assets in Alaska and Washington with aggregate fair market value
of $875,251 and liabilities totaling $515,930; included in assets was
Alaska limited entry fishing permit with fair market value of
$393,400; Commissioner determined deficiency and sec. 6662(a)
accuracy-related penalty resulting from foreclosure sale and relief of
debt; and, in making sec. 108(d)(3) insolvency calculation, petition-
ers excluded certain assets they contended were exempt from credi-
tor claims under State law, relying on insolvency exception of sec.
108(a)(1)(B), Court determined (1) "assets" as used in sec. 108(d)(3)
definition of "insolvent" includes assets exempt from creditors
under State law, and consequently petitioners were required to
include DOI income from foreclosure sale in gross income, since
they were not insolvent under sec. 108(d)(3); and (2) petitioners
were liable for sec. 6662(a) accuracy-related penalty. Carlson v.
Commissioner
Discharge of Indebtedness-Net Recovery Buyout Recap-
ture Agreement on Farmers Home Administration (FmHA)
Mortgage Loan-Accuracy-Related Penalty.-Where on 1996
joint income tax return petitioners did not report discharge of
indebtedness income arising from refinancing arrangement with
FmHA for agricultural property subject to outstanding mortgages
held by FmHA; under arrangement, (1) petitioners obtained third-
party loan and paid FmHA net recovery value of property, (2)
FmHA wrote off remaining loan balance, and (3) petitioners entered
into net recovery buyout recapture agreement with FmHA to repay
discharged amounts if they disposed of land within 10 years; and
petitioners did not report as income Social Security benefits
received, Court determined petitioners were required by sec.
61(a)(12) to recognize discharge of indebtedness income, since
obligation to pay any further amount to FmHA was totally within
their control; under sec. 86(a)(2), petitioners were liable to pay tax
on 85% of Social Security benefits received in 1996; and petitioners
were liable for sec. 6662(a) accuracy-related penalty for substantial
understatement of tax, since 1996 tax return reported zero liability
and disclosed neither discharge of indebtedness income nor Social
Security payments. Jelle v. Commissioner
Gross Income-Annuities-Taxpayer's Inflation Adjust-
ment to Basis in Retirement Annuity.-Where in 1996 income
tax return petitioner retired annuitant reported taxable income
from qualified sec. 401(a) defined benefit pension plan after adjust-
ing basis in retirement annuity to account for inflation between
date of petitioner's voluntary contributions to plan and starting
date of annuity and then further adjusted basis as of retirement
date to account for expected inflation over actuarial life; and
Commissioner calculated taxable portion of petitioner's pension
income under exclusion ratio of reg. 1.72-4 without adjustment to
basis for inflation, Court determined petitioner's basis in retirement
annuity could not be adjusted to account for inflation for purposes
of calculating amount of pension annuity that was subject to tax.
Nordtvedt v. Commissioner
Election for Relief From Joint and Several Liability-
Request for Leave To Withdraw Sec. 6015 Election Without
Prejudice-Eligibility for Relief.-Where in 1991-93 petitioners
filed joint income tax returns that were subject of T.C. Memo.
2000-128; Court reserved for development of factual record issue of
W's posttrial claim on brief for relief from joint and several liability
under sec. 6015(b) and (c); subsequently W requested leave to with-
draw, without prejudice, elections for relief under sec. 6015(b) and
(c) and presented no additional evidence; and Commissioner con-
tended W should not be permitted to withdraw elections and was
not entitled to relief, Court denied W's request to withdraw without
prejudice issue of qualification for relief under sec. 6015(b) and (c),
since sec. 6015(g)(2) prescribes res judicata effect of final decision
in instant case and consequently precludes W's election of relief at
some later time, and Court determined W did not qualify for relief
under sec. 6015(b) show that she met requirements of sec.
6015(c)(3)(A)(i). Vetrano v. Commissioner
Relief From Joint Liability Under Sec. 6015(c)-Disallowed
Deduction as Item Giving Rise to Deficiency-Commis-
sioner's Burden of Showing W's Actual Knowledge of Inter-
venor H's Lack of Profit Objective.-Where in 1993 joint income
tax return H and W claimed loss from H's cattle activity; in May
1995, H and W divorced; on Dec. 23, 1996, Commissioner issued
separate notices of deficiency to H and W disallowing loss, contend-
ing activity was not engaged in for profit under sec. 183; W filed
petition but did not challenge disallowed loss, claiming entitlement
only to relief from joint liability under sec. 6013(e), which was
repealed and retroactively replaced by sec. 6015; H did not file peti-
tion but intervened in instant case after Commissioner had
assessed deficiency against H (see King v. Commissioner, 115 T.C.
118) and objected to W's being relieved of liability; and Commis-
sioner asserted W was not entitled to relief under sec. 6015(b) or
(c), contending W had actual knowledge of item giving rise to defi-
ciency, Court determined (1) W met all requirements for sec.
6015(c) relief from tax liability unless Commissioner demonstrated
W had actual knowledge of item giving rise to deficiency at time of
signing return; (2) in context of disallowed deduction, sec.
6015(c)(3)(C) requires Commissioner to prove W's actual knowledge
of factual circumstances that made item unallowable as deduction;
(3) in instant case, factual basis for disallowance of deduction was
H's lack of required profit objective under sec. 183; (4) Commis-
sioner did not prove W knew that H did not have primary objective
of making profit; and (5) W was entitled under sec. 6015(c) to relief
from tax liability arising from activity solely attributable to H.
King v. Commissioner
Separate Liability Election Under Sec. 6015(c)(3)(C) —
Actual Knowledge of Item Giving Rise to Deficiency-
Commissioner's Burden of Proof.-Where in 1994-95 petition-
ers H & W signed and filed joint income tax returns prepared by
W that did not report W's embezzlement income; H claimed relief
from joint and several liability under sec. 6015(c)(3)(C) separate
liability election; and Commissioner contended H failed to meet lack
of actual knowledge requirement, Court determined
6015(c)(3)(C) shifted burden to Commissioner to prove by prepon-
derance of evidence H's actual knowledge of item giving rise to defi-
ciency, not merely what reasonable person would know; and H
qualified for relief under sec. 6015(c) with respect to funds W
embezzled, since Commissioner failed to satisfy burden. Culver v.
Commissioner
6-Year Limitation Period for Substantial Omission of
Income-Partners' Distributive Share of Second-Tier Part-
nerships' Gross Income-"Gross Income Stated in the
Return" Interpreted.-Where petitioners' 1985 joint income tax
returns showed ordinary losses from several partnerships identified
by name, address, and EIN; some identified partnerships (first tier)
were themselves partners in second-tier partnerships; after
Commissioner determined income tax deficiencies for 1985, parties
stipulated that sec. 6501(a) 3-year limitation period had expired,
but Commissioner contended that sec. 6501(e)(1)(A) 6-year limita-
tion period applied because petitioners had omitted more than 25%
of "amount of gross income stated in the return"; and petitioners
argued 6-year limitation period was inapplicable because informa-
tion returns of first-tier partnerships should be treated as disclosing
respective shares of gross incomes set forth on information returns
of second-tier partnerships, Court determined finding "amount of
gross income stated in the return" (denominator in 25% test for
extended limitations period for sec. 6501(e)(1)(A)) purposes)
required tracking gross income through second-tier partnerships'
information returns, since second-tier partnerships' information
returns were treated as adjuncts to, and parts of, first-tier partner-
ships' information returns, which in turn were treated as adjuncts
to, and parts of, petitioners' tax returns. Harlan v. Commissioner
Proceeding for Determination of Employment Status-
Limitation on Assessment-Fraud.-Where petitioner, who had
filed sec. 7436 petition contesting Commissioner's determination
regarding worker classification of individuals who had performed
services for petitioner's sole proprietorship, contended expiration of
sec. 6501(a) 3-year period of limitations barred assessment of addi-
tional employment tax liability; and Commissioner argued sec.
6501(c)(1) period of limitations remained open because petitioner's
employment tax returns for 1992 were false and fraudulent with
intent to evade tax, Court determined (1) elements of fraud for
employment tax purposes are same as those for income, estate, and
gift tax; (2) petitioner did not commit fraud; and (3) general 3-year
period of limitations under sec. 6501(a) barred Commissioner from
assessing additional employment taxes for periods at issue. Neely
v. Commissioner
PARTNERSHIPS
See also LIMITATIONS.
Partner's Bankruptcy-Allocation of Distributive Shares
Between Bankruptcy Estate and Bankrupt-"Partnership
Item" Interpreted.-Where in jointly filed income tax returns for
1991-94, petitioners claimed net operating loss (NOL) carryovers
from H's 1990 income tax return, on which H had claimed status
of married person filing separately; H's 1990 return included H's
distributive shares of interests in several calendar year partner-
ships, portions of which were attributable to period before H had
filed ch. 7 bankruptcy petition on July 5, 1990 (prepetition losses);
remainder of distributive shares was reported by H's bankruptcy
estate; no notice of final partnership administrative adjustment
(FPAA) under sec. 6226 had been issued to partnerships for 1990;
and Commissioner disallowed portions of NOL carryovers attrib-
utable to prepetition losses, contending prepetition losses belonged
to bankruptcy estate, not to H, Court determined (1) no FPAA was
necessary because manner of allocating distributive shares of part-
ner in bankruptcy between partner and bankruptcy estate was not
sec. 6231(a)(3) "partnership item"; and (2) prepetition partnership
losses were reportable entirely by bankruptcy estate under sec.
706(a), since H did not have sec. 706(d)(1) "change in interest" as
result of transfer of assets to bankruptcy estate, which held bene-
ficial ownership of partnership interests at close of partnership
years; and (3) Commissioner properly disallowed NOL carryovers
for petitioners' taxable years 1991-94 to extent NOL carryovers
were attributable to prepetition partnership losses. Katz v.
Election of S Corporation Status-Pre-Election Sale of
Assets With Accrued Gain-Applicability of Transition Rule
of Tax Reform Act of 1986.-Where petitioner single-shareholder
corporation had filed income tax returns as C corporation from 1977
incorporation until making valid sec. 1361(a) election to be S cor-
poration in 1988; petitioner revoked election in 1989, reverting to
C corporation status, but again elected S corporation status in 1994;
in 1994-96 tax years, petitioner sold assets acquired before 1988
that had unrealized gain and earnings and profits that accrued dur-
ing earlier C corporation period; Commissioner determined income
tax deficiencies under sec. 1374 for petitioner's 1994-96 years
attributable to petitioner's failure to recognize built-in gain; and
petitioner contended special transition rule of Tax Reform Act of
1986, Pub. L. 99-514, sec. 633(d), 100 Stat. 2278, applied because
it elected S status before Jan. 1, 1989, Court determined transition
rule became inapplicable when petitioner became C corporation in
1989, and sec. 1374(d)(9) applied to "most recent election" to become
S corporation, which was 1994. Colorado Gas Compression, Inc.
v. Commissioner
Dismissal for Failure To Prosecute-Penalty Against Coun-
sel-Attorney's Fees Awarded to Commissioner.-Where pri-
mary issue in consolidated cases for 1996 was whether income
reported by trust was taxable to petitioner as individual or as
trustee on alternative grounds of lack of economic substance,
assignment of income, or grantor trust principle; and after failure
of informal discovery efforts and only partial compliance by peti-
tioner with Court orders for discovery, Commissioner moved to dis-
miss cases for lack of prosecution and to impose sanctions, Court
determined petitions were to be dismissed for lack of prosecution
and attorney's fees were to be awarded under sec. 6673(a)(2)
against petitioner's counsel, who multiplied proceedings unreason-
ably and vexatiously. Johnson v. Commissioner
Jurisdiction-Collection
Claimed on Returns Filed More Than 3 Years Late.-Where
petitioner's 1989-97 income tax returns were filed consistently late
and each directed that overpayment from withholding or carried-
over estimated tax was to be applied to subsequent year's liability;
Commissioner sent Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 for 1992 and 1996 tax
years; and, after sec. 6330 hearing, petitioner filed petition contest-
ing levy on ground that amounts in issue were paid by excess
withholding taxes in earlier years, Court determined jurisdiction
existed under sec. 6330(d)(1), since underlying tax liability related
to income taxes, and, under sec. 6511(b), petitioner was not entitled
to credits for overpayments claimed on returns filed more than 3
years late. Landry v. Commissioner
Jurisdiction-Equivalent Hearing Not Waiver-Separate
Notices of Intent To Levy Issued to H and W.-Where on Mar.
16, 1999, Commissioner mailed to petitioner H notice of intent to
levy for unpaid 1987-91 and 1997 tax liabilities, and on Apr. 27,
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