Reports of the Tax Court of the United States

RETURNS-Continued

classification, and determined statute was not unconstitutional con-
sidering strong presumption of constitutionality in which revenue
statute is clothed and deference that judiciary must generally show
to legislative choices. John A. Bayless‒‒‒‒

Joint-Relief From Liability-Innocent Spouse.-W was entitled to
sec. 6013(e) relief from liability for deficiencies in 1961 and 1962 to
extent that liability related to omissions from gross income attributable
to H, since W did not benefit significantly from omitted items on
evidence showing that W did not receive even ordinary support from H
in such years when she provided support for herself and their children
and that value of property transferred under divorce decree was not
unusual, but W was not entitled to relief from liability (1) attributable
to deductions disallowed under sec. 482, since W, not having disputed
correctness of deficiency determinations, was precluded from arguing
such items should be classified as reallocations of gross income, or
(2) attributable to W's share of income from community property
for which sec. 6013(e) provides no relief. Relief was not available for
1960, since Court sustained Commissioner's determination that omis-
sions from gross income attributable to H were less than 25% of gross
income stated on return, W having failed to prove that certain items
which Commissioner classified as gross income from community prop-
erty resulted from performance of substantial services by H. Jennie
Allen

Joint-Relief from Liability—Innocent Spouse.-Where H embezzled
funds from X and Y banks in 1966 and 1967, W was not entitled to
benefit of sec. 6013(e) in 1966, since W was not called as witness to
testify as to whether she knew of 1966 embezzlements, there was no
testimony or other evidence of record on which Court could base
finding that she did not know of them, and there was no showing that
W did not benefit from misappropriations and no evidence revealing
what was done with any of embezzlements from X bank except
$58,250 downpayment for Y stock in 1967. Blaine S. Fox-.
RULES

Rule 121(b)-Motion for Summary Judgment-Collateral Estoppel.-
Court denied Commissioner's motion for summary judgment under
Rule 121(b), which he based on ground that petitioner was collaterally
estopped from litigating deficiencies determined for 1968, 1969, and
1971 because controlling facts and law were identical to those liti-
gated for 1967 deficiency, since Commissioner failed to show absence
of genuine issue as to any material facts in that petitioner's profit-
seeking intent in making gambling trips to Las Vegas, for which he
claimed deductible gambling expense under sec. 212(1), was in issue
for taxable years and could not be determined without trial. James T.
Shiosaki

Rule 70(a)(1)-Motion for Protective Order-Written Interrogatories.-
Commissioner's motion for protective order under Rule 103 (a) (2),
to avoid answering written interrogatories served more than 30 days
after joinder of issue but before any informal consultation or com-
munication between parties, was granted for reasonable period of time
with direction that parties attempt to attain discovery objectives
through informal consultation or communication, since petitioners
failed to comply with letter and spirit of discovery rules under Rule
70(a) (1) which envisions use of discovery procedures only after in-
formal efforts have been made to obtain needed information volun-
tarily, and recently adopted discovery procedures were not intended
to weaken stipulation process. Branerton Corp-----
SELF-EMPLOYMENT TAX

Limited Partner-Applicability.-Limited partner's distributive share
of partnership income constituted "net earnings from self-employment"
subject to tax under sec. 1402(a) and reg., contrary to his contention
that such income was excluded as passive income because he con-
tributed no services, since statute specifically defined phrase to include
partnership income without making any distinction between general

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704

861

691

SELF-EMPLOYMENT TAX-Continued

and limited partners, which was clearly in keeping with legislative
intent, and reg. accurately reflected legislative intent and was valid.
Estate of William J. Ellsasser___

SMALL BUSINESS CORPORATIONS

See also CREDITS AND EXEMPTIONS, EXPENSES-TRADE OR
BUSINESS, and PARTNERSHIPS.

Election-Timeliness-Net Operating Loss Deduction.-New small
business corporation X, which borrowed $20,000, received assignment
of lease of business premises for nightclub operation, and expended
some of borrowed funds for remodeling premises and other purposes,
and more than 1 month later filed its election under sec. 1372(a) to be
taxed as small business corporation for fiscal Nov. 30, 1965, did not
timely file election within sec. 1372(c) (1) and regs., so that net operat-
ing loss was not deductible by shareholder-petitioners, since election
was required to be made not later than 1st month of taxable year,
which was to begin for these purposes when X had shareholders,
acquired assets, or began doing business, and here taxable year began
when it acquired assets by borrowing money or at least when it acquired
lease and engaged in other transactions prior to critical date. Nick A.
Artukovich

Family Stock Transaction-Validity of Gifts to Children-Relitigation
of Issue in Subsequent Years.-Court followed decision in Michael F.
Beirne, 52 T.C. 210, that gifts of stock in petitioner's subch. S corpora-
tion to his children were not bona fide and that he rather than children
was taxable on corporate income for 1960-62, and determined that in
taxable years 1965-67 petitioner continued to hold complete control
over children's stock, gifts lacked economic substance, and petitioner
was to be treated as owner of stock during such years. Michael F.
Beirne

TRANSFEREES

See also DEFICIENCY NOTICE.

Corporate Debtor/Shareholder-Liability Under California Law-Con-
sideration.-50% shareholder/director who had received substantial
corporate advances, herein determined to be bona fide loans, was not
liable under sec. 6901(a) as transferee for corporate tax obligations,
since Court determined in light of case law that bona fide enforceable
promise to pay can be fair consideration under California Uniform
Fraudulent Conveyance Act, and Commissioner failed to show share-
holder's promises were of insufficient value when given. James K.
Pierce

Stockholder of Liquidated Corporation-Assumption of Corporation's
Liability by Third Party-State Law.-Where X corporation sold its
assets to Z in October 1966 for cash and other consideration, including
Z's agreement to pay X's income tax liabilities, and most of cash pro-
ceeds of sale were distributed to petitioner shareholder A upon X's
liquidation in November 1966, under State law and in light of case
law A as distributee of X's assets within meaning of sec. 6901 (h) was
liable as transferee for income taxes owing at time of X's liquidation,
though not then determined or assessed, and fact that Commissioner
did not seek to hold Z liable for X's taxes did not exonerate A; but
since under State law transferee is not liable for indebtedness created
after transfer, A was not liable for income taxes which became due as
result of postliquidation refunds based on tentative allowance of net op-
erating loss carryback adjustments to prior years. Morris Alexander_
UNITED STATES TAX COURT

Amended Answer-Additional Arguments-Burden of Proof.-Addi-
tional arguments raised by Commissioner in his amended answer did
not constitute new matter within former Rule 32, so as to shift burden
of proof to Commissioner on those arguments, since deficiency notice
informed W of Commissioner's position that sec. 1033 nonrecognition-
of-gain provisions did not apply to sale proceeds of deceased H's
property, which required W to prove H had met all prerequisites of

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100

268

424

278

UNITED STATES TAX COURT-Continued

sec. 1033, and arguments raised involved same section, were consistent
with original determination, and did not affect deficiency amount.
Estate of George W. Jayne‒‒‒‒

Constitutionally Deficient Evidence-Presumption of Correctness De-
stroyed-Burden of Going Forward With Proof.-Where Commissioner's
deficiency determination was based entirely on evidence previously
found to have been illegally seized in violation of 4th amendment and
petitioner's showing of such constitutional deficiency established
prima facie case which destroyed presumption of correctness normally
attached to such determination, Commissioner's determination could
not be sustained, he having refused to present independent, constitu-
tionally untainted evidence and declined to go forward with proof as
so ordered by Court. Efrain T. Suarez___

Deficiency Notice-Limitations-Statutory Interpretation.-Court re-
jected petitioner corporation's contention that deficiency notice mailed
Sept. 12, 1972, based on 1968 return filed Sept. 12, 1969, did not suspend
running of limitations period for assessment because it could not take
effect until Sept. 13, 1972, under provision of sec. 6503 (a) (1) that
running of period is suspended "after" mailing of notice which means
"day after," since petitioner's interpretation was contrary to well-
established case law and long-standing regulation; moreover, statute
did not require uniform interpretation of term "after" with term as
used in other Code sections whose contexts varied in intent and purpose,
and under petitioner's interpretation there would be 1-day gap in sus-
pension period during which assessment could be made, contrary to
statutory purpose. Whirlpool Corp‒‒‒‒‒

Jurisdiction-Untimely Petition-Postmark on Deficiency Notice As
Mailing Date.-Deficiency notice which was deposited by Commissioner
in certified mail Mar. 29, 1973, but was contained in envelope post-
marked Mar. 31, 1973, was mailed Mar. 31, 1973, within intendment of
sec. 6213(a), so that petition filed with Court June 28, 1973, was timely
filed on 89th day and Commissioner's motion to dismiss for lack of
jurisdiction was denied. Duane M. Traxler----

Lessee's Payment-Lease Modification-Reconsideration on Remand
of Taxability.-On remand, for Court to reconsider its determination
that payment received by lessor petitioner for updating restoration
clause in lease of its theater did not constitute amount realized from
sale or exchange of business property within sec. 1231 for capital
gains treatment, but was compensation taxable as ordinary income,
Court reaffirmed its opinion. Sirbo Holdings, Inc----

Motion for Decision of No Deficiency in Estate Tax-Earlier Denial of
Motion to File Late Answer-Rule 18(a).—Court denied petitioner's mo-
tion for decision of no deficiency in estate tax and determined that cir-
cumstances were insufficient to warrant application of Rule 18(a), since
petitioner failed to demonstrate it suffered substantial prejudice or
hardship because of Commissioner's unjustified 13-day delay in filing
answer in disregard of direct Court order, and Court's earlier denial of
Commissioner's motion to file late answer effectively prevented him
from bringing into issue any affirmative allegations, including fraud
additions, and was effective sanction on facts herein. Clark Tank Lines
Co., an unreported Memorandum Sur Order filed July 18, 1972, dis-
tinguished. Estate of Helen Moore Quirk_----

Motion to Reconsider Opinion-Reversal of Case Relied On-Payment
for Insider's Profit.-Court denied Commissioner's motion for recon-
sideration of opinion herein, notwithstanding reversal of Anderson by
7th Circuit to which appeal herein would not lie, and reaffirmed holding
that payment made to MGM by petitioner, after SEC indicated he
might be liable for insider's profit within sec. 16(b) of Securities Ex-
change A, was deductible under particular circumstances herein as
sec. 162 ordinary and necessary business expense made to protect peti-
tioner's business reputation and to avoid delay in issuance of MGM
proxy in his capacity as director and not as shareholder. Nathan
Cummings

UNITED STATES TAX COURT-Continued

Motion to Release Assets to Pay Legal Fees-Jeopardy Assessment-
Deficiency Notice.-Petitioners' motions for release of assets from lien of
jeopardy assessments in order to pay legal and accounting fees, to have
deficiency notices declared null and void, and for other relief were
denied, considering inter alia (1) under case law sec. 6861(a) jeopardy
assessment was clearly constitutional, and on record petitioners did
not make showing "that under no circumstances could the Government
ultimately prevail" required for Court to examine methods and reasons
behind jeopardy assessment, (2) under case law courts have refused to
hold deficiency notices null and void, and circumstances herein did not
justify shifting burden of proof to Commissioner as contended by
petitioners, and (3) as to payment of counsel fees, the most a tax-
payer is entitled to is post-trial determination as to deprivation of any
constitutional right of representation, and no action was warranted
since petitioners had legal representation and uncovered outside re-
sources. Human Engineering Institute-----

Motion to Withdraw Shareholder's Corporate Tax Rate Election Con-
ditionally Made After Disposition of Substantive Issues-Controlled
Foreign Corporation.-Petitioners' motion to withdraw conditionally
sec. 962 election for taxable year 1963 after disposition of substantive
issues by this Court finding taxable income to be less than amount
which would make election advantageous, but to reinstate such election
if, in event of appeal, appeals court should determine taxable income
in excess of present disadvantageous amount, was denied, since under
case law sec. 962 is elective and does not operate automatically when-
ever it benefits taxpayer and petitioners could not claim mistake of
fact as basis for election. Albert L. Dougherty____
VALUATION

Livros

Reports of the Tax Court of the United States, Volume 61