Reports of the Tax Court of the United States

ing Method-Rate Support Deductions-Deduction Deferral
and Reg. 1.1502–13(b)(2).- Where in 1985 X and Y were members
of affiliated group filing consolidated income tax return under sec.
1504; vehicle manufacturer X and finance company Y both used
accrual method to maintain books and report income; as incentive
to increase vehicle sales during 1980's, petitioner instituted inter-
company interest-rate support programs whereby retail customers
could finance vehicles from Y at below-market interest rates sup-
ported by X; for pre-1985 tax years, petitioner reported X's rate sup-

CONSOLIDATED RETURNS Continued

port deductions and Y's rate support discount income as intercom-
pany transactions and deferred reporting X's rate support deduc-
tions on consolidated income tax return until Y recognized associ-
ated discount income; in 1985 and later, petitioner discontinued
intercompany transaction treatment and reported X's rate support
payments as current deductions when paid to Y; petitioner filed
refund claims for pre-1985 tax years contending that deferral of X's
rate support deductions on consolidated returns had been incorrect;
and Commissioner contended consolidated return regulations were
method of accounting and petitioner's consistent deferral of X's rate
support deductions had established regular method of accounting
that petitioner had wrongfully changed without Commissioner's
consent under sec. 446(e), Court determined (1) consolidated return
regulations in issue constituted method of reporting and not method
of accounting (Henry C. Beck Co. v. Commissioner, 52 T.C. 1, and
Henry C. Beck Builders, Inc. v. Commissioner, 41 T.C. 616, fol-
lowed); and (2) X's rate support deductions were not subject to
deferral under reg. 1.1502-13(b)(2), since discount income earned
by Y was not corresponding item of income in intercompany trans-
action to rate support deductions. General Motors Corp. & Subs.
v. Commissioner

CORPORATIONS

Corporate Restructuring and Carryback of Consolidated

Net Operating Loss (CNOL)-Tentative Refund of Income

Tax to Former Common Parent of Consolidated Group-

Deficiency Determined Against Successor Common Parent.-

Where, after 1986 corporate restructuring, former common parent

Y was spun off as separate publicly traded corporation and was no

longer part of group that had filed consolidated 1974-84 income tax

returns, and petitioner X was successor common parent; after

restructuring, X and Y both incurred CNOL's and filed sec. 6411

applications for tentative refunds of income tax attributable to

carryback of postrestructuring CNOL's to prerestructuring years

when Y was common parent; Commissioner issued tentative

refunds to X and Y, treating refunds to Y as rebate refunds for pur-

poses of computing deficiencies of X and group for years at issue,

1981 and 1984; X contended because Commissioner wrongly paid

tentative refunds to Y, they were not rebate refunds that could be

taken into account in determining X's deficiency; and Commissioner

countered that Y was authorized group representative for purposes

of issuance of tentative refunds, Court determined tentative refunds

were nonrebate refunds as to X and group for purposes of comput-

ing group's deficiencies for 1981 and 1984, since Y's authority to act

for group terminated when Y's affiliation with group ended, and

Commissioner could not seek recovery of tentative refunds from X

through deficiency procedures. Union Oil Co. v. Commissioner, 101

T.C. 130, distinguished. Interlake Corp. v. Commissioner

Page

270

103

Page

DEFICIENCY NOTICE

See EVIDENCE.

EMPLOYEES' TRUSTS

Qualified Employees' Pension Plan and Trust-Applicabil-

ity of Tax on Prohibited Transaction to Loan Treated as Dis-

tribution-Addition to Tax for Failure To File Excise Tax

Returns.-Where petitioners H and W, disqualified persons for sec.

4975 purposes, participated in prohibited transaction with their

wholly owned corporation's qualified employees' pension plan and

trust by borrowing on Dec. 1, 1986, from plan and executing

promissory note but never making payments; in deficiency notices

dated June 25, 1997, Commissioner determined H and W were lia-

ble for excise taxes and sec. 6651(a)(1) additions to tax for failing

to file excise tax returns for taxable years 1991 through June 30,

1997; H and W contended sec. 4975 excise taxes were inapplicable

because (1) loan was treated as taxable distribution in 1986 pursu-

ant to sec. 72(p) or (2) prohibited transaction was corrected in 1991

when H executed document assigning to plan proceeds from future

sale of realty purchased with 1986 loan, Court determined (1) sec.

4975 excise taxes applied to prohibited (loan) transaction notwith-

standing its treatment as distribution for sec. 72(p) income tax pur-

poses in 1986; (2) prohibited transaction was not corrected by

assignment to plan of future sale proceeds, since no repayment of

principal or interest resulted; (3) “amount involved" for loan subject

to sec. 4975 excise taxes is greater of interest paid or fair market

value interest relating to loan; (4) fair market interest rate was

10.5 percent, since H and W paid no interest on loan and did not

establish Commissioner's rate was erroneous; and (5) H and W were

liable for sec. 6651(a)(1) additions to tax for years at issue. Medina

v. Commissioner

ESTATES AND TRUSTS

Valuation of Decedent's Shares in Family-Owned Corpora-

tion-Premium for Voting Privileges-Discount for Market-
ability Restrictions on Transfer or Hypothecation. - Where
petitioner estate's decedent died June 24, 1993, owning 23.55 per-
cent of class A voting shares and 2.79 percent of class B nonvoting
shares of private, family-owned corporation; remaining stock was
held by decedent's siblings; voting stock was subject to 360-day
restriction on transfer or hypothecation, stockholders of both classes
were entitled to any per-share dividends, and class B stockholders
were entitled to liquidation preference; on estate tax return, peti-
tioner reported fair market per-share value of both classes at
$2,650; and Commissioner determined fair market per-share value
of $801,994.83 and $3,585.50 for classes A and B, respectively,
Court determined (1) on facts and circumstances, classes A and B
should not be combined and valued together, since premium for vot-
ing privileges was appropriate and was to be computed in relation

ESTATES AND TRUSTS Continued

to equity value of corporation (enterprise value plus cash minus
liabilities) and since a different marketability discount applied to
each class; (2) sec. 2056 marital deduction had to be recalculated
because of revaluation of class A stock bequeathed to credit shelter
trust established by decedent's will and because of State transfer
and inheritance taxes on bequest that were chargeable to credit
shelter trust; and (3) petitioner was not liable for penalties under
sec. 6662 for substantial estate valuation understatements or
misstatements because of petitioner's good faith reliance on advice
of tax professionals and appraisers. Estate of Simplot v. Commis-
sioner

ESTATE TAX

Valuation-Discount for Lack of Marketability of Minority

Stock Block-Stock in Qualified Terminable Interest Prop-

erty (QTIP) Trust Not Aggregated With Stock in Revocable

Trust.-Where decedent, who died Apr. 18, 1993 (valuation date),

was beneficiary of QTIP trust holding 27.8671 percent of X Corp.

shares and of revocable inter vivos trust (initially established with

deceased husband) also holding 27.8671 percent of X shares; on

estate tax return filed Jan. 18, 1994, petitioner estate claimed

blockage discounts, because of size of blocks, in valuing trust shares

under secs. 2033 and 2044, respectively; and in Jan. 15, 1997,

notice of deficiency Commissioner determined X shares held by two

trusts should be merged for valuation purposes, arguing that

decedent should be treated as owner of QTIP for valuation pur-

poses, Court determined (1) separate blocks of X stock in QTIP

trust and revocable trust should not be aggregated or merged for

estate tax valuation purposes, since neither sec. 2044 nor its legis-

lative history indicated QTIP should be treated as owned by second

spouse to die and aggregated with other fractional interests in same

property included in decedent's estate under sec. 2033, and (2) fair

market value of X stock. Estate of Mellinger v. Commissioner

EVIDENCE

Page

130

....

Deficiency Notice Failing To Disclose or Explain Denial of

Benefit-Community Income and Partial Relief of Spouse
From Liability-New Matter Requiring Presentation of Dif-
ferent Evidence.-Where, after H and W had filed timely joint
returns for 1990-91, H filed delinquent 1992 return as joint return;
Commissioner's bank deposits analysis indicated H had under-
reported business receipts for 1990-92; in deficiency notice for 1992,
Commissioner determined H's proper filing status was married fil-
ing separately but did not allocate one-half of H's 1992 income to
W pursuant to California community property law; and, on brief,
Commissioner relied exclusively on sec. 66(b) to justify denying
community property benefits to H, although deficiency notice made
no reference to community property law, sec. 66(b), or any facts to

Page

EVIDENCE-Continued

support Commissioner's denial of benefits, Court determined (1)

applicability of sec. 66(b) to deny H benefits of community property

law depended on evidence different from that necessary to decide

matters described in notice of deficiency; (2) sec. 7522 required defi-

ciency notice to describe basis for Commissioner's determination; (3)

under Rule 142(a) Commissioner's reliance on sec. 66(b) was new

matter on which Commissioner had burden of proof; (4) Commis-

sioner failed to meet burden; and (5) H was entitled to community

property law benefits for 1992. Shea v. Commissioner

EXEMPT ORGANIZATIONS

Rental of Mailing List-Royalty Income or Unrelated Busi-

ness Taxable Income (UBTI)-Taxability of Compensation of

List Broker and List Manager.-Where in 1991-93 petitioner

tax-exempt organization described under sec. 501(c)(4) maintained

supporter mailing list with professional computer service and

rented list to mailers through list manager and list brokers; in

accord with standard industry practice for typical mailing list

rental transaction, 10% management commission, 10% brokerage

commission, and computer charges incurred in producing copy of

rental list were subtracted by list manager from compensation paid

to petitioner for mailing list rental; petitioner did not report income

received from mailing list transactions; Commissioner contended

entire payment petitioner received from mailing list rental activi-

ties constituted UBTI subject to tax under sec. 511(a)(1), since peti-

tioner regularly carried on activity that was not substantially

and computer house were petitioner's agents; and petitioner argued

payments received for mailing list transactions were royalties

excluded from UBTI under sec. 512(b)(2), Court determined (1)

excepting brokerage fee portion, list rental income was royalty

excludable under sec. 512(b)(2) from UBTI; (2) brokerage activities

were not royalty-related activities, and (3) compensation received by

list manager (in its capacity as list broker) and list brokers was not

attributable to petitioner, since they were not acting as petitioner's

agents. Common Cause v. Commissioner

EXPENSES-TRADE OR BUSINESS

Judgment Award-Attorney's Fees and Court Costs Attrib-

utable to Recovery of Actual and Punitive Damages-
Deductibility as Business Expenses.-Where in 1992 petitioner
received judgment award from former employer for actual and puni-
tive damages, as well as interest and costs, in lawsuit for breach
of contract and conversion; on 1992 Schedule C, Profit or Loss From
Business, petitioner included actual damages, but not punitive
damages, from lawsuit recovery as income and deducted court costs
and attorney's fees as costs arising from petitioner's sole proprietor

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Reports of the Tax Court of the United States, 112. sējums