a. Willie Nelson Music Co., 85 T.C. 914

ISSUE: Whether the Willie Nelson Music Company can obtain motions to seal records up to the time of the income tax deficiency trial to prevent annoyance, embarrassment, and oppression for Willie and Connie Nelson, nationally known personalities.

FACTS: A notice of deficiency was issued on October 15, 1984, to petitioners Willie H. Nelson and Connie Nelson for income tax deficiencies and additions. A case was called before the Court on the petitioners' motions to seal filed in each case on May 16, 1985.

In their motions to seal, petitioners seek a protective order sealing the entire record of both cases (including but not limited to all pleadings, depositions, exhibits, papers, and filings) to be opened only by order of the Court. In addition, the order would be direct that the parties and their counsel in these cases be prohibited from disclosing to the media or public the contents of the sealed records.

At the hearing, the petitioners' counsel modified his motions in requesting that the records be sealed only up to the time of the trial. Petitioners argue that Willie H. and Connie Nelson as nationally know personalities are subject to "intense and continual" scrutiny by the media. Because the Willie Nelson Music Co. is wholly owned and controlled by the Willie H. and Connie Nelson, the company is also subject to "intense and continual" scrutiny by the media as well.

The petitioners assert that they have been seriously and irreparably damaged by the public's impressions. Petitioners maintain that the damage is caused in part by newspaper headlines, which indicate the petitioners are subject to criminal prosecution, thus causing undue embarrassment and considerable emotional distress, along with financial injury as well.

HOLDING: The U.S. Tax Court held that the petitioners have demonstrated no probative evidence of good cause to outweigh the public interests. Although petitioners are nationally known entertainers, this is not a good enough reason to seal the records up to the time of the trial. Since good cause has not been demonstrated, the petitioners' motions will be denied.

ANALYSIS: Official records of all courts, including the U.S. Tax Court, shall be open, available to the public for inspection, and copying. However, the right to inspect and copy judicial records is not absolute.

The U.S. Tax Court has broad discretionary powers to control and seal, if necessary, records and files in its possession, and the standard for review is for abuse of discretion. To determine whether the sealing of the records in any manner is appropriate, in exercising their discretion, the Tax Court must weigh the interests of the public. The presumptive right to access may be rebutted by showing that there is a sufficient counter-interest to outweigh the public interest in accessing the records and demonstrates good cause.

A party must bring forth testimony and factual evidence to support claims of harm that would occur as a consequence of disclosure. Nevertheless, petitioners have not demonstrated any harm (financial or otherwise) that they have suffered or will suffer if their motions are denied.

By the petitioners merely asserting annoyance and embarrassment is wholly insufficient to demonstrate good cause. This is further supported by the fact that the petitioners did not show one instance where public scrutiny would or has taken place. In the court's view, Willie Nelson's popularity and desirability as a performer has remained intact and increased as a result.

b. CITATION: Independent Contracts, Inc., 73 AFTR2d. 94-1406

ISSUE: Whether the Commissioner abused his discretion in determining that the cash method of accounting did not clearly reflect Independent Contracts, Inc.'s, the Plaintiff, income.

FACTS: The Plaintiff, Independent Contract, Inc., (IC) seeks recovery of internal revenue taxes, penalties, and interest it claims were erroneously or illegally assessed and collected from it.

IC is a heating and air conditioning subcontractor. In its course of business, IC bids on proposed jobs and, when awarded a job, enters into a lump-sum contract with the general contractor. The lump sum includes payment for installation and service as well as for the actual HVAC system that plaintiff installs. At all times pertinent, IC used a cash method of accounting for tax purposes.

Because of the IRS audit, the Commissioner determined that the cash method of accounting did not clearly reflect the Plaintiff's income. The Commissioner required Plaintiff to begin using the accrual method of accounting and to pay the difference for the audited years based on the accrual method.

HOLDINGS: The U.S. District Court, Northern District of Alabama, found that the Commissioner did not abuse his discretion in determining that the cash method of accounting did not clearly reflect the Plaintiff's income, and in requiring the Plaintiff to switch to the accrual method of accounting and to pay the tax difference for the audited years. The defendant's motion for Summary Judgment is hereby granted.

ANALYSIS: The IRS argues that the cash method of accounting does not clearly reflect Plaintiff's income. Furthermore, Regulation §1.446-1(c)(2)(I) provides that, where inventories are required, as in the case of the Plaintiff, the accrual method of accounting must be used. The Court finds, given the Knight-Ridder, 743 F.2d. 788, present state of legal precedent, that it is within the Commissioner's discretion to deem the HVAC systems "inventory" for the purpose of tax accounting, and thus to require that Plaintiff, IC, use the accrual method of accounting.

The Commissioner argues that the "critical factor" in determining the proper accounting method in the present case is the fact that the sale of HVAC systems is "a significant income-producing factor as reflected by the percentage of the taxpayer's gross receipts represented by the costs of goods sold." In the present case, more than 50 percent of the Plaintiff's gross receipts can be attributed to the transfer of the HVAC units.

c. In Harold Jenkins, 47 TCM 238 (1983), the Tax Court ruled that payments made to investors to reimburse them for their losses are deductible under §162 as ordinary and necessary business expenses of petitioner's business as a country music performer.

The Court concluded on the basis ofLohrke v. Comm., 48 T.C. 679, that the negative impact of a potential lawsuit from the investors on the petitioner's career would justify the reimbursements as an expense of maintaining the integrity and reputation of that career.