INDEX-DIGEST

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ACCOUNTING METHODS

See also DEDUCTIONS and DEPRECIATION.

Accrual Method-Income From Sale of Valentine Merchandise Shipped in Prior Year-Year Reportable.-Where petitioner, a calendar year and accrual basis manufacturer of greeting cards and other "social expression" merchandise, for valid business reasons, shipped Valentine merchandise to customers in year prior to that in which holiday occurred, and specified in sales contract that title and risk of loss did not pass to customer until Jan. 1 of following year, Court determined income from sale of Valentine merchandise was properly reported in year in which title and risk of loss passed to purchaser, and income was not accruable as of Dec. 31 in year in which merchandise was shipped, since (1) the "all events" test was not satisfied until year following shipment, and (2) petitioner's method was not a "hybrid" method of accounting because it was an accrual method and as such was a "permissible method" under sec. 446(c)(2) which had been applied consistently and hence was deemed to clearly reflect income. Hallmark Cards, Inc. v. Commissioner.

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Completed Contract Method-Unique Items-Severence of Contracts by Delivery.-Where petitioner corporation used completed contract method to account for income from several of its manufacturing divisions, Court determined (1) petitioner's use of completed contract method to account for income from two divisions was proper, since items produced by these divisions were "unique items" within meaning of reg. 1.451-3(b)(1)(ii); (2) contracts entered into by the two divisions were not to be severed by delivery, since contracts could not be independently priced by delivery; and (3) Commissioner's determinations as to petitioner's other divisions were sustained. Sierracin Corp. v. Commissioner .......

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ACCUMULATED EARNINGS TAX

Reasonable Needs of Business-Burden of Proof-Business-
Related Investments Not Current Assets.-Where petitioner corpo-
ration leased improved real and tangible personal properties, Court
determined (1) as to statement filed by petitioner alleging justifica-
tion for accumulation of earnings and profits, burden of proof was
on petitioner with respect to grounds 1 and 5, and on Commis-
sioner with respect to grounds 2, 3, and 4 as to which petitioner
set forth specific facts which, if proven, would support alleged
business needs for accumulation, and (2) petitioner was not liable
for acculumated earnings tax imposed by sec. 531, since earnings
and profits were not accumulated beyond the reasonable needs of
its business because pivotal issue was whether petitioner's assets
were current assets, and petitioner demonstrated that stock was
purchased to prevent feared corporate takeover, and that orange
grove and residential real estate partnership interests were pur-
chased as part of plan to diversify its business. Hughes, Inc. v.
Commissioner.

ADDITIONS TO TAX

See also DEDUCTIONS and LOSSES.

Negligence, etc., Additional Amount-Sec. 6653(a)(2) Applicability
to Underpayment of 1981 Withholding Tax-Last Date Prescribed
for Payment.-Where under secs. 1441 and 1442, petitioner corpo-
ration failed to withhold tax on 1981 interest payments made to
wholly owned foreign corporations, and under reg. 1.6302-2(a), tax
deposit was due before end of December 1981, Court determined
petitioner was subject to addition to tax under sec. 6653(a)(2), since
tax deposit is not automatically equated with tax payment, and
under reg. 1.6302-2(b)(5), last date prescribed for payment of
withholding tax was last date for filing return, which was Mar. 15,
1982. Kurt Orban Co. v. Commissioner

Substantial Understatement of Liability-Sec. 6661 Rate for
1982-Conflict in Enacted Laws.-Where Tax Reform Act of 1986
(TRA), which was passed by House on Sept. 25, 1986, and by
Senate on Sept. 27, 1986, and was signed into law on Oct. 22,
1986, provided for sec. 6661 addition to tax for substantial
understatement of liability with increased rate of 20 percent, and
Omnibus Budget Reconciliation Act of 1986 (OBRA), which was
passed by both House and Senate on Oct. 17, 1986, and was
signed into law on Oct. 21, 1986, provided for increased rate of 25
percent, Court determined rate of addition to tax provided by sec.
6661 is 25 percent on additions assessed after Oct. 21, 1986, since
in language of sec. 8002 of OBRA, Congress recognized the conflict
and directed that OBRA was to control over TRA ammendment,
nothing in TRA suggested that TRA was to overrule OBRA, and
legislative history suggested nothing different. Pallottini v. Commis-
sioner.

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498

ADDITIONS TO TAX-continued

Valuation Overstatement-Computer Software-Additional Inter-
est Attributable to Tax-Motivated Transaction.-Where petitioners
were shareholders in subch. S corporation which distributed
computer software, and Court determined herein that investment
in computer software had economic substance and was an activity
engaged in for profit within meaning of sec. 183, Court determined
petitioners were liable under sec. 6621(c) for additional interest
attributable to tax-motivated transaction, since inclusion of
$3,244,050 speculative nonrecourse note in basis of software for
depreciation purposes was valuation overstatement within meaning
of sec. 6659(c). Ronnen v. Commissioner.

BASIS

See also DEDUCTIONS, GAIN OR LOSS, PARTNERSHIPS,
and SMALL BUSINESS CORPORATIONS.

Property Transfer Between Spouses Incident to Divorce-Appli-
cability of Sec. 1041-Computation of Gain From Sale to Third
Party. Where in 1984 W transferred house, which was purchased
for $32,200 in 1973 and titled in her name, to petitioner H
pursuant to property settlement agreement signed by H on July
25; under agreement, H paid $18,000 to W within 6 months of
conveyance of title; H promptly sold house to third party for
$64,000 and acquired new home; and H did not report sale of
house or acquisition of new home on his 1984 income tax return,
Court determined (1) sec. 1041, added by Deficit Reduction Act of
1984 and applicable to transfers after July 18, 1984, was applica-
ble, since agreement became effective and transfer of property
occurred after July 18, 1984; and (2) H's basis was $32,200, since
under statute and regs., $18,000 paid to W did not increase H's
basis. Godlewski v. Commissioner...

CAPITAL EXPENDITURES

See EXPENSES-TRADE OR BUSINESS.

CAPITAL GAINS AND LOSSES

See also BASIS, INCOME, and INSURANCE COMPANIES.
Cash Payment for Assignment of Oil and Gas Lease With
Retained Oil Payment Right-Substance vs. Form-Capital or
Advance Royalty Subject to Depletion.-Where in lottery peti-
tioner acquired from U.S. Department of Interior mineral lease on
311.53 acres of land, which was not within any known geologic
structure of producing oil or gas field, and after assigning
one-third of lease to third party, petitioner and third party
assigned lease to Exxon for cash payment and retention of
purported production payment of $10,000 per acre payable out of 5
percent of any oil or gas marketed from the lease, Court
determined cash payment was not taxable as long-term capital
gain, but represented advance royalty taxable as ordinary income

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CAPITAL GAINS AND LOSSES-continued

subject to depletion, since (1) on record, there was no reasonable expectation that production payments would be made, and (2) because there was no reasonable prospect that production payment would be paid off, lease assignment was not a sale, and substance of transaction was sublease. United States v. Morgan, 321 F.2d 781 (5th Cir. 1963), followed. Watnick v. Commissioner

COMMISSIONER OF INTERNAL REVENUE

See EVIDENCE, LIMITATIONS, and UNITED STATES TAX COURT.

COMPENSATION
See INCOME.

CONTRIBUTIONS

Charitable-Undivided Interests in Works of Art-Deductibility, Valuation, and Increased Interest Rate.-Where in 1977-78, petitioner donated to charitable organization undivided interests in collection of 44 works of art; under deeds of gift, donee was entitled to possession during each of years following donations for that portion of each year reflected by donee's undivided interests therein; but donee did not actually take possession of any of works of art during 1977-78, Court determined (1) donations qualified as charitable contribution deductions in 1977-78 under reg. 1.170A7(b)(1); (2) eight paintings were to be valued as of December 1978 and sculpture was to be valued as of December 1979 based upon their values determined herein as of December 1977, with appropriate adjustments; and (3) based on Court's determinations, valuation overstatement under sec. 6621(c) was present only for 1979. Winokur v. Commissioner.

CORPORATIONS

See CREDITS AND EXEMPTIONS, INCOME, and UNITED STATES TAX COURT.

DISC Qualification of Subsidiary-Backdated Promissory Note Received From Parent Not a Qualified Export Asset-Tax Consequences of DISC Disqualification.-Where petitioner parent corporation X's wholly owned subsidiary Y had elected to be treated as DISC under sec. 991; in taxable year 1980, Y's only income was attributable to commissions X "paid" Y with promissory note designated a "producer's loan" and not representing a commission; and note was delivered later than 60 days after close of Y's taxable year, but was backdated to date that fell within 60 days after close of year, Court determined (1) Y did not qualify as a DISC in 1980, since it failed to meet qualified export assets requirement of sec. 992(a)(1)(B) because backdated promissory note did not constitute payment within 60 days after close of Y's taxable year and hence was not a qualified export asset; (2) X was not taxable on deemed dividends attributable to Y, since Y failed

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