Annotations 10/2015

Tax preparers must pay an annual fee to obtain a preparer tax identification number (PTIN).  Effective November 1, 2015, the annual fee for a 2016 PTIN is $50 for new applications and renewals of existing PTINS.  The $50 fee will split between the IRS and a third-party administrator with the third-party receiving $17 for administration of the online system and provision of customer support and the IRS retaining $33.  IR-2015-123.


The petitioner claimed that he was a trader in securities and had, in an earlier year, made a mark-to-market election.  To do so, a Form 3115 must be attached to the return.  However, IRS didn’t have any evidence from the petitioner that a Form 3115 had been filed and the petitioner could not prove his claim that he had filed one in an earlier year.  The court held for the IRS that a valid mark-to-market election had not been made.  Poppe v. Comr., T.C. Memo. 2015-205.


The IRS has issued a news release to inform non-credentialed tax return preparers (preparers other than CPAs, attorneys or enrolled agents) of certain continuing education requirements that must be satisfied after 2015.  Specifically, the IRS noted that non-credentialed preparers must participate in the IRS' "voluntary" education program, the Annual Filing Season Program (AFSP).  Effective for tax returns and claims for refunds prepared and signed after 2015, non-credentialed preparers must complete either 15 or 18 hours of continuing education from IRS-approved continuing education providers which must be completed by December 31, 2015, to be able to receive a 2016 Annual Filing Season Program Record of Completion.  IR 2015-123.


In 2008, numerous cases of salmonellosis (an infection caused by the salmonella bacteria) were reported.  Federal agencies investigated and later the U.S. Food and Drug Administration (FDA) issued a press release that the outbreak "appeared to be linked" to the consumption of "raw red plum, red Roma, or round red tomatoes."  Additional press releases were issued with a final release announcing that fresh tomatoes in the domestic market "are not associated with the current outbreak."  The plaintiffs, tomato producers whose tomatoes were linked to the outbreak, claimed that their perishable tomatoes were destroyed due to a decrease in market demand for their tomatoes and sued for a regulatory taking.  The court denied the claim on the basis that the government action had no legal effect on any property interest of the plaintiffs.  The court (opinion by Obama-appointed judge) held that government advisory opinions are insufficient to constitute a Fifth Amendment taking even if there is a significant financial impact on the marketplace.  Dimare Fresh, Inc. v. United States, No. 2015-5006, 2015 U.S. App. LEXIS 18741 (Fed. Cir. Oct. 28, 2015). 


The defendant was an order buyer of cattle (broker) that the plaintiff bought cattle from.  The parties entered into multiple contracts for the defendant to deliver 644 head of cattle to the plaintiff.  While written contracts were not produced, the bankruptcy trustee identified two separate contracts accounting for 572 of the delivered cattle - one executed on Aug. 26, 2010 and one executed on Sept. 17, 2010.  The defendant was paid by check three days after delivery (in mid-October), which were then voided and replaced by a single wire transfer on October 20, 2010.  The plaintiff filed bankruptcy on Dec. 6, 2010, and the bankruptcy trustee sought to set aside the payment under 11 U.S.C. Sec. 547(b).  The defendant, however, claimed that the payment amounted to a contemporaneous  exchange for value and that the payment was made in the ordinary course of business - both exceptions to 11 U.S.C. Sec. 547(b) contained in 11 U.S.C. 547(c).  On the ordinary course of business exception, the court noted that the defendant had not established a pattern of behavior and that the court could not conclude that the wire transfer was made in the ordinary course of business.  On the issue of substantially contemporaneous exchange for value, the court noted that the plaintiff's checks had not been dishonored, had not been presented to a bank for payment, and that the plaintiff had changed the form of payment by replacing them with the wire transfer.  As such, the parties intended the exchange to be contemporaneous, and it was, in fact, contemporaneous.  The court granted the defendant's motion for summary judgment.  In re Eastern Livestock Co., LLC v. Krantz, No. 10-93904-BHL-11, 2015 Bankr. LEXIS 3656 (Bankr. S.D. Ind. Oct. 28, 2015). 

 


Owners of adjacent tracts, for decades, had treated an invisible line between their properties as the boundary.  A new owner of one of the adjacent tracts had a survey taken which showed that the line was six-feet onto their tract and that the swimming pool on the adjacent tract was partially on their side of the surveyed line.  An existing split-rail fence was on the line between the properties, but had not been there the statutorily required 10-years to establish a boundary by acquiescence (IA Code §650.14).  The new owner removed the fence and the plaintiffs (owners of the adjacent tract) sued to quiet title to establish the line as the boundary between the properties via acquiescence.  The trial court determined that the elements for boundary by acquiescence had been satisfied.  Testimony at trial revealed that the adjacent owners had always mowed up to the line and maintained their respective tracts up to the line.  That was sufficient evidence of a physical division between the tracts that had been recognized for at least 10 years.  Mapes v. U.S. Bank National Association, N.D., et al., No. 14-1770, 2015 Iowa App. LEXIS 993 (Iowa Ct. App. Oct. 28, 2015).    


The petitioner was in the land development business and sold land to builders for home construction.  The petitioner accounted for the income from the sales under the completed contract method which applies to home construction contracts and other real estate construction contracts if the taxpayer estimates that the contracts will be completed within two years of the contract commencement date and the taxpayer satisfies a $10 million gross receipts test under the Treasury Regulations.  Under the completed contract method, no income is reported until the contract is complete irrespective of when contract payments are actually received.  The IRS asserted that the contracts didn't qualify for the completed contract method of accounting because the contracts could not be considered long-term and were not construction contracts because the taxpayer did no construction activities.   The court determined that the custom lot and bulk sale contracts were long term contracts and were construction contracts.  However, the court determined that none of the contracts were home construction contracts because the taxpayer merely paved the road leading to a home.  Thus, gain under the contracts could not be reported under the completed contract method.  The court also determined that none of the contracts involved a general contractor or subcontractor relationship.  The Howard Hughes Company, LLC v. Comr., No. 14-60915, 2015 U.S. App. LEXIS 18726 (5th Cir. Oct. 27, 2015), aff'g., 142 T.C. No. 20 (2014).


The plaintiffs are various landowners that entered into oil and gas leases with the defendant.  Two leases at issue contained the same provision that allowed the leases to consolidate the land involved into a single development area with all royalties from wells in the area to be divided between all of the lessors proportionally based on any particular lessor's acreage in the consolidated area.  The consolidated area was comprised of 228 acres with five wells being drilled in the area from 1954 through 1980 and two more being drilled between 2007 and 2012.  The plaintiffs' acreages were where the 2007-2012 wells were drilled which was within the consolidated area.  Some lessors, however, were not included in the well permit application that the defendant submitted to the state (OH) Department of Natural Resources (DNR).  The plaintiffs claimed that, as a result, the consolidated area was abrogated and that the plaintiffs were entitled to 100 percent of the royalty amount.  The trial court disagreed, granting the defendant's motion for judgment on the pleadings, based on the unambiguous lease language, and because a well permit application cannot abrogate or modify an oil and gas lease.  The court also held that any damages resulting from the calculation and distribution of royalties were pure economic losses barred by the economic loss doctrine.  K and D Farms, Ltd., et al. v. Enervest Operating, LLC, et al., No. 2015CA00038, 2015 Ohio App. LEXIS 4364 (Ohio Ct. App. Oct. 26, 2015).


On July 18, 1929, a mineral deed conveyed a one-half interest to a buyer.  The deed was filed in the appropriate county office (county Register of Deeds office) on Nov. 4, 1929.    Under Kan. Stat. Ann. Sec. 79-420, a mineral deed is to be filed within 90 days of its execution.  The defendant obtained the one-half interest via a mineral deed conveyed on Aug. 31, 1944, which was recorded on Sept. 16, 1944.  In 2013, the plaintiff sued to quiet title against the defendant claiming that the plaintiff owned the surface and mineral rights to the property and that the defendant's claimed interest was invalid because the 1929 mineral deed was not recorded within 90 days of its execution.  The plaintiff claimed that the defendant's interest clouds the plaintiff's title.  The defendant sought summary judgment, on the basis that because the deed was filed by March 1 of the year after its execution it was valid.  The plaintiff responded that the failure to record within 90 days  was not fatal if the defendant met the "listing for taxation" portion of Kan. Stat.  Ann. Sec. 79-420, but that the defendant had not met its burden on that point.  The trial court granted the defendant's motion on the basis that because the deed was filed before March 1 of the following year which satisfied the "listing for taxation" requirement.  On appeal, the court affirmed, on the basis that, to be held void, the deed must fail to be recorded within 90 days of execution and be failed to be listed for taxation.  By filing the deed by March 1 of the year following execution, the minerals in the deed were available to list for taxation.  The minerals need not actually be taxed the year after the year of severance, only be listed for taxation which is accomplished by registering the deed with the register of deeds by March 1 of the year following execution.  Hess v. Cleroy, Inc., et al., No. 112,579, 2015 Kan. App. Unpub. LEXIS 867 (Kan. Ct. App. Oct. 23, 2015).      


The decedent worked with his father and brother in a family business operated in the corporate form that was created in 1959.  When the corporation was formed, the father contributed more capital that the others, but each of them were listed as registered owners of one-third of the corporate stock.  A family dispute arose and the decedent sought to cash-out his stock interest.  However, his father refused noting the disproportionate contributions and claiming that a portion of the decedent’s stock was being held in an oral trust for the benefit of the decedent’s children.  The dispute ended up in litigation ultimately resulting in a family settlement agreement in 1972 under which the decedent transferred one-third of his stock interest to a trust for his children with the balance being redeemed for $5 million.  No gift tax return was filed at the time on the belief that the transfer of shares to the trust was not a gift.  The IRS claimed otherwise, asserting that the transfer to the trust was a gift that was not entered into in the normal course of business for full and adequate consideration because the decedent’s children paid nothing for it.  The Tax Court, in a full T.C. opinion, disagreed with the IRS.  The court noted that the transfer did occur in the ordinary course of business for full and adequate consideration in money or money’s worth required by Treas. Reg. §25.2512-8.  The consideration, the court determined, was the recognition of the other shareholders that the decedent owned outright the other two-thirds of the stock interest being disputed.  Thus, the decedent did not make a taxable gift, and the estate was not liable for a gift tax deficiency of $737,625 plus $368,813 for fraud, $36,881 for negligence and $184,406 for failure to timely file a gift tax return.  Redstone v. Comr., 145 T.C. No. 11 (2015).


The defendants were harvesting wheat approximately two miles downwind from the plaintiff’s farm when the field caught fire and wind quickly spread the fire such that it burned approximately 1,200 acres including the plaintiffs’ property.  The origin of the fire was not established with certainty although its likely source was from a grain cart being pulled by a tractor that was headed to unload a combine.  The plaintiff sued on a res ipsa loquitor theory and the defendants motioned for summary judgment.  The trial court granted the motion on the basis that field fires that occur during harvesting are not uncommon and cannot be said to occur in every situation due to negligence.  On appeal, the court affirmed.  The court noted that no Nebraska cases could be found involving field fires and res ipsa loquitur, but that other states had considered the situation and determined that field fires were not that uncommon and could occur without any negligence.  Thus, the element of res ipsa loquitur, that the occurrence be one that would not, in the absence of negligence, was not satisfied.  The other two elements of res ipsa – that the instrument that caused the event was under the exclusive control and management of the defendant, and that the defendant couldn’t explain how the event occurred, were not at issue.  Lamprecht v. Schluntz, 25 Neb. App. 335 (2015).    


The petitioner, a family operated business that employed family members, rented a beach house for a week for the enjoyment of the family and employees of a customer.  The business claimed deductions for the rental expense and entertainment as “advertising” on the basis that the week-long retreat was for the business purpose of building customer relationships.  The IRS disallowed the expenses and the court agreed.  The petitioner had scant documentation and no proof that the expenses claimed were paid for what the petitioner claimed they were paid for.  Accordingly, the deduction failed for lack of substantiation.  The petitioner also claimed expense method depreciation for two vehicles, but again did not have records that could substantiate the deduction.  Karras v. Comr., T.C. Memo. 2015-204. 


The petitioner invested $285,000 into a scrap metal business (C corporation) operated by his brother.  The business filed bankruptcy.  The petitioner operated a profitable landscaping business.  On this joint return, the petitioner included a Schedule C for the landscaping business and another Schedule C showing a loss from the scrap metal business claiming a $359,000 loss for 2008.  The loss was reported as “other expenses” on line 27 of the Schedule C.  All other lines of the second Schedule C were blank.  The loss more than offset the gain from the Schedule C landscaping business.  The IRS disallowed the loss and the court agreed.  The loss was not a bad debt, a worthless security or a capital loss.  The loss did not become worthless in the year at issue, and his brother kept the scrap metal business operational after the tax year in issue.  The petitioner’s short-term capital loss was also disallowed that he was initially allowed upon the IRS initially believing that the petitioner had a bad debt.  The negligence penalty was not applied.  Espaillat v. Comr., T.C. Memo. 2015-202.


The petitioner submitted what he thought was a joint income tax return, but IRS sent it back for lack of the spouse's signature.  On audit for the tax year involved, the petitioner claimed that IRS could not review the return because the three-year statute of limitations had expired.  However, the IRS claimed the statute was not tolled because a legitimate return for the year was not filed.  The court agreed with the IRS because the return did not substantially comply with the rules for a properly filed joint return, and there was no tacit consent by the other spouse to filing the joint return, and the petitioner did not sign the spouse's name on the return nor try to fix the problem when the IRS sent the return back to the petitioner.  Reifler v. Comr., T.C. Memo. 2015-199.


The petitioner was in the construction business and also rented out two floors of a four-floor multi-family house.  The petitioner claimed approximately $70,000 in losses associated with the rental activity for 2010 and 2011 combined which the IRS denied for failure to satisfy passive loss rules of I.R.C. Sec. 469.  However, the petitioner's construction business counted as a real property trade or business for purposes of the 50% test and the 750-hour test of I.R.C. Sec. 469(c)(7)(B)(i).  Based on the petitioner's records, the court was able to discern that the petitioner materially participated in the rental activity by putting in more than 500 hours into the rental activity during the tax years at issue.  Simmons-Brown v. Comr., T.C. Sum. Op. 2015-62.   


The Environmental Protection Agency (EPA) developed a new "Clean Water Rule" detailing the EPA's jurisdiction under the Clean Water Act (CWA) with an effective date of August 28, 2015.  The CWA governs discharges into "navigable waters of the United States" and the rule was EPA's attempt to define it's jurisdiction over such waters.  However, the rule became subject to numerous legal challenges and legislative attempts to block or eliminate it based on the rule expanding the EPA's jurisdiction over navigable waters and other waters associated with navigable waters, including "tributaries" and "adjacent waters" which are now jurisdictional if there is a "significant nexus" to a water of the United States.  Under the rule, there is no "hydrologic connection" necessary to establish a significant nexus.  Any water with a bed and bank and an "ordinary high water mark" that contributes flow directly or indirectly to a navigable water may have the required nexus.  Due to confusion surrounding the rule's requirements and various legal challenges to it, the court issued a nationwide injunction staying the rule immediately.  The court determined that the 18 states challenging the rule had a substantial likelihood of success on the merits that the rule violated established Supreme Court precedent on the issue of EPA jurisdiction, and that the rule's promulgation likely violated the Administrative Procedure Act.  Briefing continues on the issue of whether the court has jurisdiction to consider the merits of the challenge to the rule.  State of Ohio, et al. v. United States Army Corps of Engineers, et al., Nos. 15-3799/3822/3853/3887, 2015 U.S. App. LEXIS 17642 (6th Cir. Oct. 9, 2015).  In a related action, a federal Joint Panel on Multidistrict Litigation (MDL) established for the purpose of coordinating discovery and pre-trial procedure in the litigation filed in numerous courts, denied the EPA's request to consolidate the nine district court cases in the District of Columbia.  The court noted that little discovery was required and that the cases were procedurally postured differently.  In re Clean Water Rule:  Definition of "Waters of the United States," MDL No. 2663, 2015 U.S. Dist. LEXIS 140117 (Oct. 13, 2015).    


The South Dakota Department of Revenue (SDDOR) has updated its guidance on the sales tax implications of selling farm machinery.  The guidance notes that all sales of farm machinery, attachment units and irrigation equipment that are exclusively used for agricultural purposes in South Dakota are subject to a four percent excise tax.  For purposes of the tax, "agricultural purposes" means the "producing, raising, growing, or harvesting of food or fiber upon agricultural land," and "agricultural land" is defined under S.D.C.L. Sec. 10-6-31.3.  The services of custom harvesters, chemical applicators, fertilizer spreaders and cultivators are considered to be agricultural purposes.  Repair parts, repair services, maintenance supplies and services to farm machinery and attachment units that are used exclusively for ag purposes are exempt from the excise tax as well as sales and use tax.  That is the case for repair parts if the repair parts replace a part that the manufacturer assigned a specific or generic part number.  The SDDOR states that the buyers have the responsibility to pay the excise tax directly to the SDDOR if the retail seller does not collect the tax and report it as a use tax on the state sale tax return.  South Dakota Tax Facts No. Oct. 1, 2015 (Farm Machinery Attachment Units and Irrigation Equipment).


The petitioners, a married couple, failed to fully report their income on their joint return.  The wife worked for an attorney promoter of fraudulent tax schemes, and she put her paychecks into a bank account from which she paid personal living expenses without reporting the wage income.  The husband was aware that her income was not being reported and he didn't report his income for one year at issue.  The husband sought innocent spouse relief and the court, based on the factors set forth in Rev. Proc. 2013-34, determined that the husband knew of the unpaid tax liability, and denied innocent spouse relief.  Williams v. Comr., T.C. Memo. 2015-198.  


In this case, the president of a corporation impeded an IRS audit of the corporation by creating and backdating promissory notes, issuing false Forms 1099, among other things.  From 2004 to 2008 the corporations earned over $100 million but didn't file any tax corporate tax returns.  The IRS claimed that the corporation owed $120 million in taxes, interest and penalties.  The petitioner was a minority shareholder that had received bonuses and dividends during the years that the corporation was not paying taxes.  The IRS sought to recover $5 million from the two minority shareholders.  The petitioner received over $3.5 million in dividends during the years at issue while the company was insolvent and another minority shareholder received about $.5 million.  Under state (FL) law, the IRS did not have to pursue all reasonable collection efforts against the corporation, but could go directly after the minority shareholders to the extent of dividends received during the years at issue.  Kardash v. Comr., T.C. Memo. 2015-51.  On reconsideration, the court determined that the corporation was solvent in 2005, but determined that the transfers were constructively fraudulent as a part of a series of transactions that led to the corporation's insolvency.  Consequently, the post-2004 transfers were fraudulent because they were for less than fair market value and resulted in the corporation's insolvency.  Kardash v. Comr., T.C. Memo. 2015-197. 


The plaintiff bought a property at a non-judicial sale.  The IRS had an I.R.C. Sec. 6321 lien against the property that had been filed more than 30 days before the sale.  The IRS was not given notice of the sale at least 25 days before the sale.  The IRS lien had been filed with the county.  The plaintiff claimed that the lien was not valid, but the court determined otherwise.  The IRS, the court held, did not get effective notice of the sale of the property.  Thus, the IRS could foreclose the lien and had priority position against other creditors as to the proceeds of sale.  Mendoza v. Cisneros, et al., No. 14-cv-3324-WJM-KMT, 2015 U.S. Dist. LEXIS 141416 (D. Colo.  Oct. 14, 2015).

 


The defendant raised hogs that he received from the plaintiff via a hog production contract.  The plaintiff paid for the feed, transportation and veterinary services for the hogs and the defendant cared for the hogs until they reached market weight.  The plaintiff paid the defendant a monthly fee for his services, but retained ownership of the hogs.  The defendant accounted for the hogs and unaccounted-for hogs would be charged against the defendant's next monthly payment.  The defendant could only keep the plaintiff's hogs at the facility where they were raised.  The plaintiff was alerted by a third party that inventory counts did not match and some hogs might be missing.  The defendant claimed that some hogs were put in a "slush pen"  rather than being marketed because of slow weight gain, and that no inventory was kept of them.  The following year, the defendant filed bankruptcy and the plaintiff contacted the hog buyer and over 3,000 hogs could not be accounted for based on what had been supplied and what had been marketed.  The defendant claimed the difference was attributable to the defendant also marketing his own hogs at the same time to the buyer.  The plaintiff sued for conversion, and the trial court awarded $290,000 to the plaintiff for the hogs plus interest and $50,000 in punitive damages and court costs.  On appeal, the court affirmed.  The court noted that the defendant's personal income tax returns showed no income from the sale of livestock and no other documentation that would have supported the notion that the defendant was raising his own hogs.  On financial statements provided to his bank, the defendant reported that he had no "market livestock or poultry" and no "breeding stock."  The court also determined that the trial court properly admitted the weekly calendar and farm book that the plaintiff maintained and the summary exhibits that relied on those exhibits.  Pruisner v. Ballhagen, No. 14-1431, 2015 Iowa App. LEXIS 912 (Iowa Ct. App. Oct. 14, 2015). 


The defendant made a declaration of ownership over 89 miles of the Rogue River in accordance with the process established by state law.  In making such declaration, the defendant must get a court to find that the watercourse at issue is navigable or the defendant must make such a declaration.  Here, the defendant made such a declaration after following the state-prescribed procedures, including public notice of the watercourse at issue.  The trial court held that the defendant failed to provide sufficient evidence to establish navigability, and noted that the defendant's procedure would have exchanged dry river channel for flowing river channel with the result that some plaintiff's homes on dry land would be located where the river once flowed and would be within the defendant's ownership determination.  On appeal, the court reversed, in part, and remanded the case.  The court noted that the defendant's determination of navigability was based on a public notice that didn't provide enough specificity to allow interested persons to discover what land the defendant was actually claiming.  However, the court held that evidence of log drives at the time Oregon was admitted to the Union along with post-statehood recreational use that did not differ materially from the type of use at the time of statehood permitted a conclusion that the portion of the river at issue was susceptible to being used as a highway for commerce - the test for navigability.  Hardy, et al. v. State Land Board, 274 Ore. App. 262 (2015). 


The parties, brother and sister, owned two parcels of farmland with each of them owning an undivided one-half interest in each tract.  They received complete ownership in the tracts upon the last of their parents to die.  Tract A contained 315 acres with 157 of those acres tillable, and had been the parents homestead.  The brother had farmed Tract A for over 40 years and a portion of it continued to be leased to the brother.  Tract A contained 5 grain bins, three of which the brother put up.  The bins were valued at $59,000 and one expert appraiser valued Tract A at $929,000 and the other expert appraiser valued Tract A at $778,000.  Tract B contained 163 acres, 110 of which were tillable and had some developmental potential.  The expert appraisers valued the tracts at $1,200,000 and $620,000 respectively.  The brother sought a partition and sale of the tracts and the sister sought a partition in-kind, seeking to retain ownership of Tract A and having her brother own Tract B with an equalization payment.  The trial court determined that the sister had not established that a partition in-kind would be equitable and practical and that such a partition would involve "too much guesswork" and dismissed the sister's proposal that she retain Tract A coupled with an equalization payment to her brother of $75,000.  The trial court held that the Tracts should be partitioned by sale via public auction unless the parties agreed otherwise.  The sister appealed, and the appellate court reversed.  The court noted that any sale of Tract A would trigger approximately $150,000 of capital gain tax if it were to be sold, but Tract B would not trigger capital gain tax due to its high basis.  The court determined that it would not be equitable to divide Tract A due to the need to construct fencing and because livestock would not have a water source.  Thus, the court held that the sister had met her burden to establish that an in-kind partition would be equitable if she retained Tract A, her brother retained Tract B and she paid him a $75,000 "equalization payment believing that this resulted in each party retaining one-half of the farmland value.  A dissenting judge pointed out that the two properties, according to the expert appraisers, had a difference in value of $580,000 and that a $75,000 equalization payment was nowhere close to evening out value.  Accordingly, the dissent would have affirmed the trial court that a sale and split of the proceeds was the only equitable result for the parties.  Newhall v. Roll, No. 14-1622, 2015 Iowa App. LEXIS 920 (Iowa Ct. App. Oct. 14, 2015). 


The plaintiff retired in 2004 from being an airline pilot.  The airline had filed bankruptcy in 2002.  The plaintiff's non-qualified deferred compensation plan benefits vested upon his retirement, and the airline computed the present value of the benefits to be paid in accordance with I.R.C. Sec. 3121(v)(2) and withheld Medicare taxes.  The value of the benefits exceeded the FICA limit in 2004, and the computation of the present value of the benefits was computed without regard to the possibility that the benefits might not actually be paid because based on the definition of  "amount deferred" in terms of "present value" in Treas. Reg. Sec. 31.3121(v)(2)-(c)(2)(ii).  Based on that value, the airline withheld over $4,000 of payroll tax.  The deferred compensation liability of the airline, however, was largely discharged in bankruptcy such that the plaintiff received just over $60,000 of the approximately $300,000 of benefits owed to him - even though he paid payroll tax on the full amount.  The plaintiff challenged the regulations as invalid, but the IRS maintained that the regulations were appropriate and required payroll tax on the full benefit.  The court upheld the regulation as rational and a reasonable interpretation of I.R.C. Sec. 3121 and there was nothing in the statute requiring the IRS to refund the payroll taxes on account of the airline's bankruptcy.  The statute provided no exception when there was a risk of nonpayment.  Balestra v. United States, No. 2014-5127, 2015 U.S. App. LEXIS 17756 (Fed. Cir. Oct. 13, 2015), aff'g., 119 F. Cl. 109 (2014). 


The debtors defaulted on two loans secured by mortgages on their 144-acre farm.  The farm was divided by a public road, with bare farmland on one side of the road and the other side containing the residence and farm buildings.  Ultimately, the debtors filed Chapter 12 to stave off the sale of the farm at auction.  The debtors filed multiple amended plans so that the farmland could be sold to partially satisfy a secured loan and obtain plan confirmation.  The bankruptcy court approved a plan allowing the private sale of the farmland or the entire farm, but there was no provision that allowed the trustee (or debtor) to divide the farm into multiple tracts.  While the debtor did find a buyer for the farmland, the sale didn’t close before the auction which resulted in a sale to the highest buyer at over $12,000/acre (total selling price of $1.75 million).  However, the debtors claimed that their appraisers valued the property at twice that amount.  The bankruptcy court did not allow for a plan modification that would have given the debtors more time before the sale because there was insufficient time before the scheduled sale remaining when the petition for an amended plan was filed.  On appeal, the court affirmed.  The court determined that bankruptcy rule 90006(c) barred plan modifications without at least 21 days’ notice.  The court also determined that the debtor did not establish that the trustee had a duty to divide the farm into multiple tracts.  Thus, the debtor had the duty to take the necessary steps to get the property divided before the auction.  The court also held that it was not error for the bankruptcy court to conclude that any error that the auctioneer made by indicating that the property could not subdivided except for one or two homes did not drive away prospective buyers.  It was up to prospective buyers, the court held, to undertake their own due diligence as to how the land could be utilized.    The deed to the farm will not be transferred to the buyer because the debtors filed an appeal with the U.S. Court of Appeals for the Third Circuit.  In re Thorpe, No. 15-5239, 2015 U.S. Dist. LEXIS 137997 (E.D. Pa. Oct. 9, 2015).


The plaintiff was injured while using a hydraulic cattle chute that he bought from the defendant.  At the time of the injury the plaintiff was using the chute to pregnancy check cattle.  The chute had been purchased just a few weeks before the incident at issue, and the plaintiff had operated it without incident.  The operator’s manual for the chute provided a warning that the chute should only be operated with its own power source and that the use of a different power source would void the warranty.  The purpose of the restriction was to ensure that there would be a constant flow of hydraulic fluid without any excess or reverse flow.  At the time of the plaintiff’s injury, the chute was using the hydraulic system of a tractor rather than the chute’s own power source.  Hydraulic fluid shot from a control valve and struck the plaintiff in the cheek, leaving an injection wound.  The plaintiff sued for his injuries.  A post-event analysis revealed that an o-ring failed and the chute operated properly after the o-ring was replaced.  The plaintiff’s suit was based in strict liability for defective design, defective manufacture, failure to warn or inspect or test.  The jury was instructed that “a product is in defective condition if [it] has defects in design, manufacturing, instructions, warnings, and such defects existed at the time the product left the manufacturer’s and/or seller’s hands.”  At the instructions conference, the plaintiff wanted additional jury instruction language noting that “A product may also be defective without any ascertainable defect in the product and although the product was precisely what it was intended to be, if the manufacturer fails to give adequate and timely warnings as to the dangers or hazards which may result from a foreseeable use or misuse of the product.”  The trial court judge rejected the additional language and the jury returned a verdict for the defendant.  On appeal, the court upheld the trial court’s jury instruction.  The verdict was not contrary to the evidence and the jury instruction that was not used would not have resulted in a different outcome insomuch as the cause of the accident was not known and there was evidence that the plaintiff had not followed the manual in other respects concerning the operation of the chute.  Feight v. Moly Manufacturing, Inc., No. 111,899, 2015 Kan. App. LEXIS 839 (Kan. Ct. App. Oct. 9, 2015).


In this advice, the IRS concluded that an employer can exclude from an employee's gross income amounts paid for health insurance coverage that is provided through the group health plan of the spouse of the employee to the extent that the spouse paid for all or part of the coverage on an after-tax basis and not through a salary-reduction under an I.R.C. Sec. 125 cafeteria plan.  The payment can also include the after-tax amounts paid for both spouses by the employee's spouse.  Thus, an employer would be able to reimburse the payments tax free for the portion that represents the employee's cost and the portion that represents the cost of the employee's spouse.  While not addressed, it would appear that because the amounts in issue are tied to the spouse's employer's group health plan, the Obamacare restrictions would not come into play because the reimbursement plan is integrated with the group health plan.  However, Obamacare bars an insured plan from discriminating under the same rules as those that apply to reimbursement plans once regulations are promulgated that put the discrimination rules in place (See Notice 2011-1).  C.C.A. 201547006 (Oct. 7, 2015).


The plaintiffs bought a home on an acre and leased the mineral rights to the defendant's predecessor in exchange for a lease bonus and royalty interest.  The lease authorized the defendant to use the surface for oil and gas operations and drill horizontal wells.  The lease was pooled with other leases to create a larger drilling unit.  A year after the first well was drilled (not on the plaintiffs' property), the plaintiffs sued claiming that the defendant's negligent oilfield operations subjected them to toxic chemicals and noxious odors that made their existing health problems worse and damaged their property by creating sinkholes and damaging the home's pier and beam foundation.  The defendant moved for summary judgment and moved to strike most of the plaintiffs' evidence as inadmissible hearsay, unqualified lay opinions, and unreliable, speculative and conclusory expert opinions.  The trial court agreed and granted both a no-evidence summary judgment motion (directed verdict before trial) and a summary judgment motion.  On appeal, the court affirmed.  The court determined that the plaintiffs did not present more than a scintilla of probative expert evidence to create a material fact as to causation because none of their expert witnesses presented any evidence that differentiated between the plaintiffs' preexisting physical conditions and the new problems they claimed resulted from the oilfield operations.  The plaintiffs' nuisance claim also failed because lay witness testimony failed to show that the defendant's activities were the proximate cause of the complained-of substantial interference with the plaintiffs' use and enjoyment of their property.  Cerny v. Marathon Oil Corporation, No. 04-14-00650-CV, 2015 Tex. App. LEXIS 10364 (Tex. Ct. App. Oct. 7, 2015). 


The petitioner was 76 and dying of cancer.  For his business, he had taken out a $50,000 line of credit with his bank in 2008.  He couldn't pay off the credit line and the bank agreed to accept $15,628 as full payment on the loan in 2009.  The petitioner also couldn't pay other debts totaling over $68,000 and that amount was also canceled in 2009.  The petitioner received Form 1099-C from the bank with box 5 checked, indicating that that the petitioner was not liable for repaying the debt balance.  However, the petitioner did not report his canceled debt in income on the 2009 return.  He attached a statement to the return that the local IRS office had told him that "it would likely come under the hardship rules for approval."  While the petitioner believed that he was not liable for reporting the cancellation of debt income (CODI), the IRS and the court disagreed.  The court noted that there is no exception under I.R.C. Sec. 108 for "hardship."  In addition, the court noted that administrative guidance from the IRS is not binding on the court and it cannot change the plain meaning of tax statutes.  While the court agreed that the petitioner had suffered from hardships, such hardships did not absolve him from reporting the CODI.  The petitioner was neither insolvent or in bankruptcy.  Dunnigan v. Comr., T.C. Memo. 2015-190.


The petitioner occasionally made loans to friends, acquaintances and business associates, doing so 12 times over a six-year period without the normal formalities associated with a lending business.  He did not hold himself out as in the business of lending money and did not keep business records that were close to adequate, and did not perform "due diligence" with respect to any loans that he made.  He made a loan to a construction company which failed to pay its $925,000 loan upon it becoming due in 2007.  The company filed for reorganization bankruptcy in 2008 showing assets of over $62 million and liabilities of over $34 million.  The petitioner did not file a claim in the bankruptcy.  Ultimately, the case was converted to Chapter 7 from Chapter 11.  The petitioner filed an amended return claiming a business bad debt deduction (ordinary loss deductible on debt that becomes partially worthless) on the 2008 return.  The petitioner argued that if the loss wasn't deductible in 2008, it was in 2009.  The court held that the loan would not qualify as a business bad debt, but that any bad debt would be a non-business bad debt (deductible as a short-term capital loss  in the year in which the debt becomes wholly worthless).  The court determined that the plaintiff had failed to show that the debt was completely worthless in either 2008 or 2009.  Instead, the court pointed out that the petitioner first acted as if the debt was worthless in 2010 when he filed his amended 2008 return.  The company's filing of bankruptcy that year was insufficient to show that the debt was worthless in 2008 because it was not clear at that time that the company was insolvent.  Cooper v. Comr., T.C. Memo. 2015-191.     


The regular percentage depletion rate for independent producers and royalty owners remains at 15 percent for calendar year 2015.  The regular percentage depletion rate for independent producers and royalty owners is 15 percent. For qualifying marginal production (less than 15 daily barrels of oil equivalent per day) the 15 percent rate is increased by one percentage point for each dollar the price of crude oil is less than $20 per barrel.   With the barrel price exceeding $20 per barrel, there is no increase to the 15 percent rate.  Percentage depletion for oil and gas production is 15 percent of gross revenue limited to 100 percent of a property’s net income.  IRS Notice 2015-65, 2015-40 IRB 466.


The petitioner, 47 years old, withdrew funds from her IRA to pay her son’s medical expenses.  Her son was not claimed as a dependent on her return.  She did not pay the additional 10 percent penalty on the withdrawal required under I.R.C. Sec. 72(t).  The IRS assessed the additional penalty and the court upheld the IRS position.  The court noted that the petitioner did not claim her son as a dependent on her return for the tax year in issue and that he did not otherwise qualify as a dependent under I.R.C. Sec. 152, which would have avoided the penalty on the withdrawn amount to the extent of what the taxpayer could have claimed as a deduction for qualified medical expenses under I.R.C. Sec. 213.  Unlike a health savings account, where the withdrawn amounts used to pay for the son’s medical expenses would have also been tax-free if the son had been a dependent, the withdrawn amounts from the IRA are taxable.  Ireland v. Comr., T.C. Sum. Op. 2015-60.  


The defendant imports baby worms from Europe and feeds and grows them in “worm houses” on its property, a 750-acre tract on which corn is grown to ensure a quality feed supply for the worms.  The corn is made into silage and combined with a mixture of peat moss, lime and water, and then is fed to the worms until they are “harvested.”  The defendant did not pay its employees overtime based on the exemption from the overtime pay requirement for agricultural employees contained in 29 U.S.C. Sec. 213(b)(12) of the Fair Labor Standards Act (FLSA).  The trial court ruled for the defendant on the basis that the growing and raising of worms constituted “agriculture” and the plaintiffs, employees, appealed.  On appeal, the court affirmed.  The court determined that 29 U.S.C. Sec. 203(f) was broad in that it covered “the production, cultivation, growing, and harvesting of any agricultural or horticultural commodity.” “Agriculture” was defined as “farming”, which included agricultural commodities and the court determined that worms are like “cultivated commodities.”  Simply because the worms were raised for bait did not deprive them of their agricultural character.  The worms are raised and harvested like an ag commodity.  Thus, the defendant was not required to pay overtime wages to its employees as they were agricultural employees.  Barks, et al. v. Silver Bait, LLC, No. 15-1575, 2015 U.S. App. LEXIS 17310 (6th Cir. Oct. 2, 2015).     


The petitioners, a married couple, bought a 10-acre tract in 2006 on which they built their residence and also barns and a horse riding arena used in their LLC's  horse boarding and sales business.  The business sustained a loss of almost $100,000 in 2009 showing up as negative gross income on their joint return.  The riding arena suffered from construction defects, requiring additional sums to be spent to resolve the problem.  During 2009, the husband conducted his (very limited) law practice from an office in the residence.  The petitioner shared the office with his (much younger) wife who is an equestrian a realtor and experienced horse jumper.  The couple's joint return included over $12,000 of "other expenses" consisting, in part, of telephone expenses and $25 of "miscellaneous" expenses.  The petitioners claimed expenses for five telephone lines and internet service.  The IRS disallowed half of the deductions for telephone expenses and all of the miscellaneous expenses, and a claimed casualty loss deduction.  The IRS also imposed an accuracy-related penalty.  the court sustained the IRS determinations.  On the telephone expenses, the court noted that the petitioners did not tie any expenses to any particular telephone line or business activity.  The miscellaneous deductions were also disallowed for lack of explanation.  The riding arena did not sustain a casualty loss because the construction defects giving rise to the extra expenses were not "sudden, unusual or unexpected in nature."  Costs associated with faulty construction are not deductible.  In addition, the loss was not sustained in the conduct of a trade or business and the petitioners continued to use the asset.  The riding arena was not sold, abandoned or permanently withdrawn from use during 2009.  The court upheld the accuracy-related penalty with respect to the adjustments conceded to and the disallowance of the deduction for miscellaneous expenses.  Wideman v. Comr., T.C. Summary Op. 2015-61.


A trust had been created for the benefit of the taxpayer's husband and his children from a prior marriage before the taxpayer was born.  The trust specified that the taxpayer would receive half of the current income during her husband's life and all of the income if he pre-deceased her until the death of the husband and his two siblings.  A second trust established before the taxpayer's marriage to the husband paid the taxpayer a fixed annuity with staged principal distributions upon the taxpayer reaching various ages so long as the taxpayer and the husband were co-habituating.  Upon marriage the taxpayer's trust interest would end unless she disclaimed her interest in the first trust with the remainder being split among the husband's grandchildren or descendants.  The taxpayer knew nothing about the second trust until after it was established and proposed to disclaim her interest in the first trust within nine months of the marriage to her husband.  The IRS allowed the disclaimer because it was within reasonable time after she obtained knowledge of her interest according to Treas. Reg. Sec. 25. 2511-1(c), and the disclaimer would not be treated as a taxable gift.  The IRS noted that the trust involved was created before 1977 under a different set of rules than now apply.  Priv. Ltr. Rul. 201540006 (Jun. 11, 2015). 


The petitioner claimed that he lost his business records in a flood, but he was still able to produce large amounts or records that were disorganized.  The court held that the records failed to show the business purposes of particular expenses and were not helpful in distinguishing the type of expenses incurred - reimbursed or non-reimbursed.  While the petitioner had information for the years in issue, he made no attempt to reconstruct his claimed business expenses.  Consequently, some of his claimed business expenses were denied.  Young v. Comr., T.C. Memo. 2015-189.


The petitioner sought a redetermination from the Tax Court and the petition was delivered to the court on the 98th day - 8 days beyond the 90-day deadline.  Normally, the petition is considered to have been filed at the time of mailing.  The petition's envelope included a "postmark" by Stamps.com on the 90th day.  However, the envelope also had a certified mail label with a tracking number and tracking data of the U.S. Postal Service showed that the USPS received the envelope on the 92nd day.  The court ignored the Stamps.com "postmark" and held that the petition had not been timely filed.  Tilden v. Comr., T.C. Memo. 2015-188


The petitioner's S corporation claimed a net operating loss (NOL) as a result of writing down real estate holdings due to the collapse of the real estate market.  The petitioner claimed that the properties had been abandoned in that same year or had become worthless.  The IRS disallowed the NOL and the court agreed.  The petitioner never abandoned the properties and a loss on account of worthlessness of property that is mortgaged, the court noted, means worthless of the petitioner's equity in accordance with I.R.C. Sec. 165.  The court noted that, with respect to recourse debt, the petitioner could not claim any loss deduction until the year in which a foreclosure sale occurs.  Thus, the petitioner was not entitled to any deduction until some point in the future.  Tucker v. Comr., T.C. Memo. 2015-185.


The petitioner's S corporation sustained losses which the petitioner carried forward to offset income in the carry forward years.  The IRS denied the carry forward of the NOLs because the petitioner did not establish that he had waived the carryback period, failed to show that the losses had not been absorbed in an earlier year, and even failed to show that the S corporation incurred the losses.  The court agreed with the IRS and also noted that the petitioner failed to show that the petitioner had sufficient basis in the S corporation shares.  Jasperson v. Comr., T.C. Memo. 2015-186. 


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