conditions have been fulfilled. The right of possession or property may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer." [Italics supplied.]Petitioner contends that this case has been overruled by Nevada Motor Co. v. Bream (1928), 51 Nev. 89">51 Nev. 89; 269 Pac. 602, and that the law in Nevada now recognizes that the transactions, usually called conditional sales contracts, are in their essence a mortgage.We do not share this view. The Nevada Motor Co. case does hold that the vendee, under a conditional sales contract, has an equitable ownership of the article specified in the contract and that the creditor of the vendee may be placed in the "shoes" of the vendee upon tendering performance of all obligations existing against the vendee. This case appears to be decided on its particular facts and would have no bearing on a case where the facts were substantially different. The facts in the Nevada331 Motor Co. case were substantially as follows: Vendee had entered into a conditional sales contract and had not defaulted in any payments; the creditors of the vendee tendered the remaining payments plus interest to the vendor, thereby, at least in substance, making the conditional sales contract a completed contract. Under such circumstances it appears that it would have been inequitable for the court to have reached any other result, but we think the conclusion not helpful here.As we view the problem, our main consideration is whether or not the courts of Nevada recognize a conditional sales contract as distinguished from a mortgage, and we consider the Studebaker Bros. Co. case as affirming such distinction, especially in view of the case of Sellai v. Lemmon (1944), 62 Nev. 330">62 Nev. 330; 151 Pac. (2d) 95, which considers as valid a conditional sales contract, and says:The conditions of the contract whereby plaintiff, on default of defendant repossessed the subject thereof, sold it at private sale and brought suit for the deficiency, were terms which could be validly imposed in the contract. They are not inconsistent with332 the retention of title in the seller, nor restricted by law, 95 nor are they contrary to public policy. Such terms have been recognized as valid in this and other jurisdictions. [Citing the Studebaker Bros. Co. case.]The above language, in our view, recognizes conditional sales contracts as effective in Nevada. See also Southern Pacific Co. v. Miller, 154 Pac. 929.Studebaker Bros. Co. v. Witcher, supra, is cited in the case of In re Halferty, 136 Fed. (2d) 640 (643), where the question was whether a contract was of conditional sale or of mortgage. The court, holding that it was not a mortgage, says:In all jurisdictions, where litigated, such contracts as the one now in issue have been construed to be conditional sale contracts rather than mortgages, and effective to postpone the transfer of title, regardless of whether the action was based on the Uniform Sales Act, or the Uniform Conditional Sales Act, or both, or neither, or regardless of whether there were one or more valid conditions precedent. See Faisst v. Waldo, 57 Ark. 270">57 Ark. 270, 21 S. W. 436;333 * * [Citing many cases, including the Studebaker case, as above stated.]Though in matters of equitable cognizance the right to redeem has been recognized in matters of conditional sale and retention of title, nevertheless the distinction between the "mortgage" required by section 719 (a) (1) and conditional sale is deeply grounded. In re Lakes Laundry, Inc., 79 Fed. (2d) 326, involved section 77B of the Bankruptcy Act and a conditional sales contract under the Uniform Conditional Sales Act. The court held that property of one whose rights were only those of a conditional vendee was not covered by a reorganization petition, but was that of the conditional vendor until payment, and subject to repossession by the vendor; and that the vendor was not a mortgagee. The court said:But, even though section 77B is a remedial statute to be construed liberally, we think Congress did not intend to ignore the distinction between property mortgaged by a debtor and property held by a debtor as conditional vendee. The distinction has been recognized in legislation from early times, and was a part of the common law. The fact that Congress expressly included334 the words "conditional sale agreement" in subdivision (o) (6) of section 75 of the act, 11 USCA § 203 (o) (6), and omitted any reference to conditional sales in subdivision (c) (10) of section 77B of the act, 11 USCA § 207 (c) (10), is significant and points to the conclusion that it meant in this instance to exclude property in the possession of the debtor whose rights therein were only those of a conditional vendee.So here we think it is significant that Congress omitted any reference to "conditional sales contract" along with "mortgage" in section 719 (a) (1), and that we should not consider the conditional sales agreement here presented as within the ambit of that section. The petitioner seeks to demonstrate borrowed capital. We do not think that a mortgage "in effect" is shown in the instant case, within the intendment of the statute here to be construed. In truth, it shows the erection of a 96 plant by Western-Knapp Engineering Co., with title expressly and specifically retained by that company until it had received payment, in a certain manner, but in general according to the amount of ore or 335 concentrates milled in the plant. Then, and only then, would a bill of sale be executed, under the agreement, and until that time the seller could select the managing operator of the plant, to be paid $ 500 per month by the petitioner. To us such an arrangement appears to come neither within the letter nor the spirit of the statute as to considering "borrowed capital" in the computation of excess profits tax. The contract was, in our view, under Nevada law and general principles, neither in form nor in substance, the mortgage required by section 719 (a) (1). In the light of such conclusion, it is needless to consider whether "indebtedness" was created by the contracts.We hold that the Commissioner did not err in denying consideration of the amount involved as borrowed invested capital.Decision will be entered for the respondent. Footnotes1. The supplemental agreement referred to petitioner as "owner" and Western-Knapp as "contractor."↩2. SEC. 719. BORROWED INVESTED CAPITAL.(a) Borrowed Capital. -- The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following:(1) The amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624329/	L. C. MITCHELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mitchell v. CommissionerDocket No. 41610.United States Board of Tax Appeals28 B.T.A. 767; 1933 BTA LEXIS 1073; July 27, 1933, Promulgated 1073 1. The word "mutual" used in a postnuptial contract which provided that each spouse should own a certain share of mutual property and income, constructed to cover only property which was joint or common and not to include the earnings of either spouse from an employment that was not joint or common. 2. The stock of the corporation was purchased by a husband in his own name with money arising from a joint bank account and with the proceeds of bonds, in both of which the wife had an interest. Held, the wife had a joint equitable interest in the stock. Joseph Nievinski, Esq., for the petitioner. George S. Adams, Esq., for the respondent. MARQUETTE 768 Respondent has determined a deficiency in income tax for the year 1925 in the amount of $7,680.69. The petitioner assigns as errors (1) the failure of the respondent to permit a division of income between the petitioner and his wife in accordance with a partnership agreement between them; and (2) that the respondent has increased the petitioner's income by adding to it an amount which in fact was income of his wife. FINDINGS OF FACT. The petitioner and his wife, Hattie, were married1074 in Oregon on June 9, 1909. At that time the petitioner had $300 in cash and his wife $400, which amounts they had saved prior to their marriage. Shortly after their marriage they purchased a bakery business at McMinnville, Oregon, for the price of $1,200, on which they made a cash payment of $700 and the balance was to be paid at the rate of $75 per month. Mrs. Mitchell desired a paper to evidence the fact that she had furnished a part of the capital, and such also was the desire of her family. On June 25, 1909, the petitioner and his wife entered into an agreement in writing which had been drawn by an attorney. The material part of that agreement reads: It is mutually agreed that in consideration of the amount of capital furnished by each of the parties hereto, that said Lloyd C. Mitchell shall own three-sevenths (3/7) of all Mutual property and income, and that the said Hattie Mitchell shall own four-sevenths (4/7) of all mutual property and income. The above agreement was not recorded but was known generally to those who dealt with the bakery. Both parties worked in the bakery and neither drew any wages. The unpaid installments on the bakery were paid from the proceeds1075 of the business. In November 1911, the petitioner and his wife sold the bakery for $4,250, of which the amounts of $2,000 or $2,200 were paid in cash. This, with the remaining installments as paid, was deposited in a bank account in the name of petitioner and his wife, on which either could draw. From this time on the petitioner and his wife maintained such a bank account and neither thereafter had an individual bank account. After the sale of the bakery the petitioner attended a bakery school in Chicago. He returned to Oregon in the spring of 1912. While 769 he was away Mrs. Mitchell worked a large part of the time and deposited her earnings in the joint bank account, from which the petitioner's expenses in Chicago were paid. On his return to Oregon petitioner worked on a salary for a flour milling company in Portland testing flour. He put in a laboratory at his home and Mrs. Mitchell, having been taught by him, assisted him at this laboratory in teaching others to test flour. She devoted four or five hours a day to this work. This laboratory work brought in between $600 and $700. These amounts and petitioner's wages were deposited in a joint bank account. Out1076 of this account a house in Portland was purchased, the title to which was in petitioner and his wife. The latter part of 1914 the petitioner went to Los Angeles, California, and accepted a position with a milling company as demonstrator of flour in the bakeries which were customers of the mill. The house in Portland was sold. The petitioner also conducted a laboratory for testing flour in which no charge was made for services to customers of the mill but charges were made to competitors. His wife and he worked in the laboratory on Sundays and on many evenings. The petitioner's salary, the income from the laboratory, and the proceeds of the sale of the house in Portland were deposited in a joint bank account. Unregistered Liberty bonds were purchased with money withdrawn from this account. Mrs. Mitchell purchased some of the bonds. All the bonds were kept together. In April 1919, the petitioner accepted a position in Ogden, Utah, at a salary of $75 a week with the Ogden Baking Co., a corporation with a capital stock of 60,000 shares, of which 57,000 shares were outstanding and 3,000 shares were retained in the treasury. At this time the petitioner purchased 5,500 shares1077 of the stock of this corporation, for which he paid $5,500. This payment was made from the joint bank account. In 1920 the petitioner purchased 29,000 shares from one Wright and 5,500 shares from one Wishart. This stock was paid for with about $4,000 of the Liberty bonds and for the balance the petitioner executed his individual promissory notes, payable $500 per month. Before this latter purchase was made the petitioner and his wife called Wright's attention to their agreement of 1909 and requested that this stock be issued three sevenths to the petitioner and four sevenths to his wife. This Wright refused to do, stating that he did not wish any woman mixed up in the deal, that he did not desire to be compelled to take any action against a woman. When this purchase was proposed to the petitioner he informed Wright that he was financially unable to make the payments. Wright replied that the petitioner could raise his salary. It was then agreed that the installment payments would be made out of his salary and out of the dividends on the stock. The petitioner's salary 770 was increased to $150 a week and then to $1,000 a month. The stock so purchased was paid for out1078 of the petitioner's salary and the dividends on the stock. Two hundred and fifty shares of the stock of the company were placed in Mrs. Mitchell's name in order that the might act as a director. These 250 shares constituted the only stock that ever stood in her name. Mrs. Mitchell did some work for the company but drew no salary. In 1924 the Continental Baking Corporation desired to buy all the stock of the Ogden Baking Co. In order to effectuate this sale it became necessary for the petitioner to purchase all the outstanding stock which was not then in his name or that of his wife. He purchased this stock for cash derived from money borrowed on notes. The sale to the Continental Baking Corporation was made in 1925 for $225,000 cash. Out of this the notes were paid, leaving a balance in the neighborhood of $165,000. Of this amount $100,000 was set aside for future investments and was invested; $30,000 was turned over to Mrs. Mitchell to be and was placed in a trust fund for the education of their daughter, and the petitioner received what was left, somewhere between $31,000 and $33,000. About the same time Mrs. Mitchell received from the petitioner $7,000 or $8,000 arising1079 from the sale of property which stood in his name. The installment payments which constituted this transfer were permitted to stand in the petitioner's name. Neither the petitioner nor his wife ever made a purchase or a sale or entered into any transaction without consulting the other. No partnership income tax return was ever made by the parties. In his income tax return for 1925 the petitioner reported all of his salary from the Ogden Baking Co. and all the dividends from the stock in that company which stood in his name and from the 250 shares which stood in the name of his wife. He took as a deduction a loss sustained on the sale of certain real estate. He reported gain from the sale of the stock of the Ogden Baking Co. in the amount of $29,672.82. His wife made a separate return for 1925 in which she reported but one item of income, to wit, the amount of $39,564.27 arising from the sale of this stock. She took no deductions. Respondent allowed the loss on the sale of the real estate but in an amount less than that reported. He determined the cost of the stock of the Ogden Baking Co. purchased in 1919 at $5,500 and the cost of the stock purchased in 1920 at $39,0001080 and determined a capital net gain on the sale of these stocks of $83,850.67. He determined the cost of the stock of the Ogden Baking Co. purchased in 1924 at $10,000 and of that purchased in 1925 at $71,050 and determined a gain on the sale of these stocks at $8,987, all of which gains he taxed to the petitioner. 771 OPINION. MARQUETTE: Shortly after their marriage and on the eve of acquiring the bakery business in McMinnville, Oregon, the petitioner and his wife entered into the contract of June 25, 1909. Respondent contends that this contract related only to the capital invested in and the income derived from this particular business. The petitioner asserts that this contract was in the nature of a marriage settlement which fixed the proportions in which the petitioner and his wife were to own all property acquired by either during the marriage. The contract contains no provisions which in terms show that it applied only to the baking business. On the other hand it speaks of "all" mutual property and income - a very general term. In this state of case the mutual understanding of the parties should be given consideration. Both testify that it was their understanding1081 that it was to continue in effect so long as they were married. This contemporaneous construction by the parties interested in our opinion resolves the doubt in favor of their construction. When we come to the question of what property was embraced by the contract we find that the words "property" and "income" are modified by the adjective "mutual." This adjective is used twice and evidently for a definite purpose and that purpose was, we think, one of restriction. Not all property and all income were to be owned by the husband and wife in the proportions stated but only such property as was mutual. The primary meaning of this word is reciprocal. It also imports the idea of common or joint, Webster's New International Dictionary. ; ; . Here the parties were about to invest their capital and contribute their labor to a common or joint enterprise. The capital of each was to be jointly used and the income which was to be shared was that derived from the joint use of their capital and the common contribution of their labors. 1082 Giving to the word "mutual" the only meaning which is applicable to the situation and construing it in the light of the enterprise about to be begun, it seems clear that the word as used imports the idea of common or joint. Thus, it certainly could not be successfully contended that property acquired by either from sources that were not mutual was to be owned by both, as, for instance, property acquired by devise or bequest. By the same token we think that this word does not cover the earnings of either which were not derived from a mutual source. This contract was valid in Oregon (Oregon Laws, secs. 9743, 9744, 9745; ; ) and being intended to cover after-acquired property to the extent we have 772 indicated, it was valid in California and Utah. ; , and authorities cited. Under this construction all the income derived from the school in Portland and the laboratory in Los Angeles was mutual. On the other hand, the petitioner's earnings from his employment in the mill in Oregon Became his separate property and his earnings1083 from his position in Los Angeles were community income, which under the laws of California were his income. . But when the petitioner deposited his earnings in the joint bank account in Oregon they at once became mutual and were owned in the proportions fixed by the contract of 1909. The same is true of the deposits made in the bank in California. , and cases cited. By virtue of the agreement of 1909 the interest of each in the joint deposit was in the ratio of three to four. The purchase in 1919 of 5,500 shares of the stock of the Oregon Baking Co. was made with money drawn from the joint bank account in which Mrs. Mitchell had an undivided four-sevenths interest, with the result that she became the equitable owner of four sevenths of the stock then purchased. ; ; affd., ; . The petitioner owned the other three sevenths. In 1920 the petitioner purchased 29,000 shares from Wright and 5,5001084 shares from Wishart. On this purchase a down payment amounting to $4,000 was made in Liberty bonds which had been purchased with money drawn from the joint bank account. Although it is not clear whether an indefinite number of these bonds belonged to Mrs. Mitchell, it would seem that the only effect of such a transaction would be to increase her share. Not being informed as to the amount, if any, of the bonds which she may have separately owned, we find that she was the equitable owner of the stock then purchased to the extent of her four-sevenths interest in the bonds used in the acquisition of this stock. For the remainder of the purchase price the petitioner executed his personal notes which according to the understanding between him and Wright, were to be paid out of his salary and from the dividends. This agreement was carried out. None of this money came from a mutual source but all from the earnings and property of the petitioner. The stock so purchased, except to the extent of Mrs. Mitchell's interest in the Liberty bonds, was the petitioner's stock. What we have said with reference to this stock applied equally to that purchased in 1924 and 1925 in order to effect1085 the sale to the Continental Baking Corporation. All of this stock belonged to petitioner. 773 As against this conclusion the petitioner makes two contentions. The first is that when he purchased the stock from Wright it was his desire that four sevenths of it be placed in the name of his wife, a request with which Wright refused to comply. We attach little importance to this for two reasons. First, the petitioner agreed to it and, second, if he was in fact in earnest about this being done, he could easily have placed four sevenths of the 5,500 shares purchased in 1919 in his wife's name. Wright could not have objected to this since that stock was paid for in cash and Wright or whoever owned it would not have been compelled to sue Mrs. Mitchell. Besides, 250 shares of this stock were placed in her name in order that she might qualify as a director. The second contention of petitioner is that the division in 1925 of the proceeds of the sale was made in accordance with the contract of 1909. We are unable to find that any such division was made. The testimony on this question is quite hazy. We do not know what became of the $100,000 fund that was set aside. We do1086 not know how or in whose name it was invested. We are informed that $30,000 was turned over to Mrs. Mitchell, but this amount was to be and was placed in trust for the education of their daughter, a duty which rested just as much on him as on her. The petitioner retained between $31,000 and $33,000. It is true that Mrs. Mitchell received between $7,000 and $8,000, but this came not from the proceeds of the sale of the stock but from a sale of land which stood in the petitioner's name. The record does not disclose that Mrs. Mitchell then or thereafter received four sevenths of the proceeds of the sale. The respondent's determination is sustained except to the extent of the gain arising from the sale of Mrs. Mitchell's equitable interest in the stock of the Ogden Baking Co. by reason of the investment therein of her four-sevenths interest in the joint bank account and in the Liberty bonds. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624331/	R. C. MCKNIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McKnight v. CommissionerDocket No. 10804.United States Board of Tax Appeals13 B.T.A. 885; 1928 BTA LEXIS 3153; October 10, 1928, Promulgated 3153 Held, that during the taxable years petitioner, his wife, and his mother were members of a partnership engaged in coal mining and should be taxed as such. D. Curtis Reed, Esq., and Thad H. Brown, Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. VAN FOSSAN 885 This proceeding is brought to redetermine deficiencies in income tax of the petitioner asserted by respondent in the sum of $46,649.14 and $9.81 for the years 1920 and 1921, respectively. The sole question in controversy is whether the coal mining operations which resulted in the income found by the respondent to have been earned in the years under consideration, were conducted by the petitioner individually or by a partnership composed of himself, his mother and his wife. Certain adjustments were made by the respondent which increased the income of the business for the year 1920 and decreased it for the year 1921, but both the petitioner and the respondent have agreed to such adjustments. FINDINGS OF FACT. Prior to October, 1917, M. C. Hobart and M. J. Sauer were engaged in a partnership coal-mining operation near Pomeroy, Ohio, under a lease covering3154 about 300 acres of partially exhausted coal lands. Hobart was responsible for the financial and business part of the enterprise, while Sauer directed the mine operations. At that time only one opening, known as the "Dabney Mine," was being worked. In October, 1917, Hobart's one-half interest in the partnership of Hobart and Sauer was purchased by the petitioner who, with his wife, Marie L. McKnight, lived at the home of his mother, Margaret McKnight. The purchase price, $5,000, was paid by the conveyance of two small houses owned by Margaret McKnight. The amount so paid by Margaret McKnight constituted a loan by her to her son, R. C. McKnight, and interest was paid quarterly thereon during the continuance of the partnership of McKnight and Sauer, or until about April 15, 1918, but no interest was paid thereafter. McKnight and Sauer adopted the firm name of "Pomeroy Mining Company" and opened books. Only the simplest forms of journal entries were used. The bank account was carried under R. C. McKnight's name and checks for the partnership disbursements were signed "Pomeroy Mining Company, by R. C. McKnight." The petitioner's personal 886 deposits were credited to the3155 same account. No one connected with the enterprise from its operation by Hobart and Sauer to its sale to the Kenova Mining Co., hereinafter mentioned, was familiar with accounting methods or adept in bookkeeping. No capital account or other such normal entries were made on the books of the Pomeroy Mining Co. at any time. The partnership of McKnight and Sauer continued until about April 15, 1918, when the conduct of Sauer, his inability to manage the personnel at the mine, and his consequent failure to produce a proper tonnage therefrom, compelled the petitioner to discontinue the relationship. The situation was discussed thoroughly by the petitioner, his mother and his wife and it was agreed to form a partnership. McKnight agreed to contribute his interest in the former partnership of McKnight and Sauer; Margaret McKnight offered to contribute the $5,000 which had been paid by her conveyance of the two houses to Hobart; Marie L. McKnight offered to contribute about $300 in cash - all she possessed - and to take charge of the clerical part of the business, which was then being conducted in a room of their home. Later she contributed an additional $200 for the benefit of the3156 enterprise. The partnership arrangement was so effected and about April 15, 1918, the partnership interest of Sauer was purchased by the payment to him of $1,258.40 and the assignment to him of McKnight's interest in the lease of the Dabney Mine, while McKnight received from Sauer the assignment of his interest in the lease on the "White Mine," which had been opened by McKnight and Sauer a short time before and was located about four miles distant from the home of the petitioner. During the remainder of the year 1918 and the year 1919 the petitioner withdrew $24 (later $25) per week to cover the joint living expenses of himself, his mother, and his wife. Whatever profits were derived from the business were utilized to purchase additional equipment for the White Mine and to provide for an enlarged out-put. In addition Margaret McKnight mortgaged the home in which all three partners lived for $3,000, to purchase a small steam plant, electric machines and other equipment needed for the mine. At times during 1918 and 1919 the venture was almost at the point of failure, but succeeded in surviving until 1920, when the period of increased coal prices enabled the firm to make a large3157 profit. During 1920, with the advice and consent of Margaret and Marie L. McKnight, the petitioner opened stock brokerage accounts in Parkersburg, W. Va., and Columbus, Ohio, for the benefit of the partnership. In the spring of 1921 a distribution of $20,000 was made to each of the partners. Margaret and Marie L. McKnight received their shares in municipal bonds, which they retained in their own 887 possession and owned at the time of the hearing. R. C. McKnight received $10,000 in such bonds and utilized the remaining $10,000 of his share in his dealings in stocks. At various times further distributions were made in equal amounts to the three partners by the assignment of stocks or in cash withdrawals. Some of these transactions were carried on in the name of the petitioner in order to facilitate their expeditious handling. Unfortunate experiences in trading in stocks on margin and in the outright purchase of securities, together with the failure of a brokerage house, resulted in serious losses to the partnership, all of which were borne equally and jointly by all three members thereof. In January, 1921, the assets of the Pomeroy Mining Co. were sold to the Kenova3158 Mining Co. for the consideration of $50,000, of which sum $35,000 was paid in cash, and a mortgage retained for the balance. Later the partnership was forced to foreclose that mortgage and the White Mine with its equipment is now owned by the said partnership. No written agreements were entered into relating to the partnership status of Hobart and Sauer, McKnight and Sauer, the Pomeroy Mining Company, or the firm of R. C. McKnight, Margaret McKnight and Marie L. McKnight. No partnership returns were filed by the Pomeroy Mining Co. or the firm composed of the petitioner, his mother and his wife until 1921. Failure to do so was caused by ignorance of these taxpayers concerning the nature of a partnership return and the necessity of filing it. The employment of an auditing company in connection with the sale to the Kenova Mining Co. occasioned the first filing of a partnership return, covering the year 1920. On many occasions prior to, at, and subsequent to the purchase of the interest of Sauer in the partnership of McKnight and Sauer on or about April 15, 1918, the petitioner, McKnight, Margaret Mc,Knight, and Marie L. McKnight represented to strangers that the partnership3159 of the said three individuals was about to be or had been formed for the purpose of acquiring the interest of the said Sauer. At times when transactions were carried on in the nme of R. C. McKnight as a matter of convenience, it was disclosed and they were for the benefit of the partnership composed of himself, his mother and his wife. OPINION. VAN FOSSAN: In the State of Ohio a husband and wife may enter into any contract which either might if unmarried. General Code of Ohio, section 7999. It is also fundamental that a partnership may be created by an oral agreement. The sole question with which we 888 are concerned is whether or not the petitioner, R. C. McKnight, his mother, Margaret McKnight, and his wife, Marie L. McKnight, actually formed a partnership which conducted a coal mining business and operated the White mine from about April, 1918, to January, 1921, and continued partnership transactions later in that year. Chancellor Kent defined a partnership as follows: A contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them in lawful commerce or business, and to divide the profit and bear the loss3160 in certain proportions. A further definition is contained in : The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. In , we said: Several of the well recognized tests of the existence of a partnership are sharing of profits and losses, mutual agency and community of interest. The evidence in this case discloses that petitioner was engaged in a partnership venture in coal mining with one Sauer, which had proved unprofitable, and petitioner determined to terminate the relationship. This was accomplished by the payment to Sauer of $1,258.40 in cash and the assignment to him of all of McKnight's interest in the Dabney mine and the assignment to McKnight of all of Sauer's interest in the lease on the White mine. The situation was fully discussed by McKnight, his mother and his wife and it was agreed that a partnership should be formed. McKnight agreed to contribute his half interest in the partnership business3161 of McKnight and Sauer and proposed to superintend the mining and production of coal at the White mine. The mother, Margaret McKnight, agreed to contribute the sum of $5,000 by canceling the loan previously made to her son which had been used to purchase the interest of M. C. Hobart and form the partnership of McKnight and Sauer, while petitioner's wife, Marie L. McKnight, agreed to contribute the sum of $300 and to manage the office of the business, including the taking of orders, checking mine reports, making up pay rolls, etc. Each of the three partners was to share equally in profits and losses. The three partners carried out their respective agreements and the partnership was formed. During 1918 and 1919 no profits were made and only a small amount was withdrawn from the partnership for living expenses, all three partners living together under the same roof. During this time Margaret McKnight borrowed $3,000 additional by mortgaging her home to purchase additional equipment. In 1920 and 1921, however, 889 the profits were large and in so far as any distributions were made such distributions were in equal proportions to the three partners, and the surplus was used*3162 for the benefit of the partners jointly in attempts to make money in the stock market. The partnership relation existing between the three persons above mentioned was a matter of general knowledge in the community. Various witnesses testified that at the time of the formation of the partnership and on other occasions the three partners had represented to them that such a partnership existed and was conducting its business under the name of the Pomeroy Mining Co. These representations were made long prior to the time when, for tax purposes, an advantage might have accrued to the partners by reason of the filing of a partnership return rather than individual returns. The evidence is uncontradicted and convincing that a partnership consisting of petitioner, his wife and his mother was formed on or about April 15, 1918, and continued during the years 1920 and 1921. The action of the respondent in determining the deficiencies in this case is disapproved. ; . Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624333/	Amy Guest, Petitioner, v. Commissioner of Internal Revenue, RespondentGuest v. CommissionerDocket No. 12213United States Tax Court10 T.C. 750; 1948 U.S. Tax Ct. LEXIS 204; April 30, 1948, Promulgated 204 Decision will be entered for the respondent. In computing 90 per cent victory tax limitation on taxes "imposed by" chapter 1 under Internal Revenue Code, section 456, held addition to 1943 tax liability of 25 per cent of 1942 tax is not affected as being "imposed by" section 6 of Current Tax Payment Act and not by chapter 1. B. H. Bartholow, Esq., for the petitioner.A. H. Monacelli, Esq., for the respondent. Opper, Judge. Johnson, J., concurs only in the result. OPPER750 OPINION.Respondent determined a deficiency in income and victory tax liability for the year 1943 in the amount of $ 18,883.17. 205 The sole litigated question is whether in computing the victory 751 tax limitation in section 456 of the Internal Revenue Code, chapter 1 tax for 1943 includes the increase in tax for that year occasioned by section 6 (a) of the Current Tax Payment Act of 1943.All of the facts have been incorporated in a stipulation of facts which are hereby found accordingly, as follows:1. The petitioner is an individual who resides in Palm Beach, Florida. The petitioner's income and victory tax return for the calendar year 1943 was filed with the Collector of Internal Revenue, Jacksonville, Florida.2. The petitioner's income tax net income for the calendar year 1943 was $ 305,997.15.3. The tax (exclusive of the victory tax) imposed upon the petitioner by chapter 1 of the Internal Revenue Code for the calendar year 1943 (determined without regard to section 6 (a) of the Current Tax Payment Act of 1943) was $ 242,485.28 (computed without regard to credits against the tax).4. Such tax for the calendar year 1943 after credits against the tax was $ 239,181.88, the credit for income tax paid at the source being $ 2,558.71, and the credit for foreign taxes being $ 744.69.5. The tax imposed206 upon the petitioner by chapter 1 of the Internal Revenue Code for the calendar year 1942 (determined without regard to section 6 (a) of the Current Tax Payment Act of 1943) was $ 228,922.50 (computed without regard to credits against the tax).6. Such tax for the calendar year 1942 after credits against the tax was $ 225,618.32, the credit for income tax paid at the source being $ 2,559.49, and the credit for foreign taxes being $ 744.69.7. Such tax for the calendar year 1942 (determined without regard to section 6 (a) of the Current Tax Payment Act of 1943, without regard to interest or additions to the tax, and without regard to credits against the tax for amounts withheld at the source) was $ 228,177.81 [$ 225,618.32+$ 2,559.49].8. Such tax (exclusive of the victory tax) for the calendar year 1943 (determined upon the same basis used in the preceding paragraph hereof) was $ 241,740.59 [$ 239,181.88+$ 2,558.71].In the notice of deficiency, respondent computed petitioner's victory tax to be $ 16,177.56, and computed a total income and victory tax liability, including the 25 per cent increase for 1942 tax, of $ 311,764.02.When the wartime additional income tax, called the "victory207 tax," was enacted, it was accompanied by a saving provision designed to limit the total taxes on the income of a single year to 90 per cent. The technique employed was: 1The tax imposed by section 450 (Victory tax) * * * shall not exceed the excess of 90 per centum of the net income of the taxpayer for the taxable year over the tax imposed by this chapter [chapter 1], computed without regard to section 450 * * .The victory tax was made applicable to years beginning with 1943, and to the same year, and shortly after the adoption of section 450, there was also made applicable the Current Tax Payment Act, the purpose of which was to place taxpayers on a current basis for tax purposes, and at the same time to relieve them of the payment of two 752 full years' payment in one year. This was accomplished by provisions which in effect collected a tax for 1942 or 1943, whichever was the larger, and forgave the equivalent of 75 per cent of the tax for the smaller of the two years. 208 William F. Knox, 10 T.C. 550">10 T. C. 550.Petitioner's 1943 tax was greater than that for 1942, and her situation hence falls within the provisions of section 6 (a) of the Current Tax Payment Act. 2 Her combined income and victory tax for the year 1943 did not exceed 90 per cent of her income, except that if to the 1943 tax is added the 25 per cent of 1942 tax, imposed by section 6 of the Current Tax Payment Act, the three amounts combined aggregate more than the 90 per cent. The issue presented is whether the 90 per cent limitation is applicable before or after the 25 per cent addition made by section 6.209 A scrutiny of the language of the 90 per cent limitation reveals that the taxes to be limited are "the victory tax," together with "the tax imposed by this chapter," that is, chapter 1. At the outset, accordingly, the problem can be stated more narrowly as the ascertainment of whether the 25 per cent additional tax provided by section 6 of the Current Tax Payment Act is a tax "imposed by this chapter."The tentative answer would appear to be definitely in the negative. In order for a tax to be imposed by chapter 1, no other possibility reveals itself than for the provision imposing the tax to be included in chapter 1, if not as originally enacted, then at least by legislation adopted as an amendment to it. The 25 per cent tax in controversy was imposed by section 6 of the Current Tax Payment Act, which not only was not enacted as part of chapter 1, but was not designed to be even an amendment to that chapter, nor indeed to the code itself. Were we limited to these words, the provision under consideration would seem to be an unambiguous statutory command not to include the 25 per cent additional tax in the computation of the 90 per cent limitation.In certain respects, to be sure, 210 the tax added by section 6 is, as petitioner suggests, treated as an integral part of chapter 1 tax liability, see, e. g., Lawrence W. Carpenter, 10 T. C. 64, and in all probability 753 some of the provisions of chapter 1 are applicable to the tax imposed by section 6. Current Tax Payment Act, sec. 1 (b). 3 But since, as we have seen, the 25 per cent additional tax is "imposed" in a technical sense by section 6, and not by chapter 1, the question of what taxes Congress intended to include in the computation of the 90 per cent limitation remains at the best ambiguous. For the solution, we must resort to accepted means of statutory interpretation.It may be accepted as the reasonable aim of section 456 that the taxpayer's income for any one year should not normally be taxed at higher than 90 per cent of that income. 211 4 But the approach applied in the Current Tax Payment Act was in effect to combine the years 1942 and 1943 in computing total unforgiven payments to which a taxpayer would be subjected. The undesirability of leaving untaxed in the hands of a taxpayer less than 10 per cent of his income applicable to an ordinary year would presumably be subject to a different view when the companion year involved the forgiveness of 75 per cent of the total tax. Although petitioner's remaining income for 1943 might thus prove to be less than 10 per cent of her income for that year, her remaining income for the two years 1942 and 1943 would be much greater than twice 10 per cent of the income for either of the years or than 10 per cent of the combined income of the two. It would hence not be unreasonable to suppose that the forgiveness of 75 per cent of the 1942 tax would lead to the legislative conclusion that the 90 per cent limitation need not include the 25 per cent tax carried over to 1943 from what is in effect an unpaid tax of the prior year.212 It is easy to see that 125 per cent of the tax of a taxpayer in a high bracket might easily approach or even exceed the total income for a single year. When the possibility is added that one year's income could greatly exceed the other's, and that to a high tax there might be added 25 per cent of still another tax, the chance increases of numerous cases where total taxes for one year might exceed 90 per cent or even 100 per cent of the smaller year's income. That this very situation was in the minds of both Houses of Congress when the Current Tax Payment Act was passed appears from an example included in the report of the Senate Finance Committee and again in the report of the Conference managers. 5 Nothing would consequently be gained by applying to a small segment of the tax, such as the victory tax, a 90 per cent limitation, which is neither applicable nor intended in the situation as a whole.Finally, section 456213 in its amended form was passed subsequent 754 to the Current Tax Payment Act. It is applicable to the year 1943, and hence is the statutory provision operative here. 6 It was accompanied by a Senate Finance Committee report, which, eliminating the last vestige of doubt, states expressly:* * * For taxable years beginning in 1943 the limitation provided by section 456 of the Code is computed without regard to the additions to the 1943 tax required by section 6 of the Current Tax Payment Act of 1943 and the victory tax will be payable even though such additions make the total tax greater than 90 per cent of the net income of the taxpayer. * * * [S. Rept. No. 475, 78th Cong., 1st sess.].True, the Senate made no change in the House bill, and the quoted statement does not appear in the report of the House Ways and Means Committee. But "The fact that this is a report of a committee of only one House of Congress does not deprive it of considerable weight." Porter v. Murray (C. C. A., 1st Cir.), 156 Fed. (2d) 781, 785; Fleming v. Mohawk Co., 331 U.S. 111">331 U.S. 111, 120, 122. This unmistakable expression relating to 214 an otherwise ambiguous reference, combined with the purpose and earlier history of the companion legislation, seems to us to furnish the most reliable aid to interpretation available to us, and to justify respondent's administrative construction to the same effect. Regulations 111, section 29.456-1, as amended by T. D. 5309, 1943 C. B. 619, 624, and T. D. 5350, 1944 C. B. 370, 372.There being no impediment in fairness or logic to the elimination of the 90 per cent limitation under the circumstances now in controversy, we conclude that the object of the legislation and its history can lead solely to the result reached by respondent. The deficiency is accordingly approved.Decision will be entered for the respondent. Footnotes1. Internal Revenue Code, sec. 456↩.2. SEC. 6. RELIEF FROM DOUBLE PAYMENTS IN 1943.(a) Tax for 1942 Not Greater Than Tax for 1943. -- In case the tax imposed by Chapter 1 of the Internal Revenue Code upon any individual * * for the taxable year 1942 (determined without regard to this section, without regard to interest or additions to the tax, and without regard to credits against the tax for amounts withheld at source) is not greater than the tax for the taxable year 1943 (similarly determined), the liability of such individual for the tax imposed by such chapter for the taxable year 1942 shall be discharged as of September 1, 1943, except that interest and additions to such tax shall be collected at the same time and in the same manner as, and as a part of, the tax under such chapter for the taxable year 1943. In such case if the tax for the taxable year 1942 (determined without regard to this section and without regard to interest or additions to the tax) is more than $ 50, the tax under such chapter for the taxable year 1943 shall be increased by an amount equal to 25 per centum of the tax for the taxable year 1942 (so determined) or the excess of such tax (so determined) over $ 50, whichever is the lesser. * * *↩3. (b) Meaning of Terms Used. -- Except as otherwise expressly provided, terms used in this Act shall have the same meaning as when used in the Internal Revenue Code.↩4. The purpose of the limitation provision, as originally enacted, was "to provide that the total income tax and Victory tax should not exceed 90 per cent of the taxpayer's net income." S. Rept. No. 1631, 77th Cong., 2d sess., p. 8.↩5. S. Rept. No. 221, 78th Cong., 1st sess., p. 44; H. Rept. No. 510, 78th Cong., 1st sess., p. 58.↩6. See footnote 1, supra↩; Public Law No. 178, 78th Cong., 1st sess. (H. R. 3381.)	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624335/	Elsie Keil Mathisen, Petitioner, v. Commissioner of Internal Revenue, RespondentMathisen v. CommissionerDocket No. 44363United States Tax Court22 T.C. 995; 1954 U.S. Tax Ct. LEXIS 132; July 30, 1954, Filed July 30, 1954, Filed 132 Decision will be entered for the respondent. 1. Partnership interest acquired with funds borrowed on petitioner's individual credit held, under Washington law, not to be community property but to give rise to income taxable to petitioner individually. E. C. Olson, 10 T. C. 458, followed.2. Western Construction Co., 14 T. C. 453, affirmed per curiam (C. A. 9) 191 F. 2d 401, in which petitioner was not a party, held not to conclude petitioner's individual tax liability for the years there in issue. Ralph B. Potts, Esq., for the petitioner.Wilford H. Payne, Esq., and Francis J. Butler, Esq., for the respondent. Opper, Judge. OPPER995 Deficiencies in income tax were determined against petitioner for 1943 and 1944 in the respective133 amounts of $ 9,075.02 and $ 281, arising by reason of respondent's conclusion that an interest in a limited partnership known as Western Construction Company was petitioner's separate property and taxable to her in full rather than as community income. Petitioner claims overpayments for both years.Petitioner contends that the determination is incorrect on the merits, and also that the matter is no longer open by reason of our decision in Western Construction Co., 14 T.C. 453">14 T. C. 453, affirmed per curiam (C. A. 9) 191 F.2d 401">191 F. 2d 401. Some of the facts were stipulated.FINDINGS OF FACT.The stipulated facts are hereby found accordingly.Elsie Keil and Elsie Keil Mathisen, hereinafter referred to as petitioner, are one and the same person. Petitioner is a citizen and resident of the United States, residing in Seaview, Washington. The returns for the periods here involved were filed with the collector of internal revenue for the district of Washington.The notice of deficiency was mailed to petitioner on June 27, 1952. The taxes in controversy are income taxes for the taxable years 1943 and 1944.Petitioner married Rudolph Keil (sometimes134 hereinafter referred to either as petitioner's former husband or as Rudolph) in 1935 and was married to Rudolph during the taxable years involved in this proceeding. Throughout those years they resided in Seattle, Washington.996 Rudolph was a painter in 1942 and had been in that business continuously from 1927 until 1951. His salary from this work during the periods here involved was negligible.In 1942, a limited partnership was formed under the partnership name of "Western Construction Company," hereinafter sometimes referred to as the partnership. Albin Johnson, sometimes hereinafter referred to as petitioner's father, was a general partner and two of his children, namely, petitioner and her brother Winston Johnson, sometimes hereinafter referred to as petitioner's brother, were listed as limited partners. Petitioner did not bring this partnership agreement home, nor did she remember signing it.In April of 1942, petitioner executed a note in favor of her father in the amount of $ 10,000. This note was not signed by petitioner's former husband, Rudolph, nor was Rudolph asked to sign the note.On or about May 7, 1942, petitioner's father drew a personal check in favor135 of petitioner in the amount of $ 10,000 which petitioner endorsed and immediately turned over to the partnership. This amount represented her partnership interest. The partnership deposited the check in the Seattle National Bank on May 7, 1942.The partnership was modified by a certificate of formation of a limited partnership bearing the date of June 30, 1943. By reason of the modification of the limited partnership agreement, additional limited partners were taken into the partnership, among them being Vedola Johnson, daughter of Albin Johnson and sister of petitioner. Vedola Johnson, sometimes hereinafter referred to as petitioner's sister, executed a note made out to her father for $ 6,666.67, and petitioner and her brother had their former notes of $ 10,000 returned to them. They in turn each executed another note payable to their father in the amount of $ 6,666.67. This note was signed by petitioner and dated June 30, 1943. Petitioner's former husband did not sign this note.Petitioner did not know who was present when this second note was signed, nor did she remember where it was signed. Petitioner's brother was not present when the second note was signed. Petitioner136 did not know if the second note had been paid, and only remembers paying interest on the note once, that being the $ 876.65 payment which she made by getting the money from her father.On or about April 20, 1945, petitioner instituted an action for divorce against Rudolph in the Superior Court of the State of Washington for King County. The complaint stated that the parties had accumulated as community property household furniture for a 5-room house of the approximate value of $ 1,000, a 1931 Hupmobile sedan of the approximate value of $ 200, some war bonds of undisclosed amounts, and 3 life insurance policies. No mention was made in this complaint filed by petitioner of the partnership interest.997 On June 30, 1945, petitioner and her former husband entered into a property settlement which provided in part that petitioner would have the care and custody of the couple's minor daughter and that Rudolph would pay as support money for the child $ 35 a month. There was, in addition, a disposition made of the property set out by petitioner in her complaint and the property settlement then provided in part as follows:That the plaintiff has a certain Limited Partnership interest137 in Western Construction Company a copartnership consisting of her father, Albin Johnson, J. A. Johnson and George Johnson, and other limited partners. It is hereby specifically agreed by and between the parties hereto that the said limited partnership interest of plaintiff in said Western Construction Company shall be set over to the plaintiff as her sole and separate property, and she agrees to save the defendant harmless from any claim or claims of any kind arising out of said partnership, and particularly to save the defendant harmless from any demand or claim made upon a certain $ 10,000.00 note given to her father, Albin Johnson, as security for a loan, the proceeds of which were used by the plaintiff to buy her interest in said copartnership. And the plaintiff further agrees to save the defendant harmless from any claim on income tax arising out of her interest in said copartnership.No mention was made in this property settlement of the note in the face amount of $ 6,666.67 which petitioner had given to her father.On August 28, 1945, petitioner was granted an interlocutory decree of divorce by an order entered in the Superior Court of the State of Washington for King County. 138 Petitioner's former husband did not appear and had been, before this, adjudged in default for lack of appearance. On March 19, 1946, a final decree of divorce was granted to petitioner.There were no profits credited to the accounts of the limited partners and no withdrawals by them until after the close of the taxable year ending December 31, 1942. Rudolph Keil did not withdraw any amounts from the partnership during the years in controversy or at any other time, nor did he ever try to get any money from the partnership. Rudolph only knew of two times that petitioner got money from the partnership. One time he knew she had received money to go to Canada with two girl friends and another time she had received money to get her teeth fixed.Rudolph Keil and petitioner filed separate returns of income for the years 1943 and 1944, in which the income from the limited partnership was divided and one-half reported by each of said Keils.Petitioner withdrew numerous amounts from the partnership during the taxable years in controversy.Rudolph learned of petitioner's interest in the partnership from her when she got her interest. She had told him that she received shares from the company139 and that she might get a little money out of it. He was not, however, consulted, nor did he see either the first partnership agreement or any of the publications in the newspaper 998 concerning said partnership. It was Rudolph's understanding that petitioner's father gave her the shares. He neither resisted nor assisted petitioner in getting her interest in the partnership.Although petitioner's former husband knew about her interest in the partnership he did not know that she had signed a note for $ 10,000, nor did he have any discussions with her at the time of the signing of either the first or the second notes. Rudolph did not know that the second note for $ 6,666.67 existed.Rudolph first found out about a note in 1945 by accident. This was the first that Rudolph knew about a note being signed since he then mentioned it to petitioner and was informed by her that she had signed a note and had received $ 876.65 from her father to pay the interest thereon. Rudolph never knew about the second note until being so informed at the hearing of this case.Respondent, some time prior to March 22, 1950, made deficiency determinations against the three general partners, J. A. 140 Johnson, George Johnson and their wives, and Albin Johnson, and also Lloyd Johnson and Roberta M. Johnson, his wife, which proceedings were consolidated for hearing and heard before the Tax Court of the United States which promulgated a decision on March 22, 1950. Said decision and Findings of Fact are reported in volume 14 of the Tax Court Reports, beginning on page 453.Petitioner's partnership interest was her separate property.OPINION.It cannot be questioned that petitioner was not, in terms, a party to the Western Construction Co. case 1142 upon which she relies for her plea of res judicata or estoppel by judgment. Identity of parties is a prerequisite to the success of that contention. American Range Lines, Inc., 17 T. C. 764, affirmed on this issue (C. A. 2) 200 F.2d 844">200 F. 2d 844. Nor can she have been in privity with her father or any other individual party to the litigation, since her interest was not derived from him or anyone else on her own version of the facts. The remaining ground urged is that this was class litigation and, her interests being affected, she was in substance a party. 30 Am. Jur. 957, 962, 963. 141 But there were two issues in the Western Construction Co. proceeding. 2 The first, a claim by respondent that it was an association 999 taxable as a corporation did, indeed, indirectly affect her, though the decision in any event was conclusive as to her interests only by derivation, as a stockholder's fortunes are identified with those of his corporation. See American Range Lines, Inc., supra.But the second issue bound her not at all. Only the general partners who were there charged with the entire income of the venture, could have lost -- or won -- as a consequence of the litigation. The tax liabilities there in question, did not include that of petitioner for any year, even indirectly. 3 We cannot see how she was a member of a "class" involved in the proceeding, and thus a party herself. Even her property rights, as distinguished from her tax liability, were not affected, so much as indirectly. Her father could have been held taxable in spite of her legal right to the income. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293.143 We agree with petitioner that if any principle of repose applies, it would presumably be that of res judicata, rather than mere collateral estoppel. Unlike most cases in this field, see, e. g., Tait v. Western Maryland Ry. Co., 289 U.S. 620">289 U.S. 620, and Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, the years involved in the prior litigation, and those presently in controversy are the same. But the issues were, nevertheless, different because, as we have said, petitioner's individual tax liability was not there litigated, nor could it have been. No deficiency determined against her was being contested. Secs. 271, 272, I. R. C.This is more like a restatement of the conclusion previously arrived at that petitioner was not a party directly or by privity. In the tax field this would ordinarily require privity by title or estate, or, as in the case of a transferee, by identity of taxable status. See, e. g., First National Bank of Chicago v. Commissioner, (C. A. 7) 112 F.2d 260">112 F. 2d 260, certiorari denied 311 U.S. 691">311 U.S. 691. And it is unfortunate that respondent chooses not to argue144 the point but only to preserve it. He says merely:Because it has been shown by the respondent that the doctrines of res judicata or collateral estoppel do not apply to this proceeding -- since the issues here involved are so obviously different -- no time has been devoted in this brief to the question of whether petitioner was a party or in privy to the first proceeding, but the respondent here submits that this question is not without doubt and for that reason it is by no means conceded. See, American Range Lines, Inc. (1951) 17 T. C. 764, modified (C. A. 2d, 1952) 200 F. 2d 844, * * * [Respondent's brief, p. 30.]Nevertheless, it was in connection with the second, or partnership, issue that the findings were made upon which petitioner seeks to invoke the plea of res judicata. And they are too general to be helpful, especially if it is merely an estoppel by judgment upon which she relies. The statements as quoted in petitioner's brief are:1000 While none of the husbands of the Johnson daughters signed any of these notes given to the general partners, generally speaking the notes were signed by the wives with 145 the knowledge and consent of their husbands. Though the sons-in-law did not sign the notes, they treated these obligations as resting on their community property.* * * The partnership profits were regarded by all of the limited partners and their spouses as community property and in the filing of their returns for the years 1942 to 1945, inclusive, such profits were divided in the returns of the spouses on a community property basis the same as other income. * * Partnership checks representing distribution of profits were sometimes made out to the limited partners and sometimes to the spouses of the limited partners, depending upon which one requested the money. It was regarded as a family business and no distinction was made as between limited partners or his or her spouse when it came to distributing the profits. [Petitioner's brief, pp. 9, 10.]It seems manifest that if these findings were material at all, it could only be connection with the second issue -- that of the liability of the general partners for tax on all the partnership income. As to this issue, we have already noted that petitioner -- and hence respondent here -- was not bound even indirectly. It matters146 not therefore whether we conclude that res judicata is not applicable because petitioner was not a party to the prior litigation, or that collateral estoppel cannot be invoked because, the claim being different, no facts pertinent here were actually litigated and decided. See The Evergreens v. Nunan, (C. A. 2) 141 F. 2d 927, certiorari denied 323 U.S. 720">323 U.S. 720. In either event, the present question is still open, in our opinion, for decision now.On the merits, the law of the State of Washington, in which the marital community existed, prohibits the wife from obligating the credit of the community under such circumstances as this. Wilbeck v. Conway, 141 Wash. 250">141 Wash. 250, 251 Pac. 282. When she alone signed and delivered to her father the original $ 10,000 note which furnished her with the funds to buy her partnership interest it could purchase only her separate property. Unless, as she contends, the note became a community obligation by reason of the acquiescence, acknowledgment, or ratification of her husband, the situation would accordingly appear to be governed by E. C. Olson, 10 T. C. 458.147 There, "The respondent contends * * that the funds used to purchase the * * * [partnership interest] were borrowed on the separate credit of petitioner and were his separate funds; and that petitioner's share of the profit * * * was his separate income." In spite of the fact that "The courts of the State of Washington have uniformly held that money borrowed by a husband is presumed to be community property and that the property acquired with such borrowed money is presumed to be community property" (emphasis added) we there held that respondent's determination "that the borrowed money and 1001 the property acquired were the separate property of petitioner * * 'effectually overcomes the ordinary presumptions of law and the petitioners continue to have the duty of going forward with their proof. * * '"That it was the wife who borrowed the money in this proceeding makes the present case even stronger. And if her inability to pledge the community credit without her husband's consent does not overcome the presumption of Washington law that property acquired during marriage is ordinarily community property, see Stephens v. Nelson, 31">37 Wash. 2d 31, 221 P. 2d 520,148 clearly respondent's determination must do so.This brings us to the controverted factual issue as to whether petitioner's husband, now divorced, did in fact consent to or ratify the borrowing. Our findings dispose of that question.They are based on an effort to reconcile the testimony of all witnesses on both sides, who, we assume, were each attempting to give his best recollection of his version of the occurrences. The conflict seems to arise primarily because of a failure to distinguish between petitioner's acquisition of an interest in the partnership on the one hand and her liability on the notes on the other. Of the first, we think the husband was made aware at some time near the actual event. As to the second, we accept his statement that he learned of the first note only by accident and of the subsequent one not at all; and that he was accordingly never asked, nor given occasion, to agree to or ratify any pledging of the credit of the community. That there was some failure even to keep him informed of the transactions is conclusively apparent from the reference in the property settlement of June 1945 to "a certain $ 10,000 note given to * * * Albin Johnson" which, at149 the time, no longer existed and had been extinguished exactly 2 years earlier; whereas it is stipulated that no reference was made to the note for $ 6,666.67 which was the only one then in effect.We have accordingly found that petitioner's ex-husband did not know of either note at the time each existed and that the partnership interest was consequently petitioner's separate property. The income was not community income. "On the contrary * * [the evidence] indicates that petitioner borrowed the * * * [money], that any notes given were * * * [her] personal notes * * * Under the circumstances, our conclusion is that the petitioner invested * * * [her] separate funds * * ; that it [the property] became * * [her] separate property and that of * * * [her] partners; and that * * * [her] distributable share of the profit * * * is * * * [her] separate income and taxable as such." E. C. Olson, supra, 464, 465.Decision will be entered for the respondent. Footnotes1. 14 T. C. 453, affirmed per curiam (C. A. 9) 191 F. 2d 401↩.2. "Petitioner Western Construction Co. was created as a limited partnership under the laws of the State of Washington in 1942 and again in 1943. The certificate of formation of the partnership included petitioners J. A., George, and Albin Johnson as the general partners and their several adult sons and daughters as the limited partners. Held, on the evidence, petitioner Western Construction Co. does not resemble an association in corporate form and is, therefore, not taxable as such ( Glensder Textile Co., 46 B. T. A. 176, followed); held, further, the Western Construction Co. is a bona fide partnership composed of the three Johnson brothers and their several children as set out in the certificate of formation of the partnership and is recognized as such for tax purposes ( John A. Morris, 13 T. C. 1020, folowed)." (Headnote, Western Construction Co., supra↩.)3. Petitioner's claims of overpayment are in essence a recognition that petitioner's individual tax liability was not determined in the prior proceeding but is in issue here.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624336/	ROQUEMORE GRAVEL & SLAG COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roquemore Gravel & Slag Co. v. CommissionerDocket No. 101756.United States Board of Tax Appeals44 B.T.A. 641; 1941 BTA LEXIS 1295; June 5, 1941, Promulgated 1295 Taxpayer corporation on September 9, 1935, entered into a written agreement with a second corporation, whose properties had been turned over to petitioner to operate. The agreement contemplated a joint effort to obtain a loan of $70,000 and specifically provided that in the event this loan was obtained both corporations bound themselves to neither declare nor pay any dividends until the loan was paid in full. On August 28, 1936, the loan was obtained, and was not paid off until some time in 1937. In 1936 the taxpayer neither declared nor paid any dividends although it had a net income of $33,833.06 available therefor. Held, inasmuch as it does not appear that this income was earned subsequent to August 28, 1936, the taxpayer is not entitled to credit pursuant to section 26(c)(1) of the Revenue Act of 1936. Robert A. Littleton, Esq., for the petitioner. Frank M. Thompson, Esq., for the respondent. KERN 641 The Commissioner determined deficiencies in income and excess profits taxes for the year 1936 in the amounts of $8,888.85 and $2,524.20, respectively. Petitioner admits liability for the entire excess profits tax deficiency as well1296 as for $2,276.42 of the income tax liability. The balance, $6,612.43, representing surtax on undistributed profits, is contested. The sole question presented is whether a certain agreement of September 9, 1935, between petitioner and the Montgomery Gravel Co. constitutes a written contract executed prior to May 1, 1936, a provision of which expressly deals with the payment of dividends, within the meaning of section 26(c)(1) of the Revenue Act of 1936. 642 FINDINGS OF FACT. The Roquemore Gravel & Slag Co., the petitioner herein, is a corporation organized in 1933 under and by virtue of the laws of the State of Alabama. Its principal office and place of business is at Montgomery, Alabama. Its Federal income tax return for 1936 was filed with the collector of internal revenue at Birmingham, Alabama. Petitioner was formed for the purpose of acquiring properties formerly owned by the Roquemore Gravel Co., which properties had been foreclosed and bid in by a committee representing the holders of bonds issued by the Roquemore gravel co. Prior to the organization of petitioner in 1933, John D. Roquemore had entered into an agreement with the committee representing1297 bondholders of the old company that he would purchase from them on behalf of the petitioner the gravel deposits owned by the old company and, in connection with such purchase, the new company (petitioner) would assume and pay in addition to the purchase price an indebtedness of approximately $23,000 representing court expenses, receivers' and lawyers' fees incurred in the receivership proceeding against the Roquemore Gravel Co. Petitioner was unable to finance the purchase alone, and on September 9, 1935, entered into a written agreement with the Montgomery Gravel Co., the material provisions of which were as follows: 1. Roquemore Gravel & Slag Company shall be the operating company, * * 3. Certain capital stocks of said corporations have this day been exchanged between the stockholders thereof, and this contract shall be effective from and after this date, and the possession of the properties of the Montgomery Gravel Company are hereby delivered to the Roquemore Gravel & Slag Company for the effectuation of the purposes of this contract, and subject to the terms thereof. 4. The term of this contract shall be for a period of one (1) year from this date, except that in1298 the event the loan from the Reconstruction Finance Corporation hereinafter provided for or some other source is procured, the term of this contract shall be from the date hereof until said loan or any renewal or extension thereof shall have been paid in full. 5. It is contemplated that efforts will be made by the two corporations to procure a joint loan in the sum of SEVENTY THOUSAND ($70,000.00) DOLLARS, or so much thereof as may be obtained from the Reconstruction Finance Corporation, or such other source as may be available, the repayment of which is to be secured by mortgage of all the assets of both corporations, and both of said corporations, * * bind and obligate themselves to execute any and all papers and documents, and take any and all steps and proceedings that may be necessary to the end of procuring such loan, * * . In the event this loan is obtained, it is understood and agreed that from the proceeds of each and every order filled there shall be set aside and deposited in a sinking fund for the retirement of said loan, the sum of five (5??) per ton, for each ton of sand and/or gravel sold and shipped, and it is further understood and agreed that all profit after1299 payment of current operating expenses and of the carrying charges of Montgomery Gravel Company, as hereinabove 643 provided for, shall be applied in liquidation of said indebtedness, and for no other purpose; and it is further understood and agreed that no dividends shall be declared or paid by either of said companies until such time as said indebtedness shall have been discharged in full. The assent of the stockholders of said corporations is evidenced by their signatures hereinafter affixed. It was also set forth in the agreement that the proceeds of any loan obtained would be applied to pay off the debt to bondholders of the former company, and the balance due on expenses of the receivership proceeding against the former company. At the time the agreement was signed, an application was made to the Reconstruction Finance Corporation for a loan. The terms specified by the Reconstruction Finance Corporation, under which the loan would be granted, were deemed unacceptable by petitioner and a new source of capital was sought. In the meantime, operations on the properties were carried on. On August 28, 1936, the loan was obtained from another source and with the proceeds1300 petitioner paid off the indebtedness incurred by the purchase of the properties from the Roquemore Gravel Co. The title to the properties then passed to the petitioner, which continued to operate them for the Montgomery Gravel Co. and Roquemore. The loan was not paid off until some time during the year 1937. In the taxable year petitioner neither declared nor paid any dividends, although it had a net income in the amount of $33,833.06 available therefor. OPINION. KERN: Petitioner contends that it executed prior to May 1, 1936, a written contract, a provision of which expressly dealt with the payment of dividends, and that, without violating that contract, it could not distribute any dividends in the taxable year. Respondent contends, however, that the contract did not prohibit petitioner from paying dividends until and unless the desired loan was obtained. We agree with respondent's interpretation of the contract, and come to the conclusion that the written contract did not prohibit petitioner from distributing dividends until August 28, 1936. Prior to that date petitioner could have distributed dividends at will without violating any provision of the written contract1301 here in evidence. See . Petitioner's single witness spoke of a prior agreement between John D. Roquemore and a committee representing bondholders of the old company which provided that the petitioner, when formed, should issue no dividends as long as it operated the old company's property until the purchase price should be fully paid by petitioner. This agreement was not offered in evidence nor is there any indication 644 that it was a written agreement. One thing, moreover, is certain; it was not executed by petitioner. Therefore, any such agreement is immaterial to our present discussion. Having determined that the contract did not forbid the distribution of dividends until August 28, 1936, the day the loan was procured, there still remains for us the problem of whether petitioner is entitled to a credit for any part of the undistributed profits. Had it been shown that on August 28, 1936, petitioner had no earnings from which dividends could have been declared, it would be clear that any 1936 dividends would have to have been declared out of earnings of the petitioner acquired after the date of the loan. A distribution*1302 of these earnings was strictly forbidden by the contract here in evidence. Such is not the case presented by the record before us, however, for petitioner has not raised this issue nor has it introduced any evidence tending to shed light on petitioner's financial status at the date of the loan; and it is a well established rule that the determination of the Commissioner is entitled to a presumption of correctness. . An application of that rule to our instant situation necessitates the presumption that petitioner's undistributed profits as of August 28, 1936, amounted to no less a figure than at the end of that year, and that a distribution of dividends on August 27, 1936, could have been made in the full amount of $33,833.06, without violating a provision of any written contract exected by petitioner. Since the burden of coming forward with the proof rests with the petitioner in matters of this sort, , we must follow the above reasoning and sustain the respondent's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624343/	Estate of Alfred Johannes Schneider-Paas, Alfred C. Schneider-Paas, Executor v. Commissioner.Estate of Schneider-Paas v. CommissionerDocket No. 1797-62.United States Tax CourtT.C. Memo 1969-21; 1969 Tax Ct. Memo LEXIS 274; 28 T.C.M. (CCH) 81; T.C.M. (RIA) 69021; January 30, 1969, Filed 274 A. Jesse Duke, Jr., and Herbert P. Polk, for the petitioner. John J. Hopkins, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined a deficiency in estate tax of petitioner in the amount of $4,428,496. All of the issues raised by the petition have been disposed of by the parties with the exception of the fair market value of 282 shares of stock in a German company held by Alfred Johannes Schneider-Paas at the date of his death, December 11, 1957. Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioner is the Estate of Alfred Johannes Schneider-Paas, Alfred C. Schneider-Paas, executor. Alfred Johannes Schneider-Paas (herein after referred to as decedent) died on December 11, 1957. At the time of his death he was a citizen of the United States residing in Montclair, New Jersey. Alfred C. Schneider-Paas, the decedent's son, was appointed executor of decedent's estate. The address of the executor at the time the petition in this case was filed was Montclair, New Jersey. The executor filed the estate tax return for decedent's estate on June 11, 1959, with the district director275 of internal revenue, Newark, New Jersey. During the 1920's the decedent, who was then a citizen and resident of Germany, purchased 362 Kuxe (shares) of Gewerkschaft Eisenhuette Westfalia (hereinafter referred to as G.E.W.). In 1946 he transferred 80 of such shares to 4 of his children. These shares continued to be owned by the 4 children from the time of such transfer until the date of their father's death. At the date of his death decedent owned the remaining 282 of the 362 shares he had acquired in the 1920's. G.E.W. is classified under German law as a Gewerkschaft. A Gewerkschaft is generally a mining company and such a company is not governed under German law by the same statutes as are other German corporations. Generally, a German corporation is an Aktiengesellschaft or a GmbH. A share in a Gewerkschaft is called a Kuxe. The number of Kuxe of a Gewerkschaft is 100. However, the number of Kuxe can be 1,000 or multiples thereof but not more than 10,000. The Kuxe cannot be divided or split as can the shares of other corporations. 82 G.E.W. was organized and began business in 1826. Its original purpose was the mining of moorstone and its smelting. At all times pertinent276 herein, the right to mine has not been utilized by G.E.W. and over the years G.E.W. developed into a foundry. In 1930, it started to manufacture machinery. It is unusual for a Gewerkschaft to be a manufacturing corporation. When it was organized the ownership of G.E.W. was represented by 1,000 shares which by its charter it was authorized to issue. The shares of a Gewerkschaft are assessable. If a shareholder does not pay the amount of the assessment, he has the right to offer his shares to the Gewerkschaft. The Gewerkschaft will then sell the Kuxe at auction and out of the value received at the auction pay the Gewerkschaft the assessment and then return any excess to the stockholder. In 1932 G.E.W. assessed its shareholders. The holders of 284 shares of the 1,000 shares turned their shares over to G.E.W. as a result of the assessment, and G.E.W. has held the 284 shares since 1932. There have been no assessments placed on the shares of G.E.W. since 1932. At the time decedent became associated with G.E.W., he became chairman of the executive committee of the company, which position he retained until 1947 when he and his wife emigrated to the United States. In 1947 decedent became277 disassociated with the active management of G.E.W. After becoming a United States citizen in 1953, decedent was re-elected to the executive committee of G.E.W. as vice chairman, which position he retained until the date of his death. The 282 shares of G.E.W. owned by decedent at the date of his death represented approximately 39 percent of the outstanding shares of G.E.W. The next largest block of shares was owned by a trust for a German family, which trust owned 182 shares. Of the remaining shares, 30 shares were owned by one individual, 20 shares by each of four of decedent's children and 20 shares by another individual, 17 shares by an individual, 14 shares by one individual, and 11 by another. There were 3 individuals who owned 8 shares each, one who owned 7 shares, five who owned 5 shares each, three who owned 3 shares each, two who owned 2 shares each and 11 who owned 1 share each. Except for the shares owned by decedent and the 80 shares owned by his four children who in the late 1940's became American citizens, and 12 shares part of which were owned by two Dutch people who were husband and wife all of the shares of G.E.W. were owned by German citizens. When decedent left278 Germany and discontinued his active participation in the management of G.E.W., a German lawyer by the name of Keil, who was decedent's personal legal representative in Germany, became chairman of the executive committee of G.E.W. and remained in that capacity until 1958. Also during the time decedent was living in America his personal certified public accountant and financial consultant in Germany was the managing director or chief executive officer of G.E.W. The charter and bylaws of G.E.W. provide for an executive committee of at least three and not more than six members, which committee is to be elected by the shareholders. Provision for the manner of election is set forth in the charter and bylaws and contains the following: If in a final election of the chairman another member receives at least one-third of the votes cast, he shall take office as deputy chairman. Similarly, if in the election of the third member another member receives at least one-third of the votes cast, he shall take office as the fourth member of the committee. In the above cases no separate election shall be held for deputy chairman or for the fourth member. The charter provides for notices to be sent279 of meetings of the executive committee, that normally at least one meeting of the executive committee shall be held each month, and that the executive committee shall act by majority vote following a general discussion. The executive committee shall have a quorum if three members are present including either the chairman or deputy chairman. The bylaws provide that a general meeting of shareholders shall be held annually during the first half of the year at the Westfalia plant and that a shareholders' meeting shall have a quorum if a majority of the shares are represented at it. If no such majority is represented, a second shareholders' meeting shall be held within a month and the second meeting shall have a quorum with respect to all subjects on the agenda, regardless of the number of shares represented, provided it has been stated in the notices as a second shareholders' meeting called because of lack of a quorum at the preceding meeting. The bylaws provided that the 83 shareholders' meeting adopt its decisions by a simple majority except with respect to certain specified matters or when amending the charter which required a three-fourths majority. The charter provided that280 a single shareholder may demand the right to inspect the books of account only if he holds at least 300 shares but several members, joining together, owning at least 300 shares, shall be permitted to have their agent make an inspection of the books for the purpose of auditing. Alfred C. Schneider-Paas (hereinafter referred to as Alfred), decedent's son and the executor of his estate, was born in Germany in 1914. He went to England in 1933 as an exchange student and in November 1936 came to the United States and became a citizen of the United States during World War II. From 1936 to 1947 he worked for various companies in the United States and in January 1940 bought a small manufacturing company in Highland Mills, New York, which he operated during the war in defense production. In 1949 decedent founded Mining Progress, Inc., a New York corporation, the main business of which was to represent G.E. W.'s interest in North America. Mining Progress, Inc. began business in 1951 and in 1953 Alfred became its treasurer and he has remained in that capacity until this date. From 1953 through 1957 Alfred made two or three trips each year to Germany to assist his father at the annual shareholders281 meeting of G.E.W. and in connection with business matters involving Mining Progress, Inc. and G.E.W. In August 1957 Alfred was elected to the executive committee of G.E.W. and at the reorganization of G.E.W. in January 1958 the executive committee was re-elected and Alfred became its chairman which position he continued to hold until the time of the trial of this case. Prior to the time Alfred was elected to the executive committee of G.E.W. in August 1957, there had been five members of the committee, and Alfred, when he was elected, made the sixth member. The members of the executive committee are elected for a term of 4 years and may be reelected. Alfred had attended during the 4 years preceding his election to the executive committee at least six meetings of that committee as an adviser to his father. The declaration of a dividend by a Gewerkschaft is controlled by the shareholders. Dividends are declared by a majority vote of the shareholders in favor of the dividends. In the case of a Gewerkschaft which does not own a mine, which was the situation with respect to G.E.W., a vote of 75 percent of the voting shares is required to liquidate the company. In 1931 G.E.W. began282 the manufacture of underground coal mining machinery. In Germany the long wall mining method of underground coal mining is used as distinguished from the room and pillar method of mining generally used in the United States. G.E.W. manufactured machinery for long wall coal mining. At the time G.E.W. commenced the manufacture of underground coal mining machinery, an engineer named Loebbe started designing such machinery for G.E.W. Long wall mining consists basically of drilling a shaft of from 100 to 300 yards long into a coal vein forming a narrow, low tunnel. The coal is extracted by loosening it from the long side of the tunnel. Long wall mining machinery systems consist of three main components: A machine for conveying the coal from the shaft, a winning machine, and a roof support. The roof support is a mechanism to support the weight of the coal and the earth above the seam. As coal is loosened and removed from the shaft, mining proceeds forward into the seam of coal permitting the earth above the worked seam to collapse. Following the end of World War II in 1945 most manufacturing plants in Germany were either destroyed or not in workable condition and the economy was in a very283 disrupted state. In 1948 with the currency reform put in by the Government of West Germany, recovery began in the German economy. From the practical standpoint the currency reform eliminated the old currency and only a small amount of the new currency, the Deutsch Mark (DM) was issued. From a practical standpoint all corporations and individuals had to start business operations anew in 1948. Due to American help, to some extent through the Marshall Plan, and many other factors, recovery of the West German economy proceeded at a fast pace following 1948. One of the major problems in Germany in 1948 and for some years following that date was a shortage of capital. By 1957 and for a number of years prior thereto, G.E. W.'s principal products were coal mining machinery although it continued to manufacture certain other machines. In 1957 non-coal mining machinery amounted to approximately 5 percent of G.E. W.'s total sales. Included in the manufacture of coal mining machinery are parts for such 84 machinery. Of G.E. W.'s total production of coal mining machinery and parts, approximately 60 percent was of machinery and 40 percent of parts. Prior to 1939 G.E.W. had been manufacturing284 and selling a double-chain type conveyor and a winning machine which is a plow or planter. In the 1930's this type conveyor and winning machine had become the standard tool used by the mining industry in Germany and was beginning, prior to World War II, to be used in other parts of Europe. G.E. W.'s conveyor and winning machine were covered by patents filed under German law. Subsequent to World War II certain competitors of G.E.W. began making a conveyor which G.E.W. considered to be in violation of its patent on its conveyor. G.E.W. worked out a compromise with its competitors whereby it granted licenses to certain of its competitors under its conveyor patent. Demag is a publicly held German corporation engaged in the manufacture of large machinery for diversified uses. Included among the products Demag manufactures are machines for long wall mining which are competitive with the machines manufactured by G.E.W. In 1955 Demag began manufacturing a conveyor which G.E.W. considered to be in violation of its patent. Discussions between representatives of Demag and G.E.W. with respect to G.E. W.'s position in connection with the conveyor being manufactured by Demag led to representatives285 of Demag stating to representatives of G.E.W. that Demag contemplated filing a proceedings to nullify G.E. W.'s conveyor patent. Negotiations between Demag and G.E.W. continued and were terminated by an agreement whereby G.E.W. purchased from Demag its 1959 production of conveyors and a supply of spare parts for 350,000 DM and Demag agreeing to refrain in the future from manufacturing the double-chain conveyor which G.E.W. contended violated its patent. The last patent covering any part of G.E. W.'s conveyor was issued in 1949. In Germany a patent is legally good for a period of 17 years. There were other manufacturers of conveyors for long wall mining in Germany in 1957. The winning machine which was developed by G.E.W. during the 1940's reached a fully developed state in the latter part of 1950. Many parts of G.E. W.'s winning machine were patented under German law and some parts of this machine were patented in countries other than Germany. During the 1940's G.E. W.'s coal plow which was a part of its winning machine was experimentally tried out in a Germanowned mine. The mine operators filed seven patents with respect to this coal plow which they later sold to the Coal Industry286 Association. Difficulties developed between the Coal Industry Association and G.E.W. in connection with G.E. W.'s further development of its coal plow. Negotiations between G.E.W. and the Coal Industry Association with respect to the further development of G.E. W.'s coal plow which began in 1953 were settled in early 1958 by G.E. W.'s agreeing to take from the Coal Industry Association a royalty-free license for all coal plows delivered in Germany and to pay a 6 percent royalty on all plows shipped abroad. In addition G.E.W. agreed to pay 150,000 DM to the Coal Industry Association and to license German competitors to use G.E. W.'s plow patents on a royalty-free basis. G.E. W.'s sales market was primarily the European coal mining industry. It did export some machinery to the United States, England, Belgium, Holland, and France. The offices and manufacturing facilities of G.E.W. are located in Wethmar, near Lunen, Westfalia, Germany, which is a part of the Ruhr Basin. G.E.W. had an English subsidiary which it acquired in 1956 called Underground Mining Machinery Ltd. (hereinafter referred to as UMM) in which it owned a 66 2/3 percent interest. It also had an affiliate called Unterage287 GmbH (hereinafter referred to as UGmbH) in that part of the Saar Region which, until 1959, was under the control of France. During 1957 and years prior thereto at least from 1953, G.E.W. owned a 42 1/2 percent interest in UGmbH. In addition to exports to England and France through its affiliated companies, G.E.W. also exported machinery during 1957 and for a number of years prior thereto to Belgium and Holland. In England there were no plows manufactured which were similar to those manufactured by G.E.W. other than those manufactured by G.E. W.'s English affiliate and all of this type of plow used in England were plows which had been purchased from G.E.W. or its English affiliate, UMM. In 1955 there were 43 coal plow installations in England and 18 of those 85 were of G.E.W. plows. The others were a type of cutting machine or drum cutter which winned coal from a long wall face by loosening it rather than shearing the coal as does the G.E.W. plow, and it was this English type plow which competed with G.E. W.'s plow. In Germany in 1955 there were 80 or perhaps a few more than 80, coal plow installations and of the total coal plow installations in Germany, 76 were G.E. W. 288 's installations. Both UMM and UGmbH were licensed by G.E.W. to manufacture plows and conveyors under G.E. W.'s patents. In addition to the conveyor and plow, in order to complete an underground mining installation for long wall mining, a roof support is necessary. When long wall mining commenced, the roof supports were of a type that had to be moved by hand. Sometime prior to 1957 an English company had designed and commenced manufacturing a self-advancing type of roof support. In 1957 and for a number of years prior thereto when G.E.W. would obtain a contract for a complete long wall underground mining unit, it would purchase from another company the best available type of roof support in order that it might make the full installation since in 1957 and prior thereto G.E.W. had not completed development of its own self-advancing roof support. In 1950 G.E. W.'s engineers had started the design of a high pressure hydraulic self-advancing roof support which in the view of officials of G.E.W. would revolutionize the coal mining industry by abolishing the need for men to manually move any part of the roof supports. By 1955 G.E.W. had a prototype of its hydraulic self-advancing roof289 support. At approximately the time that G.E.W. began to experiment with the high pressure hydraulic self-advancing roof support, it began trying out its experimental models in the Frederick Heinrich Mine which is one of the best known mines in the Ruhr District of Germany. By the beginning of the year 1957 G.E.W. had installed 14 units in its experimental installation in the Frederick Heinrich Mine. On the basis of these installations in 1957 G.E.W. received in 1957 an order for 55 additional units for installation in the Frederick Heinrich Mine. Approximately 110 units of the hydraulic self-advancing roof supports are necessary for a mining face 150 yards long and 135 units are necessary for a face 200 yards long. In the early part of 1958 when G.E.W. was preparing its brochure for the Essen Fair which was to be held in September 1958, the officials preparing the brochure put in the brochure references to development of the hydraulic self-advancing roof support being at a state which would enable G.E.W. to solicit orders for the roof support. Prior to going to the Essen Fair officials of G.E.W. asked officials of the Frederick Heinrich Mine for endorsements of its roof support290 since it had been experimenting in that mine for approximately 8 years. The chief of the operation of the Frederick Heinrich Mine flatly refused to give such endorsement and told the representatives of G.E.W. that the roof support was not ready to be offered to the mining industry as a whole because the safety of the miners depended on it and that further experiments were needed. G.E.W. continued the experimental installations at the Frederick Heinrich Mine and the units installed in 1957, 1958, and 1959 were brought back to G.E. W.'s factory, redesigned, rebuilt, and repaired several times before the hydraulic self-advancing roof support was considered ready to be marketed to mines in general. The first general sales by G.E.W. of the hydraulic automatic roof support were made in 1960. G.E. W.'s hydraulic automatic self-advancing roof support was of a more advanced design than the English type self-advancing roof support which had been sold in 1957 and for sometime prior thereto. G.E. W.'s hydraulic automatic roof support operates on a pressure of 4,200 pounds per square inch as compared with the English unit which operates at 1,400 pounds pressure per square inch. G.E. W.'s hydraulic291 automatic roof support consists of two frames or legs, having on each side two props or jacks that move alternately, and while one side remains tight against the roof, the other side pulls itself along forward. When the side which is moved is set in place, the other side is automatically released and pulled forward. One of the difficulties encountered by G.E.W. in the development of its hydraulic self-advancing roof support resulted from its starting its experimenting with oil and being required by the German authorities to convert to an emulsion which caused corrosive problems and problems with operating valves and with the excess pressure valves. The problem of the selection of materials for 86 G.E. W.'s hydraulic self-advancing roof support was partially caused by the high driving pressures used in this support. In 1957 the engineers at G.E.W. concluded that it was necessary to redesign the valves and operating units of the hydraulic system to meet the high pressure and also to make certain changes in the power unit moving the roof support with respect to which certain trouble had been experienced. It was also necessary for G.E.W. to train its labor force to work with the292 fine tolerances required in connection with the G.E. W.'s hydraulic roof support, and also necessary for G.E.W. to obtain the specialized equipment to deal with such fine tolerances. The first successful installation of G.E.W. hydraulic self-advancing roof support was in the United States where there was no prohibition against driving the support with oil. In 1957 the cost of a complete installation of a conveyor in a typical long wall mining operation would range from 100,000 DM to 200,000 DM and the cost of a complete installation of a plow in 1957 would range between 200,000 DM and 400,000 DM. In 1960 when G.E.W. commenced commercial sales of its hydraulic self-advancing roof support, the cost of a 150 unit support was approximately 630,000 DM. In 1960 the price range for a typical complete installation of all three components would range between a minimum of 900,000 DM and 1,500,000 DM, not including the power plant which was not marketed by G.E.W. Since 1953, G.E.W. has exhibited its mining machinery at the annual meetings of the Mining Congress shows in the United States which are usually held in May. In 1957 at the Cleveland show G.E.W. did not effect any sales of its machinery293 in the United States. In the 1920's the American coal mining industry ceased the use of the long wall mining system. Around 1950 coal miners in the United States began again to show some interest in long wall mining systems with the expectation that such systems might yield greater production and labor savings. In 1951 G.E.W. made its first installation of long wall mining machinery in the United States. At that time the mining industry was considering machinery which would yield a 25-ton production per man per shift. In 1955, at the Mining Congress show in Pittsburgh, manufacturers of mining machinery were approached by American miners looking for machines capable of producing 100 tons per man per shift. The installation made by G.E.W. in 1951 was in mines operated by Eastern Gas & Fuel Associates which installation resulted from decedent's suggestion in 1948 to the Bureau of Mines that the long wall mining system should again be tried in the United States and the high interest evidenced in this type of mining by officials of the Bureau of Mines. The installation in the Eastern Gas and Fuel Associates mine was successful. However, since for so many years the room and pillar system294 of mining had been used in the United States, G.E.W. was able to sell only a few installations in the United States during the years 1951 through 1957. However, the installation in the Eastern Gas and Fuel Associates mine was used by G.E.W. for advertising purposes. Representatives of G.E.W. would contact mine operators from various other countries who had for some reason come to the United States and take them to examine the long wall mechanized mining system which G.E.W. had installed at Eastern Gas and Fuel Associates and as a result of these inspection trips was able to make sales in the markets in various other countries. It was not until approximately 1964 that mining operators in the United States evidenced a real interest in long wall mining machinery. The model long wall mining installation which G.E.W. had in the Eastern Gas and Fuel Associates mine was the only comparable type of complete installation in the United States prior to the 1960's. This installation was in active use from the time it was installed in 1951 to the end of 1957. Its operation was closed at the end of 1957 and it did not again commence operation until August 1960. The mechanical roof supports which295 were used in this installation had been purchased by G.E.W. from other companies. Prior to January 1, 1958, when the installation at Eastern Gas and Fuel Associates closed down other installations in the United States in which mining machinery manufactured by G.E.W. was in use had closed. In 1957 G.E. W.'s physical plant was composed of a foundry, three machine shops, a warehouse, an electro station, transformer station, service installations, 87 and a gear works. Two of the machine shops were general shops and one a welding shop. All of the plants, except the foundry and one general machine shop, were relatively new, having been built after the conclusion of World War II. The foundry and one of the machine shops had been constructed a number of years prior to the commencement of World War II. Most of the machinery used in G.E.W.'s plant had been acquired after World War II although there was some machinery in operation which was 20 or 30 years old. In 1957 G.E.W. had plans to modernize its foundry and had prepared a preliminary plan looking toward such modernization. In 1957 G.E.W. had an office building for the planning department which had been constructed after World296 War II and was in the process of building a 3-story office building for the general business department. A separate building for executive officers had been rebuilt during 1957. During the years 1950 through 1957 G.E.W.'s exports, exclusive of sales of its affiliates, accounted for approximately 30 percent of its total sales. In 1957 German mining machinery manufacturers were the second largest exporters of such machinery in the world. G.E.W.'s principal market in Germany for its machinery is for use in the bituminous and anthracite mines. Its sales of machinery for use in lignite mines are relatively insignificant. The following schedule shows total production of bituminous coal in the West German Republic for the years 1950 through 1965 and the production per work day:Production perwork-day(In 1,000(In 1,000Yeartons)tons)(1950 = 100)1950125,739414.3100.01951135,054446.1107.71952139,3564 60.3111.11953140,740464.8112.21954144,721477.8115.31955147,934488.4117.91956151,363499.912 0.71957149,446496.9119.91958148,838494.8119.41959141,687469.5113.31960142,287468.4113.11961 142,741474.5114.51962141,136467.6112.91963142,116472.4114.01964142,201469.6113.31965135,077445.9107.6297 The following table shows the total consumption of bituminous coal and briquettes in the West German Republic for the years 1952 through 1965: TotalConsumptionYear(In 1,000 tons)195288,127195385,591195488,830195593,575195697,860195796,151195888,241195984,751196092,905196191,162196294,041196394,766196489,535196583,719The following schedule shows the primary energy consumption in the West German Republic for the years 1955 through 1965 divided between at-home-produced energy and imported energy, energy sources, and total energy consumption: Energy source195519561957195819591960Bituminous coalAt-home-produced64.1961.6259.4757.2857.8456.06Imported6.667.979.327.233.843.5370.8569.5968.7964.5161.6859.59Lignite coalAt-home-produced13.6313.4713.7213.6013.4112.57Imported1.991.691.762.161.811.8215.6215.1615.4815.7615.2214.39Mineral oilAt-home-produced1.681.751.942.272.582.52Imported7.839.539.9813.1016.3919.179.5111.2811.9215.3718.9721.69Natural gasesAt-home-produced0.200.270.280.290.340.36Imported0.200.270.280.290.340.36Mine gas (manuf'd)At-home-produced0.040.040.020.040.040.03Imported0.000.000.000.040.040.020.040.040.03Water power andimportedKW (surplus)At-home-produced2.412.432.312.542.072.24Imported0.260.190.120.440.530.772.672.622.432.982.603.01Nuclear energy ImportedOther At-home-produced1.111.041.081.051.150.930.68Total energyconsumptionAt-home-produced83.2680.6278.8277.0777.4374.71Imported16.7419.3821.1822.9322.5725.29100.00100.00100.00100.00100.00100.00298 Energy source19611962196319641965Bituminous coalAt-home-produced52.7649.1246.1242.8738.82Imported3.383.933.983.543.5356.1453.0550.1046.4142.35Lignite coalAt-home-produced12.4012.0611.8511.8510.63Imported1.761.731.741.491.2114.1613.7913.5913.3411.84Mineral oilAt-home-produced2.822.862.872.902.84Imported22.6526.4929.7833.7338.2425.4729.3532.6536.6341.08Natural gasesAt-home-produced0.410.480.620.901.21Imported0.000.000.010.410.480.620.901.22Mine gas (manuf'd)At-home-produced0.030.040.040.050.06Imported0.000.000.010.030.040.040.050.07Water power andimportedKW (surplus)At-home-produced2.181.941.781.702.11Imported0.780.520.390.150.632.962.462.171.852.74Nuclear energy Imported0.000.020.010.020.02Other At-home-produced0.830.810.820.800.6800.68Total energyconsumptionAt-home-produced71.4367.3164.1061.0756.35Imported28.5732.6935.9038.9343.65100.00100.00100.00100.00100.00299 The following table shows total orders received in the West German Republic for mining machinery in the years 1955 through 1961, broken down into categories with values in million DM: Category1955195619571958195919601961Underground installations151.4185.8223.9167.2149.7215.8240.7Pneumatic tools for mining and17.220.620.116.014.618.114.7quarrying industryShaft hoisting equipment43.243.953.852.841.350.947.9Coal preparation and coking97.3129.1175.7124.3118.6221.0150.9machinerySpares and accessories for the175.4204.4228.2197.9239.6325.7338.7above positionsConveyors and mining machines68.880.8109.160.7109.5110.7138.6for open-cast mines 1Oil and deep hole drills 148.871.575.066.482.685.153.9Total602.1736.1885.8685.3755.91,027.3985.4In 1956 at the American Mining Congress show there were discussions of expansion plans in the coal mining industry. At the 1957 American Mining Congress show, no such plans were discussed. In each year from 1953 through 1956 G.E.W. had effected some sales of its machinery at the annual coal mining shows in the United States but none was effected in 1957. The following schedule shows total stocks of hard coal at mine in Belgium, France, Saar, West Germany, Netherlands, and the United Kingdom in thousands of tons as of the end of the years 1954 through 1957: WestNether-UnitedYearBelgiumFranceSaarGermanylandsKingdom19542,8 157,8365366542871,13019553715,9832295722922,33019561794,5241027003142,99619571,4124,5821817353768,807Stocks of bituminous and anthracite coal in consumers' hands in West Germany were approximately 7 million tons at the end of 1956, 11 million tons at the end of 1957 and approximately 12 million tons at the end of 1958 and 9 million tons at the end of 1959. In a report dated April 8, 1958, prepared by the American Consul General's office in Duesseldorf, Germany and addressed to the Department of State, Washington, D.C., the following statement appeared: I. Summary. The most noteworthy development in the West German coal industry was the reversion to a buyers' market by years 89 end. The situation was complicated by record imports of U.S. coal and increased competition from fuel oil. A decrease in the overall growth rate of the West German economy added its pressure with a slight decrease in overall consumption. Domestic production of hard coal, for the first time since the end of World War II, declined by 0.9 percent to a 1957 total of 133,156,000 tons. Additional paid holidays and absenteeism resulting from the severe influenza epidemic in the fall were responsible. Coke production increased by 4 percent in 1957 to a new high of 45,193,000 tons, although the rate of increase was less than that of earlier years. Raw brown coal production increased by 1.7 percent to a record 96,811,000 tons, but brown coal briquette production declined slightly to 16,826,000 tons. Total imports rose by 12.1 percent to a total of 23,051,000 tons, including a record total of 15,974,000 tons of U.S. coal. Exports decreased slightly to 25,293,000 tons. Overall consumption of hard coal and its products declined slightly but total deliveries reached 120,084,000 tons. Of deliveries, year end consumer stockpiles included 11,092,000 tons of hard coal, 566,000 tons of coke at gas works, and 373,000 tons of hard coal at steel mill cookeries. Imports covered 21.5 percent of total hard coal deliveries, more than offsetting the reduced supply of domestically produced coal. * * * The outlook for 1958 is not too encouraging, with abnormally large stocks at pitheads and in the hands of consumers. Import restrictions, voluntary or forced, are viewed with increasing favor by the industry. It is realized however that Ruhr coal production is not now sufficient for the needs of West German industry and that imports will continue to be necessary. Competition from fuel oil is increasing and nuclear energy looms on the horizon as a competitor. Reduced industrial activity in the Federal Republic will aggravate the current over-supply of coal. II. Market Developments. The sellers' market for coal in the Federal Republic, which came into being in late 1954 and continued throughout 1955 and 1956 began to shift during the last quarter of 1957 in a movement that with great rapidity changed the entire market situation. The effect of this present buyers' market was not really felt in 1957 but became increasingly evident during the first quarter of 1958. The spectacular growth rate of West German industrial production in prior years created a demand for fuel that outstripped the capacity of West German coal mines, and in addition, was not being adequately met by the Ruhr coal allocation system. Consequently increasing reliance was placed on imported coal, mainly from the U.S. by industrial consumers, i. e., power plants, gas works, the iron and steel industry, etc. This tendency was accelerated by the drop in ocean freight rates which occurred shortly after the Suez crisis in late 1956 had pushed these freight rates to artificially high levels that could not be maintained. During the first and second quarters of 1957 importers eagerly entered into long term contracts (up to three years) for the importation of U.S. coal, at freight rates of between 40-60 shillings, to such an extent that total imports of U.S. coal during 1957 reached the unprecedented figure of approximately 16,000,000 tons. As a result, by the end of 1957 and during the early months of 1958, the total fuel consumption of many power stations and gas works in Northern Germany included as much as 90-95 percent U.S. coal. The relatively mild 1957/58 winter and existing consumer stocks slowed household purchases of coal so that pit head stocks began to accumulate in December 1957 and continued to accumulate at an increasing rate during the first quarter of 1958. The situation was complicated by a general slowing in late 1957 and early 1958 of the prodigious growth rate of the West German economy, with a consequent effect on fuel demand. Coal consumption declined slightly (1.1 percent decline), but miners' productivity increased, particularly in late 1957 and early 1958, after the influenza epidemic in the fall of 1957 had reduced output. Daily production of coal rose as demand slackened, until industrial consumer stocks of coking coal and coke also began to accumulate in late February and March 1958. Competition from fuel oil which, during 1957, satisfied an increasing percentage of fuel consumption further aggravated the unfavorable coal market situation, with every prospect of increased future reliance on fuel oil in view of the current heavy investment in oil processing plants and pipelines. The consequences of the changed market situation will not become fully apparent for some time with the most significant period probably the summer of 1958 (See Outlook). * * * 90 Face Work. The influence of face mechanization on productivity appears to be decreasing. Further noticeable advance of face mechanization depends largely on better roof support methods in difficult workings. Full mechanization of mining and loading of very hard types of coal, especially in thin seams, is still an unsolved problem, although tests of plane-like machines and devices without their own drives look promising. The use of hydraulic roof support posts and frames reduces support installation time and might permit coal plowing or cutting in faces so far not suitable for these processes. * * * X Outlook. Although the coal industry during most of 1957 was relatively tranquil, the basis was laid for difficulties that became apparent in the early months of 1958. Greatly increased importation of coal from abroad, chiefly from the U.S., the increase in the price of Ruhr coal, and increased competition from fuel oil, coupled with increased productivity on the part of the coal miners, and another relatively mild winter, led to an over supply of Ruhr coal for the first time since 1954. The outlook for 1958, if not bleak, is sobering. The coal surpluses, which have resulted from the combination of circumstances which took place during 1957, threaten to become menacing during late 1958. At first limited to household grade coal and coke, stockpiles by early April 1958 included excessive pit head supplies as well as near maximum industrial stocks of coal and coke. Reduced industrial activity, particularly in iron and steel, is now expected to result in abnormally low coal purchases during the second and third quarters of 1958, the season of the year when industrial and consumer stockpiles are normally replenished. A continuing high rate of importation of coal from the U.S. will continue, since the coal was purchased on long term contracts, although the total imports are expected to decline to less than 11,000,000 tons. Curiously enough, roughly 60 percent of the imported coal was contracted for by importers controlled by Ruhr coal interests, so that the recent outcry by the industry that coal imports be restricted has a hollow ring. Nevertheless, it is the opinion of many observers that political considerations in view of the forthcoming Northrhine-Westphalian general election in 1958, may compel Federal Government action to limit coal imports, although limitation of the validity of contracts to one year or 1 1/2 years appears to offer the only real possibility for government action. Industry sources feel that coal price increases during 1958 are extremely unlikely, but are also of the opinion that price decreases will not stimulate sales, despite the current competitive positions of imported coal and fuel oil. Long-term purchase contracts for Ruhr coal are hailed in some industry quarters as a solution, but deprecated by responsible industry spokesmen and importers who point out that most large industrial consumers have already entered into long-term contracts for U.S. coal. Subsequently, long-term purchase agreements for Ruhr coal could only become effective some time in the future. Those long-term contracts, now the subject of much discussion, were theoretically possible in the past, but fear of ECSC intervention through declaration of an emergency was feared if the former system of allocations was abandoned. No formal request for approval by ECSC is required and if deemed necessary, the industry will enter into such agreements, without fear of ECSC intervention, in view of the current market situation. Any increase in exports is rendered improbable by the Government's decision that exports must be sold at the domestic price. Ruhr coal can not thereby compete with U.S. coal even in such a favorable market as Argentina which has cut U.S. imports and would presumably welcome Ruhr coal if it was competitive. A solution to the present Ruhr situation may result from a combination of voluntary import restrictions, (entered into jointly by U.S. exporters and West German exporters); continued stockpiling (before WW II pit head stocks of as much as 5,000,000 tons were considered normal), and, if necessary, reduced production (although the latter measure is highly unpopular with both industry and labor). The long term outlook for continued imports of U. S. coal is good, since it is generally admitted that available Ruhr coal supplies are simply insufficient for the needs of the West German economy. The following schedule shows the debtor and creditor interest rates in West Germany since the currency reform: 91 Percent per annumCentralChargesCentralbank rateforChargesApplicablebankformoney loansfor ownfromdiscountadvancesUnderrateoncreditOverdraftssecuritiesagreement1948 July 156n1 /n1 /Sep. 156910-1/2Dec. 15569-1/2111949 May 274-1/25-1/2910-1/2July 14458-1/2101950 Oct. 276710-1/2121952 May 29569-1/211Aug. 214-1/25-1/2910-1/21953 Jan. 8458-1/210June 113-1/24-1/289-1/21954 May 203489-1/2July 1347-3/49-1/41955 Aug. 43-1/24-1/289-1/21956 Mar. 84-1/25-1/2910-1/2May 195-1/26-1/21011-1/2Sep. 6569-1/2111957 Jan. 114-1/25-1/2910-1/2Sep. 19458-1/2101958 Jan. 173-1/24-1/289-1/2June 27347-3/49-1/4July 21347-1/291959 Jan. 102-3/43-3/47-1/48-3/4Sep. 4347-1/29Oct. 23458-1/2101960 June 3569-1/211Nov. 11458-1/2101961 Jan. 203-1/24-1/289-1/2May 5347-1/29Percent per annumCharges for discount creditsItemsamountingto:ApplicableDM 5,000DM 1,000fromacceptancesDM 20,000to lessto lessLess thanpurchasedorthanthanDM 1,000aboveDM 20,000DM 5,0001948 July 11 /1 /1 /1 /1 /Sep. 186-1/277-1/28Dec. 158-1/2-9-1/277-1/288-1/21949 May 278-96-1/277-1/28July 147-1/2-8-1/266-1/277-1/2 3 /2 /1950 Oct. 279-1/288-1/2991952 May 298-1/277-1/288Aug. 2186-1/277-1/27-1/21953 Jan. 87-1/266-1/277June 1175-1/266-1/26-1/21954 May 206-1/255-1/266July 16-1/255-1/2661955 Aug. 475-1/266-1/26-1/21956 Mar. 886-1/277-1/27-1/2May 1997-1/288-1/28-1/2Sep. 68-1/277-1/2881957 Jan. 1186-1/277-1/27-1/2Sep. 197-1/266-1/2771958 Jan. 1775-1/266-1/26-1/2June 276-1/255-1/266July 216-1/255-1/2661959 Jan. 106-1/44-3/45-1/45-3/45-3/4Sep. 46-1/255-1/266Oct. 237-1/266-1/2771960 June 38-1/277-1/288Nov. 117-1/266-1/2771961 Jan. 2075-1/266-1/26-1/2May 56-1/255-1/266300 92 Percent per annumCentralChargesCentralbank rateforChargesApplicablebankformoney loansfor ownfromdiscountadvancesUnderrateoncreditOverdraftssecuritiesagreement1965 Jan. 223-1/24-1/289-1/21965 Mar. 1 4/3-1/24-1/289-1/2Percent per annumCharges for discount creditsItemsamountingto:ApplicableDM 5,000DM 1,000fromacceptancesDM 20,000to lessto lessLess thanpurchasedorthanthanDM 1,000aboveDM 20,000DM 5,0001965 Jan. 2275-1/266-1/26-1/2bills eligibleother billsforrediscount atthe1965 Mar. 1 4/7Bundesbank1/21966 May 27 5 6-1/4 9-1/2 11301 8-1/2 28 29-Aug. 13 4 5 8-1/2 10 7-1/2 27 28-1/2 26-1/2 28 The following schedule shows the gross sales of fixed-interest securitiesand shares of domestic issuers of stock in West Germany from the second halfof 1948 through 1965: Millions ofDM, nominal valueFixed-interestsecuritiesof whichBank bondsMortgageBondsPeriodbondsCommunalofOther(including(andspecializedbankship mort-similarcreditbondsgage bonds)bonds)institutions19482nd half6.32.31949201.133.019.91950210.799.296.21951468.0158.91.91952628.1161.3219.819531,043.442 9.4224.619542,238.81,001.4264.92.819551,381.71,026.1507.719561, 038.2616.114.219571,161.11,125.2265.219581,618.82,337.6521.12.019593,050.02,363.71,331.119602,343.41,119.9501.13.019613,641.5 2,505.31,051.2100.019624,096.22,368.21,12 2.0401.119634,070.83,397.61,857.9969.219644,805.93,772.11,775.11,441.919654,331.23,691.11,242.71,392.71964 Oct.377.4284.332.7143.5Nov.364.2165.523.773.2Dec.544.0283.5223.2155.21965 Jan.582.6441.6129.4205.0Feb.444 .0382.1250.7270.2March488.4287.698.065.9April372.5343.278.2134.2May238.6200.863.1129.6302 The following schedule shows the gross sales of fixed-interest securitiesand shares of domestic issuers of stock in West Germany from the second halfof 1948 through 1965: Millions ofDM, nominal valueGrossTotalsalesIndustrialPeriodbondsLoans ofTotal(includingpublicTotalconvertibleauthoritiesbonds)19482nd half8.610.018.61949254.095.7420.4770.11950406.153.3217.1676.51951628.861.756. 9747.419521,009.2130.3418.21,557.719531,697.4396.3808.22,901.919543,507.9791.6391.5 4,691.019552,915.5432.0333.23,680.719561,668.5563.7332.02,564.219572,551.5931.1 700.94,183.519584,479.51,651.91,903.78,035.119596,744.8919.52,039.29,703.519603,967.427.51,332.65,327.519617,298.0319.61,991.29,608.819627,987.51,076.12,780.911,844.5196310,295.51,552.54,576.516,424.5196411,79 5.0973.74,138.716,907.4196510,657.7585.83,589.214,832.71964 Oct.837.950.0458.71,346.6Nov.626.6370.0996.6Dec.1,205.96.035.31,247.21965 Jan.1,358.6150.0797.52,306.1Feb.1,347.011.31,358.3March939.9115.8119.51,175.2April928.1452.31,380.4May632.1375.01,077.1303 The following schedule shows the gross sales of fixed-interest securitiesand shares of domestic issuers of stock in West Germany from the second halfof 1948 through 1965: Millions ofDM, nominal valueamongFixed-ofPeriodwhich:interestloansMedium-Sharessecuritiesoftermandforeignnotessharesissuers19482nd half0.519.1194941. 3811.4195051.2727.71951164.7912.11952259.31,817.01953268.73,170.61954453.05,144.019551,554.85,235.519561,837.54,401.719571,631.75,815.221.01958102.0 1,139.59,174.692.019591,295.21,383.011,086.5 344.61960568.51,904.57,232.044.81961388.72,192.411,801.212.01962810.01,506.713,351.2100.019631,528.71,015.717,440.2160.019641,981.01,608.418,515.8895.019651,453.82,645.917,478.61,389.21964 Oct.102.8126.51,473.160.0Nov.80.290.21,086.8Dec.104.071.11,318.31965 Jan.245.886.42,392.565.0Feb.164.5288.71,647.0157.3March184.978.01,253.2400.0April17.590.91,471.3May197.4327.61,334.7106.7304 94 Millions of DM,nominal valueFixed-interestsecuritiesof whichMortgageBondsPeriodbondsCommunalofOther(including(andspecializedbankship mort-similarcreditbonds1965gage bonds)bonds)institutionsJune276.8376.513.8138.1July404.3513.4305.988.0Aug.235.0256.741.974.8Sept.297.1245.264.454.0Oct.346.5154.823.271.4Nov.295.5248.797.889.2Dec.349.9240.576.372.3Millions of DM,nominal valueGrossTotalsalesIndustrialPeriodbondsLoans ofTotal(includingpublicTotalconvertibleauthorities1965bonds)June805.2270 .0343.61,418.8July1,311.6482.51,794.1Aug.608.460.6669.0Sept.660.757.9718.6Oct.595.9326.3922.2Nov.731.250.0347.21,128.4Dec.739.0215.5954.5Millions of DM,nominal valueamongFixed-ofPeriodwhich:interestloansMedium-Sharessecuritiesoftermandforeign1965notessharesJune74.1415.31,834.126.6July55.8176.51,970.6116.8Aug.89.0544.91,213.9Sept.63.4105.5824.1Oct.86.6221.31,143.5236.8Nov.162.070.11,198.5160.0Dec.112.8240.71,195.2120.0305 The following schedule shows sales, gross income, total income, expenditures and profit of G. E. W. for each of the years 1953 through 1960 and separately shows the depreciation deducted which is included in total expenditures shown: 11953195419551956(In DM)(In DM)(In DM)(In DM)Sales76,106,690.0058,526,399.0073,009,460.0096,517,068.00Gross income40,996.056.6928,154,605.0638,943,915.3849,641,616.04Total income41,591,351.1028,789,313.3339,381,132.4850,897,476.19Expenditures31,144,328.6423,638,414.5627,385,227.3734,809,126.55Profit10,447,022.465,150,898.7711,995,905.1116,088,349.64Depreciation1,827,234.482,087,509.812,252,541.912,584,092.55deductedThe following schedule shows sales, gross income, total income, expenditures and profit of G. E. W. for each of the years 1953 through 1960 and separately shows the depreciation deducted which is included in total expenditures shown: 11957195819591960(In DM)(In DM)(In DM)(In DM)Sales124,197,450.00105,695,295.0081,163,276.00102,150,035.00Gross income63,087,856.4352,844,013.5338,468,873.2247,397,556.29Total income64,720,501.1955,407,956.5240,778,408.4049, 996,525.44Expenditures44,342,295.6840,192,699.2433,31 0,961.8239,158,694.11Profit20,378,205.5115,215,257.287,467,446.5810,836,831.33Depreciation3,269,996.773,818,002.373,345,024.593,143,417.57deducted306 96 The following schedule shows the assets, liabilities, capital, and undivided profits of G.E.W. as of December 31 for each of the years 1952 through 1960: 195219531954(In DM)(In DM)(In DM)Assets50,797,734.5270,966,741.2149,261,757.52Current Liabilities31,405,186.0441,157,834.5213,228,459.38Capital8,148,000.008,148,000.0020,148,000.00Undivided profits1,103,235.049,770,184.233,939,899.37Profit for year9,417,213.4410,447,022.465,150,898.17195719581959(In DM)(In DM)(In DM)Assets106,683,048.10105,127,646.68119,039,693.17Current Liabilities23,275,218.6910,259,025.0511,989,595.35Capital41,148,000.0046,322,946.0049,235,473.00Undivided profits10,535,237.9024,307,457.4135,984,698.69Profit for year20,378,205.5115,215,257.287,467,446.5819551956(In DM)(In DM)Assets65,285,122.9184,602,097.75Current Liabilities17,184,419.6620,764,796.85Capital21,148,000.0034,148,000.00Undivided profits7,732,798.146,091,288.26Profit for year11,995,905.1116,088,349.641960(In DM)Assets129,494,711.93Current Liabilities17,462,077.73Capital59,277,396.00Undivided profits31,280,039.87Profit for year10,837,831.33307 The undivided profits for each of the years 1952 through 1957 were arrived at by adding to undivided profits at the close of the previous year the profits for the year and deducting therefrom dividends, certain tax adjustments, obsolescence write-offs, transfers to capital, and for one year a depreciation adjustment, in accordance with the following schedule: 1952Undivided Profit 12/31/51DM1,103,235.04Profit for Year9,417,213.4410,520,448.48Deduct: Dividends143,200.00Tax Adjustment afterExam.607,064.25750,264.251953OUndivided Profit 12/31/529,770,184.23Corporation Tax Refund937,492.68Profit for the Year10,447,022.4621,154,699.37Deduct: Dividends214,800.00Obsolescence write-Off5,000,000.00Transfer to Capital12,000,000.0017,214,800.001954Undivided Profit 12/31/533,939,899.37Profit for the Year5,150,898.779,090,798.14Deduct: Dividend Paid358,000.00Transfer to Capital1,000,000.001,358,000.001955Undivided Profit 12/31/547,732,798.14Profit for the Year11,995,905.11$019,728,703,25Deduct: Dividend Paid429,600.00Add'1. Corp. Tax207,814.99Transfer to Capital13,000,000.0013,637,414.991956Undivided Profit 12/31/556,091,288.26Profit for the Year16,088,349.6422,179,637.90Deduct: Dividend Paid644,400.00Obsolescence Write-Off4,000,000.00Transfer to Capital7,000,000.0011,644,400.001957Undivided Profit 12/31/5610,535,237.90Profit for the Year20,378,205.51Depreciation Adjustment3,998.0030,917,441.41Deduct: Dividend Paid1,074,000.00Transfer to Capital5,000,000.006,074,000.00Undivided Profit 12/31/57DM24,843,441.41308 The following schedule shows the assets, liabilities, and capital of UGmbH, G.E.W.'s French affiliate, in French francs as of December 31, 1957: Assets Current AssetsCash on Hand90 943Cash in Banks79 515 887Accounts Receivable403 750 119Notes & Trade AcceptancesReceivable625 000Other Receivables24 834 982Total508 816 931Working & Trading AssetsRaw Materials & Supplies179 194 171Goods in Process95 077 620Finished Goods27 075 435Total301 347 226Total Current Assets810 164 157Fixed AssetsInvestments19 000 000Land & Buildings91 347 485Machinery & Equipment128 751 741Total Fixed Assets239 099 226Prepayments433 344Total Assets1049 696 727LiabilitiesCurrent LiabilitiesAccounts Payable93 657 158Trade Acceptances Payable17 280 000Customers' Deposits24 785 188Owing to Affiliated Companies125 782 318Other Liabilities73 879 556Accrued Taxes of Expenses66 448 272Total Liabilities401 832 492CapitalCapital Stock Issued20 000 000Earned Surplus 1/1/57482 493 753Plus: Profit for the Year145 379 482627 864 235647 864 235Total Liabilities and Capital1049 696 727309 For each of the calendar years 1953 through 1957, UGmbH, G.E.W.'s French affiliate, had total sales, gross manufacturing profit, income from operations and net income in French Francs as shown by the following schedule: IncomeGrossIncome frommanufac-Yearfrom salesturingoperationsNet incomeprofit1953675,214,864380,794,21391,968,04768,076,99819541,388,975,3 80442,475,48285,874,44860,546,95619551,746,420,904606,531,626132,106,49889,271,82719561,935,551,392632,332,65387,203,50357,215,98619572,501,532,065890,949,754227,644,595145,370,482The following schedule shows the assets, liabilities and capital of UMM, G.E.W.'s English affiliate in English pounds as of March 31, 1958: AssetsCurrent AssetsCash on Hand110 5 0Cash in Bank35 221 5 6Accounts233 265 7 10ReceivableDeposits andLoansReceivable2 678 9 6Total271 275 7 10Inventories21 729 19 6Total Current293 005 7 4AssetsFixed AssetsLand & Buildings13 703 12 5Machinery &51 468 9 11EquipmentTotal Fixed65 172 2 4AssetsTotal Assets358 177 9 8LiabilitiesCurrentLiabilitiesAccounts Payable28 650 15 3Owing toAffiliatedCompanies140 741 14 0Accrued Expenses30 657 14 6Taxes Payable76 217 11 11Total Current276 267 15 8LiabilitiesFixed Liabilities- LoanPayable2 600 0 0Total Liabilities278 867 15 8CapitalCapital StockIssuesGEW20 000 0 0Other10 000 0 0stockholders30,000 Shares30 000 0 0IssuesEarned Surplus onApril1, 195721 931 1 2ADD: Profit forthe year1957/195827 378 12 10Total Earned49 309 14 0Surplus79 309 14 0Total Liabilities358 177 9 8& Capital310 The following schedule shows the gross sales, gross profit on sales, net operating profit, and net profit in English pounds of UMM for the fiscal years ended March 31, 1956, March 31, 1957, and March 31, 1958: GrossGross profitNet operatingYearsaleson salesprofitNet profit195642,905. 3.1114,643.16. 88,439. 2. 32,437. 4. 91957220,981.17. 590,894. 5. 261,228. 8. 01,493.16. 51958587,371.18. 4169,544.16. 0106,990. 8.1027,378.12.10On December 11, 1957 the value of a German deutsche mark was 0.238 United States dollars or a ratio of approximately 4.2 deutsche marks per United States dollar. Prior to 1957 the rate of exchange between French francs and German deutsche marks was 100 francs to 1.2 deutsche marks. Thereafter the rate of exchange was 100 francs to 1 deutsche mark. For the years 1956 and 1957 the rate of exchange between English pounds and German deutsche marks was one English pound to 11.76 deutsche marks. There are no German companies whose stock is listed on the public exchange and with respect to which financial statements are published that are strictly comparable to G.E.W. A listed German corporation, 311 Demag, manufactures underground mining machinery in competition with G.E.W. but also manufactures many other varieties of heavy machinery, furnishes engineering and consulting services in installing such machinery and manufactures and sells other products. A listed corporation, Wedag, is engaged in building construction and home construction, as well as the manufacture of industrial machinery. Orenstein-Koppel, another West German corporation whose financial data was [sic] published and whose stock was listed is engaged in the manufacture of large conveyors and of coal and earth moving equipment, floating dredgers and cranes, construction machines, Diesel locomotives, passenger and freight railroad cars, track installations, narrow gauge and field railway equipment, buses, disc brakes, elevators and other conveyor installations, escalators, passenger conveyor belts, and traveling scaffolds, and a number of other activities. In Germany in 1957 and the preceding years, corporations who published their earnings data generally grossly understated their actual true earnings in their published reports. The fact that such understatement was made in the published reports was common knowledge312 in Germany and in the United States among persons knowledgeable with respect to German investments. It was generally believed by these persons that the reason for the understatement was to conceal the company's true earnings from the shareholders because of the fact that the stockholders, at the annual meeting of stockholders, declared the annual dividend the company would pay, and management of the companies who were desirous of retaining earnings in the companies, felt that concealment of true earnings would result in a more conservative dividend being voted by the shareholders. In 1957 and immediately preceding years, it was the practice of certain private investment bankers in Germany to calculate the true earnings of a German corporation on the basis of considering the relationship between the taxes paid and the published earnings of the corporation. These calculations were made by the banks for the benefit of their customers and were used by their customers when considering the making of investments in the various companies. While a portion of the understatement of earnings might be reflected in excessive depreciation deductions, it was more prevalent for companies to conceal313 true earnings by creating various reserves which would be merely designated on the balance sheet as "specific or other reserves" or by writing off such assets as inventories, accounts receivable, or fixed assets by merely reducing their value and crediting some reserve or merely creating a reserve on the liability side of the balance sheet as a method of diminishing earnings. The following schedule shows for each of the years 1953 through 1959 the published earnings, estimated true earnings calculated on the basis of taxes paid, depreciation deducted, dividends, and price as of December 31, 1957, all on a per share basis stated in 1,000 deutsche marks for Demag, Wedag, and Orenstein-Koppel: 101 EstimatedPricePublishedtrueDepreciationper shareearningsearningsdeductionDividendDec. 1957Demag19538.716.813.9919549.516.010.09195511.917.08.710195611.120.012.8101 95714.522.817.310190195818.630.216.912195921.330.515.612Wedag19530.61.30.7919540.72.02.4919550.83.52.31019560.92.72.21019571.22.92.31023219581.63.41.91219 591.92.41.912Orenstein-Koppel19530.81.33.6719540.81.85.2819551.42.07.9919561.41.47.8919571.51.67.5916019582.03.17.71219592.13.87.913314 Chash flow is computed by adding depreciation deducted to earnings. The following schedule shows the dividends paid by G.E.W. in each of the years 1949 through 1960: Dividend per KuxYearpaid in DMs194950195050195110019521001953200195430019555001956600195790019581,50019591,50019603,000In Germany dividends declared in a year are out of the previous year's earnings, that is, the 1950 dividend would be out of 1949 earnings. Prior to the annual meeting of the shareholders of G.E.W. there would be a meeting of the executive committee. At this meeting of the executive committee, as at the other executive committee meetings, matters on the agenda were generally discussed and with respect to some items there would be extended debate. However, during all of the years of existence of G.E.W., the ultimate vote at the meetings of the executive committee was always unanimous, except for one instance in 1941 when the representative of the German family trust on the executive committee objected to G.E.W.'s offering bonus shares to the inventor, Loebbe, and to the then executive director. At the meeting of the executive315 committee just prior to the annual meeting of shareholders, the executive committee would determine a dividend to be recommended to the shareholders at the annual meeting. The annual shareholders meeting was presided over by the chairman of the executive committee and he would recommend the agreed-to dividend. Generally there were questions raised with respect to the amount of the dividend and at times minority shareholders would question whether the dividend might be increased. On one occasion prior to his death, decedent questioned whether the dividend recommended by the chairman of the executive committee might not be raised. However, throughout the entire history of G.E.W. the dividends as actually declared were declared by the unanimous decision of the stockholders at the meeting to accept the recommendation of the executive committee. Alfred attended the annual meeting of the shareholders in the years 1954 through 1957 as an advisor to decedent. Approximately 90 percent of the shareholders of G.E.W. would be present in person at these meetings. Generally, the shareholders who did not attend the annual meeting would give proxies to other shareholders but not necessarily to the316 management of G.E.W. It was not the practice of G.E.W. to solicit proxies from the shareholders for purposes of the annual meetings nor was there generally any solicitation of proxies by anyone for the purpose of the annual meeting. 102 During the years 1953 through 1957, in addition to the chairman who was decedent's personal lawyer, decedent who was vice chairman, and the accountant who was both decedent's personal accountant and the accountant for G.E.W., as well as executive director of G.E.W., there was a fourth member of the executive committee, Oscar Schultz who owned 30 shares of G.E.W. and who had been a member of the executive committee since 1930. Under German law there is an assessment in the nature of a tax made by the Government on corporate shares. The assessment notice sets forth the "gemeinwert" which is the determination of the value of the shares of a closely held corporation on the basis of which the tax will be imposed. The notice issued to G.E.W. determining the gemeinwert as of December 31, 1956, for its shares placed a value of 25,000 DM per share on those shares which were not held as part of a block of shares and a value of 42,000 DM on those shares317 held in blocks. The assessment notice issued to G.E.W. contained a statement that gemeinwert had been determined on the basis of sales of shares during the years 1956 and 1957 and the assets and prospects of the corporation. There were no sales of shares of G.E.W. stock during the years 1956 and 1957. Although the shares of G.E.W. stock have never been traded on any stock exchange, during the period 1949 through 1961 there were a few sales and transfers of shares of G.E.W. stock. The following schedule shows all such sales or transfers during the years 1949 through 1961, other than the transfer of decedent's shares to his estate: [See Table on Page 103] Most of these sales and transfers were by parties related in some way to one another. The two sales on November 22, 1958 by Otto Wossidlo of shares to each Alfred and Hans Greef were not transfers between related individuals. However, at the time Otto Wossidlo was in need of funds in building. nection with the construction of a new building. The three transfers made by Georg Kortmann on December 15, 1961 of one share to each Adalbert Keil and Hans Greef and of two shares to Alfred were not transfers between related parties. 318 Georg Kortmann was in need of money at the time of these transfers to satisfy large bank loans he had outstanding. The purchasers in all instances of shares which were not transfers between related parties were persons serving as an officer or director of G.E.W. at the time of the purchase. There are specific provisions of German statute stating the manner in which tax officials are to fix the gemeinwert for shares in closely held corporations or kuxe in Gewerkschafts. The sections of German law dealing with the determination of the gemeinwert state that the valuation is to be based on the fair market value unless something else is prescribed and that fair market value is to be determined by the price which could be realized in a sale under ordinary business circumstances considering the condition of assets and specifically provide as follows: For corporate shares, mining shares, shares in a limited liability company and participating debentures which are not officially quoted within Germany, the fair market value * * is controlling. If it is impossible to derive the fair market value from sales, it has to be estimated considering the net worth and the prospective earnings of319 the corporation or mining company. In practice there existed a regulation of the taxing authorities which provided a formula which might be used in determining the gemeinwert of shares of stock in corporations or mining companies which were not listed. This formula was in general use in Germany during the 1950's although it was not mandatory on the tax department to use the formula. In Germany the gemeinwert assigned to shares of stock in a closely held corporation is generally one of the factors considered between parties in attempting to negotiate a price at which stock will be purchased and sold. A general description of property offered for sale in Germany, referred to as an "expose," sets forth items which the seller considers significant for trading in a particular item. Where an expose is made with respect to shares of stock in a closely held corporation, it is the usual practice in Germany to include with the other information set forth therein the latest gemeinwert attributable to the shares. When two individuals who are forming a German corporation are considering entering into a buy-sell agreement with respect to the stock, it is not uncommon that the gemeinwert be used320 instead of the book value per share for the purposes of such buy-sell agreement as generally the gemeinwert of a German company is higher than the balance sheet value per share because the gemeinwert in many 103 No. ofsharesPrice paidDateSellerBuyersoldin DM3/16/49Berta Schulz, DortmundJ.C.O. Schulz, Alsdorf11,200.003/14/50von Schorlemer, MunsterAdalbert Keil,11,200.00Karlsrube5/9/50E. H. Walter and M.S.M.Oscar Schulz, Bad11,200.00ClausenGodesberg11/8/50Wilhelm Eckey, LuenenJ.O.C. Schulz, Alsdorf55,000.001951Heirs of MeisterOscar Schulz, Bad33,600.00Godesberg12/17/52Heirs of Carl Duncker,Wolfgang Sakken11,500.00Luenen6/29/54Adele WeidtmannVictor Weidtmann's24,800.00Family Trust, Osterode8/16/54Paul Weimar, QuintBanking House Burgardt14,000.00and Brockelschen9/4/54B. H. Burgardt &Schuchtermann-14,000.00BrockelschenSchillerscheFamilyTrust4/25/58Heirs of M. Schmale,Heinz Schmale,14,000.00DusseldorfDusseldorf6/2/58Heirs of Victor Wolff,Paul Schmale,1DusseldorfDusseldorf6/3/58Heirs of Victor Wolff,Mathilde Schmitz,1DusseldorfDusseldorf-Wersten7/23/58Heirs of Victor Wolff,Heinz Schmale,1DusseldorfDusseldorf11/22/58Heirs of Einhaus,Wilhelm Zoyen, Rhoydt1Dusseldorf11/22/58Otto Wossidlo, HammAlfred C. Schneider240,000.00Paas Cappenberg11/22/58Otto Wossidlo, HammHans Greef,120,000.00Altluenen-Wethmar5/29/59Maria Kortmann,Gerhard Kortmann Co.,5137,500.00CappenbergCappenberg11/22/59Wilhelm Zoyen, RhoydtPaul Schmale,1Dusseldorf12/15/61Georg Kortmann,Adalbert Keil,133,000.00CappenbergKarlsruhe12/15/61Georg Kortmann,Hans Greef,133,000.00CappenbergAltluenen-Wethmar12/15/61Georg Kortmann,Alfred C. Scheider266,000.00CappenbergPass, Cappenberg321 instances reflects reserves and intangible assets as well as goodwill which items would not be reflected on the corporate balance sheets. In the immediate post-war years the governments of West Germany and of certain municipalities in West Germany were issuing government securities in an effort to obtain funds for a government. In this early period industrial companies that were able to float public bond issues did so at an interest rate of 8 percent and then generally the bonds were sold at a discount, in effect increasing the interest rate to the issuers. During this time public companies were raising capital by selling shares to their shareholders at prices substantially below the quoted values on the stock exchange. These shares were underwritten by banks which would purchase the shares not subscribed by the individual shareholders. There were 1.8 billion shares of German securities issued in 1956, 1.6 billion shares issued in 1957, and 1.1 billion shares issued in 1958. From 1948 through 1965 there was a period of economic recovery in Germany. Although industrial production in Germany constantly increased during this period, commencing in 1956 the increase was at a lesser322 rate than prior thereto. From 1953 to 1954 industrial production in Germany increased by approximately 18 percent; from 1954 to 1955 the increase was 20 percent; from 1955 to 1956 the rate of increase was approximately 10 percent; from 1956 to 1957 the increase was approximately 5 percent; and from 1957 to 1958 again the increase was approximately 5 percent. In the United States during the period July 1957 through April 1958 there was a drop in industrial production. Gross national product grew in Germany 5.8 percent in 1957 as compared to a 12 percent growth rate in 1955 and a 7 percent growth rate in 1956. The cost of living index in Germany increased 2 percent and industrial prices increased 1.7 percent in 1957. Overall employment rose 4.2 percent in 1957 but in that year the normal working hours of over 6 million people employed in industry were reduced from 48 hours to 45 hours per week with the result that there was little change in the total man hours worked between the years 1956 and 1957. Wages and salaries in Germany rose 8.1 percent in 1957 over 1956 and during this same period productivity of labor increased approximately 4 percent. All during the 1950's there was a labor323 shortage in western Germany. This labor shortage was referred to in various publications with respect to coal mining with the recommendation that further mechanization of mines was a possible solution to such labor shortage. Under German corporation law a corporation owing a 25 percent or more interest in another corporation is not taxed on dividends received from such other corporation if the dividends are passed on to the shareholders of the parent. The rate of tax on the parent corporation in the year 1957 on dividends received from another corporation in which it owned 25 percent or more interest which were not passed on to its shareholders, was 15 percent as compared with the normal tax rate of 40 percent on operating income. Blocks of shares consisting of 25 percent of the total shares of a corporation are frequently traded in Germany and it is not uncommon for banks to purchase such blocks of shares. During the years 1957 through 1963 there were purchases of German securities by American investors. As of 1957 Vicker's Guide to Investment Company Portfolios listed two American funds having portfolios which included German securities. He number of German securities held by American324 funds and the number of American funds holding such securities had substantially increased by 1960 and 1961. As of 1957 there were 182 different American investments in European countries totaling 119 million dollars, wherein the investment constituted a minority interest of the specific business. Of these, 70 such investments having a value of 69 million dollars had been made prior to 1946, 30 such investments with a value of 22 million dollars were made during the years 1946 to 1950, and 82 such investments with a total value of 28 million dollars were made during the years 1951 to 1957. As of 1954 there were issued in Germany shares of stock representing an approximate value of 453 million DM and during each of the years 1955 through 1965 there were shares issued having a total value of at least 1,000 million DM. From approximately the middle of 1956 through the middle of 1957 the German stock market was in a general state of decline. From the beginning to the end of 1957 the German stock market index rose 5 percent. During this same year the United States stock market declined 12.8 percent. In December 1957 the German stock market 105 index was at a level of 37.6 as325 compared to its lowest level in 1957 which was a level of 34.43 in June 1957. Joy Manufacturing Company is an American listed corporation which during the 1950's was engaged to a large extent in the manufacture of mechanized underground coal mining machinery for use in the room and pillar type of mine. Another listed American company engaged in manufacturing mechanized underground coal mining machinery, among other products, was Goodman Manufacturing Company. The different economic situations and other factors affecting American corporations and German corporations are such that a valuation of a German corporation based on ratios of the price of the stock to earnings, book value, sales or net worth of an American corporation requires such substantial adjustments to arrive at any comparability as to render this approach unrealistic. American Depository Receipts (ADR's) were the means by which some German securities were traded in the United States in 1957 and for some years prior and subsequent thereto. ADR's are a method which enables an investor to make an investment in American dollars for the purchase of a foreign stock. In 1957 the Chemical Bank in New York had outstanding326 ADR's for five German companies. The number of German companies for which this bank issued ADR's increased several fold in 1960 and 1961 as compared to 1957. There were no German securities listed on any American stock exchange in 1957. As of the beginning of 1957 G.E.W. had a backlog of unfilled orders of approximately 19 million DM and by the middle of 1957 it had a backlog of approximately 35 million DM which had been reduced as of December 31, 1957, to approximately 27.4 million DM. As of the end of 1957 the management of G.E.W. was of the opinion that G.E.W. needed to retain the large cash reserve which it had for the purpose of perfecting its new self-advancing roof support and expanding its world market by building new plants in countries other than the two in which it, at that time, had affiliated companies. As of the end of 1957 G.E.W.'s ratio of current assets to current liabilities was 3.6. The similar ratio of Demag was 1.6, of Orenstein-Koppel 1.2 and of Wedag 1.3. Although G.E.W. had some difficulty prior to 1959 when the Saar region was returned to German control in obtaining dividends from its French affiliate, it did in 1957 obtain royalties from this affiliate. 327 Although G.E.W. had no difficulty obtaining dividends from its English affiliate, it did not actually receive any such dividends until 1958. The need for coal is directly related to the level of industrial production in a country. In the midfifties Australia, Japan, India, and Asia were building energy plants which would consume coal and were desirous of increasing their own coal production rather than importing the necessary coal. With an increase in coal production in these countries there would exist an available market for mechanized coal mining machinery to be exported to such countries. On the estate tax return filed for the Estate of Alfred Johannes Schneider-Paas, decedent's shares in G.E.W. were valued at $4,761.90 per share. Respondent in his notice of deficiency determined that the fair market value as of December 11, 1957, the date of death of decedent, of decedent's shares of G.E.W. stock was $38,500 per share. At the trial and on brief in the instant case, petitioner takes the position that the fair market value as of December 11, 1957, of decedent's 282 shares of G.E.W. stock was 57,000 DM or $13,566 per share and respondent on brief takes the position that the value328 of decedent's 282 shares of G.E.W. stock as of the date of his death was 140,000 DM or $33,333 per share. Ultimate Finding of Fact The value of decedent's 282 shares of G.E.W. stock as of December 11, 1957, the date of his death, was 100,000 DM or $23,809 per share. Opinion The issue in this case is factual but nevertheless difficult. In addition to the problems that must be considered in valuing the shares of a closely held American corporation, consideration in this case must be given to the fact that the shares to be valued are of a German company. Some of the factors to be considered are the value of the underlying assets of the corporation, the earnings, the dividends paid, whether the interest being valued is a minority interest, the nature of the management of the company, as well as other factors such as the prospects and the economic environment in which the business operates, and the industry it serves. Estate of Harry Stoll Leyman 40 106 T.C. 100">106 T.C. 100, 119 (1963), remanded on another issue 383 U.S. 832">383 U.S. 832, and cases there cited. The opinions of expert witnesses329 are, of course, of assistance in making the determination. In this case each party offered the testimony of an expert witness who had for a number of years kept abreast of the German securities market and had advised clients of their businesses with respect to the purchase and sale of foreign securities including German securities. In addition, respondent offered the testimony of a securities analyst employed by the Internal Revenue Service who made a valuation based on a statistical comparison of earnings, cash flow, and book value of G.E.W. with that of certain listed German and American corporations and the testimony of a person knowledgeable with respect to economic conditions in the coal industry. Petitioner, in addition to the testimony of an expert witness knowledgeable in trading of German securities, offered testimony of the executor of the decedent's estate with respect to his knowledge of conditions affecting G.E.W. both with respect to the plans of that company, economic conditions in Germany and the conditions existing in the German coal industry as of the end of 1957 and beginning of 1958, as well as the testimony of an individual knowledgeable in the computation of actual330 earnings of German corporations. The expert offered by petitioner who had experience in sales of German securities valued the stock of G.E.W. as of December 11, 1957, at 57,000 DM per share, and the expert of respondent who was knowledgeable with respect to the sale prices of foreign securities valued the stock of G.E.W. as of December 11, 1957, at 140,000 DM per share. Petitioner now argues that the Court, in determining the issue in this case, should accept the value placed on the shares of G.E.W. stock by petitioner's expert in the foreign securities market; and respondent now argues that the Court should accept the value placed on the shares of G.E.W. stock by his witness knowledgeable in the sale of foreign securities. These two experts approached their valuation problem by using substantially the same underlying data, some of which we have set forth in some detail in our findings of fact. They had some differences of opinion with respect to the proper weight to be given various items and minor differences as to the amount of some items. Their major differences of opinion were with respect to the economic outlook as of December 11, 1957, of the German coal industry, the weight331 to be given to this economic outlook, and to the effect on a price per share which would exist because of the number of shares being valued being approximately a 39 percent interest in the corporation. The two experts also differed substantially in their view as to the availability of funds for the substantial investment necessary to acquire 282 shares of stock of G.E.W. The two experts had some difference of opinion as to what consideration should be given to the investment of G.E.W. in its French and English affiliates in determining the fair market value of 282 shares of stock of G.E.W. They also disagreed as to whether only the earnings and profits for the year 1957 should be used in considering the evaluation of the shares of G.E.W. stock and if not what period of prior years should be considered. Petitioner's expert took the position that G.E.W. was a cyclical company with its high cyclical peak in 1957 and for this reason that at least a 5-year average earnings should be used in valuing its stock. Respondent's witness took the position that since the period 1953 through 1957 was a period of extreme growth in Germany, occasioned by the abnormal period of expansion caused by the332 country's practically starting its economy over again after World War II, a 5-year average of earnings beginning with 1953 gives too great a weight to the period of the lower point in the recovery pattern. Both parties recognize that fair market value is that amount which a willing buyer would pay a willing seller, both being knowledgeable with respect to the items being bought and sold and under no compulsion to buy or sell. Petitioner recognizes this definition of fair market value and does not contend that the few actual sales which were made are determinative of the fair market value of the 282 shares which are being valued. However, the parties do argue as to the weight to be given to the small quantities of sales. Petitioner argues that weight should be given to the value determined for the gemeinwert but does not contend that such value in and of itself is determinative of the fair market value of the stock as of December 11, 1957. It is respondent's position that all the sales of G.E.W. stock were either between related persons or under conditions that in 107 substance amounted to forced sales and that these sales should be given no weight. Respondent argues that333 the gemeinwert is merely someone else's opinion of a value based on some formula and therefore should be given no consideration in the determination of value. In this regard it is worthy of note that petitioner's expert testified that generally the gemeinwert would be in excess of the book value of the corporate shares of stock. In the instant case the gemeinwert as of the end of 1956 was determined at 25,000 DM for shares not in blocks and 42,000 DM for shares in blocks whereas under petitioner's computation the book value per share of G.E.W. stock at the end of 1957 was 118,800 DM and the unadjusted book value from the balance sheet was 116,421 DM per share. Respondent's computation of the book value as of the end of December 1957 is 126,662 DM per share. The difference between these two computations is primarily due to whether an item of 1,296,286 DM referred to on the balance sheet as reserve for export promotion should be subtracted from the book value as shown on the balance sheet to arrive at an adjusted book value. Both parties recognize that the value of the investment in the French and English affiliates should be added to the balance sheet value of G.E.W. in arriving at334 an adjusted book value for the purpose of valuing G.E.W. stock. Both parties recognize that cash flow which they consider to be the earnings of the company after taxes plus depreciation is a better criteria for use as earnings of the company in determining the value of the shares of G.E.W. than is the earnings after taxes without any adjustment. The earnings and cash flow of G.E.W. as used by petitioner's expert witness in arriving at his valuation were as follows for the years indicated: EarningsCash flowYearper shareper share(In DM)(In DM)195314,59017,14219547,19410,110195516,75419,900195622,46926,078195728,46033,017195821,25026,582195910,42915,100196015,13719,527Average17,89321,2491953-1957Average15,60520,4031958-1960Petitioner's expert witness made the following computations of value per share of G.E.W. stock: Book value per share (DM 85,088 million: 716)= 118,800 DMYield value per share (Dividend of DM 1,500 capitalized at= 30,000 DM5 percent)Earnings value per share (Five year average earnings of DM= 53,700 DM17,893 capitalized at 3 times)Cash flow value per share (Five year average cash flow of= 42,500 DM21,249 DM capitalized at 2 times)245,000 DMDivided by 4= 61,250 DM335 Based on these computations, his judgment as to the lack of easy marketability of a minority interest in G.E.W. stock, the gloomy outlook which he considered to exist at the end of 1957 for the German economy in general and for the coal mining industry and coal mining machinery industry in particular, and the difficulty of an investor's finding the amount of money necessary to purchase 282 shares of G.E.W. stock, as well as a number of factors which he considered of lesser importance, this expert arrived at what he considered to be a maximum fair market value of G.E.W. stock on December 11, 1957, of 57,000 DM per share. Respondent's expert witness, in arriving at his opinion, considered that 116 percent of adjusted book value, 4.7 times 1957 adjusted earnings, 6.0 times 1955-1957 average adjusted earnings, 7.4 times 1953-1957 average adjusted earnings, 4.1 times 1957 adjusted cash flow, 5.1 times 1955-1957 average adjusted cash flow, and 6.2 times 1953-1957 average adjusted cash flow were reasonable methods to be considered in determining a price at which 282 shares of G.E.W. stock would have sold per share on December 11, 1957. In making this determination he added in amounts336 representing earnings of affiliates of G.E.W. to G.E.W's earnings and used earnings and cash flow in the following amounts: YearEarnings perCash flow pershare (In DM)share (In DM)195316,28218,93319548,34611,410195517,59420,975195623,04626,966195729,60634,473195822,49228,190195911,67416,607196017,16921,572The earnings of the English affiliate were adjusted to a calendar year basis in making this computation. In coming to his conclusion respondent's expert considered the 39 percent interest which was represented by 282 shares to be in substance a controlling interest. He was of the opinion 108 that the upturn in the German stock market toward the end of 1957, the large amount of orders of machinery on hand at the end of 1957, the outlook for sales by G.E.W. in foreign markets, and the prospect of G.E.W.'s soon having available the mechanized self-advancing roof support of its own design, gave a much brighter outlook to the future prospects of G.E.W. than the outlook petitioner contended existed as of December 11, 1957. Although respondent's witness recognized that there was a decline in 1958 in the337 coal industry in Germany, it was his opinion that the full import of this decline could not reasonably have been anticipated at December 11, 1957. We have considered the testimony of both these witnesses along with the other evidence of record. In our view, as of December 11, 1957, the outlook for G.E.W. in its German markets as well as its foreign markets was not as gloomy as painted by petitioner's expert, particularly in view of the fact that at that time G.E.W. was anticipating shortly having completed development of its own self-advancing roof support. However, we recognize that there existed indications of a forthcoming decline in coal production in Germany as of December 11, 1957, that would have been known to a prospective seller and purchaser of G.E.W. stock. However, there were in December 1957 indications that coal production might be increased in other countries. Also, decreasing of production costs by further mechanization is a factor considered by coal miners even when the coal mining industry is not at its highest peak. While we recognize, as petitioner contends, that the 39 percent interest which the 282 shares constitute could not control G.E.W., we likewise recognize338 that the owner of this number of shares was assured at least the vice chairman's place on the executive committee and of a fourth member of that committee. By having a representative on the executive committee and being its vice chairman, information from the books of G.E.W. would appear to be available to an owner of 282 shares of stock even though the bylaws of G.E.W. provided that the right to inspect the books as a stockholder required a combination of 300 shares of the 1,000 shares of G.E.W. stock issued at the time G.E.W. was organized. Considering the factors that we have discussed, the opinions expressed by the various experts, the reasoning given in support of these opinions, and all the other evidence of record, we have concluded that as of December 11, 1957, the 282 shares of stock of G.E.W. owned by decedent at the time of his death had a value of 100,000 DM or $23,809 per share. Decision will be entered under Rule 50. Footnotes1. Including spares and accessories. ↩1. Up to February 28, 1965 compiled on the basis of announcements of the Hessian Bank Supervisory Authority; in most of the other Federal Lander equal rates applied. The rates apply only to credits fully taken. Turnover commission or charges per item processed are disregarded. ↩3. From September 1, 1949, to October 26, 1950 = 7 percent.↩2. From September 1, 1949 to October 26, 1950 = 7-1/2 percent.↩4. From March 1, 1965 the rates laid down in the Interest Rates Order of the Federal Banking Supervisory Office apply; the charges for discount credits are no longer differentiated according to the amount of the bills.↩1. "Cash flow" is computed by adding to profits the depreciation deducted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624344/	Sumner Rhubarb Growers' Association v. Commissioner.Sumner Rhubarb Growers' Ass'n v. CommissionerDocket No. 26291.United States Tax Court1951 Tax Ct. Memo LEXIS 229; 10 T.C.M. (CCH) 465; T.C.M. (RIA) 51146; May 17, 1951John W. Fishburne, Esq., for the petitioners. Wilford H. Payne, Esq., for the respondent. JOHNSON Memorandum Findings of Fact and Opinion JOHNSON, Judge: Respondent determined deficiencies in income tax, excess profits tax and declared value excess-profits tax as follows: ExcessProfitsDeclared ValueYearIncome TaxTaxExcess-Profits TaxFiscal period Jan. 1, 1939 to May 31, 1939$ 39.06$42.61Fiscal year ended May 31, 1940252.67$275.64Fiscal year ended May 31, 1941211.93217.03Fiscal year ended May 31, 1942186.88135.33Fiscal year ended May 31, 19461,219.00Fiscal year ended May 31, 19473,117.10The sole issue is whether petitioner is exempt from income tax, excess profits tax and declared value excess-profits tax for the above taxable230 years under section 101(12), Internal Revenue Code. Findings of Fact Petitioner is a corporation organized April 30, 1930, and existing under the laws of the State of Washington. The articles of incorporation stated that it was organized as a "cooperative association or corporation under Chapter XIX of the Laws of 1913 and the amendments thereto". Petitioner filed for the fiscal years ended May 31, 1944, May 31, 1945, May 31, 1946, and May 31, 1947, Form 990, information return of organizations "exempt from income tax under section 101 of the Internal Revenue Code, or under corresponding provisions of prior revenue acts" with the collector of internal revenue for the district of Washington. Petitioner's articles of incorporation stated that the purposes for which petitioner was formed were: "(a) To pack, process, can, store, warehouse, handle, and market fruit, vegetables, rhubard [rhubarb] and other agricultural and horticultural products grown in the State of Washington by any means and in any way whatsoever. "(b) To buy, process, pack, handle and sell all kinds of agricultural and horticultural products, both for its own231 account and on commission for others, and to contract accordingly, and to operate warehouses, canneries, cold storage plants and packing houses, wherever necessary or expedient in the carrying on of the company's business. "(c) To lend money upon and to negotiate loans upon agricultural and horticultural products; to borrow money and to establish domestic and foreign agencies to carry on the general purposes of the corporation. "(d) To buy or otherwise acquire, to own, operate, mortgage, lease, sell or otherwise dispose of any and all kinds of personal property. "(e) To promote, do, acquire, hold and dispose of anything incidental to or necessary, convenient or proper to carry out any of the purposes aforesaid, or anything which may be useful, incidental or auxiliary to accomplish any of the purposes of the corporation. "(f) To conduct public warehouses. "(g) The primary purpose for the organization of this corporation is to handle the agricultural and horticultural products of its members upon a cooperative basis and to handle all of such products of members who shall sign the standard marketing agreement of the association upon the basis of actual cost to the association232 and an amount apportioned over the entire operations of any one season, not to exceed eight per cent of the then issued common capital stock of this corporation, and an amount sufficient for proper reserves for advertising, general commercial hazards, betterments, development work, and other secondary charges." The authorized capital of the corporation was 1,500 shares of capital stock of a par value of $1 per share. For its fiscal year ended May 31, 1947, petitioner had $1,214 of issued capital stock at the beginning of the year and $1,202 at the end of that year. The by-laws of the corporation provided that its powers should be exercised by a board of trustees to be elected annually by the stockholders. The board of trustees was generally referred to as the board of directors. The directors' powers included the power to conduct, manage and control the affairs and business activities and to make necessary rules and regulations for guidance of its officers; to appoint a manager; to borrow money; to issue certificates of capital stock; to transfer stock and to purchase any and all of the shares of any stockholder at book value whenever any stockholder should fail to sign the marketing233 agreement or cease to be engaged in the production of rhubarb. No stockholder could dispose of his stock without first offering it to the corporation. The directors receive no compensation but the manager receives a salary. The manager handles the sales. By signing the standard marketing agreement as prescribed by the corporation and paying $1, a farmer (rhubarb grower) could thereby become a member and receive at least one share of capital stock. The marketing agreements executed by petitioner and its members have been substantially the same for all years. They provided, among other things, as follows: "1. The price to be paid by the Association shall be the market price as conclusively determined by the manager of the Association from time to time, f.o.b. cars, Summer, Pierce County, Washington, which price shall be paid to the grower from time to time as soon as returns from resales are available, less, however, a deduction of one cent per crate for all hothouse rhubarb delivered. "2. From time to time there shall be issued to the Grower certificates of stock in the Association to the amount of the deductions made from the purchase price of the produce delivered by the Grower234 as in the foregoing paragraph set forth, such stock to be issued at par and in such denominations as the Association may determine. * "6. This agreement shall be binding upon the Grower, his representatives, successors and assigns, during the period above mentioned, as long as he raises hothouse rhubarb directly or indirectly or has the legal right to exercise ownership or control of any thereof or any interest therein or any land on which such product is grown during the term of this contract. "7. This agreement is one of a series generally similar in terms, comprising with all such agreements signed by individual Growers, one single contract between the Association and the said Growers, mutually and individually obligated under all the terms thereof. The Association shall be deemed to be acting, in its own name, for all of such Growers in any action or legal proceeding on or arising out of this contract." The members of petitioner receive boxes at cost from petitioner for packing the rhubarb. Petitioner is able to buy the boxes in large quantities at cheaper prices than the individual grower would have to pay. The rhubarb is packed in boxes by the growers and turned235 over to petitioner for shipping and marketing under petitioners' name. Each week during the harvesting season, which is from January to May of each year, the amount received by petitioner from sale of the rhubarb brought in by the members during that week is pooled and distributed according to the quantity each member brought in. The member receives back the full sale price of every box of rhubarb, minus a handling charge which has generally been 20 cents per box and minus a charge of one or two cents a box for a reserve for contingencies. The member pays in no money except the $1 it costs him to join petitioner. The gross sales price of the rhubarb is shown in petitioner's books. Petitioner keeps its own bank account for operating expenses. On May 29, 1947, the Deputy Commissioner of Internal Revenue wrote petitioner, relative to claims of petitioner for refund in the total amount of $366.03 of employers' tax for the period from October 1, 1942, through June 30, 1946, "Although it is stated on your claims that your Association is a cooperative farming organization for marketing purposes and is exempt from income tax under Section 101(1) of the Internal Revenue Code236 , the records of this office" indicated only "that your Association, * * was granted exemption under Section 103(12) of the Revenue Act of 1928 and prior acts which corresponds to Section 101(12) of the Internal Revenue Code". Accordingly, the letter stated, "If exemption has not been granted under Section 101(1) of the Internal Revenue Code and it is your desire to apply for such exemption, the necessary forms and information may be obtained from the office of the collector of internal revenue for your district." On July 25, 1947, petitioner executed Form 1024, affidavit for corporations claiming exemption under section 101(1), of the Code. On October 27, 1947, the Deputy Commissioner wrote petitioner that "Form 1024 does not appear to be the correct exemption affidavit to be used by an organization of your type" and requested that Form 1028, affidavit for corporations claiming exemption under section 101(12), Internal Revenue Code, be executed by petitioner and submitted, "together with a classified statement of your receipts and expenditures for the fiscal year ended May 31, 1947, and a complete statement237 of your assets and liabilities as of the end of that year." On November 6, 1947, petitioner, by its attorney-in-fact, E. S. Watts, C.P.A., wrote the Commissioner: "It would seem senseless for us to execute the enclosed forms 1028 for exemption under section 101(12) when according to your letter of May 29, 1947, this organization already has exemption under the said subsection." By letter dated December 15, 1947, the Deputy Commissioner renewed his request of October 27, 1947, that petitioner submit Form 1028 and other information. On December 17, 1947, the collector of internal revenue at Tacoma, Washington, notified petitioner that it was on the delinquent list for an information return, Form 990, covering the fiscal year ended May 31, 1947. On December 26, 1947, petitioner, by its attorney-in-fact, wrote the Commissioner again refusing to execute Form 1028, because "We will not agree that our income exemption should not be under Sec. 101(1), so naturally we will not make application under Sec. 101(12)." Petitioner also enclosed its information return, Form 990, for the fiscal year ended May 31, 1947. On March 12, 1948, the Deputy Commissioner wrote petitioner, referring238 to their previous correspondence: "The letters indicate that you do not intend to furnish the required information, since in your letter of January 21, 1948 it is stated that unless this Bureau is satisfied that you should have exemption from income tax under section 101(1) you will immediately upon receipt of advice to that effect initiate in the Federal Court the proper action to give you your proper position under the revenue laws. "Since you have not shown that you are now being operated in such a manner as to be entitled to exemption from Federal income tax under section 101 of the Internal Revenue Code or any other provisions of the Code, Bureau letter to you dated September 3, 1931, holding that you were entitled to exemption under section 103(12) of the Revenue Act of 1928 is hereby revoked, effective January 1, 1939, which is the effective date of the Internal Revenue Code. You will, therefore, be required to file Federal income tax returns, beginning with the year 1939. "The collector of internal revenue at Tacoma, Washington, is being instructed to take up the matter with you with a view to obtaining the required income tax returns." On March 17, 1948, petitioner, 239 by its attorney-in-fact, wrote the Commissioner reiterating its position that it did "not wish to file exemption claim under Sec. 101(12) when we claim we are entitled to it under Sec. 101(1)." On May 19, 1948, the Deputy Commissioner wrote petitioner, stating that "As you have failed to submit the necessary information, Bureau ruling of March 12, 1948, revoking the ruling of September 3, 1931, * * remains in effect." On May 25, 1948, petitioner, by its attorney-in-fact, wrote the Commissioner again reiterating its position that "until disposition has been made of our pending claim for refund we do refuse to file application for exemption under Sec. 101(12)." On July 1, 1948, petitioner, by its attorney-in-fact, wrote the Commissioner again reiterating its position that "since we claim income tax exemption under Sec. 101(1) as well as Sec. 101(12), we did not wish to execute the affidavit claiming exemption only under Sec. 101(12)." On July 12, 1948, petitioner, by its attorney-in-fact, wrote the Commissioner: "Now enclosed you will find the affidavit form 1028 which you will notice we have executed under Sec. 101 and have inked out any reference to a subsection. We do240 not know what information this will give you other than what you already have, but it was just recently explained to the writer by a deputy collector that this is a way the affidavit could have been executed to have saved the Government and this agricultural association needless expense. If we had known this before, we would have been glad to file the form in this manner." On November 4, 1948, petitioner, by its attorney-in-fact, wrote the Commissioner: "There has been no change in our method of operations under which we were exempt from income tax from inception of the Corporation in 1931 down to date and since we have a case pending in Federal Court which should adjudicate our position under section 101 we will make no further filing of form 1028 until that case has been decided. The docket number of that case is 1157. If that case does not decide our income tax exemption by deciding that we are in no way subject to Social Security Taxes then we will petition the Tax Court on any income tax assessments proposed." Petitioner brought suit against Clark Squire, Collector of Internal Revenue, in the United States District Court of Western District of Washington, Southern Division, 241 to recover a refund of $89.14 in employment taxes for the years 1943 through 1946 which had been paid by petitioner upon the wages of its office personnel. The claims for refund had originally aggregated $366.03 but the Commissioner had allowed the claims insofar as they covered the tax on the wages of employees other than office employees. The District Court, after a hearing, held that under the provisions of sections 101(1) and 101(12), of the Code, plaintiff (petitioner herein) was exempt from social security tax upon any of its employees and entered judgment in favor of plaintiff for the full amount plus interest and costs. On appeal, in Squire v. Sumner Rhubarb Growers' Ass'n. (C.A. 9, 1950), 184 Fed. (2d) 94, the judgment of the District Court was reversed, the Court of Appeals for the Ninth Circuit holding that appellee (petitioner herein) was not exempt under section 101(1) of the Code, and that though the District Court was correct in holding appellee exempt under section 101(12) of the Code, nevertheless services of the office employees in question were not "agricultural labor" as defined in 26 U.S.C.A. § 1426242 (h)(4), and therefore appellee was not exempt from payment of employment taxes on wages of these office employees. After notification by the Deputy Commissioner in his letter of March 12, 1948, above, that petitioner would "be required to file Federal income tax returns, beginning with the year 1939", the following corporation returns covering the years here in question were subsequently prepared and filed in petitioner's behalf by the deputy collector for the district of Washington: YearReturnFiscal period Jan. 1, 1939, to May 31, 1939Income, Declared Value Excess-Profits and De-fense TaxFiscal year ended May 31, 1940Income, Declared Value Excess-Profits and De-fense TaxFiscal year ended May 31, 1941Income, Declared Value Excess-Profits and De-fense TaxFiscal year ended May 31, 1942Income and Declared Value Excess-Profits TaxFiscal year ended May 31, 1946Income and Declared Value Excess-Profits TaxFiscal year ended May 31, 1947Income TaxPetitioner's balance sheet as of May 31, 1946, was as follows: BALANCE SHEETAs at May 31, 1946ASSETSCash in Bank$ 6,887.49Cash on Hand6.22$ 6,893.71State Unemployment Taxes - (Part)189.30Inventories: Floor Supplies787.53Advertising918.00Field Boxes2,233.89Hothouse Boxes5,011.208,950.62Current$16,033.63Floor Equipment$497.45Office Equipment748.251,245.70Less, Depreciation Reserve1,245.70Total Assets$16,033.63LIABILITIESSocial Security$ 2.56Undistributed Proceeds (1944 Season)900.83Undistributed Proceeds4,282.25Current$ 5,185.64EQUITIESCapital Stock Outstanding$ 1,214.00Capital Surplus June 1, 1945$2,758.39Plus: Bank Error$ .60Dormant Refund47.8048.402,709.99Reserve for Contingencies6,924.00Members' Equity10,847.99Total Liabilities and Equities$16,033.63243 Petitioner's statement of operations and distributions for the year ended May 31, 1946, was as follows: STATEMENT OF OPERATIONS AND DISTRIBUTIONSYear ended May 31, 1946Sales: Hothouse Rhubarb (92,193 Boxes)$208,698.14Field Rhubarb13,677.65Price Adjustments - Net2,698.76$225,074.55Adjustments by Charges to Growers: Hothouses434.06Field61.86495.92Outside Sales: Boxes and Supplies12.50Outside Discount Collected9.90Interest Charged Growers45.31Discount Earned109.15164.36Costs Charged to Growers: Hothouse: Supplies$ 273.82Advertising1,843.86Brokerage4,760.00Boxes13,677.57Handling13,828.9534,384.20Field: Supplies7.00Brokerage324.97Handling1,005.20Boxes1,581.792,918.9637,303.16Total Revenue and Collected Costs$263,050.49Direct Disbursements: Hothouse: Advertising$ 1,183.89Supplies1,350.13Brokerage5,101.61Boxes11,921.1119,556.74Field: Brokerage315.00Boxes1,569.741,884.74Indirect Costs and Handling: Freight and Express$ 19.52Federal License and County Tax21.18Interest and Discount49.14Legal and Auditing90.00Treasurer's Fee100.00Donations, Dues and Advertising172.65Office Supplies and Postage240.98Precooling354.80Inspection494.15Insurance and Bond Premiums552.62Rent, Heat and Light684.42Telephone and Telegraph748.10Wages3,244.74Salaries7,107.5013,879.80Total Expense and Supply Disbursements35,321.28Balance227,729.21Less: Depreciation Reserve69.24Accounts Receivable Error80.00Reserve for Contingencies921.931,071.17For Distribution to Member Growers226,658.04Distributions to Growers: Hothouse208,698.14Field13,677.65222,375.79Undistributed Proceeds$ 4,282.25244 Petitioner's balance sheet as of May 31, 1947, was as follows: BALANCE SHEETAs at May 31, 1947ASSETSCash in Bank$ 9,940.39Cash on Hand16.41$ 9,956.80Hothouse Accounts Receivable8.00State Unemployment Department189.30Inventories: Floor Supplies236.35Advertising795.60Field Boxes225.20Cartons2,844.00Hothouse Boxes6,483.3810,584.53Current20,738.63Cold Room Equipment5,648.66Less: Depreciation Reserve564.875,083.79Floor Equipment$535.40Office Equipment748.251,283.65Less: Depreciation Reserve1,245.7037.95Total Assets$25,860.37LIABILITIESAccounts Payable$ 182.41Undistributed Proceeds (Prior Seasons)854.56Undistributed Proceeds11,885.39Current$12,922.36EQUITIESCapital Stock Outstanding$ 1,202.00Capital Surplus2,709.99Reserve for Contingencies at June 1, 1946$6,924.00Addition at 2" per Box2,102.029,026.02Members' Equity12,938.01Total Liabilities and Equities$25,860.37Petitioner's statement of operations and distributions for the year ended May 31 1947, was as follows: 245 STATEMENT OF OPERATIONS AND DISTRIBUTIONSYear ended May 31, 1947Sales: Hothouse Rhubarb (105,101 Boxes)$180,220.46Field Rhubarb39,794.63Price Adjustments - Net3,203.22$223,218.31Adjustments by Charges to Growers: Hothouses517.73Field202.04719.77Outside Sales: Boxes and Supplies10.00Advertising2.40Discount Earned223.27225.67Costs Charged to Growers: Hothouse: Supplies$ 382.64Pre-Package2,072.78Advertising2,102.02Brokerage5,654.51Handling21,020.20Boxes21,049.4852,281.63Field: Supplies$ 7.20Brokerage1,118.03Handling4,663.20Boxes8,088.1613,876.5966,158.22Total Revenue and Collected Costs$290,331.97Direct Disbursements: Hothouse: Advertising$ 862.02Supplies3,254.58Brokerage5,522.59Boxes18,720.6828,359.87Field: Brokerage905.00Boxes7,387.288,292.28Cartons391.35Indirect Costs and Handling: County Property Tax14.53Social Security16.34Treasurer's Fee100.00Insurance and Bond Premiums100.56Legal and Auditing101.25Office Supplies and Postage138.74Dues and Advertising165.50Interest and Discount313.71Inspection738.00Telephone and Telegraph1,066.91Rent, Heat and Light1,165.30Salaries6,585.25Wages6,894.2917,400.38Total Expense and Supply Disbursements54,443.88Balance$235,888.09Less: Depreciation Reserve564.87Pre-Package allowances1,320.72Reserve for Contingencies2,102.023,987.61For Distribution to Member Growers231,900.48Distributions for Growers: Hothouse180,220.46Field39,794.63220,015.09Undistributed Proceeds$ 11,885.39246 The amount of $4,282.25 shown on the balance sheet and on the statement for the year ended May 31, 1946, as "Undistributed Proceeds" has since been distributed. Undistributed proceeds due the growers by agreement with the growers are sometimes left with petitioner during the winter to purchase supplies for the growers. The amounts due are then distributed in the spring. The cash in the bank of $9,940.39 shown on the balance sheet at May 31, 1947, was kept to be used toward the payment of $11,885.39 in undistributed proceeds due the members for the current season. The item on the balance sheet at May 31, 1946, of $900.83 for "Undistributed Proceeds (1944 Season)" was attributable to proceeds due members who had left the territory. Otherwise all proceeds from the sale of rhubard prior to that date had been distributed to members, less the cost of handling and additions to the contingent reserve. The operation of petitioner has been substantially the same from its inception in 1930. In contingent reserve was maintained for unforeseen expenses such as, for instance, losses by freezes on carload shipments. The board of directors of petitioner determined each year the amount of reserve247 to be set up. The average increase in the contingent reserve over the years of petitioner's operations has amounted to approximately $700 per year. The reserve was not all in cash but a part was in equipment and inventory. In the fiscal year 1946 the amount reported under page 1, of Form 990, item 14(d), "Value of agricultural products marketed (or handled) for members (1) actually produced by such members" corresponded with the amount reported under item 7, page 2, of the form "Gross receipts from business activities," which included "Costs Charged Growers". In 1947 the amount reported under item 14(d), page 1 of Form 990, was only the gross receipts less costs charged growers, which latter were shown under item 7, page 2. Petitioner was an exempt organization within the meaning of section 101(12) of the Internal Revenue Code for the years involved. Opinion Petitioner corporation was originally granted exemption on September 3, 1931, under the provisions of section 103(12) of the Revenue Act of 1928 according exemption to farmers' and fruit growers' cooperatives. That section is in all material respects similar to the present provisions of section 101(12) 1 of the Internal Revenue Code248 , which is involved in this proceeding and applicable for taxable years beginning after December 1, 1938. On March 12, 1948, respondent arbitrarily revoked its letter of September 3, 1931, granting petitioner exemption under section 103(12) of the Revenue Act of 1928, the revocation to be effective retroactively as of January 1, 1939. 249 The sole question is whether petitioner is entitled to exemption under section 101(12) for the years here involved, namely, the period January 1 to May 31, 1939, and the fiscal years ended May 31, 1940, 1941, 1942, 1946 and 1947. In Squire, Collector of Internal Revenue v. Sumner Rhubarb Growers' Ass'n (C.A. 9, 1950), 184 Fed. (2d) 94, in which the issue was whether appellee, petitioner herein, was excepted from payment of employment taxes under the Social Security Act on wages of its office personnel for the years 1943 through 1946, the Court of Appeals for the Ninth Circuit, in deciding that it was not, found it necessary to consider whether petitioner was exempt from income tax under section 101(12) and stated that it was so exempt. However, appellant, the collector of internal revenue, in the words of the court, "made no point" of whether petitioner was exempt from income tax under section 101(12). Accordingly, the point not being controverted, the Commissioner is not collaterally estopped to raise it in this proceeding for the different years here before us, even though, as we have found, there has been no change in petitioner's method of operation since its inception250 in 1930. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591; Sam Schnitzer, 13 T.C. 43">13 T.C. 43; aff'd (C.A. 9, 1950), 183 Fed. (2d) 70; certiorari denied, 340 U.S. 911">340 U.S. 911. However, on the merits, we reach the same conclusion on the record here before us for the years here involved as did the Court of Appeals in the above proceeding involving other years, namely, that petitioner "fits exactly into the wording of this statute". (Section 101(12)). Petitioner is an association of rhubarb growers who joined together in a group to facilitate the packing, processing, shipping and sale of their products. Petitioner's sales are handled by a salaried manager who is selected by the directors, the latter being members elected as directors annually and serving without compensation. The members receive boxes at cost from petitioner for packing the rhubarb. The rhubarb is packed in the boxes by the members and turned over to petitioner for shipping and sale under petitioner's name. Each week during the harvesting season, which is from January to May of each year, the amount received by petitioner from that week's sales of rhubarb is pooled and distributed according251 to the quantity each member brought in. The member receives back the full sale price of every box of rhubarb, minus a handling charge which has generally been twenty cents per box and minus a charge of one or two cents a box for a reserve for contingencies. It is quite clear that these operations are within the requirements of section 101(12) set forth above. As we have said, there has been no change in petitioner's method of operation since its inception in 1930. Respondent, however, maintains that petitioner's Form 990, the information return for organizations exempt under section 101, Internal Revenue Code, for the fiscal year 1947, "showing a complete change over 1946 in the method of handling and reporting produce sales and charges to growers was ample justification for respondent's action in withdrawing exemption". However, scrutiny of the Forms 990 for those two years shows, as set forth in our findings, that precisely the same method of operation was revealed for both years; the information was merely reflected in a different place on the form in the two years. The testimony of E. S. Watts, petitioner's auditor who prepared the forms, in answer to the252 question of counsel for respondent as to why the change was made, was simply that "we decided we were making the form wrong". There seems no reason to regard this testimony with suspicion. Certainly, at any rate, this change in petitioner's method of reporting its operations, the operations themselves remaining unchanged, does not justify a holding that petitioner was thereafter no longer entitled to exemption under section 101(12). Respondent also contends that there is no satisfactory showing by petitioner of any consistent policy to distribute the proceeds of each year's operations to its members. The record does not support this contention. In the fiscal year 1946 of the amount of $226,658.04 for distribution to member growers (after deduction of costs of $35,321.28, and small amounts for reserves for depreciation and contingencies, from total revenue and collected costs for that year of $263,050.49), the amount of $222,375.79 was distributed in that fiscal year to growers. The balance of $4,282.25 in undistributed proceeds left after audit was shown as a liability on the balance sheet and distributed during the following season, being left temporarily with petitioner by agreement253 with the growers to purchase supplies for the growers. The only proceeds carried over from any prior seasons consisted only of some $900.83 from the 1944 season (1945 fiscal year), also shown as a liability, attributable to proceeds due certain members who had left the territory. In the fiscal year 1947, of the amount of $231,900.48 for distribution to member growers, the amount of $220,015.09 was distributed in that year. The undistributed proceeds of $11,885.39 were set up as a liability, petitioner's auditor testifying that cash on hand as of the same date, May 31, 1947, in the amount of $9,940.39 was held toward the payment in the following season of the balance due the members. No period beyond May 31, 1947, is before us in this proceeding but we think petitioner has shown satisfactorily that its settled policy was to distribute to its members the proceeds of its operations. Respondent maintains that there was no "legal obligation on the part of petitioner, prior to the receipt of its income, to return to its members all of the proceeds of sales and operations in excess of actual costs," and that such amounts were "subject to the control of the Board of Directors and depended254 upon its determination as to if and when they should be distributed." Accordingly, respondent contends, citing American Box Shook Export Association v. Commissioner (C.A. 9, 1946), 156 Fed. (2d) 629; affirming 4 T.C. 758">4 T.C. 758, that there is no justification for relieving petitioner from tax. This contention is without merit. The marketing agreements which petitioner signed with its members clearly provided that petitioner was to pay to the members the market price received for the rhubarb (less a deduction of one cent per box for additions to the contingent reserve) and constitute legal obligations. Accordingly, American Box Shook Export Association v. Commissioner, supra, where the requisite legal obligation was lacking, is not in point. Furthermore that case did not specifically involve the question of statutory exemption under section 101(12), the only question in the present proceeding. Respondent also mentions that "no credits were set up on the books of account in favor of the members with reference to such undistributed amounts", to support his contention that petitioner was under no legal obligation to return these undistributed amounts to255 the members. The marketing agreements provided the legal obligation, as we have said. Furthermore, the total undistributed amounts were set up as liabilities by petitioner's auditor, as the facts show, the auditor testifying they were to be entered on petitioner's books in the same menner, the amounts due each member to be computed by petitioner on the basis of the number of boxes he turned in. Respondent's own regulations (Regulations 111, section 29.101(12)-1) state "The Code does not require, however, that the association keep ledger accounts with each producer selling through the association". Clearly, there is nothing in petitioner's method of handling distributions to its members, either in practice or on its balance sheets and books, to justify denial of exemption under section 101(12). Respondent maintains that the annual deductions by petitioner from the proceeds of the produce sold for a "large and consistently growing" contingent reserve warrants inquiry as to petitioner's right to exemption under section 101(12). The facts show that this reserve increased at an average rate of about $700 per year from petitioner's inception through the taxable years involved, and totaled256 $9,026.02 as of May 31, 1947. This reserve was kept for possible contingencies, such as, for instance, losses by freezes on carload shipments. Not all of it was in cash; a part was in equipment and inventory. Section 101(12) provides that exemption shall not be denied cooperative associations otherwise qualified because there is accumulated and maintained by it "a reasonable reserve for any necessary purpose". We would certainly think the maintenance of a reserve for contingencies a necessary precaution on the part of a cooperative association engaged in marketing perishables. Moreover, in view of the volume of business handled by petitioner for its members, - well over $200,000 annually in both 1946 and 1947, - we can not regard additions to this reserve for contingencies of a mere $700 annually as unreasonable. We conclude that petitioner is entitled to exemption under section 101(12) of the Code from the taxes here involved. Decision will be entered for the petitioner. Footnotes1. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall be exempt from taxation under this chapter - * (12) Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. * * nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624345/	APPEAL OF PERMANENT LOAN AND SAVINGS ASSOCIATION.Permanent Loan & Sav. Asso. v. CommissionerDocket No. 2268.United States Board of Tax Appeals2 B.T.A. 132; 1925 BTA LEXIS 2539; June 23, 1925, Decided Submitted May 21, 1925. 2539 Upon the evidence, held, that, under the provisions of section 231(4) of the Revenue Act of 1921, taxpayer is exempt from taxation for the year 1921. John D. Watkins, Esq., and John E. McClure, Esq., for the taxpayer. Robert A. Littleton, Esq., for the Commissioner. LITTLETON132 Before LITTLETON and TRUSSELL. This appeal is from a determination by the Commissioner of a deficiency in tax for the calendar year 1921 in the amount of $503.52. The question involved is whether or not the taxpayer is entitled to exemption from taxation for the year 1921, under the provisions of section 231(4) of the Revenue Act of 1921. FINDINGS OF FACT. The taxpayer is a domestic building and loan association, organized under the laws of the State of Indiana in the year 1885. The capital stock of the association consists, and consisted during the year 1921, of running or installment shares of the par value of $100 each. It has not now and did not have in the year 1921 any paid-up stock. During the year 1921 the total amount of loans made by the association was $158,590, of which $114.115 was to members who had subscribed to running stock2540 prior to the time they applied for loans. Prior to August 5, 1921, the association also made loans in the amount of $44,475 to persons who had not previously subscribed for running stock, and it is these loans which give rise to the controversy. These loans were made under the following conditions: Prior to August 5, 1921, it was not the custom of the association to issue certificates of stock to its members except on request. When a person applied for stock in the association, he did not sign a formal subscription blan, but was simply given a pass book in which were entered his weekly payments, and, unless he specifically requested a certificate, this book was all the evidence he had of his ownership of stock. When a person holding running stock applied for a loan, he was required to sign a formal application therefor, which was based on his stockholding, and to execute a mortgage on real estate as security. Thereafter, his weekly payments were entered in his pass book as usual. No person could obtain a loan in excess of the par value of his stock. When a person who had not previously subscribed for stock and received a pass book applied for a loan, he was required to make2541 a 133 formal application for the loan setting forth the number of shares of stock on which he desired to obtain the loan, and also to execute a mortgage on real estate, which mortgage contained a covenant to the effect that he was a member of the association and entitled to the mutual benefits and advantages accruing therefrom. He was then given a pass book, and the weekly payments thereafter made were entered in his pass book. The weekly payments were based on shares of stock having a par value at least equal to the amount of the loan. In other words, a person who had not previously subscribed for stock, and who borrowed $1,000, made a formal application setting forth that he desired to obtain a loan on 10 shares of stock, and upon the granting of the loan he was given a pass book and thereafter paid and had entered in the pass book, weekly, amounts equal to the regular weekly payments or dues required by the association on 10 shares of its stock. Certificates of stock were not issued to members prior to August 5, 1921, whether borrowers or nonborrowers, unless specifically requested, but after that date certificates were made out and pasted in the back of all outstanding2542 pass books and those subsequently issued. The persons who had not subscribed for stock prior to the time the applied for loans received, on or after August 5, 1921, certificates the same as other members, and their certificates were dated as of the dates of their applications for loans. The persons who had not subscribed for stock prior to making loans, from the time they received pass books and commenced making weekly payments, participated in the profits of the association on exactly the same basis as members who had received stock prior to the time they applied for loans. They had the same rights and benefits and the same liabilities as any regular certificate-holding member of the association. DECISION. The deficiency determined by the Commissioner is disallowed. OPINION. LITTLETON: The taxpayer contends that it is entitled to exemption from taxation for the year 1921 under the provisions of section 231(4) of the Revenue Act of 1921, which provides: That the following organizations shall be exempt from taxation under this title - * * * (4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; 2543 * . The Commissioner contends that substantially all the business of the taxpayer was not during the year 1921 confined to making loans 134 to its members, and that it therefore does not come within the provisons of law just quoted. It is conceded by the Commissioner that, if the persons to whom loans, in the total amount of $44,675, were made prior to August 5, 1921, were members of the association, it is entitled to exemption from taxation in the year 1921. Upon consideration of the evidence in this appeal, we are of the opinion that all of the business of the taxpayer during the year 1921 was confined to making loans to members. The loans fall into two classes - those made to persons who at the time they applied therefor were members and holders of stock in the association, and those made to persons who became members and stockholders at the time they applied for and received loans. Borrowers of the latter class, upon the making of the applications for loans and the issuance of pass books to them, immediately became members and stockholders of the association, entitled to the same rights and benefits and subject to the same liabilities as any other member. It*2544 is immaterial, we think, that certificates of stock were not issued to those persons at the time they became members. A certificate is merely the stockholder's evidence of title to his stock. In this appeal the persons whose loans are involved did everything necessary to make them members of the association when they made their applications for loans. They became members in fact, entitled to all the benefits and subject to the liabilities incident to membership. We are, therefore, of the opinion that the taxpayer is entitled to exemption from taxation for the year 1921, under section 231(4) of the Revenue Act of 1921.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624346/	JULIAN M. LIVINGSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Livingston v. CommissionerDocket No. 105539.United States Board of Tax Appeals46 B.T.A. 538; 1942 BTA LEXIS 856; March 10, 1942, Promulgated 856 1. Respondent disallowed the deduction of the cost of certain preferred stock to the petitioner, as a loss, on the ground that the stock became worthless prior to the taxable year. Held, such stock was not worthless prior to that year but became so during that period. 2. Held, that certain amounts were deductible from petitioner's gross income of the taxable year. Lewis Schimberg, Esq., for the petitioner. John D. Kiley, Esq., and Lester M. Ponder, Esq., for the respondent. LEECH538 Respondent determined a deficiency in petitioner's income tax for the year 1937 in the sum of $16,868.74. Respondent, by amended answer, requests that the deficiency be increased by the sum of $1,719.85. The first issue is whether or not petitioner is entitled to a deduction in the taxable year for a loss due to worthlessness of certain stock. The second issue is whether or not petitioner may deduct certain amounts expended in the taxable year as ordinary and necessary expenses of a trade or business. Many of the facts were stipulated. Additional facts were adduced from evidence presented at the hearing. FINDINGS OF FACT. First Issue.857 Most of the facts with which the first issue is concerned were stipulated. We adopt the stipulated facts as a part of our findings but set forth herein only those of the stipulated facts which are material to discussion in our opinion. Petitioner is an individual residing in New Rochelle, New York. He filed his Federal income tax return for the year 1937 with the collector of internal revenue for the first collection district of Illinois. 539 Orpheum Circuit, Inc., hereinafter referred to as Orpheum, was a holding company incorporated on December 22, 1919, under the laws of the State of Delaware. Thereafter, Orpheum acquired all, or substantially all, of the stock of a number of companies operating a chain of vaudeville and motion picture theatres in the western part of the United States and Canada. In 1928, Keith-Albee-Orpheum Corporation, hereinafter known as K.A.O., was organized and thereafter acquired all of the outstanding common stock of Orpheum. Later in 1928, the entire outstanding common stock of K.A.O. was acquired by Radio-Keith-Orpheum Corporation, hereinafter referred to as R.K.O. K.A.O. and R.K.O. were holding companies engaged in the business858 of producing, distributing and showing motion pictures and vaudeville. Orpheum, K.A.O., and R.K.O. were all operated as a part of a single operating system under the control and management of R.K.O. The total issued outstanding shares of 8 percent cumulative convertible preferred stock of Orpheum, hereinafter called the preferred stock, aggregated 63,840 shares, of which 9,462 shares were owned and held by K.A.O. and the remaining 53,378 shares were owned by the general public. The stock had a par value $100of per share. Petitioner acquired 1,500 shares of Orpheum preferred stock in 1925 for cash at an aggregate cost of $150,099. Petitioner acquired an additional 220 shares of this stock in 1932 for cash at a total cost of $1,446.50. Dividends on the preferred stock of Orpheum were paid regularly from 1920 until October 1, 1931, when there was a default on the quarterly dividend due on that date. No dividends were ever paid thereafter on this stock. In January 1932, a group of 18,000 Orpheum preferred stockholders organized a protective committee known as Orpheum Circuit, Inc. Preferred Stockholders Protective Committee. At or about the same time, an additional protective859 committee was organized by a group of Orpheum preferred stockholders on the Pacific Coast. On December 6, 1932, both of these committees were consolidated into a single committee known as Orpheum Circuit, Inc. Preferred Stockholders Consolidated Protective Committee and hereafter referred to as the committee. Petitioner was a member of this committee which continued to function until January 3, 1938. On January 11, 1932, R.K.O. offered to the preferred stockholders of Orpheum the right to convert Orpheum preferred stock into R.K.O. common stock on the basis of two shares of R.K.O. common for one share of Orpheum preferred. This offer expired on November 30, 1933, and was not thereafter extended. Petitioner did not avail himself of the offer. In December 1932, R.K.O. made a 540 new offer to the committee to exchange three shares of R.K.O. common for each share of Orpheum preferred. From eight to ten thousand shares, only, of the 53,378 shares of Orpheum preferred stock outstanding in the hands of the public were so exchanged. Petitioner and other preferred shareholders rejected the offer on the ground that the Orpheum preferred stock was of far greater value than860 the R.K.O. common stock. On January 27, 1933, Orpheum filed a voluntary petition in bankruptcy in the United States District Court for the Southern District of New York, hereinafter referred to as the District Court, and on the same day was adjudicated a bankrupt. On February 17, 1933, the Irving Trust Co. of New York was elected trustee in bankruptcy of Orpheum. In September 1933, because of its dual capacity of trustee of Orpheum and receiver of R.K.O. and consequent diversity of interests, the Irving Trust Co. resigned as trustee in bankruptcy of Orpheum and Marcus Heiman was appointed successor trustee in bankruptcy. Orpheum continued in bankruptcy thereafter, the trustee filing his final report with the District Court on April 11, 1938. Creditors were paid an aggregate of 30 cents on the dollar for their claims against the bankrupt. Nothing was ever paid with respect to the preferred or common stock of the company. At the time of its adjudication in bankruptcy Orpheum filed schedules showing total assets of $22,328,067.81 and total liabilities of $16,727,884.58. On January 27, 1933, receivership proceedings were instituted in the District Court against R.K.O. and a861 receiver in equity was duly appointed on that date. In June 1934, the receivership proceeding was converted into a proceeding under section 77B of the Bankruptcy Act. The Irving Trust Co. of New York acted as trustee of the debtor's estate and was still serving as such on September 8, 1938. Stadium Theatres Corporation, hereinafter referred to as Stadium, was incorporated on January 27, 1933, under the laws of the State of Delaware. Its officers were the same as those of R.K.O. and K.A.O. The entire capital stock of Stadium was issued to the Irving Trust Co. as receiver in equity for R.K.O. Prior to May 3, 1932, Orpheum began to borrow large sums from K.A.O. By October 1, 1932, K.A.O. had advanced to Orpheum a total principal amount of $2,880,000 and had received from Orpheum notes therefor secured by nearly all of Orpheum's assets, consisting of stocks held by it in theatre companies and claims against those companies. After January 27, 1933, K.A.O. filed a claim in the amount of $3,000,000 in the bankruptcy proceedings of Orpheum. This claim was filed as a secured one. Some months later, the claim of K.A.O. was assigned to Stadium, which took possession of the pledged862 securities and has managed them ever since. Heiman, as trustee in bankruptcy 541 for Orpheum, never operated any of the properties or companies the stocks of which were pledged to Stadium. The next largest claim filed in the bankruptcy proceedings was in the sum of $1,112,000 and was filed on behalf of the trustee for bondholders of the Omaha Orpheum Co., one of Orpheum's subsidiaries, the bonds of which had been guaranteed by Orpheum. This claim was objected to by the trustee in bankruptcy but was held valid and later passed to one Snyder as successor trustee for the Omaha bondholders. As of January 1933, the total claims against Orpheum amounted to about $5,600,000. At that time the assets consisted of approximately $3,000 in cash and the bankrupt's equity of redemption in the stocks and claims pledged as collateral security to K.A.O. and thereafter held by Stadium. Under date of May 21, 1934, Stadium informed the trustee in bankruptcy of Orpheum that all of the notes of Orpheum held by Stadium were in default. Under date of June 5, 1934, the trustee in bankruptcy of Orpheum notified Stadium that he did not recognize the validity of the notes held by Stadium nor863 the validity of the pledge of collateral and that any steps taken with regard to the notes or pledge would be taken on the responsibility of Stadium. On December 21, 1934, the committee served formal notice on the trustee in bankruptcy of Orpheum demanding that the trustee institute action against the officers and directors of Orpheum, K.A.O., and R.K.O. for damages incurred by the pledge of Orpheum's assets to Stadium, waste of assets of Orpheum and dissipation of its property, and other alleged misdeeds. The committee further demanded that the trustee institute action to set aside the transfer of Orpheum's assets to Stadium. No action was taken by the trustee in bankruptcy of Orpheum on this demand. On June 6, 1935, preferred bondholders of Orpheum filed a petition with the referee in bankruptcy of Orpheum for an order allowing them to sue for recovery of the assets from Stadium and also for damages against the officers and directors of Orpheum, K.A.O., and R.K.O. On the same date the Northwestern National Bank of Minneapolis, Minnesota, a creditor of Orpheum, filed a similar petition in the pending bankruptcy proceedings, requesting the same relief sought by the preferred864 shareholders. On June 6, 1935, the trustee in bankruptcy of Orpheum filed an affidavit in connection with the hearings on the petitions of the preferred bondholders and the creditor filed June 6, 1935, in which he requested that legal action such as demanded by the petitions of June 6, 1935, should be postponed until the plan of reorganization of R.K.O. had been formulated. On June 26, 1935, the referee in bankruptcy of Orpheum entered an order denying the applications of the preferred shareholders and of the Northwestern National Bank of Minneapolis, with the proviso 542 that the applications might be renewed within a reasonable time if no plan of reorganization of Orpheum was effected or satisfactory disposition of the matter made within that time. On July 5, 1935, a petition to review the order of the referee in bankruptcy was filed. On September 3, 1935, the District Court entered an order affirming the order of the referee. This order was also entered without prejudice of the applicants to renew their applications. On September 26, 1935, additional petitions were filed by the preferred bondholders and the Northwestern National Bank of Minneapolis, requesting865 the relief previously applied for on June 6, 1935. On September 26, 1935, the trustee in bankruptcy of Orpheum filed a report with the referee in bankruptcy in which he requested that legal action by the preferred shareholders be delayed until the formation of a plan of reorganization for R.K.O. On March 30, 1936, the referee in bankruptcy entered an order with respect to the petitions of September 26, 1935, by which the trustee in bankruptcy was directed to institute actions to recover Orpheum's assets in the hands of Stadium and to obtain damages arising from the transfer of assets to Stadium. The order authorized the petitioning preferred shareholders and Northwestern National Bank of Minneapolis to institute actions at the cost of the preferred shareholders and the Northwestern National Bank of Minneapolis against persons responsible for the waste and dissipation of Orpheum's assets. A petition for review of this order was thereafter filed and, on May 2, 1936, the referee in bankruptcy for Orpheum filed with the District Court his certificate on the petition to review his order dated March 30, 1936. No order was ever entered by the District Court with respect to this proceeding866 for review. On or about November 20, 1936, a plan of reorganization of R.K.O. was filed in the District Court in the then pending 77B proceedings. This plan was the first plan of reorganization filed in the 77B proceedings and made no provision for participation of the preferred stockholders of Orpheum in the reorganization of R.K.O. In November or December 1936, petitioner became chairman of the committee. On November 7, 1936, the committee voted to assess the preferred shareholders of Orpheum one dollar per share in order to meet the expenses of the committee. In response to this call holders of 13,845 shares of Orpheum preferred stock contributed the sum of $13,845. The holders of an additional 4,612 shares authorized the committee to act for them but did not pay the one dollar per share assessment. Of the total amount paid on this assessment, $11,601 was collected prior to January 2, 1937. The remaining $2,244 was collected during the period January 2 to June 1, 1937. Petitioner contributed the sum of $1,720 in response to the one dollar a share assessment. 543 On December 23, 1936, Stadium offered to purchase all of the assets of Orpheum (with the exception867 of cash in possession of the trustee in bankruptcy in the sum of $2,500) for the sum of $700,000 in cash and the cancellation or subordination of its claims and certain claims held by its subsidiaries in the sum of approximately $3,450,000 to the claims of other creditors. On January 8, 1937, the referee in bankruptcy of Orpheum appointed appraisers to appraise all of the bankrupt's estate. No appraisal of the assets of Orpheum prior to the one ordered January 8, 1937, had been made subsequent to the filing of the petition in bankruptcy of Orpheum. The appraisers' report on Orpheum's assets held in pledge by Stadium showed a value of $2,700,000 as of January 28, 1937. On February 2, 1937, the claims of creditors (including interest) amounted to approximately $7,000,000. On January 25, 1937, the committee filed a petition with the referee requesting that the trustee be directed to reflect the offer of Stadium, to file a petition in the 77B proceedings of R.K.O. in order to bring Orpheum within the R.K.O. plan of reorganization and to object to the proposed plan of reorganization of R.K.O. which had been presented on or about November 20, 1936. At a creditors' meeting held868 on February 2, 1937, at which the Stadium offer was considered, the preferred shareholders tendered an offer of $2,000,000 free and clear of liens for the pledged assets. The preferred shareholders gave no assurance that the independent creditors would receive as much as they would receive under the Stadium offer. On February 18, 1937, the referee in bankruptcy for Orpheum entered an order directing the trustee in bankruptcy to accept the offer of Stadium. On the same day, he entered an order dismissing the petition of the committee which had been filed January 25, 1937. Thereafter, title to all the assets of Orpheum (other than the $2,500 in cash in possession of the trustee in bankruptcy) was conveyed to Stadium pursuant to the order of the referee. A petition to review these orders of the referee was then filed. It was denied by the District Court on June 11, 1937, and the order of the referee affirmed. Petition for leave to appeal from the decision of the District Court to the Circuit Court of Appeals for the Second Circuit was denied on July 30, 1937. On August 16, 1937, the committee filed a petition for leave to intervene in the 77B proceedings of R.K.O. This petition869 was denied on August 31, 1937, by the District Court. The Central Hanover Bank & Trust Co. was designated as transfer agent for the preferred stock of Orpheum in New York City. Its term as transferee agent expired on or about June 20, 1933. The trustee in bankruptcy for Orpheum refused to pay in advance fees of the 544 transfer agent and the Central Hanover Bank & Trust Co. refused to act as transfer agent. Under the rules of the New York Stock Exchange a security for which facilities for transfer in the city of New York are not maintained may be removed from the list. The preferred stock of Orpheum prior to June 20, 1933, had been listed on the New York Stock Exchange. On June 20, 1933, it was removed from the exchange because of failure to maintain a transfer agent and has not since been listed on any stock exchange. On January 27, 1933, the closing price of the preferred stock on the New York Stock Exchange was $3 per share. On January 28, 1933, the closing price of this stock on the New York Stock Exchange was $3 a share. On June 14, 1933, the closing price of the preferred stock on the New York Stock Exchange was $6 per share. The preferred stock of Orpheum870 was traded in the over-the-counter market until sometime in 1937. Munds, Winslow & Potter, stock brokers, on January 11, 1936, owned 230 shares and on that date purchased for their own account two lots of 25 shares at $8 and 75 shares at 10 1/8 per share. On January 22 of that year they purchased for their own account 10 shares at 11 3/4 and on the same date sold 100 shares at 10 1/2 and 100 shares at 10 3/8 per share. On June 30, 1936, they sold 40 shares at 10 1/2 per share. On September 29 of that year they bought 15 shares at $10 and on October 20, 41 shares at $6 per share. On November 9 of the same year they sold 55 shares at $9 per share. On November 19, they bought 30 shares at $8 per share. On November 27 of that year they bought 50 shares at $7, on December 2, 3 shares at $7, on December 11, 10 shares at $7 and on December 30 sold 50 shares at 7 1/2 per share. On January 6, 1937, these brokers sold 50 shares at 6 1/2 and on March 11, 34 shares at 5 1/2 per share. On the same day they sold, as agents for another broker, 166 shares at 5 1/2 per share. The bid and asked prices for this stock during 1936 and 1937 follow: DateFirmAddressSharesBidSharesOffer2-8-36A. C. Gebhardt & CoN.Y1011100133-9-36Englander & CoN.Y10113-18-36Morris Stein & CoN.Y108 1/23-27-36Swift, Langill & HenkeChgo1007 3/43-31-36Carstairs & CoPhila1006 1/2107 1/2Wurts, Dulles & CoPhila108 1/24-2-36Robert C. Mayer & CoN.Y7104-9-36Vermilye BrosN.Y79Munds, Winslow & PotterN.Y100710010Hanson & HansonN.Y100510084-24-36Carstairs & CoPhila107 1/25-7-36Philipson & CoUtica5 1/27-9-36Abbott, Proctor & PaineN.Y1537-23-36Distributors Group IncN.Y100210058-7-36H. D. Knox & CoBoston470079-2-36Crockett & CoBoston549-9-36Steelman & BirkinsN.Y59Munds, Winslow & PotterN.Y6910-5-36Wurts, Dulles & CoPhila108 7/810-6-36Paul E. Kern & CoN.Y50610-9-36Robert C. Mayer & CoN.Y5810-9-36Vermilye BrosN.Y58Hanson & HansonN.Y50450811-20-36Wurts, Dulles & CoPhila108 7/812-3-36Gilbert J. Postley & CoN.Y20912-8-36Paul E. Kern & CoN.Y508 1/412-9-36Carstairs & CoPhila1084-8-37H. D. Knox & CoBoston100210054-9-37Pelz & CoN.Y34-9-37Munds, Winslow & PotterN.Y10041007Vermilye BrosN.Y3 1/25 1/2Robert C. Mayer & CoN.Y25Hanson & HansonN.Y1004 1/21007 1/25-6-37Paul E. Kern & CoN.Y1002 1/46-8-37H. D. Knox & CoBoston100210056-9-37Pelz & CoN.Y2 1/43 3/48-18-37H. D. Shuldiner & CoN.Y1002403 1/210-5-37Robert C. Mayer & CoN.Y100210-9-37Munds, Winslow & PotterN.Y2Vermilye BrosN.Y24Hanson & HansonN.Y1002 1/211-9-37Vermilye BrosN.Y.241-7-38Robert C. Mayer & CoN.Y10034-8-38Pelz & CoN.Y1/84-9-38Hanson & HansonN.Y10028-9-38Robert C. Mayer & CoN.Y5Luckhurst & CoN.Y1/410-8-38Hanson & HansonN.Y1002871 545 From the time of its formation the committee, through its counsel, consulted with officers of R.K.O. and K.A.O. concerning the interests of the preferred stockholders. The committee protested the pledge of the assets of Orpheum to Stadium but was informed that in view of the proposed reorganization of R.K.O. such intercompany transactions would have no effect on their interests. Counsel for the committee remained in close contact with the progress of the bankruptcy proceedings of Orpheum. The committee was requested by R.K.O. officials to refrain from bringing actions against R.K.O. and K.A.O. and their officers and directors, the reason given for the request being that such action was unnecessary to secure to the preferred stockholders of Orpheum the full anc complete protection in the reorganization being worked out for R.K.O. The representatives of the preferred stockholders were repeatedly assured from 1933 on that the plan contemplated would secure such full protection of the equity of the preferred stockholders as to give entire satisfaction to them. These assurances by R.K.O. officers that the plan of reorganization then being prepared would include Orpheum872 were continued to a time practically coincident with the filing on November 20, 1936, by the representatives of R.K.O. of the plan of reorganization of the latter, under which plan no provision was made for the participation of the preferred stockholders of Orpheum. Petitioner had a total cost basis of $153,265.50 for the 1,720 shares of Orpheum preferred stock which he continued to hold up to and including December 31, 1937. This stock had a substantial value at the end of 1936 and became worthless during the calendar year 1937. On his Federal income tax return for the year 1937, petitioner 546 deducted the sum of $153,265.50 as a loss due to worthlessness of stock. Respondent disallowed the deduction. Second Issue.In the year 1937, petitioner was president of the Ward Baking Corporation, receiving a salary of $38,372.75 and director's fees of $675. Petitioner devoted the greater part of his time to that position. During the year 1937, petitioner received income from other sources as follows: Dividends from foreign and domestic corporations$34,896.97Interest1,402.36Syndicate404.67Rent144.31Income from business (Greenroof Tearoom and ranch in Estes Park, Colorado)913.68Gain from sales of securities4,806.02873 Petitioner is not a trader in securities and buys securities solely for investment purposes. During the year 1937, petitioner owned real estate having a total cost basis of approximately $200,000. Petitioner also had investments in two corporations amounting to approximately $42,000 and $100,000, respectively. On his return for the year 1937, petitioner deducted the following amounts under the heading "Other deductions authorized by law": Legal and Auditing expenses$944.51Office salaries2,600.00Office and miscellaneous expense92.18Depreciation of office furniture and fixtures22.55Total3,659.24The sum of $250 of the amount deducted for legal and auditing expense was paid for attorney's fees incurred in changing title registration of certain property owned by petitioner to the Torrens System. The remainder of the legal and auditing expense deduction related to fees paid to an accountant for auditing and for preparation of petitioner's income tax return. The sum of $2,600 which constituted the deduction for office salaries was paid to petitioner's brother who attended to petitioner's real estate interests and acted as petitioner's representative874 as a director on the boards of two corporations in which petitioner was interested. Petitioner maintained an office in a building occupied by a corporation in which petitioner had a large investment. Petitioner paid no rent for this office. The office and miscellaneous expense deducted by petitioner on his return for the taxable year consisted of expenditures for items such as telephone calls and stamps. The 547 deduction by petitioner for depreciation of office furniture and fixtures was taken on items located in petitioner's rent-free office. In his notice of deficiency respondent allowed petitioner deductions for legal and auditing expenses, office salary, office and miscellaneous expense and depreciation on office furniture and fixtures in an aggregate amount of $3,659.24. By amended answer respondent made claim for increased deficiency on the ground that he erred in allowing the deductions totaling $3,659.24. OPINION. LEECH: The primary issue is whether or not petitioner may deduct in the taxable year a loss due to worthlessness of Orpheum preferred stock. The law is clear that the loss may be deducted only in the year in which it was sustained. There875 must be something identifiable to mark the period. . The rule is clear, only its application is difficult. Respondent determined that the preferred shares of Orpheum became worthless prior to 1937, the year in which petitioner asserts his right to deduct the loss. It is, of course, the petitioner's burden to overcome the prima facie correctness of that determination and to show that these shares became worthless during 1937. This burden may be met by proof that the stock had value either at the end of 1936, ; affd., , or that it had value at the beginning of 1937, , and that it lost such value during that year. But this value means, not necessarily intrinsic value of the assets applicable to the stock, but may include the market value of the stock. . Respondent points to 876 , which affirmed the memorandum opinion of this Board holding that the same stock became worthless prior to 1934. However, the proceeding now before us, involving an issue of fact, must be decided wholly on the present record, which is much more complete than that in the Lambert case. Here it is disclosed that Orpheum had paid dividends regularly on its preferred shares from the date of its organization in 1920 until October, 1931, when it defaulted. K.A.O. then owned all the common shares of Orpheum, and R.K.O., in turn, owned all the common shares of K.A.O. The three companies had the same officers and were operated as a single enterprise. Large loans had been made to Orpheum by K.A.O. By October 1, 1932, these loans amounted to $2,880,000 and most of Orpheum's assets had been assigned to K.A.O. as security therefor. Petitioner and many other preferred shareholders, as well as bondholders, bank and other 548 creditors, were dissatisfied with the management being given to the company by R.K.O. Committees were organized in 1932, to protect their interests. The position of these committees was that the877 officers and directors of Orpheum had been guilty of waste and mismanagement and were liable to damages therefor, that the notes given by Orpheum to K.A.O. were not valid obligations of Orpheum and that the transfer of Orpheum assets collateralizing those notes was likewise, therefore, invalid. Early in 1933, the Orpheum notes and securing assets were transferred to Stadium. On January 27, 1933, Orpheum filed a voluntary petition in bankruptcy and, as a matter of course, a formal adjudication was made on the same day. Its schedules, filed at that time, showed it to be solvent by about five and one-half million dollars. Certainly that adjudication afforded no basis for a determination of worthlessness of Orpheum preferred stock. ; ; ; ; affd., ; ; 878 ; . That conclusion is corroborated emphatically by several facts. On January 28, 1933, one day after the bankruptcy adjudication, the stock sold at $3 per share on the New York Stock Exchange while on June 14, five months later, the market had risen to $6 per share. Throughout 1933, after this adjudication, the preferred shareholders of Orpheum had an existing right under an offer by R.K.O. to exchange each share of their preferred stock for two shares of common stock of the latter company. This offer was later increased to three shares of R.K.O. common stock for one preferred share of Orpheum. Neither of these offers was accepted by petitioner and the other holders of more than 43,000 of the 53,378 shares of Orpheum preferred stock in the hands of the public, because they believed Orpheum preferred stock had a value in excess of the R.K.O. stock for which it could be exchanged. In 1934 and 1935, conditions continued substantially the same. The assets of the bankrupt were being managed by the trustee. The preferred shareholders, as well as the bondholders, were organized to protect879 their investments. Committees representing them, as well as a bank creditor acting for itself, had made several efforts to have suit brought against the officers and directors of Orpheum, who were likewise officers and directors of K.A.O., R.K.O., and Stadium, to have the notes of Orpheum to K.A.O., together with the transfer of Orpheum's assets securing the notes, then in the hands of Stadium, declared invalid, and to recover damages from such officers for mismanagement and waste. But these efforts were not fruitful. The 549 officers of R.K.O. continued their assurances, begun in 1933, that the interests of the preferred shareholders would not be served by such suits and that their equity would be recognized by providing for their participation in the reorganization of R.K.O. in the 77B proceedings. Both the referee in bankruptcy and the District Court lent weight to this advice by denying for that reason and without prejudice petitions asking the referee to direct the trustee in bankruptcy to bring such suits. Finally, in 1936, on the repeated filing of such petitions, the referee in bankruptcy entered an order directing that such suits be instituted by or in the name880 of the trustee in bankruptcy. However, a petition for review of this order was filed and no order was ever entered thereon by the District Court. The assurances from the officers of R.K.O. continued, however, until late in 1936, when the plan of reorganization of R.K.O. was filed in the District Court in the then pending 77B proceedings. This was the first plan of reorganization filed in those proceedings and made no provision for participation by the preferred stockholders of Orpheum. See Following that closely, in December of 1936, the offer to purchase the assets of Orpheum was made by Stadium, the holder of Orpheum's notes and assets. In order to pass upon this offer, the assets of Orpheum were appraised for the first time early in 1937. The value of these assets was there shown to be considerably less than the claims which had been filed against Orpheum in the bankruptcy proceeding. Following this appraisal came the orders of the referee in bankruptcy on February 18, 1937, directing the trustee to accept the offer by Stadium and dismissing the petition of the committee filed January 25, 1937, under which orders the assets of Orpheum881 were transferred to Stadium, leaving nothing for the preferred shareholders of Orpheum and no hope for participation in the reorganization of R.K.O., which had been assured to them. See Then came the order of the District Court on June 11, 1937, affirming these orders of the referee. Petition for leave to appeal from this decision to the Circuit Court of Appeals was denied on July 30, 1937. The preferred stock of Orpheum was removed from the New York Stock Exchange June 20, 1933. But this was only because it no longer had a transfer agent in New York City. However, the stock was traded in the over-the-counter market thereafter until sometime in 1937. The records of actual sales during 1936 and 1937, as well as the bid and asked prices for this stock during those years, closely parallel the history of this company during that period, and they are therefore entitled to real evidentiary weight. Cf. . Though the actual purchases and sales disclosed during that period in this record were made by one firm 550 of stockbrokers, those purchases and882 sales were made from and to at least six different brokerage firms. Between November 7, 1936, and June 1, 1937, 116 shareholders, owning 13,845 shares of the 18,000 shares of Orpheum preferred stock represented by the committee, contributed $13,845, or $1 per share, for the purposes of the committee. Petitioner contributed $1,720. We think petitioner has met his burden. This record establishes to our satisfaction (1) that Orpheum preferred stock had a market value at the close of 1936 and the beginning of 1937 and (2) that such stock became worthless during 1937, as we have found. Respondent is reversed on this issue. The second issue is whether or not petitioner is entitled to deduct certain amounts from gross income of the taxable year as ordinary and necessary expenses of a trade or business. This issue arises from an affirmative pleading by respondent in his amended answer. Consequently, respondent has the burden of proving that he erroneously allowed the deductions in question. The evidence shows that petitioner was engaged in activities involving real estate and investments in two corporations. It may be that both of these activities constituted a trade or business883 of petitioner. In any event, respondent has failed to prove that they did not. Where expenses are incurred in activities which are business and nonbusiness in nature an allocation of expenditures may be made. . Here respondent has not shown the basis for a proper allocation. We may assume, therefore, that petitioner was engaged in a trade or business and that expenses incurred therein may be deductible. We are of the opinion, however, that the sum of $250 expended for change of title registration is not a proper deduction but should be reflected in the basis of the property to which it related. Petitioner concedes on brief that only 80 percent of the salary deduction should be allowed. Adjustments covering these items should be made. Respondent has not proved that the other amounts deducted under "Other deductions authorized by law" were improperly allowed by him. Reviewed by the Board. Decision will be entered under Rele 50.ARUNDELLARUNDELL, dissenting: As the Member who heard the testimony in this case it seems proper that I should set forth the reasons for my disagreement with the majority884 opinion. The Commissioner determined that the preferred shares of Orpheum became worthless prior to 1937, the period in which the petitioner seeks to take his loss. To 551 prevail petitioner must prove that the shares in fact had value at the beginning of 1937, and that that value ceased within the year 1937. Mark D. Eagleton,35 B.T.A. 551">35 B.T.A. 551; affd., 97 Fed.(2d) 62. The undisputed evidence shows that the Orpheum Corporation was declared a bankrupt in 1933, that the creditors were finally paid 30 cents on the dollar, and that the preferred shareholders received nothing. The only possible basis for the attachment of any value to these shares in 1937 is that 250 of the shares were disposed of in over-the-counter sales and that there were some "bid and asked" prices. This testimony came from a bookkeeper of a defunct brokerage firm who knew absolutely nothing about the circumstances of the sales. The statute allows losses in the year within which the property becomes worthless and at no other time. The rule is not like that provided for bad debts where the ascertainment of the creditor is all important. It is the period of the loss and not885 the time the taxpayer learned of his loss which is determinative. Given an identifiable event demonstrating worthlessness, one need not be an optimist. If we approach the situation here present in the way it usually appears, the error of the majority would seem more self-evident. Thus, should a taxpayer prove that the corporation in which he holds shares has been declared a bankrupt, that the shares have not one penny of liquidating value, and that the creditors will not receive more than 30 cents on the dollar, he must still be denied his loss on such shares if perchance the Commissioner shows purchases by some badly informed optimists who are ready to gamble on the chances of salvaging something out of the situation. There were 63,840 preferred shares of Orpheum, 10,000 of which had been converted and 9,462 of which were owned by K.A.O., the parent company, leaving some 43,000 preferred shares in the hands of the public. Are these stockholders to be denied their loss at the actual time the shares become worthless because it is shown within the year 1937 less than one-half of 1 percent of the shares were sold over the counter under circumstances not disclosed? There is not*886 even proof in this case that this individual taxpayer could have sold his holdings of 1,720 shares within the year 1937, let alone that there was any market in that year for the entire outstanding shares of preferred stock. As pointed out by Judge Patterson in the Orpheum bankruptcy proceedings, , not once did these stockholders, of which petitioner was one, prove their right to share in any of the bankrupt's estate. The Congressional plan has always been to require that losses be taken when sustained and the statute contemplates that shares of stock in a corporation become worthless at the same time for all stockholders. VAN FOSSAN and DISNEY agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624347/	SYDNEY G. AND LISA M. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. Comm'rNo. 9845-09United States Tax Court133 T.C. 424; 2009 U.S. Tax Ct. LEXIS 37; 133 T.C. No. 18; December 21, 2009, Filed37 R issued Ps a notice of deficiency that determined deficiencies in income tax and accuracy-related penalties for 2003, 2004, 2005, and 2006 under secs. 6662, I.R.C., and 6662A, I.R.C. R subsequently sent Ps notices of assessment for penalties assessed under sec. 6707A, I.R.C., for 2004, 2005, and 2006. R filed aMotion to Dismiss for Lack of Jurisdiction and to Strike as to the Section 6707A Penalties.Held: This Court lacks jurisdiction to redetermine sec. 6707A, I.R.C., penalties in a deficiency proceeding.Michael E. Lloyd and Stephen J. Pieklik, for petitioners.John R. Bampfield, for respondent.Kroupa, Diane L.DIANE L. KROUPA425 OPINIONKROUPA, Judge: This matter is before the Court on respondent's Motion to Dismiss for Lack of Jurisdiction and to Strike as to the Section 6707A Penalties. We decide for the first time whether this Court has jurisdiction in a deficiency proceeding to redetermine a taxpayer's liability for section 6707A1 penalties. We conclude that we do not.BackgroundWe 38 recite these facts solely for purposes of ruling on respondent's motion. Petitioners resided in Hawaii at the time they filed the petition. Respondent issued petitioners a deficiency notice for 2003, 2004, 2005, and 2006. Respondent determined a deficiency in income tax for each challenged year, as well as accuracy-related penalties under sections 6662 and 6662A as follows:2PenaltiesYearDeficiencySec. 6662Sec. 6662A2003$ 637$ 127.40--200465,0655,433.20$ 10,804.50200533,68394.6010,500.00200634,58953.0010,762.00Respondent also sent petitioners notices of assessment of section 6707A penalties for failure to report involvement in a listed transaction. The assessments were for 2004, 2005, and 2006, in the amount of $ 100,000 for each year, totaling $ 300,000.Respondent also issued deficiency and assessment notices to petitioner Mr. Smith's solely owned company, Sydney G. 426 Smith, MD, Inc. (corporation). Respondent determined that the corporation had deficiencies in income tax for 2004, 2005, and 2006 and was liable for accuracy-related penalties under sections 6662 and 6662A. Respondent also assessed the corporation with section 6707A penalties for years 2004, 2005, and 2006, in the amount 39 of $ 200,000 for each year, totaling $ 600,000. Mr. Smith filed this case separately from the case involving his corporation, Sydney G. Smith, MD, Inc. v. Commissioner, Docket No. 10037-09.Petitioners timely filed a petition challenging the deficiency notice and the notices of assessment. Respondent then filed a Motion to Dismiss for Lack of Jurisdiction and to Strike as to the Section 6707A Penalties, stating that this Court lacks jurisdiction to redetermine the section 6707A penalties. Petitioners object and ask the Court to deny respondent's motion and find that this Court has jurisdiction to redetermine liability for the section 6707A penalties.The parties agree that we have jurisdiction to decide the issues presented in the deficiency notice. The parties disagree, however, whether this Court has jurisdiction to redetermine petitioners' liability for the section 6707A penalties.DiscussionWe now consider whether we have jurisdiction to redetermine petitioners' liability for section 6707A penalties. We begin by explaining the general principles of Tax Court jurisdiction.Tax Court JurisdictionThis Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent 40 authorized by Congress. Naftel v. Commissioner, 85 T.C. 527">85 T.C. 527, 529 (1985). The Tax Court is without authority to enlarge upon that statutory grant. See Phillips Petroleum Co. v. Commissioner, 92 T.C. 885">92 T.C. 885, 888 (1989). We nevertheless have jurisdiction to determine whether we have jurisdiction. Hambrick v. Commissioner, 118 T.C. 348 (2002); Pyo v. Commissioner, 83 T.C. 626">83 T.C. 626, 632 (1984); Kluger v. Commissioner, 83 T.C. 309">83 T.C. 309, 314 (1984). We therefore find we have authority to determine 427 whether this Court has jurisdiction to redetermine petitioners' liability for the section 6707A penalties.Respondent contends that we lack jurisdiction to redetermine the section 6707A penalties and has therefore moved to strike them from the pleading. This Court may strike from any pleading any insufficient claim or defense or any redundant or immaterial matter upon a timely motion of the parties or on our own initiative. Rule 52. In determining whether we lack jurisdiction and therefore may strike the portion relating to the section 6707A penalties, we turn now to the legislative history of section 6707A.Legislative History of Section 6707ACongress enacted section 6707A to aid the Internal Revenue Service's 41 (IRS) effort to stop abusive tax shelters, specifically by imposing a penalty for a taxpayer's failure to disclose participation in certain tax-avoidance transactions known as reportable transactions. 242 See H. Rept. 108-548 (Part 1), at 261 (2004). Before section 6707A's enactment, the Treasury Department had issued regulations requiring taxpayers to disclose participation in reportable transactions. See id. at 260; sec. 1.6011-4, Income Tax Regs. Even with the disclosure requirement, however, the IRS often did not learn of the existence of tax shelters until after it conducted audits. National Taxpayer Advocate, 2008 Annual Report to Congress (Vol. Two), at 420 (2008). Congress believed that Treasury needed additional tools to enforce compliance with the reportable transaction disclosure regulations. Congress thereafter passed a law imposing a penalty for failure to include information regarding participation in a reportable transaction on a taxpayer's tax return or statement. H. Rept. 108-548 (Part 1), supra at 261. Congress codified the new penalty in section 6707A. American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 811, 118 Stat. 1575.The amount the IRS may assess a taxpayer for failure to include information required under section 6011 with respect to a reportable transaction other than a listed transaction is $ 10,000 in the case of an individual and $ 50,000 in any other 428 case. Sec. 6707A(b)(1). If the failure is with respect to a listed transaction the penalty is increased to $ 100,000 in the case of an individual and $ 200,000 in any other case. Sec. 6707A(b)(2). The penalty applies without regard to whether the transaction ultimately results in an understatement of income, estate, gift, or excise tax, or, for that matter, any tax whatsoever, and in addition to any other penalty, including an accuracy-related penalty, imposed by the Code. See sec. 6707A(f).The Commissioner may rescind all or any portion of the penalty imposed respecting a reportable transaction other than a listed transaction. Sec. 6707A(d)(1). A determination by the Commissioner 43 regarding the rescission of a penalty may not be reviewed in any judicial proceeding. Sec. 6707A(d)(2). The legislative history indicates that the statute's prohibition of judicial review is not intended otherwise to limit the taxpayer's ability to litigate whether a penalty is appropriate. H. Rept. 108-548 (Part 1), supra at 262 n.233; see Rev. Proc. 2007-21, 1 C.B. 613">2007-1 C.B. 613. We turn now to petitioners' liability for the section 6707A penalties.Tax Court Review of "Assessable Penalties"Petitioners filed a petition with this Court asserting that we have jurisdiction not only over the deficiency notice but also over the assessed section 6707A penalties. Respondent counters that our deficiency jurisdiction does not include section 6707A penalties.A section 6707A penalty is an "assessable penalty" located under subchapter B of chapter 68, entitled "Assessable Penalties." Respondent asserts that petitioners may not seek a redetermination by this Court of the section 6707A penalty because it is an "assessable penalty." The label of "assessable penalty," however, does not automatically bar a taxpayer from using the deficiency procedures to challenge the liability. An assessable penalty, 44 rather, must be paid upon notice and demand and assessed and collected in the same manner as taxes. Sec. 6671; Hickey v. Commissioner, T.C. Memo 2009-2">T.C. Memo. 2009-2.Certain penalties imposed under subchapter B of chapter 68 are explicitly exempt from the deficiency procedures. 345 No 429 such explicit limitation is found in section 6707A. Section 6707A's silence as to deficiency proceedings, however, does not vest this Court with jurisdiction. This Court and others have held that other penalties lacking such an explicit exemption are not subject to the deficiency procedures. See Shaw v. United States, 331 F.2d 493">331 F.2d 493 (9th Cir. 1964) (distinguishing section 6672 penalties not subject to deficiency proceedings from section 6651 additions subject to deficiency proceedings); Medeiros v. Commissioner, 77 T.C. 1255">77 T.C. 1255 (1981) (this Court lacks jurisdiction to review previously assessed section 6672 penalties), affd. 742 F.2d 1446">742 F.2d 1446 (2d Cir. 1983); Judd v. Commissioner, 74 T.C. 651">74 T.C. 651 (1981) (this Court lacks jurisdiction to review assessment of section 6652 additions to tax)."Deficiency" means, as relevant here, the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the amount shown as tax by the taxpayer upon his or her return. Sec. 6211(a); see Granquist v. Hackleman, 264 F.2d 9">264 F.2d 9, 15 (9th Cir. 1959). We conclude that section 6707A penalties are not included in the statutory definition of "deficiency." See secs. 6671, 6211. Section 6707A penalties do not depend upon a deficiency. They may be assessed even if there is an overpayment of tax. The IRS imposes the penalty for failure to disclose a reportable transaction.We note that this Court has never exercised jurisdiction 46 over an assessable penalty that was not related to a deficiency, even absent Congress' explicitly circumscribing our jurisdiction. See Williams v. Commissioner, 131 T.C. 54">131 T.C. 54, 58 n.4 (2008) (assessable penalties fall outside the deficiency notice regime of sections 6212 to 6214 and thus fall outside this Court's deficiency jurisdiction). Moreover, most of the assessable penalty provisions 447 that do not implicate deficiency 430 proceedings concern a taxpayer's failure to file a return or provide other information similar to failing to disclose a reportable transaction under section 6707A.Here respondent issued a deficiency notice, which is a condition precedent to Tax Court jurisdiction. See Medeiros v. Commissioner, supra at 1260. The notice, however, did not determine the section 6707A penalties. Respondent assessed penalties based on his determinations that petitioners failed to report a listed transaction as required by section 6011. Sec. 6707A(a). The section 6707A penalty is not within our deficiency jurisdiction. See sec. 7442. Respondent may therefore assess and collect the penalty without issuing a deficiency notice. 5 We accordingly conclude that we lack jurisdiction 649 to redetermine the section 6707A penalties and shall grant respondent's motion to dismiss and to strike as 48 to the section 6707A penalties. 7For the foregoing reasons,An appropriate order will be issued.Footnotes1. All section references are to the Internal Revenue Code (Code) in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩2. Sec. 1.6011-4(b), Income Tax Regs., defines "reportable transactions" to include "listed transactions" (e.g., a transaction the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and has identified by notice, regulation, or other published guidance as a listed transaction).3. Secs. 6677(e) (failure to file information with respect to foreign trust), 6679(b) (failure to file returns, etc., with respect to foreign corporations or foreign partnerships), 6682(c) (false information with respect to withholding), 6693(d) (failure to provide reports on certain tax-favored accounts or annuities), 6696(b) (rules applicable with respect to secs. 6694, 6695, and 6695A), 6697(c) (assessable penalties with respect to liability for tax of regulated investment companies), 6706(c) (original issue discount information requirements), 6713(c) (disclosure or use of information by preparers of returns), 6716(e)↩ (failure to file information with respect to certain transfers at death and gifts).4. See secs. 6651 (failure to file a tax return or to pay a tax; the deficiency procedures apply only to the portion of the penalty attributable to the deficiency in taxes), 6677 (failure to file information returns with respect to certain foreign trusts), 6679 (failure to file returns, etc., with respect to foreign corporations or foreign partnerships), 6686 (failure to file returns or supply information by domestic international sales corporation or foreign sales corporation), 6688 (assessable penalties with respect to information required to be furnished under sec. 7654), 6690 (fraudulent statement or failure to furnish statement to plan participant), 6692 (failure to file actuarial report), 6707 (failure to furnish information regarding reportable transactions), 6708 (failure to maintain lists of advisees with respect to reportable transactions), 6710 (failure to disclose that contributions are nondeductible), 6711 (failure by tax-exempt organization to disclose that certain information or service available from Federal Government), 6712↩ (failure to disclose treaty-based return positions).5. The Court notes that the IRS is aware of the impact of the sec. 6707A penalties on taxpayers. National Taxpayer Advocate, 2008 Annual Report to Congress (Vol. Two), at 420 (2008). The IRS "believe[s] the imposition of such a large penalty on a taxpayer who entered into a transaction that produced little or even no tax savings and without regard to the taxpayer's knowledge or intent raises significant * * concerns." Id. at 421. Though Congress may later determine that this Court should be given jurisdiction to review sec. 6707A↩ penalties to address these concerns, we are constricted at this time.6. Though this Court is currently without jurisdiction, petitioners may have other avenues for judicial review. Petitioners may pay the penalties and seek recovery in a refund court. See sec. 7422; 28 U.S.C. sec. 1346 (2006). In addition, we would presumably have jurisdiction to redetermine a liability challenge asserted by petitioners in a collection due process hearing. See sec. 6330(d)(1); Williams v. Commissioner, 131 T.C. 54">131 T.C. 54, 58 n.4 (2008); Callahan v. Commissioner, 130 T.C. 44">130 T.C. 44, 48 (2008); D & M Painting Corp. v. United States, 2009 U.S. Dist. LEXIS 28913">2009 U.S. Dist. LEXIS 28913, A.F.T.R.2d (RIA) 1516, 2009-1 USTC par. 50,343, (W.D. Pa. 2009)(District Court dismissed case because taxpayer could still seek redress by either paying the tax or through obtaining a pre-levy hearing pursuant to sec. 6330↩).7. We maintain jurisdiction as to petitioners' deficiencies and the accuracy-related penalties under secs. 6662 and 6662A↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624348/	William Palazzolo and Pauline Palazzolo v. Commissioner.Palazzolo v. CommissionerDocket No. 2992-68.United States Tax CourtT.C. Memo 1970-59; 1970 Tax Ct. Memo LEXIS 302; 29 T.C.M. (CCH) 258; T.C.M. (RIA) 70059; March 5, 1970, filed. 302 Robert O. Leming 1st National Bank Bldg., Cincinnati, Ohio, for the petitioners. Raymond L. Hampton, for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The Commissioner determined a deficiency of $6,336 in petitioners' income tax for the taxable year 1966. The issues presented for decision are: (1) whether the deduction of $30,000 labeled on petitioners' 1966 income tax return as "investment in venture - business failed" was either "incurred in a trade or business" or a "transaction entered into for profit;" (2) whether petitioners have shown that a loss was sustained and is otherwise properly deductible in 1966. Findings of Fact The parties have stipulated certain facts, which, together with the attached exhibits are incorporated herein by this reference. William and Pauline Palazzolo were husband and wife, residing at Cincinnati, Ohio, at the time of filing the petition herein. They filed a joint Federal income tax return for the calendar year 1966 with the district director of internal revenue at Cincinnati, Ohio. William Palazzolo, hereinafter referred to as petitioner, is presently employed as manager of the Daily Donut Corporation in Cincinnati, 303 Ohio, and was so employed at all times relevant herein. During 1964 petitioner was approached by Barney Peller (Peller) who requested petitioner to finance the promotion of a radio and possible television program. Peller proposed that petitioner advance up to $30,000 to cover the expenses of promoting the program. Profits from the program were to be applied first to repay petitioner's advances. The remaining profits were to be divided as follows: 25 percent each to petitioner and Peller, 50 percent to Bennett Levine, the program personality. The parties never agreed how possible losses were to be shared because petitioner was the only one advancing any money, and any losses above the amount loaned by petitioner were not discussed. Petitioner secured the necessary funds through a loan from the Buckeye Savings and Loan Company. The loan proceeds were deposited by petitioner in a checking account at the First National Bank of Cincinnati. Petitioner engaged an attorney, Don Lerner, to act as his disbursing agent for the checking account while petitioner was out of town. Checks were drawn upon the checking account as shown below: AmountDatePayeeDrawerEndorser$1,760.008/28/64Barney PellerWilliam PalazzoloBarneyPeller2,500.008/28/64Bennett LevineWilliam PalazzoloBennett Levine500.008/28/64Aronoff, Rosen & LernerWilliam PalazzoloArnoff, Rosen & Lerner194.269/1/64American AirlinesDon LernerAmerican Airlines200.009/1/64CashDon LernerAmerican Airlines1,000.009/2/64Mort KasmanDon LernerMort Kasman200.009/2/64Barney PellerDon LernerBarney Peller300.009/2/64Mort KasmanDon LernerMort Kasman500.009/2/64William HorwatzDon LernerWilliam Horwatz300.009/2/64Bennett LevineDon LernerBennett Levine--Jeannie Levine2,055.009/2/64Bennett LevineDon LernerBennett Levine24.259/8/64Donald M. LernerDon LernerDonald M. Lerner4,000.009/9/64Bennett LevineDon LernerBennett Levine200.009/9/64Barney PellerDon LernerBarney Peller200.009/17/64Barney PellerDon LernerBarney Peller1,915.799/17/64Terrace Hilton HotelsDon LernerTerrace Hilton Hotel24.259/18/64Donald M. LernerDon LernerDonald M. Lerner--Bonnie Hornsby1,000.009/18/64William PalazzoloWilliam Palazzolo--62.889/23/64Barney PellerWilliam PalazzoloBarney Peller-- William Pallazzolo200.009/23/64Barney PellerWilliam PalazzoloBarney Peller10,000.009/28/64Bennett Products, Inc.William PalazzoloBennett Products, Inc. by Donald Biber200.0010/1/64Barney PellerWilliam PalazzoloBarney Peller340.6410/5/64 1Buckeye SavingsWilliam Palazzolo--Association200.0010/7/64Barney PellerWilliam PalazzoloBarney Peller340.6411/3/64 1Buckeye SavingsWilliam Palazzolo--500.0011/23/64Barney PellerWilliam PalazzoloBarney Peller340.6412/4/64 1Buckeye SavingsWilliam Palazzolo--1,000.0012/23/64Benny LevineWilliam PalazzoloBennett Levine97.631/27/65 2William PalazzoloWilliam PalazzoloWilliam Palazzolo304 Petitioner, Peller and Levine executed a written Memorandum of Agreement, dated August 28, 1964, wherein two corporations, Pel-Pal Pictures, Inc. (Pel-Pal) and B.S.C. Productions, Inc. (B.S.C.) were to form a third corporation which was in turn to develop and promote a radio and possible television program, "Benny the Fan." Under the agreement, Pel-Pal agreed to loan the third corporation up to $30,000. Petitioner and Peller signed the agreement as agents Pel-Pal and Levine signed as agent of B.S.C. The agreement also provided a personal guarantee by Levine of repayment of all sums loaned by Pel-Pal. This provision was included at the instance of petitioner's attorney. When the funds advanced by petitioner were exhausted and the aforementioned checking account was closed, petitioner refused to advance additional funds to the venture. Since petitioner was to receive the first $30,000 returned by the venture as repayment of his advance, additional outside financing was difficult 305 to obtain. Therefore, pursuant to Levine's request, on October 25, 1965, petitioner telegraphed Levine's attorney that petitioner was relinquishing all rights in the venture in exchange for Levine's promissory note of $30,000. The note was non-interest-bearing payable in installments on December 6 of 1966, 1967, and 1968 and provided that upon failure to pay an installment the entire balance was due and payable. On December 16, 1966, petitioner's attorney wrote Levine's attorney advising him that the first installment was due and requested information concerning Levine's whereabouts. The reply indicated Levine's probable whereabouts but cautioned that "we are of the opinion that he has no current financial worth and that there is no immediate likelihood of any income that would permit payment of anything more than a bare living." The radio program, "Benny the Fan," which was being broadcast at the time, was first broadcast on October 10, 1966, over station WTOP, Washington, D.C., and continued until it was cancelled January 27, 1967. Petitioner has not collected any money on the note and on his 1966 tax return petitioner deducted the full amount of the note as "investment in venture 306 - business failed." Ultimate Finding of Fact Petitioner did not sustain a business bad debt loss or a loss from a transaction entered into for profit for 1966. Opinion Section 165(a) of the Code 1 allows as an ordinary loss deduction "any loss sustained during the taxable year and not compensated for by insurance or otherwise." Subsection (c) limits the deductible losses in the case 260 of an individual to (1) losses incurred in a trade or business and (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business. Under Income Tax Regulations, respondent has provided: Section 1.165-1(b) Nature of loss allowable. To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and * * actually sustained during the taxable year. * * * Section 1.165-1(d) Year of deduction. (1) A loss shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained. For this purpose, a loss shall be treated as sustained during the taxable year in which 307 the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year. * * Respondent contends the loss was neither incurred in a trade or business nor in any transaction entered into for profit. Respondent contends further that the loss was not sustained during the taxable year 1966. Petitioner apparently contends the loss was incurred in either a trade or business or in a transaction entered into for profit, and that the loss was actually sustained in the taxable year 1966. Since we find petitioner has not adequately shown a loss sustained and otherwise properly deductible in 1966, we do not reach the issue of whether the amount in question arose from a trade or business or a transaction entered into for profit. Petitioner has the burden of showing that the conditions imposed under respondent's Regulations above have been met, and in our opinion, petitioner has failed to meet this burden. Petitioner borrowed the money and opened the checking account in August 1964. The funds were exhausted and the account closed in February 1965. In October 1965 petitioner relinquished all rights in the venture in exchange for Levine's *308 promissory note of $30,000. The program "Benny the Fan" was broadcast from October 1966 through January 1967 when it was cancelled. Regardless of whether petitioner's hopes of repayment were dependent upon success of the venture or the personal credit of Levine, petitioner has failed to show a loss sustained during the taxable year 1966 in accordance with the conditions imposed under the Regulations cited above. Decision will be entered for the respondent. Footnotes1. These checks represent loan repayments which petitioner concedes are not deductible. ↩2. This withdrawal by petitioner eliminated the balance in account number 665-792-8 and it was thereafter closed on February 1, 1965.↩1. All section references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624349/	EMILY BELL, Petitioner v. COMMISSIONER of INTERNAL REVENUE, RespondentBell v. CommissionerDocket No. 3304-76.United States Tax CourtT.C. Memo 1984-235; 1984 Tax Ct. Memo LEXIS 446; 47 T.C.M. (CCH) 1769; T.C.M. (RIA) 84235; April 30, 1984. Iven R. Taub, for the petitioner. Frances J. Honecker, for the respondent. SWIFTMEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judges: Respondent determined a deficiency in petitioner's and her former husband's Federal income tax liability in the amount of $29,370.20 for 1972 in a notice of deficiency dated January 29, 1976. Petitioner's former husband, Steven Singer, filed a petition in Bankruptcy on September 24, 1975, which bankruptcy proceeding447 is still pending. Petitioner, Emily Bell, is not a party to that proceeding. However, petitioner and respondent have stipulated that the resolution of the underlying tax deficiency in the bankruptcy proceeding will be binding upon the parties herein. The only issue for decision in this proceeding is whether petitioner signed the 1972 Federal income tax return under duress and therefore should be relieved of joint and several liability for whatever deficiency is determined to exist by the bankruptcy court. FINDINGS of FACT Petitioner resided in Teaneck, New Jersey, at the time the petition was filed. The 1972 joint Federal income tax return was timely filed. Some facts were stipulated and are so found. Petitioner (also referred to as "Emily") and her former husband (referred to as "Steven") were married in 1960. Three children were born of the marriage. During the marriage Emily was a homemaker and did not work outside the home. The sole support of the family was derived from Steven's employment. Steven generally made all the financial decisions except where major expenditures were involved, such as the purchase of their residence. Steven and Emily filed joint Federal448 income tax returns throughout their marriage, from 1960 until their divorce in 1974. In 1971, marital problems arose between Steven and Emily, and they separated in August of that year. Both parties sought professional counseling in connection with these marital problems. Emily received counseling throughout 1971 and 1972. After separating from Emily, Steven continued to provide the sole support of the family. In addition to providing support, Steven frequently visited the children, which visits Emily encouraged. There is no indication Steven physically harmed Emily or the children. Emily, however, testified that she feared for the childrens' safety when the children would spend time with Steven after she and Steven had had an argument. During the separation, there were several emotional confrontations between Steven and Emily. The arguments usually pertained to the status of the divorce proceeding, the financial future of the children and herself and their relationship. Although no physical abuse occurred, these arguments often resulted in shouting, and Steven apparently threatened to cut off all financial support. At least in part, as a result of the arguments, Emily449 experienced strong physical side effects and eventually was diagnosed as having ulcerative colitis. During early 1973, Steven and Emily, represented by independent counsel, began negotiations for a final divorce. Negotiations continued throughout the year and resulted in a signed agreement dated October 23, 1973. The divorce became final on January 23, 1974. Steven and Emily testified differently concerning the circumstances of the signing of the 1972 Federal income tax return on April 15, 1973. Steven recalled no particular problems with or argument concerning the signing of the return. Emily, however, recalled that Steven came to the house on Sunday, April 15, to pick up the children for his weekly visit with them. She testified that Steven gave Emily the first page of the return and told her to sign it. When she questioned Steven about the return, she recalled that he became angry and abusive whereupon she signed the return. Soon after signing the return, Emily discussed the return with her attorney, but the first time she raised the issue of duress and attempted to disavow the return was in December of 1983. At no time after signing the 1972 return did Emily submit450 an amended return indicating that she had not joined in the 1972 return as filed. OPINION Section 6013(d)(3) of the Internal Revenue Code of 1954, as amended, provides that "if a joint [Federal income tax] return is made, * * * the liability with respect to the tax shall be joint and several." Under certain circumstances, however, a taxpayer may be relieved of joint and several liability even where he or she has signed a return designated as a joint return. Where a taxpayer executes a return under duress, he or she will be relieved of joint and several liability. See Stanley v. Commissioner,81 T.C. 634">81 T.C. 634 (1983); Brown v. Commissioner,51 T.C. 116">51 T.C. 116 (1968) and cases cited therein. In cases where duress is claimed, this Court has resolved the issue by applying a subjective standard; i.e., "whether the pressure applied did in fact so far affect the individual concerned as to deprive [the spouse] of contractual volition." Furnish v. Commissioner,262 F.2d 727">262 F.2d 727, 733 (9th Cir. 1958),451 affg. in part and remanding in part 29 T.C. 279">29 T.C. 279 (1957), quoting 17 C.J.S. Contracts, sec. 175; Brown v. Commissioner,supra, at 119. In applying this standard, the Court has developed a two-pronged test first announced in Stanley v. Commissioner,45 T.C. 555">45 T.C. 555 (1966). That test provides that the texpayer must prove (1) that he or she was unable to resist the demands to sign the return and (2) that he or she would not have signed the return but for the constraint applied to his or her will. Stanley v. Commissioner,45 T.C. at 562. See also Brown v. Commissioner, supra, at 119. Respondent contends that petitioner in the present case has not established either element of the test. We agree with respondent. In order to satisfy the first element of duress under the test enunciated in Stanley v. Commissioner,45 T.C. 555">45 T.C. 555 (1966), petitioner must prove that she was unable to resist Steven's demands that she sign the 1972 Federal income tax return. To this end, petitioner claims that she suffered a long and continued course of mental intimidation. Petitioner claims that Steven's emotional452 outbursts and threats to cut off all financial support constituted such a course of mental intimidation. In Brown v. Commissioner,supra, this Court determined that a spouse who had been subjected to a long and continued course of mental intimidation was found to have signed the return under duress. In Brown, the taxpayer's former husband "displayed little regard for [the taxpayer] and her welfare and mental and physical wellbeing. He had a violent temper and often struck and bruised [the taxpayer]. * * * He intimidated his children to the point that eventually both ran away from home." Also, the taxpayer's husband threatened to strike her if she refused to sign the tax returns. Brown v. Commissioner,supra, at 117. In the present case, "a long and continued course of mental intimidation" has not been established. Steven always provided for the welfare of Emily and the children before, during and after the separation. He never physically abused Emily or the children nor did he threaten to do so. Arguments occurred and threats concerning financial support were made, but it does not appear that Emily was so intimidated as to453 be deprived of her volition. Petitioner also contends that she was unable to resist Steven's demands out of fear for the safety or custody of the children. In Stanley v. Commissioner,81 T.C. 634">81 T.C. 634 (1983), we recognized a realistic fear of forced separation from children may constitute duress. In this case, there were no threats either to harm the children or to deprive Emily of custody of the children. Petitioner never attempted to limit Steven's rights to visitation. On the contrary, she encouraged the frequent visitations which she believed benefited the children. The second element of duress under the test announced in Stanley v. Commissioner,45 T.C. 555">45 T.C. 555 (1966), requires that petitioner prove she would not have signed the return but for the constraint applied to her will. Petitioner has not established that she signed the 1972 Federal income tax return solely because of pressure applied by Steven. Petitioner signed joint returns for the years 1960 through 1971 and 1973. She has not claimed that any of these returns were signed under duress. Petitioner did not disavow her signature on the 1972 return although the did consult with her454 attorney shortly after she signed it. The first time petitioner raised the issue of duress was ten years after she signed the return. It would appear that the idea of disavowing the return on the basis of duress was an "afterthought." See Federbush v. Commissioner,34 T.C. 740">34 T.C. 740, 755 (1960), affd. per curiam 325 F.2d 1">325 F.2d 1 (2d Cir. 1963). As discussed above, it is concluded that petitioner was not deprived of contractual volition in signing the 1972 joint Federal income tax return. She is therefore jointly and severally liable for any deficiency with respect thereto. An appropriate order will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624350/	Burl J. Ghastin and Anita Marie Ghastin, Petitioners v. Commissioner of Internal Revenue, RespondentGhastin v. CommissionerDocket No. 1213-71United States Tax Court60 T.C. 264; 1973 U.S. Tax Ct. LEXIS 123; 60 T.C. No. 31; May 22, 1973, Filed 123 Decision will be entered for the respondent. One of petitioners, a Michigan State trooper, received a cash subsistence allowance in accordance with Michigan law. He generally purchased one meal a day in a restaurant in his patrol area but was permitted to bring his lunch or sometimes to eat at home with no reduction in his subsistence allowance. Held, the subsistence allowance is not excludable from petitioners' income since petitioner was furnished cash, not meals, and was not furnished meals for the convenience of his employer. John C. Leaming, for the petitioners.Chauncey W. Tuttle, Jr., for the respondent. Scott, Judge. SCOTT 265 Respondent124 determined deficiencies in petitioners' Federal income taxes for their taxable years 1966 and 1967 in the amounts of $ 104.02 and $ 121.73, respectively. The issue for decision is whether petitioners may exclude from their gross income under section 119, I.R.C. 1954, 1 a cash subsistence allowance paid by the State of Michigan to Burl J. Ghastin, a uniformed member of the State Police, during the years 1966 and 1967. 2FINDINGS OF FACTSome of the facts have been stipulated and are found accordingly.Petitioners Burl J. Ghastin125 and Anita Marie Ghastin, husband and wife, resided at Wayland, Mich., at the time they filed their petition in this case. Petitioners filed joint Federal income tax returns for their taxable years 1966 and 1967 with the district director of internal revenue at Detroit, Mich. Petitioners filed amended returns, claiming a refund for their taxable years 1966 and 1967 with the same district director on February 17, 1969. The refunds claimed on the amended returns were allowed by respondent.In the years 1966 and 1967 Burl J. Ghastin, hereinafter referred to as petitioner, was a uniformed member of the Michigan State Police serving in the rank of trooper. The Michigan State Police (MSP) is a separate department of the Michigan State government, consisting of commissioned officers, plainclothes detectives, specialists, and uniformed troopers plus civilian support personnel. During the calendar years of 1966 and 1967, the MSP was authorized 1,576 enlisted personnel and on July 1, 1966, the actual number of enlisted personnel employed by the MSP was 1,466. The jurisdiction of the MSP is statewide. However, generally an area served by an organized police force is not served by the MSP126 except upon request. During the years 1966 and 1967, there were 59 posts or barracks throughout Michigan to which troopers were assigned. Personnel serving in the rank of trooper are primarily engaged in patrol of highways of the State although their duties also include investigating crimes. The post to which a trooper is assigned is his headquarters for all purposes. He checks in and out of his post, files his reports there, and looks to his post supervisors for orders and assignments. The MSP furnishes officers and 266 troopers with uniforms, weapons, and police vehicles for official business.During the years 1966 and 1967, the normal work shift for petitioner consisted of 8 consecutive hours. Meals were not scheduled for any specific time. Each trooper ate when the requirements of his patrol permitted. The trooper was permitted to stop for meals at a restaurant having a telephone in the area he was assigned to patrol. The trooper was also permitted to carry his lunch with him and eat on the job in or near his patrol car although few troopers did this. A trooper was permitted to eat at his home only when his home was in his patrol area and convenient to the performance127 of his duty. The trooper was required to report to his post the location and telephone number at any time he left his patrol car for any reason so his post could reach him. The trooper was on duty during his meal periods. He could be dispatched by his post wherever his services were needed even without allowing him to finish his meal. Three-fourths of the work shifts were at night. The troopers generally ate one meal during an 8-hour work shift whether the shift was in the day or in the evening. Once or twice a week when petitioner worked a day shift he would be assigned to an area which would allow him to eat lunch at home. On these days he ate at home but the remainder of his meals eaten during his work shift were eaten in restaurants. Each trooper was on call during all hours when he was not working.Petitioner was assigned to the MSP post in Gaylord, Mich., during the years 1966 and 1967. The Gaylord post troopers patrolled a 2,500-mile area. During 1967 petitioner was ordered to Detroit for a week or 10 days during the month of July because of civil disorders in that city. During the time he was in Detroit, petitioner was billeted in the National Guard Armory on Eight128 Mile Road in Detroit and he ate his meals at the armory. These meals were provided to petitioner, either by the MSP or by the Michigan National Guard. At no other time during 1966 and 1967 was petitioner away from home overnight for business purposes.The restaurants where petitioner ate during his working hours were adjacent to the highway patrolled or in cities or villages near the highway. Some of the restaurants frequented by petitioner were in cities which the MSP did not patrol, that is cities with municipal police departments. None of the restaurants was owned by the State of Michigan. The MSP did not provide cooking or dining facilities at any of its posts around the State and bachelor troopers who occasionally were billeted at these posts were prohibited from possessing even rudimentary cooking facilities such as hot plates.267 During 1966 and 1967 petitioner was paid by the MSP for the following described hours:1966 DescriptionHoursRegular hours worked2,007Overtime paid61Compensatory time used60Sick leave used22Annual leave used104Total2,2541967 DescriptionHoursRegular hours worked1,930Overtime paid111Compensatory time used54Annual leave used80Sick leave used8Holiday paid8Total2,191129 Compensatory time used represents overtime work performed in 1964 and 1965 for which petitioner had received no pay. In 1966 and 1967 he was permitted to be compensated for this previously worked overtime by taking off time for which he was not charged with leave. Sick leave, annual leave, and holidays were hours for which petitioner was paid when he actually performed no work.Officers of the MSP, including troopers, received subsistence allowances. These allowances were paid for subsistence within the post area. When the troopers traveled outside the post area, they were reimbursed for their actual expenses within dollar limits.Sometime prior to 1965, the subsistence allowance had been set at $ 3 a day based on three meals a day at $ 1 each. From July 1, 1965, until July 1, 1966, each trooper received a monthly subsistence allowance computed at $ 60 a month less $ 8.40 Federal income tax withheld, with a net of $ 51.60. The amount was paid to the trooper whether he was on duty, on vacation, or on sick leave with the exception that when a trooper was on extended sick leave (more than 4 days) his flat rate subsistence allowance would be reduced. From July 1, 1966, through 130 the end of the taxable year 1967, the subsistence allowance was computed at 34 cents per hour in the grade of corporal. This amount was computed at $ 60 per month divided by 174 hours in a month and was included in the officer's regular paycheck from which Federal tax and State retirement was withheld. State retirement was in the amount of 5 percent.Beginning July 1, 1966, the subsistence allowance of a trooper with 2 years or less service was 36 cents an hour, for a trooper with more than 2 years service the allowance was 35 cents an hours, for sergeants 32 or 33 cents an hour. The hourly subsistence allowance for lieutenants, captains, and majors was 31 cents, 18 cents, and 19 cents, respectively. Lieutenant colonels and colonels received no subsistence allowance.Subsistence allowance for overtime worked in excess of 8 hours per 268 day was at the rate of 1 1/2 times the subsistence rate. This subsistence amount was also used in the computation of State Police retirement pay.Before July 1, 1966, the monthly subsistence allowance was reduced if a trooper was traveling on official duty outside his post area and reimbursed for his actual travel expenses. After July 1, 131 1966, and through December 31, 1967, a trooper would continue to receive his hourly subsistence allowance while traveling on official duty outside his post even though he was receiving his full travel expenses.Petitioner kept no records of the cost of the meals he purchased at restaurants during working hours in the years 1966 and 1967. He did not account to the MSP for any of the costs incurred.During the first 6 months of 1966 petitioner received a cash subsistence allowance at the rate of $ 60 per month or a total of $ 360. During the last 6 months of 1966 and for the entire year 1967, petitioner received 36 cents per hour for cash subsistence allowance for regular time and 54 cents per hour as subsistence allowance for overtime.On their original joint Federal income tax return for 1966 petitioners included in gross income the amounts received as a cash subsistence allowance. On their amended joint Federal income tax return (Form 1040-X) for 1966, petitioners excluded the cash subsistence allowance. The refund of $ 104 resulting from this exclusion on their amended return was made to petitioners.On their original joint Federal income tax return for 1967 petitioners included132 in gross income the amounts received as a cash subsistence allowance. On their amended joint Federal income tax return (Form 1040-X) for 1967, petitioners excluded a cash subsistence allowance in the amount of $ 720. The refund of $ 121.73 resulting from this exclusion was made to petitioners.Respondent determined in his notice of deficiency that the cash subsistence allowances were not excludable from petitioners' gross income and on this basis determined deficiencies in the exact amounts of the refunds previously made to petitioners for the years 1966 and 1967.OPINIONPetitioner contends that the amounts he received as a cash subsistence allowance in his taxable years 1966 and 1967 are excludable from his gross income under section 119, which provides as follows:SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE EMPLOYER.There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if -- 269 (1) in the case of meals, the meals are furnished on the business premises of the employer, or(2) in the case of lodging, the employee is required to accept133 such lodging on the business premises of his employer as a condition of his employment.In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.This statute sets the following three conditions for the exclusion by a taxpayer of the value of meals furnished by his employer: (1) Meals must be furnished to the employee; (2) the meals must be furnished to the employee for the convenience of the employer; and (3) the meals must be furnished on the business premises of the employer.Petitioner contends that all these conditions are met by the payment to him of a subsistence allowance in accordance with the provisions of Michigan law. 3 He contends that the facts in this case do not substantially differ from those in the cases of United States v. Barrett, 321 F. 2d 911 (C.A. 5, 1963); United States v. Morelan, 356 F. 2d 199 (C.A. 8, 1966), affirming 237 F. Supp. 879">237 F. Supp. 879 (D. Minn. 1965);134 and United States v. Keeton, 383 F. 2d 429 (C.A. 10, 1967), affirming per curiam 256 F. Supp. 576">256 F. Supp. 576 (D. Colo. 1966), each of which held similar allowances to be excludable from a State trooper's income under section 119.Respondent contends that the facts in the instant case distinguish it from the cases relied on by petitioner, but his primary contention is that those cases are an incorrect interpretation of the statute. Respondent relies on Wilson v. United States, 412 F. 2d 694, 697 (C.A. 1, 1969), in which the court refused to follow the Barrett, Morelan, and Keeton cases.Although the instant case is distinguishable on its facts from the cases relied upon by petitioner, 4136 if we were to accept the common 270 holding of those cases (1) that the word "meals" as used in section 119 includes a cash "allowance for meals," (2) that "the convenience135 of the employer" is satisfied when the choice of the restaurant and meal to be selected is left to the employee, and (3) that the "business premises" of the employer includes public restaurants near the public highways, petitioner in this case would be entitled to exclude at least some portion of the subsistence allowance he received from his income. We, therefore, will take the course of deciding whether to follow these cases or the decision of the Court of Appeals for the First Circuit in the Wilson case, as to the meaning of the word "meals." 5137 In our view the interpretation of the term "meals" as used in section 119 which comports with its clear language and its legislative history is that adopted by the First Circuit in the Wilson case. In that case the court held that under section 119, the value of meals is excludable only if the meals are furnished by the employer in kind. This is the view we adopted in Charles N. Anderson, 42 T.C. 410">42 T.C. 410 (1964), reversed on other grounds 371 F. 2d 59 (C.A. 6, 1966). See also Michael A. Tougher, Jr., 51 T.C. 737">51 T.C. 737 (1969), affirmed per curiam 441 F. 2d 1148 (C.A. 9, 1971), certiorari denied 404 U.S. 856">404 U.S. 856 (1971), and S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., pp. 190-191 (1954), which states:Section 119 applies only to meals or lodging furnished in kind. Therefore, any cash allowances for meals or lodging received by an employee will continue to be includible in gross income to the extent that such allowances constitute compensation.271 A similar statement appears in H. Rept. No. 1337, 83d Cong., 138 2d Sess., p. A39.In our view petitioner in this case was not furnished "meals" by his employer within the meaning of section 119.The facts in this case also fail to meet the second test of the statute that the meals be furnished for the convenience of the employer. Section 1.119-1(a) (2), Income Tax Regs., contains the following provision:(2) Meals furnished without a charge. (1) Meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if such meals are furnished for a substantial noncompensatory business reason of the employer. If an employer furnishes meals as a means of providing additional compensation to his employee (and not for a substantial noncompensatory business reason of the employer), the meals so furnished will not be regarded as furnished for the convenience of the employer. * The subsistence allowance paid to petitioner had its origin in a payment to troopers for three meals a day at a dollar a meal. The payment remained in theory payment for three meals a day although troopers generally ate only one meal during their 8-hour work shift. Even though they were on call 24 hours a day, 139 they apparently generally ate their other two meals at home.The allowance paid to petitioner during the first half of his taxable year 1966 was paid on a flat rate which did not take into consideration whether the trooper was on vacation, sick leave, compensatory time, or worktime. The trooper was not required to account for his meal expenses except when on travel status. The record indicates that for the periods after July 1, 1966, and through December 31, 1967, a trooper would continue to receive his subsistence allowance supplement (36 cents per hour for petitioner) while at the same time receiving full travel expenses.The hourly subsistence allowance supplement for the period after July 1, 1966, provided for increases in the hourly rate for the supplement for overtime hours and was taken into consideration for computation of State retirement benefits.The subsistence allowance decreased as the uniformed member of the MSP was promoted in rank and, we assume, in pay.Under the provisions of respondent's regulation the subsistence allowance was not paid to petitioner for the convenience of his employer, MSP, since the evidence amply demonstrates that the subsistence allowance140 was a means of furnishing Michigan troopers with additional compensation and served no other purpose of the employer.The record shows that a trooper was entitled to eat his meal during his 8-hour duty shift at his own home if his home was in his assigned patrol territory, or to carry a lunch with him in his police vehicle. Section 1.119-1 (a)(3)(i) states: "If an employer provides meals 272 which an employee may or may not purchase, the meals will not be regarded as furnished for the convenience of the employer." This regulation is a reasonable interpretation of the statute. Under this provision of the regulations, the subsistence allowance paid to petitioner was not for the convenience of his employer.In view of our holding that subsistence payments to petitioner do not meet the first two requirements of section 119, we need not decide whether the restaurants at which petitioner ate while on duty are includable within the phrase "the business premises of the employer" as used in section 119.Decision will be entered for the respondent. Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. Petitioners in their petition alleged that if the subsistence allowance payment is not excludable, then the amount thereof is deductible as a business expense. This contention is not made on brief and we infer from petitioners' statement on brief that the only issue is whether the payment is excludable under sec. 119, I.R.C. 1954↩, is an abandonment of the claim that the amount of the payment is a deductible business expense.3. Mich. Comp. Laws, sec. 28.7↩ (1948) (Mich. Stat. Ann. sec. 4.437).4. In United States v. Barrett, 321 F. 2d 911 (C.A. 5, 1963), the taxpayer-patrolman was required to submit an expense account showing the sum spent for each meal each day and was repaid up to a maximum of $ 4 a day for the amount certified as actually spent. In the instant case no such requirement was imposed on petitioner. In fact he could eat a sandwich in his patrol car and continue to receive the meal allowance.In United States v. Morelan, 356 F. 2d 199, 201, 204 (C.A. 8, 1966), the taxpayer-patrolman was required to eat in public restaurants "to insure public safety and obedience to law through the physical presence of the officers in uniform and to facilitate their availability to the public for the reporting of accidents and the seeking of information with reference to the traffic and motor vehicle laws of the State." In the instant case, the petitioner was permitted to eat his meals at his residence if he were assigned to patrol an area encompassing his home or to bring his lunch and eat it in or near his patrol car.In United States v. Keeton, 383 F. 2d 429 (C.A. 10, 1967), the taxpaper-patrolman was required to take his meals at a public restaurant while on duty as in the Morelan case. Furthermore, the meal allowance in Keeton was specifically for one meal per day, whereas in the instant case the meal allowance was under the statute a subsistence allowance for three meals a day. There is absolutely no suggestion in the record that the two meals eaten by petitioner while not on duty were eaten at any place other than at petitioner's home. In the Keeton↩ case, the amount of the meal allowance did not enter into computations for retirement purposes whereas it does in the instant case.5. The U.S. Court of Appeals for the Sixth Circuit, to which an appeal in this case would lie, in Commissioner v. Anderson, 371 F. 2d 59, 65 (C.A. 6, 1966), stated as follows with respect to United States v. Barrett, 321 F. 2d 911 (C.A. 5, 1963), and United States v. Morelan, 356 F. 2d 199 (C.A. 8, 1966):"The phrase 'on the business premises of the employer', as used in Sec. 119, has been the subject of judicial construction in other reported decisions. In the case of United States v. Barrett, 321 F. 2d 911 (C.A. 5, 1963) the issue confronting the Court was whether state highway patrolmen were entitled to exclude from gross income the reimbursement received by them from the State of Mississippi for meals purchased at various locations along the highway while on duty. The Commissioner there sought to contend that 'business premises' was confined to the State Patrol Headquarters. The Court concluded that since the 'business of the state law enforcement agency was not confined to the patrol headquarters, but rather, it covers every road and highway in the State 24 hours a day every day', the value of meals taken along the highway while on duty was excludable."A similar issue involving the exclusion of the value of meals furnished a highway patrolman was presented in the case of United States v. Morelan, 356 F. 2d 199 (C.A. 8, 1966) with a similar result being reached. In affirming the decision of the District Judge, reported at 237 F. Supp. 879">237 F. Supp. 879, the Appeals Court concluded that restaurants near or adjacent to highways were 'on the business premises of the employer' for the purpose of determining the excludability of the value of meals taken there by a highway patrolman while on duty."Although the Court in each of the foregoing cases rejected the Commissioner's contention that 'business premises' would be limited to premises owned or controlled by the employer, the decisions are consistent with the view that the premises must be those upon which some portion of the employee's duties were performed. * * *"While the Sixth Circuit did not disapprove of the definition of "business premises" used in the Barrett and Morelan cases, we do not consider that this circuit in any way accepted the meaning of "meals" as used in those cases. There was no issue before the Sixth Circuit as to the meaning of the term "meals" as used in sec. 119. See Michael A. Tougher, Jr., 51 T.C. 737">51 T.C. 737 (1969), affirmed per curiam 441 F. 2d 1148↩ (C.A. 9, 1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624351/	Coast Coil Company, Petitioner v. Commissioner of Internal Revenue, RespondentCoast Coil Co. v. CommissionerDocket No. 3431-65United States Tax Court50 T.C. 528; 1968 U.S. Tax Ct. LEXIS 105; June 27, 1968, Filed 105 Decision will be entered under Rule 50. Petitioner adopted a plan of complete liquidation and thereafter within 12 months sold its trade accounts receivable at their actual value, a negotiated price, which was less than their book or face value. Held, the accounts receivable are installment obligations within the meaning of sec. 337(b), I.R.C. 1954, and therefore the loss realized by petitioner should be recognized. Family Record Plan, Inc., 305">36 T.C. 305 (1961), affd. 309 F. 2d 208 (C.A. 9, 1962), certiorari denied 373 U.S. 910">373 U.S. 910 (1963), followed. Douglas W. Argue and Gilbert Dreyfuss, for the petitioner.Thomas J. Sullivan, for the respondent. Hoyt, Judge. HOYT528 Respondent determined a deficiency in petitioner's income tax for the period July 1, 1960, to June 30, 1961, 107 after disallowance of certain depreciation deductions claimed. Petitioner, however, while reexamining its return for that year, discovered its failure to take a deduction for a loss resulting from sale of its accounts receivable at less than book value. By its petition filed herein error is assigned to respondent's failure to allow the loss from this sale. The sale occurred while petitioner was liquidating pursuant to section 529 337. 1 By stipulation respondent concedes that petitioner is entitled to the depreciation expense deduction claimed and disallowed.The two issues which remain to be decided are:(1) Did petitioner in fact suffer a loss by the sale of its accounts receivable; and(2) Does the sale of accounts receivable fall within the nonrecognition-of-loss provisions of section 337?FINDINGS OF FACTThose facts which were stipulated are found accordingly, and incorporated herein by this reference.Petitioner, 108 Coast Coil Co. (now dissolved), was a corporation organized and existing under the laws of the State of California, with its principal place of business located in Los Angeles, Calif. Petitioner's final income tax return for the period here involved was timely filed with the district director of internal revenue at Los Angeles, Calif. Petitioner regularly kept its records and filed its Federal income tax returns on the accrual method of accounting.Petitioner was incorporated in 1954, and since that time had been engaged in the manufacture, distribution, and sale of electric and electronic equipment. Some of its sales were on open account and were reflected on its books and tax returns as accounts receivable. Petitioner did not maintain a reserve for bad debts but instead used the specific chargeoff method of reporting bad debts for Federal tax purposes. As an accrual basis taxpayer, petitioner had included the full face value of the receivables in its gross income for Federal tax purposes.On April 25, 1961, petitioner adopted a plan of complete liquidation pursuant to section 337. Less than a year later, by March 15, 1962, most of petitioner's assets had been distributed to109 its shareholders in complete liquidation. Petitioner was dissolved pursuant to the laws of the State of California on April 25, 1962.During the last week of April 1961, preliminary negotiations began for the sale of Coast Coil. Petitioner's president, A. K. Frederick, and McKay Manning, Inc.'s president, Howle Saltzman, initially agreed on a purchase price of $ 575,000. That amount was determined through appraisal of the fixed assets, an examination of the books, and further negotiations. The initial agreement contemplated alternative forms of final settlement. McKay Manning would either buy the stock at the agreed price, or instead elect to purchase from Coast Coil all its assets except cash, certain securities, and an automobile. The latter method was elected, and on June 29, 1961, the agreed-upon assets were sold to McKay Manning for a total adjusted consideration of $ 386,758.88.530 When the buyer elected to purchase assets rather than stock, the value of the assets to be retained by petitioner was deducted from $ 575,000 to reach the new purchase price. Each item sold had previously been valued separately, some according to an appraisal by the buyer, others at 110 book value, and others through negotiations. The bill of sale noted the allocations of the total consideration because both buyer and seller felt such an itemization to be desirable. Although the book and face value of the accounts receivable was $ 41,003.80, and petitioner's basis for tax purposes therein was the same, only $ 25,000 of the total consideration had been allocated thereto. Such allocation resulted from arm's-length negotiations between the parties and their representatives.On June 20, 1961, the parties first decided to value the accounts receivable at their actual rather than face value. The buyer agreed to an actual value at first because he recognized that some of the debts might be hard to collect. A few days later, however, the buyer decided that he wanted the accounts receivable value at the "amount actually due," instead of an actual current value.Further negotiations in that area brought to light new aspects concerning the accounts receivable. Frederick was leaving the business, and many of the accounts would thereafter become difficult to collect. He had been the strong man of the business theretofore who had effected collection of accounts. It was 111 apparent that there might well be expenses incurred in enforcing collection. Coast Coil also wanted to sell the accounts receivable at their actual value to avoid assertion by the buyer of potential offsets against the promissory notes which were to be part of the purchase price. Coast Coil therefore negotiated for a valuation equal to the collectible value in order to prevent the buyer from later claiming any offsets. It had been advised by counsel that the sale of corporate assets was a nontaxable transaction under section 337 and that the allocation of consideration in the bill of sale to be executed would have no effect on petitioner's tax liability. There was therefore no "tax savings motive" present to influence the fixing of value. Another factor taken into account was that the sale of the accounts receivable would be "without recourse."After all points were considered and a series of negotiations and discussions had taken place, a realistic value of the outstanding balance of the accounts, roughly 60 percent, rounded to the nearest dollar amount, was assigned to the accounts receivable by the parties to the transaction. This consideration, $ 25,000, was stated in the112 bill of sale dated June 29, 1961, for petitioner's accounts receivable "(without warranty or responsibility on the part of Seller as to collection)."The accounts receivable which were sold consisted of 41 separate accounts ranging from over $ 6,500 to less than $ 10. The record does not disclose how accurate the judgment of the parties was as to the 531 value assigned but at least one of the accounts with an original balance of $ 2,262 remained uncollected for many years, and at time of trial litigation was pending to enforce collection. The accounts were subsequently sold by McKay Manning to another corporation in 1962.Petitioner's income tax return for the period ended June 30, 1961, reported a nontaxable gain on the sale of assets during liquidation. Included in the assets sold were accounts receivable of $ 41,003.80. During the audit of this return by the Internal Revenue Service, petitioner's counsel for the first time urged that a loss on the sale of these accounts was allowable under section 337. The claimed deduction was denied in the 10-day letter with the following explanation:The taxpayer has raised an issue relative to an allowance of a loss on accounts receivable113 sold as a part of all the corporate assets. Inasmuch as such property does not fall within the exceptions of Section 337(b) of the internal revenue code, no loss is allowable.Per books (accounts receivable)$ 41,003.80Allocable sales price25,000.00Loss not recognized16,003.80In its petition filed in this Court, Coast Coil assigned error to the Commissioner's failure to allow a loss (not claimed in the tax return) in the amount of $ 16,003.80 realized during the taxable year ended June 30, 1961, from the sale of certain accounts receivable, alleging, inter alia, that they constitute property described in section 337(b)(1) (A) of the Code.OPINIONIn his statutory notice of deficiency, respondent disallowed a depreciation deduction taken by petitioner in its corporate income tax return for the taxable year ending June 30, 1961. In its subsequent petition to this Court, petitioner not only assigned error to respondent's failure to allow its depreciation deduction, but also alleged that it was entitled to recognize a loss deduction of $ 16,003.80 realized during the taxable year from the sale of certain accounts receivable. Petitioner had not recognized the loss114 on its return nor claimed a deduction therefor. Respondent subsequently abandoned his original disallowance of the depreciation deduction and now asserts no deficiency for the taxable year in question. Petitioner, however, maintained its claim of overpayment on account of its failure to recognize the loss. Respondent denies that petitioner suffered a loss on the sale of its accounts receivable, and further claims that even if petitioner did suffer such a loss, it is not recognizable because of section 337(a).The burden of proof is on the petitioner to show that it realized a loss on the sale of its accounts receivable. McKay Manning agreed to pay $ 386,758.88 for certain of petitioner's assets after an appraisal and an examination of the books had been made. Following arm's-length and bona fide negotiations between the parties, both of whom 532 were knowledgeable businessmen represented by counsel throughout, the accounts receivable were assigned consideration equal to their actual value based on a realistic and fair valuation. That amount was $ 25,000. Their face and book value was $ 41,003.80, which was also petitioner's basis. While we agree with respondent that 115 we are not bound to accept the allocation of the parties, the record convinces us that it was the substance of the transaction and a perfectly proper valuation. We therefore hold that petitioner did in fact realize a loss of $ 16,003.80 on the sale of its accounts receivable to McKay Manning.Petitioner had elected to liquidate under section 337. The plan was adopted on April 25, 1961. The sale of the accounts receivable occurred on June 29, 1961. Petitioner did not recognize the loss on its final corporate income tax return for that year, it having previously been advised that no gain or loss was to be recognized. It now alleges an overpayment for that year on account of its failure to recognize the loss realized.The sole remaining issue is whether the sale of accounts receivable comes within the nonrecognition-of-gain or -loss provisions of section 337. The problem presented is whether or not the accounts receivable are excluded from the meaning of "property" as that term is used in section 337(a). 2116 Section 337(b)3 excludes specific items or assets from the definition of property, thereby precluding nonrecognition of gain or loss in 533 those situations. In order therefore for the petitioner to recognize its loss, it must demonstrate that its accounts receivable were within one of the categories of excluded property under section 337(b). We hold that the accounts receivable are not property under section 337(b) and therefore the loss realized upon their sale should be recognized by petitioner; section 337(a) does not apply.117 We held in Family Record Plan, Inc., 36 T.C. 305">36 T.C. 305 (1961), affirmed on other grounds 309 F. 2d 208 (C.A. 9, 1962), certiorari denied 373 U.S. 910">373 U.S. 910 (1963), that accounts receivable are installment obligations within the meaning of section 337(b)(1)(B). In that case, the Commissioner advocated the above rule in order to uphold recognition of a gain on the sale of accounts receivable against a cash basis taxpayer. The Ninth Circuit affirmed using an anticipatory assignment of income theory, without discussing the interpretation which we had adopted.As we noted in Family Record Plan, Inc., supra, section 337(b)(1) excludes installment obligations from the definition of property as used in section 337(a); there is, however, no definition of "installment obligations." After discussing the legislative history and particularly the Senate Finance Committee Report, S. Rept. No. 1622, 83d Cong., 2d Sess., p. 259 (1954), we concluded that: "The clear intent of Congress was that sales in the ordinary course of business would result in ordinary gain to the corporation as if it were118 not in the process of liquidating."Respondent contends in this case that "installment obligations" as used in section 337(b)(1)4 means only those obligations resulting from the sale of property which the seller has elected to report under the installment method provided in section 453. We rejected that contention made by the petitioner in Family Record Plan, Inc., supra, and there objected to by respondent, and must also reject it here. We need not repeat here what we said there. We believe the intent of section 337(b)(1) (A) and (B) is much broader than the ground covered by section 453 with reference to the obligations there involved and is designed to embrace accounts receivable arising from the sale of stock in trade by an accrual basis corporation as well. Here the taxpayer, on the accrual method of accounting, reported and paid income taxes on its sales as the accounts accrued. Later when it sold those accounts 534 during liquidation it was certainly selling property excluded by section 337(b)(1) from the nonrecognition provisions of section 337 (a) (1) and (2). Respondent's position is contrary here not only to his former views119 but also to the congressional intent.The taxpayer in Family Record Plan, Inc., supra, reported income for Federal tax purposes on the cash method. Petitioner herein used the accrual method of accounting. The rationale we used in Family Record Plan, Inc., was not dependent upon any accounting method. Rather, we reached a conclusion we deemed120 to be harmonious with that intended by the Congress. Any sale in the ordinary course of business within the specified period following adoption of a liquidation plan should result in gain or loss to the corporation as if it were not in the process of liquidating. The accounts receivable with which we are concerned here represent consideration for sales of stock in trade in the ordinary course of petitioner's business. Thus, the accounts are a mere extension of ordinary business transactions. Had the accounts been sold under ordinary circumstances and not during the year following adoption of the plan of liquidation an ordinary loss rather than a capital loss would have been recognized. Sec. 1221(4).We have found as a fact that the actual value of the accounts was $ 16,003.80 less than their face or book value. This was the loss which resulted from a sale made between knowledgeable businessmen following bona fide, arm's-length open negotiations. Since petitioner was on the accrual method, it had already recognized and reported the unreceived face value of the receivables as income. We conclude that here the sale of accounts receivable acquired in respect of the sale of stock121 in trade was a sale within the ordinary course of business, as intended by Congress when they framed section 337(b)(1)(B). Petitioner therefore should recognize $ 16,003.80 as a loss in the year of sale. Family Record Plan, Inc., supra.Respondent urges that our opinion in Family Record Plan, Inc., has been sapped of all vitality by the opinion of the Ninth Circuit, 309 F. 2d 208, affirming on other grounds. However, as we read that opinion, the results rendered here are entirely consistent with the Ninth Circuit's approach to that case; our views were not rejected on appeal.Cash basis taxpayers have in the past been required by the courts to recognize gain on the sale of accounts receivable during a statutory liquidation under various theories. An anticipatory assignment of income rationale is generally favored, but in light of the intent of Congress, we perceive no valid reason for different treatment for cash basis and accrual basis taxpayers. We discover no suggestion that section 337 was designed to afford diverse treatment dependent upon the accounting method used. In fact if the situation were reversed and122 535 petitioner here were on the cash basis of accounting and had realized gain on the sale, we might well find the Commissioner urging that gain be recognized, so as to require the clear reflection of income. See Commissioner v. Kuckenberg, 309 F. 2d 202, 206 (C.A. 9, 1962), affirming in part and reversing in part 35 T.C. 473">35 T.C. 473 (1960).An alternative rationale by which we also conclude that the accounts receivable here involved are not property within the meaning of section 337 is through analogy with section 1221. In Pridemark, Inc. v. Commissioner, 345 F. 2d 35 (C.A. 4, 1965), affirming in part and reversing in part 42 T.C. 510">42 T.C. 510 (1964), it was held that the heart of the definition of property in section 337 was taken from the definition of capital assets found in section 1221. Both were designed to give preferential treatment to sales of certain types of assets not held for sale in the ordinary course of business. Thus, only capital assets fall within the scope of property as defined by section 337(b)(1). Accounts receivable such as those here involved123 are not capital assets, and thus are not property within the meaning of that statute. Sec. 1221(4). They therefore are exempt from nonrecognition treatment under section 337, and the petitioner must recognize the loss realized upon their sale.In Frank W. Verito, 43 T.C. 429">43 T.C. 429, 441 (1965), we agreed with respondent that not all sales of property are covered by the nonrecognition provisions of section 337 and observed that in those cases where it had not been applied the corporation involved was trying to convert ordinary income into capital gain. Here petitioner, an accrual basis taxpayer, has already reported all of the trade accounts receivable it sold in 1961 as ordinary income and has paid income tax thereon, if any was due. There is no attempt to convert ordinary income into capital gain under such circumstances and the sale of such trade accounts in 1961 resulted in ordinary loss not capital loss, under section 1221(4). We held in Verito that where certain assets would be considered capital within the meaning of section 1221(1), they would be "property" within section 337(b)(1). The converse of that rule would require the holding that trade*124 accounts receivable, not being capital assets, are not "property." Therefore, the accounts receivable here involved do not qualify for the nonrecognition treatment of section 337.For the foregoing reasons and because we conclude that the spirit of section 337 dictates inclusion of trade accounts receivable within the phrase "installment obligations" as used in section 337(b)(1)(B), we conclude and hold that the loss realized on their sale in 1961 is to be recognized by petitioner.Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise specified.↩2. SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.(a) General Rule. -- If -- (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.↩3. (b) Property Defined. -- (1) In general. -- For purposes of subsection (a), the term "property" does not include -- (A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,(B) installment obligations acquired in respect of the sale or exchange (without regard to whether such sale or exchange occurred before, on, or after the date of the adoption of the plan referred to in subsection (a)) of stock in trade or other property described in subparagraph (A) of this paragraph, and(C) installment obligations acquired in respect of property (other than property described in subparagraph (a)) sold or exchanged before the date of the adoption of such plan of liquidation.(2) Nonrecognition with respect to inventory in certain cases. -- Notwithstanding paragraph (1) of this subsection, if substantially all of the property described in subparagraph (A) of such paragraph (1) which is attributable to a trade or business of the corporation is, in accordance with this section, sold or exchanged to one person in one transaction, then for purposes of subsection (a) the term "property" includes -- (A) such property so sold or exchanged, and(B) installment obligations acquired in respect of such sale or exchange.↩4. Here there is no suggestion, contention, or argument either in the pleadings, in the opening statements at trial, or in the briefs that subsec. 337(b)(2) is applicable or controlling or that the accounts in question are "installment obligations acquired in respect of such sale or exchange." Petitioner relies solely on subsec. 337(b)(1) in contending that the accounts receivable here involved are "installment obligations" thereby excluded. Respondent taking the opposite view from the position he urged in Family Record Plan, Inc., urges that the accounts are not "installment obligations" within the exemption afforded by sec. 337(b)(1)↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624352/	EDWARD J. TURNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Turner v. CommissionerDocket No. 18543.United States Board of Tax Appeals6 B.T.A. 523; 1927 BTA LEXIS 3491; March 15, 1927, Promulgated 3491 Under the Revenue Act of 1921, the March 1, 1913, value of property must be reduced by depreciation sustained in determining the gain from the sale of property. Charles H. Smith, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. TRAMMELL523 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $642.18. The deficiency arises from the action of the respondent in reducing the March 1, 1913, value of a building by depreciation sustained in determining the amount of gain on the sale thereof in 1922, such depreciation not having been claimed as a deduction in the income-tax returns of the petitioner in years prior to 1920. No testimony was introduced, all of the facts being stipulated. FINDINGS OF FACT. The petitioner is an individual and a citizen of the United States, residing at Rutherford, N.J. In May, 1908, the petitioner acquired real property located at 74-80 Park Avenue Rutherford, N.J., at a cost of $18,500. The fair market value of said property as of March 1, 1913, was: Land $13,062.50, buildings $18,500 - total $31,562.50. Subsequent to March 1, 1913, the3492 petitioner expended for improvements on said building the sum of $858.45. Prior to 1920 the petitioner, in making his income-tax returns, made no claim for depreciation on said property. In 1922 he sold the said property for $56,928.80. In reporting the transaction in his 1922 return, the petitioner added depreciation to the purchase price equal to the sum deducted as such in his income-tax returns for the years 1920 and 1921, in the total sum of $740. The respondent adjusted depreciation on said building from $740 to $3,268.33, by computing depreciation on the March 1, 1913, value of the building ($18,500) at 524 the rate of 2 per cent for eight and five-sixths years, that is, from March 1, 1913, to December 1, 1921. OPINION. TRAMMELL: There is no question between the petitioner and the respondent as to the rate of exhaustion, wear and tear, as both used the same rate. The petitioner, however, in determining the gain from the sale of the property, disregarded the exhaustion sustained, except for the two years, when he claimed deductions in his income-tax returns with respect thereto. Under the Revenue Act of 1921, it is immaterial whether the petitioner deducted*3493 any amount on account of exhaustion, wear and tear in determining his gain from the sale of property. He can not, under that Act, reduce his taxable gain from the sale of property by not claiming deductions for exhaustion, wear and tear sustained. This case is governed by the . See also ; ; ; and . Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4653923/	IN THE SUPREME COURT OF PENNSYLVANIA EASTERN DISTRICT COMMONWEALTH OF PENNSYLVANIA, : No. 275 EAL 2020 : Respondent : : Petition for Allowance of Appeal : from the Order of the Superior Court v. : : : JERMAINE T. COX, : : Petitioner : ORDER PER CURIAM AND NOW, this 20th day of January, 2021, the Petition for Allowance of Appeal is DENIED.	01-04-2023	01-22-2021