Wendland v. Comm'r of Internal Revenue
| Decision Date | 23 August 1982 |
| Docket Number | 9376-80.,5771-80—-5773-80,5769-80,Docket Nos. 5708-80—-5712-80 |
| Citation | 79 T.C. 355 |
| Parties | ROBERT P. WENDLAND and DONNA C. WENDLAND, v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners were limited partners in TCR, a partnership that was formed in 1976 to engage in coal mining. On Dec. 31, 1976, TCR paid $3 million to GSA to acquire, among other things, a number of valuable assets that were necessary to the mining operation, including coal leases, a mining agreement, and a coal supply agreement. The payment consisted of $650,000 cash and a $2,350,000 nonrecourse note. Petitioners contend that the entire $3 million was payment of advanced royalty and claimed a deduction under sec. 1.612-3(b)(3), Income Tax Regs., as it read prior to its retroactive amendment, for their pro rata shares thereof. They challenge the validity of the retroactive amendment to the regulations. Held, in amending sec. 1.612-3(b)(3), Income Tax Regs., respondent complied with the purposes behind the Administrative Procedure Act, 5 U.S.C. sec. 553(d) (1982 ed.), and retroactivity of the amended regulation was valid exercise of the authority granted under sec. 7805(b), I.R.C. 1954. Held, further, the “legislative reenactment doctrine” does not apply to bar respondent from so amending the regulation. Held, further: Some portion of the cash transferred to GSA constituted payment of advanced royalty. The cash portion paid as advanced royalty exceeded the amount of the deduction to which petitioners are entitled for coal actually mined during 1977; therefore, petitioners may deduct the advanced royalty on the coal mined in 1977.
TCR paid $100,000 to the law firm that performed legal work necessary for the organization and marketing of the partnership. Held, further, such expenses constituted organizational expenses which must be capitalized under sec. 709, I.R.C. 1954. Held, further, miscellaneous deductions claimed by TCR and petitioners are disallowed. Welch v. Helvering, 290 U.S. 111 (1933). Zayle A. Bernstein, Michael S. Feinman, Jack Stein, Sidney T. Bernstein, and Allan F. Meyer, for the petitioners.
Roger D. Osburn and Judy K. Hunt, for the respondent.
By statutory notices dated March 24, 1980,2 respondent determined deficiencies in petitioners' income taxes for the taxable years ended December 31, 1973, December 31, 1976, and December 31, 1977, as follows:
+---------------------------------------------------------+
¦Docket No. ¦Petitioner ¦Year ¦Deficiency ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5708-80 ¦Robert P. Wendland ¦1973 ¦$9,990.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Donna C. Wendland ¦1976 ¦14,270.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦1977 ¦383.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5709-80 ¦Irwing M. Adler ¦1976 ¦56,460.77 ¦
+------------+------------------------+------+------------¦
¦ ¦and Helene E. Adler ¦1977 ¦2,753.93 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5710-80 ¦Brent W. Trump ¦1976 ¦21,777.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Cheryl A. Trump ¦1977 ¦27,350.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5711-80 ¦Ronald Glassman ¦1976 ¦37,585.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Lenora Rae Glassman ¦1977 ¦835.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5712-80 ¦Stephan L. Nemerofsky ¦1976 ¦34,334.13 ¦
+------------+------------------------+------+------------¦
¦ ¦and Nina B. Nemerofsky ¦1977 ¦852.29 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5769-80 ¦Gerald L. Gunderson ¦1976 ¦$28,556.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Judith C. Gunderson ¦1977 ¦1,874.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5771-80 ¦Sherwin Ross ¦1976 ¦73,524.70 ¦
+------------+------------------------+------+------------¦
¦ ¦and Marlynn Ross ¦1977 ¦1,548.25 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5772-80 ¦Roman M. Wenzel ¦1976 ¦16,218.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Emily A. Wenzel ¦1977 ¦598.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦5773-80 ¦Wilbur F. Helmus, Jr., ¦1976 ¦20,124.00 ¦
+------------+------------------------+------+------------¦
¦ ¦and Patricia Helmus ¦1977 ¦23,813.00 ¦
+------------+------------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+------------------------+------+------------¦
¦9376-80 ¦Russell L. Redhouse, Jr.¦1976 ¦12,351.32 ¦
+---------------------------------------------------------+
The petition of Antonio Gonzalez-Revilla, Jr., and Nair Gonzales-Revilla, docket No. 5770-80, originally was consolidated with the other petitions but was severed from the group by the granting of the oral motion to continue of June 1, 1981.
The issues for our decision are (1) whether, under section 1.612-3(b)(3), Income Tax Regs., T.D. 7523, 1978-1 C.B. 192, an advanced royalty paid on December 31, 1976, by Tennessee Coal Resources, Ltd. (hereinafter TCR), a limited partnership, is deductible in the year of payment or only in the year when the coal is sold; (2) whether the advanced royalty deduction allowable to TCR includes the amount reflected in the nonrecourse note given by TCR as well as the cash actually paid; (3) whether each petitioner may include his share of the nonrecourse note of the partnership in his basis in TCR; (4) whether TCR properly characterized a payment of $100,000 as deductible legal expenses; and (5) whether petitioners adequately substantiated miscellaneous other deductions claimed on the 1976 and 1977 tax returns of TCR and on the returns of certain individual petitioners.
Some of the facts have been stipulated and are so found. The stipulation of facts and supplemental stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
At the time of filing their petitions herein, petitioners' legal residences were as follows:
+-------------------------------------------------------------------+
¦Petitioner ¦Residence ¦
+--------------------------------------------+----------------------¦
¦ ¦ ¦
+--------------------------------------------+----------------------¦
¦Robert P. Wendland and Donna C. Wendland ¦Lighthouse Point, Fla.¦
+--------------------------------------------+----------------------¦
¦Irwin M. Adler and Helene E. Adler ¦Miami, Fla. ¦
+--------------------------------------------+----------------------¦
¦Brent W. Trump and Cheryl A. Trump ¦Pomapano Beach, Fla. ¦
+--------------------------------------------+----------------------¦
¦Ronald Glassman and Lenora Rae Glassman ¦Plantation, Fla. ¦
+--------------------------------------------+----------------------¦
¦Stephen L. Nemerofsky and Nina B. Nemerofsky¦Plantation, Fla. ¦
+--------------------------------------------+----------------------¦
¦Gerald L. Gunderson and Judith C. Gunderson ¦Deerfield Beach, Fla. ¦
+--------------------------------------------+----------------------¦
¦Sherwin Ross and Marlynn Ross ¦Miami, Fla. ¦
+--------------------------------------------+----------------------¦
¦Roman M. Wenzel and Emily A. Wenzel ¦Key Biscayne, Fla. ¦
+--------------------------------------------+----------------------¦
¦Wilbur F. Helmus, Jr., and Patricia Helmus ¦Lighthouse Point, Fla.¦
+--------------------------------------------+----------------------¦
¦Russell L. Redhouse, Jr. ¦Santa Clara, Calif. ¦
+-------------------------------------------------------------------+
The income tax returns for the taxable years involved were filed by each of the petitioners with the Office of the Internal Revenue Service at Chamblee, Ga. In addition, on April 5, 1977, Robert P. and Donna C. Wendland filed an application for tentative refund with the Internal Revenue Service Center at Chamblee, Ga., in which they claimed a carryback from 1976 to 1973 of unused net operating loss in the amount of $33,036. Respondent's notice of deficiency in docket No. 5708-80 reflects a disallowance of this deduction.
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