INDEX-DIGEST

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ACCOUNTING METHODS

See also GAIN OR LOSS; INSURANCE COMPANIES; INTER-
EST; INVENTORIES.

Accrual Method Corporation-Contested Liability-Deductibility
of Letter of Credit Placed in Trust To Satisfy Estimated Claims.—
Where corporate petitioner utilizing accrual accounting method
deducted $20 million on its income tax return for 1981 as sec.
461(f) contested liability for letter of credit, valid and enforceable
on Dec. 28, 1981, that petitioner placed in settlement trust
pending outcome of antitrust litigation in which petitioner was
defendant, Court determined petitioner could not deduct contested
liability since letter of credit was not transfer of money or other
property within meaning of sec. 461(f)(2). Williamette Industries,
Inc. v. Commissioner..

Commissioner's Change of-Partnership's Interest Deduction
Under Rule of 78's-Not Clearly Reflecting Income.-Where peti-
tioners invested in real estate investment partnership that calcu-
lated accrued interest deductions relating to long-term loan on
basis of "Rule of 78's," Court determined use of Rule-of-78's
method of calculating accrued interest deduction did not result in
clear reflection of income (Prabel v. Commissioner, 91 T.C. 1011,
followed); and Commissioner properly exercised his sec. 446(b)
authority in disallowing partnership's accrued interest deductions
under Rule-of-78's and in requiring partnership to calculate accrued
interest deductions relating to loan on basis of economic accrual of
interest. Levy v. Commissioner ..

Computation of Basis by FIFO-Sale of Noncertificate Shares of
Regulated Mutual Fund-Failure To Meet Adequate Identification
Requirement. Where petitioner used LIFO method of computing
gains and losses recognized on sales of noncertificate shares in two
mutual funds; stock was acquired on different dates and at
different costs; petitioner did not specify to anyone, at time of

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sale, which particular shares he was selling; and broker's written
confirmation order did not refer to specification, Court determined
petitioner was required to use FIFO method in allocating basis,
since he failed to adequately identify stock sold as required by reg.
1.1012-1(c) in order to prove his basis in asset sold. Hall v.
Commissioner ..

LIFO-Finished Inventory Acquired in Purchase of Assets of
Ongoing Business-Separate LIFO Business Unit Pool Not Re-
quired. Where newly formed petitioner X acquired in arm's-length
transaction assets, including finished inventory, of division of Y;
petitioner elected LIFO inventory method in its first tax return,
for year ending Mar. 31, 1981; and petitioner computed value of
inventory using dollar value, link-chain method, placing all of its
raw materials, work in progress, and finished inventory in single
business unit pool, Court determined petitioner properly included
finished inventory in single pool, since this furthered overall
purpose of LIFO regulations, and since petitioner's single purchase
of finished inventory was not continuous and regular course of
conduct so as to constitute separate wholesaling or retailing
business under reg. 1.472-8(b). UFE, Inc. v. Commissioner...

ADDITIONS TO TAX

See CONTRIBUTIONS; CREDITS AND EXEMPTIONS; DE-
DUCTIONS; INCOME; LIMITATIONS; PARTNERSHIPS; RE-
TURNS; UNITED STATES TAX COURT.

Fraud and Failure To Pay Estimated Tax on Unreported Income
From Drug Trafficking-Petitioner's Blanket Fifth Amendment
Refusal To Testify-Self-Employment Tax.-Where petitioner, who
filed no returns for 1983-84, was stopped for speeding, and found
with $610,712.42, marijuana, controlled substances, drug parapher-
nalia, and his passport; Commissioner reconstructed petitioner's
unreported income under cash-expenditures method for 1983 in
amount of drug purchases recorded in "drug ledgers" seized from
third parties and linked to petitioner, and for 1984 income in
amount of recorded drug purchases, cash found in his possession
when stopped for speeding, and estimated living expenses for year,
and Commissioner asserted addition to tax for fraud; and peti-
tioner asserted blanket Fifth Amendment privilege in refusing to
testify, Court determined, on facts, Commissioner properly deter
mined deficiency; petitioner was liable for sec. 6653(b)(1) and (2)
addition to tax for fraud, since several "badges of fraud" were
present including petitioner's illegally engaging in selling mari-
juana, failing to file income tax returns, failing to maintain or
present records to Commissioner's agents, and dealing in cash;
petitioner was liable for sec. 6654 addition for failing to pay
estimated tax; and petitioner was liable for sec. 1401 self-
employment tax. Petzoldt v. Commissioner.

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ADDITIONS TO TAX-continued

Interest on Substantial Underpayment Attributable to Tax-
Motivated Transactions-Motion To Abate Additional Interest-
Commissioner's Post-Trial Actions.-Where Commissioner re-
quested, and was granted, multiple extensions of time to file briefs,
and failed to file timely Rule 155 calculation, Court denied
petitioner's motion to abate additional interest under sec. 6621(c),
since facts did not reach level of severity to warrant sanctions
against Commissioner. Lansburgh v. Commissioner

Master Recording Transaction-Petitioner's Pretrial Concession
of Investment Tax Credit-Additions to Tax for Negligence,
Valuation Overstatement, Substantial Understatement, and Inter-
est on Underpayments Attributable to Tax-Motivated Transac-
tion. Where petitioner, commercial loan officer with college degree
in business and economics, claimed on his 1982 return investment
tax credit base and fair market value of $185,000 in master
recording he had leased for $11,000 under agreement with Ameri-
can Educational Leasing; and petitioner conceded shortly before
trial that master recording agreement was license and not lease,
but he continued to claim deductions for lease payments and other
expenses, Court determined, on facts, transaction had no profit
objective or economic substance, fair market value of property was
negligible, and petitioner was not entitled to claimed deductions
relating to master recording; petitioner was liable for sec. 6653(a)
addition to tax for negligence or intentional disregard of rules and
regulations and for sec. 6661 addition for substantial understate-
ment for full amount of underpayment; no part of underpayment of
petitioner's taxes was attributable to valuation overstatement, and
sec. 6659 did not apply (Todd v. Commissioner, 89 T.C. 912, affd.
862 F.2d 540 (5th Cir.), followed); and petitioner was liable for sec.
6621(c) additional interest attributable to tax-motivated transac-
tion on portion of underpayment attributable to disallowed deduc-
tions, but not on portion attributable to concession that agreement
was no lease. McCrary v. Commissioner..

Substantial Understatement of Income Tax-Mail-Order
"Church" as Tax Shelter Item-Rate of Tax.-Where petitioner,
who had paid $1,200 for mail-order documents purporting to
establish chapter of Basic Bible Church of America with himself as
tax-exempt minister, claimed on his 1983 return to be exempt from
income taxation due to his "minister" status and his executing
vow of poverty, and petitioner subsequently conceded he was not
tax-exempt, Court determined petitioner failed to prove his entitle-
ment to dependency exemption, partnership loss, or head of
household filing status; petitioner was liable for sec. 6653(a)(1) and
(2) addition to tax; and petitioner was liable for sec. 6661 addition,
since his typical mail-order "church" was plan or arrangement
described in sec. 6661(b)(2)(C)(ii)(III) whose principal purpose was

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