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INDEX-DIGEST

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ACCOUNTING METHODS

Bad Debt Reserve-Financial Institution-Validity of Commis-
sioner's Regulation Requiring Taxable Income Reflect Net Operat-
ing Loss (NOL) Carrybacks Before Calculation of Deduction for
Addition to Bad Debt Reserve.-Where in 1971-80, petitioner
financial institution calculated its deduction under sec. 166(c) for
additions to its bad debt reserve by using "percentage of taxable
income method" set forth in sec. 593(b)(2)(A); and petitioner carried
back its sec. 172(c) NOL for 1981-82 to preceding years in manner
contrary to subdivisions (vi) and (vii) of regs. 1.593-6A(b)(5), which
generally required that taxable income reflect any NOL before
calculation of deduction for addition to bad debt reserve, Court
determined subdivisions (vi) and (vii) of regs. 1.593-6A(b)(5) were
invalid to extent that they required taxable income to reflect any
NOL carrybacks before calculation of addition to bad debt reserve
for certain financial institutions. Pacific First Federal Savings Bank
v. Commissioner....

ADDITIONS TO TAX

See also ESTATES AND TRUSTS; EXPENSES-TRADE OR
BUSINESS; INSTALLMENT SALES.

Failure to File Timely Estate Tax Return-Reasonable Cause or
Willful Neglect-Unresolved Fact Question.-Where sec. 6075(a)
required petitioner to file decedent's estate tax return by Dec. 6,
1984; petitioner's attorney filed return on Mar. 8, 1985, simulta-
neously applying for extension of time to file/pay until Mar. 8,
1985; neither application was approved; Commissioner billed peti-
tioner for tax, addition, and interest, but later abated addition
pending audit; petitioner paid tax and interest; after examination
of return Commissioner increased tax and asserted sec. 6651(a)(1)
late filing addition, Court determined (1) Commissioner did not
abuse discretion by not approving applications filed with late
return, since attorney's maintaining "periodic consistent contact"

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ADDITIONS TO TAX-continued

with IRS office while preparing return did not compensate for
failure to file timely for extension or plausibly explain failure to do
so; (2) inclusion of previously abated sec. 6651(a)(1) addition in
deficiency notice was not abuse of Commissioner's statutory
authority, since there was no closing agreement or other binding
agreement precluding Commissioner from subsequently asserting
it; and (3) summary judgment on liability for addition was
inappropriate, since fact questions remained as to whether failure
to file timely was due to reasonable cause and not willful neglect.
Estate of Wilbanks v. Commissioner.....

Installment Purchase of Farm by Limited Partnership in Tax-
Motivated Transaction-Overvaluation of Improvements-Negli-
gence and Reasonable Reliance on C.P.A. Partner.-Where petition-
ers were limited partners who deducted their distributive shares of
losses arising from accrual method partnership's 1981 installment
contract to purchase farm; contract did not provide for payment of
interest, and Commissioner imputed interest under sec. 483;
partner A was C.P.A. who maintained partnership records and
prepared tax returns; and improvements were valued at $227,000
by partnership, which was 243% of $93,400 actual value, Court
determined (1) partner A was liable for sec. 6653(a)(1) addition to
tax for negligence for his 1982-83 individual income tax returns on
his entire underpayment, since he computed depreciation deduc-
tions using partnership basis that was not supported by informa-
tion available to him, but partners B and C were not liable, since
they reasonably relied on A; (2) partners were liable for sec. 6659
addition for underpayment attributable to valuation overstate-
ment; (3) A was not liable for sec. 6661 addition, since his
partnership investment was not tax shelter and substantial author-
ity existed supporting his deduction of imputed sec. 483 interest
ratably over life of contract; and (4) partners were liable for
increased interest under sec. 6621(c) for engaging in tax-motivated
transaction. Weis v. Commissioner.........

BAD DEBTS

See ACCOUNTING METHODS.

CAPITAL EXPENDITURES

Renovations to Rental Property-Characterization of Gain on
Sale of Properties-Liability for Alternative Minimum Tax.—
Where in 1983, petitioner made renovations to three of her 13
rental properties in anticipation of selling them, Court determined,
on facts, renovations were nondeductible sec. 263 capital expendi-
tures (since petitioner did not elect under sec. 179 to treat
expenditures as deductible expense) that increased her basis in
property and reduced amount of capital gain realized on sale, and
petitioner was liable for sec. 55 alternative minimum tax, since
amount of sec. 1202 net long-term capital gain attributable to

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CAPITAL EXPENDITURES-continued

property sales was tax preference item under sec. 57(a)(9). LaPoint
v. Commissioner....

CAPITAL GAINS AND LOSSES

Corporation-Loss on Sale of Terminated Executive's House-
Ordinary Loss or Capital Loss.-Where petitioner family-owned
nut business deducted, as ordinary loss for its TYE June 29, 1985,
loss incurred on resale of terminated executive's house that had
been purchased pursuant to employment contract, Court deter-
mined house was capital asset under sec. 1221 giving rise to
nondeductible capital loss, not ordinary loss under sec. 165(f)
for property used in petitioner's business. Arkansas Best Corp.
v. Commissioner, 485 U.S. 212, followed. Azar Nut Co. v. Commis-
sioner....

Regulated Sec. 1256 Futures Contracts-Losses Incurred by
Investor and "Associated Person" in Commodities Straddles
Transactions-"Commodities Dealer in the Trading of Commodi-
ties" Interpreted.-Where petitioners claimed deductions on their
1980-81 income tax returns for substantial losses incurred in
commodities straddles transactions; petitioner H was commodities
investor employed as account executive with brokerage firm; H
was registered as "associated person" with Commodity Futures
Trading Commission and as registered commodity representative
with Chicago Board of Trade; H was not floor trader, floor broker,
or member of exchange, and was required to use services of floor
broker to place orders, Court determined, for purposes of sec.
108(b) of Deficit Reduction Act of 1984 as amended by sec. 1808(d)
of Tax Reform Act of 1986, H was not "commodities dealer in the
trading of commodities" since he did not buy and sell commodities
futures on the floor of, and subject to the rules of, an exchange.
Kovner v. Commissioner

CORPORATIONS

See also CAPITAL GAINS AND LOSSES; TAXES; VALUA-
TION.

Domestic International Sales Corporation (DISC)-Computation
of Overall Profit Percentage Limitation-Validity of Commission-
er's Regulations.-Where petitioner corporation and its wholly
owned subsidiaries manufactured alcoholic beverages on which it
paid Federal excise tax on distilled spirits sold domestically and
utilized DISC as commission agent for export sales of its liqueur
product line; on its 1981 and 1983 Federal income tax returns,
petitioner included in gross receipts total amount received from its
customers for liqueur purchases and deducted Federal excise tax
as expense; and Commissioner disallowed deductions claimed for
commissions paid to DISC, Court determined (1) for purposes of
computing overall profit percentage limitation under regs. 1.994-2,
"gross receipts" from both domestic and export sales include total

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CORPORATIONS-continued

sales proceeds received from customers without reduction or other
adjustment for manufacturer's payment of excise tax on distilled
spirits, (2) regs. 1.994-2(b)(3), which was issued under specific
authority of sec. 994(b)(2) as "legislative regulation," was valid,
and (3) aggregation rule of reg. 1.994-2(c)(2)(ii) may be used to
calculate overall profit percentage with respect to single related
supplier even if aggregation is not used to calculate overall profit
percentage of any other member of controlled group. Brown-Forman
Corp. v. Commissioner ...

CREDITS AND EXEMPTIONS

Investment Tax Credit-Automobile-"Property Used in Connec-
tion With Furnishing of Lodging."-Where in 1983, petitioner
purchased new BMW automobile which she used while inspecting
and maintaining her 13 rental properties, Court determined peti-
tioner was not entitled to investment tax credit for her automobile
since sec. 48(a)(3) provides that property used in connection with
furnishing of lodging fails to qualify as sec. 38 property. LaPoint v.
Commissioner...

...

Residential Energy Credit-Water Source Heat Pump-"Renew-
able Energy Source Property" Interpreted.-Where petitioners
claimed sec. 44C residential energy credit on their 1980 income tax
return for purchase and installation of water-to-air heat pump and
cooling system in their house; and system used groundwater with
constant temperature (about 13 degrees centigrade) stored in
underground tanks to heat house and as "sink" for energy drawn
from house in cooling, Court determined, from regulations and
legislative history of sec. 44C, petitioners were not entitled to
claimed credit for "renewable energy source property," since their
system failed to qualify as "solar energy" under regs. 1.44C-2(f)(1)
or as "energy derived from geothermal deposits" under 50 degree
centigrade minimum temperature requirement imposed by regs.
1.44C-2(h). Newborn v. Commissioner

DEDUCTIONS

Activity Engaged In for Profit-Bona Fides-Dog Breeding and
Grooming As Single Activity.-Where petitioners filed joint re-
turns claiming deductions for dog breeding and grooming opera-
tion, Court determined that, considering all facts and circum-
stances, (1) close organizational and economic relationship between
two operations made them one activity for purposes of sec. 183;
and (2) steadily decreasing losses and eventual turning of profit
indicated petitioners engaged in activity with profit-making objec-
tive. Keanini v. Commissioner..

Partnership Debt Obligations-Computer Equipment Leasing
Transaction-"At Risk" Requirement.-Where in 1979-82 petition-
ers claimed their allocable share of limited partnership losses from

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DEDUCTIONS-continued

.......

multiple-party computer equipment leasing transactions in which
limited partners had no realistic economic liability because of
guarantees made to limited partners by other transaction partici-
pants, because of underlying nonrecourse third-party debt on which
transaction was based, and because of other transaction features,
Court determined petitioners were protected from loss on partner-
ship debt obligations under sec. 465(b)(4) and were not at risk
within meaning of sec. 465(b)(2). Thornock v. Commissioner .............
Partnership Losses in Sham Transaction-Commissioner's Ad-
justment of Interest Accrued Under Modified Rule of 78's-
Addition to Tax.-Where for 1982 petitioners in consolidated test
cases invested less than $8,000 each in limited partnerships to
finance Barbados hotel; deferred nonrecourse payments of principal
and interest extended over 40 years; petitioners acquired no
interest in underlying real estate but supposedly had right to
one-time vacation, worth under $1,500, at hotel; petitioners could
not sell or transfer interests for profit; and petitioners claimed
large losses based on interest payment deductions, inconsistent
with payment schedule, accruing to over $90,000 for first year
under modified Rule of 78's, Court determined (1) purported
investments were obvious tax-shelter sham transactions lacking
economic substance and claimed losses were disallowed, since
petitioners had no possibility of profit other than claimed tax
benefits; (2) Commissioner properly exercised sec. 446(b) authority
to correct distortion in income caused by application of modified
Rule of 78's interest accrual method; and (3) petitioners were liable
for increased interest rate of sec. 6621(c), negligence addition to
tax of sec. 6653(a)(1) and (2), and sec. 6661 addition to tax on
substantial underpayment of income tax. LaVerne v. Commissioner
DEFICIENCY NOTICE

Joint Notice Sent Only to Divorced H at Separate Address-
Actual and Timely Filing of Joint Petition-Validity to Toll
Limitations Period for W.-Where petitioners, who filed joint
income tax returns for 1982-84 before their divorce, each notified
Commissioner of their separate residences through filing of individ-
ual returns for subsequent years; Commissioner sent joint notice of
deficiency to H, but did not send duplicate original joint notice to
W at her address; H forwarded copy of notice to W, who filed joint
petition with H within required 90-day period under sec. 6213(a)
but after expiration of 3-year limitations period for assessment
under sec. 6501(a); and Commissioner filed amended answer
asserting sec. 6653(b) fraud addition, Court determined (1) Commis-
sioner issued and mailed joint notice of deficiency to W; (2)
notwithstanding Commissioner's failure to send duplicate joint
notice to W's last known address, jurisdiction to hear case existed
because W received actual notice and timely petitioned; (3)
notwithstanding W's not receiving actual notice until more than 3

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