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Summaries - H

Click on the case name for the complete text.

Hale v. Commissioner
44 TCM 1116, Tax Ct. Mem. Dec. (CCH) 39,339(M), (P-H) ¶ 82,527 (1982)

[Returns: Marital status: Single v. married: Losses: Casualty: Storm damage to trees: Evidence: Business: Dealer in commodities futures v. investor: Expenses for production of income: Deductions: Capital gains and losses: Deferral of gain on sale of residence: Proof of sale: Expenses--trade or business: Moving expenses: Proof: Interest: Deductions: Determination of amount: Additions to tax: Untimely filing: Negligence.]--Held:(1) During 1973, P was married and must file as a married person filing separately, since he failed to show that he was legally divorced or separated from his wife, or that she was no longer living.(2) P is not entitled to any deduction for damage to his trees since he failed to prove that the casualty caused a loss in the value of his property. (3) P is not entitled to deduct any amount as a business loss since he failed to prove that he was engaged in an activity that constituted a trade or business, but he is allowed to deduct certain amounts under sec. 212 , I. R. C. 1954, for expenditures for the production of income or for the management of income-producing property.(4) P is not entitled to defer the gain on the sale of a residence since he failed to prove that he sold a residence.(5) P is not entitled to deduct any amount for moving expenses since he failed to prove that his move was incident to commencing any employment or business at the new location.(6) P is entitled to deduct a determined amount as interest.(7) P is liable for the addition to tax under sec. 6651(a) , I. R. C. 1954, for failure to file timely his return for 1973.(8) P is liable for the addition to tax under sec. 6653(a), I. R. C. 1954, for negligence.
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Harper v. United States
274 F. Supp. 809; 67-2 USTC ¶9712; 20 AFTR 2d 5777 (D. S.C. 1967).

A hurricane partially destroyed standing timber on five timber tracts owned by the taxpayers. The taxpayers calculated their economic loss by estimating the difference in the units of marketable saw timber (expressed in thousands of board feet) and pulpwood (expressed in cords) before and after the hurricane, and multiplying the difference by the market value of such units at the date of destruction. The taxpayers deducted their entire economic loss on the theory that such losses did not exceed the total adjusted basis of the timber on the five tracts. The Commissioner limited the deduction to the taxpayer's adjusted basis in the units of saw timber and pulpwood actually destroyed. The taxpayer offered the testimony of an' experienced forester that a partial casualty loss to a tract of timber can adversely affect the marketability of undamaged timber. However, the forester had not seen the particular tracts in question, and the valuation of the undamaged timber agreed upon by the taxpayer and the Government was the same before and after the casualty.
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Harper v. United States
396 F.2d 223, 68-2 U.S. Tax Cas. ¶9441, 21 Am. Fed. Tax R.2d 1417 (4th Cir. 1968).
Affirming 274 F. Supp. 809, 67-2 U.S. Tax Cas. ¶9712, 20 AFTR 2d 5777 (1967).

A hurricane partially destroyed standing timber on five timber tracts owned by the taxpayers. The taxpayers calculated their economic loss by estimating the difference in the units of marketable saw timber (expressed in thousands of board feet) and pulpwood (expressed in cords) before and after the hurricane, and multiplying the difference by the market value of such units at the date of destruction. The taxpayers deducted their entire economic loss on the theory that such losses did not exceed the total adjusted basis of the timber on the five tracts. The Commissioner limited the deduction to the taxpayer's adjusted basis in the units of saw timber and pulpwood actually destroyed. The taxpayer offered the testimony of an experienced forester that a partial casualty loss to a tract of timber can adversely affect the marketability of undamaged timber. However, the f6rester had not seen the particular tracts in question, and the valuation of the undamaged timber agreed upon by the taxpayer and the Government was the same before and after the casualty.
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Hines v. United States
344 F. Supp. 1259 (N.D. Miss. 1972) 72-2 USTC; ¶9511; 30 AFTR 2d 5037

On January 18, 1966, the directors of the corporation held a special meeting at which they decided to recommend to the stockholders that the corporation's timberland be distributed to the shareholders, Each stockholder was to receive the same interest in the land as he held in the corporation. The stockholders approved the director's recommendations and the timber land was distributed to the stockholders.

As soon as the transfer was completed, invitations for sealed bids on the timberland were sent to various major timber companies by agents of the stockholders. On December 15, 1966, the land was sold to the highest bidder. The corporation did not report this sale or a smaller, earlier sale on its corporate income tax returns. Each stockholder reported his pro rata portion of the sales on his individual return, claiming long-term capital gain treatment on each sate.

The Commissioner concluded that the gain on the sales of the land by the stockholders should be imputed to the corporation on the grounds that the distribution lacked a justifiable commercial motivation and was made for the principal purpose of avoiding the corporate level tax. By imputing the sales to the corporation, the Commissioner was able to determine that the corporation had had current earnings and profits out of which to pay a dividend, and that the distribution to the stockholders thus constituted a dividend to the extent of such earnings and profits. Accordingly, the corporation was taxed on the gain on the sales and each stockholder was taxed on the receipt of the dividend as income to the extent of his interest in the corporation.
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Hines v. United States
477 F.2d 1063, 73-1 U.S. Tax Cas. ¶9403, 31 Am. Fed. Tax R.2d 73-1215 (5th Cir. 1973).
Reversing 344 F. Supp. 1259, 72-2 U.S. Tax Cas. ¶9511, 30 AFTR 2d 72-5037 (1972).

Taxpayer was a shareholder in a corporation whose assets consisted largely of timberlands and which was facing financial difficulties, The corporation considered selling its timberlands but decided not to enter into negotiations with any prospective buyers because of the double taxation of the shareholders' dividends which would result, Since there were obstacles to a true liquidation, the corporation distributed the lands to its shareholders, who then sold the properties to a single buyer. Taxpayer claimed capital gain treatment for his share of the proceeds from the sale, while the corporation did not report the sale. The Commissioner concluded that the income from the sale should be imputed to the corporation and that the proceeds received by the taxpayer constituted a dividend, to the extent of current earnings and profits, combined with a return of capital, to the extent of the taxpayer's basis, leaving only the excess eligible for capital gains treatment.
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J. A. Hipp, et al. v. Commissioner
47 TCM 623, TC Memo. 1983-746

Corporations: Shareholders v. corporation: Distributions: Stock redemptions: Valuation: Real property.--A corporation was found to be an entity distinct from its stockholders and, as such, was the owner of certain real property for federal tax purposes concerning distribution transactions. Incorporation served a valid business purpose in that it provided a more convenient form of managing the family enterprises, isolated potential liabilities, and assured continuity of life and management. In addition, the corporation's business activities warranted its recognition as a separate taxable entity. The taxpayers, former stockholders, failed to overcome the presumptive correctness of the Commissioner's determinations that a taxable stock for property exchange took place, rather than a nontaxable Code Sec. 333 liquidation, when the taxpayers exchanged their stock for land. Finally, after considering the appraisal reports and testimony of the taxpayers' and Commissioner's expert witnesses, the Tax Court determined the fair market value of the real property distributions to the taxpayers.
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Hitchcock v. Frank
63-1 USTC ¶ 9497; 11 AFTR 2d 1703 (W.D. Wash. 1963).

The taxpayer was the successful bidder under a timber offering by the U.S. Department of the Interior. He was notified on July 26, 1950, that his bid had been accepted; on July 31, 1950, a proposed contract was signed by the taxpayer; and on September 20, 1950, the Assistant Secretary of the Interior signed the contract. The taxpayer agreed to purchase the timber, to pay a specified price per thousand board feet, to cut all timber by a designated date, and to pay the full purchase price whether the timber was actually cut or not. Title was retained by the seller until payment was received. In October 1950, the taxpayer organized a partnership which began cutting the timber in March 1951. The partnership's cutting was pursuant to an implicit unwritten understanding between the taxpayer and the partnership that the taxpayer would retain the contract and that the partnership would have the right to cut and sell the logs for its own account. In October 1952, the taxpayer achieved a more definite and certain arrangement with the partnership, which was reflected in the accounts of the partnership. The taxpayer reported the payments received from the partnership in 1953, 1954 and 1955 as long-term capital gain from a disposal with a retained economic interest under sections 117(k)(2) and 631(b). The Commissioner contended that the payments were ordinary income, apparently contending that: (1) the contract with the Government did not confer ownership of the timber on the taxpayer; (2) if the contract conferred ownership on the taxpayer, he held the timber for less than six months before he permitted the partnership to begin cutting; (3) if the taxpayer was the owner and had held the timber for six months, he did not retain an economic interest in it; and (4) section 707(b)(2) deprives gain from a sale between a partnership and his partnership of capital gain status.
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Holmes v. Commissioner
TC Memo. 1997-401, 74 TCM 494

Nonprofit activities: Farming: Lack of profit motive: Incomplete books: Commingling of funds: Knowledge of activity: Time devoted: Other businesses: Success in: Significant losses: Personal benefit.--Married taxpayers were denied deductions relating to their farming activity because the activity was not engaged in for profit. The taxpayers failed to maintain adequate books and records, submitted incomplete ledgers to the IRS in a disorganized manner, presented no evidence of their record-keeping practices, and commingled personal and business funds. Further, the taxpayers did not establish that the land, equipment and other assets used in connection with their farming activity had appreciated in value or would result in a profitable activity, and their past success in dissimilar activities was insufficient to show that they engaged in farming for profit. Also, the taxpayers were unable to link the significant losses sustained with respect to the farming activity to unanticipated start-up expenses, drought or deer damage. The farming activity never generated a profit, and the taxpayers realized substantial income from other investments and the husband's wages. Moreover, the taxpayers derived personal and recreational benefit from their farming activity.

Penalties, civil: Negligence: Inadequate records: Reliance on accountant.--Married taxpayers who were denied deductions relating to their farming activity were liable for negligence penalties. They commingled personal and business funds and kept inadequate records. Also, they were unable to show that they provided their accountant with complete and accurate books or that they relied in good faith on his advice.
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Estate of Elizabeth G. Hughan, Deceased, John W. Hughan, Executor v. Commissioner
61 T.C.M. 2932 (1991) T.C. Memo 1991-275; Docket No. 23221-88

The Commissioner determined a deficiency of $194,294 in decedent's Federal estate tax. The issue for decision is the special use valuation of 41.37 acres of agricultural real property in Ventura County, California, on the date of decedent's death.

The parties agree that the valuation of decedent's property is governed by the method prescribed by section 2032A(e)(8). It remains for the Court to decide whether the capitalization of fair rental value factor (subparagraph (B)) and "any other factor" (subparagraph (E)) are relevant, and whether the sales prices of agricultural property in Ventura County are affected by nonagricultural use, thus requiring the parties to compare sales of farmland located outside the vicinity of decedent's property (subparagraph (D)).
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Huxford v. United States
299 F. Supp. 218; 69-2 USTC ¶ 9439; 23 AFTR 2d 1339 (D. Fla. 1969).

The taxpayers were shareholders in a Small Business Corporation (Huxford} that owned a tract of timber. In 1960, Huxford entered into a timber contract with the Buckeye Cellulose Corporation (Buckeye) which called for Buckeye "to pay Huxford a total purchase price of $2,200,000 for the present standing timber plus fifty per cent of all stumpage money realized by Buckeye from the use or resale of hardwood and cypress timber." The contract contained an escalator clause based upon the current price for "rail loaded pine pulpwood within 200 miles of Foley, Florida." The contract also provided (in Paragraph 17) that should either party be unable to perform any of its obligations or undertakings...by reason of (a) war, (b) acts of the public enemy [etc.] ... such party shall be relieved, to the extent and for the time only it is so prevented thereby." The taxpayers treated the proceeds received by the corporation under this contract as being received from a disposal of timber with a retained economic interest under Section 631(b) of the Code and thus subject to capital gain treatment.

The Government contended that Huxford failed to qualify for capital gain treatment under Section 631(b) because it had failed to retain an economic interest in the timber. The Government pointed to the fact that the contract required Buckeye to pay the purchase price whether or not any timber was cut and thus payment was not contingent on the severance of the timber - a requirement for retention of an economic interest under Section 631(b). The taxpayers, on the other hand, contended that payment was contingent on severance. They relied on Paragraph 17 which they say placed the risk of loss on Huxford until the timber was cut. The fact that Huxford had the risk of loss until severance, they argued, meant that Huxford retained an economic interest until that time.
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Huxford v. United States
441 F.2d 1371 (5th Cir. 1971); 71-1 USTC 9379, 27 AFTR 2d 1298
Affirming, 299 F. Supp. 218 (D. Fla. 1969)

The taxpayers were shareholders in a Subchapter S corporation {Huxford) that owned a tract of timber, which had supported a naval stores business since 1929. By 1952 or 1953, the suitability of the land for naval stores had declined so much that the naval stores business was discontinued. At approximately the same time, a market developed for the "cat faces" - turpentine trees which had been scraped for turpentine - on the land, and in subsequent years the sale of these "cat faces," and other good round trees, became the primary business of Huxford. The corporation advertised itself in a directory as a tree farm, but did no other advertising or promotion. On December 12, 1960, the corporation entered into an agreement with Buckeye Cellulose Corporation {Buckeye), whereby Buckeye acquired the right to remove and sell all timber then standing on the land. Buckeye agreed to pay the corporation $2,200,000 in equal annual installments, together With a share of the proceeds of all sales of hardwoods and cypress. If the price of pulpwood rose, then Huxford was to be paid certain additional sums. Buckeye agreed to continue the existing replanting program, but Buckeye did not have the right to cut and harvest any timber planted by it. By the time of this sale to Buckeye, there were few "cat faces" remaining, and very few of the trees on the tract had been grown for use in the naval stores business. Two shareholders of Huxford treated their share of the Buckeye payment as capital gains, contending that the sale of timber constituted the sale of a capital asset, and that the payments were therefore capital gains under Sections 1221 and 1231 of the Internal Revenue Code. The Government argued that the payments should be treated as ordinary income since the timber was "property held by the taxpayer primarily for sale to customers in the ordinary course of business."
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