Annotations - Last 30 Days

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.  

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 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 "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. 

A farmer entered into a contract with a third party for the construction of a hog building that would utilize the defendant’s trusses.  The building was completed in the spring of 2008, but during the winter of 2014, several of the trusses failed which caused a large portion of the roof of the hog building to collapse and killed many hogs.  The farmer had taken out an insurance policy with the plaintiff that covered the building.  The farmer submitted a claim for $338,381.00 and the plaintiff paid the claim - $300,000 for damage to the building, $30,000 for debris clean-up and $8,381 to the hog supplier for loss of their hogs covered under the farmer’s policy.  The plaintiff then sued the defendant claiming that their loss of $338,381 was caused by a manufacturing defect in the defendant’s trusses – a breach of implied warranty claim.  The defendant move to dismiss the claim and the court agreed.  The plaintiff’s claim arose out of the construction of a hog building in which the defendant’s trusses were used and the building was used in a commercial business and the damage was to the building itself and livestock in the building which were all covered under the plaintiff’s insurance policy.  As such, the economic loss doctrine applied to bar the tort action.  The losses were purely economic in nature.  Farm Bureau Mutual Insurance Company of Michigan, et al. v. Borkholder Buildings & Supply, L.L.C., No. 1:14-cv-1118, 2015 U.S. Dist. LEXIS 128830 (W.D. Mich. Sept. 25, 2015).

The plaintiff was in the business of selling “unit doses” of drugs in non-reusable container intended for single-dose administration to patients.  The plaintiff bought the drugs it identifies as suitable for unit doses in bulk and then engages in operating procedures for the processes and equipment to be used in converting the drugs purchased in bulk into unit doses.  The IRS denied a domestic production activities deduction (DPAD) under I.R.C. Sec. 199 on the basis that the plaintiff’s activities constituted “packaging, repackaging, labeling and minor assembly” under Treas. Reg. Sec. 1.199-3(e)(2).  The plaintiff claimed that its activities were comparable to the taxpayer’s activities in United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) where the taxpayer assembled gift baskets and was allowed a DPAD.  The court agreed with the taxpayer in this case and allowed the DPAD on the basis that the activities involved were analogous to those in Dean.  The court believed that activities beyond mere packaging and repackaging were involved, including market research to identify which drugs to buy, testing of drugs, studies involving the mixing of drugs, testing of plastics, and other related activities.  As such, the plaintiff was engaged in a production process and was entitled to a DPAD on its qualified production income.  While the case was decided after the IRS proposed new DPAD regulations containing an example noting the disagreement of the IRS with the result of Dean, the court’s opinion did not involve any analysis or application of those regulations.  Precision Dose, Inc. v. United States, No. 12 C 50180, 2015 U.S. Dist. LEXIS 128115 (N.D. Ill. Sept. 24, 2015). 

The creditors sought summary judgment on their claim that the debtor’s obligation to them should not be discharged in his Chapter 7 bankruptcy proceeding.  The court granted the creditors’ motion, finding that the $135,000 debt was excepted from discharge under 11 U.S.C. § 523(a)(2)(A).  The court had already ruled in a December 17, 2013, decision, that the debtor’s bankruptcy should be converted from a Chapter 12 to a Chapter 7 case on the grounds of fraud.  The court found that the debtor did  not tell the creditors he had filed bankruptcy when he contracted with them for the sale of hay.  As a result, the law of the case applied to establish 11 U.S.C. §523(a)(2)(A)’s required elements: (1) fraudulent omission by the debtor; (2) knowledge of the deceptiveness of his conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor; and (5) damage to the creditor).  In re Clark, No. 12-00649, 2014 Bankr. LEXIS 97 (Bankr. D. Idaho Jan. 10, 2014).  In a later decision, the court noted that during the pendency of the Chapter 12 case, the debtor had also sold a tractor to unrelated persons and deposited the funds into the bank account of a limited liability company (LLC) that he managed (but of which he was not a member or owner).  The trustee claimed that various against various defendants that the trustee claimed had received transfers from the LLC before the case was converted to Chapter 7.  The trustee later filed an avoidance action against the buyers of the tractor on the grounds that the transfer was avoidable.  The buyers claimed that the transfer of the tractor to them was not avoidable because of the two-year statute of limitations contained in 11 U.S.C. Sec. 549.  The court agreed that the transfer was avoidable because the trustee knew of the potentially avoidable transfer at the time the case was converted to Chapter 7 and the trustee obtained the LLC records, but never identified the purchasers.  Thus, the transfer was avoidable because the buyers had no notice that an avoidance action was contemplated until more than two years after the sale of the tractor.  In re Clark, No. 12-00649-TLM, 2015 Bankr. LEXIS 3167 (Bankr. D. Idaho Sept. 18, 2015).


The petitioner issued residual value insurance policies that insured lessors and lenders against not properly estimating the residual value of leased property at the end of the lease term.  Such policies insure the expected residual value remaining on an asset at the end of a lease.  The petitioner utilized the accounting rules of I.R.C. Sec. 832 applicable to insurers.  However, the IRS claimed that the petitioner was not an insurance company and that the policies they issued were merely a hedge against investment risk rather than truly insurance.  As a result, the IRS claimed that the I.R.C. Sec. 832 rules were inapplicable and that the petitioner had to use the rules contained in I.R.C. Secs. 451 and 461 resulting in a $55 million deficiency.  The IRS also cited Tech Adv. Memo. 201149021 (Aug. 30, 2011) to support its position.    The states that the petitioner operated in regulated the petitioner as an insurance company, and Fitch, Moody’s and S&P rated the petitioner as an insurer.  The petitioner offered evidence that it insured against “low frequency/high severity” risks such as earthquakes or floods,” but the IRS claimed that the risk was illusory.  The court rejected the IRS position because of evidence showing risk-shifting and risk-distribution.  A real risk of loss was being covered.  In addition, the court noted that every state in which the petitioner did business the state regulates the petitioner as an insurer.  R.V.I. Guaranty Co., Ltd. & Subsidiaries, 145 T.C. 9 (2015).

The decedent died testate in late 2008.  At the time of his death, the decedent was not married, had no children, and both of his parents had predeceased him.  The Form 1041 for the estate was filed in April of 2012 reporting $335,854 of income and claimed a $314,942 charitable deduction.  The IRS disallowed the charitable deduction in its entirety, claiming that the amount had not been permanently set aside for charity as required by I.R.C. §642(c)(2).  The decedent’s will, executed in 1983, instructed the executor to pay all estate expenses and costs from the general estate, and conveyed 100 percent of the residuary estate to the church that the decedent regularly attended.  There was no provision in the will specifically providing for gross income to be permanently set aside or separated into distinct accounts.  Over a timeframe of several years, the estate tried to determine whether there were any unascertained heirs with several being identified as potential heirs.  Ultimately, the will was challenged and a proposed settlement was reached with two thirds of the decedent’s gross probate estate.  The court noted that, to claim a charitable deduction, the estate must show that the contribution was from the estate’s gross income, that the will/trust terms made the charitable contribution, and that the charitable contribution was permanently set aside for charitable purposes in accordance with I.R.C. Sec. 170(c).  The IRS did not challenge the first two requirements, but claimed that the residue of the estate was not permanently set aside for charitable purposes.  The court agreed with the IRS that it had not.  The court noted that the chance the charitable amount was go to non-charitable beneficiaries for the year in issue was not so remote as to be negligible.  The proposed settlement was evidence of the ongoing legal battle that had not yet concluded.  he court noted that for the year in issue the estate was in the midst of a legal battle and had ongoing undetermined expenses, and their remained a possibility that the amount set aside for the churches that the decedent attended would go to the challengers.  Estate of DiMarco v. Comr., T.C. Memo. 2015-184.

The petitioner was a cardiologist and his wife also worked in his practice.  They constructed a house in 1997 and tried to sell it for four years, after which they rented the house for four years to an unrelated tenant, and then to their daughter at one-third of the amount it was rented to the unrelated tenant.  They resumed sales efforts in 2010.  On their 2008 return, the petitioners indicated the house was rental property with a net loss of $134,360 which they characterized as a passive loss on Form 8582.  On the 2009 and 2010 returns the petitions again showed net losses on the property, but indicated they were in the construction business.  They filed a 2008 amended return claiming a refund relating to expenses claimed on the house, which IRS disallowed and also assessed an accuracy-related penalty.  The IRS determined that the house was held for the production of income and that the losses were passive losses under I.R.C. Sec. 469.  The IRS also asserted that the deductions attributable to the house were limited by I.R.C. Sec. 280A.  The court agreed with the IRS because a related party lived in the house and used it for personal purposes for more than the greater of 14 days a year or 10% of the number of days the house was rented at fair rental. The court rejected the petitioners’ claim that they were real estate developers that needed to have their daughter live in the house to keep it occupied as required by their homeowners policy which would then make Sec. 280A inapplicable.  Thus, the deductions attributable to the house were limited to the extent of rental income. The court upheld the application of the accuracy-related penalty, and did not need to determine whether the losses were passive.  Okonkwo v. Comr., T.C. Memo. 2015-181.


In 2009, the plaintiff bought two multi-peril crop insurance policies (one for each of the plaintiff's two farms) that the defendant reinsured through the federal crop insurance corporation (FCIC).  The policies each provided a tobacco crop yield guaranty which guaranteed a minimum yield at $1.85/lb.  The plaintiff's 2009 tobacco crop harvest did not meet yield and quality expectations and the losses were reported to the defendant as attributable to plant disease.  The policy paid on one of the farms, and after an investigation, the defendant attributed losses on the other farm to various diseases and adverse weather conditions.  The defendant made a final decision with respect to this policy that no indemnity payment was due because the plaintiff failed to timely harvest the crop and failed to purchase and apply the proper fungicides.  The defendant also found that the plaintiff had inadequate barn space to cure all of its tobacco, which led to the untimely harvesting resulting in deterioration of the crop in the field.  The plaintiff sought mediation and administrative review, but mediation did not resolve the matter.  The defendant issued a revised final decision again finding that the lack of timely harvest and the failure to purchase and apply the proper fungicides contributed to the loss.  The revised decision recalculated the production lost due to uninsured causes, but the result remained that no indemnity would be paid.  The plaintiff sought administrative review, which resulted in a finding that there were both insured and uninsured losses, and the matter was remanded the matter for a calculation of the final indemnity amount.  The plaintiff appealed the matter to the defendant's National Appeals Division (NAD) and requested a hearing.  The result of the NAD hearing was that the outcome remained unchanged.  The plaintiff sought director review of the NAD decision, which upheld the NAD decision.  From the director review of the NAD decision, the plaintiff appealed for judicial review.  On review, the court determined that substantial evidence did not support the NAD Director's decision that plant disease did not contribute to the plaintiff's crop losses.  The court determined that the NAD Director failed to explain how the plaintiff's failure to timely harvest undermined the plaintiff's claim that the tobacco crop suffered from plant disease.  The court reasoned that plant disease and untimely harvesting are not mutually exclusive causes of loss.  The court denied the defendant's motion to dismiss and remanded the matter to the defendant to determined whether there is evidence that the plaintiff's crop suffered from plant disease and whether any disease entitled the plaintiff to an indemnity payment and whether proper methods were used to calculate the indemnity payment.  J.O.C. Farms, LLC v. Rural Community Insurance Agency, Inc. et al., No. 4:12-CV-186-D, 2015 U.S. Dist. LEXIS 124266 (E.D. N.C. Sept. 17, 2015).     

The petitioner gifted cash and marketable securities to her three daughters on the condition (pursuant to written net gift agreement) that the daughters pay any related gift tax and pay any related estate tax on the gifted property if the petitioner died within three years of gifts.  The petitioner deducted the value of the daughters' agreement to be liable for gift or estate tax from value of gifts and IRS claimed the gift tax was understated by almost $2 million.  Each daughter and the petitioner were represented by separate counsel and an appraisal was undertaken using mortality tables to compute the petitioner's life expectancy which impacted values as reported on Form 709.  The IRS' primary argument was that the daughters' assumption of potential estate tax liability under I.R.C. Sec. 2035(b) did not increase petitioner's estate and, as such, did not amount to consideration in money or money's worth as defined by I.R.C. Sec. 2512(b) in exchange for gifted property.  The court determined that the primary question was whether the petitioner received any determinable amount in money or money's worth when the daughters agreed to pay the tax liability.  The court held that the petitioner did receive determinable value as to the gift tax.  Likewise, the court held that the assumption of potential estate tax liability may have sufficient value to reduce the petitioner's gift tax liability.  The court determined that it was immaterial that it was an intrafamily deal at issue because all persons were represented by separate counsel.  However, the court determined that fact issues remained for trial on the assumption of estate tax issue. Steinberg v. Comr., 141 T.C. No. 8 (2013).  In the subsequent opinion on the estate tax issue, the court held that the fair market value of the gifted property for gift tax purposes was reduced by the value of the daughters' assumption of the potential I.R.C. Sec. 2035(b) estate tax liability.  Steinberg v. Comr., 145 T.C. No. 7 (2015). 


Under I.R.C. §170(f)(8), a taxpayer claiming a charitable contribution deduction exceeding $250.00 must substantiate that deduction with a contemporaneous written acknowledge from the donee, showing the amount of the contribution, whether any good and services were received in return for the donation and a description and good faith estimate of any goods and services provided by the donee or that the donee provided only intangible religious benefits.  However, I.R.C. §170(f)(8)(D) says that the substantiation rules don’t apply if the donee files a return including the contemporaneous written acknowledgement information that the taxpayer was otherwise supposed to report.  This provision allows taxpayers to “cure” their failure to comply with the contemporaneous written acknowledgement requirement by the donee exempt organization filing an amended Form 990.  However, without any regulations, the IRS has taken the position that the statutory provision does not apply.  Apparently believing that their position was weak and would not be supported judicially, the proposed regulations acknowledge the exception and allow the charitable organization to file a form (yet to be announced) on or before February 28 of the year after the year of the donation that shows the name and address of the donee, the donor’s name and address, the donor’s tax identification number, the amount of cash and a description of any non-cash property donated, whether the donee provided any goods and services for the contribution, and a description and good faith estimate of the value of any goods and services the donee provided or a statement that the goods and services were only intangible religious benefits.  The form must be a timely filed form and cannot be filed at the time the taxpayer is under examination, and a copy of the form must be provided to the donor.  REG-138344-13 (Sept. 16, 2015); Prop. Treas. Reg. §§1.170A-13(f)(18)(i-iii). 

The parties entered into a contract involving the removal of chicken manure from egg-laying facilities.  Under the contract, the plaintiff agreed to pay the defendant for the transfer of manure ownership with tonnage to be tracked and billed according to the quantities listed on a manure management manifest.  The specific quantity of manure was to be determined by and mutually agreeable to both parties.  A dispute arose and the trial court denied the plaintiff's motion for preliminary injunction, concluding that the plaintiff did not prove by clear and convincing evidence that it was likely to prevail on its claim of breach of contract because it failed to prove that the contract required the defendant to provide any specific amount of chicken manure.  Ultimately, the trial court returned a verdict for the plaintiff.  On appeal, a primary question was whether the contract was a goods contract (sale of chicken manure) governed by the Uniform Commercial Code (UCC) or one for the sale of services (removal of chicken manure) governed by state (OH) common law.  The appellate court determined that the contract was one for the sale of goods - the transfer of manure ownership.  Thus, the contract was one for the sale of goods - chicken manure.  Supporting this finding, the court noted that the plaintiff did not bargain for any services to be provided by the defendant.  Instead, the plaintiff was responsible for the removal of manure which it would then resell and spread.  As such, the plaintiff's ultimate goal was to acquire a product rather than to procure a service.  As a contract subject to the UCC, the plaintiff argued that it was enforceable because it provided a sufficient quantity term ("all available tonnage per year of manure") or that it was a requirements contract.  The court determined that the contract was not a requirements contract because the contract was for the sale of the output of manure rather than the manure requirements of the plaintiff, and nothing in the contract barred the defendant from selling manure to another party or preclude the plaintiff from buying manure from another seller.  On the quantity issue, which is critical for the contract to be valid under the UCC, the court noted that the parties bargained to reserve quantity for the future agreement of both parties in accordance with future negotiations.  Thus, the contract did not contain an enforceable quantity term as quantity was subject to future agreement, and the contract was unenforceable as a matter of law.  As such, the appellate court reversed the trial court and remanded the case.  H & C Ag Services, LLC v. Ohio Fresh Eggs, LLC, et al., No. 6-15-02, 2015 Ohio App. LEXIS 3615 (Ohio Ct. App. Sept. 14, 2015).

The plaintiffs, a married couple, claimed that the defendant, an oil and gas company, failed to pay a lease bonus payment of $144,000 that the parties had agreed to.  The defendant delivered a "letter agreement" to the plaintiffs stating that the parties would execute and additional "Option to Exercise Oil and Gas Lease" and that the defendant would pay $100.00 per mineral acre and a 1/8th mineral owner's royalty with a primary term of four years.  The plaintiffs did not execute the letter agreement or the additional option agreement.  A final contract with different terms was ultimately entered into that stated that it became effective when the oil and gas lease described in it was approved and on approval of title.  Ultimately, the plaintiffs claimed that the defendant breached the lease and the letter agreement when it did not pay the bonus payment of $100/acre.  The plaintiffs also claimed that they incurred over $15,000 of expenses in clearing title defects and confirming marketable title and that by obtaining the recording the lease the defendant blocked the plaintiffs from entering into agreements with other potential oil and gas companies.  The defendant motioned to dismiss on the basis that no contract was formed between the parties.  The court agreed with the defendant on the basis that there was never any offer that the plaintiffs accepted and that there was no meeting of the minds on all points that left nothing for negotiation.  The court noted that there was no evidence that the plaintiffs accepted the letter agreement and the facts did not support an inference of acceptance.  Instead, the negotiations over several months resulted in a lease with a different party (the plaintiffs' farming operation) with different terms.  The plaintiffs never executed the agreement and the facts did not support the argument that the letter agreement had been incorporated into the parties' final contract.  there simply was no mutual manifestation of assent as to key contract terms.  The option agreement also never materialized.  Norberg, et al. v. Cottonwood Natural Resources, LTD, No. 8:15CV71, 2015 U.S. Dist. LEXIS 122057 (D. Neb. Sept. 14, 2015).

Confirmation in this Chapter 12 case was delayed  until the U.S. Supreme Court ruled in Hall, et ux. v. United States, 132 S. Ct. 1882 (2012) on whether post-petition taxes are dischargeable.  The court later determined that they were not estate obligations that could be treated as unsecured claims. The debtors reorganization plan was then submitted that proposed paying post-petition taxes through the plan with estate assets.  Confirmation was denied and the case converted to Chapter 7.  The debtors' real estate and equipment were sold and a Chapter 7 discharge was received. A junior secured creditor filed a motion for marshaling of assets. The bank held a first mortgage on land, a first priority lien on equipment and a first priority lien on crop proceeds and the creditor held a second priority lien on equipment and crop proceeds and no junior mortgage on the real estate.  There were insufficient funds in the debtors' bankruptcy estate to pay all claims and the IRS asserted a  claim for priority taxes.  If marshaling were denied, it would allow more non-tax debt to be paid and the debtors claimed that allowing marshaling would inhibit the debtors' fresh start.  The court noted that the “inequity” of another creditor receiving less or nothing is not a valid reason to deny marshaling.  Accordingly, the requirements for marshaling were satisfied.  The motion to marshal assets was granted because the real estate had been sold and, the court held that the fact that a creditor’s receipt of a portion of the sale proceeds would prevent the IRS debt from being reduced was not grounds to deny marshaling which, the court noted, prefers interests of the junior lienholder.  The court ordered that a hearing was to be held to address the issues of distribution, including trustee compensation.  In re Ferguson, No. 10-81401, 2013 Bankr. LEXIS 3386 (Bankr. C.D. Ill. Aug. 20, 2013).  On further review, the court reversed.  The court determined that the bankruptcy court mistakenly looked to the conditions present at the time of the original marshaling request to determine whether to allow marshaling.  Instead, the appellate court determined that the elements that permitted marshaling no longer existed because the crops and equipment had been sold with the proceeds of sale paying the priority lien.  Ferguson v. West Central, FS, Inc., No. 14-1071, 2015 U.S. Dist. LEXIS 121096 (C.D. Ill. Sept. 11, 2015).

The decedent executed a will in 1992 that left his multi-million dollar estate, after payment of debts and taxes, to his wife if she survived him.  If she did not survive the decedent, the will specified that the decedent’s estate was to be equally divided between his two granddaughters in trust for any of the two granddaughters that had not reached age 30 at the date of the decedent’s death and outright to any of the two granddaughters that had reached age 30 at the time of the decedent’s death.  If the decedent’s wife pre-deceased him, then the share passing to any of the granddaughters that also predeceased him would pass to that granddaughter’s children or the surviving granddaughter if there were no surviving children.  If the spouse and granddaughters did not survive and there were no surviving great grandchildren, the decedent’s estate was to pass to a specifically identified veterinarian.  The will did not mention the decedent’s son.  At the time of the decedent’s death, only the granddaughters survived, and they were both over age 30.  Within two weeks of the decedent’s death, the executor filed a petition to probate the will and start estate administration.  Interested parties were provided copies of the will and publication of notice to creditors was made in accordance with state (KS) law.  At the subsequent hearing, the magistrate judge admitted the will to probate.  The son did not attend the hearing.  About six weeks later, the son filed a petition to set aside the order admitting the will to probate, and a year later the trial court rejected the son’s petition, except that the court found that the will was not self-proving and that no evidence had been submitted from the will’s witnesses.  Thus, the magistrate’s order was set aside and a new hearing scheduled.  The subsequent hearing resulted in the will being admitted to probate.  A trial ensued on the son’s challenges to the will, resulting in the court finding that the will was valid and that the property should be distributed to the granddaughters.  On appeal, the court affirmed.  The court rejected the son’s claim that the will failed because it didn’t describe how the estate should be distributed to the granddaughters and, thus, the bequest failed resulting in an intestate estate that passed entirely to him.  The bequest was neither conditional nor unenforceable.  The court also rejected the son’s claim that a 1997 will superseded the 1992 will.  However, the court determined that argument was sheer speculation and that the existence of a 1997 was not proven.  In addition, even if such a will existed, it would not automatically revoke the 1992 will.  The son’s procedural attacks on the validity of the will also failed.  The court held that the lack of obtaining an order from the trial court confirming the initial hearing date was not fatal and that filing the petition to probate the will was sufficient to avoid the six-month time bar.  While the filing of the affidavit of service did not occur until after the hearing to probate the will, such late filing, the court held, does not operate to bar the will from admission to probate.  The son received actual notice of the hearing.  Accordingly, upheld the trial court’s order admitting the will to probate and the ordering of the distribution of the estate to the granddaughters.  In re Estate of Rickabaugh, No. 111,389, 2015 Kan. App. LEXIS 61 (Kan. Ct. App. Sept. 11, 2015).

The petitioner defaulted on a car loan in 2005 with the car also being repossessed that year.  After the car was sold, an unpaid balance remained on the loan.  The lender submitted the account balance due to five collection agencies over several years to collect.  However, the balance due on the loan was not able to be collected.  In 2011, the lender wrote cancelled the debt and issued Form 1099-C to the petitioner in 2011.  The petitioner had moved, however, and the 1099-C was returned as undeliverable.  The petitioner did not report the income from the discharged debt on the 2011 return.  The IRS received a copy of the 1099-C and sought to collect the amount from the petitioner as income that should have been reported on the 2011 return.  While the petitioner argued that the income wasn't reportable due to the lack of receiving Form 1099-C, that argument failed.  However, the petitioner also argued that the income should have been reported in 2008 which was a tax year now closed.  The petitioner reached that conclusion based on the instructions for Form 1099-C which create a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on a debt at any time during a testing period ending at the close of the year.  The testing period is a 26-month period.  The last payment date on the loan was June 20, 2005, and the 36-month period expired on June 20, 2008.  The IRS bore the burden of proof under I.R.C. Sec. 6201(d) and was required to produce evidence of more than just receipt of Form 1099-C because the petitioner raised a reasonable dispute at the accuracy of the 1099-C and cooperated with the IRS.  Clark v. Comr., T.C. Memo. 2015-175.


The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust.  The trust named 60 beneficiaries, primarily family members.  The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice.  In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member.  The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees.  On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse.  The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions.  As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests.  The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests.  The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions.  In subsequent litigation, the Tax Court held that the IRS position was sufficiently justified to defeat the petitioners' claim for attorney fees.  Mikel v. Comr., T.C. Memo. 2015-64.  The subsequent litigation involving the fee issue is Mikel v. Comr., T.C. Memo. 2015-173.

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