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 Cashmere2007 Tax Ct. Memo LEXIS 21">*451 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 the2007 Tax Ct. Memo LEXIS 21">*452 grantor trusts transferred to Cashmere constituted genuine indebtedness, rendering section 357(c) inapplicable in these cases.

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 partnership2007 Tax Ct. Memo LEXIS 21">*453 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, 2007 Tax Ct. Memo LEXIS 21">*454 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 partnership2007 Tax Ct. Memo LEXIS 21">*455 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 after2007 Tax Ct. Memo LEXIS 21">*456 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. The2007 Tax Ct. Memo LEXIS 21">*457 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 to2007 Tax Ct. Memo LEXIS 21">*458 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 disposition2007 Tax Ct. Memo LEXIS 21">*459 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, 2007 Tax Ct. Memo LEXIS 21">*460 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 Entitled2007 Tax Ct. Memo LEXIS 21">*461 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.

FINDINGS OF FACT

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 shareholder2007 Tax Ct. Memo LEXIS 21">*462 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 did2007 Tax Ct. Memo LEXIS 21">*463 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 acquired2007 Tax Ct. Memo LEXIS 21">*464 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 in2007 Tax Ct. Memo LEXIS 21">*465 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 property2007 Tax Ct. Memo LEXIS 21">*466 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). 2007 Tax Ct. Memo LEXIS 21">*467 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 rights2007 Tax Ct. Memo LEXIS 21">*468 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 commercially2007 Tax Ct. Memo LEXIS 21">*469 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.

2007 Tax Ct. Memo LEXIS 21">*470 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.

OPINION

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 incurred2007 Tax Ct. Memo LEXIS 21">*471 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">416 U.S. 500, 416 U.S. 500">503-504, 94 S. Ct. 1876">94 S. Ct. 1876, 40 L. Ed. 2d 336">40 L. Ed. 2d 336 (1974). Nevertheless, in Green v. Commissioner, 83 T.C. 667">83 T.C. 667, 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 deductions2007 Tax Ct. Memo LEXIS 21">*472 for research and experimental expenditures under section 174. 83 T.C. 667"> Id. at 688-689; see also Levin v. Commissioner, 87 T.C. 698">87 T.C. 698, 87 T.C. 698">725-726 (1986), affd. 832 F.2d 403">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">845 F.2d 148, 845 F.2d 148">151 (7th Cir. 1988), affg. T.C. Memo. 1986-403; Diamond v. Commissioner, 92 T.C. 423">92 T.C. 423, 92 T.C. 423">439 (1989), affd. 930 F.2d 372">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 the2007 Tax Ct. Memo LEXIS 21">*473 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, the2007 Tax Ct. Memo LEXIS 21">*474 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. Petitioners2007 Tax Ct. Memo LEXIS 21">*475 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.

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 Court2007 Tax Ct. Memo LEXIS 21">*476 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 IRC2007 Tax Ct. Memo LEXIS 21">*477 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 in2007 Tax Ct. Memo LEXIS 21">*478 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 other2007 Tax Ct. Memo LEXIS 21">*479 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 gone2007 Tax Ct. Memo LEXIS 21">*480 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.]

2007 Tax Ct. Memo LEXIS 21">*481 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

2007 Tax Ct. Memo LEXIS 21">*482 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">845 F.2d 148 (7th Cir. 1988), affg. T.C. Memo. 1986-403; Diamond v. Commissioner, 92 T.C. 423">92 T.C. 423 (1989), affd. 930 F.2d 372">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" 2007 Tax Ct. Memo LEXIS 21">*483 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)

FINDINGS OF FACT

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:

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, respondent2007 Tax Ct. Memo LEXIS 21">*484 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.

OPINION

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 when2007 Tax Ct. Memo LEXIS 21">*485 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.

OPINION

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 record2007 Tax Ct. Memo LEXIS 21">*486 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">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">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).

2007 Tax Ct. Memo LEXIS 21">*487 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

2007 Tax Ct. Memo LEXIS 21">*488 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.

OPINION

Although petitioners2007 Tax Ct. Memo LEXIS 21">*489 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).

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 determining2007 Tax Ct. Memo LEXIS 21">*490 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 interest2007 Tax Ct. Memo LEXIS 21">*491 expense was paid or incurred by the entity during the taxable year, or if paid or incurred, was deductible.

OPINION

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).

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 relevant2007 Tax Ct. Memo LEXIS 21">*492 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 notice2007 Tax Ct. Memo LEXIS 21">*493 of deficiency.

OPINION

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 discussion2007 Tax Ct. Memo LEXIS 21">*494 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).

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 upon2007 Tax Ct. Memo LEXIS 21">*495 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.

2007 Tax Ct. Memo LEXIS 21">*496 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.

OPINION

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 relative2007 Tax Ct. Memo LEXIS 21">*497 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 of2007 Tax Ct. Memo LEXIS 21">*498 $ 6,725.

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

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 generated2007 Tax Ct. Memo LEXIS 21">*499 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 net2007 Tax Ct. Memo LEXIS 21">*500 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.

OPINION

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, 2007 Tax Ct. Memo LEXIS 21">*501 therefore, respondent's determination disallowing the deduction should be sustained.

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)

2007 Tax Ct. Memo LEXIS 21">*502 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 claimed2007 Tax Ct. Memo LEXIS 21">*503 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.

OPINION

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, 2007 Tax Ct. Memo LEXIS 21">*504 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.

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.

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">89 T.C. 535, 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 endorse2007 Tax Ct. Memo LEXIS 21">*505 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

2007 Tax Ct. Memo LEXIS 21">*506 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

OPINION

In some of the notices of deficiency issued to the Kanters and/or in amended2007 Tax Ct. Memo LEXIS 21">*507 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, and2007 Tax Ct. Memo LEXIS 21">*508 decisions will be entered pursuant to Rule 155.

APPENDIX 1

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

2007 Tax Ct. Memo LEXIS 21">*509 APPENDIX 2

Carlco's officers and directors during 1982 through 1989:

Exhs. 67, 2086, 424, 477.

APPENDIX 3

TMT's officers and directors during 1982 through 1989:

2007 Tax Ct. Memo LEXIS 21">*510 Exh. 91.

APPENDIX 4

BWK's officers and directors during 1982 through 1990:

Exhs. 112, 2009.

APPENDIX 5

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

2007 Tax Ct. Memo LEXIS 21">*511 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:

2007 Tax Ct. Memo LEXIS 21">*512 APPENDIX 7

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

APPENDIX2007 Tax Ct. Memo LEXIS 21">*513 8

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

2007 Tax Ct. Memo LEXIS 21">*514 Exh. 5406.

APPENDIX 9

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

APPENDIX 10

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

2007 Tax Ct. Memo LEXIS 21">*515 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:

2007 Tax Ct. Memo LEXIS 21">*516 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:

2007 Tax Ct. Memo LEXIS 21">*517 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:

APPENDIX 14

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

APPENDIX 15

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

2007 Tax Ct. Memo LEXIS 21">*518 Exh. 9078; Kuck, Transcr. at 3482-3490.

APPENDIX 16

The IRS issued the following summonses:

Lunk, Transcr. at 1045-1052.

APPENDIX 17

Original and additional beneficiaries of the Bea Ritch Trusts:

2007 Tax Ct. Memo LEXIS 21">*519 Exhs. 135, 9187, 9269, 9270, 9271.