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Each member of the Rich family owns various investments in stocks and bonds. Mr. and Mrs. Rich each manage their own investments. Mr. Rich also manages his daughters' investments by serving, with pay, as custodian of two trusts established for this purpose. Incomes on the investments of the Rich family were as follows: 20X1 20X2 20X3 20X4 20X5 Mr. Rich Div & interest $12,000 $14,000 $15,000 $ 15,000 $ 8,000 Capital gains -0- 3,000 (8,000) 200,000 -0- Mrs. Rich Div & interest 16,000 20,000 25,000 32,000 40,000 Capital gains -0- -0- -0- -0- -0- Ima Rich Div & interest 2,000 3,000 5,000 8,000 6,000 Capital gains -0- -0- -0- 40,000 -0- Uri Rich Div & interest 1,000 2,000 3,000 5,000 3,000 Capital gains -0- -0- -0- 30,000 -0-
While vacationing in the Rocky Mountains, in the summer of 20X3 on some land owned by their partnership, Mr. and Mrs. Rich were kidnapped. Under threats of death to himself and his wife, Mr. Rich instructed, by telephone, the chief accountant of Rich Manufacturing Corporation to pay $400,000 in cash to the kidnapper. Upon payment of the ransom, Mr. and Mrs. Rich were released unharmed. In September of 20X3, the riches' younger daughter, Uri, and her pet dog were kidnapped. Under threats of death to his daughter and her dog, Mr. Rich instructed the chief accountant of Rich Manufacturing Corporation to pay $100,000 in cash to the kidnapper. Upon payment of the $100,000, Uri was released unharmed, but the dog was not returned. Mr. Rich was again contacted by the kidnapper and told that the dog would be killed unless he paid another $20,000. For the sake of his daughter, he had the chief accountant of Rich Manufacturing Corporation pay the additional $20,000 to the kidnapper. The dog was recovered unharmed. In late 20X5, the kidnapper was caught and it was determined that the same person was responsible for both the kidnapping of Mr. and Mrs. Rich and the of their daughter and her dog. Of the ransom, $100,000 was recovered by the police. Mr. Rich had it returned to the Rich Manufacturing Corporation. The balance of the ransom was never recovered. Both the kidnapping took place in the same state. The laws of this state distinguish between the crimes of extortion and theft. The crime of extortion is defined as the obtaining of property from another with his consent by a wrongful use of force or fear. The state law regarding theft states that every person who shall feloniously steal, take, carry, lead, or drive away the personal property of another is guilty of theft. In its tax return for 20X3, the corporation deducted the ransoms paid of $520,000 as a business expense in computing its taxable income for that year. The $100,000 recovered was reported as taxable income for 20X5. The Internal Revenue Service has alleged that the corporation has neither deduction nor income. Rather, the $520,000 is deemed to be a dividend paid to Mr. Rich and, hence, taxable as ordinary income to him. If you were a tax Court judge, how would you rule in this case? Why?
CASE 13 Points on Refinancing Loretta and Rod married young and had yet to establish their credit when they found the "home of their dreams." They were, however, able to obtain the required financing and to buy the home. Unfortunately, they could only get a four-year balloon note and the rate of interest that they were required to pay was quite high.