Estate of Kanter v. Comm'r

2007 T.C. Memo. 21, 2007 Tax Ct. Memo LEXIS 21

• Court: United States Tax Court
• Decided: February 1, 2007
• Docket: No. 712-86, 1350-87, 31301-87, 33557-87, 3456-88, 32103-88, 16421-90; 26251-90, 20211-91, 21555-91, 21616-91, 1984-92, 16164-92, 23743-92; 7557-93, 22884-93
• Status: Unpublished

Opinion

ESTATE OF BURTON W. KANTER, DECEASED, JOSHUA S. KANTER, EXECUTOR, AND NAOMI R. KANTER, ET AL., ¹, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Estate of Kanter v. Comm'r

No. 712-86, 1350-87, 31301-87, 33557-87, 3456-88, 32103-88, 16421-90; 26251-90, 20211-91, 21555-91, 21616-91, 1984-92, 16164-92, 23743-92; 7557-93, 22884-93

United States Tax Court

T.C. Memo 2007-21; 2007 Tax Ct. Memo LEXIS 21;

February 1, 2007, Filed

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[EDITOR'S NOTE: PART 5 OF 5. THIS DOCUMENT HAS BEEN SPLIT INTO MULTIPLE PARTS ON LEXIS TO ACCOMMODATE ITS LARGE SIZE. EACH PART CONTAINS THE SAME LEXIS CITE.]

Ballard v. Comm'r, 429 F.3d 1026, 2005 U.S. App. LEXIS 23640 (11th Cir., 2005)Estate of Lisle v. Comm'r, 431 F.3d 439, 2005 U.S. App. LEXIS 25217 (5th Cir., 2005)Estate of Kanter v. Comm'r, 406 F.3d 933, 2005 U.S. App. LEXIS 8064 (7th Cir., 2005)

Haines, Harry A.

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ISSUE VII. Whether Kanter Received Unreported Income From Equitable Leasing Co., Inc., During 1983 (STJ report at 128-129)

FINDINGS OF FACT

Respondent determined in the notice of deficiency issued to the Kanters for 1983 that Kanter failed to report income of $ 635,250 for that year. As discussed in detail below, this adjustment is attributable to respondent's determination that Kanter attempted to assign to THC and Zion income he earned from transactions involving Equitable Leasing Co., Inc. (Equitable Leasing).

Joel Mallin (Mallin) was a good friend and former law partner of Kanter who organized and promoted various equipment leasing transactions through Equity Leasing, his wholly owned company. Kanter, Transcr. at 4749; Mallin, Transcr. at 5172-5175. Mallin's leasing transactions were highly leveraged, and the residual value of the leased equipment provided the ostensible paper profit on his investors capital. Mallin, Transcr. at 5175-5186.

During 1983, Kanter allowed Mallin to include Zion as an investor in some of Equitable Leasing's offerings so that the offering would be fully subscribed and could close. Kanter, Transcr. at 4752. During 1983, Kanter also introduced additional investors to Mallin so that Equitable Leasing could complete certain transactions. Kanter, Transcr. at 4753, Mallin, Transcr. at 5213-5215.

During 1983, Equitable Leasing transferred funds totaling at least $ 635,250 to THC and Zion, as follows:

Date	Amount	Payee	Exhibit
1/04/83	$ 317,250	Zion	9203; 146, at 6 (AJE 32)
1/24/83	9,500	THC	9203; 146, at 2 (AJE 8)
6/01/83	6,500	Zion	9203; at 9
6/30/83	302,000	THC	9203; 148, at 12

Exh. 146, at 2 (AJE 8), provides an entry for $ 24,500 and states "Commission Income Consulting Fees to reclass C/R from Equitable Leasing on 9/21/82 & 1/25/83." It appears this $ 24,500 entry pertains to a $ 15,000 item from September 1982 combined with the $ 9,500 item dated January 24, 1983. As previously discussed, Zion was a subsidiary of THC during the year 1983.

THC's accounting records related to these transactions are inconsistent and contradictory. THC recorded about half of the funds it received from Equitable Leasing as loans and the other half as commissions. Exh. 146, at 2, 6 (AJE's 8 and 32); Exh. 148, at 12 (listing loans of $ 8,000 and $ 302,000 on June 27 and 30, 1983, respectively). However, THC's records also include an adjusting journal entry for $ 310,000 (which probably includes the $ 302,000 transferred to THC on June 30, 1983, and the $ 8,000 listed as a loan on June 27, 1983, see Exh. 148, at 12) and which appears to read: "N/P-Equitable Leasing, Commission Income, to reclassify funds from Eq. Leasing [date illegible]." Exh. 146, at 11 (AJE 59).

Mallin paid commissions to Kanter (through payments to THC and Zion) in exchange for Kanter's assistance in recruiting investors for his leasing transactions. Kanter, Transcr. at 4753; Mallin, Transcr. at 5213-5214.

OPINION ¹⁴³

The provision of section 61 that gross income includes all income from whatever source derived would encompass fees and commissions earned as compensation for services. THC and Zion received payments from Equitable Leasing which were labeled inconsistently as commissions and/or loans. Kanter asserts THC and Zion "received certain amounts from Equitable Leasing in the first six months of 1983 as an accommodation to allow Zion to make investments in certain offerings Equitable Leasing was promoting so that those offerings could become fully subscribed and close." Petitioners' Reply Brief at 1245.

Respondent contends all the moneys Equitable Leasing transferred to THC and Zion were commissions paid to Kanter to compensate him for recruiting investors for Mallin's equipment leasing transactions. Kanter argues the funds in question were loans. We agree with respondent.

The record shows: (1) Kanter recruited investors for Equitable Leasing's transactions, and (2) Mallin/Equitable Leasing paid commissions for these services to Kanter-related entities, THC and Zion. Against this evidence, Kanter offered little in the way of rebuttal. Although THC's accounting records labeled some of the funds it received from Equitable Leasing as loans, those entries were contradicted by other entries labeling the payments as commissions. Kanter did not provide any additional evidence such as promissory notes or proof of principal or interest payments to corroborate THC's records. Given that Kanter controlled the entities involved, we resolve any doubts engendered by the record in respondent's favor. Considering all the circumstances, we sustain respondent's determination that the funds that Equitable Leasing transferred to THC and Zion during 1983 represented income that Kanter earned during 1983 and that he attempted to assign to THC and Zion. These payments are includable in Kanter's income for 1983.

Issue VIII. Whether Kanter Received Unreported Income for 1982 According to the Bank Deposits Method of Income Reconstruction (STJ report at 129-133)

During 1982, Kanter made a total of approximately $ 2.8 million in deposits to his three bank accounts at American National Bank at Chicago, Illinois. Kanter maintained a check register in which he recorded the source and nature of the deposits made to these accounts. In preparing the Kanters' 1982 joint individual Federal income tax return, Linda Gallenberger, Kanter's accountant, used the check register to determine what portion of his 1982 bank deposits represented taxable income. Respondent determined the Kanters failed to maintain or provide adequate books and records with respect to their taxable income for 1982. Respondent further determined Kanter had in excess of $ 2 million in unreported income for 1982, which unreported income determination was based upon respondent's analysis of deposits to Kanter's three American National Bank accounts. The deposit slips from which respondent reconstructed Kanter's 1982 taxable income did not specify the taxable or nontaxable nature of the deposits. ¹⁴⁴ At trial, Kanter offered into evidence his check register and a series of spreadsheets and a summary analysis of his bank deposits prepared by Gallenberger. Exhs. 9168-9172.

Respondent conceded a portion of the subject adjustment, but maintains Kanter failed to report $ 1,303,207 of income for 1982 based on the bank deposits from the payors or sources in the amounts listed below:

Payor Or Source	Funds Received	Characterization
THC	$ 787,129.17	Loan
Computer Placement Services	40,000.00	Loan
TACI Special E Account	190,077.83	Return of investment
TACI Special Account	286,000.00	Loan
Total	1,303,207.00

Transcr. at 4322.

OPINION

A. The Commissioner's Use of the Bank Deposits Method of Income Reconstruction

Where a taxpayer fails to maintain or produce adequate books and records, the Commissioner is authorized under section 446 to compute the taxpayer's taxable income by any method which, in the Commissioner's opinion, clearly reflects income. Holland v. United States, 348 U.S. 121, 130-132, 75 S. Ct. 127, 99 L. Ed. 150, 1954-2 C.B. 215 (1954); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965); Sutherland v. Commissioner, 32 T.C. 862 (1959). The Commissioner has great latitude in selecting a method for reconstructing a taxpayer's income, and the method need only be reasonable in the light of all the surrounding circumstances.

This Court has long accepted the bank deposits method of income reconstruction. Nicholas v. Commissioner, 70 T.C. 1057, 1065 (1978); Estate of Mason v. Commissioner, 64 T.C. 651, 653 (1975), affd. 566 F.2d 2 (6th Cir. 1977). While not conclusive, bank deposits are prima facie evidence of income. Boyett v. Commissioner, 204 F.2d 205 (5th Cir. 1953), affg. a Memorandum Opinion of this Court; Hague Estate v. Commissioner, 132 F.2d 775 (2d Cir. 1943), affg. 45 B.T.A. 104 (1941).

Taxpayers generally bear the burden of proving that the Commissioner's determinations are erroneous; and in the case of a bank deposits analysis, a taxpayer normally must show the deposits came from a nontaxable source. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933).

B. The Parties' Arguments

Kanter contends respondent's reconstruction of his income for 1982 under the bank deposits method is arbitrary and excessive. Kanter asserts (1) he maintained adequate records (i.e., his check register) identifying the taxable and nontaxable deposits to his bank accounts, and (2) respondent's determination should not be accorded its normal presumption of correctness. With regard to the latter point, Kanter maintains respondent should bear the burden of proof on this issue or respondent should have the burden of going forward with the evidence. Kanter further asserts the credible evidence of record (which includes his check register and Gallenberger's spreadsheets and testimony) is sufficient to prove the deposits in question were either proceeds of loans or return of investment funds.

Respondent contends Kanter has not satisfied his burden of proof under Rule 142(a). Respondent argues the testimony and other evidence petitioners offered should be disregarded as self-serving. Respondent asserts Kanter offered no credible documentation substantiating the nontaxable nature of the $ 1,303,207 of deposits at issue. Respondent emphasizes that two of the disputed deposits are attributable to funds Kanter received from the TACI Special E and TACI Special Accounts which Kanter purportedly used to disguise payments to himself as loans.

C. The STJ Report

The STJ report recommended holding for Kanter on this issue on the grounds that (1) Kanter and Gallenberger testified credibly that the questioned deposits were either loans to Kanter or returns of Kanter's capital, ¹⁴⁵ (2) Kanter's and Gallenberger's testimony was corroborated by Kanter's check register, and (3) respondent offered no evidence to rebut the above evidence and testimony.

D. Analysis

Considering the large amounts of the bank deposits in question and Kanter's obfuscation during the examination process, we cannot fault respondent for declining to accept Kanter's check register as an adequate record of his taxable income for 1982. Without more, respondent was wholly justified in employing the bank deposits method of income reconstruction to determine the correct amount of Kanter's taxable income for 1982.

Respondent's determination was not a so-called naked assessment, nor was it arbitrary or excessive. See, e.g., Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977). Respondent offered ample evidence linking Kanter to income- producing activities during 1982 including his law practice and the fees and commissions Kanter earned from, among others, The Five. Respondent identified four specific deposits that were determined to represent unreported income. Therefore, respondent's determination of unreported income is entitled to the normal presumption of correctness, and there is no basis for shifting to respondent either the burden of proof or the burden of going forward with the evidence. See, e.g., United States v. Esser, 520 F.2d 213, 217 (7th Cir. 1975).

As indicated, the record includes Kanter's check register, Gallenberger's spreadsheets and summaries, and Gallenberger's testimony regarding the methods she used in preparing the Kanters' tax return for 1982. Considering all the circumstances, particularly Kanter's and Gallenberger's misconduct as outlined by the District Court during the summons enforcement proceedings, we conclude it was manifestly unreasonable to conclude Kanter's testimony (if it exists) and Gallenberger's testimony was credible. See United States v. Administration Co., 1994 U.S. Dist. LEXIS 7155, 74 A.F.T.R.2d (RIA) 5252, 94-2 U.S. Tax Cas. (CCH) P50479 (N.D. Ill. 1994); United States v. Administration Co., 1994 U.S. Dist. LEXIS 8474, 74 A.F.T.R.2d (RIA) 5256, 94-2 U.S. Tax Cas. (CCH) P50480 (N.D. Ill. 1994).

We conclude the evidence Kanter offered on this issue was insufficient to satisfy his burden of proof. Given the large amounts of the deposits in question, not to mention Kanter's experience as a tax attorney, Kanter should have been prepared to offer additional records, such as loan documents, checks reflecting prior investments, checks reflecting principal or interest payments, or other accounting records in support of the proposition that the deposits in question were in fact loans or returns of capital. In the absence of such evidence, we sustain respondent's determination that Kanter failed to report $ 1,303,207 of income for 1982.

Issue IX. Whether Kanter Received Barter Income From Principal Services Accounting Corp. During 1988 and 1989 (STJ report at 133-135)

Respondent determined in notices of deficiency issued to the Kanters for 1988 and 1989 that Kanter failed to report barter income he received from Principal Services Accounting Corp. (PSAC) during those years. These adjustments were resolved in petitioners' favor, and the decisions entered by the Court at docket Nos. 26918-92 (taxable year 1988) and 25981-93 (taxable year 1989) on September 24, 2001, were not appealed and are otherwise final. See secs. 7481(a)(1), 7483. ¹⁴⁶ Consequently, we need not consider this issue.

Issue X. Whether the Kanters Received Unreported Interest Income During 1988 (STJ report at 136-137)

Respondent determined in the notice of deficiency issued to the Kanters for 1988 that the Kanters failed to report interest income they received during 1988. This adjustment was resolved in petitioners' favor, and the decision entered by the Court at docket No. 26918-92 (taxable year 1988) on September 24, 2001, was not appealed and is otherwise final. See secs. 7481(a)(1), 7483. ¹⁴⁷ Consequently, we need not consider this issue.

Issue XI. Whether the Kanters Are Entitled to Certain Deductions They Claimed on Schedules A and C for 1986 to 1989 (STJ report at 137-144)

In notices of deficiency issued to the Kanters for 1986 to 1989, respondent disallowed deductions the Kanters claimed on Schedules A and C of their tax returns for those years. These adjustments were resolved in petitioners' favor, and the decisions entered by the Court at docket Nos. 24002-91 (taxable year 1987), 26918-92 (taxable year 1988), and 25981-93 (taxable year 1989) on September 24, 2001, were not appealed and are otherwise final. See secs. 7481(a)(1), 7483.

Respondent does not challenge the ultimate conclusion in the STJ report regarding the Kanters' deductions for the taxable years 1987 to 1989. Respondent, however, does not state whether he objects to the STJ report holding with regard to the Kanters' Schedule A deduction for 1986. Therefore, we shall address the question whether petitioners are entitled to the Schedule A deduction in question for 1986. ¹⁴⁸

On Schedule A of the Kanters' 1986 Federal income tax return, the Kanters claimed a deduction of $ 368,227 in "Other interest" expenses. In the notice of deficiency, respondent determined that no deduction was allowable to the Kanters for the $ 368,227 in interest expenses claimed for 1986. The notice of deficiency stated in pertinent part:

It is determined that the claimed interest expense deduction

of $ 368,227 in 1986 is not allowed because you have not

established:

(1) that there was a valid indebtedness;

(2) if there was a valid indebtedness, that the indebtedness

was yours; or

(3) that you actually paid any interest.

Therefore, your taxable income for 1986 is increased by

$ 368,227.

For 1986, almost all of Kanter's expenses claimed as deductions on the Kanters' tax return were paid through funds from TACI and PSAC accounts. The funds used to pay Kanter's expenses either belonged to Kanter or were borrowed by him from other TACI and PSAC clients.

During the course of the trial, petitioners began offering evidence with respect to the above expenses as well as certain 1982 Schedule C deductions. Counsel for the parties then requested and received a short recess in order to meet and discuss off the record the various evidentiary and legal matters pertaining to these expenses. The Court did not participate in counsels' deliberations.

Immediately following their conference, counsel for the parties advised the Court that: (1) The Kanters were entitled to deduct the 1982 Schedule C expenses, and (2) the 1987, 1988, and 1989 Schedule A and Schedule C expenses the Kanters claimed had been substantiated, except that respondent (a) disputed that the expenses paid out of funds from the TACI and PSAC accounts had been paid by Kanter and (b) questioned whether the Kanters were entitled to deduct expenses with respect to property held in trust. Counsel made no mention as to whether this agreement included the Kanters' 1986 Schedule A deduction for interest expenses. Transcr. at 3957-3960. However, counsel for petitioners expressed to the Court their belief that the parties had narrowed the issues on all of the adjustments that were then being heard by the Court. Counsel for respondent expressed no disagreement with that assertion. Following the colloquy between counsel for the parties and the Court, the trial resumed with respect to the remaining issues as to which the parties were unable to agree: (1) Whether payment of the subject expenses out of the TACI Special E and PSAC Special accounts represented payment by the Kanters, and (2) whether the Kanters were entitled to a deduction for interest payments with respect to property (the Kanters' personal residence) that was titled in a grantor trust in which Kanter was the deemed owner.

During and after the trial, the parties filed several stipulations of settlement. On May 15, 1995, the parties filed a Stipulation Of Settlement As To Certain Issues Between Petitioners Burton W. Kanter, Naomi R. Kanter, * * * [IRA], And Subsidiaries, And Respondent. The May 15, 1995 Stipulation Of Settled Issues listed a number of adjustments contained in the notices of deficiency that the parties had settled, including an "Unreported Fee Income" adjustment for 1986. The 1986 interest expense the Kanters claimed was not listed among these settled issues, nor was there any listing of the other Schedule A and Schedule C expenses identified above for the various years in question.

A. The Parties' Arguments

The parties disagree whether their off-the-record conference, during which they narrowed the issues then being heard by the Court, included petitioners' 1986 interest expense deduction of $ 368,227. Petitioners contend their agreement included the 1986 interest expense deduction, and reference to its inclusion was inadvertently omitted in their representation to the Court. Respondent disagrees and contends that all of the reasons stated in the notice of deficiency for disallowance of the interest expense deduction for 1986 remain in dispute.

B. Analysis

After the parties' off-the-record conference described above, counsel for petitioners stated on the record that he believed the parties' agreement included all adjustments then being considered by the Court and invited counsel for respondent's position on that assertion. Counsel for respondent did not point out any qualifications, restrictions, or exceptions to any of the adjustments as to which the issues had been narrowed. On brief, respondent takes the position the issues were not narrowed with respect to petitioners' 1986 interest expense deduction, nor was any agreement reached with respect to that issue.

On this record, we conclude petitioners' 1986 interest expense deduction was included in (but inadvertently omitted from) the agreement of counsel narrowing the issues to be decided by the Court. Bearing in mind that these cases were very complicated, involving numerous issues covering several tax years of several taxpayers, it is easy to understand how one adjustment could easily have been overlooked in counsel's announcement to the Court that the parties had agreed to narrow the issues in dispute. Moreover, respondent failed to qualify or take any exception to petitioners' counsel's representations to the Court regarding the scope of their agreement.

Thus, we are left only with the question whether the funds from the TACI and PSAC accounts used to pay Kanter's expenses were Kanter's funds. As previously discussed, the funds Kanter held in the TACI and PSAC accounts were his funds or funds he borrowed from other TACI or PSAC clients. Accordingly, the Kanters are entitled the interest expense deduction they claimed for 1986.

Issue XII. Whether Kanter Realized and Must Recognize Capital Gains as a Result of Transactions Involving Cashmere Investments Associates, Inc., During 1983 and Whether the Kanters May Use the Installment Method To Report Gains (STJ report at 145) ¹⁴⁹

During the 1970s, Kanter was involved in a series of real estate development projects with developers Sam Zell (Zell) and Robert Lurie (Lurie). Kanter, Transcr. at 4241-4243, 4261. The development properties were owned by partnerships (real estate partnerships) and Kanter held interests in the real estate partnerships through the BWK Revocable Trust, the Everglades Trusts (Nos. 1-5), the BWK Family Trusts, and THC. Exh. 9156, items 3, 6. The BWK Revocable Trust and the Everglades Trusts were grantor trusts whose income was attributable to Kanter personally. Exhs. 130 and 130A; Kanter, Transcr. at 4235, 4261-4262.

The designated beneficiaries of the BWK Revocable Trust, the BWK Family Trusts, and the Everglades Trusts were members of Kanter's family. Exhs. 453, 583, 9213, 130, 130A; Kanter, Transcr. at 4235, 4261-4262. During 1983, THC's shareholders included Kanter, his immediate family members, and a large number of Kanter family trusts. Exh. 152, at 1, 2, 6, 7; Exh. 454. Weisgal was THC's president. Exh. 9156, item 3.

Kanter's interests in the real estate partnerships are identified below by the entity which held each interest, the partnership, and the entity's percentage interest in the partnership at the beginning of 1983:

		Percentage
Entity	Partnership	Interest
BWK Revocable Trust	Diversified River Bend	18.60
BWK Revocable Trust	Diversified Stephenson's	8.44
BWK Revocable Trust	Bajomonte Associates	27.33
Everglades Trusts 1-5	Wayside Partners	5.01
Everglades Trusts 1-5	Manderville Partners	3.86
Everglades Trusts 1-5	Shady Crest Investors	8.43
Everglades Trusts 1-5	Palo Alto Partners	8.90
Everglades Trusts 1-5	Diversified Raintree	8.269
Everglades Trusts 1-5	Cedar Cove Partners	8.71
Everglades Trusts 1-5	Diversified Boot Lake	8.706
Everglades Trusts 1-5	Edgewater Partners	3.53
Everglades Trusts 1-5	Kentucky Holdings	9.296
Everglades Trusts 1-5	Walnut Creek Group	4.03
Everglades Trusts 1-5	Candlelite Apartments	8.825
Everglades Trusts 1-5	Village Square-Lexington	12.51
Everglades Trusts 1-5	Worthman Office Mall	23.75
Everglades Trusts 1-5	Kon Tiki Apartments	16.667
Everglades Trusts 1-5	J.S. Investors	7.50
Everglades Trusts 1-5	Cove Realty Company	8.00
Everglades Trusts 1-5	Diversified Hillsborough	8.27
Everglades Trusts 1-5	Midwest Properties Group	8.44
Everglades Trusts 1-5	Washtenaw Management Co.	8.17
Everglades Trusts 1-5	Tradewinds Shopping Ctr.	5.88
BWK Family Trusts	Centennial Investors	17.02
THC	River Bend Investors	3.40
THC	C & W Investors	30.00
THC	First Commitment & Dev.	42.50
THC	332 Equity Partnership	8.75
THC	Katy Land Company	16.67

Exh. 9156, Index and item 6. The River Bend Investors partnership interest held by THC was previously held by the Bea Ritch Trusts and was transferred to THC on or about January 1, 1983. Exh. 146, AJE's 26 and 27.

During 1982, Zell informed Kanter that Equity Financial Management Co. (Equity), an entity Zell controlled, was interested in purchasing all of the real estate partnership interests listed above. Kanter, Transcr. at 4242-4244, 4253-4254, 4265, 4302-4303. Although Kanter was interested in selling the partnership interests, he was concerned the transaction would trigger significant capital gains because his grantor trusts had negative capital accounts in the real estate partnership interests; i.e., their liabilities exceeded their bases. Kanter, Transcr. at 4244. Kanter's grantor trusts' negative capital accounts for the partnership interests in question, as of May 15, 1983, totaled $ 476,888.60, as follows:

Entity	Partnership/Interest	Cap. Acct.
BWK Rev. Trust	Bajomonte Associates	(180,270.00)
BWK Rev. Trust	Diversified River Bend	(37,622.05)
BWK Rev. Trust	Diversified Stephenson's	(30,364.70)
Everglades Trusts	Wayside Partners	(4,806.00)
Everglades Trusts	Shady Crest Investors	(36,425.79)
Everglades Trusts	Diversified Raintree	(27,005.92)
Everglades Trusts	Cedar Cove Partners	(40,725.89)
Everglades Trusts	Diversified Boot Lake	(15,942.00)
Everglades Trusts	Edgewater Partners	(24,798.38)
Everglades Trusts	Kentucky Holdings	(4,703.19)
Everglades Trusts	Walnut Creek Group	(2,095.05)
Everglades Trusts	Candlelite Apartments	(77,401.56)
Everglades Trusts	Village Square-Lexington	(15,032.32)
Everglades Trusts	Worthman Office Mall	(12,751.50)
Everglades Trusts	Kon-Tiki Apartments	(25,606.66)
Everglades Trusts	Diversified Hillsborough	3,979.00
Everglades Trusts	Manderville Partners	10,353.65
Everglades Trusts	Palo Alto Partners	1,219.11
Everglades Trusts	J.S. Investors	9,305.00
Everglades Trusts	Cove Realty	14,098.00
Everglades Trusts	Midwest Properties Group	13,834.56
Everglades Trusts	Washtenaw Management Co.	2,766.09
Everglades Trusts	Tradewinds Shopping Ctr.	3,107.00
Net capital accounts		(476,888.60)

Exh. 142 (Sch. 7); Exh. 9166; Kanter, Transcr. at 4267, 4300-4302.

As of mid-1983, the fair market value of the real estate partnership interests Zell was interested in purchasing totaled $ 1,219,321.64, as follows:

Entity	Partnership/Interest	Price (FMV)
BWK Rev Trust	Bajomonte Associates
BWK Rev Trust	Diversified River Bend
BWK Rev Trust	Diversified Stephenson's
Total FMV -- BWK Revocable Trust		$ 12,321.64
Entity	Partnership/Interest	Price (FMV)
Everglades Trusts	Wayside Partners
Everglades Trusts	Shady Crest Investors
Everglades Trusts	Diversified Raintree
	Partners
Everglades Trusts	Cedar Cove Partners
Everglades Trusts	Diversified Boot Lake
	Partners
Everglades Trusts	Edgewater Partners
Everglades Trusts	Kentucky Holdings
Everglades Trusts	Walnut Creek Group
Everglades Trusts	Candlelite Apartments
Everglades Trusts	Village Square Lexington
Everglades Trusts	Worthman Office Mall
Everglades Trusts	Kon-Tiki Apartments
Everglades Trusts	Diversified Hillsborough
	Partners
Everglades Trusts	Manderville Partners
Everglades Trusts	Palo Alto Partners
Everglades Trusts	J.S. Investors
Everglades Trusts	Cove Realty
Everglades Trusts	Midwest Properties
Everglades Trusts	Washtenaw Management Co.
Everglades Trusts	Tradewinds Shopping Ctr.
Total FMV -- Everglades Trust		$ 657,000.00
Entity	Partnership/Interest	Price (FMV)
BWK Family Trusts	Centennial Investors	$ 30,000.00
Entity	Partnership/Interest	Price (FMV)
The Holding Co.	River Bend Investors
The Holding Co.	C & W Investors
The Holding Co.	First Commitment & Dev.
The Holding Co.	332 Equity Partnership
The Holding Co.	Katy Land Company
Total FMV -- The Holding Co.		$ 520,000.00

Exh. 9166.

Because an unqualified transfer of the partnership interests of the grantor trusts to Zell would involve the assumption of liabilities in excess of the trusts' bases in the partnership interests, Kanter (the owner of those interests by virtue of the grantor trust provisions (sections 671-677) would be required to recognize capital gains on the sale to Zell. In an effort to avoid this result, Kanter directed a series of transactions in 1983 which ultimately resulted in the transfer of both cash and the real estate partnership interests from his grantor trusts to Zell. The transfers took place in three stages described below.

A. Transfer of Real Estate Partnership Interests to Cashmere

Cashmere Investments Associates, Inc. (Cashmere), was an inactive "shelf" corporation incorporated in Delaware in 1982 and controlled by Kanter. Exh. 9156; Kanter, Transcr. at 4231-4246, 4249, 4260-4261, 4266. Cashmere's board of directors consisted of Sharon Meyers and Weisgal. Exh. 9156, items 4, 10(g); Kanter, Transcr. at 4264-4265. Weisgal was Cashmere's president, Sharon Bayers was secretary, and Meyers was treasurer. Exh. 9156, item 4, at 2; Kanter, Transcr. at 4265.

On or about May 15, 1983, Kanter directed the transfer of the grantor trusts' real estate partnership interests to Cashmere in what was intended to be a nontaxable exchange under section 351 in return for Cashmere common and preferred stock. Exh. 9156; Kanter, Transcr. at 4234-4245. THC, the BWK Family Trusts, and the grantor trusts received Cashmere stock in exchange for the real estate partnership interests as follows:

	Shares of Stock
Shareholder	Common	Class A Preferred
BWK Revocable Trust	50	241.274
Everglades Trusts	400	257.226
BWK Family Trusts	30	--
THC	520	--

Exh. 9156, items 3, 5, 6.

Concurrently with the transfers described above, Kanter's grantor trusts also transferred to Cashmere eight promissory notes with an aggregate face value of $ 498,500. Exh. 9156, item 7; Kanter, Transcr. at 4235-4238, 4244, 4249, 4267-4268. Kanter's grantor trusts transferred the following notes receivable to Cashmere:

Maker	Payee	Amount
THC	Everglades Trusts	$ 90,000
Burton W. Kanter	Everglades Trusts	34,230
Beach Trust	Burton W. Kanter	128,725
HELO	Everglades Trusts	94,800
GL's Associates	Everglades Trusts	38,000
ARO Trusts	Burton W. Kanter	25,045
Baroque Trusts	Burton W. Kanter	66,000
BWK Children's Trust	Burton W. Kanter	21,700
Total		498,500

Exh. 9156, index and item 7; Kanter, Transcr. at 4269-4270. Each promissory note listed above was dated May 1, 1983, and was due and payable on August 31, 1983. Respondent's Opening Brief at 1024, par. 1538; Petitioners' Reply Brief at 1348.

The trustee of Beach Trust was Albert Morrison, the grantor was Kanter, and the beneficiaries were members of Kanter's family. Exh. 9216. The trustee of the Baroque Trusts was Patricia Grogan, the grantor was Kanter, and the beneficiaries were members of Kanter's family. Exh. 9219. For Federal tax purposes, Kanter was the "deemed owner" of the Baroque Trusts, and income therefrom generally was reportable on Kanter's individual Federal income tax returns. Exh. 9111, Bates Nos. 000125-000127.

Kanter intended that, if the promissory notes were accorded bases equal to face values, the promissory notes would increase the aggregate basis of the property the grantor trusts transferred to Cashmere; i.e, the promissory notes' bases would offset the grantor trusts' negative capital accounts in the real estate partnership interests, thereby eliminating the gain that otherwise would have been realized under section 357(c) if Cashmere had received the real estate partnership interests alone. ¹⁵⁰ Kanter did not, however, present any evidence to establish the genuineness of the promissory notes.

B. Sale of Cashmere Stock to Waco

Waco Capital Co. (Waco) was a corporation organized under the laws of the State of Delaware, Meyers was its president, and the Bea Ritch Trusts were its sole shareholders. Exh. 9156, items 8, 10(b), (c), (f); Kanter, Transcr. at 4270. The Bea Ritch Trusts' beneficiaries were members of Kanter's family and who were also the beneficiaries of Kanter's grantor trusts. Waco later changed its name to Windy City, Inc. Kanter, Transcr. at 4536. ¹⁵¹

On July 12, 1983, the BWK Revocable Trust, the Everglades Trusts, THC, and the BWK Family Trusts sold all of their Cashmere stock (common and preferred shares) to Waco for promissory installment notes totaling approximately $ 1.5 million. Exh. 9156, items 8, 9. The Waco promissory notes provided for payments in 1983 and 1984 and balloon payments in 1993. Id. The Waco promissory notes were secured by the Cashmere stock, subject to Waco's option to substitute as collateral the guaranties of its shareholders, the Bea Ritch Trusts, which would pledge various partnership interests (known in the aggregate as "Cablevision"). Exh. 9156, item 7, at 3. Sharon Meyers, on behalf of Waco and the Bea Ritch Trusts, subsequently exercised this option to substitute collateral. Exh. 9156, item 46.

Kanter reported installment sale income on Forms 6252 attached to his Federal income tax returns for 1984 and 1985. Exhs. 130, 130A. Kanter did not present any evidence to establish that WACO actually made any payments in connection with the installment promissory notes described above.

On August 25, 1983, Kanter wrote a letter to Lurie which stated that Cashmere's stockholders (at this point Waco and/or the Bea Ritch Trusts) decided they would approve a sale of 100 percent of Cashmere's stock to Equity only in exchange for cash. Exh. 9157. The letter also stated Cashmere held only real estate partnership interests and promissory notes "all of which will be paid down by August 31, 1983." Id.

On August 31, 1983, the promissory notes held by Cashmere were paid off by checks drawn on the TACI Special E account, as follows:

Ck. No.	Date	Payee	Amount
1315	8/31/83	Holding Company	$ 90,000
		"For BRT"
1316	8/31/83	BWK Revocable Trust	34,230
		"For BRT"
1317	8/31/83	Beach Trust	128,725
		"For Trust (BRT)"
1318	8/31/83	Cashmere	94,800
		"For HELO"
1319	8/31/83	Cashmere	38,000
		"For GLS Assoc"
1320	8/31/83	Cashmere	25,045
		"For ARO"
1321	8/31/83	Cashmere	66,000
		"For Baroque Tr."
1322	8/31/83	Cashmere	21,700
		"For BWK Childrens Tr."
Total			498,500

Exhs. 9159, 9160, 9161, and 9162; Kanter, Transcr. at 4276-4278, 4284-4285, 4288-4289, 4292. Check Nos. 1315 to 1317, listed above, were not made out to Cashmere because the debtors on those notes (Beach Trust, BWK Revocable Trust, and THC) were instructed to transmit their own checks to Cashmere. Exh. 9158 (Beach Trust); Exh. 148, at 8, 13 (THC); Kanter, Transcr. at 4274-4275, 4284-4286. Kanter testified that TACI transferred to Beach Trust, BWK Revocable Trust, and THC the amounts reflected in check Nos. 1315 to 1317 above), the amounts so transferred were considered loans from the Bea Ritch Trusts, and those loans were paid back. Kanter, Transcr. at 4292-4294. However, no documentary evidence (promissory notes, payment schedules, canceled checks representing interest or principal payments, or other records) was presented at trial to substantiate Kanter's testimony.

As of September 1, 1983, Waco held all of Cashmere's outstanding stock, and Cashmere's assets included the real estate partnership interests and $ 498,500 in cash. Exh. 9156, Item 10(a), at 5.

C. Sale of Cashmere Stock From Waco to Zell

On September 2, 1983, Kanter negotiated the sale of Waco's Cashmere stock to Equity in exchange for a check in the amount of $ 1,647,500. Exh. 9156, items 10A, 52; Kanter, Transcr. at 4250-4251, 4259, 4263. Because Cashmere held cash in the amount of $ 498,500, $ 1,149,000 of the purchase price was allocable to the partnership interests that Zell was interested in acquiring. Exh. 9156, items 10(A); Exhs. 9157, 9164.

Zell was not interested in the Cashmere stock and would have preferred to buy the partnership interests outright, but this was the only way that Kanter would permit the sale. Exh. 9157; Kanter, Transcr. at 4250, 4252-4253.

A. The Parties' Arguments

Respondent determined that Kanter received a net long-term capital gain of $ 190,756 as a result of the transfers from his grantor trusts to Cashmere. The notice of deficiency stated in pertinent part: "It is determined that your grantor trusts had a zero basis and negative capital account of $ 476,889 in the partnership interests transferred. The transfer of other assets to the corporation by the trusts has no bona fide business purpose, was made only to avoid income tax, and, thus is ignored for Federal income tax purposes." Respondent further determined that Kanter received a net long-term capital gain of $ 378,800 as a result of his grantor trusts' sale of Cashmere stock to Waco. The notice of deficiency stated in pertinent part:

The installment sale by the trusts was a sale of property to a related party (the first disposition). The related-party purchaser disposed of the property (the second disposition) before the grantor trusts received any payments under the first disposition. It is determined, therefore, that the total contract price for the first disposition is treated as received by the grantor trusts at the time of the second disposition.

On brief, respondent asserts the transfers from Kanter's grantor trusts to Cashmere do not qualify for nonrecognition treatment under section 351 on the alternative grounds that (1) there was no valid business purpose for the transfers from the grantor trusts to Cashmere and/or the grantor trusts did not control Cashmere immediately after the transfer (under the step-transaction doctrine), (2) the principal purpose for the transfers from the grantor trusts to Cashmere was the avoidance of Federal income tax under section 357(b), and (3) the promissory notes that the grantor trusts transferred to Cashmere did not represent genuine indebtedness, and therefore Cashmere assumed liabilities in excess of the bases in the partnership interests it received within the meaning of section 357(c). Respondent also avers that Waco's purchase of Cashmere's stock did not qualify for installment sale treatment because the transaction amounted to a disposition "of property to a related person" within the meaning of section 453(e)(1)(A).

Kanter argues the question whether the Cashmere transaction qualifies for nonrecognition treatment under section 351 is not properly before the Court, and, in any event, the grantor trusts transferred their partnership interests to Cashmere for legitimate business purposes; i.e., to enjoy tax advantages in the event the partnership interests were sold and/or to "have an aggregation of value" within the corporate entity to allow for more efficient investments. Kanter, Transcr. at 4243. Kanter further asserts the section 357(b) issue was not raised in the pleadings and is not properly before the Court and, in any event, the Cashmere transaction is not the type of arrangement that section 357(b) is designed to address. Finally, Kanter contends the promissory notes the grantor trusts transferred to Cashmere constituted genuine indebtedness, rendering section 357(c) inapplicable in these cases.

B. Analysis

Respondent determined in the notice of deficiency that the transfers from Kanter's grantor trusts to Cashmere for stock did not qualify as a tax-free exchange because the transfers were not intended to serve a bona fide business purpose but instead were carried out only to avoid Federal income tax. Although the notice of deficiency did not explicitly refer to section 351 or 357, we conclude Kanter understood respondent's position regarding the Cashmere transaction and the bases for respondent's adjustments. We further conclude, as discussed in detail below, the Cashmere transaction does not qualify for nonrecognition treatment under either section 357(b) or (c), and therefore we sustain respondent's determination that Kanter realized a long-term capital gain as a result of the Cashmere transaction.

A taxpayer generally recognizes gain or loss on a sale or exchange of property. Sec. 1001(c). Section 351(a) provides an exception to the general rule of section 1001(c), however, when a taxpayer transfers an appreciated asset (such as a partnership interest) to a controlled corporation solely in exchange for the corporation's stock. The favorable tax benefits associated with section 351 are subject to several qualifying provisions outlined below.

As a general rule, if a taxpayer receives property pursuant to a section 351 exchange and, as part of the transaction, another party to the transaction assumes a liability of the taxpayer, the assumption of liability shall not be treated as the receipt of money or property and shall not disqualify the transaction for nonrecognition treatment under section 351. Sec. 357(a). The general rule of section 357(a) is subject to the two exceptions set forth in section 357(b) and (c).

To paraphrase, section 357(b) provides that an assumption of a taxpayer's liability under section 357(a) shall be considered money received by the taxpayer for purposes of section 351 if, taking into consideration the nature of the liability and the circumstances surrounding the arrangement, it appears the taxpayer's principal purpose was to avoid Federal income tax on the exchange or was not a bona fide business purpose.

Section 357(c)(1)(A) provides, in the case of an exchange to which section 351 applies, that if the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to the exchange, the excess is treated as gain from the sale of a capital or noncapital asset, as the case may be. ¹⁵²

1. Applicability of Section 357(b)(1)

Considering all the facts and circumstances, we conclude Kanter arranged the Cashmere transaction principally for the purpose of avoiding Federal income tax. The convoluted series of Cashmere transactions began when Zell informed Kanter of Equity's desire to acquire the partnership interests held by Kanter's grantor trusts. In the end, Equity acquired those partnership interests in exchange for cash. In between, over a period of a few months, Kanter arranged: (1) Transfers of notes receivable to his grantor trusts in an aggregate amount approximately equal to the grantor trusts' negative capital accounts in their partnership interests, (2) transfers of the grantor trusts' partnership interests and the notes receivable to Cashmere in exchange for Cashmere stock, (3) sales by the grantor trusts of their Cashmere stock to Waco for promissory notes, (4) the purported satisfaction of the notes receivable held by Cashmere, and, finally, (5) Waco's sale of Cashmere stock to Equity.

Considering Zell simply wanted to acquire the real estate partnership interests held by Kanter's grantor trusts, and taking into account Kanter's desire to avoid recognizing gain on the sale to Zell to the extent his grantor trusts had negative capital accounts in the partnership interests, it is clear the rapid series of transactions described above, particularly the transfer of notes receivable to Cashmere, was carried out for no reason other than to avoid Federal income tax. Moreover, Waco's promissory notes to Kanter's grantor trusts ostensibly provided additional tax benefits in that Kanter reported the gains realized on the sale of Cashmere stock to Waco under the installment method, even though Equity paid Waco in full in 1983. In the absence of any showing that Cashmere served any legitimate business purpose before or after the transactions described above, we sustain respondent's determination that the transfers of the partnership interests with negative capital accounts to Cashmere constitute money received by Kanter (through his grantor trusts) and Kanter is taxed on the gain resulting from the transfers up to the full amount of the assumed liabilities.

2. Applicability of Section 357(c)

Section 357(c)(1)(A) provides that, in the case of an exchange to which section 351 applies, if the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to the exchange, then the excess is treated as gain from the sale of a capital or noncapital asset, as the case may be. Considering all the circumstances, we conclude, as an alternative to our analysis under section 357(b), that the grantor trusts' transfer of the eight notes receivable to Cashmere is not entitled to be respected for purposes of applying section 357(c).

Cashmere was, at best, a passive investment vehicle as opposed to an operating business, and in this light the transfer of the notes receivable to Cashmere served no business purpose independent of the tax benefits Kanter hoped to reap. The eight notes receivable in question (1) were either payable by Kanter individually or by entities he controlled, (2) reflected a total principal amount approximately equal to the aggregate negative capital accounts of the partnership interests in question, (3) were all dated May 1, 1983, and payable on August 31, 1983, and (4) were all repaid with funds from a TACI account. There is no discernible paper trail evidencing the source of the TACI funds. In the end, the cash paid to Cashmere/Waco on the notes receivable was returned to Kanter (indirectly) in the form of a portion of the cash payment Equity made to Waco for Cashmere's stock.

Considering all the circumstances, we conclude the notes receivable were used as a device to circumvent section 357(c) and resulted in nothing more than a circular transfer of funds between and among Kanter-controlled entities. There is no evidence in the record that the notes receivable represented valid indebtedness.

In the absence of any discernible bases in the notes receivable, we conclude the notes did not increase the aggregate basis in the property Kanter's grantor trusts transferred to Cashmere. Under section 357(c), Kanter was required to recognize as capital gain the excess of the liabilities Cashmere assumed over basis in the property his grantor trusts transferred to Cashmere.

3. Kanter's Use of the Installment Method

Section 453(a) provides the general rule that income from an installment sale shall be reported under the installment method. An installment sale generally is defined as a disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. Sec. 453(b)(1).

Section 453(e) prescribes special rules applicable to installment sales by related persons. In particular, section 453(e)(1) provides that if a person sells property to a related party (the first disposition) under the installment method, and the related party purchaser then resells the property (the second disposition) within 2 years after the first disposition and before the original seller has received all payments due with respect to the first disposition, the amount realized by the related party on the second disposition is treated as a payment received at that time by the original seller. Section 453(e)(7) provides that subsection (e) shall not apply to a second disposition if neither the first disposition nor the second disposition had as one of its principal purposes the avoidance of Federal income tax.

Section 453(f)(1)(A) and (B) defines the term "related person" for purposes of section 453(e) as a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property or a person who bears a relationship described in section 267(b) to the person first disposing of the property.

Waco's stock was owned entirely by the Bea Ritch Trusts, and the beneficiaries of the Bea Ritch Trusts were members of Kanter's family. In addition, Kanter's family members were the beneficiaries of Kanter's grantor trusts. Because the Waco stock owned by the Bea Ritch Trusts is considered owned by the beneficiaries of the Bea Ritch Trusts under section 318(a)(2)(B)(i), and those same beneficiaries are also the beneficiaries of Kanter's grantor trusts, ownership of the Waco stock is imputed to the grantor trusts under section 318(a)(3)(B)(i). ¹⁵³ It follows that the grantor trusts' sale of Cashmere stock to Waco constituted a sale to a related person for purposes of section 453(f)(1)(A). When Waco subsequently, within 2 years, transferred the Cashmere stock to Equity before paying the grantor trusts for the Cashmere stock, the installment method of reporting was no longer available to the grantor trusts (and Kanter) by virtue of section 453(e)(1). In sum, the entire amount Waco realized upon its sale of Cashmere stock to Equity (the second disposition) is treated as received by the grantor trusts at the time of the second disposition. Thus, we sustain respondent's determination that Kanter was not eligible for installment sale reporting.

Issue XIII. Whether Kanter Is Entitled to Research and Development and Business Expense Deductions Related to Immunological Research Corp. for 1979 (STJ report at 147-163) ¹⁵⁴

In an amendment to answer, filed November 6, 1989, respondent asserted the Kanters were liable for an increased deficiency for 1979 attributable to the disallowance of a loss of $ 311,478 the Kanters claimed from Immunological Research Corp. (IRC), an S corporation in which the Kanters held an interest through grantor trusts (i.e., the Pillpoppers Trusts). Respondent determined that IRC was not entitled to a research and development expense of $ 980,000 or various other business expenses it reported for 1979.

The facts underlying this issue were also considered by this Court in Estate of Cook v. Commissioner, TT.C. Memo 1993-581, ¹⁵⁵ which involved another shareholder in IRC. In Estate of Cook, the Court sustained the Commissioner's disallowance of research and experimentation expenses under section 174(a), as well as similar expenses claimed by two other subchapter S corporations, Antiviral Research Corp. (ARC) and Biological Research Corp. (BRC), that were engaged in the same activity. Kanter was not a stockholder in ARC or BRC. In the instant case, the parties stipulated to the record of Estate of Cook except as to those portions of the record relating to the other two subchapter S corporations.

Kanter was counsel of record for the taxpayers in Estate of Cook and was the trial attorney before this Court. Since Kanter was an investor in IRC, he had offered himself as a witness for the taxpayers at the trial of the Estate of Cook case. The Court did not allow Kanter to testify, however, because he was the trial attorney for the taxpayers. In the instant cases, Kanter was not the trial attorney and was before this Court as a party litigant and, therefore, he was allowed to testify as a witness. For present purposes, the Court recites the pertinent facts from Estate of Cook. Kanter contends the Court's holding in Estate of Cook is in error. A more detailed and comprehensive findings of fact can be found in the reported opinion of Estate of Cook. During 1979, Kanter and three other individuals (including George Cook, whose estate was the taxpayer in Estate of Cook, invested in IRC. None of the stockholders in IRC, including Kanter, had any formal educational background or experience in the field of pharmaceutical compounds, which was the business IRC was set to engage in.

Shortly after IRC was organized, IRC entered into a research/licensing agreement with Newport Pharmaceutical International, Inc. (Newport). Newport was then engaged in the manufacture, marketing, research, and development of pharmaceutical compounds. Newport owned an undivided one-half interest in a compound identified as the NPT-15000 series that it had acquired in 1978 from the Sloan-Kettering Memorial Institute for Cancer Research (Sloan- Kettering), the discoverer of the compound. At that time, this particular compound was still in the experimental stage of development.

In the 1978 transaction, Newport also acquired one-half of the "Patent Rights [of the compound], and the inventions and improvements covered thereby, throughout the world." The term "Patent Rights" was comprehensively defined elsewhere in the 1978 sales agreement. In this 1978 sales agreement, Newport was given the exclusive right to exploit the patent rights to the subject compound on a world-wide basis, as to which Newport agreed to use its best efforts to exploit the patent rights for the mutual benefit of itself and Sloan-Kettering. The agreement further allowed Newport to license third parties in connection with the exploitation of the subject compound; however, such licensing agreements, among other things, had to be agreed to by Sloan-Kettering.

IRC ostensibly was organized to engage in a licensing agreement with Newport for exploitation of the NPT-15000 series compound in which Newport held a one-half interest. IRC and Newport entered into such an agreement in 1979 for the compound identified as NPT-15392, which was within the NPT-15000 series. However, the licensing agreement IRC entered into was only with Newport. Sloan-Kettering was not a party to the agreement, did not sign the agreement, and there is no evidence that Sloan-Kettering ever acquiesced in the agreement. Newport and IRC were cognizant of Sloan-Kettering's patent reservation rights, and, accordingly, the licensing agreement between IRC and Newport was structured or attempted to be structured in such fashion that the exploitation of the subject compound by IRC or its licensees would not violate Sloan-Kettering's rights. With that end in mind, the research agreement between IRC and Newport contained the following provision:

2. Ownership of Project Results.

Any and all products, processes, compounds, inventions, ideas, patents, patent rights, technical information, data and other proprietary know-how resulting or deriving from the Project, including all improvements thereto, and any other rights to commercially exploit the Project and the products and results thereof, including but not limited to, licensing and distribution rights, shall be the sole and exclusive property of the corporation [i.e., IRC]; provided, however, the Corporation shall have no ownership rights or rights which may be deemed to be a sub-license to the extent that any of the foregoing constitutes a "Patent Right" or an invention or improvement covered thereby as defined in the agreement dated March 28, 1978 between Newport and Sloan-Kettering Institute * * *. [Emphasis added.]

Pursuant to this licensing agreement, IRC paid Newport, during 1979, $ 980,000 for Newport's services for the research, experimentation, and further development of the compound NPT 15392. On their 1979 Federal income tax return, as noted earlier, the Kanters claimed a deduction for their portion of this $ 980,000 research and experimentation expense, which respondent disallowed, consistent with the Commissioner's position in Estate of Cook v. Commissioner, T.C. Memo. 1993-581.

In Estate of Cook, this Court sustained the Commissioner's determination disallowing the portion of the $ 980,000 expense claimed by George Cook as a deduction under section 174(a). The parties agreed in the Estate of Cook case that IRC was not engaged in a trade or business within the meaning of section 162(a). The Kanters here do not contend otherwise. The Kanters contend, however, as Kanter argued for the taxpayers in the Estate of Cook case, that the expense nevertheless qualified as a deduction under section 174(a) as a research or experimentation expense.

This Court, in the Estate of Cook case, held the expense was not a research or experimentation expense within the meaning of section 174(a) based on the premise that, to qualify under section 174(a), two requirements must be satisfied: (1) The taxpayer must have an objective intent to enter into the trade or business envisioned by the licensing agreement, and (2) the taxpayer must demonstrate the capability to engage in such trade or business. The Court went on to conclude that IRC failed to meet both of these tests. Of significance to the Court was the fact that the taxpayers had not established that IRC had obtained any ownership rights in any technology to be developed by Newport because Sloan-Kettering was not a party to and had not consented to the licensing agreement (as required in the 1978 sale by Sloan-Kettering to Newport), and, moreover, the license agreement between Newport and IRC expressly provided that no ownership rights in the technology to be developed by Newport would inure to IRC to the extent that such technology or rights envisioned by the agreement came within the definition of "Patent Rights" as reserved by Sloan-Kettering in the 1978 sale to Newport. The reservation by Sloan-Kettering in the 1978 sale to Newport provided:

[the third-party license] shall have no ownership right or rights which may be deemed to be a sub-license to the extent that any of the foregoing constitutes a "Patent Right" or an invention or improvement covered thereby as defined in the

agreement dated March 28, 1978 between Newport and Sloan-Kettering Institute or is covered by the Assignment Agreement between Newport and Paul Gordon dated April 26, 1971 (collectively the "Prior Agreements").

In light of the reservation in the 1978 sale by Sloan-Kettering to Newport and the broad definition of "Patent Rights" in the same instrument, this Court concluded little, if anything, was left to be acquired by IRC in the 1979 licensing agreement between Newport and IRC. ¹⁵⁶ The Court stated: "In light of this definition, it is hard to visualize that [IRC] obtained ownership of anything that could be commercially exploited in a trade or business." The Court surmised that virtually anything Newport developed would constitute a "Patent Right", and, if so, the ownership of such improvement or technology would not be owned by IRC.

There were other facts the Court discussed to support the conclusion IRC was not engaged in a trade or business and did not have the capability to engage in a trade or business. These other findings are not seriously challenged by Kanter in the instant cases, and the Court does not consider it necessary to discuss those factors here.

Kanter was the only witness for petitioners with respect to this issue. No documentary evidence was presented to corroborate Kanter's testimony. Kanter's testimony was directed toward establishing that there were certain rights or the ownership of technology that IRC could acquire from the licensing agreement with Newport that would not fall within the umbrella of the "Patent Rights" exception existing in favor of Sloan-Kettering.

A. Trade or Business Requirement of Section 174

Section 174(a)(1) provides:

A taxpayer may treat research or experimental expenditures which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction.

Section 174(a)(1) applies to expenditures paid or incurred by a taxpayer for research or experimentation undertaken directly by a taxpayer or to expenditures paid or incurred by a taxpayer for research or experimentation carried on by another person or entity on the taxpayer's behalf. Sec. 1.174-2(a)(8), Income Tax Regs.

To be entitled to deductions for research and experimental expenditures, a taxpayer is not required to currently produce or sell any product. Moreover, a taxpayer need not be currently engaged in a trade or business in order to qualify for such deductions. Snow v. Commissioner, 416 U.S. 500, 503-504, 94 S. Ct. 1876, 40 L. Ed. 2d 336 (1974). Nevertheless, in Green v. Commissioner, 83 T.C. 667, 686-687 (1984), the Court stated:

For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and * * * [the Court] must still determine, through an examination of the facts of each case, whether the taxpayer's activities in connection with a product are sufficiently substantial and regular to constitute

a trade or business for purposes of such section. [Fn. ref. and citations omitted.]

A taxpayer must be more than a mere investor to be entitled to deductions for research and experimental expenditures under section 174. Id. at 688-689; see also Levin v. Commissioner, 87 T.C. 698, 725-726 (1986), affd. 832 F.2d 403 (7th Cir. 1987). In the case of an entity claiming deductions under section 174, the relevant inquiry is whether the entity has any realistic prospect of entering into a trade or business involving the technology under development. Spellman v. Commissioner, 845 F.2d 148, 151 (7th Cir. 1988), affg. T.C. Memo. 1986-403; Diamond v. Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d 372 (4th Cir. 1991).¹⁵⁷

As the foregoing cases demonstrate, when an entity contracts out the performance of the research and development in which it intends to engage, all of the surrounding facts and circumstances are relevant to the inquiry whether the entity has any realistic prospect of entering into a trade or business with respect to the technology under development. Consideration is given to (1) the intentions of the parties to the contract for the performance of the research and development, (2) the amount of capitalization retained by the entity during the research and development contract period, (3) the exercise of control by the entity over the person or organization doing the research, (4) the existence of an option to acquire the technology developed by the organization conducting the research and the likelihood of its exercise, (5) the business activities of the entity during the period in question, and (6) the experience of the investors in the entity. Absent a realistic prospect that the entity will enter a trade or business with respect to the technology, the entity will be treated as a passive investor, not eligible for deductions under section 174.

As indicated previously, in Estate of Cook v. Commissioner, T.C. Memo. 1993-581, the Court addressed another IRC shareholder's entitlement to a deduction for IRC's claimed 1979 research and development expense. In Estate of Cook, the Court rejected the taxpayers' contention that a realistic prospect existed of IRC's entering into a trade or business to exploit the results of the research and experimentation it acquired from Newport.

B. The Parties' Arguments

Because respondent raised this issue in an amendment to answer in which he asserted an increased deficiency, respondent has the burden of proof on this issue under Rule 142(a)(1). Respondent asserts the identical research and development expense and business expense issues were presented to and decided by the Court in Estate of Cook, and respondent maintains the Court's reasoning and conclusions in Estate of Cook are equally applicable here.

Petitioners contend the issues are purely factual and the present cases can be distinguished from the Estate of Cook case on the grounds that (1) Respondent, not petitioners, bears the burden of proof; and (2) Kanter was permitted to testify in these cases. Petitioners argue that the Court's conclusions here with respect to IRC should not be based upon certain "irrelevant" facts concerning Antiviral Research Corp. (ARC) and Biological Research Corp. (BRC), as petitioners imply happened in Estate of Cook. Petitioners maintain that almost all of the facts concerning ARC and BRC that were discussed in the Estate of Cook opinion are irrelevant here because (1) Kanter was not a shareholder of either ARC or BRC, and (2) all events relating to ARC and BRC occurred after 1979. In particular, petitioners assert that much of the documentation cited and relied upon by respondent in respondent's proposed findings of fact is not actually in evidence in the instant cases, in the light of petitioners' specific exclusion in the parties' written stipulation of those portions of the Estate of Cook record regarding ARC and BRC.

C. Analysis

Preliminarily, the Court notes that the parties, for purposes of the instant cases, generally stipulated the Estate of Cook record, except for evidence that related only to ARC or BRC. Thus, as the Court interprets the parties' stipulation, the evidence presented in Estate of Cook on ARC and BRC that would be relevant to IRC (not including perhaps the testimony of Dr. Charles Altschuler, which the Court, in any event, hereinafter does not rely upon) would be considered as evidence in the instant cases and could be considered in resolving the IRC issues for 1979. The Court does not construe the parties' stipulation to limit the evidence here to only those portions of the Estate of Cook evidentiary record that petitioners, in their sole opinion, considered "relevant" to IRC and Kanter.

On this record, respondent has established that Kanter is not entitled to deduct research and development expenses for 1979 under section 174(a). The evidence establishes that there was no realistic prospect of IRC's entering into a trade or business to exploit the technology relating to the NPT-15392 compound being developed under the IRC-Newport research/licensing agreement. Simply put, there was little, if anything, IRC could acquire from the deal since virtually anything that Newport developed would almost certainly be a patentable property right that could not be owned by IRC.

As this Court previously noted in Estate of Cook v. Commissioner, T.C. Memo. 1993-581: (1) The broad definition of the term "patent rights", as defined in the March 28, 1978, agreement between Newport and Sloan-Kettering, made it virtually impossible for IRC to acquire ownership of anything that could be commercially exploited in a trade or business; (2) the existence of the IRC Shareholders-Newport put/call agreement made it extremely unlikely IRC would ever be able to use, in a trade or business, the research Newport conducted because (a) if the research were sufficiently successful to require the payment of royalties, then Newport likely would exercise its call option allowing it to buy the IRC stock and, (b) if the research were not sufficiently successful to require the payment of royalties, then IRC's shareholders would be motivated to put their IRC shares to Newport in return for Newport common stock; (3) after its initial capital was expended, IRC had no further capital to conduct or finance further research, and the existence of the put and call agreements gave IRC's shareholders no incentive to contribute additional capital to IRC; and (4) some of IRC's shareholders apparently had always wanted to acquire Newport stock, and structuring such an investment as a research and development activity would allow the investors a deduction for their investment.

Although the record in these cases includes Kanter's testimony, testimony which was not allowed in the Estate of Cook case, the Court finds Kanter's testimony unconvincing. Kanter's testimony was in the nature of advocacy as opposed to a presentation of substantive evidence that would show that the conclusions of the Court in Estate of Cook were in error, or that essential and relevant facts had not been presented to the Court in Estate of Cook. Essentially, Kanter misunderstood this Court's reasoning in Estate of Cook. Kanter argued that the Court in Estate of Cook incorrectly assumed that IRC held no technical legal ownership rights in the know-how produced under the research project. Kanter contended that IRC did hold "other valuable rights" in the research know-how outside of any existing and derivative future "patent rights" in the NPT-15000 series of compounds retained by Newport and Sloan-Kettering. ¹⁵⁸ However, Kanter was unable to explain or describe what those rights might be, nor was any other evidence presented that would establish or support his contention. Kanter testified:

[Kanter]: * * * But it was my understanding and my belief that there is a body of rights that, unless encompassed by a specific patent that would be issued to Sloan-Kettering and Newport, under which they could theoretically preclude the exploitation of that limited right, all other rights that might result from this particular research project did belong to IRC and that they were broad enough in -- as we understood it to allow for exploitation of a profitable product or to move to the next stage of possible licensing, if in fact there was something developed.

The Court: So this body of rights that you are referring to -- would these be rights that would be considered research and development.

[Kanter]: Well, actually my recollection is -- and the [Estate of Cook] record will disclose it more accurately -- Dr. Glasky tried to point out to the Court at that time that there is in this pharmaceutical field not the necessity at any given time for a research and development project that you develop a marketable product that can go on the shelf in a drugstore, but that in this field it is common to bring research to a point where you can license what you have developed to a large pharmaceutical manufacturer, who will take it to another stage to bring it to a commercial product that will be put on the shelf.

And I can't tell you now what might have conceivably been developed were this product research and development to have been successful or gone far enough, but it was our impression and understanding at this time that it either would -- or could produce something significant and allow for future research and licensing or something significant enough to be an actual product that could be commercially manufactured. * * * [Emphasis added.]

The Court: But there have been no development of these other rights that you are talking about?

[Kanter]: Well, those rights existed. There was no preclusion of the rights as far as I know, that nobody took them away in the form of defined patent rights. [Kanter, Transcr. at 4853-4854.]

The mystery to the Court is just what those "rights" might be. The Court is quite skeptical that, in the everyday world, an investor would pay $ 980,000 for a bundle of ambiguous property rights when there is no indication that the rights could be exploited or developed. Moreover, this Court's holding in Estate of Cook was not premised totally or exclusively upon IRC's holding no technical legal ownership rights whatsoever in the research, as Kanter implies. Rather, in Estate of Cook, this Court concluded, after considering the totality of the attendant facts and circumstances, including certain highly relevant factors, that there was no realistic prospect of IRC's entering into a trade or business to exploit the technology being developed under the IRC-Newport R&D and license agreement. ¹⁵⁹

Indeed, in his testimony, Kanter could not elaborate or describe what realistic prospects IRC would have of exploiting commercially the technology being developed. In view of the broad scope of the existing and potential patent rights Newport and Sloan-Kettering held, it is difficult to believe that a third party, such as a major pharmaceutical company, would want to license from IRC the know-how on NPT-15392 to further develop that technology.

On the basis of the foregoing, the Court holds the Kanters are not entitled to a deduction under section 174 for 1979 with respect to IRC's claimed research and development expense. See Spellman v. Commissioner, 845 F.2d 148 (7th Cir. 1988), affg. T.C. Memo. 1986-403; Diamond v. Commissioner, 92 T.C. 423 (1989), affd. 930 F.2d 372 (4th Cir. 1991); Estate of Cook v. Commissioner, T.C. Memo. 1993-581.

The Court further holds the Kanters are not entitled to deductions under section 162 for 1979 with respect to IRC's claimed business expense deductions. IRC was not engaged in an active trade or business during 1979, as IRC's activities fail to satisfy even the "in connection" with a trade or business standard of section 174. See Estate of Cook v. Commissioner, supra.

Issue XIV. Whether Kanter Received Unreported Partnership Income During 1978 (STJ report at 145-146)

The notice of deficiency respondent issued to the Kanters for 1978 included as an attachment a Form 4549-B, Income Tax Examination Changes, and an accompanying schedule describing the changes determined in the notice. Item 1h, titled "Partnership Income" states:

It is determined that during the tax year 1978 you failed to report your distributive share of partnership income from the sources shown. Consequently, your taxable income is increased in the amount of $ 4,953.00.

As Shown Below:

T.C. Family Trust	($ 512.00)
Everglades Trust No. 1	1,093.00
Everglades Trust No. 2	1,093.00
Everglades Trust No. 3	1,093.00
Everglades Trust No. 4	1,093.00
Everglades Trust No. 5	1,093.00
	4,953.00

The notice of deficiency did not identify the partnership(s) generating the income determined in item 1h. In addition, although Kanter disputed this adjustment in his petition, he did not identify the underlying partnership.

On June 13, 1994, respondent filed an amendment to answer which identified the $ 4,953 adjustment as "Partnership Income/Loss (Fuel Boss -- Energy Management Systems)".

No evidence regarding this adjustment was offered by either party during the trial of these cases.

After trial, on May 15, 1995, the parties submitted to the Court a stipulation of settlement addressing a number of the adjustments determined in the notice of deficiency for 1978. Paragraph 5 of the stipulation of settlement concerns item 1f from the notice of deficiency and states: "Notice of deficiency adjustment 1(f), 'Schedule C -- Income/Loss.' The Court need not address this adjustment at this time, inasmuch as the parties have agreed that this issue is part of the 'Energy Management' project which is under the jurisdiction of Judge Halpern." The parties' stipulation of settlement, however, does not address item 1h from the notice of deficiency.

Respondent's amendment to answer, filed June 13, 1994, identified the $ 4,953 adjustment as "Partnership Income/Loss (Fuel Boss -- Energy Management Systems)". Under the circumstances, it appears this issue pertains to the Energy Management Project and the adjustment was overlooked when the parties submitted to the Court their stipulation of settlement for 1978. Consequently, the parties shall make adjustments for this issue in their computations for entry of decision under Rule 155.

Issue XV. Whether the Kanters Are Entitled to a Loss From GLS Associates for 1981 (STJ report at 163-165) ¹⁶⁰

On their 1981 income tax return, the Kanters claimed a $ 4,283 loss from GLS Associates, a partnership, which respondent disallowed in the notice of deficiency.

On brief, petitioners acknowledge there is no specific evidence in the record establishing the existence of a computer leasing transaction by GLS Associates Partnership out of which the claimed loss arose. However, petitioners contend there is evidence in this record with respect to other computer leasing transactions entered into by other entities, arguing on brief:

The record is replete with evidence regarding [certain] computer sale/leaseback transactions [of other entities]; otherwise neither party submitted any evidence with respect to * * * [GLS' computer sale/leaseback] transaction except that the parties have both introduced argument and information pertaining to the case of HGA Cinema Trust v. Commissioner, T.C. Memo. 1989-370, affd. 950 F.2d 1357 (7th Cir. 1991) * * *.

Petitioners maintain the GLS Associates computer sale/leaseback transaction was "essentially the same in substance and form" as the SLG Partners computer sale/leaseback transaction considered by this Court in HGA Cinema Trust v. Commissioner, T.C. Memo. 1989-370, affd. 950 F.2d 1357 (7th Cir. 1991). Petitioners appear to refer to evidence presented in connection with an IRA computer equipment leasing transaction as proof they are entitled the loss they claimed with regard to GLS Associates.

Respondent, on the other hand, contends petitioners failed to carry their burden of proof under Rule 142(a).

Petitioners failed to propose any findings of fact on this issue in their posttrial opening brief. Petitioners are misguided in their attempt to bootstrap this issue with that of the HGA Cinema Trust case regarding the SLG Partners computer sale/leaseback transaction. SLG Partners was a separate and distinct entity from GLS Associates, and the SLG Partners computer sale/leaseback transaction was a separate and different transaction from the GLS Associates transaction. It was incumbent on petitioners to introduce pertinent evidence on the GLS Associates transaction, as opposed to merely arguing that the GLS Associates transaction was essentially the same as the SLG Partners transaction. Petitioners failed to produce any evidence on this issue, and their self-serving legal arguments on brief do not constitute evidence. Consequently, the Court sustains respondent's determination on this issue. See Rule 142(a). ¹⁶¹

Issue XVI. Whether the Kanters Are Entitled to Losses From Equitec for 1983 and 1984 (STJ report at 165-167) ¹⁶²

On their 1983 and 1984 income tax returns, the Kanters claimed losses of $ 83,333 and $ 161,727, respectively, from an entity named Equitec. Respondent disallowed the Equitec losses.

A. The Parties' Arguments

Although petitioners offered little, if any, evidence concerning the computer leasing transactions they contend Equitec entered into, petitioners argue that "respondent has failed to recognize the evidence of record regarding the experience of Kanter vis-a-vis equipment leasing transactions [of other entities] and the issues of Equitec before this Court." Petitioners maintain that Equitec's transactions should be reviewed "de novo * * * based upon the testimony and evidence offered regarding the extensive activity of petitioners in the computer leasing field and the pertinence of such experience to determine the potential [of the] transactions for profit."

Respondent, on the other hand, contends that petitioners failed to carry their burden of proof under Rule 142(a).

B. Analysis

Petitioners failed to meet their burden of proof on this issue. Petitioners offered no substantive evidence regarding Equitec's computer leasing transactions. Petitioners' legal arguments on brief are no substitute for evidence relating to Equitec's transactions. For instance, even assuming for the sake of argument that Kanter's prior experience in similar investments may be a relevant factor to be considered in determining whether Equitec had an actual and honest profit objective, that factor alone is far from dispositive. See sec. 1.183-2(b), Income Tax Regs. Consequently, the Court sustains respondent's determination on this issue. See Rule 142(a).

Issue XVII. Whether the Kanters Are Entitled to an Investment Interest Expense Deduction for 1981 (STJ report at 167-168) ¹⁶³

On their 1981 income tax return, the Kanters deducted $ 45,095 identified as investment interest expense related to GLS Associates. Respondent disallowed this deduction in the notice of deficiency, which stated in pertinent part:

The above * * * claimed investment interest expense [from GLS Associates] is disallowed because you have not substantiated that the entity was engaged in an activity entered into for profit or that the investment interest expense was paid or incurred by the entity during the taxable year, or if paid or incurred, was deductible.

A. The Parties' Arguments

Petitioners essentially advance the same arguments they raised above relating to (1) the partnership loss they claimed with respect to GLS Associates for 1981; and (2) the loss they claimed from Equitable Leasing for 1984, which the Court has rejected. Petitioners contend the GLS Associates leasing transaction in issue is substantially the same as the SLG Partners' leasing transactions and the Court should consider Kanter's experience with other entities in the equipment leasing field.

Respondent contends petitioners failed to carry their burden of proof on this issue under Rule 142(a).

B. Analysis

Petitioners failed to offer sufficient substantive evidence concerning GLS Associates' purported leasing transaction and GLS Associates' claimed investment interest expense for 1981 to sustain their burden of proof. Self-serving legal arguments on brief are not evidence and do not suffice to sustain the burden of proof. For instance, even assuming for the sake of argument that Kanter's prior experience with similar investments is a relevant factor in determining whether GLS Associates had an actual and honest profit objective, that factor alone is far from dispositive. See sec. 1.183-2(b), Income Tax Regs. Petitioners failed to establish that: (1) GLS Associates was engaged in an activity for profit; (2) GLS Associates incurred and paid the claimed investment interest expense; and (3) even assuming the investment interest expense was incurred, that such interest expense is deductible. Consequently, the Court sustains respondent's determination on this issue. See Rule 142(a).

Issue XVIII. Whether the Kanters Are Entitled to an Investment Tax Credit Carryover for 1978 (STJ report at 169-170) ¹⁶⁴

On their 1978 income tax return, the Kanters claimed a $ 120,566 investment tax credit carryover. Respondent disallowed the tax credit in the notice of deficiency.

A. The Parties' Arguments

Petitioners contend that their entitlement to the 1978 investment tax credit carryover is purely "computational" under Rule 155. Petitioners assert, in pertinent part:

The issue of whether Kanter is entitled to a carryover of investment tax credit from his 1977 year to his 1978 year is purely computational. The resolution of this issue is entirely dependent upon the resolution of Kanter's Tax Court case

involving his 1977 year (docket. No. 12282-82), which was previously docketed and decided by this Court. Although respondent * * * [in his proposed finding] states that petitioners failed to address this issue, that is not the case. Respondent's counsel stipulated on the record that petitioners had addressed all of the issues raised in respondent's notice of deficiency. (Tr. 4825). Since this issue is purely computational, and respondent is well aware of the terms of the resolution of Kanter's 1977 tax liability, the amount of the carryover from 1977 to 1978 will be addressed in the eventual Rule 155 proceeding in this matter, and need not be addressed by the Court at this time.

The "stipulation" referred to is the discussion that took place among the Court, petitioners' counsel, and respondent's counsel concerning the parties' settlement of a number of other adjustments for the years at issue.

Respondent contends petitioners failed to carry their burden of proof under Rule 142(a).

B. Analysis

During the trial of these cases, Kanter's counsel suggested that he would read into the record the issues the parties had settled. Transcr. at 4823. The Court rejected this proposal and instead directed the parties to submit to the Court a comprehensive written stipulation of settlement. Transcr. at 4823-4825. The Court's objective was to avoid the confusion that an oral presentation of the settled issues was likely to create. Id.

Petitioners' entitlement to an investment tax credit carryover for 1978 is not addressed in the stipulation of settlement the parties filed with the Court on May 15, 1995. Petitioners now nevertheless contend that the disposition of the credit carryover issue is tied to the resolution of the underlying investment tax credit issue for 1977 -- a year that was not before the Court in these consolidated cases

The Court rejects petitioners' argument as contrary to the burden placed upon them under Rule 142(a). Petitioners presented no evidence to establish the existence of, nor their entitlement to, the claimed carryover. See Leavell v. Commissioner, T.C. Memo. 1996-117.¹⁶⁵ Moreover, petitioners must bear responsibility for submitting to the Court a stipulation of settlement that does not make any reference to this issue. Since there are several factual matters that must be established to prove the amount of the carryover that were not established at trial, the Rule 155 computational process is not a forum within which this matter can be considered. See Price v. Commissioner, T.C. Memo. 1995-290. The Court, therefore, rejects petitioners' argument that this issue is computational under Rule 155. Respondent is sustained on this issue.

Issue XIX. Whether the Kanters Are Entitled to an Interest Deduction for 1986 (STJ report at 171-173) ¹⁶⁶

On Schedule E of their 1986 income tax return, the Kanters claimed a $ 50,380 deduction for "interest computers". Respondent disallowed this deduction in the notice of deficiency.

A. The Parties' Arguments

Petitioners contend either (1) they should be allowed their claimed interest deduction, or (2) the net income they reported for 1986 from the related computer leasing activity should be disregarded or eliminated. Petitioners argue on brief, in pertinent part:

[In his proposed finding of fact], respondent asserts that the * * * computer equipment leasing deduction disallowed for 1986 is from the same Equitec investment which was disallowed in the subsequently issued notice of deficiency issued relative to * * * [the Kanters'] 1984 year * * *. Both [the notice of deficiency for 1984 and the notice of deficiency for 1986] * * * contain boilerplate language disallowing Kanter's computer leasing related interest deduction, on a variety of grounds typically used to attack perceived equipment leasing tax shelters. Most significantly, * * * [respondent's] notice of deficiency claimed that Kanter failed to establish that "the activity was entered into for profit or was economically viable." However, respondent's notice of deficiency for 1986, in contrast to the notice issued to Kanter concerning this same investment for 1984, fails to take into account (i.e., reverse) the rental income reported from this computer equipment transaction.

It is submitted that Kanter's $ 50,380 1986 Schedule E interest deduction must be viewed in conjunction with the Schedule E rents reported and depreciation claimed from the equipment leasing activity. Kanter introduced his Schedule E with respect to the computer leasing activity involved * * * revealing that he reported rents in 1986 from the leasing activity involved of $ 118,835, and claimed depreciation of $ 61,730, for a net taxable gain of $ 6,725.

Respondent contends petitioners failed to meet their burden of proof under Rule 142(a).

B. Analysis

The Equitec computer leasing transaction referred to above relative to the Kanters' 1984 tax year was resolved in respondent's favor. With regard to the 1984 loss issue, we held that the Kanters failed to sustain their burden of proof because they failed to offer substantive evidence on the merits of the activity. For the 1986 tax year, which involves the same Equitec activity, petitioners claim that either the interest claimed for 1986 should be allowed as a deduction, or the net income reported from the activity for 1986 should be disregarded or eliminated.

Here again, the record does not include any substantive evidence regarding the merits of the Equitec computer leasing activity. There likewise is no evidence regarding the merits of the indebtedness upon which the interest payments were purportedly made by the Kanters. As noted in petitioners' brief, respondent disallowed the various expenses claimed in connection with Equitec "on a variety of grounds typically used to attack perceived equipment leasing tax shelters." The fact that the leasing activity generated a profit (for 1986) does not impress the Court as proof that petitioners are entitled to an interest expense deduction for 1986. By the same token, the disallowance of expenses claimed with respect to an activity does not mean that the income or gross receipts of the activity can be disregarded. Section 1.183-1(e), Income Tax Regs., provides, in pertinent part, that "gross income derived from an activity not engaged in for profit includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from such activity." Such gross income shall include, for instance, capital gains and rents received for the use of property that is held in connection with the activity. The gross receipts of an activity, even if the activity is not engaged in for profit, constitute gross income, and there is no provision for the exclusion or the disregarding of such income simply because the expenses related thereto are not deductible.

Petitioners, therefore, failed to sustain their burden of proving their entitlement to an interest deduction of $ 50,380 for 1986, and the Court rejects petitioners' contention the net income of the activity for 1986 should be disregarded. Respondent's determination on this issue is sustained.

Issue XX. Whether the Kanters Are Entitled to a Business Deduction of $ 104,231 for 1980 (STJ report at 173-177)

Respondent disallowed a deduction of $ 104,231 that petitioners claimed on Schedule C of their 1980 tax return. The deduction related to a joint venture between two of Kanter's clients, Feigan and Rappaport, to purchase a painting of George Washington. Kanter was instrumental in bringing the two businessmen together at the start of the venture. The transaction subsequently soured, the painting was returned to its original owner, and, although the seller returned the full purchase price, Rappaport, who provided the funds for the purchase, lost money on account of an intervening decline in the value of the British pound against the U.S. dollar. A dispute between Rappaport and Feigan ensued, Kanter convinced Feigan to make Rappaport whole, and Kanter contributed $ 104,231 to reimburse Rappaport.

A. The STJ Report

The STJ report recommended findings of fact and conclusions of law that Kanter was not engaged in a trade or business of dealing in art, and, therefore, respondent's determination disallowing the deduction should be sustained.

B. The Parties' Arguments

Kanter argued the deduction should be permitted because he made the $ 104,231 payment to protect his professional reputation and he felt an obligation to shoulder a share of the loss because he had acted as a "broker". Petitioners' Reply Brief at 1407. Although respondent argued on brief that his determination disallowing the deduction should be sustained, respondent conceded in his objection to the STJ report that this transaction, like several of the transactions Kanter engaged in with The Five, served to demonstrate that Kanter routinely used his business and professional contacts to assist clients in obtaining business or in raising capital for business ventures. Citing the Court of Appeals for the Seventh Circuit's treatment of this issue in Estate of Kanter v. Commissioner, 337 F.3d at 855-856, respondent concedes Kanter is entitled to the disputed deduction. We accept respondent's concession of this issue.

Issue XXI. Whether the Kanters Are Entitled to a Deduction for a Charitable Contribution to the Jewish United Fund for 1982 (STJ report at 177-180)

FINDINGS OF FACT

Sometime during 1982, Jewish United Fund (JUF) solicited Kanter for a donation. On or about December 17, 1982, THC executed a $ 15,000 promissory note, payable to Kanter, due on March 1, 1983, and bearing interest at 12 percent per annum. On December 27, 1982, THC enclosed in a letter to JUF (1) the $ 15,000 promissory note payable to Kanter, and (2) Kanter's completed pledge card for a $ 15,000 donation to JUF. The December 27, 1982, letter stated: "THC will pay its note to Kanter, who will, in turn, see to providing these funds to JUF."

In a letter to Kanter dated December 30, 1982, JUF acknowledged its receipt of the THC promissory note. The December 30, 1982, letter further stated that "This note has been assigned by you to * * * JUF as a charitable contribution, and we are pleased to accept it as such."

On February 28, 1983, THC paid to Kanter the full $ 15,000 in principal due on the promissory note, plus interest of $ 370. On that same date, Kanter then paid $ 15,000 to JUF by issuing to JUF his own $ 15,000 check. Kanter did not pay over to JUF the $ 370 in interest he received on the THC promissory note.

On their 1982 income tax return, the Kanters claimed a $ 15,000 charitable deduction for Kanter's contribution to JUF. On their 1983 income tax return, the Kanters reported the $ 370 in interest THC paid on the THC note as interest income. Respondent disallowed the $ 15,000 JUF charitable contribution deduction claimed by the Kanters.

A. The Parties' Arguments

Petitioners contend they are entitled to a charitable contribution deduction for 1982 of at least $ 14,700, which they maintain was the THC promissory note's fair market value on the date of its contribution to JUF in December 1982. Petitioners assert: "While a small discount for the fact that the note was not to be paid until several months after the date of contribution is perhaps required, there is no basis for disallowing the entire contribution." Petitioners submit that, given the interest rates at the time (as reflected in the IRS's applicable Federal rates, as well as the 12-percent interest rate set in the note itself), the 1982 deduction should be discounted not more than $ 300.

Respondent contends the Kanters are not entitled to a charitable contribution deduction for 1982 because: (1) There was no endorsement of the THC promissory note by Kanter to JUF, and (2) the Kanters failed to establish the note's fair market value as of the date of its purported contribution to JUF in late 1982.

B. The STJ Report

The STJ report recommended holding that the Kanters are entitled to a charitable contribution deduction of $ 14,630 for 1982 related to the JUF transaction. We reject the recommendation in the STJ report because it is erroneous as a matter of law.

C. Analysis

Section 170(a) generally provides that a deduction is allowed for a charitable contribution, payment of which is made within the taxable year. Payment to a charity generally occurs when the donee relinquishes control over the property to the donee. See, e.g., Goldstein v. Commissioner, 89 T.C. 535, 542 (1988).

The record shows that Kanter did not make a payment to JUF during 1982. In short, THC forwarded to JUF a $ 15,000 promissory note payable to Kanter along with a letter which stated: "THC will pay its note to Kanter, who will, in turn, see to providing these funds to JUF." In accordance with this letter, THC paid $ 15,370 to Kanter in February 1983, and Kanter forwarded $ 15,000 to JUF at that time.

On these facts, it is evident Kanter did not endorse the promissory note over to JUF during 1982 or otherwise relinquish control of the promissory note to JUF at any time. In the absence of a payment to JUF during 1982 within the meaning of section 170(a), it follows that the Kanters are not entitled to a charitable contribution deduction for 1982. Nevertheless, Kanter did make a $ 15,000 charitable contribution to JUF during 1983, and, thus, the Kanters are entitled to a deduction for that year, subject to the adjusted gross income limitations of section 170(b).

Issue XXII. Whether Kanter Is Liable for Self-Employment Tax for 1982 (STJ report at 180-181) ¹⁶⁷

OPINION

Respondent determined in the notice of deficiency for 1982 that Kanter is liable for additional self-employment tax of $ 848. Inasmuch as respondent's determination turns on the disposition of other adjustments respondent determined for 1982, the amount of Kanter's self-employment tax will be determined in the parties' computations for entry of decision pursuant to Rule 155.

Issue XXIII. Whether the Kanters Realized Capital Gains and Losses as Reported on Their 1987 Tax Return (STJ report at 182-198)

Respondent determined in the notice of deficiency issued to the Kanters for 1987 that they were not entitled to capital losses arising from various sales of stocks, bonds, promissory notes, and partnership interests to Mallin, MAF, Inc., Windy City, Inc., and others. These adjustments were resolved against petitioners and the decision entered by the Court at docket No. 24002-91 for the taxable year 1987 on September 24, 2001, was not appealed and is otherwise final. See secs. 7481(a)(1), 7483. Consequently, we need not consider this issue.

Issue XXIV. Additions to Tax and Related Matters

In some of the notices of deficiency issued to the Kanters and/or in amended pleadings filed in the Kanters' cases, respondent determined (as an alternative to respondent's determination the Kanters were liable for additions to tax for fraud) that the Kanters were liable for additions to tax under section 6653 (negligence), section 6659 (substantial valuation overstatement), section 6661 (substantial understatement of tax), and increased interest under section 6621(c).

The STJ report, at 265-293, recommended holding (1) the Kanters were liable for additions to tax under sections 6653, 6659, and 6661 for the years in question, and (2) the Kanters were liable for increased interest for 1980, 1984, 1986, and 1987.

Inasmuch as respondent asserted these additions to tax against Kanter strictly as alternatives to respondent's assertion of the fraud additions (which we sustained above with regard to income Kanter earned from The Five), we need not consider the alternative additions to tax.

To reflect the foregoing,

Appropriate orders will be issued (1) striking from respondent's amendment to answer filed at docket No. 31301-87 increased deficiencies for 1978, and (2) granting respondent's oral motion to conform the pleadings to the proof at docket No. 26251-90, and decisions will be entered pursuant to Rule 155.

APPENDIX 1

Frey's payments to IRA's subsidiary Zeus during 1980-85:

Date	Payments	Exhibits
1980	$ 127,372	12, Stmts. 7, 25, at 7,
		"Zeus" column; Kuck, Transcr.
		at 3371-3373.
1981	105,764	14, at 7, "Zeus" column,
		ll. 2, 6, and 7; 5814
		and 5817; Kuck, Transcr. at
		3378-3384
1982	538,781	17, at 16, Zeus column,
		l. 4; Kuck, Transcr. at 3409
1-17-83	6,875	224
2-16-83	9,375	224
3-14-83	11,875	456
4-19-83	7,500	456
5-24-83	7,500	456
6-30-83	7,500	5815, 5818
7-25-83	7,500	456
8-5-83	7,500	456
9-7-83	7,500	456
10-7-83	7,500	456
11-21-83	7,250	456
12-16-83	7,250	224, at 11
11-3-83	15,000	456
	110,125	18, at 20 "Zeus" column
1-13-84	$ 7,250	456
2-14-84	7,250	456
3-15-84	7,250	456
4-15-84	7,250	456
6-7-84	7,250	456
	7,250	456
7-24-84	7,250	225
	7,250	225
10-5-84	23,392	225
	4,108	225
12-4-84	18,000	457; 5819
	103,500	19, at 12, "Zeus" column
1-31-85	1,625	457 (Bates 000022, 000023)
3-29-85	3,250	457 (Bates 000025, 000024)
4-10-85	123,888	457 (Bates 000026)
	128,763	20, 16, "Zeus" column
Total	1,114,305

APPENDIX 2

Carlco's officers and directors during 1982 through 1989:

Title	1982	1983	1984
Directors	Kanter	Freeman	--
	Carl Kanter	Meyers	--
President	Carl Kanter	Meyers	Henry Lisle
Vice president	Kanter	--	Donna Lisle
Secretary	Meyers	Gallenberger	D. Dubanevich
Treasurer	Meyers	Meyers	--
Assistants	Meyers	--	--
Title	1985	1986	1987
Directors	--	--	--
President	Henry Lisle	Henry Lisle	Henry Lisle
Vice president	Donna Lisle	Donna Lisle	Donna Lisle
Secretary	Dubanevich	Dubanevich	Dubanevich
Treasurer	--	Gallenberger	Gallenberger
Assistants	Meyers	Lisle	Lisle
Title	1988	1989
Directors	--	--
President	Henry Lisle	Robert Lisle
Vice president	Donna Lisle	Thomas Lisle
Secretary	Dubanevich	Donna Lisle
Treasurer	Gallenberger	Gallenberger
Assistants	--	--

Exhs. 67, 2086, 424, 477.

APPENDIX 3

TMT's officers and directors during 1982 through 1989:

Title	1982	1983	1984
Directors	Kanter	Freeman	Freeman
	Joshua Kanter	Meyers	Meyers
	Meyers	--	--
President	Kanter	Meyers	Meyers
Vice president	Meyers	--	--
Secretary	Meyers	Gallenberger	Gallenberger
Treasurer	Joshua Kanter	Meyers	Meyers
Assistants	Joshua Kanter
Title	1985	1986	1987
Directors	Meyers	Gallenberger	Gallenberger
President	Meyers	Gallenberger	Gallenberger
Vice president	--	--	--
Secretary	Gallenberger	Gallenberger	Gallenberger
Treasurer	Meyers	Gallenberger	Gallenberger
Assistants
Title	1988	1989
Directors	Gallenberger	Gallenberger
President	Gallenberger	Gallenberger
Vice president	--	--
Secretary	Gallenberger	Gallenberger
Treasurer	--	--
Assistants	--	--

Exh. 91.

APPENDIX 4

BWK's officers and directors during 1982 through 1990:

Title	1982	1983	1984
Directors	Kanter	Weisgal	Weisgal
	Joshua Kanter	--	--
	Meyers	--	--
President	Kanter	Weisgal	Weisgal
Vice president	Meyers	--	--
Secretary	Meyers	Meyers	Meyers
Treasurer	Meyers	Meyers	Meyers
Assistants	--	--	--
Title	1985	1986	1987
Directors	Weisgal	Weisgal	Weisgal
President	Weisgal	Weisgal	Weisgal
Secretary	Gallenberger	Gallenberger	Gallenberger
	Kanter	Kanter	--
Secretary	Gallenberger	Gallenberger	Gallenberger
Treasurer	--	--	--
Assist. sec.	Snedden	Snedden	Snedden
Title	1988	1989	1990
Directors	Weisgal	Weisgal	Kanter
President	Weisgal	Weisgal	Kanter
Vice president	Gallenberger	Gallenberger	--
	Kanter	Kanter	--
Secretary	Gallenberger	Gallenberger	Gallenberger
Treasurer	--	Kanter	--
Assist. sec.	Snedden	Snedden	Snedden

Exhs. 112, 2009.

APPENDIX 5

During 1984 to 1989, IRA made loans to KWJ Partnership as follows:

Date	Amount	Exhibit
3-22-84	$ 3,000	29, at 15
4-24-84	3,000
5-29-84	3,000
6-29-84	3,000
7-30-84	3,000
9-12-84	3,000
9-26-84	3,000
11-7-84	4,000
11-29-84	4,000
12-26-84	4,000
12-31-84	adj. (3,000)
	30,000
1-21-85	4,000	32, at 13
2-21-85	4,000
3-5-85	1,500
3-22-85	4,000
4-25-85	4,000
5-28-85	4,000
6-24-85	4,000
7-8-85	4,000
8-27-85	4,000
9-23-85	4,000
10-18-85	4,000
12-2-85	4,000
	45,500
1-3-86	4,000	33, at 8-9
1-31-86	4,000
3-3-86	4,000
7-8-86	2,000
7-29-86	4,000
8-15-86	20,000
	38,000
1-8-87	20,000	9000, at 9
7-16-87	8,000
10-20-87	12,000	34, at 3
11-30-87	8,000
	48,000
3-31-88	20,000	35, at 3
11-27-89	68,370	36, at 5
Total	249,870	9077, Kuck Summary #3

APPENDIX 6

During 1985 to 1989, IRA transferred the payments that it received from PMS to Carlco, TMT, and BWK in a 45/45/10 percent split as follows:

	Payments
Date	From PMS	Carlco	TMT	BWK	Total	Exhibit
1-9-85	90,423	--	--	--	--	320
4-3-85	90,423	--	--	--	--	323
7-1-85	90,423	--	--	--	--	325
10-2-85	90,423	--	--	--	--	327
Total	361,692	$162,000	$162,000	$ 36,000	$ 360,000	32, at 15-16
1-7-86	90,423	--	--	--	--	329
5-15-86	90,423	--	--	--	--	330
7-2-86	90,423	--	--	--	--	332
9-30-86	90,423	--	--	--	--	334
Total	361,692	$ 162,370	$ 162,370	$ 36,082	$ 360,822	33, at 12
1-12-87	90,423	--	--	--	--	335
5-1-87	90,423	--	--	--	--	336
7-2-87	90,423	--	--	--	--	337
10-14-87	90,423	--	--	--	--	338
Total	361,692	$ 192,313	$ 192,313	$ 36,169	$ 420,795	9000, at 11
						34, at 7-8
1-22-88	90,423	--	--	--	--	339
4-27-88	90,423	--	--	--	--	340
7-18-88	90,423	--	--	--	--	341
10-24-88	90,423	--	--	--	--	342
	361,692	$ 162,760	$ 162,760	$ 36,169	$ 316,691	35, at 7
1-9-89	90,423	--	--	--	--	343
	1 750,000	--	--	--	--
	840,423	$ 378,190	$ 378,190	$ 84,042	$ 840,422	36, at 8
Total	2,287,191				2,298,730

APPENDIX 7

During 1983, THC transferred $ 2,335,298 to TACI's accounts as follows:

Date	Amount	Exhibit
1-6-83	$ 36,000	148, at 3
1-24-83	100,000	148, at 3
1-25-83	79,164	148, at 3
2-16-83	50,000	148, at 4
2-18-83	70,000	148, at 4
3-2-83	20,000	148, at 4
3-21-83	50,000	148, at 4
3-28-83	100,000	148, at 4
3-31-8	315,000	148, at 4
4-7-83	60,000	148, at 4
4-11-83	40,000	148, at 5
5-11-83	110,000	148, at 5
5-17-83	180,000	148, at 5
5-23-83	35,000	148, at 6
5-31-83	130,000	148, at 6
6-9-83	15,000	148, at 6
6-15-83	44,000	148, at 6
6-21-83	30,000	148, at 6
7-7-83	8,600	148, at 7
7-11-83	100,000	148, at 7
7-17-83	50,000	148, at 7
8-5-83	80,000	148, at 7
8-18-83	30,000	148, at 8
12-23-83	1,000	148, at 8
12-28-83	21,000	148, at 8
12-29-83	60,000	148, at 8
9-1-83	80,000	149, at 1
9-2-83	6,100	149, at 1
9-6-83	30,000	149, at 1
9-14-83	160,000	149, at 1
9-15-83	33,334	149, at 1
9-20-83	200,000	149, at 1
9-20-83	11,100	149, at 1
10-14-83	20,000	149, at 2
10-19-83	30,000	149, at 2
12-19-83	250,000	174, at 112
Total	2,335,298

APPENDIX 8

TACI transferred $ 1,339,843 to THC during 1983 as follows:

		Check
Bates Stamped	Dated	No.	Payable	Amount
0-0002732	1-4-83	1186	THC	95,000
0-0002756	1-11-83	1198	THC	35,000
0-0002762	1-12-83	1201	THC	8,000
0-0002810	2-4-83	1227	THC	60,000
0-0002868	2-25-83	1258	THC	20,000
0-0002894	3-4-83	1271	THC	15,000
0-0002946	3-24-83	1297	THC	18,000
0-0002958	3-30-83	1303	THC	125,000
0-0002982	4-4-83	1315	THC	68,000
0-0003112	4-19-83	1405	THC	25,000
0-0003162	5-9-83	1432	THC	106,000
0-0003166	5-10-83	1434	THC	50,000
0-0003184	5-17-83	1444	THC	15,000
0-0003192	5-26-83	1448	THC	59,843
0-0003214	6-2-83	1461	THC	25,000
0-0003218	6-3-83	1463	THC	30,000
0-0003270	6-29-83	1491	THC	28,000
0-0003356	8-11-83	1538	THC	10,000
0-0003374	8-15-83	1547	THC	5,000
0-0003378	8-15-83	1549	THC	41,000
0-0003380	8-16-83	1551	THC	16,000
0-0003466	9-21-83	1602	THC	50,000
0-0003468	9-23-83	1603	THC	76,000
0-0003496	10-3-83	1618	THC	43,000
0-0003512	10-6-83	1627	THC	15,000
0-0003514	10-6-83	1628	THC	20,000
0-0003532	10-18-83	1639	THC	10,000
0-0003582	10-25-83	1664	THC	30,000
0-0003586	10-25-83	1666	THC	8,000
0-0003588	10-25-83	1667	THC	8,000
0-0003590	10-25-83	1668	THC	53,000
0-0003594	10-26-83	1670	THC	15,000
0-0003622	11-4-83	1685	THC	1,500
0-0003658	11-23-83	1705	THC	15,000
0-0003662	11-28-83	1707	THC	60,000
0-0003686	12-7-83	1720	THC	10,000
0-0003752	12-28-83	1756	THC	50,000
0-0003762	12-30-83	1761	THC	20,500
Total				1,339,843

Exh. 5406.

APPENDIX 9

THC transferred $ 1,194,000 to TACI during 1984 as follows:

Date	Amount	Exhibit
2-10-84	$ 25,000	149, at 3
2-16-94	1,000	149, at 3
2-16-84	1,000	149, at 3
3-15-85	20,000	149, at 4
4-13-84	60,000	149, at 4
4-18-84	10,000	149, at 4
4-25-84	50,000	149, at 4
5-23-84	13,000	149, at 5
7-20-84	50,000	149, at 5
8-10-84	30,000	149, at 6
8-24-84	37,000	149, at 6
9-10-84	125,000	150, at 1
9-21-84	20,000	150, at 1
10-2-84	110,000	150, at 1
10-10-84	30,000	150, at 1
11-14-84	345,000	150, at 1
11-15-84	140,000	150, at 1
11-21-84	37,000	150, at 1
12-31-84	90,000	150, at 2
Total	1,194,00

APPENDIX 10

TACI transferred $ 756,300 to THC during 1984 as follows:

		Check
Bates Stamped	Dated	No.	Payable	Amount
0-0003766	1-4-84	1763	THC	$ 2,650
0-0003768	1-4-84	1764	THC	2,650
0-0003804	1-13-84	1785	THC	25,000
0-0003826	1-24-84	1797	THC	1,000
0-0003828	1-24-84	1798	THC	1,000
0-0003854	1-31-84	1811	THC	1,000
0-0003890	2-13-84	1829	THC	500
0-0003892	2-13-84	1830	THC	500
0-0003894	2-13-84	1831	THC	5,000
0-0003898	2-14-84	1833	THC	39,000
0-0003938	2-17-84	1853	THC	9,000
0-0003974	3-7-84	1872	THC	106,000
0-0004002	3-22-84	1887	THC	90,000
0-0004016	3-26-84	1894	THC	12,000
0-0004076	4-19-84	1927	THC	5,000
0-0004106	5-1-84	1942	THC	55,000
0-0004160	5-3-84	1970	THC	27,000
0-0004298	6-21-84	2039	THC	117,000
0-0004318	6-28-84	2049	THC	40,000
0-0004324	6-29-84	2052	THC	15,000
0-0004330	7-2-84	2057	THC	5,000
0-0004348	7-3-84	2067	THC	20,000
0-0004378	7-11-84	2084	THC	25,000
0-0004414	7-25-84	2106	THC	50,000
0-0004500	8-23-84	2153	THC	29,000
0-0004670	10-24-84	2247	THC	4,000
0-0004692	10-30-84	2260	THC	2,000
0-0004698	11-1-84	2263	THC	5,000
0-0004754	12-4-84	2294	THC	5,000
0-0004784	12-13-84	2311	THC	7,000
0-0004794	12-18-84	2316	THC	15,000
0-0004800	12-20-84	2321	THC	20,000
0-0004804	12-21-84	2323	THC	7,000
0-0004786	12-14-84	2312	THC	8,000
Total				756,300

Exh. 5406.

APPENDIX 11

During 1983, $ 407,458 was transferred from the TACI account to Kanter's personal bank account purportedly as loans, as follows:

Bates Stamped		Check
Deposited	Dated	No.	Payment	Amount	Memo
0-0002988	4-5-83	1318	Burton Kanter	$ 15,000	--
0-0003160	5-9-83	1431	Burton Kanter	55,000	--
0-0003282	7-5-83	1497	Burton Kanter	50,000	--
0-0003284	7-6-83	1498	Burton Kanter	2,000	--
0-0003288	7-7-83	1500	Burton Kanter	1,000	Loan
0-0003296	7-12-83	1504	Burton Kanter	35,000	Loan
0-0003314	7-19-83	1514	Burton Kanter	15,000	--
0-0003332	7-25-83	1525	Burton Kanter	25,000	Loan
0-0003396	8-25-83	1560	Burton Kanter	5,000	--
0-0003402	8-26-83	1563	Burton Kanter	5,000	--
0-0003404	8-30-84	1565	Burton Kanter	55,000	Loan
0-0003410	8-31-83	1568	Burton Kanter	25,000	Loan
0-0003452	9-16-83	1595	Burton Kanter	22,000	Loan
0-0003464	9-20-83	1601	Burton Kanter	5,000	Loan
0-0003478	9-27-83	1608	Burton Kanter	5,000	Loan
0-0003526	10-17-83	1635	Burton Kanter	5,000	Loan
0-0003530	10-18-83	1638	Burton Kanter	2,500	Loan
0-0003534	10-18-83	1649	Burton Kanter	5,000	Loan
0-0003538	10-19-83	1642	Burton Kanter	1,500	--
0-0003548	10-21-83	1647	Burton Kanter	1,000	Loan
0-0003554	10-21-83	1650	Burton Kanter	2,000	Loan
0-0003578	10-24-83	1662	Burton Kanter	1,500	Loan
0-0003596	10-28-83	1671	Burton Kanter	42,958	Loan
0-0003678	12-6-83	1716	Burton Kanter	6,000	Loan
0-0003708	12-15-83	1732	Burton Kanter	10,000	Loan
0-0003756	12-29-83	1758	Burton Kanter	10,000	Loan
Total				407,458

Exh. 5407.

APPENDIX 12

During 1984, $ 909,000 was transferred from the TACI Special account to Kanter's personal bank account purportedly as loans, as follows:

		Check
Bates No.	Dated	No.	Payable	Amount	Memo
0-0003812	1-19-84	1789	Burton Kanter	$ 25,000	Loan
0-0003824	1-24-84	1796	Burton Kanter	5,000	--
0-0003844	1-27-84	1806	Burton Kanter	2,000	Loan
0-0003852	1-31-84	1810	Burton Kanter	2,000	Loan
0-0003880	2-7-84	1824	Burton Kanter	25,000	Loan
0-0003902	2-14-84	1835	Burton Kanter	5,000	Loan
0-0003922	2-16-84	1845	Burton Kanter	5,000	Loan
0-0003942	2-23-84	1855	Burton Kanter	20,000	Loan
0-0003952	3-1-84	1861	Burton Kanter	15,000	Loan
0-0003956	3-2-84	1863	Burton Kanter	6,000	Loan
0-0004004	3-22-84	1888	Burton Kanter	10,000	Loan
0-0004028	3-29-84	1900	Burton Kanter	26,000	Loan
0-0004082	4-23-84	1930	Burton Kanter	2,500	Loan
0-0004092	4-27-84	1935	Burton Kanter	30,000	Loan
0-0004174	5-15-84	1977	Burton Kanter	30,000	Loan
0-0004194	5-17-84	1987	Burton Kanter	5,000	Loan
0-0004198	5-21-84	1989	Burton Kanter	70,000	Loan
0-0004208	5-23-84	1994	Burton Kanter	5,000	Loan
0-0004210	5-24-84	1995	Burton Kanter	5,000	Loan
0-0004222	5-30-84	2001	Burton Kanter	10,000	Loan
0-0004230	5-31-84	2005	Burton Kanter	4,000	Loan
0-0004234	6-1-84	2007	Burton Kanter	1,000	--
0-0004272	6-13-84	2026	Burton Kanter	1,500	Loan
0-0004274	6-14-84	2027	Burton Kanter	55,000	Loan
0-0004784	6-20-84	2032	Burton Kanter	20,000	Loan
0-0004296	6-21-84	2038	Burton Kanter	5,000	--
0-0004312	6-26-84	2046	Burton Kanter	10,000	Loan
0-0004342	7-3-84	2064	Burton Kanter	15,000	Loan
0-0004366	7-9-84	2077	Burton Kanter	15,000	--
0-0004376	7-11-84	2082	Burton Kanter	5,000	Loan
0-0004382	7-17-84	2086	Burton Kanter	17,000	Loan
0-0004406	7-24-84	2101	Burton Kanter	15,000	Loan
0-0004432	8-1-85	2118	Burton Kanter	10,000	Loan
0-0004460	8-8-84	2132	Burton Kanter	10,000	Loan
0-0004482	8-17-84	2143	Burton Kanter	20,000	Loan
0-0004488	8-21-84	2146	Burton Kanter	56,000	Loan
0-0004492	8-22-84	2149	Burton Kanter	70,000	Loan
0-0004564	9-14-84	2187	Burton Kanter	6,000	Loan
0-0004572	9-17-84	2191	Burton Kanter	55,000	Loan
0-0004576	9-18-84	2196	Burton Kanter	7,000	Loan
0-0004586	9-24-84	2202	Burton Kanter	5,000	Loan
0-0004608	10-3-84	2216	Burton Kanter	175,000	Loan
0-0004618	10-5-84	2221	Burton Kanter	8,000	Loan
0-0004728	11-20-84	2280	Burton Kanter	15,000	Loan
0-0004732	11-21-84	2283	Burton Kanter	5,000	Loan
Total				909,000

Exh. 5407.

APPENDIX 13

During 1983, $ 24,000 was transferred from the TACI account to Kanter's personal bank account purportedly as retainer fees, as follows:

Date	Amount	Exhibit
1-3-83	$ 2,000	148, at 3
2-2-83	2,000	148, at 3
3-14-83	2,000	148, at 4
3-31-83	2,000	148, at 4
5-2-83	2,000	148, at 5
6-1-83	2,000	148, at 6
6-27-83	2,000	148, at 7
8-1-83	2,000	148, at 7
9-2-83	2,000	149, at 1
9-20-83	2,000	149, at 1
11-1-83	2,000	149, at 2
12-1-83	2,000	149, at 2
Total	24,000

APPENDIX 14

During 1984, $ 24,000 was transferred from the TACI to Kanter's personal bank account purportedly as retainer as follows:

Date	Amount	Exhibit
1-3-84	$ 2,000	149, at 3
2-2-84	2,000	149, at 3
3-1-84	2,000	149, at 4
4-3-84	2,000	149, at 4
5-1-84	2,000	149, at 4
7-3-84	2,000	149, at 5
8-1-84	2,000	149, at 6
8-30-84	2,000	149, at 6
10-1-84	2,000	150, at 1
11-1-84	2,000	150, at 1
12-4-84	2,000	150, at 1
12-6-84	2,000	150, at 1
Total	24,000

APPENDIX 15

During 1984, $ 161,000 was transferred from the TACI account to Kanter's personal bank account purportedly as loans, as follows:

	Check			Check
Date	No.	Payable to	Amount	Memo
3-16-84	1878	Burton Kanter	$ 106,000	Loan
3-23-84	1890	Burton Kanter	25,000	Loan
8-9-84	1975	Burton Kanter	5,000	Loan
8-13-84	2136	Burton Kanter	10,000	Loan
9-27-84	2207	Burton Kanter	10,000	Loan
11-27-84	2287	Burton Kanter	10,000	Loan
Total			161,00

Exh. 9078; Kuck, Transcr. at 3482-3490.

APPENDIX 16

The IRS issued the following summonses:

	Tax
Summons Issued to	Year	Date of Summons	Exhibit
Claude Ballard	1984	July 25, 1991	484
Linda Gallenberger	1984	Jan. 10, 1991	485
(In the matter of
Claude & Mary
Ballard)
Linda Gallenberger	1984	Jan. 10, 1991	486
(In the matter of
Robert Lisle &
Donna Lisle)
Linda Gallenberger	1984	Jan. 10, 1991	487
(In the matter of
Claude & Mary
Ballard)
Donna Lisle	1984	July 30, 1991	488
Linda Gallenberger	1984	Jan. 10, 1991	489
Robert Lisle	1988	July 30, 1991	490
Linda Gallenberger	1984	Jan. 10, 1991	491
Officer, PSAC
(In the matter of
Robert Lisle &
Donna Lisle)
PSAC	1983,	Oct. 1, 1990	9046
(In the matter of	1985-88
Burton & Naomi
Kanter)
Mildred Schott	1983,	Apr. 30, 1990	492
(In the matter of	1985-88
Burton & Naomi
Kanter)

Lunk, Transcr. at 1045-1052.

APPENDIX 17

Original and additional beneficiaries of the Bea Ritch Trusts:

	Original	Additional
Trust Name	Beneficiaries	Beneficiaies
BWK Trust	Burton Kanter	JSK 1st Trust #5
		JSK 2d Trust #5
		JSK 3d Trust #5
Naomi Trust	Naomi Kanter	JSK 3d Trust #19
		JSK 1st Trust #20
BN Trust	Burton & Naomi	JSK 1st Trust #4
		JSK 2d Trust #4
		JSK 3d Trust #4
Joel Trust	Burton & Joel	JSK 1st Trust #17
	Kanter	JSK 2d Trust #17
Janis Trust	Burton & Janis	JSK 3d Trust #15
	Kanter	JSK 1st Trust #16
Joshua Trust	Burton & Joshua	JSK 2d Trust #18
	Kanter	JSK 3d Trust #18
Joel Childrens	Burton & Naomi	JSK 3d Trust #17
Trust	Joel & Joel's	JSK 1st Trust #18
	children living
Janis Childrens	Burton & Naomi	JSK 2d Trust #16
Trust	Janis & Janis's	JSK 3d Trust #16
	children living
	from time to time
Joshua Childrens	Burton & Naomi	JSK 1st Trust #19
Trust	Joshua & Joshua's	JSK 2d Trust #19
	children living
	from time to time
JL-1 Trust	Burton & Joel	JSK 3d Trust #11
	Harriet Blum &	JSK 1st Trust #12
	Joel's 1st child
JL-2 Trust	Burton & Joel	JSK 2d Trust #12
	Debbie Blum &	JSK 3d Trust #12
	Joel's 2d child
JL-3 Trust	Burton & Joel	JSK 1st Trust #13
	Jeff Blum &	JSK 2d Trust #13
	Joel's 3d child
JA-1 Trust	Burton & Janis	JSK 1st Trust #9
	Henry Krakow	JSK 2d Trust #9
	Janis's 1st child	JSK 3d Trust #9
JA-2 Trust	Burton & Janis	JSK 1st Trust #10
	Helen Krakow &	JSK 2d Trust #10
	Janis's 3d child	JSK 3d Trust #10
JA-3 Trust	Burton & Janis	JSK 1st Trust #11
	Evelyn Krakow &	JSK 2d Trust #11
	Janis's 3d child
JS-1 Trust	Burton & Joshua	JSK 3d Trust #13
	Gerald L. Kanter &	JSK 1st Trust #14
	Joshua's 1st child
JS-2 Trust	Burton & Joshua	JSK 2d Trust #14
	Ruth Kanter &	JSK 3d Trust #14
	Joshua's 2d child
JS-3 Trust	Burton & Joshua	JSK 1st Trust #15
	Joshua's 3d child	JSK 2d Trust #15
	& all of the
	children of
	Gerald L. Kanter
	living from time	to time
BK Childrens	Burton, Naomi, &	JSK 1st Trust #1
Trust	all of the children	JSK 2d Trust #1
	of the grantor's	JSK 3d Trust #1
	son living from
	time to time
BK Descendants'	Burton, Naomi, &	JSK 1st Trust #2
Trust	all of the descen-	JSK 2d Trust #2
	dants of the	JSK 3d Trust #2
	grantor's son
	living from time
	to time
BK Grand-	Burton, Naomi, &	JSK 1st Trust #3
children's Trust	Burton's grand-	JSK 2d Trust #3
	children living	JSK 3d Trust #3
	from time to time
Lillian Trust	Burton, Naomi, &	JSK 2d Trust #20
	Lillian Wilsker	JSK 3d Trust #20
J-1 Wifes Trust	Burton, Joel's wife	JSK 1st Trust #6
	& the children of	JSK 2d Trust #6
	Carl I. Kanter	JSK 3d Trust #6
	living from time
	to time
J-2 Husbands	Burton & Janis's hus-	JSK 1st Trust #7
Trust	band & the child-	JSK 2d Trust #7
	ren of Aloysius B.	JSK 3d Trust #7
	and Helene M.
	Osowski
J-3 Wifes Trust	Burton, Joshua's	JSK 1st Trust #8
	wife & Ruth &	JSK 2d Trust #8
	Philip Loshin	JSK 3d Trust #8

Exhs. 135, 9187, 9269, 9270, 9271.

---

Footnotes

• 1. Cases of the following petitioners are consolidated herewith: Estate of Burton W. Kanter, Deceased, Joshua S. Kanter, Executor, and Naomi R. Kanter, docket Nos. 1350-87, 31301-87, 33557-87, 3456-88, 32103-88, and 26251-90; Claude M. and Mary B. Ballard, docket Nos. 16421-90, 20211-91, 21616-91, 1984-92, 23743-92, and 22884-93; and Estate of Robert W. Lisle, Deceased, Thomas W. Lisle and Amy L. Albrecht, Independent Co-Executors, and Estate of Donna M. Lisle, Deceased, Thomas W. Lisle and Amy L. Albrecht, Independent Co-Executors, docket Nos. 21555-91, 16164-92, and 7557-93.

• 143. The STJ report recommended holding that respondent is barred from making any determination concerning the taxable year 1983 on account of the expiration of the period of limitations governing assessment and collection for that year. As previously discussed, we determined that Kanter's income tax returns for the years at issue were fraudulent, and, therefore, the period of limitations remains open pursuant to sec. 6501(c)(1).

• 144. The record does not disclose whether the Kanters provided the check register to the revenue agent who examined their 1982 return. Apparently the revenue agent had been unsuccessful in obtaining a number of documents requested from the Kanters, as the agent attempted to reconstruct Kanter's 1982 taxable income based upon an analysis of Kanter's bank account deposits. To obtain copies of the bank account statements and other account information, the agent issued a third-party administrative summons to the bank.

• 145. The STJ report, at 131-132, includes statements suggesting that Kanter offered testimony regarding his bank deposits for 1982 and that testimony was credible. The Court is unable to find any citation of Kanter's testimony on this point in petitioners' posttrial briefs, nor is the testimony apparent from a review of the transcript.

• 146. Respondent does not challenge the ultimate conclusion in the STJ report on this issue.

• 147. Respondent does not challenge the ultimate conclusion in the STJ report on this issue.

• 148. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report.

• 149. The STJ report recommended holding that respondent is barred from making any determination concerning the taxable year 1983 on account of the expiration of the period of limitations governing assessment and collection for that year. As previously discussed, we determined that Kanter's income tax returns for the years at issue were fraudulent, and, therefore, the period of limitations remains open pursuant to sec. 6501(c)(1).

• 150. Sec. 357(c) provides in pertinent part:

  SEC. 357 (c). Liabilities in Excess of Basis. --

  (1) In general. -- In the case of an exchange --

  (A) to which section 351 applies * * *

  if the sum of the amount of the liabilities assumed * * * exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

• 151. As previously mentioned supra p. 176, Zeus purchased Waco/Windy City, Inc. stock in 1986. In addition, Kanter sold to Windy City certain promissory notes, bonds, and shares of stock in a failed attempt to generate capital losses for 1987. See Issue XXIII, infra.

• 152. Sec. 357(c)(2)(A) provides sec. 357(c)(1) shall not apply to any exchange to which sec. 357(b)(1) applies.

• 153. Alternatively, under Issue V supra, we concluded Kanter was the grantor of the Bea Ritch Trusts under the grantor trust provisions. Attributing the Waco stock held by the Bea Ritch Trusts to Kanter, see sec. 318(a)(2)(B)(ii), it follows that Kanter's ownership of the Waco stock also is attributed to Kanter's grantor trusts under sec. 318(a)(3)(B)(ii). Thus, Waco and the grantor trusts are considered related persons under sec. 453(f)(1)(A).

• 154. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report.

• 155. The decision the Court entered at docket No. 9533-87, in accordance with its Memorandum Opinion in Estate of Cook v. Commissioner, T.C. Memo. 1993-581, was not appealed and is final. See secs. 7481(a)(1), 7483.

• 156. The Mar. 28, 1978, agreement wherein Sloan-Kettering conveyed a one-half interest to Newport defined "patent right" as follows:

  a. Any U.S. patent application hereafter filed covering any invention or improvement resulting from the Collaborative Efforts, and division, continuation, and continuation-in-part of any such application, and any patent which shall issue based on such application, division, continuation, and continuation-in-part.

  b. Any patent which is a reissue or an extension of, a patent of addition to, any patent defined in (a) above;

  c. Any patent application or patent corresponding to any patent application or patent identified in (a) or (b) above which is hereafter filed or issued in any country.

  In the licensing agreement between Newport and IRC, entered into in 1979, the research to be undertaken by Newport was described as follows:

  The research which is the subject of this Agreement will include, but is not limited to the areas of: chemical synthesis and analysis of compounds to be agreed upon; research and development of pharmaceutical dosage forms and methods of quality control testing for identity, purity and stability; preclinical toxicological, pharmacological and biochemical studies in tissue culture and animal models to determine safety efficacy and method of action and to provide guidelines for the investigation of potential applicability to human subjects; toxicological, pharmacological and biochemical studies in human subjects to determine safety and degree of tolerance in man; and clinical trials to determine range of clinical potential and conditions for obtaining maximum therapeutic benefit at minimum risk in clinical usage.

  This shall be a fixed price contract and Newport will provide to * * * [IRC] data on NPT-15392 and such other substances as may be agreed to, establishing the acute toxicity (single dose administration to two species); subacute toxicity (multiple dose administration in two species for 90 days); single dose

  administration to humans designed to establish the level at which the drug may be safely administered (including laboratory and physical measurements of potential side effects) and the results of efficacy testing in at least 12 patients in which laboratory parameters of the immune response are measured.

• 157. See also Double Bar Chain Co., Ltd. v. Commissioner, T.C. Memo. 1991-572; Coleman v. Commissioner, T.C. Memo. 1990-357.

• 158. Kanter testified as follows:

  [Kanter]: Well, I can't speak to it, Your Honor, in terms of being a patent attorney, and I don't profess to necessarily understand what a patent attorney would testify to as an expert, but it was my understanding that the documents here [i.e., the IRC-Newport R&D and License Agreement and the March 28, 1978, agreement between Newport and Sloan-Kettering], which are part and parcel of the manner in which the * * * [Court] developed its opinion in Cook, involved patent rights as a form of rights that belonged to * * * (Newport] and Sloan-Kettering under the documents.

  The other rights [belonging to IRC] would be those, of course, that exist if no patent rights were obtained, and any other rights that were not encompassed by any patent rights that were defined, so that there was a body of rights that could be available to IRC.

  Absent Newport * * * and Sloan-Kettering undertaking something that would preclude a given right, if they were granted such a right, IRC had the basic rights it could proceed with, should a product be developed from this particular research.

  The Court: So I guess what you are saying is, * * * that the researcher really has * * * [retained the rights to develop the technology]

  * * * * *

  [Kanter]: Right. And I think that is one of the things they do go on, and the Court, in * * * [Estate of Cook], pointed to the fact that Newport,.and Sloan-Kettering appeared, under the definition of patent rights, to own the rights, and that IRC owned no rights.

  [Petitioners' counsel]: Well, in fact, isn't it true, Mr. Kanter, that unless a patent was obtained or reissued, that all rights would have remained in IRC?

  [Kanter]: That is my understanding.

  Kanter, Transcr. at 4851-4854.

• 159. Other factors considered by the Court included a put/call agreement that allowed the IRC shareholders to "put" their stock in IRC to Newport, which the stockholders of IRC would likely exercise if the research turned sour, or the "call" agreement that allowed Newport to buy the IRC stock, which likely would occur if the development of the technology proved to be successful. The Court also noted that all of the Schedules 10-K filed by Newport with the Securities and Exchange Commission, pursuant to sec. 13 or 15(d) of the Securities Exchange Act of 1934, as amended, described the research agreement, as entered into with IRC, as being more in the nature of an investment than a licensing of the technology. The Court further noted that, even if IRC acquired the technology from Newport, there was no showing that IRC had the resources to devote to the exploitation of the technology, nor was there any obligation on the part of IRC to compel or require capital contributions from its stockholders. The Court concluded the investments in IRC were nothing more than an investment in Newport that was structured to allow the investors in IRC a deduction for their $ 980,000 investment through purported research and experimental deductions that would not have been available had the investment been made directly in Newport.

• 160. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report. Petitioners have not registered any specific objections to the STJ report regarding this issue.

• 161. The Court also finds petitioners' seeming reliance upon HGA Cinema Trust v. Commissioner, T.C. Memo. 1989-370, affd. 950 F.2d 1357 (7th Cir. 1991), curious, as petitioners are not arguing that this Court should reach a conclusion similar to its conclusion therein. In HGA Cinema Trust, this Court, among other things, determined that certain long-term promissory notes SLG Partners issued in connection with the purchase of computer equipment were not valid indebtedness. The taxpayer in HGA Cinema Trust was a trust that was a limited partner in SLG Partners. Kanter was the trust's trustee and also its counsel in the litigation before this Court and the U.S. Court of Appeals for the Seventh Circuit. Moreover, in the instant cases, although there originally had been certain adjustments at issue between the parties relating to SLG Partners and K&D Associates (which latter entity, according to petitioners, simply held an interest in SLG Partners), those adjustments were settled by the parties. On May 15, 1995, the parties filed with the Court their stipulation of settlement as to certain issues between the Kanters and respondent. Pursuant to the May 15, 1995, stipulation of settlement, petitioners generally conceded the underlying SLG Partners and K&D Associates adjustments, except petitioners did not agree any additions to tax should be imposed with respect to these conceded adjustments.

• 162. The STJ report recommended holding that respondent is barred from making any determination concerning the taxable year 1983 on account of the expiration of the period of limitations governing assessment and collection for that year. As previously discussed, we determined that Kanter's income tax returns for the years at issue were fraudulent, and, therefore, the period of limitations remains open pursuant to sec. 6501(c)(1).

  The foregoing aside, the Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report with regard to the taxable year 1984.

• 163. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report.

• 164. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report.

• 165. For example, the burden of proof includes not only establishing the amount of the investment credit for the year the credit was earned but also establishing what portion of the credit was absorbed or applied in the carryback of the credit to prior years, after which the remaining amount of the credit can be applied to the first carryforward year.

• 166. The Court's disposition of this issue represents in large measure a wholesale adoption of the recommended findings of fact and conclusions of law set forth in the STJ report.

• 167. The STJ report recommended alternative holdings that turned on whether the self-employment tax issue was inadvertently omitted from the parties' stipulated settlement. If so, the STJ report proposed to hold for petitioners. On the other hand, if the matter was purely computational, the matter would be addressed in the parties' Rule 155 computations. The Court concludes, on the basis of the manner in which the issue is set forth in the notice of deficiency, that this issue is purely computational.

• 1. This $ 750,000 payment was remitted by PMS to PSAC per Kanter's instructions. Nevertheless, PSAC transferred this money to IRA for distribution to Carlco, TMT, and BWK in a 45/45/10 split.