Life Insurance-Mortgage Loan Prepayment Penalties-Capital
or Income Includable in Gross Investment Income.-Where peti-
tioner, a mutual life insurance company, treated certain prepay-
ment penalties attributable to its post-1954 corporate mortgage
loans as long-term capital gain under sec. 1232, and, in computing
its "gross investment income" under sec. 804(b), excluded those
prepayment penalites from income described under sec. 804(b)(1)(C),
Court determined prepayment penalty fees were ordinary income
includable in gross investment income under sec. 804(b) and not
gain from the sale or exchange of capital asset under sec. 1232,
since, inter alia, prepayment penalties on mortgage loans in general
constitute interest substitutes, there was no evidence that peti-
tioner realized any capital appreciation on mortgage loans or that
petitioner intended prepayments to be compensation for lost
capital appreciation, and there was nothing in legislative history
indicating that Congress intended prepayment penalties on post-
1954 corporate mortgage loans to qualify for long-term capital gain
treatment under sec. 1232. Prudential Insurance Co. of America v.
Commissioner..
See ADDITIONS TO TAX, CONTRIBUTIONS, CREDITS
AND EXEMPTIONS, DEDUCTIONS, EXPENSES-TRADE OR
BUSINESS, and UNITED STATES TAX COURT.
See DEFICIENCY NOTICE and UNITED STATES TAX
COURT.
Form 872 Consent To Extend Time To Assess Tax-Assent
Established by Petitioner's Overt Act of Signing Form-Equitable
Estoppel Not Applied Against Commissioner.-Where petitioner
signed Form 872 Consent To Extend Time To Assess Tax for 1978
while her attorney was on vacation; petitioner believed form's
terms conformed with her attorney's wishes, but they did not;
petitioner's attorney later signed second Form 872 further extend-
ing period of limitations, although he objected to terms of both
consent forms; and Commissioner issued deficiency notice before
expiration date of second consent form, Court determined period
for assessing deficiency had not expired prior to date on which
Commissioner issued deficiency notice, since (1) petitioner's overt
act of signing first Form 872 constituted her assent to that form,
and form was therefore valid; and (2) Commissioner was not
equitably estopped from relying upon first consent form, since
petitioner failed to prove that there was false representation or
misleading silence. Kronish v. Commissioner
Interpretation of Form 872-A Special Consent To Extend Time
to Assess Tax-Effective Date of Termination by Petitioners-
Commissioner's 2 Weeks' Delay in Supplying Requisite Termina-
tion Form 872-T Not Equivalent to Breach of Agreement and Not
Prejudicial to Petitioner.-Where on Mar. 17, 1980, petitioners
executed Form 872-A Special Consent to Extend the Time to
Assess Tax for 1971-78; a Form 872-T was sole means by which
petitioners could terminate Form 872-A agreement; petitioners
attempted unsuccessfully for 2 weeks to obtain Form 872-T from
Commissioner before obtaining photocopy of Form 872-T which
petitioner signed on Nov. 3, 1981, and mailed on Nov. 5, 1981; and
deficiency notice would be timely only if Nov. 9, 1981, date of
receipt of Form 872-T by Commissioner, was effective date of
termination for computation of 90-day period in which deficiency
notice could be issued, Court determined Form 872-T took effect
on date of receipt by Commissioner as set forth in Form 872-A,
and not on date of mailing contended for by petitioners, since on
record, Commissioner did not breach an obligation to provide
Forms 872-T, and petitioners were not prejudiced by delay in
obtaining form because they were able to terminate the Form
872-A and pursue litigation if necessary. Kovens v. Commissioner ..
Timeliness of Deficiency Notice-Automatic Stay Provisions of
Bankruptcy Code-Suspension Period Ended on Date of Discharge
Despite Lack of Notice to Commissioner.-Where petitioners filed
petition in bankruptcy, thereby imposing automatic stay on
collection and assessment of taxes (11 U.S.C. sec. 362(a)(6)), as well
as suspending running of statute of limitations thereon, and
petitioners' discharge in bankruptcy lifted automatic stay, Court
determined Commissioner's deficiency notice was untimely, since in
light of sec. 6503(i) statutory language, legislative history of
limitation provision, and Court's prior interpretation of identical
language in another Code section, suspension period ended and
limitations period began to run on date automatic stay was lifted
by discharge and not at later date when Commissioner received
notice of the discharge. Clark v. Commissioner.
Validity of Deficiency Notice-Return Lost by U.S. Postal
Service-Risk of Nondelivery on Petitioners.-Where petitioners'
1979 income tax return, which was required to be filed by June 15,
1980, was deposited in U.S. mail on June 13, 1980; and return was
lost by U.S. Postal Service before delivery to Internal Revenue
Service, Court determined period for assessing deficiency against
petitioners did not expire before June 15, 1984, date deficiency
notice was issued, since for purposes of limitations on assessment
of tax, petitioners assumed risk of nondelivery, and failure of U.S.
Postal Service to deliver return constituted failure of petitioners to
file return. Walden v. Commissioner
See also DEDUCTIONS, GAIN OR LOSS, PARTNERSHIPS,
and SMALL BUSINESS CORPORATIONS.
Commodity Spread Transactions Violating Exchange Rules-
Nonrecognition of Gains and Losses-Additions to Tax for
Fraud.-Where petitioner owned seat on New York Mercantile
Exchange and held commodities futures contracts in form of
spread, or straddle, positions, Court determined (1) per-se rule of
sec. 108(b) of Deficit Reduction Act of 1984, as amended by Tax
Reform Act of 1986, did not apply because spread transactions
were executed in violation of rules of exchange; (2) gains and losses
from transactions were not recognized for Federal tax purposes,
since spread transactions were not bona fide competitive trades; (3)
gains on prior trades were includable in taxable income, absent any
evidence that prior spread trades were not bona fide, legitimate
transactions; and (4) Commissioner failed to prove that petitioner
was liable for additions to tax for fraud. Katz v. Commissioner.....
Commodity Tax Straddles in London Options Transaction-No
Economic Substance-Availability of "Per Se Dealer Rule" Under
Sec. 108(b) of Tax Reform Act of 1984.-Where petitioner herein
filed motion for reconsideration of findings and opinion in Glass v.
Commissioner (87 T.C. 1087) in which Court determined petitioners
were not entitled to deduct losses because commodity tax strad-
dles were prearranged and lacked economic substance; and peti-
tioner herein contended that because he was commodities dealer,
sec. 108(b) of Tax Reform Act of 1984 permitted him to deduct
losses even though transactions lacked economic substance, Court
determined, in light of case law and congressional intendment, that
it was appropriate before applying the per se rule of sec. 108(b) to
enquire whether straddle transactions were fictitious, prearranged,
or otherwise in violation of rules of the exchange, and if so,
whether losses were actually incurred, and that since straddle
transactions in Glass were prearranged causing transactions to
lack economic substance, petitioner incurred no losses to which the
per se rule could be applied. Cook v. Commissioner ...
Theft-Out-of-Pocket Amount of Tax-Motivated Investments-
Texas Law. Where petitioners, who invested in limited partner-
ships that engaged in transactions identical to and controlled by
the Court's opinions in Julien v. Commissioner, 82 T.C. 492, and
Glass v. Commissioner, 87 T.C. 1087, conceded that they were not
entitled to deductions originally reported as losses from such
transactions, but contended that they were entitled to theft loss
deductions for their out-of-pocket "investments," Court determined
that petitioners were not entitled to theft loss deductions, since
under applicable Texas law, record contained no evidence of theft,
and moreover, petitioners failed to demonstrate that there was no
reasonable prospect of recovering their "investments." Viehweg v.
Commissioner.
See UNITED STATES TAX COURT.
See also CREDITS AND EXEMPTIONS, DEDUCTIONS, DE-
PRECIATION, and EXPENSES-TRADE OR BUSINESS.
Actions Under Partnership Audit and Litigation Procedures-
Tax Court's Appointment of Limited Partner as Tax Matters
Partner for Litigation Purposes-General Partners Debtors in
Bankruptcy Proceeding.-Where in 89 T.C. 198, Court held that
petitioner partnership's general partners were ineligible to serve as
tax matters partner because they were debtors in bankruptcy
proceeding; and before this litigation, Commissioner did not select
tax matters partner under sec. 6631(a)(7), Court exercised its
inherent powers to appoint a limited partner, after notice and
hearing, to serve as tax matters partner solely for purposes of this
litigation, since a tax matters partner is essential to operation of
statutory procedures of sec. 6221 et seq. and to fair, efficient, and
consistent disposition of partnership proceedings before Court.
Computer Programs Lambda, Ltd. v. Commissioner..
Partners' Losses After Stock Brokerage Firm Absorbed by
Third Party-Includability in Partners' Bases of "Back Office"
Liabilities-Third Party's Assumption of Liabilities Equivalent to
Constructive Distribution.-Where petitioners were general part-
ners in New York Stock Exchange firm A that incurred large
"back office" liabilities to its customers and other brokerage firms,
precipitating withdrawals of firm capital and violation of NYSE
rules; to prevent A's financial collapse, brokerage corporation X
agreed in 1970 to assume A's business and all of its assets and
liabilities, subject to obligation by petitioners to pay X any deficit
in A's net worth, Court determined (1) liabilities attributable to
accrual basis partnership's deductible expenses must meet "all
events" test before inclusion in bases of petitioners' partnership
interests, (2) reserves representing "back-office" liabilities were not
includable in petitioners' bases in determining amount of their loss,
since they were not fixed obligation that was sufficiently determin-
able in amount, (3) petitioners realized amount equal to A's
liabilities upon transfer of A's business, resulting in constructive
cash distribution reducing partners' bases (secs. 733 and 752), and
(4) under sec. 731, transfer of A's business to X was sale or
exchange of petitioners' partnership interests, resulting in capital
loss. La Rue v. Commissioner
PENALTIES
See DEDUCTIONS.
See UNITED STATES TAX COURT.
Rule 82-Depositions Before Commencement of Case-Testimony
Not in Danger of Being Lost Before Trial.-Where pursuant to
Rule 82, petitioners filed application to depose two individuals to
perpetuate testimony in anticipation of filing petition, and prospec-
tive deponents were neither advanced in years nor threatened by
illness or infirmity, Court denied petitioners' application, since
Rule 82 requires that applicant for deposition to perpetuate
testimony show that testimony is in danger of being lost before
trial. Reed v. Commissioner
SMALL BUSINESS CORPORATIONS
Audit and Litigation Procedures-Number of Qualifying Share-
holders for Small S Corporation Exception-Petitioner's Motion To
Dismiss for Lack of Jurisdiction.-Where petitioner, S corporation
with three shareholders in 1983, moved to dismiss case for lack of
jurisdiction on ground that, for 1983, an S corporation having 10
or fewer shareholders was excepted as a "small S corporation"
from application of S corporation audit and litigation procedures
because Commissioner failed to promulgate modifying regulations,
Court denied petitioner's motion, since (1) setting the number of
qualifying shareholders for the small S corporation exception at
greater than one should be left to Commissioner's administrative
discretion; (2) statute requires only that single shareholder S
corporations be excepted (Blanco Investments & Land, Ltd. v.
Commissioner, 89 T.C. 1169, followed); and (3) there were no
grounds for concluding that Commissioner abused his discretion in
applying unified S corporation procedures to this case, absent
showing by petitioner that applying procedures would be futile or
useless. 111 West 16 Street Owners, Inc., Alan Silverman, Tax
Matters Person v. Commissioner
Shareholders' Portion of Net Operating Losses-Basis in Stock
Not Increased by Guarantee of Corporate Debt-No Economic
Outlay. Where on Sept. 12, 1979, subch. S corporation X bor-
rowed $300,000 from bank, when X's liabilities exceeded its assets;
X's shareholders personally guaranteed payment of loan; all
payments of principal and interest on loan were made by X; and
petitioners maintained that their guarantees of loan increased their
bases in X stock sufficiently to allow deduction of their porportion-
ate shares of 1979-81 corporate losses, Court determined that
under former sec. 1374(c), petitioners' loan guarantees did not
increase their bases in X stock, absent economic outlay by
petitioners. Brown v. Commissioner, 706 F.2d 755 (6th Cir.), affg.
T.C. Memo. 1981-608, and Calcutt v. Commissioner, 84 T.C. 716,
followed; Selfe v. United States, 778 F.2d 769 (11th Cir.), ex-
|