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Summaries - M

Click on the case name for the complete text.

Maher v. Commissioner
76 T.C. 593 Tax Ct. Rep. (CCH) 37,816, (P-H) ¶76.50

The taxpayers claimed an $8,000 casualty loss under Section 165(c)(3) for the death of coconut palms growing on their residence. Death was due to "lethal yellowing," a fungus disease transmitted by a leaf hopper insect. A requirement for deductibility of nonbusiness losses under Section 165(c)(3) is that the loss resulted from a sudden, unusual or unexpected cause. The taxpayer argued that the sudden insect infestation satisfied this requirement.
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Maher v. Commissioner of Internal Revenue
680 F.2d 91, 82-2 USTC ¶ 9460, 50 AFTR2d 82-5290 (11th Cir. 1982)
Affirming Tax Court, 76 TC 593, CCH Dec. 37,816

Casualty losses: Coconut palm trees: Lethal yellowing: Disease v. other causes.--The destruction of the taxpayer's coconut palm trees by lethal yellowing disease was not a casualty within the meaning of Code Sec. 165. Thus, no casualty loss deduction could be claimed for value of the trees.
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Malat v. Ridell
64-1 USTC ¶ 9432, 13 AFTR2d 1348 (S.D. Cal. 1964)

Sales and exchanges: Sales in the course of business: Capital gain v. ordinary income.--Gain on the sale of two parcels of land in u954 was taxable as ordinary income, rather than capital gain, since the parcels were held primarily for sale in the ordinary course of business rather than for investment. The failure to obtain rezoning and satisfactory financing was the primary cause of the sale, which was the step intended by the parties to be taken at the time the property was acquired and while it was held, if the rezoning and financing failed.
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Malat v. Ridell
347 F.2d 23, 65-2 USTC ¶ 9452, 15 AFTR2d 1121 (9th Cir. 1965)
Affirming District Court, 64-1 USTC ¶9432

Sales and exchanges: Sales in ordinary course of business: Capital gain v. ordinary income.--The holder of property which is acquired and held with the purpose of realizing gain from it in any feasible manner has several alternative purposes for his holding, each of which in turn actually becomes the primary purpose as efforts are concentrated in that direction. Thus, where real estate developers acquired and held property for the dual purpose of investment and sale, their intention to sell the property after they abandoned their plans to develop the property as a rental investment became the primary purpose for holding the property. The resulting sale of the property, therefore, was a sale in the ordinary course of business, and the gain realized was taxable as ordinary income.
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Malat v. Ridell
383 U.S. 569, 86 S. Ct. 1030, 16 L. Ed. 2d 102,
1966-1 C.B. 184, 66-1 USTC ¶ 9317, 17 AFTR2d 604 (1966)
Vacating and remanding CA-9, 65-2 USTC ¶9452, 347 F. 2d 23

Capital gains: Sale of real estate: Meaning of property held "primarily" for sale: Dual purpose.--In determining that gain on the sale of real estate which had been acquired with intent either to develop it for rental purposes or to sell it, whichever would be more profitable, was ordinary income because the property was held primarily for sale in the ordinary course of business, the District Court and the Court of Appeals applied an incorrect legal standard. "Primarily" means "of first importance" or "principally." The Court of Appeals, in affirming the District Court, had said that when the taxpayer resolved to sell, that purpose became the primary purpose.
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Malat v. Riddell
275 F. Supp. 358, 66-2 USTC ¶ 9564,
18 AFTR2d 5015 (S.D. Cal. 1966) (on remand)

Capital gain v. Ordinary income: Real estate sales: Assets held primarily for sale: Fact finding.--On remand from the Supreme Court (66-1 USTC ¶9317) the District Court found that 20.255 acres of real estate were not held by taxpayers' partnership primarily for sale to customers in the ordinary course of trade or business. Therefore, taxpayers were entitled to report the gains from the sales of the property as capital gains.
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Maple v. Commissioner
27 T.C.M. 944; P-H T.C. Memo ¶ 68,194 (I968).

The taxpayers and a company known as M & M entered into a partnership arrangement for the purpose of developing an orange grove. M& M operated a nursery which raised and sold citrus trees, and the partnership agreed to purchase its trees from M & M. Under the terms of this agreement, the partnership agreed to purchase seedlings in a "lined" state from M & M, and M & M agreed to develop the seedlings into orange trees capable of being transplanted to an orchard. In return for developing the seedlings, M&M was to receive $63,700. M&M agreed to be responsible only for those losses due to factors under its control. The partnership was to bear alt other risks. Prior to the time the trees were transplanted they had gone through three significant stages: Budding, lopping and bailing. Budding is a process whereby rootstock seedlings (i.e., seedlings which produce inedible oranges) are converted into edible orange trees by grafting a bud from an edible orange tree to the rootstock. Lopping is the bending over of the rootstock to force it to die so that only the growth from the grafted bud and the roots remain. Bailing is the process of digging up the tree and wrapping it in a burlap bag for transplanting. All three of these processes were performed by M & M in return for the $63,700 paid by the partnership. The partners deducted this amount as developmental expenditures under the section of the Treasury Regulations dealing with expenses of farmers, i.e., Reg. § 1.162-12. The Commissioner denied the deduction, contending that all costs of raising a tree from a seedling to the point where it can be transplanted to an orchard are preparatory expenses rather than developmental expenses, and thus must be capitalized as part of the cost of the tree.
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Maple v. Commissioner
440 F.2d 1055 (9th Cir. 1971); 71-1 USTC ¶9548 27 AFTR 2d 1144
Affirming, 27 TCM 944 (1968)*

The taxpayers were partners in the Maple Corona Ranch Company (Corona), a partnership organized to develop and operate a citrus orchard. In June 1961, Corona contracted with the M&M Company, a nursery, to purchase 26,000 seedlings at $.30 per seedling. M&M agreed to maintain, cultivate, and bud the seedlings in its nursery for $2.45 per tree. An orange tree will not grow from a seedling until a bud has been inserted in the seedling. The contract specified that the risk of loss for the seedlings was to be borne by Corona except for loss caused by M&M's negligent care. The normal practice in the citrus farming industry is for the grower to purchase trees ready for the orchard and to capitalize their full cost. M&M was selling such transplantable trees to other growers in the area, ready for the orchard, at $2.75 per tree. The taxpayers deducted the full cost of the maintenance contract, over $63,000, as a business expense in 1961. The taxpayers contended that under Section 162 of the Code and Treas. Reg. § 1.162-12 they could deduct the cost of the contract since it was an expense incurred in the development of an orchard. The Commissioner contended that the cost of the contract must be capitalized since the expenses were incurred while the seedlings were in a pre-productive state. The Commissioner argued that the services performed by M&M under the contract were alt cultural services that were necessary to bring the seedlings into a plantable stage.
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Martin Timber Co., Inc. v. Commissioner
31 T.C.M. 1266; P.H.T.C. Memo ¶72,255 (1972)

The taxpayer was engaged in the production and sale of yellow pine and hardwood lumber. During 1966 and 1967 it cut pine and hardwood from 36 tracts of its timberland. During those same two years, the over-all market price for timber, as well as the market price in the area in which the company operated its business, increased by as much as ten percent. The quality of the timber that the company sold was similar to the quality sold in the same area by the United States Forest Service. The density and volume cut per acre on these lands were also quite similar.

Taxpayer, operating on a calendar year for tax purposes, had elected under section 631(a) to treat the cutting of timber during 1966 and 1967 as a sale or exchange of a capital asset. The company had recognized gain on the sale of timber to the extent of the difference between the fair market value of the timber on the first day of the taxable year when it was cut and its adjusted basis.

The Commissioner determined the fair market value of the timber cut to be somewhat less than the amount the company had reported on its return and asserted appropriate deficiencies.
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Martz v. Commissioner
41 T.C.M. 1236, Tax Ct. Mem. Dec. (CCH) 37,818, (P-H) ¶81,168

The taxpayer claimed a $925 casualty loss deduction under Section 165(c)(3) for the death of coconut palm trees growing on her residential property. The taxpayer claimed that lightning killed the trees, The Government claimed that the trees were killed by "lethal yellowing," a fungus disease transmitted by a leaf hopper insect, and that death by disease is not a "sudden, unexpected" cause qualifying the loss for deduction under Section 165(c)(3).
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McGrew v. Commissioner
24 T.C.M. 1391; P-H T.C. Memo ¶65,256 (1965).

The taxpayers were members of a partnership engaged in the business of purchasing timberlands and marketing logs cut from them. The togs were sold to a corporation of which the partners owned two-thirds of the stock. Cutting operations from one tract resulted in a loss; and the Commissioner disallowed deduction of the loss on the ground that it had been incurred in a transaction between related persons as defined in section 267. The taxpayers contended that section 267 was not meant to disallow the deduction of losses resulting from ordinary business transactions. The taxpayers also challenged the Commissioner's method of calculating the loss.
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McKean v. Commissioner
42 T.C.M. 1709, Tax Ct. Mem. Dec. (CCH) 38441, (P-H) ¶81,670

The taxpayer claimed a $17,586 casualty loss under Section 165(c)(3) for the death of a shade tree killed by an attack of woodboring insects. The oak tree was the dominant feature of the taxpayer's front yard. Expert testimony showed that the loss of the tree reduced the fair market value of the property by $15,000. The Government contended that the loss was not a "casualty" within the meaning of Section 165 because the taxpayers had not shown that death of the tree resulted from a sudden, unexpected or unusual cause.
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McKelvey v. Commissioner
T.C. Memo. 2002-63

Respondent determined deficiencies in petitioner's Federal income tax of $3,034 for 1995 and $6,015 for 1996. After concessions, the issues presented for decision by the parties' motions are: (1) Whether petitioner's expenditures related to his tree farm activities are startup expenses that are not currently deductible under section 195; and (2) if the expenses are not startup expenses, whether petitioner was engaged in an activity for profit within the meaning of section 183.

We sustain respondent's determination that petitioner's "trees" expenses were startup expenses and not currently deductible. In so doing, we shall grant respondent's motion and deny petitioner's motion. As a result, we do not reach the section 183 issue raised by respondent.
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McMullan v. United States
686 F.2d 915, 82-2 USTC ¶¶9539, 13,483 50 AFTR2d 82-5494, 82-6199

The taxpayer owned and leased extensive acreages of timberland in West Virginia. In 1979 the Court of Claims ruled that for the years 1969-71, this taxpayer held the timberland as an investment and was therefore entitled to capital gains treatment on outright sales. In addition, the 1979 ruling held that the taxpayer was entitled to deduct timber sales expenses against his ordinary income (Wilmington Trust Co. v. United States). In the current case, which involves 1972, the Government again raised both issues

The taxpayer argued that the holdings in Wilmington Trust Co. collaterally estopped the government from raising the issues of whether or not the timber constitutes a capital asset and whether the timber sales expenses can be deducted against ordinary income. The government argued that it was not collaterally estopped because the manner in which the timber activities are carried out had changed materially in 1972.
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McMullan v. United States
78-2 U.S.T.C. ¶ 9656 42 AFTR 2d 78-5723 (1978)

The taxpayers jointly owned land which produced income from oil, gas, coal and timber. The income from the timber, about 80 percent of the total, was received from cutting contracts and was treated by the taxpayers as capital gain under Section 631(b) of the Internal Revenue Code. All of the taxpayers' costs of managing the land, including expenses directly related to the sale of the timber under the cutting contracts (i.e., a disposal of timber with a retained economic interest) were treated as ordinary and necessary business expenses and deducted by the taxpayers from ordinary income. The Internal Revenue Service disagreed with the taxpayers' deduction of the expenses directly related to the acquisition, negotiation and management of the timber cutting contracts, contending that these expenses (salaries of foresters for marking timber, legal fees for drafting contracts, etc.) were capital expenditures rather than deductible expenses and as such should be treated for tax purposes as an offset against the taxpayers' capital gains on the timber disposals. In arguments before the Court of Claims the Government relied on a previous Court of Claims case (Casey v. united States) in which the Court had required a taxpayer purchasing timber from public lands to treat the cost of a logging road it had to construct under the government contract as a capital expenditure rather than a deductible expense. The Commissioner also relied on a basic principle of tax law that the direct costs of a sale of a capital asset must be offset from the gain on the sale rather than deducted from ordinary income. The taxpayers argued that the Casey case involving the logging road was not controlling since the expenses in the two cases are of a different nature. They further argued that the controlling case was the decision of the Court of Claims in Union Bag-Camp Paper Corp. v. United States, decided in 1963, which held that certain direct costs of disposing of timber under a cutting contract could be deducted rather than capitalized because (a) in the particular case the costs were "nominal", or (b) even if the direct costs of the disposal under Section 631(b) were not nominal, the legislative history of that section indicates that Congress did not intend to require that the direct costs of a Section 631(b) disposal be capitalized and offset against the capital gains resulting from the disposal.
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Homer F. and Dorothy L. McMurray v. Commissioner
Docket No. 4850-90., 63 T.C.M. 1802 (1992), T.C. Memo. 1992-27

The central issue in this case is the amount of charitable deduction to which the McMurrays are entitled as a result of donating property known as the Ponemah Bog in Amherst, New Hampshire, to the Audubon Society of New Hampshire. The McMurrays, who are husband and wife, in 1954 acquired the approximately 72-acre Bog and other contiguous parcels of land.

In February 1978, Audubon solicited from the McMurrays a donation of the Bog, in order to ensure its perpetual preservation. The McMurrays agreed, and in 1979, 1982 and 1985 conveyed their interests in the Bog and an abutting residential lot to the Audubon Society in four separate transactions. Only the value of the 1982 and two 1985 conveyances are at issue in this case. The McMurrays claimed income tax deduction for the donation on their 1982-1988 income tax returns.

Upon conducting an examination of the McMurrays' returns for 1984, 1985 and 1986, the Commissioner determined that the fair market value of the 1982 conveyance was $23,200, rather than $780,000, as the McMurrays claimed. Accordingly, the Commissioner ruled that there was no carryover from 1982 to either 1983 or 1984, and thus no deduction allowable for 1984. The Commissioner also ruled that the fair market value of the 1985 Bog transfer was $6,250, as opposed to the $580,000 the McMurrays claimed; and that the value of the residential lot transferred the same year was $35,000 rather than $57,500, as claimed by the McMurrays. Based on these figures, the Commissioner determined that the McMurrays were entitled to a 1985 deduction of $24,750, and that no carryovers were available for future years. Thus, the Commissioner found deficiencies for 1984, 1985 and 1986. The Commissioner also asserted additions to tax under I.R.C. §6653 for negligence and intentional disregard of rules a and regulations, and under I.R.C. §6659 for underpayment of tax attributable t to a charitable valuation overstatement. The Commissioner subsequently determined tax deficiencies for 1987 and 1988, as well as additions to tax under sections 6653 and 6659.

In March 1990, the McMurrays filed a petition in the tax court seeking a redetermination of the 1984, 1985, and 1986 deficiencies. On March 19, 1992, the tax court ruled against the McMurrays (Appeal No. 92-1513). Meanwhile, in March 1991, the McMurrays had sought redetermination of their 1987 and 1988 deficiencies. The Commissioner filed a motion for summary judgment in the 1991-filed case, claiming that the McMurrays were collaterally estopped by the decision in the 1990 case from relitigating the 1985 contributions. On April 23, 1992, the tax court granted the Commissioner's motion for summary judgment (Appeal No. 92-1628).
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MHC Properties v. United States
96-2 USTC ¶ 50,347 (DC La.)

Depletion: Burden of proof: Timber. Age: Merchantability. - For depletion purposes, the unrebutted testimony of lumber companies' expert witnesses established that pine timber on the taxpayers' land became merchantable at ten years of age.
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Miller v. Commissioner
29 T.C.M. 741; P-H T.C. Memo ¶ 70,167 (1970)

The petitioners, husband and wife, purchased a house on a wooded lot. Wooded lots in the area cost approximately $2,500 more than similar unwooded lots. The lot was graded and leveled on December 2, 1965. By the spring of 1967 some of the trees had to be removed because it was apparent they were dead, by the fall of 1967 it was evident that other trees also were dead and would have to be removed. A landscape gardener and tree surgeon believed that the trees were doomed from the date of the grading because the grading of fill dirt of the root system prevented osmotic action of absorption and seration, thereby suffocating the trees. The fair market value of the lot dropped $1,500 because of the loss of the trees. The taxpayers claimed a $1,400 casualty loss under Section 165(c)(3) which allows a deduction to individuals for "losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft ..." The Commissioner assessed a deficiency contending the loss was not within Section 165(c)(3).
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Austin L. Mitchell v. Commissioner
TC Memo. 2006-145, July 6, 2006.

Respondent determined deficiencies in petitioners' Federal income taxes and that petitioners were liable for accuracy-related penalties under section 6662(a) for 1998, 1999, and 2000 (the years at issue). For 1998, respondent determined a $1,060 deficiency and $212 accuracy-related penalty. For 1999, respondent determined a $946 deficiency and $189 accuracy-related penalty. For 2000, respondent determined a $1,346 deficiency and $284 accuracy-related penalty.

There are two issues for decision. The first is whether petitioner Austin L. Mitchell (petitioner) conducted his farming activity for profit during the years at issue. We hold he did not. The second issue is whether petitioners are liable for the accuracy-related penalty for their underpayments of tax in the years at issue. We hold they are liable.
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Murphy v. United States
60-1 USTC ¶¶ 9275, 9246 5 AFTR 2d 784 (W.D. Wash. 1960).

Issue No. 1
Upon acquiring certain timberlands, the taxpayer agreed to sell a portion of the limber back to his grantors. This agreement was made in good faith and not for the purpose of avoiding income tax liability. The taxpayer elected to treat his cutting of the timber as a sale or exchange under section 117(k)(1). The Commissioner contended that the taxpayer was neither the owner of the timber nor the holder of a contract right to cut it and was thus not qualified to make an election under section 117(k)(1).

Issue No. 2
In computing his gain under section 117(k)(1), the taxpayer reported the fair market value of the timber as $20 per thousand board feet. The Commissioner contended that the fair market value per thousand board feet was only $13.35. At the trial, the taxpayer contended for a value of $40, arguing that his original estimate of $20 was erroneous. Both the taxpayer and the Commissioner presented expert witnesses to support their computations.
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