Discharge of Indebtedness-Insolvency Exclusion From
Income "Contingent" Liabilities.-Where petitioners had
personally guaranteed promissory note given to bank by their
wholly owned corporation X; in 1991, X and bank entered struc-
tured workout agreement under which bank ultimately released X
from liability as maker of note and petitioners as guarantors with-
out bank's making formal request or demand for payment; in 1991,
State issued "Notice of Sales and Use Tax Due" to X for taxes, pen-
alties, and interest due, although no assessment was made before
tax was abated because of X's successful protest; and on 1991
income tax return, petitioners excluded under sec. 108(a)(1)(B) their
distributive share of certain partnership income realized from dis-
charge of indebtedness on Sept. 1, 1991, contending their contin-
gent liabilities for guaranties and State taxes rendered them insol-
vent; and Commissioner contended petitioners' guaranties and
State tax exposure were contingent liabilities and not liabilities on
Aug. 31, 1991, measurement date, Court determined (1) for sec.
108(d)(3) purposes, "liabilities" required petitioners to prove they
would be required to pay amount of either obligation claimed as
liability; (2) petitioners failed to prove they would be called upon to
pay any amount with respect to either obligation claimed as liabil-
ity; (3) petitioners failed to prove their liabilities exceeded fair mar-
ket value of their assets on Aug. 31, 1991, measurement date; and
(4) petitioners were not entitled to exclude any amount under sec.
108(a)(1)(B), since they failed to qualify for insolvency exception.
Merkel v. Commissioner
Consolidated Returns of Affiliated Group of Life and
Nonlife Insurance Companies-Amount of Net Operating
Losses (NOL) of Nonlife Insurance Companies Usable To
Reduce Life Insurance Company Income Single Aggregate
Entity or Separate Entity Treatment of Members of Recently
Acquired Nonlife Insurance Company Affiliated Group.—
Where in 1980-85 petitioners were life and nonlife insurance
companies (life companies and nonlife companies) that elected
under sec. 1504(c)(2) to file consolidated income tax returns;
petitioners had merged and expanded greatly during early 1980's,
acquiring groups of life companies and nonlife companies; in cal-
culating amount of nonlife company losses allowed by sec. 1503(c)(2)
to reduce life company income, regulations under secs. 1502 and
1503 treated as separate entity each nonlife company member of
consolidated group, and consolidated NOL of all nonlife companies
in consolidated return was required to be reduced by "ineligible
NOL" of each ineligible nonlife company member of consolidated
group; ineligible NOL came from companies that had not been part
of same affiliated group for 5 years immediately preceding filing
consolidated income tax return; regulations did not address nonlife
INSURANCE COMPANIES-Continued
companies that (prior to acquisition) had filed consolidated income
tax return as part of single, aggregate group of companies; petition-
ers, in calculating NOL under sec. 1503(c)(1) and (2), aggregated
losses of nonlife companies under single entity method and applied
them against income of affiliated life insurance company; included
in petitioners' aggregate losses were losses of ineligible nonlife
companies that constituted part of previously affiliated and consoli-
dated group; and Commissioner contended separate entity method
of reg. 1.1502-47(m)(3)(vi) limited amount of nonlife company losses
that could be used to reduce income of life companies, Court deter-
mined reg. 1.1502–47(m)(3)(vi) applied to companies that were
members of newly acquired groups for purposes of calculating
amount of losses of nonlife companies that could be used to reduce
life company income, since challenged regulation was legislative in
nature and Commissioner's interpretation was consistent with sec.
1503(c)(2) and its legislative purpose to restrict use of ineligible
nonlife company losses against life company income. Connecticut
Gen. Life Ins. Co. v. Commissioner
Deductions-Indebtedness to Former Spouse Incident to
Divorce Allocation to Assets Received.-Where, upon 1987
divorce, petitioner H received from former W stock plus her interest
in land and bottling plant and marital residence and agreed to pay
W $625,000 with 10% interest over 10 years; H secured promissory
note to W with mortgage on residence; on income tax returns for
1992 and 1993 H deducted amounts of "investment interest" pay-
ments to W; and Commissioner disallowed deductions as personal
interest under sec. 163(h)(1), arguing sec. 1041, providing transfers
incident to divorce are treated as gifts, prevented allocation of debt
to property so acquired, Court determined sec. 1041 did not require
characterization of H's payments as personal interest, since history
of amendments indicated no such congressional intent; portion of
H's payments was qualified residence interest; and remaining
interest was to be allocated to H's indebtedness on other assets
received in property settlement, in accordance with stipulated com-
putation to be worked out by parties. Seymour v. Commissioner.. 279
Necessity of Closed and Completed Transaction-Denial of
Rezoning Application and Designation as Federal Wetlands
of Land Purchased for Development-Alleged Involuntary
Conversion.-Where in 1987 partnership bought unimproved land
for residential redevelopment; in 1989, local government denied
partnership's rezoning application, and new Federal manual revised
procedures guidelines under Clean Water Act of 1977, Pub. L. 95-
217, 91 Stat. 1566, resulting in nearly 75% of partnership's land's
being reclassified as wetlands under Federal policy that required
partnership to obtain permit before beginning residential project on
wetland portion of property; partnership did not apply for wetland
permit until 1991, and application was later administratively with-
drawn; and partnership claimed ordinary loss deduction under secs.
165 and 1231(a) on 1989 income tax return for decrease in property
value for involuntary conversion attributable to newly issued Fed-
eral wetland development restrictions, Court determined partner-
ship was not entitled to sec. 165 loss deduction, since no realization
event fixed decrease in property value in closed and completed
transaction. Lakewood Associates v. Commissioner
PARTNERSHIPS
See DEDUCTIONS.
Basis-Adjustment on Sale of Partnership Interest in
Professional Football Franchise-Computation of Amortiz-
able Basis in Player Contracts.-Where in 1984 majority
interest was sold in partnership that owned and operated profes-
sional football franchise; sale constituted constructive termination
under sec. 708(b), and partnership claimed increased amortization
deductions for 1989 and 1990 attributable to stepped-up basis (to
fair market value) in player contracts; partnership did not elect
optional adjustment to basis under sec. 754; and Commissioner con-
tended (1) sec. 1056 limited basis adjustment of player contracts or
(2) alternatively, partnership's basis was otherwise incorrectly com-
puted, Court determined (1) sec. 1056 was inapplicable to partner-
ship transaction at issue, since there was no "sale or exchange" of
sports franchise or player contracts, and (2) mandatory basis
adjustment of sec. 732(d) applied, since Commissioner failed to
carry burden of proving that fair market value of player contracts
was other amount used by partnership, and partnership correctly
computed basis in player contracts. P.D.B. Sports, Ltd. v.
Commissioner
Collateral Estoppel-Issue Preclusion Raised Sua Sponte
by Court-Interest Paid to Bank Account Controlled by Peti-
tioner. Where income tax deficiency notice for 1991 included in
petitioner's income "interest" payments to partnership bank account
and $25,000 deposited in petitioner's bank account that petitioner
contended was reimbursement of legal fees paid on behalf of cor-
poration, and Commissioner contended petitioner was collaterally
estopped by earlier decision (Monahan v. Commissioner, T.C.
Memo. 1994-201) from denying dominion and control over partner-
ship bank account, Court determined (1) it had authority to raise
issue preclusion sua sponte, notwithstanding Commissioner's
apparent consent to relitigation of pre-1991 issues; (2) petitioner
was collaterally estopped from relitigating 1991 partnership control
UNITED STATES TAX COURT-Continued
issue (Peck v. Commissioner, 90 T.C. 162, followed); (3) petitioner
was taxable on "interest" deposited in partnership bank account,
since petitioner controlled partnership bank account and benefited
from funds; (4) petitioner failed to carry burden of proving that
$25,000 was reimbursement for fees paid on corporation's behalf
and not taxable income; and (5) petitioner was liable for sec.
6662(a) accuracy-related penalty. Monahan v. Commissioner
Jurisdiction-Petition for Review of Denial of Requests for Abatement of Interest-Requests Denied Before July 30, 1996, Enactment Date of Sec. 6404(g).—Where Commissioner's Appeals Office issued final determination letter on Jan. 26, 1996, disallowing petitioners' requests for abatement of interest for taxable years 1979-84 (except from Mar. 24, 1993, to Mar. 14, 1994); on Sept. 23, 1996, petitioners filed petition pursuant to sec. 6404(g) seeking review of Commissioner's denial of requests for abatement of interest; and Commissioner moved for dismissal for lack of jurisdiction on grounds that (1) petitioners' abatement requests were submitted prior to effective date of sec. 6404(g) or (2) petition was not timely filed within 180 days of mailing of final notice disallowing claim, Court determined that under Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 302(b), 110 Stat. 1452 (1996), sec. 6404(g) was inapplicable to requests for abatement made and denied prior to July 30, 1996, enactment of statute (and consequently there was no 180-day period following date of mailing of final determination not to abate interest) and granted Commissioner's motion to dismiss for lack of jurisdiction. White v. Commissioner
Jurisdiction-Petition for Review of Denial of Requests for Abatement of Interest-Requests Pending After July 30, 1996, Enactment of Sec. 6404(g).—Where, prior to July 30, 1996, petitioner H submitted requests for abatement of interest for 198587, and after July 30, 1996, Commissioner sent notice of final disallowance of requests; on Feb. 5, 1997, petitioners H and W filed petition under sec. 6404(g) for review of Commissioner's denial of requests; and Commissioner moved for dismissal for lack of jurisdiction, Court determined jurisdiction existed to review denial of H's requests, since they were pending after July 30, 1996, enactment of sec. 6406(g) in Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 302, 110 Stat. 1457 (1996), but Court lacked jurisdiction as to W, since she did not file request for abatement and no notice of final determination denying request had been issued to her. Banat v. Commissioner
Motion for Litigation Costs-Attorney's or Accountant's Fees-Limitation on Amount Awarded.—Where petitioner filed motion for award of litigation costs after Commissioner conceded deficiencies determined for 1990-91; Commissioner also conceded deficiencies determined against petitioner for 1990-92 and that petitioner satisfied all requirements for award of reasonable litiga
UNITED STATES TAX COURT-Continued
tion costs under sec. 7430, but Commissioner argued, inter alia, attorney's fees of $250 per hour and accountant's fees of $170 and $175 per hour were excessive, Court determined (1) petitioner failed to establish existence of special factor that would justify award of attorney's fees exceeding $75-per-hour statutory cap (adjusted for inflation) of sec. 7430(c)(1)(B)(iii), and (2) petitioner's accountant was also limited to $75-per-hour rate, since sec. 7430(c)(3) provided that fees for services of individual (attorney or otherwise) authorized to practice before IRS or Tax Court should be treated as fees for services of attorney for purposes of sec. 7430(c)(1) and (2). Cozean v. Commissioner
Overpayment-Tax Withheld From Wages by EmployerExpiration of Time for Assessment of Tax.-Where in 1984 tax return petitioner had claimed refund of entire amount of employerwithheld taxes; no 1984 tax was ever assessed or refunded; in Bachner v. Commissioner, 81 F.3d 1274, where Commissioner conceded validity of petitioner's altered 1984 income tax return and 3year period of limitations for 1984 had expired, Court of Appeals remanded to Tax Court on issue whether petitioner overpaid 1984 income tax; and petitioner contended he was entitled to refund of all withheld tax for 1984 because Commissioner had failed to assess within statutory period, Court determined overpayment was limited to excess of tax paid over amount that might have been properly assessed and demanded even though assessment was barred by statute of limitations (Lewis v. Reynolds, 284 U.S. 281, followed), and amount of overpayment was $95.95 plus interest (withholding of $4,396.95 minus total tax liability of $4,301). Bachner v. Commissioner
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