-341-
of the trusts’ gross receipts; (2) $295,298 of the trusts’
interest income; (3) dividend income of $325; (4) passive
activity partnership losses totaling $261,040; (5) $3,094,058 of
net capital gain income;136 and (6) certain investment interest
expenses.
OPINION
A. Grantor Trust Provisions of Sections 671 Through 678
Section 671 provides that if the grantor or another person
is treated as the owner of all or a portion of a trust under
sections 672 through 678, that person must include in income all
136 The STJ report, at 115 note 49, recommended that
respondent should not be permitted to argue on brief that
$2,033,368 of this adjustment represented long-term capital gain
realized by the Bea Ritch Trusts in 1986 (as opposed to 1987)
attributable to investments in Oyster Bay Associates Partnership
(OBA). We reject the recommendation in the STJ report that
respondent’s assertion on this point represented a “new matter”
not properly before the Court. A review of the record reveals
(1) Kanter’s tax liability for 1986 is at issue at docket No.
26251-90, (2) Kanter was not surprised or prejudiced with regard
to the matter because his counsel elicited testimony from
Gallenberger that the income was recognized in 1986
(Gallenberger, Transcr. at 4483-4485); (3) respondent promptly
made an oral motion to conform the pleadings to the proof and
respondent’s motion apparently was granted (Transcr. at 4495-
4500), (4) Kanter did not identify any evidence which he was
prevented from introducing as a result of respondent’s motion,
and (5) respondent’s assertion that the item is taxable to Kanter
in 1986 is not inconsistent with the original determination that
the Bea Ritch Trusts were Kanter’s grantor trusts, it did not
require new evidence, and it merely reflected a good-faith error
in the timing of when specific income was earned. Consistent
with this Court’s holding in Achiro v. Commissioner, 77 T.C. 881,
890 (1981), respondent’s oral motion to amend the pleadings will
be granted, and we decline to shift to respondent the burden of
proof on this point.
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