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Summaries - Z

Click on the case name for the complete text.

Zardo v. Commissioner
43 T.C.M. 626, Tax Ct. Mem. Dec. (CCH), 38,813(M), (P-H) ¶ 82,094 (1982)

Losses: Casualty: Storm damage to ornamental trees: Amount of loss determined.--The Court determined the amount of deductible casualty loss suffered by the taxpayers following the storm destruction of five trees on their property. In view of the fact that the record was incomplete, the Court took into consideration the costs of restoring the property to its original condition in reaching its determination as to the allowable amount of the deduction.
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Andris Zarins and Zigrida A. Zarins v. Commissioner
81 TCM 1375, Dec. 54,282(M) , TC Memo. 2001-68

Nonprofit activities: Farming: Profit motive: Married taxpayers' deductions for expenses incurred in connection with an unsuccessful tree farming activity were disallowed because the undertaking lacked a profit objective. The activity was not operated in a businesslike manner. The taxpayers did not maintain a business plan or accurate production records with respect to the tree farm. Moreover, they had no marketing plan, obtained no expert advice to correct the farm's losses, and did not spend a significant amount of time raising or selling trees. Also, they produced no evidence in support of their contention that future appreciation in the value of the farm, together with anticipated farm income, would permit them to recoup prior farm losses.

Zarins v. Commissioner of Internal Revenue
2002-1 USTC ¶50,471

Affirming the Tax Court, 81 TCM 1375, Dec. 54,282(M) , TC Memo. 2001-68
Nonprofit activities: Farming: Profit motive: The Tax Court's determination that a married couple's deductions for expenses incurred in connection with their tree-farming activity should be disallowed because the undertaking lacked a profit objective was not clearly erroneous. Of the nine factors outlined in Reg. §1.183-2(b) to determine whether the activity was engaged in for profit, five favored the IRS, while the other four were neutral. Moreover, although the record reflected that the husband expended $10,000 for the purchase of equipment and performed significant labor that involved constructing an irrigation pond and working 15-20 hours per week on the farm, the couple failed to prove that they operated the activity in a businesslike manner.

Zemurray Foundation v. United States
81-1 U.S.T.C. ¶9419, 47 AFTR2d 81-1488

The taxpayer, a private foundation, sold its one-half undivided interest in 12,746 acres of timberland to an unrelated party. During the six years prior to the sale, the only activity the taxpayer engaged in on the property was the sale of timber. The land produced no rents or royalties. The government treated the sale proceeds as "net investment income" subject to an excise tax under Section 4940(a). For purposes of this section, net investment income is defined to include gains realized from the sale of property used to produce interest, dividends, rents or royalties.

Since the property was used for the production of trees, not passive income, the taxpayer argued that the sale proceeds did not constitute net investment income. However, the government asserted that the statutory phrase "used for the production of..." meant actual or potential use. Even though the property was used as timberland, it could have been used to produce passive income so gain from its sale was subject to the tax.
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Zemurray Foundation v. United States
687 F.2d 97, 82-2 USTC ¶9609, 50 AFTR2d 82-5786
Reversing 509 F.Supp. 976 81-1 USTC ¶9419, 47 AFTR2d 81-1488

The taxpayer, a private foundation, sold its one-half undivided interest in 12,746 acres of timberland to an unrelated party. During the six years prior to the sale, the only activity the taxpayer engaged in on the property was the sale of timber. The land produced no rents or royalties. The government treated the sale proceeds as "net investment income" subject to an excise tax under Section 4940(a). For purposes of this section, net investment income is defined to include gains realized from the sale of property used to produce interest, dividends, rents or royalties.

Since the property was used for the production of trees, not passive income, the taxpayer argued that the sale proceeds did not constitute net investment income. However, the government had adopted a regulation construing the statutory phrase "used for the production of..." to mean actual or potential use. The government argued that even though the property was used as timberland, it could have been used to produce passive income so gain from its sale was subject to the tax.
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Zemurray Foundation v. United States
84-1 USTC ¶ 9246, 53 AFTR2d 84-842 (1984) (D.C. La.) on rem.

Private foundations: Excise tax on net investment income: Sale of capital asset: Property of a type which generally would produce interest, dividends, rents, or royalties. Although the U. S. Court of' Appeals for the Fifth Circuit upheld the validity of a regulation which the District Court considered to be overly broad (Reg. § 53.4940(f) (1)) and stated that under this regulation property sold by a tax-exempt private foundation need only be of a type which generally produces income in one of four categories, (interest, dividends, rents, or royalties) and need not actually to have been used for the production of one of those four categories of income (as originally held by the District Court) in order for the gain resulting from the sale of such property to be subject to the net investment income excise tax, on remand the District Court, under this new test, determined that the timberland sold by the private foundation was also not the type of property that generally produced interest, dividends, rents, or royalties. Consequently, it again held that the foundation was not liable for the excise tax on net investment income (which includes both gross investment income and capital gains earned from the sale or disposition of property used for the production of (or of a type which would generally produce) interest, dividends, rents, or royalties) on the sale of the property. Also, the fact that the timberland fell within a fifth category (property of a type which generally produces capital gains through appreciation) contained in Reg. §53.4940-1(f)(1), but not in Code Sec. 4940, did not, by itself, make the property subject to the excise tax. The District Court interpreted the Fifth Circuit's opinion as upholding the validity of the fifth category only to the extent that it encompassed property properly includable in one or more of the first four categories.
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Zemurray Foundation v. United States
85-1 USTC ¶9276, 755 F2d 404, (CA-5)
(Aff'g 84-1 USTC ¶9246)

Private foundations: Excise tax on investment income: Real estate sale: Timberland.--The District Court properly determined on remand that a tax-exempt private foundation was not liable for tax on the sale of timberland because the property was found, using an economic viability test, not susceptible for use to produce interest, dividends, rents or royalties. The District Court properly considered the usage of the particular property and rejected the government's argument that theoretical susceptibility to the enumerated productive use was enough. The District Court's finding that the timberland was not property of a type that was economically feasible to lease for hunting, growing timber, grazing, or minerals was not clearly erroneous. Also, the appellate court held that the fifth category of Reg. §53-4940-1(f)(1), which reaches property of a type that produces "capital gains through appreciation", does not provide a valid independent basis for taxation under Code Sec. 4940. It is valid only to the extent it reaches property that is of a type that produces interest, dividends, rents, or royalties but is currently being held for capital gains through appreciation.
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