86 T.C. 492 (1986), 15789-82, Jackson v. C.I.R.
|Docket Nº:||15789-82, 32889-83, 32890-83.|
|Citation:||86 T.C. 492|
|Opinion Judge:||GOFFE, JUDGE:|
|Party Name:||JOHN L. JACKSON and YVONNE JACKSON, ET AL.,  Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||R. LaMar Bishop, for the petitioners. Richard W. Kennedy, for the respondent.|
|Case Date:||March 27, 1986|
|Court:||United States Tax Court|
1. Petitioners and their partnership acquired territorial sublicenses to distribute specially designed tape recorders from petitioners' wholly owned corporate licensee. Petitioners and the partnership obligated themselves to contribute to an advertising cooperative with other sublicensees. The purchase price of the sublicenses and the advertising cooperative obligation were paid primarily with recourse and nonrecourse notes. The Commissioner disallowed the deductions for amortization and advertising expense because petitioners and the partnership were not in the trade or business of distributing tape recorders during 1978. HELD, the tax treatment of the territorial sublicenses is governed by sec. 1253(d)(2), I.R.C. 1954. HELD FURTHER, satisfaction of the trade or business requirement of sec. 162, I.R.C. 1954, is a prerequisite to any deduction under sec. 1253(d)(2), I.R.C. 1954. HELD FURTHER, neither petitioners nor the partnership were engaged in the trade or business of distributing the tape recorders in 1978 within the meaning of sec. 162, I.R.C. 1954.
2. The Commissioner determined that amortization of the sublicenses based, in part, upon nonrecourse notes was not allowable because sec. 1253(d)(2), I.R.C. 1954, requires ‘ actual payment.‘ HELD, delivery of nonrecourse promissory notes constitutes ‘ payment‘ under sec. 1253(d)(2), I.R.C. 1954.
3. The Commissioner determined that the nonrecourse notes used by petitioners and partnership to acquire the sublicenses to distribute tape recorders were not bona fide within the meaning of Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir. 1976), affg. 64 T.C. 752 (1975), and, therefore, could not support the license amortization deductions claimed. HELD, unlike the notes given in Estate of Franklin v. Commissioner, the nonrecourse notes given by petitioners and the partnership represented bona fide debt.
4. The Commissioner determined that the nonrecourse notes used by petitioners and partnership to acquire the sublicenses to distribute tape recorders and also used to contribute to the advertising cooperative were too contingent to support license amortization and advertising expense deductions. HELD, the notes in issue had definite due dates and were not excessively contingent.
5. The Commissioner determined that license amortization and advertising expense deductions were not allowable in excess of petitioners' cash investment under sec. 465, I.R.C. 1954. HELD, recourse notes executed by petitioners and partnership, and payable to the corporation are not includable in petitioners' amounts at risk because these amounts were borrowed from a person who has a relationship to petitioners specified in sec. 267(b), I.R.C. 1954. Sec. 465(b)(3), I.R.C. 1954. HELD FURTHER, the nonrecourse notes are not at risk by petitioners under sec. 465(b)(4). HELD FURTHER, in calculating petitioners' amount at risk from partnership interest, each trade or business of the partnership constitutes a separate activity. Sec. 465(c)(3), I.R.C. 1954.
6. The Commissioner, in his answer, determined an increased deficiency based upon petitioners' distributive share of partnership income, which determination was made more than 3 years after the partnership return was filed. Petitioners alleged that the increased deficiency was barred by the statute of limitations. HELD, because a partnership is not a tax-paying entity, because the statute of limitations applies only to determinations of deficiency in tax liability, and because the running of the period of limitations as to petitioners was suspended by the issuance of the statutory notice of deficiency, the increased deficiency determined by the Commissioner was not barred. Sec. 6501(a), I.R.C. 1954.
7. The Commissioner determined additions to tax under section 6651(a), I.R.C. 1954. Petitioners' tax advisor informed them that although timely filing of their Federal income tax returns was required, no additions to tax would be incurred because petitioners would not have any deficiencies in tax for the years in issue. HELD, the reliance of petitioners upon the erroneous advice of their tax advisor was not reasonable cause for failure to file timely income tax returns and the additions to tax under section 6651(a), I.R.C. 1954, were proper.
8. The Commissioner also determined additions to tax for negligence or intentional disregard of rules or regulations under sec. 6653(a), I.R.C. 1954, against petitioners. HELD, because petitioners relied upon the tax opinion of an attorney regarding the tax treatment of the sublicense agreements, the additions to tax under sec. 6653(a), I.R.C. 1954, are not imposed.
The Commissioner determined deficiencies in, and additions to, petitioners' Federal income tax as follows:
|Additions to tax|
|Petitioners||year||Deficiency||Sec. 6651(a)2||Sec. 6653(a)|
|John L. and||1978||$18,879.05|
|Gregory M. and||1978||50,906.70||$7,096.00||2,545.34|
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