                  T.C. Memo. 2004-78



                UNITED STATES TAX COURT



           RICHARD R. HAMLETT, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8986-01.            Filed March 22, 2004.



     In 1996, P sold his stock in two S corporations to
Parker for $100,000. P received some of the $100,000 from
Parker in 1995, and the remainder in 1996, and transferred
his stock to Parker “effective” Dec. 31, 1995. P did not
report the transaction on his 1995 and 1996 tax returns. In
1998, P filed for bankruptcy. In 2000, the bankruptcy court
entered a consent order which, among other things, declared
the stock transfer void ab initio. On the same day, P
executed a 6-percent interest promissory note to Parker for
$135,000 (the $100,000 for the corporations plus $35,000 for
some partnership interests P sold to Parker, also in 1996).
By late 2003, P’s total payments to Parker under the
promissory note amounted to little more than the interest on
the note.

     1. Held: Under the claim of right doctrine, P is
required to include the $100,000 in income for 1996 as
proceeds from the sale of the S corporations stock.
                               - 2 -

          2. Held, further, P’s alternative contention, that the
     $100,000 was excludable from income because it was a gift
     from Parker, is rejected.



     Craig D. Bell, for petitioner.

     Dustin M. Starbuck, for respondent.



                        MEMORANDUM OPINION

     CHABOT, Judge:   Respondent determined deficiencies in

individual income tax and penalties under section 66621

(accuracy-related) against petitioner as follows:

                                              Penalties
     Year                 Deficiency          Sec. 6662

     1995                 $118,980            $23,796.00
     1996                  746,843            149,368.60




     1
        Unless indicated otherwise, all section references are to
sections of the Internal Revenue Code of 1986 as in effect for
the years in issue.
                              - 3 -

     After concessions by both sides,2 the issue for decision is

whether petitioner must include in gross income for 1996 the

$100,000 that he received from the sale of stock, even though in

a later year the sale was challenged and in 2000 the sale was set

aside ab initio.3

                           Background

     The instant case was submitted fully stipulated; the

stipulations and the stipulated exhibits are incorporated herein

by this reference.


     2
        The notice of deficiency lists an aggregate of more than
$2.5 million of adjustments for the 2 years in issue. The
parties have resolved more than 96 percent of this amount. What
remains is a vigorous dispute as to the tax treatment of
$100,000--less than 4 percent of these adjustments.

     Petitioner concedes that the accuracy-related penalty under
sec. 6662 applies to the entire deficiencies for both years in
issue.

     In the notice of deficiency, the $100,000 was determined to
be ordinary income. On answering brief, respondent concedes that
the $100,000 should be treated as long-term capital gain
(agreeing with one of petitioner’s alternative contentions), thus
reducing even further the percentage of the originally determined
deficiency remaining in dispute.
     3
        The parties have stipulated that some payment on the
$100,000 was made by the purchaser to petitioner in 1995. The
record does not indicate how much was paid in 1995, nor does it
indicate when in 1996 the payment of the $100,000 was completed.
In the notice of deficiency, respondent lists the entire $100,000
as an adjustment to 1996. Both parties treat the transaction,
and accordingly, any income recognition resulting therefrom, as
occurring entirely in 1996. For purposes of this opinion, we do
the same.

     We also note that petitioner has not provided us with any
evidence regarding his basis in the stock.
                                 - 4 -

     When the petition was filed in the instant case, petitioner

resided in Roanoke, Virginia.

     Petitioner is a licensed general contractor, and a real

estate sales and management broker.

     In 1988, petitioner formed Centurion Investments, an S

corporation.   Petitioner was the sole shareholder of Centurion

Investments between 1988 and 1996.

     Sometime in 1995, petitioner decided to sell for $100,000

Centurion Investments and Roanoke Development, another S

corporation owned by petitioner, to Jane Parker (hereinafter

sometimes referred to as Parker), petitioner’s sales agent.

Centurion Investments and Roanoke Development are hereinafter

sometimes referred to collectively as the Corporations.    Parker

began to make payments to petitioner in 1995.    See supra note 3.

When petitioner received the entire $100,000 (sometime in 1996),

then he transferred to Parker all his stock in the Corporations

“effective” December 31, 1995.

     On January 2, 1996, petitioner sold for $35,000 to Centurion

Investments, or to Parker as 100 percent owner of Centurion

Investments, the following Virginia general partnership

interests:   28a percent interest in Meadow Green Associates;

44.36 percent interest in Williamsburg Manor Associates; 28a

percent interest in Crystal Tower Associates; and 44.36 percent

interest in Spanish Trace Associates.    These interests are
                               - 5 -

hereinafter sometimes referred to collectively as the Partnership

Interests.   Parker paid the entire $35,000 to petitioner in 1996.

     Petitioner filed timely 1995 and 1996 tax returns.   He used

the cash basis accounting method for his Schedule C (Profit or

Loss From Business) real estate activities.   Petitioner did not

report the income from the sale of the Corporations on either of

those tax returns.4

     Centurion Investments’ 1995 tax return shows petitioner as

its tax matters person and sole shareholder; its 1996 tax return

shows Parker as its tax matters person and sole shareholder.5


     4
        It does not appear that petitioner reported on his 1996
tax return the $35,000 that he received from the sale of the
Partnership Interests to Centurion Investments or Parker. In the
notice of deficiency, respondent determined that petitioner
realized a long-term capital gain of $823,016 on his sale of the
Spanish Trace Associates and Williamsburg Manor Associates
partnership interests. The record does not indicate how
respondent determined the amount of this adjustment, or how
respondent treated the gain or loss realized on the sale of the
Meadow Green Associates and Crystal Tower Associates partnership
interests. Nevertheless, respondent conceded this adjustment in
full. It is unclear whether the parties dealt with the $35,000
elsewhere, and if so, then how they dealt with it.

     Our findings as to the Partnership Interests are prompted by
the later combining of the Partnership Interests sale and the
Corporations sale in the consent decree and in the promissory
note, discussed, infra.
     5
        A tax matters person served a role under the so-called
partnership audit procedures made applicable to subch. S
corporations by sec. 4 of the Subchapter S Revision Act of 1982,
Pub. L. 97-354, 96 Stat. 1669, 1691, 1697, effective for taxable
years beginning after Dec. 31, 1982. This was repealed by sec.
1307(c)(1) of the Small Business Job Protection Act of 1996, Pub.
L. 104-188, 110 Stat. 1755, 1781, 1787, effective for taxable
                                                   (continued...)
                                - 6 -

     In 1998, petitioner filed a petition under chapter 7 of the

Bankruptcy Code.    The bankruptcy trustee accused petitioner of

bankruptcy fraud, and filed a complaint against petitioner,

Parker, the Corporations, several other corporations, and the

four partnerships, interests in which petitioner had sold to

Parker in 1996.    The parties in the complaint proceeding reached

an agreement.    On February 4, 2000, the bankruptcy court entered

a consent order requiring petitioner and Parker to pay $300,000

“in guaranteed funds” to the bankruptcy trustee by February 14,

2000.    This consent order further provided that, on the

bankruptcy trustee’s receipt of this $300,000, the transfers of

(1) the stock in the Corporations and (2) the Partnership

Interests “shall be void ab initio under Virginia Code Section

55-80",6 and the bankruptcy trustee shall abandon her interest in


     5
      (...continued)
years beginning after Dec. 31, 1996. Thus, the procedures apply
to the years in issue. However, because the Corporations had
five or fewer shareholders, the procedures do not apply. See
sec. 301.6241-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.
3002 (Jan. 30, 1987).
     6
        Va. Code Ann. sec. 55-80 (Michie 2003) provides as
follows:

     Sec. 55-80. Void fraudulent acts; bona fide purchasers
     not affected.--

     Every gift, conveyance, assignment or transfer of, or charge
     upon, any estate, real or personal, every suit commenced or
     decree, judgment or execution suffered or obtained and every
     bond or other writing given with intent to delay, hinder or
     defraud creditors, purchasers or other persons of or from
                                                   (continued...)
                              - 7 -

the Corporations and in the Partnership Interests.    As a result,

the sale to Parker of the stock in the Corporations was void.

Also on February 4, 2000, petitioner signed a demand promissory

note to repay to Parker the $100,000 that she paid to petitioner

pursuant to the stock sale, plus the $35,000 that Parker paid for

the Partnership Interests, with a 6-percent annual interest rate.

Petitioner was discharged from bankruptcy on August 23, 2000.

     During 2000 through September 25, 2003, petitioner made a

series of payments to Parker pursuant to the promissory note, the

payments aggregating $28,933.23.   The record does not indicate

how much of these payments was interest and how much was

principal; nor does it indicate how much of any principal

payments was allocable to the $100,000.

              _____________________________________

     Petitioner received the $100,000 from the sale of the

Corporations’ stock without restrictions on his disposition of

the $100,000; there were not any such restrictions in effect in

1996.




     6
      (...continued)
     what they are or may be lawfully entitled to shall, as to
     such creditors, purchasers or other persons, their
     representatives or assigns, be void. This section shall not
     affect the title of a purchaser for valuable consideration,
     unless it appear that he had notice of the fraudulent intent
     of his immediate grantor or of the fraud rendering void the
     title of such grantor.
                               - 8 -

     Petitioner did not recognize in 1996 an existing and fixed

obligation to repay the $100,000; he did not make in 1996

provisions to repay the $100,000.

     Parker did not make a gift of the $100,000 to petitioner.

                             Analysis7

     Respondent contends that petitioner was required to include

in gross income for 1996 the $100,000 that petitioner received

from the sale of the Corporations, and that this inclusion is

required by the claim of right doctrine.

     Petitioner maintains that the $100,000 that he received as

consideration for transferring his stock in the corporations to

Parker is not includable in gross income because his receipt of

the money did not satisfy the elements of the claim of right

doctrine.   Specifically, petitioner contends that he did not

receive the money under a claim of right, and there was a

restriction on his economic use of the money.   Petitioner

contends in the alternative that the $100,000 was a gift and thus

is excludable from gross income under section 102(a).

     Respondent replies that petitioner’s 1996 fraudulent

purpose, which led to the bankruptcy court’s voiding of the 1996


     7
        Sec. 7491, which shifts the burden of proof to the
Commissioner if the taxpayer meets certain conditions, does not
apply in the instant case because the parties stipulated that the
examination of petitioner’s tax returns began before July 22,
1998, the effective date of sec. 7491. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(a), 112 Stat. 726.
                                  - 9 -

transactions, does not protect petitioner from taxation on the

$100,000, citing James v. United States, 366 U.S. 213 (1961).

Respondent also contends that petitioner’s 1996 fraudulent

purpose contradicts petitioner’s alternative contention that the

$100,000 is excludable as a gift.

      We agree with respondent.

A.   Claim of Right Doctrine

      In Nordberg v. Commissioner, 79 T.C. 655, 664-665 (1982),

affd. without published opinion 720 F.2d 658 (1st Cir. 1983), we

described the claim of right doctrine as follows:

          This case presents merely another variation of the
     familiar “claim of right” doctrine pursuant to which the
     receipt of money under a claim of right which would
     otherwise represent taxable income must be treated as
     taxable income even though the recipient may be under a
     contingent obligation to return it at a later time. In
     North American Oil Consolidated v. Burnet, 285 U.S. 417
     (1932), often regarded as the seminal case in this area, the
     Supreme Court stated (at 424):

           If a taxpayer receives earnings under a claim of right
           and without restriction as to its disposition, he has
           received income which he is required to return, even
           though it may still be claimed that he is not entitled
           to retain the money, and even though he may still be
           adjudged liable to restore its equivalent. [Citations
           omitted.]

      Although this doctrine has been applied “in a variety of
      contexts,” the situations have shared “a common factual
      element: the receipt of money or other property by a
      taxpayer with an imperfect right to retain it.” Wootton,
      “The Claim of Right Doctrine and Section 1341,” 34 Tax Law.
      297 (1981). * * *

           Proceeding from the indisputable premise that “One of
      the basic aspects of the federal income tax is that there be
      an annual accounting of income” (Healy v. Commissioner, 345
                                - 10 -

     U.S. 278, 281 (1953); fn. ref. omitted), the receipt of
     funds, without restriction as to use or disposition, must
     trigger the incidence of taxation, unless “in the year of
     receipt a taxpayer recognizes his liability under an
     existing and fixed obligation to repay the amount received
     and makes provisions for repayment.” Hope v. Commissioner,
     55 T.C. 1020, 1030 (1971), affd. 471 F.2d 738 (3d Cir.
     1973), cert. denied 414 U.S. 824 (1973). As we have stated,
     “The mere fact that income received by a taxpayer may have
     to be returned at some later time does not deprive it of its
     character as taxable income when received” (Woolard v.
     Commissioner, 47 T.C. 274, 279 (1966); citations omitted),
     and the claim of right doctrine will apply “notwithstanding
     that the taxpayer may be under a contingent obligation to
     restore the funds at some future point” (Professional
     Insurance Agents of Michigan v. Commissioner, 78 T.C. 246,
     270 (1982); citations omitted). Where the taxpayer is
     required to repay some or all of the money in a later year,
     a deduction may then be available to him in the later year
     to the extent permitted by law (see Krim-Ko Corp. v.
     Commissioner, 16 T.C. 31, 40 (1951)),8 but the amounts are
     income nonetheless in the year of receipt.

     __________
     8
        Sec. 1341, I.R.C. 1954, offers even greater relief, in
     certain circumstances, by allowing the taxpayer to choose,
     in the year of repayment, between a deduction for the amount
     of the repayment and, in effect, a credit for the amount of
     tax that would have been saved in the year of inclusion if
     the repaid amount had been excluded from that year’s gross
     income.

     In the instant case, petitioner received the $100,000 from

Parker in 1996.   We assume that petitioner was a cash basis

taxpayer.   See Rubnitz v. Commissioner, 67 T.C. 621, 627 n.7

(1977).

     1.   Restrictions on Use

     The record does not include any evidence that petitioner was

restricted in his use of this $100,000.   On brief, petitioner

discusses the restriction-on-use question and asserts: “In the
                              - 11 -

case at hand, Petitioner and Jane Parker formed an implied

consensual recognition at the time of the fraudulent sale to

later reverse the transaction.”

     Firstly, petitioner conflates the restriction-on-use

question with the obligation-to-repay question.

     Secondly, petitioner does not state what restrictions there

were, nor does he even ask us to make a finding of fact that

there were restrictions.

     Thirdly, in Nordberg there was evidence as to what the

taxpayer did with the money he received.   79 T.C. at 662-664.

There is no such evidence in the record in the instant case.     We

may fairly assume that petitioner is in a far better position

than respondent to know what he in fact used the $100,000 for and

what, if any, restrictions were imposed on his use of this money.

From petitioner’s failure to present to the Court evidence as to

(1) what he did with the money and (2) what restrictions, if any,

were imposed on the use of the money, we infer that if such

evidence had been presented, then it would have been harmful to

petitioner.   See O’Dwyer v. Commissioner, 266 F.2d 575, 584 (4th

Cir. 1959), affg. 28 T.C. 698, 703 (1957); Stoumen v.

Commissioner, 208 F.2d 903, 907 (3d Cir. 1953), affg. a

Memorandum Opinion of this Court dated March 13, 1953; Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947).
                              - 12 -

     From the foregoing, we conclude, and we have found, that it

is more likely than not that the $100,000 was received without

restriction as to its disposition by petitioner, and there were

not any such restrictions in effect in 1996.

     2.   Obligation To Repay; Provisions for Repayment

     In the instant case, the record does not include any

evidence that in 1996 petitioner recognized his liability to

repay the $100,000, nor does the record include any evidence that

in 1996 petitioner made provisions for repaying the $100,000.    As

noted supra, petitioner stated on brief that he and Parker

“formed an implied consensual recognition * * * to later reverse

the transaction.”   On brief, petitioner supports this implied

agreement, as follows:

     The subsequent action of the Bankruptcy Court, voiding the
     fraudulent transaction, did not create an obligation to
     repay the $100,000.00. The bankruptcy court’s decision
     instead caused the realization of the pre-existing
     obligation to repay Jane Parker by voiding the transfer of
     Petitioner’s stock in Centurion Investments and Roanoke
     Development. This result is supported by the inherent
     nature and purpose of the fraud perpetrated as well as the
     immediate, voluntary drafting and signing of a promissory
     note between Petitioner and Jane Parker on the date that the
     Bankruptcy Court voided the transaction.

     Firstly, petitioner does not ask us to make a finding of

fact that there was an agreement or other recognition by him in

1996 that he had an “existing and fixed obligation to repay” the

$100,000, or that in 1996 petitioner made provisions to repay the

$100,000.   Note that “a contingent obligation to restore the
                               - 13 -

funds at some future point” will not suffice to take the

transaction out of the ambit of the claim of right doctrine.

Professional Insurance Agents v. Commissioner, 78 T.C. 246, 270

(1982), and cases there cited, affd. 726 F.2d 1097 (6th Cir.

1984).

       Secondly, petitioner does not enlighten us as to what it was

that he recognized so that we might judge whether that amounted

to a fixed and not a contingent obligation.    Nor does petitioner

enlighten us as to whether this “implied consensual recognition”

was formed in 1996 and not at a later date.    Nor does petitioner

enlighten us as to what provisions for repayment, if any, he made

in 1996.    Cf. Nordberg v. Commissioner, 79 T.C. at 662-663, 665-

666.

       Thirdly, petitioner states that the bankruptcy court’s

decision “caused the realization of the pre-existing obligation

to repay Jane Parker”.    It is far from clear what this is

intended to mean.    It suggests that the “pre-existing obligation”

was not “real” until the bankruptcy court entered the consent

order on February 4, 2000.    That in turn suggests that, in 1996,

there was not any existing and fixed obligation to repay; it

further suggests that, if there was any 1996 “implied consensual

recognition” of anything, then that implied consensual

recognition may have been an understanding that the $100,000

might have to be repaid if petitioner got caught.
                              - 14 -

     Fourthly, the promissory note on which petitioner relies

does not help petitioner’s case on this record.   The note was for

$135,000--the $100,000 Parker paid for the Corporations plus the

$35,000 Parker paid for the Partnership Interests.   The note

bears interest at 6 percent per year.   The parties have

stipulated that, through September 25, 2003, petitioner’s

payments to Parker on the note aggregated $28,933.23.   This is

approximately the amount of the required interest payments alone.

Thus, we cannot conclude from the parties’ stipulation or

anything else in the record to which our attention has been

directed, that petitioner has yet repaid any of the $100,000 that

Parker paid to him for the Corporations.    Also, (1) petitioner’s

failure to repay Parker promptly in 2000,   after the consent

order was entered and after petitioner was discharged from

bankruptcy, and (2) petitioner’s failure to repay Parker in the

3½ years after he signed the promissory note, suggest that

petitioner did not in 1996 make any provisions for repayment.     Of

course, “The best laid schemes o’ mice and men/Gang aft a-gley.”

Burns, “To a Mouse”, st. 7, in Bartlett’s Familiar Quotations 377

(17th ed. 2002).   But if petitioner had in fact made any such

provisions, then we would expect to have heard from him what

those provisions were.   O’Dwyer v. Commissioner, 266 F.2d at 584;

Stoumen v. Commissioner, 208 F.2d at 907; Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. at 1165.
                             - 15 -

     Fifthly, the lack of evidence--or even clear assertions--as

to what petitioner did in 1996 with regard to a supposedly then-

fixed obligation, combined with petitioner’s delay until 2000 in

acknowledging an obligation, combined with petitioner’s failure

through September 25, 2003, to repay any significant part (or

perhaps any part at all) of the $100,000, cause us to conclude,

and we have found, that it is more likely than not that (1)

petitioner did not recognize in 1996 an existing and fixed

obligation to repay the $100,000, and (2) petitioner did not make

in 1996 provisions to repay the $100,000.

     3.   Loan

     Petitioner urges us to apply the substance over form

doctrine and, on answering brief, refers to “the $100,000 Jane

Parker loaned Petitioner in 1996.”    We have stated that

     it is the substance of a transaction rather than mere form
     which should determine the resultant tax consequences when
     the form does not coincide with economic reality.
     Commissioner v. Court Holding Co., 324 U.S. 331 (1945);
     Higgins v. Smith, 308 U.S. 473 (1940); Foster v.
     Commissioner, 80 T.C. 34, 201 (1983)[affd. in part and
     vacated in part 756 F.2d 1430 (9th Cir. 1985)]; Gray v.
     Commissioner, 56 T.C. 1032 (1971). The taxpayer, as well as
     the Commissioner, is entitled to assert the substance-over-
     form argument although in such situations taxpayers may face
     a higher than usual burden of proof. * * * [Glacier State
     Electric Supply Co. v. Commissioner, 80 T.C. 1047, 1053
     (1983).]

     It is not clear whether petitioner’s “loan” contention is

intended to be (1) an alternative or (2) merely an attempt to
                               - 16 -

describe the legal pigeonhole that would apply if we were to

agree with petitioner’s claim-of-right contentions.

       If the latter, then the short answer is that we have

rejected petitioner’s claim-of-right contentions and concluded

that petitioner received the $100,000 under a claim of right.    If

the former, then the short answer is that there are no indicia of

a loan, and we conclude that the form that petitioner used in

1996--a sale--correctly follows the substance of what petitioner

did.

       We hold for respondent on this issue.

B.   $100,000 as a Gift

       Petitioner contends, in the alternative, that the $100,000

that he received from Parker was a gift, and thus, was excludable

from gross income under section 102(a).    Petitioner argues that,

because the bankruptcy court declared the transaction between

Parker and himself void ab initio, petitioner never transferred

ownership of the corporations to Parker; thus, petitioner

reasons, Parker’s intent in transferring the money to petitioner

must have been out of disinterested generosity because she was

under no obligation to do so, and she received nothing in return.

       Respondent maintains that the $100,000 that petitioner

received from Parker does not meet the definition of a gift, and

thus, is not excludable from gross income under section 102(a).

       We agree with respondent.
                                 - 17 -

     Section 102(a)8 provides that gifts are excluded from gross

income.    The Supreme Court defined “gift” as a transfer of

property that proceeds from a “‘detached and disinterested

generosity,’” “‘out of affection, respect, admiration, charity or

like impulses.’”      Commissioner v. Duberstein, 363 U.S. 278, 285

(1960)(quoting Commissioner v. LoBue, 351 U.S. 243, 246 (1956);

Robertson v. United States, 343 U.S. 711, 714 (1952)).        The

transferor’s intent in making the transfer is the most critical

consideration in determining whether the property transferred was

a gift.    Id.

     Applying those considerations to the instant case, it is

clear that the $100,000 that Parker transferred to petitioner was

not a gift.      While we do not have direct evidence of Parker’s

intent, we note that when she transferred the $100,000 to

petitioner, she received all petitioner’s stock in the

Corporations in return.      Thus, the $100,000 transfer to

petitioner was not motivated by a detached and disinterested

generosity.      Moreover, petitioner memorialized his obligation to

repay Parker the $100,000 after the bankruptcy court voided ab

initio the transfer of the stock.




     8
          SEC. 102.   GIFTS AND INHERITANCES.

          (a) General Rule.–-Gross income does not include the
     value of property acquired by gift, bequest, devise, or
     inheritance.
                             - 18 -

     On these facts, we conclude that Parker did not gift the

$100,000 to petitioner.

     We hold for respondent on this issue.

     To take account of the parties’ concessions and the

foregoing,



                                        Decision will be entered

                                   under Rule 155.
