Michael Gatto Philip Gatto, Stephanie Gatto v. Commissioner of Internal Revenue

Michael, Philip, and Stephanie Gatto appeal the Tax Court’s denial of two income tax deductions which they had claimed for the 1980, 1981 and 1982 tax years: (I) a deduction under 26 U.S.C. § 163 for interest on loans which had been granted to the Gattos by trusts of their own creation, and (II) a deduction under 26 U.S.C. § 174 for research expenditures incurred by certain research and development partnerships in which they were limited partners. We have jurisdiction under 28 U.S.C. § 1291 and we affirm.

I.

THE INTEREST DEDUCTIONS

In December, 1981, Michael Gatto created a trust with the assistance of attorney Dennis DiRicco and irrevocably transferred to the trust a sum of cash as trust corpus. The beneficiaries of the trust were Gatto’s niece and nephew. DiRicco served as trustee. The trust followed the pattern of what is commonly referred to as a “Clifford Trust.” See Martyr v. Commissioner, 60 T.C.M. (CCH) 1115 , 1127 n. 10, 1990 WL 161006 (1990) (discussing Helvering v. Clifford, 309 U.S. 331 , 60 S.Ct. 554 , 84 L.Ed. 788 (1940)). It provided for distributions of net income and capital gains at least once each year for the benefit of the beneficiaries until termination of…