1Cases of the following petitioners are consolidated

herewith: Estate of Howard Berger, Deceased, Susan Berger,

Administratrix, docket No. 3130-93; and Estate of Howard Berger,

Deceased, Susan Berger, Administratrix, and Susan Berger, docket

No. 3133-93.

 

T.C. Memo. 1996-76

UNITED STATES TAX COURT

ALICE BERGER, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 2464-93, 3130-93, Filed February 22, 1996.

 3133-93.

Richard C. Antonelli, for petitioner in docket No. 2464-93.

John M. McNally, for petitioners in docket Nos. 3130-93 and

3133-93.

William F. Halley and Caroline Ades-Pierri, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge: Respondent determined the following
- 2 -

deficiencies in and additions to petitioners' Federal income tax:

Howard and Alice Berger (Docket Nos. 3130-93 and 2464-93):

 Addition to tax

 Year Deficiency Sec. 6653(a)(1)

 1988 $155,646 $7,782

Alice Berger (Docket No. 2464-93):

 Addition to tax Penalty

 Year Deficiency Sec. 6651(a)(1) Sec. 6662

 1989 $307,202 $76,801 $61,440

Howard and Susan Berger (Docket No. 3133-93):

 Addition to tax

 Year Deficiency Sec. 6651(a)(1)

 1989 $68,801 $23,577

The cases in the above-mentioned dockets have been

consolidated for trial, briefing, and opinion. Following the

trial, we granted respondent's motion for leave to file an

amended answer asserting the following increased deficiency and

addition to tax against Howard and Susan Berger (Docket No. 3133-

93):

 Addition to tax

 Year Deficiency Sec. 6651(a)(1)

 1989 $237,936 $57,404

Petitioners Howard and Susan Berger did not file a reply to

respondent's amended answer. However, their opening brief

contends that their 1989 return overstated taxable income from

mausoleum crypt sales, none of which, they now assert, should

have been reported by Howard Berger, and asserts an overpayment

of $61,106.
- 3 -

All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

The parties have settled some issues, and respondent has

conceded the section 6653(a)(1) addition against Howard and Alice

Berger for 1988 and the section 6651(a)(1) addition against

Howard and Susan Berger for 1989. The following issues remain to

be decided: (1) Evidentiary objections to certain exhibits and

testimony; (2) whether Alice Berger signed the 1988 Form 1040

under duress so as to invalidate it as a joint return; (3) Howard

Berger's and Alice Berger's respective ownership interests in the

assets and business of Woodbine Cemetery (Woodbine) during 1988

and 1989 for purposes of determining their rights to income

therefrom; (4)(a) whether petitioners' method of accounting for

mausoleum crypt sales and costs should be upheld generally and

(b) whether Howard Berger must accrue income or recognize gain on

the transfer of his interest in Woodbine to Alice Berger pursuant

to their divorce settlement agreement; (5)(a) whether Howard

Berger or Alice Berger or both of them are required to recognize

gain in 1989 from the sale of Woodbine to their daughter and sonin-law, (b) the adjusted basis of Woodbine at the time of sale,

(c) whether a portion of the sale constituted a dealer

disposition under section 453(b), which would prohibit use of the

installment method for dealer assets, and (d) if so, whether and
- 4 -

how an allocation should be made between dealer and nondealer

assets in order to determine whether and to what extent the gain

on sale is entitled to installment treatment; (6) whether Howard

Berger and Alice Berger are liable for additional self-employment

tax for 1988 and 1989; and (7) whether Alice Berger is liable for

the section 6651(a) addition to tax or section 6662 accuracyrelated penalty for 1989.

After addressing the evidentiary questions, we hold that the

1988 return was a valid joint return and that petitioners used a

proper method of accounting for mausoleum crypt sales. As a

result, neither Howard Berger nor Alice Berger has taxable income

from Phase II mausoleum crypt sales for 1988. We allocate

cemetery income, including Phase II mausoleum crypt sales income,

between Howard and Alice Berger for 1989. We hold that the gain

on the sale of Woodbine is attributable in its entirety to Alice

Berger. After discussing the rules for determining the bases of

the Woodbine assets in the hands of Alice Berger, we use the rule

of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), to

determine the portion of Alice Berger's Woodbine sale gain

entitled to installment treatment as a nondealer disposition,

leaving the details to a Rule 155 computation. We hold that

Howard and Alice Berger are both subject to self-employment tax

for 1988 and 1989, and that Alice Berger is not liable for the

section 6651(a) addition to tax or the section 6662 accuracy-
- 5 -

related penalty for 1989.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulations of fact filed by the parties and the

accompanying exhibits are incorporated herein by this reference. 

When petitioners filed their respective petitions, Alice Berger

resided in Vermont, and Howard Berger and Susan Berger resided in

Florida.

Howard Berger and Alice Berger were married in 1953. During

the marriage, Alice Berger was not employed outside the home.

Prior to 1979, Howard Berger was an insurance salesman, and he

continued to receive renewal commissions through 1989.

In 1979, Howard Berger purchased the Woodbine real property

and cemetery business, located in Oceanport, New Jersey, from

John and Lois Flock, for $100,000. The Flocks had operated

Woodbine as a cemetery for in-ground interments.

Howard Berger continued the business of operating Woodbine

as a cemetery for in-ground interments. From 1979 through 1989,

the income of Woodbine from the sale of cemetery plots, interment

fees, and headstones was reported on the cash basis method of

accounting, as were most expenses. However, the cost of grave

plots ($23 per plot) was carried in an inventory account and

expensed for accounting and tax purposes when plots were sold.

By deed dated October 26, 1983, Howard Berger transferred
- 6 -

legal title in the Woodbine land, buildings, and structures into

the joint names of Howard Berger and Alice Berger. Howard Berger

put the Woodbine real property in their joint names because he

believed that Alice Berger already had an interest in the

property by reason of their marriage. By the end of 1983, Alice

Berger knew that she was a joint owner of Woodbine. After Howard

Berger transferred Woodbine into his and Alice Berger's joint

names, he thought that they were its joint owners.

Subsequent to the 1983 transfer, Alice Berger's signature,

or a copy thereof, appeared on deeds conveying cemetery spaces to

customers of Woodbine.

From 1979 through 1986, Howard Berger managed and operated

Woodbine and regularly went to work there. During this period,

Alice Berger did not participate in the operation of Woodbine. In

1984, Howard Berger hired his son-in-law, Gregg Kunkowski, the

husband of his and Alice's daughter Julia, as a salesman for

Woodbine.

In 1984 Howard Berger began to construct a mausoleum on the

Woodbine property (Phase I) and to solicit customers and receive

deposits and installment payments for mausoleum crypts. The

deposits and installment payments received prior to completion of

Phase I were not recorded as income when received but were

recorded as deposits pending completion of the Phase I mausoleum.

The costs of construction of Phase I were not deducted as
- 7 -

incurred but were instead carried as inventory costs.

In 1986 construction of Phase I was completed. Certificates

of occupancy were obtained, and certificates of ownership were

issued to all customers who had paid in full. Howard and Alice

Berger reported as income for 1986 all deposits and installment

payments previously received for this phase. The cost of

construction of Phase I was allocated to the total number of

crypts, and the allocated cost of unsold crypts was deducted

ratably as "cost of sales" as Woodbine issued certificates of

ownership to subsequent crypt purchasers at or after completion

of construction of the mausoleum.

In June 1986, during a trip to Scotland, Howard Berger

became ill with a heart condition, and he and Alice Berger

separated. When Howard Berger returned from Scotland, he did not

move back to the family home in West Long Branch, New Jersey, but

moved instead to Waterboro, Maine. He never resumed day-to-day

management or operation of Woodbine.

During Howard Berger's absence, Gregg Kunkowski acted as

manager of Woodbine. After it became clear that Howard Berger

was not going to return to work, Gregg Kunkowski proposed a

contract setting forth the terms for his continuing employment in

the Woodbine business. He presented his proposal to Dr. Florence

F. Forgotson, Alice Berger's attorney, who drafted an agreement.

On December 1, 1986, Howard Berger and Alice Berger (as
- 8 -

employers) and Gregg Kunkowski (as employee "General Manager")

entered an employment agreement. The employment agreement

provided for a 5-year term with an option to renew, compensation

equal to 20 percent of "the total gross sales of space in the

mausoleum", and rent-free occupancy by the Kunkowskis of "the

home renovated by them on the premises, indefinitely".

Construction of the second Woodbine mausoleum (Phase II)

began in 1987 and was completed in May 1989. In 1987, Gregg

Kunkowski, as manager of Woodbine, began to solicit customers for

crypts in the mausoleum to be constructed in Phase II. In 1987

Woodbine began to receive deposits and installment payments for

crypts in Phase II.

A customer who paid a deposit on a crypt in Phase II would

execute a contract setting forth the location of the crypt, the

price, and the payment terms (the crypt purchase contracts

generally provided that the customer would pay any unpaid portion

of the purchase price in equal monthly installments--without

stated interest--over a period of not more than 24 months). 

Prior to completion of construction, the purchaser would receive

a Temporary Certificate of Ownership upon payment of the full

contract price for a crypt in Phase II and then a Certificate of

Ownership when the mausoleum was completed. After completion of

construction, the purchaser would receive a Certificate of

Ownership upon payment of the full contract price for space in
- 9 -

 

2Although the letter is dated Sept. 22, 1988, subsequent

court orders, dated Oct. 21, 1987, and Dec. 18, 1987, which

restrain Alice Berger from interfering with Howard Berger's

receipt of $500 per week from Woodbine, make clear that the

letter should have been dated Sept. 22, 1987, and was sent about

that time. 

Phase II. The deposits and installment payments received by

Woodbine in 1987 and 1988 for Phase II were not recorded as

income when received; instead they were recorded as deposits

pending completion of Phase II. 

From October 1986 until March 14, 1989 (except for a short

period during late 1987), Gregg Kunkowski wrote to each of Alice

Berger and Howard Berger a $500 weekly check from Woodbine's bank

account. These checks were posted to accounts on Woodbine's

books entitled "AB Draw" or "Alice Berger Draw" and "HB Draw" or

"Howard Berger Draw", respectively. Gregg Kunkowski also used

the Woodbine business account to pay some of Howard and Alice

Berger's personal expenses (e.g., telephone and utility bills).

During 1988, Howard Berger and Alice Berger received $42,676 and

$45,578, respectively, from the Woodbine business account.

In early 1987, Alice Berger initiated New Jersey divorce

proceedings against Howard Berger. Alice Berger and Howard

Berger were represented by counsel in these proceedings. r

about September 22, 1987,2 Dr. Forgotson, as Alice Berger's

attorney, sent Gregg Kunkowski a letter stating:

Alice Berger has instructed me to advise you that as a

joint owner of the Woodbine Cemetery & Mausoleum

business, you are instructed not to make any payments

on behalf of Howard Berger and/or Susan Moorehouse, for

any reason, without the consent of Alice Berger * * * 
- 10 -

Dr. Forgotson sent copies of the letter to Alice Berger and

Howard Berger's attorney. On October 21, 1987, the Superior

Court of New Jersey, Chancery Division, Family Part, Monmouth

County (the Chancery Court),

ORDERED that plaintiff [Alice Berger] and/or her

attorney [Dr. Forgotson] be and is hereby restrained

from interfering with defendant's [Howard Berger's]

receipt of income as a partner of the Woodbine Cemetery

& Mausoleum in the amount of $500 per week * * * .

On December 18, 1987, the Chancery Court issued an order

confirming that Howard Berger was entitled to draw $500 per week

from the Woodbine business, retroactive to September 24, 1987.

During property settlement negotiations, Howard and Alice

reached an impasse. Both of them wanted Woodbine, and neither

was willing to let the other have it. To break the impasse,

Howard and Alice Berger agreed that whoever was awarded Woodbine

would sell it to Gregg and Julia Kunkowski for $680,000. On May

28, 1988, Howard and Alice Berger and Gregg and Julia Kunkowski

executed an agreement (sale agreement), which stated:

In the event that I, Alice Berger or I, Howard Berger,

am awarded the property and business known as "Woodbine

Cemetery" * * *; I will immediately sell Woodbine

Cemetery to my daughter and son-in-law Julia B. and

Gregg W. Kunkowski, who have been managing the business

for the past two years.

In late 1988, Gregg Kunkowski began to solicit deposits and

installment payments for crypts in a planned Phase IIIA

mausoleum, construction of which did not commence until after

November 17, 1989. Total deposits received on Phase IIIA crypts

prior to November 17, 1989, totaled $49,616. 
- 11 -

On November 25, 1988, American Cemetery Consultants

submitted an appraisal of Woodbine to Gregg Kunkowski. According

to this appraisal, which used both income valuation and net asset

valuation methods, Woodbine at that time had a fair market value

of $696,038. The gross and net assets of Woodbine were valued as

follows:

Cash (as of 10/1/88) $20,000

Accounts receivable ($428,601 @ 41.6%) 172,298

Office building 100,000

Residence 75,000

Service building 80,000

Storage building 40,000

Equipment and furnishings 17,000

Uninsured office and grounds equipment 26,000

Salable inventory: grave spaces 12,518

Salable inventory: mausoleum crypts 42,992

Salable inventory: cremation niches 14,205

Undeveloped land 219,555

Roads, landscaping, etc. 43,200

Gross Asset Valuation 1 878,681

Less: Debt to McCleskey Mausoleum Co. 175,000

Net Asset Valuation 703,681

1 The correct sum of these figures is not $878,681 but $862,768, which

brings the net asset valuation figure closer to the price of $680,000

ultimately agreed upon and paid.

American Cemetery Consultants viewed this result as supporting

the valuation resulting from the income valuation method.

On or about March 14, 1989, Howard and Alice Berger entered

into a settlement agreement, which resolved the issues of

alimony, equitable distribution, counsel fees, and costs. Under

the terms of the settlement agreement, the Berger family assets

be divided as follows:
- 12 -

 Alice Berger Howard Berger

Vermont house $250,000 ---

New Jersey house1 333,000 $666,000

New Jersey furniture2 27,000 27,000

Bonds 40,000 120,000

Note I --- 50,300

Note II --- 292,205

Keogh --- 92,000

Stock --- 14,400

Woodbine 680,000 ---

Annuity --- 13,000

 1,330,000 1,274,905

1 The house was to be sold and the proceeds divided.

2

Howard Berger was to use his share of the proceeds of sale of the

house to purchase one-half the furniture from Alice Berger.

The Bergers' assets were divided approximately equally according

to gross value. Although income tax liabilities were inherent in

several of the assets (e.g., Woodbine, Keogh, and Note II (an

installment sale note with a 78-percent gross profit

percentage)), the settlement agreement did not expressly take

account of or otherwise refer to tax liabilities. The settlement

agreement provided that Howard Berger would indemnify Alice

Berger for income taxes for years prior to 1986, but that they

were equally liable for any income taxes due for 1986. The

settlement agreement provided that the Bergers would file a joint

income tax return for 1988 and share equally in any savings that

resulted from filing a joint return.

The settlement agreement stated that "The property and

business known as Woodbine Cemetery and Mausoleum including real,

personal and business assets shall be transferred to * * * [Alice

Berger]".
- 13 -

 The settlement agreement also set forth the terms of the

sale agreement requiring whoever was awarded Woodbine (Alice

Berger) to sell it to Gregg and Julia Kunkowski for $680,000. 

On March 14, 1989, Howard and Alice Berger and their

counsel appeared in the Chancery Court and entered into the

record the terms and conditions of the settlement agreement. 

Alice Berger testified that she understood the terms of the

settlement agreement, that she had participated in its

negotiation, that she agreed the settlement was fair and

equitable, that no one had compelled her to accept its terms, and

that she would abide by them if they were made a part of the

Court's judgment.

Howard Berger's beneficial ownership interest in the

Woodbine assets and business ceased on March 14, 1989. 

Thereafter, he no longer received weekly payments of $500 from

the Woodbine business account, although several of his personal

bills that had accrued prior to March 14, 1989, were paid

thereafter. During 1989, Howard Berger received $10,034 from the

Woodbine business account, $7,795 of which was paid prior to

March 14, 1989.

From March 20 until November 13, 1989, Alice Berger received

weekly payments of $1,000 (twice as much per week as she had been

receiving prior to March 14, 1989) from the Woodbine business

account. In addition, some of her personal expenses continued to

be paid from the Woodbine business account. During 1989, Alice
- 14 -

Berger received, directly or indirectly, $61,404 from the

Woodbine business account, $7,560 of which was paid prior to

March 14, 1989.

On April 24, 1989, the Chancery Court entered a Judgement

For Divorce. The judgment incorporated the settlement agreement

and was stated to be effective as of March 14, 1989. The

Chancery Court did not purport to pass on whether the settlement

agreement was fair and reasonable, but stated that, based upon

its observations and the parties' testimony, the settlement

agreement had been voluntarily and knowingly entered into by the

parties with able assistance of counsel. The Chancery Court

determined that the settlement agreement became binding as a

contract and as a judgment of the Court.

The requirement in the settlement agreement for a subsequent

sale of Woodbine to Gregg and Julia Kunkowski was placed in the

Judgement for Divorce at the insistence of Gregg Kunkowski. On

May 8, 1989, Gregg Kunkowski wrote the following letter, on the

Woodbine letterhead, to Alice Berger and Howard Berger, and to

Julia's sister and brother, Florence and Richard Berger, who play

no roles in this case:

May 8, 1989

Dear Alice, Florence, Howard, & Richard

I am writing this letter to appraise [sic] all of you

of the situation which now exists here at the Cemetery

and is of the utmost importance to all of us.

When building mausoleums in phases, as we are doing at

Woodbine, it is common practice to segregate a certain
- 15 -

amount of crypts to be used for temporary entombment. 

These spaces are intended for those people who have

purchased in future phases but had the misfortune of

dying prior to the building's completion.

We have recently filled our last temporary entombment

space in Phase I and now must seek a Certificate of

Occupancy so that we may legally make entombments in

Phase II. However, in obtaining a Certificate of

Occupancy drastic tax ramifications will result for

Howard and Alice in their 1989 tax situation. All

monies collected for Phase II have been recorded as

deposits so no tax has been paid on these monies. This

is acceptable, legal accounting practice as we had not

yet taken possession of the building. The moment we so

take possession of the building, all the aforementioned

monies become income to Howard and Alice and are then

subject to income tax. Simply stated, Howard and Alice

will have one wopping [sic] tax bill for 1989.

As we have no choice but to immediately obtain a C.O.

and take possession of Phase II, there is but one

alternative to circumvent this problem. Howard and

Alice must immediately deed over the lands to the now

existing Non-Profit Corporation, Woodbine Cemetery

Association of Oceanport. Once it's done, the tax

situation will no longer exist as the Association will

not be subject to income tax.

The next step is to have the new corporation issue the

necessary Certificates of Indebtedness. Howard has

asked that these certificates be issued in both his and

Alice's names. This is impossible as to do so would be

a direct violation of a standing court order signed by

Judge Kennedy on April 24, 1989, which reads as

follows: "The Property and Business known as Woodbine

Cemetery and Mausoleum including real personal and

business assets shall be transferred to the wife, and

the business known as Woodbine Cemetery and Mausoleum

shall be thereafter sold to Julia Berger Kunkowski and

her husband Gregg Kunkowski for the sum of $680,000.

plus interest, all of which shall be paid over a period

of twenty-five years at the rate of $72,717. per year

and payable monthly at $6059.75 per month." The

Certificates must be issued in Alice's name and the

balance of the order executed.

This week I must obtain a Certificate of Occupancy so

that entombment can be continued here at Woodbine. For
- 16 -

the good of all we have to go forward with the above as

quickly as possible.

A cemetery is a public trust. No one's personal

problems should ever be permitted to supersede the

needs of the members of the community whom we serve.

Very truly yours,

Gregg Kunkowski

Cemetery Manager

On June 10, 1989, Howard Berger and Susan Moorehouse were

married, and she became known as Susan Berger.

By deed dated June 23, 1989, Howard Berger transferred his

remaining legal title to the Woodbine real property to Alice

Berger. The delay in transfer of full legal title to Woodbine

from Howard Berger to Alice Berger resulted from delay in

securing an attorney to draft the necessary papers.

Howard and Alice Berger filed joint returns for 1979 through

1987, reporting the Woodbine income and expenses on Schedule C. 

They reported that Howard Berger was the proprietor of Woodbine

and that all the income from Woodbine was self-employment income

of Howard Berger.

On October 4, 1989, the Chancery Court ordered Alice Berger

to show cause why an order should not be entered "Directing

plaintiff [Alice Berger] to sign the 1988 Federal and state

income tax returns and return them to defendant [Howard Berger]

for filing". The order was served on Alice Berger and her

counsel. On October 12, 1989, Alice Berger and her counsel
- 17 -

appeared before the Chancery Court. They were not able to

persuade the Chancery Court that Alice Berger should not have to

sign the return as required by the terms of the settlement

agreement. Although Alice Berger believed that the 1988 return

was erroneous, she also believed that the Chancery Court had

ordered her to sign it, and she signed it at the courthouse.

Howard Berger had previously signed the 1988 return on May 5,

1989.

On October 14, 1989, Alice Berger and Howard Berger timely

filed their 1988 Form 1040. Attached to the return was the

statement:

I, Alice W. Berger, do CERTIFY that I am signing this

return under duress by court order. It is my

contention that there was a change in the accounting

method of Woodbine Cemetery without approval of the

Internal Revenue Service, and that this change does not

clearly reflect income earned.

I intend to seek relief under Furnish v. Comm., 59-1

USTC, para 9189 and Brown v. Comm., 51TC116.

None of the Federal income tax returns filed by Howard or

Alice Berger for the taxable years 1986 through 1989 reported any

gross income in respect of payments to them or on their behalves

from the Woodbine business account.

By deed dated November 17, 1989, Alice Berger transferred

ownership of the Woodbine real property to Woodbine Cemetery

Association of Oceanport, Inc. (Woodbine Association), in

exchange for Woodbine Association Certificates of Debt having a
- 18 -

 

3Although the Certificates of Debt are not in evidence,

Special Resolution #2 attached to the minutes of the Nov. 17,

1989, meeting of the Board of Trustees of Woodbine Association

recites that the face amount of the Certificates of Debt was

$680,000, plus interest at 9-3/4 percent, "with interest payments

only made on a monthly basis in the amount of $5,525 per month. 

The principal shall be due within 180 days of demand made by the

Holder of the Certificates".

face value of $680,000 and bearing interest at 9-3/4 percent.3

On the same day, Alice Berger transferred her interest in the

Woodbine Association Certificates of Debt to Gregg and Julia

Kunkowski in exchange for a $680,000 note signed by Gregg and

Julia Kunkowski as makers to Alice Berger as payee. The note

called for monthly payments of principal and interest of

$6,059.75 for a term of 25 years. During 1989, Alice Berger

received two payments, totaling $12,119.50, on the note.

The parties have stipulated that the 1989 income statement

of Woodbine accurately reflects its income, expenses, and net

income for the period January 1 through November 17, 1989

(including therein $491,432 of deposits with respect to Phases I,

II, and IIIA, and $217,124 allocated as cost of goods sold for

Phases II and IIIA), if all such deposits are found to be

properly includable in income for 1989. The Woodbine 1989 income

statement shows net income of $383,133, which the parties have

stipulated is the taxable income of Woodbine for the period

January 1-November 17, 1989, if such deposits are found to be

properly includable in income for 1989.

Fully reported on the Howard and Alice Berger 1988 joint
- 19 -

return Schedule C were the following amounts received in 1988:

The total cemetery sales income (plot sales, openings and

markers) received in 1988; the total interest from the

maintenance and preservation account; and the total deposits and

installment payments received on the Phase I mausoleum.

The total deposits and installment payments received on

sales of crypts in the Phase II and Phase IIIA mausoleums in 1987

and 1988 were as follows:

 1987 1988 Total

Phase II $131,922 $352,193 $484,115

Phase IIIA -0- 7,317 7,317

 131,922 359,510 491,432

These amounts were not reported on the 1987 and 1988 joint

returns of Howard and Alice Berger.

The total deposits and installment payments received on

sales of Phase I, II, and IIIA mausoleum crypts for the periods

January 1 to March 14, 1989, and March 15 to November 17, 1989,

were as follows:

 Jan. 1-Mar. 14, 1989 Mar. 15-Nov. 17, 1989

Phase I $49,733.81 $106,989.26

Phase II 48,074.82 149,681.00

Phase IIIA -0- 42,299.48

Adjustment 2,378.35 -0-

Refunds ( 1,107.60) ( 3,158.00)

 99,079.38 295,811.74

The total cemetery income (plot sales, openings, and

markers) for the above periods in 1989 was as follows:

 Jan. 1-Mar. 14, 1989 Mar. 15-Nov. 17, 1989
- 20 -

Cemetery Income $36,030.36 $126,710.40

The total interest income (interest on maintenance and

preservation funds) for the above periods in 1989 was as follows:

 Jan. 1-Mar. 14, 1989 Mar. 15-Nov. 17, 1989

Interest Income $7,262.19 $22,779.55

The total cost of the Phase II mausoleum was $313,869,

which, when divided by the number of crypt spaces--324--yields a

per-unit cost of $968.73.

The allocated cost of goods with regard to 1987 and 1988

sales of crypts in the Phase II mausoleum and Phase IIIA

mausoleum (full payment made) was $217,124.12, computed as

follows:

224 Phase II units at $968.73 $216,995.52

 4 Phase IIIA units at $32.15 128.60

 Total 217,124.12

The above amounts were based upon total construction costs

incurred as of November 17, 1989.

The remaining cost of the assets shown on the books of

Woodbine--cash, grave and mausoleum inventories, building

improvements and equipment, less depreciation (Howard Berger's

original cost was $100,000)--as of November 17, 1989, was

$75,945. This included $5,000 of purchased goodwill, which had

not been assigned any value in the American Cemetery Consultants

appraisal. In addition, the face amount of the receivables of

Woodbine on that date was $429,371.

Alice Berger's accountant signed, and timely filed on behalf
- 21 -

of Alice Berger, an application for an automatic extension of

time, until August 15, 1990, to file her 1989 income tax return,

and for an additional extension until October 15, 1990. The

explanation of why the additional extension was needed states:

"1988 return is under audit and changes may affect 1989". The

District Director approved the application for additional

extension about August 20, 1990. Alice Berger made no estimated

tax payments with her applications for extensions to file her

1989 return. Alice Berger mailed her 1989 income tax return

(Form 1040) on October 12, 1990, and it was received by the

Service Center on October 17, 1990.

Schedule C attached to Alice Berger's 1989 income tax return

reported a net loss from Woodbine of $4,101, having included

slightly less than one-half of Woodbine's gross income and almost

all of its expenses for 1989. Attached to the return was the

following statement:

Schedule C was originally prepared by Daniel Hochberg,

accountant for Woodbine Cemetery. In 1989 the 1988

Federal income tax return of Howard and Alice Berger

was audited and accordingly, an adjustment to income

was made for an additional $229,396. This item

represented deferred income that was being book [sic]

for future years. Therefore upon receipt of the RAR,

this adjustment was made on the 1989 Federal tax

return.

Alice Berger reported the 1989 sale of Woodbine, using Form

6252 for the installment method, on her 1989 income tax return.

She reported the sale price of $680,000 but claimed that the

adjusted basis was $680,000, resulting in no reported gain or
- 22 -

loss.

On September 13, 1990, approximately 1 month prior to the

filing of Alice Berger's 1989 income tax return, the Internal

Revenue Service had issued a report, Form 4549, in connection

with the examination of the 1988 income tax return of Howard and

Alice Berger. The report took the position that Phase II

mausoleum crypt sales payments were taxable Schedule C income in

the amount of $229,396 to Howard and Alice Berger. The statutory

notice issued by respondent to Howard and Alice Berger for 1988

determined that their Schedule C gross income in respect of

Woodbine should be increased by $491,432 in respect of Phases II

and IIIA mausoleum crypt sales payments, without any offset for

the costs allocable thereto.

On March 18, 1991, the Internal Revenue Service issued a

report, Form 4549, in connection with the examination of the 1989

income tax return of Alice Berger. The report took the position

that Alice Berger's Schedule C taxable income from Woodbine

during the year amounted to $208,889. The report also took the

position that Alice Berger realized and recognized taxable income

of $604,055 on the sale of Woodbine, allowing a cost basis equal

to $75,945. The statutory notice issued by respondent to Alice

Berger for 1989 determined that her gross income from Woodbine

should be increased by $475,112 in respect of mausoleum crypt

sales payments, without any offset for the costs allocable

thereto, and also determined that she realized and recognized
- 23 -

taxable ordinary income of $604,055 on the sale of Woodbine.

Howard and Susan Berger filed a timely application for an

automatic extension of time until August 15, 1990, to file their

1989 Form 1040. They included a $10,000 estimated tax payment

with the application. Howard and Susan Berger filed their 1989

Form 1040 on July 26, 1990.

On Schedule C attached to Howard and Susan Berger's 1989

return, they reported $175,142 of taxable income from the

Woodbine business, based upon a computation of one-half of the

income from before March 14, 1989, for Phase II mausoleum crypt

sales and less than 10 percent of the total Woodbine operating

expenses for 1989.

On July 1, 1991, the Internal Revenue Service issued an

amended report, Form 4549, in connection with the examination of

the 1989 income tax return of Howard and Susan Berger. The

report and respondent's statutory notice took the position that

Howard Berger's Schedule C taxable income from Woodbine during

1989 should be increased by $245,716, without any offset for the

costs allocable thereto. Respondent's amended answer takes the

position that Howard Berger also realized and recognized taxable

income of $604,055 on the sale of Woodbine to the Kunkowskis.

Howard Berger died on April 20, 1994.
- 24 -

OPINION

As in many cases in which we sort out the tax consequences

to former spouses of the property settlement attending the

dissolution of their marriage, respondent is largely a

stakeholder. But although the cases have been consolidated, and

properly so, the benefits of consolidation could prove to be

transitory and ephemeral. Barring stipulations to the contrary,

the consolidated cases will be appealable in different circuits

because the former spouses had changed residence by the times

they filed their petitions. Even though New Jersey equitable

distribution orders can only be modified under exceptional and

compelling circumstances, Torwich v. Torwich, 660 A.2d 1214, 1216

(N.J. Super. Ct. App. Div. 1995), there could be further

litigation to decide how the tax liabilities we determine in

these cases will be finally allocated between Alice Berger and

the Estate of Howard Berger. Cf. In re Hargrave, 43 Cal. Rptr.

2d 474 (Ct. App. 1995); Hill v. Richards, 667 A.2d 695 (N.J.

1995). Although "[W]e are not called upon to determine the

ultimate responsibility for such tax" as between Alice Berger and

the Estate of Howard Berger, Yonadi v. Commissioner, T.C. Memo.

1992-602, revd. and remanded on other grounds 21 F.3d 1292 (3d

Cir. 1994), the past, current, and possible future expenditures

of judicial and party resources would have been substantially

reduced if the parties had followed our suggestions that they
- 25 -

 

4Alice Berger asks us to disregard Yonadi v. Commissioner,

21 F.3d 1292 (3d Cir. 1994), revg. and remanding on other grounds

T.C. Memo. 1992-602, because no appeal in the case at hand would

(continued...)

enter a comprehensive settlement of the cases that we are now

required to decide.

By 1988 amendment to the New Jersey equitable distribution

law, the tax consequences to each spouse of a proposed

distribution are included in the factors to be considered by the

New Jersey court. N.J. Stat. Ann. sec. 2A:34-23.1(j) (West 1987

& Supp. 1995). New Jersey courts recognized--even before this

amendment--that tax consequences, including Federal tax

consequences, should be taken into account in making an equitable

distribution. Dugan v. Dugan, 457 A.2d 1, 10 (N.J. 1983); Stern

v. Stern, 331 A.2d 257, 261 (N.J. 1975); Painter v. Painter, 320

A.2d 484, 493 (N.J. 1974). Compare Goldman v. Goldman, 646 A.2d

504, 508-509 (N.J. Super. Ct. App. Div. 1994) with Orgler v.

Orgler, 568 A.2d 67, 74 (N.J. Super. Ct. App. Div. 1989).

The fact that a New Jersey court ordering an equitable

distribution would have considered Federal tax consequences was

an important factor in the decision of the Court of Appeals for

the Third Circuit in Yonadi v. Commissioner, 21 F.3d at 1296,

that the wife was liable for the capital gains tax attributable

to the sale proceeds from the portion of the appreciated assets

of a business allocated to her under a New Jersey divorce

settlement agreement.4 The Court of Appeals held that imposition
- 26 -

 

4(...continued)

lie to the Court of Appeals for the Third Circuit. We cite and

apply the approach of the Court of Appeals in Yonadi because that

court has special familiarity with New Jersey law, which governs

the marital property rights of Howard and Alice Berger, and

because we find persuasive its approach to arriving at an

understanding of the interaction of the New Jersey equitable

distribution law and the Federal tax law.

of the capital gains tax entirely on the husband would materially

distort the one-third/two-thirds distribution that the New Jersey

court intended.

Under New Jersey law, equitable distribution is not to be

skewed along fault lines. N.J. Stat. Ann. sec. 2A:34-23.1 (West

1987 & Supp. 1995); Chalmers v. Chalmers, 320 A.2d 478, 482 (N.J.

1974); Tweedley v. Tweedley, 649 A.2d 630, 633 (N.J. Super. Ct.

Ch. Div. 1994); Kothari v. Kothari, 605 A.2d 750, 755 (N.J.

Super. Ct. App. Div. 1992). Assuming as we do that Howard and

Alice Berger originally intended an approximately equal

distribution, we have no reason to believe that they also

intended, as Alice Berger now would have it, that Howard Berger

was to bear the entire burden of the Federal income tax known to

inhere in the deposits and unrealized receivables attributable to

crypt sales of the Phase II mausoleum completed in 1989, as well

as the gain on the sale of Woodbine to the Kunkowskis.

Looking at the asset allocation under the settlement

agreement, see supra p. 12, it's obvious that there would be a

substantial imbalance in favor of Alice--to the detriment of

Howard's estate--if he were subjected to all Federal income tax
- 27 -

inherent in the cemetery assets and business transferred to the

Kunkowskis. Not only was Howard Berger to receive property

having a gross value $55,000 less than what was to be received by

Alice Berger; if he were to be saddled with all the tax

liabilities inherent in Woodbine, while Alice Berger were to

receive Woodbine free and clear of such liabilities, the aftertax advantage to Alice Berger would be even more lopsided. Cf.

Arnes v. Commissioner, 102 T.C. 522, 540-541 (1994) (Beghe, J.,

concurring). This is a state of affairs that we believe a New

Jersey court would have wished to avoid, see Goldman v. Goldman,

646 A.2d at 509, and we will try to avoid it in our effort to

reach an appropriate result.

We conclude, for reasons more fully explained infra, that

Howard Berger should not be subjected to any greater income tax

liability for 1989 than he originally reported on his 1989

return. We are impressed by the likelihood that Howard's 1989

return position reflected a contemporaneous understanding of how

the parties would treat the property settlement transaction for

tax purposes. In contrast, Alice's 1989 return positions--which

showed a loss on her share of the Woodbine operation for 1989--

and her litigating positions in this case strike us as somewhat 

aggressive: Alice argues that the receipts from the Phase II

mausoleum crypt sales are taxable to Howard in their entirety for

1988 or 1989, and that he is also taxable on the entire gain on

the sale of Woodbine to the Kunkowskis.
- 28 -

Issue 1. Evidentiary Problems

The Federal Rules of Evidence generally apply to proceedings

before this Court. Sec. 7453; Estate of Shafer v. Commissioner,

80 T.C. 1145, 1151 (1983), affd. 749 F.2d 1216 (6th Cir. 1984).

Issue 1(a). Exhibit 36-AJ, Letter From Gregg Kunkowski

Respondent's opening brief "objects to the admission of this

[May 8, 1989] letter to prove the truth of the assertions within

such letter, on hearsay grounds". Respondent goes on to state

that "The letter is admitted for the limited purpose of showing

what was communicated to Howard and Alice Berger on or about such

date." Neither Howard Berger nor Alice Berger has asserted that

the letter qualifies for an exception to the hearsay rule, nor

has either proposed facts based on the letter. The letter is

admitted for the purpose specified by respondent and for whatever

bearing the fact that it was communicated to Howard and Alice

Berger might have on their states of mind in consummating the

1989 transaction in which Woodbine was transferred to the

Kunkowskis. It also tends to indicate that Gregg Kunkowski

played a dominant role in planning the Woodbine transactions in

1989.

Issue 1(b). Exhibits 46-AT, 57, and 58, Documents Signed by

Alice Berger

Alice Berger asserts that these exhibits are hearsay and

objects to their use to prove that she was an owner of the

Woodbine business. Respondent asserts that they are party
- 29 -

admissions. See Fed. R. Evid. 801(d)(2). We agree with

respondent.

Rule 801(d) of the Federal Rules of Evidence provides that

"A statement is not hearsay if--* * * (2) Admission by partyopponent.--The statement is offered against a party and is * * *

(B) a statement of which * * * [he] has manifested * * * [his]

adoption or belief in its truth".

Alice Berger signed Exhibit 46-AT, the 1-1/2 page employment

agreement, which was

made this 1st day of December, 1986, between ALICE

BERGER and HOWARD BERGER, husband and wife, and owners

of the Woodbine Cemetery and Mausoleum, * * *

hereinafter referred to as the "employers", and GREGG

KUNKOWSKI, * * * hereinafter referred to as the

"employee".

Alice Berger's attorney, Dr. Forgotson, drafted, and Alice

Berger signed, Exhibit 57, an answer to Howard Berger's motions

for restraint, which was filed with the Superior Court of New

Jersey in the Bergers' divorce action. In five different places,

the answer describes the Woodbine business as "jointly" owned.

On or about September 22, 1987, Dr. Forgotson drafted and

signed, and Alice Berger signed, Exhibit 58, a letter sent to

Gregg Kunkowski at the Woodbine business office. The letter is

from Dr. Forgotson and states:

Alice Berger has instructed me to advise you that as a

joint owner of the Woodbine Cemetery & Mausoleum

business, you are instructed not to make any payments

on behalf of Howard Berger and/or Susan Moorehouse, for

any reason, without the consent of Alice Berger. * * *
- 30 -

We find that Alice Berger read and adopted the statements

contained in Exhibits 46-AT, 57, and 58. Therefore, they are

party admissions and not hearsay. Fed. R. Evid. 801(d)(2)(B).

Issue 1(c). Exhibit 59, Letter From Alice Berger's Divorce

Counsel to Judge Fundler

Alice Berger asserts that a letter dated April 13, 1987,

from Dr. Forgotson to Judge Fundler is hearsay and objects to its

use to prove that she was an owner of the Woodbine business.

Respondent asserts that it is a party admission. See Fed. R.

Evid. 801(d)(2). We agree with respondent.

Rule 801(d) of the Federal Rules of Evidence provides that

A statement is not hearsay if--* * * (2) Admission by

party-opponent.--The statement is offered against a

party and is * * * (C) a statement by a person

authorized by * * * [him] to make a statement

concerning the subject * * * .

On March 13, 1987, in the case of Berger v. Berger, No. FM09545-87 (N.J. Super.), Judge Fundler ordered Howard Berger to

make certain payments to Alice Berger. On April 13, 1987, Dr.

Forgotson, acting as Alice Berger's counsel in the divorce

proceeding, sent Judge Fundler the April 13 letter to clarify his

March 13 order. In the April 13 letter, Dr. Forgotson stated

that "Mrs. Berger owns one half interest in the Woodbine Cemetary

[sic] business. Any sums payable by the cemetary [sic] are

therefore coming out of her share of the business as well."

We find that Dr. Forgotson's statements in the letter to

Judge Fundler were authorized by Alice Berger; therefore they are
- 31 -

party admissions, not hearsay. Fed. R. Evid. 801(d)(2)(C).

Issue 1(d). Testimony of Gregg Kunkowski

At trial, Gregg Kunkowski's testimony about Alice Berger's

statements of ownership was admitted for the purpose of proving

that Alice Berger held herself out as a joint owner. Alice

Berger asserts that the testimony is hearsay and objects to its

use to prove that she was an owner of the Woodbine business.

Respondent asserts that it is a party admission. See Fed. R.

Evid. 801(d)(2).

We find that Alice Berger's statements to Gregg Kunkowski

are party admissions, not hearsay. Fed. R. Evid. 801(d)(2)(A).

Although Alice Berger's admissions of joint ownership in the

Woodbine business do not conclusively establish her ownership,

they are strong evidence that she held herself out as an owner

and that she accepted the benefits and burdens of ownership.

Issue 2. Duress

The settlement agreement of March 14, 1989, between Howard

and Alice Berger provided that they would file a joint income tax

return for 1988 and share equally in any resulting tax savings. 

When Alice Berger appeared in the Chancery Court with

counsel on March 14, 1989, she testified that she understood the

terms of the settlement agreement, that she had participated in

its negotiation, that the settlement agreement was fair and

equitable, that no one had compelled her to accept its terms, and

that she would abide by them if they were made a part of the
- 32 -

court's judgment. The Chancery Court's Judgment for Divorce,

entered April 24, 1989, recited that, based upon the court's

observations and the parties' testimony, the settlement agreement

had been voluntarily and knowingly entered into by the parties

with able assistance of counsel. The judgment also stated that

the settlement agreement had become binding as a contract and as

the court's judgment.

Although Alice Berger received various benefits under the

settlement agreement, she did not sign the joint 1988 Federal

income tax return prepared for Howard Berger until, subsequent to

his application, the Chancery Court ordered her, on October 4,

1989, to show cause why an order should not be entered directing

her to sign it. On October 12, 1989, she appeared with her

counsel before the Chancery Court and tried but was not able to

persuade the Chancery Court that she should not have to sign the

return. Then, in the belief that the Chancery Court had ordered

her to sign the return, she signed it at the courthouse. 

However, she attached to the return a statement that she was

signing a return that she believed to be incorrect and that she

intended to seek relief under Furnish v. Commissioner, 262 F.2d

727, 733 (9th Cir. 1958), affg. in part and remanding in part on

this issue Funk v. Commissioner, 29 T.C. 279 (1957), and under

Brown v. Commissioner, 51 T.C. 116 (1968). She now argues that

the return is not a valid joint return because she signed it

under duress.
- 33 -

 

5We said that the Court of Appeals in Furnish v.

Commissioner, 262 F.2d 727, 733 (9th Cir. 1958), affg. in part

and remanding in part on this issue Funk v. Commissioner, 29 T.C.

279 (1957), "[formulated] a standard of duress applicable in

Federal tax controversies", but it would appear that court was

rather clearly applying the California law of duress. The other

case cited in Brown v. Commissioner, 51 T.C. 116 (1968), in

support of our statement was Stanley v. Commissioner, 45 T.C. 555

(1966); while that case did support a nationwide uniform standard

of duress for the purpose of determining the validity of a

Federal income tax return as a joint return, id. at 561-562, it

expressly denied that it was establishing a Federal common law of

duress, id. at 562 n.12.

When spouses file a joint return, the tax is computed on

their aggregate income, and their liability for the tax is joint

and several. Sec. 6013(d)(3). A taxpayer's liability on a joint

return depends on the taxpayer's voluntary execution of the

return. Stanley v. Commissioner, 45 T.C. 555, 560 (1966). A

taxpayer who signs a return under duress has not voluntarily

executed the return and will not be held liable for the tax shown

due thereon, or for any tax deficiency for the year in question

that is attributable to the other spouse. Stanley v.

Commissioner, 81 T.C. 634, 637-638 (1983).

We have stated that duress is determined "under a uniform

standard unaffected by the idiosyncracies of particular State

law" and implied that we would develop an independent Federal

standard. Brown v. Commissioner, 51 T.C. at 119-120. However,

the cases that we cited support this conclusion only to a limited

 extent,5 and recent

opinions of the Supreme Court seem to indicate that we should
- 34 -

 

6Although Federal contracts are a paradigm area for the

application of Federal common law, Boyle v. United Technologies

Corp., 487 U.S. 500, 504 (1988), the Supreme Court expressly

refused to commit itself on whether State or Federal law governed

on the issue of duress in connection with a Federal military

contract in United States v. Bethlehem Steel Corp., 315 U.S. 289,

299-300 (1942). The Supreme Court's latest extended

pronouncement on the issue of Federal common law, O'Melveny &

Myers v. FDIC, ___ U.S. ___, 114 S. Ct. 2048 (1994), a unanimous

decision, would seem to indicate that State law should be applied

to decide the duress issue before us.

 

7"A federal common law of landlord and tenant does not

exist." Powers v. U.S. Postal Service, 671 F.2d 1041, 1045 (7th

Cir. 1982) (Posner, J., deciding to use State law to decide

landlord-tenant dispute to which Postal Service was a party). 

"For a variety of reasons having mainly to do with the paucity of

federal common law rules and the desirability of keeping the law

as simple as possible, federal courts asked to make federal

common law do so usually by adopting state law." Harrell v.

United States, 13 F.3d 232, 235 (7th Cir. 1993) (Posner, J.,

using State law to decide quiet title actions against Internal

Revenue Service); see also Street v. J.C. Bradford & Co., 886

F.2d 1472, 1481 (6th Cir. 1989) (Federal common law of release

"largely undeveloped" in cases).

apply State law on this issue.6

One reason to apply State law is that, in the area of

duress, as in other areas, a distinct Federal common law has not

developed.7 However, if we were to develop it, we would

presumably follow the Restatement, Contracts 2d (1981). Street

v. J.C. Bradford & Co., 886 F.2d 1472, 1481 (6th Cir. 1989)

(using Restatement, Contracts 2d to determine minimum

requirements under Federal common law of contracts with respect

to duress and abuse-of-fiduciary-relationship issues). Under the

Restatement, an improper threat by a party to a contract makes

that contract voidable by the other party for reasons of duress

when that threat leaves the victim no reasonable alternative to
- 35 -

 

8Even if Federal common law does govern our issue, it would

appear that the Federal common law would merely apply the

relevant State law. O'Melveny & Myers v. FDIC, ___ U.S. at ___,

114 S. Ct. at 2053; cf. United States v. Kimbell Foods, 440 U.S.

715, 727-729 (1979); United States v. Brosnan, 363 U.S. 237, 241-

242 (1960) (adopting State law as rule of decision in Federal tax

case despite desirability of uniformity); North Am. Rayon Corp.

v. Commissioner, 12 F.3d 583, 589-590 (6th Cir. 1993), affg. T.C.

Memo. 1992-610 (applying New York law of undue influence).

manifesting assent to the contract. 1 Restatement, Contracts 2d,

sec. 175(1) (1981). However, an improper threat by a third party

not a party to the transaction will render the contract voidable

only if the uninvolved party to the contract has not in good

faith and without reason to know of the duress either given value

or relied materially on the transaction. Id. sec. 175(2). For

our purposes, a threat inducing assent to a contract is improper

either (1) if what is threatened is the use of civil process and

the threat is made in bad faith or (2) if the resulting exchange

is not on fair terms and what is threatened is otherwise a use of

power for illegitimate ends. Id. sec. 176.

If State law governs, either independently or because

Federal common law so dictates,8 we must decide which State law,

and that is a choice-of-law question. In this case, we have

jurisdiction under the Internal Revenue Code. Therefore Federal

common law applies to the choice-of-law rule determination, and

this means applying the approach of the Restatement, Conflict of

Laws 2d (1971). Morewitz v. West of England Ship Owners Mut.

Protection & Indem. Association (Luxembourg), 62 F.3d 1356, 1362

n.13 (11th Cir. 1995); Congress Talcott Corp. v. Gruber, 993 F.2d
- 36 -

 

9Restatements are used as sources for determining Federal

common law rules in other areas besides conflict of laws. Town

of Newton v. Rumery, 480 U.S. 386, 391-392 (1987) (contracts,

enforceability of release); Central States, Southeast & Southwest

Areas Health & Welfare Fund v. Pathology Labs., P.A., 71 F.3d

1251, 1254 (7th Cir. 1995) (restitution, trusts in ERISA case);

Burlington Northern R. Co. v. Hyundai Merchant Marine Co., 63

F.3d 1227, 1231 (3d Cir. 1995) (judgments, issue preclusion);

Moench v. Robertson, 62 F.3d 553, 566 (3d Cir. 1995) (trusts,

ERISA); United States v. Northrop Corp., 59 F.3d 953, 958-963

(9th Cir. 1995) (contracts, enforceability of release); Luden's

Inc. v. Local 6 Bakery, Confectionery & Tobacco Workers' Intl.

Union of Am., 28 F.3d 347, 354-355 (3d Cir. 1994) (contracts,

collective bargaining agreement in labor law); Livingstone v.

North Belle Vernon Borough, 12 F.3d 1205, 1210 n.6 (3d. Cir.

1993) (contracts, enforceability of release).

 

10The result would be the same--and New Jersey law would

apply--under New Jersey's choice-of-law principles. On

contractual issues, New Jersey uses the law of the place where

the contract was concluded, lex loci contractus, unless the

most-significant-relationship test of 1 Restatement, Conflict of

Laws 2d, sec. 6 (1971) compels a different result. NL Indus.,

Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 319 (3d Cir.

1995); Gilbert Spruance Co. v. Pennsylvania Manufacturers'

Association Ins. Co., 629 A.2d 885, 888 (N.J. 1993); Harleysville

Ins. Co. v. Crum & Forster Personal Ins., 588 A.2d 385, 387-388

(N.J. Super. Ct. App. Div. 1990); cf. D'Agostino v. Johnson &

Johnson, Inc., 628 A.2d 305, 320-321 (N.J. 1993).

315, 319 (3d Cir. 1993) (Federal tax issue); Schoenberg v.

Exportadora de Sal, 930 F.2d 777, 782 (9th Cir. 1991); Albany

Ins. Co. v. Kieu, 927 F.2d 882, 891 (5th Cir. 1991); Edelmann v.

Chase Manhattan Bank, 861 F.2d 1291, 1294 (1st Cir. 1988); Harris

v. Polskie Linie Lotnicze, 820 F.2d 1000, 1003 (9th Cir. 1987);

Pittston Co. v. Allianz Ins. Co., 795 F. Supp. 689-690 (D.N.J.

1992).9 Whatever choice of law rule we were to use, however,

whether it be the most-significant-relationship test of 1

Restatement, Conflict of Laws 2d, section 6 (1971) or some other

test, New Jersey law would apply.10
- 37 -

In recent years, New Jersey has noticeably liberalized its

law of psychological or moral duress. Warner-Lambert

Pharmaceutical Co. v. Sylk, 471 F.2d 1137, 1143-1144 (3d Cir.

1972) (citing Rubenstein v. Rubenstein, 120 A.2d 11, 14 (N.J.

1956)). However, even though New Jersey no longer requires that

duress produce fear sufficient to overcome the will of a person

of ordinary firmness, but only that the fear overcome the will of

the person threatened, it still requires that the threat be

wrongful. Warner-Lambert Pharmaceutical Co. v. Sylk, 471 F.2d at

1144 (citing Rubenstein v. Rubenstein, 120 A.2d at 14);

Continental Bank v. Barclay Riding Academy, Inc., 459 A.2d 1163,

1175 (N.J. 1983); New Jersey Hosp. Association v. Fishman, 661

A.2d 842, 848 (N.J. Super. Ct. App. Div. 1995).

Alice Berger asserts that the Chancery Court ordered her to

sign the 1988 return and that she signed it because she believed

she had no choice and was afraid of the "consequences" of defying

a court order. Although she signed the return at the courthouse,

she does not appear to have been signed it before a judge who was

threatening improper or oppressive "consequences". See In re

N.D.N.Y. Grand Jury Subpoena No. 86-0351-S, 811 F.2d 114 (2d Cir.

1987; In re Marriage of Betts, 558 N.E. 2d 404, 427, 430 (Ill.

App. Ct. 1990). Alice Berger did not testify that the Chancery

Court had threatened "consequences" directly to her. Nor did she

testify to the consequences she believed she had been threatened

with.
- 38 -

Alice Berger and her attorney had an opportunity to show the

Chancery Court why Alice should not be ordered to sign the joint

return; she was ordered to show cause. Although Alice Berger

testified that her attorney told her--and that she believed--the

Chancery Court had ordered her to sign the return, the Chancery

Court's order was not entered into evidence, and no one else who

testified had personal knowledge of whether she was ordered to

sign the return.

As a result, we're not sure whether Alice Berger signed the

return under a court order or on her attorney's advice. If she

signed the return on her attorney's advice, we would be reluctant

to intrude into the attorney-client relationship. If the

Chancery Court ordered her to sign the return, that would appear

to have happened because she failed to show cause why she should

not be ordered to sign it. Without a showing of abuse of

discretion or threat of improper sanction, we would be reluctant

to impugn the Chancery Court's authority by construing its

exercise to have been improper or wrongful. See Groom v.

Mortimer Land Co., 192 F. 849, 852-853 (5th Cir. 1912) (execution

of deed under "coercion of the court's decree" is voluntary). 

Even if such an order by the Chancery Court might have been

erroneous, Peskin v. Peskin, 638 A.2d 849 (N.J. Super. Ct. App.

Div. 1994) (error for Chancery Court to coerce settlement

agreement in divorce case), we cannot say that it rose to the

level of being improper or wrongful, especially since Alice had
- 39 -

 

11Because no party made the argument, we do not consider at

length whether the open-endedness of the joint and several

liability under a joint return rendered unenforceable Alice

Berger's agreement to sign a joint return. Suffice it to say

that, under the test of Town of Newton v. Rumery, 480 U.S. 386,

391-392 (1987), the relevant consideration would appear to be

whether any public harm resulting from forcing her to honor her

agreement would outweigh the benefits of doing so. Cf. United

States v. Northrop Corp., 59 F.3d 953, 958-963 (9th Cir. 1995). 

Under that test, her agreement was clearly enforceable.

already freely agreed to the settlement agreement and derived

benefits from it. See Smith v. Commissioner, 65 F.3d 37, 40-41

(5th Cir. 1995), affg. T.C. Memo. 1994-149; Joyce v. Year Invs.,

Inc., 196 N.E.2d 24, 26 (Ill. App. Ct. 1964). We therefore

conclude that such an order would not have been improper in the

terms of 1 Restatement, Contracts 2d, sec. 176 (1981). Thus,

neither under New Jersey law nor under some putative distinct

Federal common law was there duress. Inasmuch as the result is

the same whether we apply New Jersey law or some distinct Federal

rule, we need not decide which law governs the question of duress

for the purpose of determining the validity of a joint return.

Although Alice Berger attached a disclaimer to the 1988 Form

1040 return that she signed, she did not alter the preprinted

jurat in such a way as to invalidate the return as a joint

return. Cf. Sloan v. Commissioner, 102 T.C. 137 (1994), affd. 53

F.3d 799 (7th Cir. 1995). Thus, we hold that the 1988 return was

a valid joint return.11
- 40 -

Issue 3. Ownership of Woodbine

The questions for decision on this issue are who owned the

Woodbine assets and business from the beginning of 1988 through

March 14, 1989, and thereafter, until November 17, 1989. The

answers to these questions should enable us to allocate the tax

liabilities on the Woodbine income for those periods and on the

gain from the sale of Woodbine to the Kunkowskis.

Income is taxable to the taxpayer who earns and controls it. 

Lucas v. Earl, 281 U.S. 111 (1930). "The choice of the proper

taxpayer revolves around the question of which person or entity

in fact controls the earning of income rather than who ultimately

receives the income." Vercio v. Commissioner, 73 T.C. 1246, 1253

(1980) (service income assigned to trust). The owners of land

may be different from the owners of a business located on the

land. See Crawford v. Commissioner, T.C. Memo. 1984-433 (land

and farm separate); Blunt v. Commissioner, T.C. Memo. 1966-280

(separating mortuary business from land).

To decide when a transfer is complete for tax purposes, we

examine all the surrounding facts and circumstances, no single

one of which is controlling. Baird v. Commissioner, 68 T.C. 115,

124 (1977). The focus of our inquiry, however, is on when the

benefits and burdens of ownership have shifted. Id. Generally,

a transfer is complete upon the earlier of the transfer of title

or the shift of the benefits and burdens of ownership. Deyoe v.

Commissioner, 66 T.C. 904, 910 (1976) (citing Dettmers v.
- 41 -

Commissioner, 430 F.2d 1019, 1023 (6th Cir. 1970), affg. Estate

of Johnston v. Commissioner, 51 T.C. 290 (1968)).

In a Federal tax controversy, State law controls the

determination of the taxpayer's interest in the property, and the

tax consequences are then determined under Federal law. United

States v. National Bank of Commerce, 472 U.S. 713, 722 (1985)

(and cases cited and quoted therein). To decide when equitable

title (i.e., the benefits and burdens of ownership) passes, we

consider the following factors under State law: (1) Legal title;

(2) intent of parties; (3) equity in property; (4) existence of

present obligation to complete transfer; (5) right of possession;

(6) party paying property taxes; (7) party bearing risk of loss;

and (8) party receiving profits from operation and sale of

property. Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C.

1221, 1237-1238 (1981); Spyglass Partners v. Commissioner, T.C.

Memo. 1995-452.

Although Howard Berger and Alice Berger had held joint legal

title to the Woodbine property since October 26, 1983, Alice

Berger did not participate in the operation of the Woodbine

business prior to Howard Berger's illness in June 1986. Neither

had she received any benefits from her ownership interest in the

Woodbine property during the years of the marriage prior to June

1986, other than indirectly through the support and maintenance

she received from Howard Berger. After Howard Berger's illness,

and the breakup of the marriage, however, her involvement in the
- 42 -

business increased, and she began to receive payments directly

from the Woodbine business account.

Although Alice Berger never participated in the day-to-day

operations of the Woodbine business after June 1986, neither did

Howard Berger. Cf. Blunt v. Commissioner, supra (joint owner of

real estate was sole and active operator and owner of the

business). Gregg Kunkowski managed the operations, soliciting

customers, negotiating contracts with customers and contractors,

paying the bills, and keeping the books and records. He

approached the Bergers only for major decisions.

In 1986, Gregg Kunkowski presented an employment proposal to

Dr. Forgotson, Alice Berger's attorney, who drafted an employment

agreement. On December 1, 1986, Alice Berger signed the

agreement (as did Howard Berger)

between ALICE BERGER and HOWARD BERGER, husband and

wife, and owners of the Woodbine Cemetery and

Mausoleum, * * * hereinafter referred to as the

"employers", and GREGG KUNKOWSKI, * * * hereinafter

referred to as the "employee".

By presenting the employment agreement to Alice Berger's

representative, Gregg Kunkowski treated Alice Berger as an owner

of the business. By signing the employment agreement, Alice

Berger bound herself to the terms of the agreement and evidenced

her acceptance of the benefits and burdens of her joint ownership

of the Woodbine business.

By September 22, 1987, Alice Berger exercised enough control

over the Woodbine business to order Gregg Kunkowski to stop
- 43 -

making payments to Howard Berger. Gregg Kunkowski appeared to

believe that Alice Berger had the authority to do so because he

stopped making the payments, see Tucker v. Commissioner, T.C.

Memo. 1983-456 (comparing owners' participation in, and control

of, the business), until the Chancery Court ordered him to resume

them.

Throughout the divorce proceedings, Alice Berger represented

to the Chancery Court that she and Howard Berger jointly owned

Woodbine, and that the weekly payments from the Woodbine business

account were in addition to alimony pendente lite.

During 1988, Alice Berger withdrew $45,578 from the Woodbine

business account, and from January 1 until March 14, 1989, she

withdrew $7,560. During 1988, Howard Berger withdrew $42,676

from the Woodbine business account, and from January 1 until

March 14, 1989, he withdrew $7,795.

 During 1988 and until March 14, 1989, Howard and Alice

Berger shared the benefits of the Woodbine business, and

Alice owned the Woodbine business jointly with Howard.

Although full legal title to the Woodbine real property was

not transferred to Alice Berger until June 23, 1989, the

settlement agreement of March 14, 1989, transferred all the

benefits and burdens of the Woodbine property and business to

Alice Berger. See Deyoe v. Commissioner, supra. Thereafter,

Howard Berger no longer received weekly payments or had his

expenses paid by Woodbine, except those expenses that had already
- 44 -

accrued, whereas Alice Berger continued to have her expenses paid

through the Woodbine business account and increased her weekly

draw payments to $1,000, receiving more than $50,000 after March

14, 1989. Alice Berger also received the entire proceeds of sale

of Woodbine in the form of the Kunkowskis' installment note, and

she has been receiving payments of interest and principal on the

note in their entirety ever since.

Alice Berger's assertion that she was merely an

accommodation party is belied by the fact that, without

consulting Howard Berger, who she asserts was the actual owner of

Woodbine, she doubled her draw. She also did not transfer

Woodbine directly to the Kunkowskis, as was required by the sale

agreement and the settlement agreement. Instead, she entered

into a relatively complicated transaction, transferring the

business and property to the Woodbine Association in exchange for

Certificates of Debt in the Woodbine Association, and then

transferring the Certificates of Debt to Gregg and Julia

Kunkowski in exchange for their promissory note. We don't

believe that Alice Berger would have entered into such a

complicated transaction if she were merely an accommodation

party.

Alice Berger was contractually bound to sell Woodbine to

Gregg and Julia Kunkowski, but she had bound herself to sell it

only if and to the extent it was awarded to her. Howard Berger

would have been similarly bound if Woodbine had been awarded to
- 45 -

 

12Alice Berger tries to make something of the fact that the

transfer documents of June 23 and Nov. 17, 1989, were nothing

more than conveyances of real property. She argues that she

never received and never transferred the Woodbine business,

including the bank accounts and receivables, and so she should

not be taxed on the income of the business, nor treated as having

sold these assets. We are satisfied, however, on the basis of

the entire record, that she had the benefits and burdens of

ownership of the business during the period Mar. 14-Nov. 17,

1989, as evidenced by the substantial draw payments she received

during this period, and that the $680,000 price she received was

based on the Woodbine assets and business in their entirety.

him. Alice Berger was awarded Woodbine; she alone reaped the

benefits of ownership from March 14 until November 17, 1989.

Among the eight factors under State law recited by Grodt &

McKay Realty, Inc. v. Commissioner, supra, only factor (1), legal

title (and that only to the extent of one-half ownership of the

real property), clearly remained with Howard Berger in the period

between March 1 and June 23, 1989. We have just seen that for

purposes of factor (8), Alice Berger was the party receiving

profits from the operation and sale of the property during that

period. In addition, the terms of the settlement agreement

rendered the transfer of full ownership to Alice Berger legally

enforceable, for purposes of factor (4); gave her the right of

possession, for purposes of factor (5); probably transferred to

her the risk of loss, for purposes of factor (7); and left her

with the obligation to pay property taxes, for purposes of factor

(6). The terms of the settlement agreement also manifested the

intent of the parties to complete the transfer, for purposes of

factor (2), which was done in due course.12 This leaves only the

acquisition of an equity in the property, factor (3),
- 46 -

indeterminate, but it would appear to us to follow the other

factors that would attribute the full ownership of Woodbine to

Alice Berger after March 14, 1989.

Howard and Alice Berger owned the Woodbine property and

business jointly during 1988 and until March 14, 1989. 

Thereafter Alice Berger was the sole owner of the Woodbine

property and business until the sale of November 17, 1989.

Issue 4(a). Method of Accounting for Mausoleum Sales and Costs

Generally, a taxpayer computes taxable income using the same

method of accounting that he or she regularly uses to compute

income in keeping the books. Sec. 446(a). A taxpayer may use

"(1) the cash receipts and disbursements method; (2) an accrual

method; (3) any other method permitted by this chapter; or any

combination of the foregoing methods permitted under regulations

prescribed by the Secretary." Sec. 446(c). The regulations

permit "any combination of * * * [the cash, accrual, or other

permissible] methods of accounting * * * if such combination

clearly reflects income and is consistently used." Sec. 1.446-

1(c)(1)(iv), Income Tax Regs. A method of accounting includes

both the taxpayer's overall method of accounting and the method

of accounting for any item. Burck v. Commissioner, 63 T.C. 556,

561 (1975), affd. 533 F.2d 768 (2d Cir. 1976); sec. 1.446-1(a),

Income Tax Regs.

If a taxpayer changes the method of accounting regularly

used to compute income in keeping the books, the taxpayer must
- 47 -

secure the consent of the Secretary before computing taxable

income under the new method. Sec. 446(e). Adoption of a method

of accounting for a new trade or business is not a change in the

method of accounting. Sec. 1.446-1(e)(1), Income Tax Regs. Use

of a method of accounting different from a taxpayer's overall

method of accounting is also not a change in the method of

accounting if it results from a change in underlying facts. Sec.

1.446-1(e)(2)(ii)(b), Income Tax Regs. For a different method of

accounting to be a change, "the item itself must be basically the

same as an item previously accounted for with the present method

of accounting differing from the prior treatment. Unless the

transactions are basically the same, the accounting treatment

would not be [a] 'change' of accounting but only a 'new'

accounting method for a different transaction." Federated Dept.

Stores, Inc. v. Commissioner, 51 T.C. 500, 513-514 (1968), affd.

426 F.2d 417 (6th Cir. 1970).

From 1979 through the years in issue, Woodbine's sales of

grave plots were recognized when cash was received, and most

expenses were recorded when paid. However, the costs of grave

plots were inventoried and expensed only as plots were sold.

When construction of the first mausoleum began in 1984,

mausoleum crypt sales were accounted for differently. Until

construction of the mausoleum was complete, customer payments to

purchase crypts were treated as deposits. When the mausoleum was

completed, prior payments were recognized as income, and the pro
- 48 -

rata share of construction costs was expensed. Subsequent sales

of crypts were then treated similarly to grave plot sales; sales

were recorded when cash was received, and the remaining cost of

crypts was inventoried and then expensed as the remaining crypts

were sold.

Alice Berger asserts that Howard Berger, by using a method

of accounting for mausoleum crypt sales different from the method

he used for cemetery plot sales, changed Woodbine's accounting

method to a method that does not clearly reflect income and that

he did so without the Secretary's consent. She therefore

concludes that receipts from the sale of crypts were income when

received. Howard Berger asserts that the method of accounting

adopted for mausoleum crypt sales was not a change in accounting

method and that the cash method for grave plot sales and the

accrual method for mausoleum crypt sales is a permissible

combination of methods that clearly reflects income. Respondent

agrees with Howard Berger that there was no change in accounting

method, and that, until March 14, 1989, Woodbine used a

permissible combination of the cash and accrual methods that

clearly reflected income. However, respondent asserts that

Howard Berger's 1989 transfer of his interest in the Woodbine

business to Alice Berger caused "a triggering of tax to Howard

and that a pro-rata portion of the profit attributable to * * *

'deposits' [received prior to the transfer] should be taxed to

Howard in 1989."
- 49 -

We find that there was no change in accounting method, that

Woodbine's combination of methods clearly reflected income during

1988 and 1989, and that, although section 1041 prevents Howard's

March 1989 transfer of his interest in Woodbine to Alice from

being treated as a gain recognition event to him, the transfer

triggered the accrual of Howard's share of the income from crypt

sales that had been previously deferred and that would not have

been otherwise includable in income until the completion of the

Phase II mausoleum in May 1989.

Sales of crypts during construction significantly differed

from sales of cemetery plots. When a cemetery plot was sold,

ownership of the plot was transferred to the purchaser at

approximately the same time as Woodbine received cash. The plot

was ready for excavation and use, and Woodbine's cost of the sale

was known. On the other hand, when a mausoleum crypt was sold

during construction, ownership of the crypt was not transferred

and the crypt was not ready for occupancy until the mausoleum

building was completed. Prior to completion of the mausoleum,

Woodbine's cost of sale of crypts could only be estimated.

Because sales of crypts significantly differed from sales of

plots, the method of accounting adopted for crypt sales was

neither a change in the overall method of accounting nor a change

in the treatment of a material item. The method of accounting

for crypt sales was a new method of accounting for a different

item. Because the new accounting method was not a change in
- 50 -

method, the Secretary's consent was not required. Sec. 1.446-

1(e)(2)(ii)(b), Income Tax Regs.

We now discuss why the different method of accounting for

mausoleum crypt sales clearly reflected income. Sec. 1.446-

1(a)(2), Income Tax Regs. Alice Berger cites Evergreen Cemetery

Association v. Burnet, 45 F.2d 667 (D.C. Cir. 1930), affg. 13

B.T.A. 638 (1928), for the proposition that "Where forfeiture of

the deposit will result from a breach of the contract by the

customer, the deposit is taxed in the year of receipt." Alice

Berger asserts that "In Evergreen, the court held that periodic

payments received pursuant to contracts for the sale of mausoleum

crypts during the construction phase were taxable when received

regardless of when construction was completed". We disagree.

The taxpayer in Evergreen Cemetery Association v. Burnet,

supra, kept its books on an accrual basis. The taxpayer had sold

crypts in 1920 before its mausoleum was completed, and in 1921,

the year the mausoleum was completed. Purchasers were allowed to

pay for crypts over time, and at the end of 1921, not all of the

crypts had been paid for in full. For 1921, the taxpayer

included in income the cash collected during 1920 and 1921 but

did not include the unpaid amounts. This accounting method was

improper because "the entire sales price of all crypts sold by it

had accrued in the year 1921". Id. at 669. Although the court

in Evergreen Cemetery Association did not directly address the

propriety of including 1920 sales in 1921 gross receipts, it
- 51 -

implicitly agreed that the income from crypt sales was taxable in

the year the mausoleum was completed, regardless of when the cash

had been collected.

Generally, when property is exchanged for cash, the receipt

of cash clearly reflects the receipt of income from the sale of

the property. However, when cash is received in exchange for a

promise to transfer property that is not yet constructed, the

amount or existence of income is less clear. As to the crypt

sales in issue, a pure cash receipts and disbursements method of

accounting would recognize income from the sale of a crypt when

cash is received but would delay deduction of the cost of

construction until the cash is spent, certainly not a clear

reflection of income. See Rotolo v. Commissioner, 88 T.C. 1500,

1514 (1987) ("'the cost of goods sold must be deducted from gross

receipts in order to arrive at gross income'" (quoting Sullenger

v. Commissioner, 11 T.C. 1076, 1077 (1948))); see also Veenstra &

DeHaan Coal Co. v. Commissioner, 11 T.C. 964 (1948). Until a

mausoleum was completed, Woodbine's overall method of accounting

would not clearly reflect income from crypt sales. Either the

costs of construction would have to be estimated and accrued, and

a portion expensed, or the recognition of gross receipts delayed

until receipts could be matched with the costs of construction. 

Neither method would appear to reflect income more clearly than

the other. Without a showing either that Woodbine's overall

method of accounting would clearly reflect income from mausoleum
- 52 -

crypt sales or that the method of accounting adopted for such

sales does not clearly reflect income, we will not change the

accounting method that was consistently used for crypt sales

during the previous 4 years and that had been implicitly

authorized by respondent. Sec. 1.446-1(c)(2)(ii), Income Tax

Regs.

As a result, we reject Alice Berger's efforts to accelerate

part of Phase II mausoleum crypt sale income into 1988 and to

make it solely taxable to Howard Berger on the ground that she

was not a party to the 1988 joint return.

Issue 4(b). Recognition of Income Upon Transfer of Woodbine

Respondent argues that Howard Berger's transfer to Alice

pursuant to their settlement agreement is similar to the

transfers of partially completed construction contracts by the

corporations in Jud Plumbing & Heating, Inc. v. Commissioner, 153

F.2d 681 (5th Cir. 1946) (liquidating corporation), affg. 5 T.C.

127 (1945), and Standard Paving Co. v. Commissioner, 190 F.2d 330

(10th Cir. 1951) (nontaxable reorganization), affg. 13 T.C. 425

(1949). Respondent argues that, as a result of Howard's

transfer, the method of accounting for mausoleum crypt sales that

we have accepted no longer clearly reflected income, at least as

to him. Respondent relies on section 1.451-5(f), Income Tax

Regs., to justify substituting a percentage of completion method

to account for Howard's share of the income from Phase II

mausoleum crypt sales for 1989. Although Alice Berger disagrees
- 53 -

with the assertions of Howard and respondent that she had or

acquired any ownership interest in the Woodbine property and

business, she concurs with respondent's general position on the

application of Jud Plumbing and Standard Paving, and argues,

under the assignment of income principle, that the deposits would

be income to Howard Berger as of the date of transfer. Howard

Berger now repudiates his 1989 return position and asserts that

the transfer of his remaining one-half interest in the Woodbine

property and business was a nontaxable transfer of property under

section 1041, not an assignment of income, and that Jud Plumbing

does not apply.

We hold that section 1041 does not trump clear reflection of

income in the peculiar factual circumstances of this case. As a

result, Howard Berger will be required to accrue a share of

income from Phase II mausoleum crypt sales for 1989, even though

he transferred his one-half interest in Woodbine in March 1989, 2

months prior to the completion of the Phase II mausoleum. 

However, by reason of section 1041, he recognized no gain on that

transfer or on Alice Berger's subsequent sale of Woodbine to the

Kunkowskis.

Section 1041 was enacted by section 421 of the Deficit

Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 793-795.

It provides as a general rule that

No gain or loss shall be recognized on a transfer of

property from an individual to * * * 

(1) a spouse, or
- 54 -

(2) a former spouse, but only if the transfer is

incident to the divorce.

Section 1041 is effective generally for transfers after July 18,

1984, in taxable years ending after such date; see DEFRA sec.

421(d), 98 Stat. 795.

Prior to the enactment of section 1041, the resolution of

property rights incident to a divorce gave rise to differing tax

results, depending on how each spouse's rights and obligations

were viewed for State law purposes. The Supreme Court had ruled

that a transfer of separately owned appreciated property to a

spouse (or former spouse) in exchange for the release of marital

claims resulted in the recognition of gain to the transferor. 

United States v. Davis, 370 U.S. 65 (1962). However, upon an

approximately equal division of community property on divorce, no

gain was recognized on the theory that there was only a

nontaxable partition, not a sale or exchange. Carrieres v.

Commissioner, 64 T.C. 959, 964 (1975), affd. per curiam 552 F.2d

1350 (9th Cir. 1977); see also Siewert v. Commissioner, 72 T.C.

326, 332-333 (1979). The Commissioner applied a like result to

the partition of jointly held property. See Rev. Rul. 74-347,

1974-2 C.B. 26. The tax treatment of divisions of property

between spouses involving other various types of ownership under

the different State laws was often unclear and resulted in much

litigation. See H. Rept. 98-432 (Part 2), at 1491 (1984). 

Several common law States had tried to avoid the result in the

Davis case by amending and bending their property and equitable
- 55 -

distribution laws. Id.

Congress was dissatisfied with the resulting patchwork and

desired to make the Federal tax law less intrusive into marital

property relationships. Id. at 1492. Section 1041 was the

result. The Ways and Means Committee explained

that the transfer of property to a spouse incident to a

divorce will be treated, for income tax purposes, in

the same manner as a gift. Gain (including recapture

income) or loss will not be recognized to the

transferor, and the transferee will receive the

property at the transferor's basis (whether the

property has appreciated or depreciated in value).

* * * This nonrecognition rule applies whether the

transfer is for the relinquishment of marital rights,

for cash or other property, for the assumption of

liabilities in excess of basis, or for other

consideration and is intended to apply to any

indebtedness which is discharged. Thus, uniform

Federal income tax consequences will apply to these

transfers notwithstanding that the property may be

subject to differing state property laws. [Id.; fn.

ref. omitted.]

An assignment of income is generally disregarded unless the

underlying income-producing property is also transferred. See

generally, 3 Bittker & Lokken, Federal Taxation of Income,

Estates and Gifts, ch. 75 (2d ed. 1991 & Supp. 1995). Usually

there is no property underlying personal service income so that 

assignment of personal service income is disregarded, and the

taxpayer who earned the income is taxed on it under Lucas v.

Earl, 281 U.S. 111 (1930). In this case, property (a one-half

interest in Woodbine) was transferred, subject to contracts for

sale of mausoleum crypts and related receivables and deposit

liabilities. Cf. Kochansky v. Commissioner, T.C. Memo. 1994-160
- 56 -

(contingent legal fee taxable to lawyer who earned it, not spouse

who was awarded it). But see Siegel v. United States, 464 F.2d

891, 894 (9th Cir. 1972) ("the line between earned income and

income from property is not always marked with dazzling

clarity").

Even though there may be a personal service element in the

income from the operation of a cemetery, this record provides no

factual basis for separating that element from the income from

mausoleum crypt sales, nor do we see any proper theoretical

ground for doing so. Moreover, Howard and Alice had both

delegated the management and operation of Woodbine to Gregg

Kunkowski.

Respondent's position that the assignment of income

principle can apply to transfers of property with economically

accrued income elements, see Rev. Rul. 87-112, 1987-2 C.B. 207,

so as to trump section 1041, has been criticized as "an

unfortunate step backward into the judicial confusion created by

the Davis rule". McCaffery & Salten, Structuring the Tax

Consequences of Marriage and Divorce, sec. 604, at 144 (1995)

(citing Asimow, "The Assault on Tax-Free Divorce: Carryover Basis

and Assignment of Income", 44 Tax. L. Rev. 65, 91-112 (1988)). 

But see Gabinet, "Section 1041: The High Price of Quick Fix

Reform in Taxation of Interspousal Transfers", 5 Am. J. Tax Pol.

13 (1986). The concerns expressed by McCaffery & Salten, supra

at 145, extend beyond the resulting uncertainty for parties
- 57 -

negotiating marital settlements to include the unfairness of

immediately triggering income before cash is in hand and even

causing income actually paid to one spouse to be attributed to

the other.

In Balding v. Commissioner, 98 T.C. 368 (1992), we rejected

the Commissioner's reliance on the assignment of income doctrine

to conclude that the payments a former wife received in

settlement of her claim to a community property interest in her

husband's military pension were nontaxable gifts under sections

1041 and 102.

In the absence of section 1041, we would not hesitate to

uphold respondent's reliance on Jud Plumbing & Heating v.

Commissioner, 153 F.2d 681 (5th Cir. 1946), to apply the clear

reflection of income rule to require Howard Berger to use the

percentage of completion method to determine his share of the

Woodbine income as of the time of the transfer. Jud Plumbing and

Standard Paving Co. v. Commissioner, 190 F.2d 330 (10th Cir.

1951), are only a couple of examples of the numerous occasions on

which a taxpayer winding up its existence as a tax-paying entity

was required to include income in its final taxable year under

the clear reflection of income rule, even though its otherwise

proper method of accounting would not have otherwise required

inclusion in that year. See Stephens Marine, Inc. v.

Commissioner, 430 F.2d 679, 687 (9th Cir. 1970), affg. T.C. Memo.

1969-39; Idaho First Natl. Bank v. United States, 265 F.2d 6 (9th
- 58 -

Cir. 1959); J.M. Turner & Co. v. Commissioner, 247 F.2d 370, 373

(4th Cir. 1957), revg. and remanding on other grounds 26 T.C. 795

(1956); Floyd v. Scofield, 193 F.2d 594 (5th Cir. 1952); United

States v. Lynch, 192 F.2d 718 (9th Cir. 1951); Commissioner v.

Carter, 170 F.2d 911 (2d Cir. 1948), affg. 9 T.C. 364 (1947); see

also Palmer v. Commissioner, 29 T.C. 154 (1957) (clear reflection

of income trumps nonrecognition under section 351, whereas

section 351 generally trumps assignment of income, Rev. Rul. 80-

198, 1980-2 C.B. 113, 114-115 (citing Hempt Bros. v. United

States, 490 F.2d 1172 (3d Cir. 1974))), affd. 267 F.2d 434, 438-

439 (9th Cir. 1959). See generally Bittker & Eustice, Federal

Income Taxation of Corporations and Shareholders, par. 3.17, at

3-82 to 3-86 (6th ed. 1994).

The termination of Howard Berger's performance obligation to

purchasers of Phase II mausoleum crypts, see sec. 1.451-5(f),

Income Tax Regs., makes it appropriate to apply Jud Plumbing and

section 446(b) to his March 14, 1989 transfer. This is a

situation contemplated by section 1.451-5(f), Income Tax Regs.,

in which "in a taxable year [1989]" Howard's "liability under the

agreement [the Phase II mausoleum crypt sales contracts]

otherwise ends", so as to make it appropriate that "so much of

the advance [payments] as was not includable in his gross income

in preceding taxable years shall be included in his gross income

for such taxable year [1989]".

Any concerns about unfair income triggering and
- 59 -

 

13The Estate of Howard Berger now takes the position that in

(continued...)

misattribution of deferred income need not detain us. At the

time of the transfer from Howard to Alice on March 14, 1989, less

than 2 months remained before the Phase II mausoleum would be

completed, and the bulk of the pre-completion deposits was

already in hand. During all of 1987 and 1988 and for the first

10 weeks of 1989, Howard Berger had received draw payments of

$500 per week, plus payments of personal expenses, that were

primarily financed by those deposits. No misattribution results

from taxing Howard on one-half the income attributable to Phase

II mausoleum crypt sales prior to his March 1989 transfer.

It follows that Howard Berger's taxable income from the

operations of Woodbine includes not only his one-half share of

the operating profits of Woodbine for the period from January 1

through March 14, 1989, computed under Woodbine's method of

accounting, but also a portion of the income from the Phase II

mausoleum crypt sales. Howard Berger has not furnished "the

cogent proof" that would require us to reduce the $175,142 of net

income that he reported from the Woodbine business for this

period in 1989. See Estate of Hall v. Commissioner, 92 T.C. 312,

337-338 (1989); Nestle Holdings, Inc. v. Commissioner, T.C. Memo.

1995-441, 70 T.C.M. 683, 707, 1995 RIA TC Memo par. 95,441 at

95-2730. Consequently, we hold him to the initial admission in

his 1989 return as to the measure of his Woodbine income,

including his share of the Phase II crypt sale income.13
- 60 -

 

13(...continued)

1989 he should be taxed only on $22,853 of Woodbine income, which

approximates the following amounts of pre-March 14, 1989 income:

Cemetery income $36,030.36

Interest income 7,262.19

 2)43,292.55

 21,646.28

This is the basis for Howard Berger's argument that he and

Susan Berger have a substantial overpayment for 1989.

Respondent would tax Howard under our 50-percent allocation

to him on $145,204 of profit on mausoleum deposits, plus $21,646,

his 50-percent share of other cemetery income and interest

income, for a total of $166,850. This is not much less than the

amount reported by Howard on his 1989 joint return. We believe

that respondent's approach to taxing Howard Berger is supported

by the parties' stipulations as to the amounts of Phase II

mausoleum crypt sales deposits and costs that would be taxed on a

percentage of completion basis, as of March 14, 1989, to a 50-

percent owner. We treat respondent's argument as a concession,

and reduce Howard Berger's 1989 Schedule C Woodbine income from

$175,142 to $166,850.

We therefore treat Alice Berger as having received the

remainder of Woodbine's taxable income for 1989. Inasmuch as the

parties have agreed that the total taxable income of Woodbine for

the period in 1989 through November 17, 1989, amounted to

$383,133, Alice Berger is taxable on the remainder of $216,283. 

It's not unfair to tax Alice Berger on that amount of Woodbine

operating income for 1989. Until March 14, 1989, she received

the same monthly draw payments as Howard Berger. Thereafter,
- 61 -

until November 17, 1989, she received draw payments from Woodbine

at $1,000 per week and total payments of $53,844, and Howard

Berger received only $2,239 on account of personal expenses that

had previously accrued. Under our approach, Alice Berger's 1989

Woodbine taxable income exceeds Howard Berger's 1989 taxable

income by approximately $50,000, the amount by which Alice

Berger's draw payments and withdrawals made after March 14, 1989,

exceeded the payments to Howard Berger during the same period:

 Woodbine 1989

 Taxable Income

1. Total taxable income $383,133

2. Alice Berger -216,283

3. Howard Berger 166,895

4. 2 minus 3 49,431

Issue 5(a). Whether Alice Berger or Howard Berger Is Required to

Recognize Gain From the Sale of Woodbine in 1989

It appears to be undisputed by the parties that the sale

transactions of November 17, 1989, should be treated as a direct

sale of Woodbine to the Kunkowskis in exchange for their

installment note to Alice Berger.

Alice Berger argues that section 1041 does not apply because

the sale to the Kunkowskis was a transfer to third parties on

behalf of a spouse and thus falls under section 1.1041-1T, Q&A-9,

Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). 

For this conclusion, she largely relies on Arnes v. United

States, 981 F.2d 456 (9th Cir. 1992). However, this Court

concluded in Blatt v. Commissioner, 102 T.C. 77, 82 (1994), that
- 62 -

 

14See also Arnes v. Commissioner, 102 T.C. 522 (1994). It

is unclear to what Court of Appeals appeal in this case would

lie, but it would almost certainly not be to the Court of Appeals

for the Ninth Circuit. Therefore Golsen v. Commissioner, 54 T.C.

742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), does not

constrain us to follow Arnes v. United States, 981 F.2d 456 (9th

Cir. 1992). 

Arnes v. United States, supra, had been wrongly decided.14 Under

the test that we expressed in Blatt v. Commissioner, supra at 81,

"A transfer that satisfies an obligation or a liability of

someone is a transfer on behalf of that person". Alice Berger's

sale of Woodbine to the Kunkowskis does not represent a sale on

behalf of Howard Berger, and thus section 1041 does not attribute

to Howard any gain realized by Alice on her sale of Woodbine to

the Kunkowskis.

Alice Berger asserts that "both parties, Alice and Howard,

were obligated to transfer Woodbine to the Kunkowskis". However,

neither Howard nor Alice was obligated to sell Woodbine until an

award was entered by the Chancery Court. The settlement

agreement stated that whoever was awarded Woodbine would

immediately sell it to the Kunkowskis. Howard Berger was not

awarded Woodbine and so was never obligated to sell it to the

Kunkowskis. We disagree with Alice's argument that her sale to

the Kunkowskis was made on behalf of Howard.

Alice Berger also argues that section 1041 does not apply

because the sale to the Kunkowskis was part of a step transaction

on behalf of Howard, and that, therefore, he must recognize gain

on the transfer of Woodbine to Alice. Alice also asserts that
- 63 -

the step-transaction doctrine applies to collapse the transfer of

the Woodbine assets and business from Howard to Alice to Woodbine

Association to Gregg and Julia Kunkowski into a direct transfer

from Howard to the Kunkowskis.

As for the step-transaction doctrine, section 1.1041-1T(a),

A-2, Example (3), Temporary Income Tax Regs., 49 Fed. Reg. 34452

(Aug. 31, 1984), does say that the step-transaction doctrine may

apply to section 1041 in appropriate circumstances. However, the

regulation addresses the use of the step-transaction doctrine to

extend, rather than limit, the sweep of section 1041. A-2 as a

whole says that section 1041 applies to all transfers of property

between spouses, not just those incident to divorce. Example (2)

says that this includes transfers between one spouse and a sole

proprietorship owned by the other spouse. Example (3) says that

section 1041 does not apply to transfers between one spouse and a

corporation wholly owned by the other. Example (3) then goes on

to say that in appropriate circumstances general tax principles,

including the step-transaction doctrine, may apply to

recharacterize the transaction. The regulation appears to

contemplate that such general principles could be used in

appropriate circumstances as a basis for applying section 1041. 

To use the step transaction doctrine to limit the scope of

section 1041 in the circumstances of this case would be

unwarranted. Indeed, we have already found that Alice Berger

alone reaped the benefits of the ownership of Woodbine from March
- 64 -

14, 1989, when Howard's beneficial ownership ceased, until

November 19, 1989, when she sold Woodbine to the Kunkowskis.

Neither of Alice Berger's arguments carries the day. 

Section 1041 operates to make her liable for tax on the entire

gain realized on the sale of Woodbine to the Kunkowskis.

Issue 5(b). Adjusted Basis of the Woodbine Property and Business

To calculate Alice Berger's gain, we must ascertain her

basis. Respondent determined that the adjusted basis of the

Woodbine property and business was no greater than $75,945, as

reflected by the total assets shown on the books and records of

Woodbine as of November 17, 1989.

Alice Berger argues that her adjusted basis should be

increased by $100,000, the amount paid for Woodbine by Howard

Berger in 1979, and by the amount of the unrealized receivables

on the books of Woodbine on the date of the March 14, 1989,

transfer. We consider these arguments, and also whether her

adjusted basis should be increased by any income accrued to

Howard Berger upon his transfer of March 14, 1989, to her and by

her as a result of her income accrued on the completion of the

Phase II mausoleum in May 1989.

The original $100,000 purchase price of the Woodbine assets

and business was already included in Woodbine's books and

records. The original purchase price was allocated among grave

plots, buildings, equipment, and goodwill. The goodwill was not

amortized and remained on Woodbine's books. Buildings and
- 65 -

equipment had been subject to depreciation from 1979 until

November 17, 1989, and their bases had been appropriately reduced

on Woodbine's books. Grave plots were held as inventory on

Woodbine's books and were expensed as they were sold. We

conclude that Howard Berger's original $100,000 cost had been

reduced, as a result of depreciation, and increased--to reflect

the unrecovered costs of unsold mausoleum crypts and cremation

niches--to $75,945, the amount on Woodbine's books on November

17, 1989, the date of Alice Berger's sale to the Kunkowskis.

We next consider whether Howard Berger's accrual of deposit

income on his transfer of March 14, 1989, to Alice changes the

basis of the Woodbine property and business in her hands.

Section 1041(b) provides that after a transfer incident to

divorce the basis of the transferee in the property shall be the

adjusted basis of the transferor. Sec. 1.1041-1T(d), A-11,

Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984),

describes the treatment of the transferee of property under

section 1041 as follows:

The transferee of property under section 1041

recognizes no gain or loss upon receipt of the

transferred property. In all cases, the basis of the

transferred property in the hands of the transferee is

the adjusted basis of such property in the hands of the

transferor immediately before the transfer. Even if

the transfer is a bona fide sale, the transferee does

not acquire a basis in the transferred property equal

to the transferee's cost (the fair market value). This

carryover basis rule applies whether the adjusted basis

of the transferred property is less than, equal to, or

greater than its fair market value at the time of

transfer (or the value of any consideration provided by
- 66 -

the transferee) and applies for purposes of determining

loss as well as gain upon the subsequent disposition of

the property by the transferee. Thus, this rule is

different from the rule applied in section 1015(a) for

determining the basis of property acquired by gift. 

[Emphasis added.]

On the basis of this regulation (and of the words of section

1041(b)), we decided in Godlewski v. Commissioner, 90 T.C. 200,

206 (1988), that a husband who bought title to their house from

his former wife for $18,000 under the terms of a divorce

agreement could not increase his basis in the house under section

1041 by the $18,000 that he paid her. Our conclusion was based

on the assumption, properly adopted in that case, that a transfer

subject to section 1041 is a nonrecognition event to both

transferor and transferee. However, section 1041(e), enacted in

1986, after section 1041 had been enacted in 1984, provides for

recognition of gain on transfers that would otherwise be

nonrecognized under section 1041(a), if (1) the transfer is in

trust and (2) liabilities assumed or encumbering the property

exceed the adjusted basis. It further provides that "Proper

adjustment shall be made under subsection (b) in the basis of the

transferee in such property to take into account gain recognized

by reason of the preceding sentence"; i.e., that the transferee's

basis is adjusted to reflect any gain recognized upon the

transfer by the transferor.

The structure of section 1041, as amended, would therefore

appear to support by analogy adjusting Alice Berger's carryover
- 67 -

basis in Woodbine to reflect the taxable income accrued to Howard

Berger under section 446(b) and Jud Plumbing & Heating v.

Commissioner, 153 F.2d 681 (5th Cir. 1946), by reason of his

transfer of March 14, 1989, to her. We believe that her basis

should be so adjusted.

We therefore distinguish Godlewski v. Commissioner, supra,

which involved a transfer on which no gain or other income was

recognized by either spouse. What Godlewski really rejects is

treating the transfer of the interest in the house in question as

a sale when section 1041(b) dictated that it should be treated as

a gift. Making adjustments to the basis in Woodbine in our case

to reflect Howard's income accrual on his transfer to Alice does

not present the same difficulty.

In order to determine Alice Berger's gain upon the transfer

of Woodbine to the Kunkowskis, we should make all adjustments to

the basis of Woodbine that are properly attributable to capital

account up to the time of that transfer. Secs. 1016(a),

7701(a)(42)-(44); United States v. Hill, 506 U.S. 546, 555

(1993); Ayer v. Commissioner, 37 B.T.A. 767, 778 (1938), vacated

on other grounds 100 F.2d 850 (1st Cir. 1939); sec. 1.1016-2(a),

Income Tax Regs. Proper adjustments are to be made for the

period of joint ownership by both Howard and Alice Berger, for

the income accrued when Howard Berger's interest was transferred

to Alice Berger, and for the subsequent period of sole ownership

by Alice Berger. Some of these adjustments, as we have seen,
- 68 -

 

15That the adjustments upward for (1) and (2) are

appropriate should be clear from the above discussion. The same

is true for the adjustments downward for (3) and (4). Neither

Howard nor Alice Berger reported any of the draw payments as

taxable income, and they were right not to do so. However, now

that we must determine Alice Berger's gain on the sale to the

Kunkowskis, the draw payments can no longer be ignored for tax

purposes. We must make the same changes to the basis of Woodbine

that we would make to the basis of partnership interests in the

hands of the partners. With respect to (3) and (4), we will have 

potential windfalls if we don't make the adjustments predicated

upon Howard's and Alice's having received distributions from the

Woodbine business that were never taxed to them. Generally,

partners don't recognize gain or loss on receipt of cash

distributions from a partnership, sec. 731(a), but a partner's

basis in his partnership interest (outside basis) is reduced by

the amount of any money distributed by the partnership, secs.

705(a)(2), 733, provided the amounts he receives from the

partnership do not exceed his outside basis, sec. 731(a)(1). 

The same is true here of Howard's and Alice's interests in

Woodbine.

have already been accounted for in respondent's figure of

$75,945. However, those not so accounted for include: (1) The

income, from whatever Woodbine-associated source, that Howard

Berger must accrue or had otherwise included no later than the

time of the transfer of his interest to Alice Berger (to be added

to basis); (2) the deposit income that Alice must accrue upon the

completion of the Phase II mausoleum and her other income from

the operation of Woodbine (also to be added to basis); (3)(a) the

draw payments and payments of Howard's expenses by Woodbine (to

be subtracted from basis) and (b) the similar payments by

Woodbine to or on behalf of Alice (also to be subtracted from

basis).15 All these adjustments must be made to the Woodbine

basis of $75,945 before we can determine Alice Berger's adjusted
- 69 -

 

16The test for whether income from sales of land is ordinary

income or capital gain is whether (1) the taxpayer was engaged in

the trade or business, (2) whether the taxpayer held the property

primarily for sale in the business, and (3) whether the sales

contemplated by the taxpayer were "ordinary" in the course of

that business. Bramblett v. Commissioner, 960 F.2d 526, 530 (5th

Cir. 1992), revg. T.C. Memo. 1990-296. Under this test, Woodbine

receivables from crypt sales were ordinary income assets.

basis in Woodbine and her taxable gain on the sale to the

Kunkowskis. Because the record does not enable us to ascertain

all the figures, we leave the details to the Rule 155

computation.

Before leaving the subject of basis, we address the Woodbine

receivables, which were omitted from the Woodbine 1989 balance

sheet that showed the unrecovered cost of the Woodbine assets to

be $75,945. The accounts receivable generated by the sale of

mausoleum crypts were ordinary income assets16 in the hands of

Howard and Alice Berger. Sec. 1221(1); Philhall Corp. v. United

States, 546 F.2d 210, 215 (6th Cir. 1976) (land option, ordinary

income); McHugh v. Commissioner, T.C. Memo. 1957-4 (land

contracts, ordinary income). They had a zero basis in the hands

of Alice Berger to the extent they had not been properly taken

into Woodbine income by Howard at the time of his transfer of

March 14, 1989, to Alice, and by Alice, at the time of the

completion of the Phase II mausoleum. Bongiovanni v.

Commissioner, 470 F.2d 921, 923 (2d Cir. 1972) (zero basis),

revg. on other grounds T.C. Memo. 1971-262; Hempt Bros., Inc. v.

United States, 354 F. Supp. 1172, 1177 (M.D. Pa. 1973) (zero
- 70 -

 

17Cf. Evergreen Cemetery Association v. Burnet, 45 F.2d 667

(D.C. Cir. 1930), affg. 13 B.T.A. 638 (1928), discussed supra pp.

48-49.

 

18It does not escape our notice that there were elements of

financial and tax planning in the structuring of the sale

transaction that do not appear to have been brought to the

attention of Howard or Alice Berger, to the financial and tax

detriment of Alice Berger.

The American Cemetery Consultants appraisal valued the

Woodbine receivables, as of Oct. 1, 1988, which then had a face

amount of $428,600, by deeply discounting them to a fair market

value of $172,298. The latter figure is the value we have

attributed to the receivables for purpose of allocating the sale

price among the various assets; after all, the $172,298 valuation

of the receivables was used in computing the $680,000 sale price

of Woodbine to be received by Alice Berger. By causing the

receivables to be transferred to the Cemetery Association, the

Kunkowskis in effect caused the difference between the deeply

discounted value of the receivables, which has been included as

(continued...)

basis), affd. on other grounds 490 F.2d 1172 (3d Cir. 1974); cf.

sec. 1.1221-2(c)(5)(i), Income Tax Regs.; sec. 1.1221-2T(b)(2),

Temporary Income Tax Regs., 58 Fed. Reg. 54075 (Oct. 20, 1993).

Respondent did not determine and has not asserted--although

there might have been valid grounds for doing so--that unrealized

receivables with respect to Phase II mausoleum crypt sales should

have been accrued prior to or upon completion of the Phase II

mausoleum in May 1989.17 It therefore appears that the Woodbine

receivables were not taken into income, under Woodbine's method

of accounting, which respondent has not disturbed, until they

were collected. As a result, the receivables on hand at the time

of Alice Berger's sale to the Kunkowskis, on November 17, 1989,

had a zero basis in her hands.18 It appears that the proceeds of
- 71 -

 

18(...continued)

part of Alice's gain, and their substantially higher face amount,

assuming that they were collected by the Cemetery Association in

due course over the following 2-year period, with few if any bad

debts, to escape tax entirely. Perhaps that difference, if the

receivables should be considered, along with the other Woodbine

assets, to have been transferred to the Kunkowskis, and retransferred by them to the Cemetery Association for its

Certificates of Indebtedness, should have been taxed to the

Kunkowskis if the receivables in fact had a value greater than

$172,298 on Nov. 17, 1989. If that difference should be so large

as to extend the period of limitations under sec. 6501(e) on the

Kunkowskis' 1989 return, respondent may still have time to

consider that possibility and determine whether the Kunkowskis

realized and recognized a substantial ordinary gain on their

constructive transfer to the Cemetery Association of the

previously undervalued Woodbine receivables from purchasers of

Phase II mausoleum crypts.

The transactions of Nov. 17, 1989, were structured for tax

purposes in such fashion that, as we shall see in the discussion

of issue 5(c), Alice Berger will be required to pay a substantial

current tax liability, even though she is receiving the $680,000

sale price in the form of monthly payments, with interest, over

25 years.

subsequent collection of those receivables by Woodbine has, to a

substantial extent, provided the wherewithal for the payments on

the Woodbine Association Certificates of Indebtedness held by the

Kunkowskis and on the Kunkowskis' note to Alice Berger.

Issue 5(c). Installment Method

The gain or loss realized by the seller of property usually

must be recognized at the time of sale. However, the seller who

is eligible to use the installment method may defer recognition

of gain, and the liability to pay tax thereon, over the period of

and in proportion to the payments as they are made. Sec. 453(c). 

Under the installment method, the seller is able to recognize

gain over the period during which the installment payments are
- 72 -

 

19Respondent has not determined or argued for the

application of sec. 453(g) or (e), concerning the sale of

depreciable property between related persons, and second

disposition by related persons, respectively. See generally

Shelton v. Commissioner, 105 T.C. 10 (1995).

 

20Whether the sale of burial rights constitutes personalty

or realty is generally determined under State law. National

Memorial Park, Inc. v. Commissioner, 145 F.2d 1008 (4th Cir.

1944). The Woodbine property and business is located in New

Jersey. Under New Jersey case law and statutory law, title to a

cemetery plot is a legal estate in real property. N.J. Stat.

Ann. sec. 8A:7-2 (West 1987 & Supp. 1995) (burial space passes to

(continued...)

received, rather than be taxed on the entire gain in the year of

sale. See Leon H. Perlin Co. v. Commissioner, T.C. Memo.

1993-79. Alice Berger claims installment treatment of her entire

gain from the sale of Woodbine.

Respondent asserts that the sale on November 17, 1989, of

Woodbine was a dealer disposition and therefore does not qualify

as an installment sale under section 453.19 The installment

method is not available for dispositions of personal property of

a kind required to be included in the inventory of the taxpayer

on hand at the close of the taxable year. Sec. 453(b)(2)(B);

sec. 15A.453-1(b)(4), Temporary Income Tax Regs., 46 Fed. Reg.

10710 (Feb. 4, 1981). The installment method is also not

available for a dealer disposition, sec. 453(b)(2)(A), which

includes any disposition of real property held by the taxpayer

for sale to customers in the ordinary course of trade or

business. Sec. 453(b)(2)(A), (l). It would therefore appear to

be immaterial for our purposes whether the Woodbine burial rights

are classified as personal property or real property.20
- 73 -

 

20(...continued)

heirs-at-law or devisees of the deceased owner); Weiss v. Cedar

Park Cemetery, 572 A.2d 662, 666-667 (N.J. Super. Ct. App. Div.

1990). Therefore, the Woodbine burial rights appear to be more

in the nature of real property than personalty.

The evidence in the record with respect to the Woodbine

burial rights, developed or undeveloped, does not indicate any

use of them by Woodbine other than for sale to customers in the

ordinary course. See Major Realty Corp. v. Commissioner, 749

F.2d 1483, 1488 (11th Cir. 1985) (assets sold in the ordinary

course of business), affg. in part and revg. and remanding on

other issues T.C. Memo. 1981-361. The Woodbine books and

records reflect these assets under an "inventory" classification. 

So does the appraisal prepared by American Cemetery Consultants. 

Therefore, the burial rights that had not yet been sold to

customers were inventory or property held for sale to customers

in the ordinary course of trade or business and not eligible for

the installment method.

In identifying dealer dispositions of both personalty and

realty, the Code refers to "any disposition". Sec. 453(l)(1)(A)

and (B). Therefore the sale, whether in bulk or individually, of

the burial rights that are normally sold to the public would be 

a dealer disposition of property. As a dealer disposition, the

sale of those component assets of Woodbine is not eligible for

the installment method. The component assets clearly not

entitled to installment treatment are those classified in the 

American Cemetery Consultants' appraisal as grave spaces,
- 74 -

mausoleum crypts, and cremation niches.

Respondent concedes that the Woodbine assets used in the

trade or business not held for sale to customers in the ordinary

course, such as the office building, the residence, the two

service buildings, and the equipment, would qualify for

installment treatment. We also include in the category of assets

qualifying for installment treatment the roads, landscaping, lot

markers, drainage, and fencing.

This leaves to be resolved the characterization of the

Woodbine accounts receivable and undeveloped land.

The unrealized receivables of Woodbine arose from sales of

inventory or property held primarily for sale to customers,

consisting of mausoleum crypts. As such, they were ordinary

income assets, deriving their character from the property that

generated them, property that was held for sale to customers in

the ordinary course of trade or business. See Coast Coil Co. v.

Commissioner, 50 T.C. 528, 532-535 (1968), affd. per curiam 422

F.2d 402 (9th Cir. 1970); Family Record Plan, Inc. v.

Commissioner, 36 T.C. 305, 308-313 (1961), affd. on other grounds

309 F.2d 208 (9th Cir. 1962); Liberty Natl. Bank & Trust v.

Commissioner, T.C. Memo. 1979-74; cf. Fourth Natl. Bank v. United

States, 36 AFTR 2d 75-5226, 75-2 USTC par. 9594 (N.D. Okla.

1975). It would be anomalous to allow the sale of the

receivables to be entitled to installment treatment when the

sales of the mausoleum crypts that generated them were not and

would not have been entitled to installment treatment. Cf.
- 75 -

Liberty Natl. Bank & Trust Co. v. Commissioner, supra; Fourth

Natl. Bank v. United States, supra.

We now turn to whether the Woodbine undeveloped land was

entitled to installment treatment. The record contains no

evidence whether the entire Woodbine tract was zoned exclusively

for cemetery purposes, or whether the undeveloped land was

already exclusively dedicated for cemetery development and sale

to customers in the form of grave plots, mausoleum crypts, or

cremation niches. However, the American Cemetery Consultants

appraisal report reflects the assumption that the undeveloped

acreage would be so used, and the appraised value of the

undeveloped land was based on that assumption.

In the absence of any proof to the contrary by Alice Berger,

we conclude that the undeveloped land of Woodbine was most likely

held for later development into grave sites and similar property

and was therefore held for sale to customers, thereby requiring

it to be treated as dealer property. Cf. Tollis v. Commissioner,

T.C. Memo. 1993-63. In so doing, we reject Alice Berger's

argument that she was never in the cemetery business; we have

already held that she was. We also reject any argument by her

that the events of 1989 were occasioned by her decision to retire

from the cemetery business, so as to change the character of the

Woodbine dealer assets to capital assets in her hands. We

rejected a similar argument in Tollis v. Commissioner, supra, and

we do so here. See Lawrie v. Commissioner, 36 T.C. 1117 (1961);

Estate of Ferber v. Commissioner, 22 T.C. 261 (1954); Grace
- 76 -

Bros., Inc. v. Commissioner, 10 T.C. 158 (1948), affd. 173 F.2d

170 (9th Cir. 1949); Martin v. United States, 330 F. Supp. 681

(M.D. Ga. 1971).

Respondent argues that the evidence in the record does not

permit us to allocate the total Woodbine sale price of $680,000

among component assets qualifying and not qualifying for

installment treatment. Cf. Monaghan v. Commissioner, 40 T.C. 680

(1963). Respondent therefore insists that Alice Berger has

failed to carry her burden of showing that any of her gain

qualifies for installment treatment and that therefore her entire 

gain on the sale to the Kunkowskis is taxable as ordinary income. 

We disagree.

The rule of Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.

1930), permits us to approximate the amounts of gain allocable to

assets that qualify for the installment method. Cohan treatment

has been given to allocations of accounting expenses between the

capitalizable cost of selling a capital asset and the deductible

expense of general auditing duties, Ellis Banking Corp. v.

Commissioner, 688 F.2d 1376, 1383 (11th Cir. 1982), affg. in part

and remanding in part on this issue T.C. Memo. 1981-123, of an

estate's partnership assets to land, a building, and personal

property, McKelvey v. Commissioner, 246 F.2d 609, 613 (3d Cir.

1957), affg. T.C. Memo. 1956-70, and of the purchase price of a

business among physical assets of the business, good will, and a

covenant not to compete, Kreider v. Commissioner, 762 F.2d 580,

589 (7th Cir. 1985), affg. T.C. Memo. 1984-68; Levine v.
- 77 -

 

21Removing the $20,000 of cash from the equation leaves the

following allocation of capital gain (installment treatment) and

ordinary gain (dealer disposition) items:

Assets qualifying for Assets not qualifying

 installment treatment for installment treatment

Office building $100,000 Accounts receivable $172,298

Residence 75,000 Grave spaces 12,518

Service building 80,000 Mausoleum crypts 42,992

Storage building 40,000 Creamation niches 14,205

Equipment 17,000 Undeveloped land 219,555

Other equipment 26,000

Roads & landscaping 43,200 _______

 Total 381,200 461,568

 

22In so doing, we take account of the fact that the

appraisal company substantially discounted the value of the

Oct.1, 1988, receivables, amounting to $428,601--approximately

the same amount as the stipulated Nov. 17, 1989, face amount of

the receivables ($429,371)--to 41.6 percent of their face amount:

$172,298. 

Commissioner, 324 F.2d 298, 302 (3d Cir. 1963), affg. T.C. Memo.

1962-68.

The American Cemetery Consultants appraisal identified the

gross value of the assets that we find to be qualified for

installment treatment as $381,200, out of a total gross asset

valuation of $842,768.21 We therefore find, using the Cohan

rule, that 45 percent of Alice Berger's gain from the sale

qualifies for installment treatment.22 We leave for the Rule 155

computation the determination of the ordinary gain currently

taxable to Alice Berger on the sale and the amounts and character

(as long-term or short-term) of the items of gain entitled to

installment treatment in her hands.
- 78 -

Issue 6. Self-Employment Tax

Alice Berger asserts that she is not liable for any selfemployment tax because she never owned or had a share in the

ownership of the Woodbine business, as opposed to the land, and

did not participate in the day-to-day operations or management of

the business. Howard Berger similarly argues that during 1988

and 1989 neither he nor Alice Berger participated in the

operation of the cemetery business, so that no self-employment

tax should be imposed on the Woodbine income of either of them. 

Section 1401 imposes a tax on the "self-employment income"

of every individual. "Self-employment income" is defined

generally in section 1402(b) as "the net earnings from

self-employment derived by an individual * * * during any taxable

year". Section 1402(a) defines the term "net earnings from selfemployment" as the "gross income derived by an individual from

any trade or business carried on by such individual, less the

deductions allowed by this subtitle which are attributable to

such trade or business". Section 1.1402(a)-2(b), Income Tax

Regs., provides that "The trade or business must be carried on by

the individual, either personally or through agents or

employees." These provisions are to be broadly construed to

favor treatment of income as earnings from self-employment. 

Hornaday v. Commissioner, 81 T.C. 830, 834 (1983).

Petitioners do not deny that Woodbine was a trade or

business under the principles laid down by Commissioner v.

Groetzinger, 480 U.S. 23 (1987). It doesn't matter whether Alice
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23Respondent has conceded that Howard and Susan Berger are

(continued...)

and Howard Berger did or did not personally conduct the trade or

business of Woodbine during the years in question. They carried

on the business through Gregg Kunkowski, their agent or employee. 

Moorhead v. Commissioner, T.C. Memo. 1993-314; Price v.

Commissioner, T.C. Memo. 1993-265.

During 1988 and until March 14, 1989, Howard and Alice

Berger are each subject to self-employment tax on their

respective shares of Woodbine's net earnings. During the period

thereafter that Alice Berger alone owned the Woodbine business,

she is subject to self-employment tax on her net earnings from

the business, excluding any capital gain from her sale of the

business. Sec. 1402(a)(3)(A).

Issue 7(a): Late Filing Addition Under Section 6651(a)

If a taxpayer fails to file a return by the due date,

including extensions of time for filing, and cannot show that the

failure is due to reasonable cause and not willful neglect,

section 6651(a)(1) imposes an addition to tax equal to 5 percent

of the underpayment of tax for each month, or fraction of a

month, that the return is late, not to exceed 25 percent. 

Although Alice Berger filed her 1989 income tax return before the

due date as extended, respondent determined that Alice Berger's

requests for extensions of time to file were invalid and that she

is therefore liable for an addition to tax under section

6651(a).23 
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23(...continued)

not liable for this addition to tax.

If an extension of time to file is deemed invalid, it will

not extend the due date of the return, and the taxpayer must show

that the failure to file a return by the original due date was

due to reasonable cause and not due to willful neglect. Crocker

v. Commissioner, 92 T.C. 899, 912 (1989). An extension of time

to file may be deemed invalid if the taxpayer did not make a bona

fide and reasonable estimate of his tax liability using the

information available at the time of the extension request. Id.

at 908. Good faith reliance on the advice of a tax return

preparer, who has been fully apprised of all relevant facts, may

show that the taxpayer made a bona fide and reasonable estimate

of tax liability. See O'Sullivan v. Commissioner, T.C. Memo.

1994-395. In addition, "The fact that we have come to a

substantive conclusion about the * * * issue different from that

of petitioners does not of itself indicate that petitioners filed

their extension request with a lack of due care or reasonable

cause". Id.

Alice Berger testified, and we believe, that she relied on

her accountant to prepare her extensions and returns for 1989. 

She was receiving fairly sophisticated tax advice, even if

it turned out, as we have seen, that the advice was wrong in

various important respects. We would not expect a former

housewife, inexperienced in business, financial, or tax matters,

to prepare a rider to the 1988 joint return, citing legal
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authorities, as was done, to support her position that the return

was invalid because she was signing under duress. At the times

her accountant signed the requests to extend the times for filing

her 1989 return, the 1988 return was under audit by the Internal

Revenue Service. On September 13, 1990, the revenue agent issued

a report taking the position that a substantial part of the Phase

II deposits was taxable on the 1988 return. Her 1989 return, as

filed on October 12, 1990, pursuant to the extensions, took the

position, obviously with the return preparer's advice, that there

was no tax due. This appears to have been due to the combination

of three mistaken positions: First, that she had a net loss of

$4,101 from Woodbine operations because the bulk of the gross

income had been taxable in the prior year, in accordance with the

revenue agent's recently issued report; second, the even more

aggressive position she has been taking in this proceeding, that

she was not taxable on any part of the 1989 Woodbine operating

income because Howard Berger owned the Woodbine business in its

entirety; and third, that she had no gain on the sale to the

Kunkowskis because the attribution of the sale to Howard Berger

under either or both of the "on behalf of" and step-transaction

approaches under section 1041 gave her a basis in Woodbine equal

to the amount realized of $680,000. Although we have concluded

otherwise on the merits, we believe that there was a reasonable

basis for Alice Berger's 1989 return positions, and for her

failures to pay tax with her extension applications. We reject

respondent's imposition of the section 6651(a) addition to tax.
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Issue 7(b). Accuracy-Related Penalty Under Section 6662

Respondent also determined that Alice Berger was liable for

the accuracy-related penalty under section 6662 for 1989. If any

portion of an underpayment is attributable to negligence,

disregard of rules or regulations, or substantial understatement

of income tax, an amount equal to 20 percent of the portion of

the underpayment attributable to such negligence, disregard, or

understatement, is added to the tax. Sec. 6662(a). Petitioner

Alice Berger bears the burden of proving that she is not liable

for this penalty. Rule 142(a).

Negligence is the failure to exercise due care or the

failure to act as a reasonable and prudent person. Neely v.

Commissioner, 85 T.C. 934, 947 (1985). The term "disregard"

includes any careless, reckless, or intentional disregard. Sec.

6662(c). We have found that Alice Berger acted as a reasonable

and prudent person when reporting her 1989 income because she had

a reasonable basis for estimating her 1989 tax liability as zero. 

By a parity of reasoning, we find that she did not carelessly,

recklessly, or intentionally disregard rules and regulations in

connection with the preparation and filing of her 1989 return. 

See Weis v. Commissioner, 94 T.C. 473, 487 (1990).

An understatement is substantial if it exceeds the greater

of 10 percent of the tax required to be shown or $5,000. Sec.

6662(d)(1)(A). An "understatement" is defined as the excess of

the tax required to be shown on the return over the tax actually

shown on the return, but the understatement will be reduced if
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the taxpayer either had "substantial authority" for, or

adequately disclosed, the tax treatment shown on the return. 

Sec. 6662(d)(2)(B).

Alice Berger provided enough information on her return for

respondent to identify the potential controversy arising from the

omission of $229,396--the amount the revenue agent's report had

included on the 1988 joint return for the prior year--from her

share of Woodbine's ordinary income for 1989. See Schirmer v.

Commissioner, 89 T.C. 277, 285-286 (1987).

This leaves the question whether Alice Berger's 1989 return

provided enough information for respondent to identify the

potential controversy concerning her disposal of Woodbine. On

that score, her 1989 return reported the sale proceeds of

$680,000 and claimed a basis of $680,000, resulting in no

reported gain. This disclosure was not sufficient to apprise

respondent of the potential controversy.

We therefore address whether Alice Berger had substantial

authority for her 1989 return positions. We decide whether a

taxpayer had substantial authority by using the same analysis and

the same precedents that we would use in deciding whether the

taxpayer's treatment of the item was proper. Antonides v.

Commissioner, 91 T.C. 686, 702 (1988), affd. 893 F.2d 656 (4th

Cir. 1990). We consider the authorities at the time the return

was filed, or at the end of the taxable year in question, even if

those authorities are ultimately held inapplicable. Collins v.

Commissioner, T.C. Memo. 1992-478, affd. 3 F.3d 625 (2d Cir.
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24When Alice Berger filed her 1989 return, in October 1990,

the question whether the assignment of income doctrine or sec.

1041 would control the allocation of the income attributable to

Howard Berger's interest in Woodbine had not been addressed in a

published decision. However, the Internal Revenue Service had

taken the position that the assignment of income doctrine could

trump sec. 1041, and indeed apply to transfers of property with

(continued...)

1993); Harston v. Commissioner, T.C. Memo. 1990-538, affd.

without published opinion 936 F.2d 570 (5th Cir. 1991). 

Substantial authority is an objective standard, less difficult to

satisfy than "more likely than not", but more difficult to

satisfy than "reasonable basis". Antonides v. Commissioner,

supra at 702; secs. 1.6661-3(a)(2) and (b)(1), 1.6662-4(d)(2),

Income Tax Regs. The weight of authorities supporting a

taxpayer's treatment of an item must be substantial in relation

to the weight of the authorities supporting contrary positions,

and an authority is given little weight if it is materially

distinguishable on its facts. Secs. 1.6661-3(b)(1), (3), 1.6662-

4(d)(3)(ii), Income Tax Regs.

A taxpayer's position may be supported by authority even

though there is no decided case or ruling supporting the

position. "Thus, a taxpayer may have substantial authority for a

position that is supported only by a well-reasoned construction

of the applicable statutory provision." Secs. 1.6661-3(b)(3),

1.6662-4(d)(3)(ii), Income Tax Regs.

We believe that Alice Berger had well-reasoned positions

that what we have held to be her share of the Woodbine income was

not taxable to her under the assignment of income doctrine,24 and
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24(...continued)

inhering accrued income elements. Compare Rev. Rul. 87-112,

1987-2 C.B. 207 with Asimow, "The Assault on Tax-Free Divorce:

Carryover Basis and Assignment of Income", 44 Tax L. Rev. 65

(1988). Our opinion in Balding v. Commissioner, 98 T.C. 368

(1992), a case of first impression holding that sec. 1041 trumps

the assignment of income doctrine (see discussion supra pp. 54-

55), was not published until March 1992.

because Howard Berger was the controlling owner of the Woodbine

business so that he earned its entire income, which was paid to

her as a property settlement. We hold that Alice Berger had

substantial authority for not reporting the ordinary income of

Woodbine that she was led to believe by her advisers was properly

taxable to Howard Berger.

We further believe that Alice Berger had substantial

authority, also in the form of a well-reasoned position, that she

had no taxable gain on the sale of Woodbine to the Kunkowskis. 

Her position was that section 1041 and the temporary regulations

thereunder are susceptible to the interpretation and application

that the transfer of the full interest in Woodbine to Alice

Berger, followed by her previously agreed-upon court-ordered sale

to the Kunkowskis, was "on behalf of" Howard Berger, or should be

so regarded under step-transaction principles. Cf. Arnes v.

United States, 981 F.2d 456 (9th Cir. 1992).

Having concluded that Alice Berger had substantial authority

for her 1989 return position that there was no tax due on her

Woodbine transactions, we reject respondent's imposition of the

section 6662 accuracy-related penalty.

To reflect the foregoing,
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 Decisions will be entered 

 under Rule 155.