Installment Contract Servicing Business-Employee Sala-
ries and Benefits Directly Related to Acquisition of Con-
tracts-Private Offering Expenditures.-Where in 1993-94
petitioners were shareholders of cash method S corporation X that
acquired and serviced installment contracts that automobile dealers
had obtained from high credit risk individuals; X typically paid 65%
of contract face value in exchange for all principal and interest pay-
ments due from borrower; X's employees performed preacquisition
credit reviews in order to decide whether X should acquire contracts
and subsequently performed additional services in paying sellers of
acquired contracts; under sec. 162(a) X currently deducted (1)
employee salaries, benefits, and overhead (printing, telephone, com-
puter, rent, and utilities) relating to installment contract acquisi-
tions and (2) professional fees, commissions, and offering expendi-
tures relating to 1993 private placement offering of subordinated
asset notes and to 1994 offering abandoned before implementation;
and Commissioner determined all of X's payments for salaries,
benefits, and overhead related to acquisition of contracts were sec.
263(a) capital expenditures, as were offering expenditures related to
notes, Court determined, using acquisition test, (1) salaries and
benefits were capital expenditures, since these items were directly
related to anticipated acquisitions of assets with expected useful
lives exceeding 1 year; (2) overhead expenses were currently deduct-
ible under sec. 162(a), since they were not directly related to antici-
pated acquisitions and any future benefit X received was incidental
to payment of these expenses; (3) under sec. 165(a), portion of
capitalized salaries and benefits attributable to contracts X did not
acquire could be deducted in respective years when X ascertained
those contracts would not be acquired; (4) X was required to capital-
ize all offering expenses, since those payments were expected to
provide significant future benefits; and (5) under sec. 165(a), por-
tion of capitalized offering expenses attributable to abandoned offer-
ing could be deducted in 1994. Lychuk v. Commissioner
Noncompetition Agreement-Shareholder's Stock Redemp-
tion With Related 60-Month Noncompetition Agreement-
Applicability of Sec. 197 15-Year Amortization Period for
Acquisition of Interest in Trade or Business.-Where in 1994
petitioner automobile dealership corporation X redeemed 75% of its
outstanding stock from Y corporation, leaving individual A sole
owner of X; X simultaneously entered into noncompetition agree-
ment with Y and with B, principal involved in management of X
and Y, in which Y and B agreed not to compete with X for 60
months; in 1994-96, X was amortizing noncompetition agreement
over 15 years pursuant to sec. 179, but in 1999 X filed claim for
refund contending noncompetition agreement should be amortized
over its 60-month life, Court determined X was required to amortize
noncompetition agreement over 15 years, since agreement was
entered into in connection with X's redemption of it stock, and sec.
197 requires 15-year amortization of covenants not to compete
entered into in connection with direct or indirect acquisition of
interest in trade or business. Frontier Chevrolet Co. v. Commis-
sioner
Real Estate Developer-Alternative Cost Method-Esti-
mated Construction Costs and Future-Period Interest
Expenses Relating to Common Improvements.-Where in 1994
petitioners were shareholders of S corporation X that was real
estate developer of golf course residential community; in 1994, X
contracted to construct golf course with attendant clubhouse facili-
ties for Y corporation that sold club memberships; during construc-
tion, X put deed to club and golf course in escrow, and Y put mem-
bership fees in escrow pending transfer of deed from X to Y; on July
19, 1996, golf course and clubhouse opened, and deed was trans-
ferred out of escrow on Apr. 21, 1999, after settlement of lawsuit;
in calculating gain on sale of residential lots under alternative cost
method of Rev. Proc. 92-29, 1992-1 C.B. 748, X allocated to its
bases in lots sold (1) estimated construction costs relating to com-
mon improvements to development and (2) estimated future-period
interest expense relating to common improvements; and Commis-
sioner contended X had ownership interest in clubhouse during
construction period and through date of transfer of title in 1999
that disqualified X from using alternative cost method, Court deter-
mined, under alternative cost method of Rev. Proc. 92–29, (1) X
properly allocated to its bases in lots sold $3,707,662 in estimated
construction costs relating to common improvements, since X did
not have interest subject to recovery through depreciation in club-
house in construction period before it was placed in service on July
19, 1996, and then Y held benefits and burdens of ownership during
transition period; and (2) consistent with general economic perform-
ance rule of sec. 461(g) and (h), $5,861,595 in estimated, future-
period interest relating to common improvements was not allocable
to X's bases in lots sold. Hutchinson v. Commissioner
Shifting Burden to Commissioner-Taxpayer's Burden To
Introduce Credible Evidence-Commissioner's Burden of
BURDEN OF PROOF-Continued
Production Regarding Additions to Tax and Penalties.-
Where for petitioners' 1996-97 income tax returns, Commissioner
had determined deficiencies, late filing addition to tax, and
accuracy-related penalty; at trial petitioners sought deductions for
casualty losses, charitable contributions, unreimbursed employee
expenses, and Schedule C and E expenses neither claimed on
returns nor raised in notice of deficiency; and Commissioner argued
petitioners had failed to satisfy credible evidence requirement so as
to shift burden of proof to Commissioner under sec. 7491(a), Court
determined petitioners had failed to introduce credible evidence
necessary to shift burden of proof to Commissioner under sec.
7491(a); and Commissioner met burden of production under sec.
7491(c), making petitioners liable for sec. 6651(a)(1) addition to tax
for failure to file timely for 1996, since 1996 return was filed more
than 1 year late, and for sec. 6662(b) accuracy-related penalty for
1997, since petitioners' failure to keep adequate books or substan-
tiate properly items in question constituted negligence. Higbee v.
Commissioner
See also UNITED STATES TAX COURT.
Credit Against Income Tax for Uses of Gasoline and Spe-
cial Fuels-Fuels Not Used for Taxable Purposes-"One
Claim" Rule.-Where on consolidated income tax returns for
1988-92 petitioner claimed on attached Forms 4136 credit against
income tax for Federal excise taxes paid on fuels; in second amend-
ed petition petitioner claimed Commissioner erred by not allowing
additional fuel tax credits for vehicles that were not "highway use"
vehicles; and Commissioner argued petitioner was making second
claim that was barred under so-called one-claim rule of sec.
6427(1)(1), which petitioner argued was inapplicable, contending sec.
34 allowed additional credits, Court determined petitioner was not
barred by one-claim rule from obtaining fuel tax credits under sec.
34(a)(3), since sec. 6427(k)(3) excepted sec. 34 credits from limita-
tions of sec. 6427(i). FPL Group, Inc. & Subs. v. Commissioner .. 73
Foreign-Source Income-Puerto Rico and Possession Tax
Credit-"Active Conduct of a Trade or Business Within a
Possession" Requirement.-Where petitioner X's wholly owned
subsidiary Y had sec. 936(h)(3) “intangible property income" in Y's
taxable years ending Aug. 31, 1990 thorough 1992, that was attrib-
utable to sale of drug Avitene manufactured in Puerto Rico by unre-
lated company Z; on Dec. 18, 1987, Z agreed to sell equipment, tech-
nology, and other assets to X and Y and continue making Avitene,
primarily for sale by Y, with Z using Z's facility, Y's raw materials,
CREDITS AND EXEMPTIONS-Continued
and X's technology; under agreement, Z was paid fee equal to
manufacturing costs plus 10%; throughout relevant period, Y had
no employees and reported Avitene sales as primary source of
income (deducting from receipts amounts paid to X and Z for labor
they expended on Avitene's manufacture); on Y's 1992 income tax
return, Y claimed entitlement to sec. 936(a) Puerto Rico and posses-
sion tax credit, which Commissioner disallowed, contending Y failed
75% test of sec. 936(a)(2)(B) for derivation of gross income through
active conduct of trade or business within Puerto Rico for 3 years
ending Aug. 31, 1992, Court determined Y did not actively conduct
"a trade or business within a possession" as required by sec.
936(a)(2)(B), and Y did not participate regularly, continually, exten-
sively, and actively in management and operation of profit-moti-
vated activity in Puerto Rico, inasmuch as Z's manufacture of
Avitene for Y was not ministerial but required specialized skill and
expertise. MedChem (P.R.), Inc. v. Commissioner
Foreign Tax Credit-Characterization of Royalties Paid by
Foreign Parent Corporation to Domestic Subsidiary-Pas-
sive Income or General Limitation Income.-Where in 1989-
91 income tax returns petitioner characterized royalty payments
received from foreign parent corporation as sec. 904(d)(1)(I) general
limitation income for purposes of calculating foreign tax credit, and
Commissioner determined royalties were sec. 904(d)(1)(A) passive
income, Court determined that neither alone nor in combination did
"reserved" paragraph in reg. 1.904-5(i)(3), written statements of
Treasury officials, or Art. 24(3) of U.S.-France tax treaty constitute
exception to sec. 904(d) characterization of royalty income as pas-
sive, and Court granted summary judgment for Commissioner.
American Air Liquide, Inc. & Subs. v. Commissioner
Foreign Tax Credit-Foreign Tax Liabilities Previously
Deducted-Timeliness of Election on Amended Returns.-
Where on timely filed 1980-82 corporation income tax returns peti-
tioner X had deducted accrued foreign tax liabilities; on July 24,
1994, filed amended returns for 1980-82 electing under sec. 901(a)
to credit foreign tax liabilities (rather than to deduct them under
sec. 164(a)(3)) and on amended 1985 return claimed refund result-
ing from carryover of foreign tax credits to 1985; and Commissioner
disallowed refund claim, contending that change of deductions to
credits was untimely, Court determined under secs. 904 and 6511
that X's election was untimely, since 10-year period under sec.
901(a) to elect foreign tax credits for 1980-82 commenced on due
dates for returns. Chrysler Corp. v. Commissioner
Validity-Commissioner's Failure To Fill In "Last Day To
File a Petition With the United States Tax Court"-Cross-
Motions To Dismiss Filed 56 Days After Expiration of Sec.
DEFICIENCY NOTICE-Continued
6213(a) 90-Day Period.-Where Commissioner sent notice of defi-
ciency for 1995 dated July 20, 1999, to petitioner's last known
address and parties agreed petitioner received notice on or about
July 23, 1999; "Last Day To File a Petition With the United States
Tax Court" was left blank; petition was filed 56 days after expira-
tion of sec. 6213(a) 90-day period; and parties filed cross-motions to
dismiss case as untimely, Court determined (1) Commissioner's fail-
ure to fill in date in accordance with Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3563(a), 112 Stat. 767, did not invalidate notice of deficiency; and
(2) petition was not rendered timely by operation of final sentence
of sec. 6213(a), which could not reasonably be construed to grant
unlimited filing period in event of absence of stamped date.
Rochelle v. Commissioner
See EXPENSES-TRADE OR BUSINESS.
Gross Estate-Includability of State Lottery Prize Install-
ments Owed to Decedent-Valuation as Annuity Under Sec.
7520 Actuarial Tables.-Where in 1992 decedent and former
spouse had won State lottery prize payable in 20 annual install-
ments; decedent died intestate on June 4, 1994; on estate tax
return, remaining 18 payments were characterized as "unsecured
debt obligation due from the State of Connecticut arising from win-
ning the Connecticut Lottery" with present value of $2,603.661.02;
estate contended stream of lottery payments was not annuity
required to be valued under sec. 7520 actuarial tables; and
Commissioner determined present value of payments should have
been reported as $3,528,058.22 under sec. 7520 tables, Court deter-
mined lottery payments were includable in decedent's gross estate
under sec. 2033 and constituted annuity that was required to be
valued for estate tax purposes under sec. 7520 actuarial tables.
Estate of Gribauskas v. Commissioner
EXPENSES-TRADE OR BUSINESS
See also AMORTIZATION.
Bank Acquiring Assets and Deposit Liabilities of Savings
Institution in Tit. 12 Conversion Transaction-Current
Deductibility of Exit and Entrance Fees Paid to Federal
Deposit Insurance Corporation (FDIC)-No Significant
Future Benefits.-Where in taxable years ending Oct. 31, 1993–
95, petitioner bank holding company X deducted on consolidated
income tax returns required exit and entrance fees subsidiary bank
|