Annotations - Last 30 Days

The petitioner operated a leasing business and an automobile salvage yard.  The IRS claimed that the petitioner overstated his gross receipts from the salvage yard, but the court determined that the evidence did not support that claim.  However, many of the petitioner's claimed business expenses, including travel expenses, were disallowed due to lack of substantiation of a business connection.  Safakish v. Comr., T.C. Memo. 2014-242. 


Here, the taxpayer is a mining company that transferred its interest in a mine to a company for consideration but retained a bonus royalty and production royalty.  As is typical with a bonus royalty, it was paid in a single lump sum after a specified amount of cumulative reserves had been added to existing reserves.  As for the production royalty, it was paid based on a sliding scale that maxed-out at a fixed percentage for the commodity price beyond a set level again after a certain amount of reserves had been produced.  The IRS determined that the taxpayer could claim a depletion deduction attributable to the retained production royalty because the taxpayer retained an economic interest in that production royalty that satisfied Treas. Reg. §1.611-1(b) and Treas. Reg. §1.614-1(a)(2).  The IRS determined, however, that the retained bonus royalty was not a retained economic interest in mineral in place.  Tech. Adv. Memo. 201448020 (Jun. 3, 2014).


The U.S. Supreme Court has declined to review a decision on the U.S. Court of Appeals for the Ninth Circuit which affirmed a Tax Court decision involving a decedent’s estate that claimed valuation discounts and deductions associated with claims against the estate.  Under the facts of the case, the decedent and her pre-deceased spouse founded a mail-order horticulture business.  They sold their shares to a company ESOP with the company funding the purchase by borrowing $70 million on an unsecured basis with one lender being the trustee of the ESOP.  The pre-deceased spouse contributed  his sale proceeds ($33 million) to his revocable trust.  Upon his death, the trust split into marital trusts, with the ESOP trustee being the trustee of the marital trusts.  The company’s earnings declined and the ESOP lenders wanted to restructure the loans so that they would be secured.  The company filed bankruptcy after the ESOP beneficiaries sued for breach of fiduciary duty.  Pending the outcome of the litigation, the ESOP trustee barred the decedent from receiving trust distributions from one of the marital trusts.  The trial court ruled against the beneficiaries, and the decedent then died while the appeal was pending.  On the decedent’s estate tax return, a $15 million liability was listed which related to the litigation associated with the three trusts.  The Tax Court denied any discount for litigation hazards and lack of marketability.  The court reasoned that the lawsuit would not have impacted a buyer’s rights.  Also, the bar on the decedent getting distributions had no impact on the value of the assets in the trust.  On the estate’s potential liability, no discount was allowed because the estate did not establish it’s liability with reasonable certainty.  On appeal, the Ninth Circuit affirmed on the same grounds that the Tax Court ruled against the estate.  The U.S. Supreme Court declined to review the case.  Estate of Foster v. Comr., 565 Fed. Appx. 654 (9th Cir. 2014), aff’g., T.C. Memo. 2011-95, cert. den., Bradley v. Comr., No. 14-267, 2014 U.S. LEXIS 8142 (U.S. Sup. Ct. Dec. 8, 2014).


The plaintiff's company sponsored the motocross activity of the plaintiff's son.  The son was a nationally recognized figure in motocross racing with numerous sponsors.  The plaintiff's business spent more than $150,000 to cover the son's motocross expenses, and the plaintiff's business did recognize additional activity as a result of the sponsorship.  IRS claimed that the business expenditures were nondeductible personal expenses, but the Tax Court disagreed.  The court noted that the plaintiff's business benefitted from the sponsorship, including the securing of a major source of financing.  The court also noted that the plaintiff's business was not the sole sponsor of the son's motocross activity and that the son had achieved national prominence before the plaintiff's business became a sponsor.  Evans v. Comr., T.C. Memo. 2014-237.


 In this case, the taxpayer got a deficiency notice letter from the IRS (90-day letter) and had to file a petition with the court by March 3, 2014.  The taxpayer printed a stamp from stamps.com on March 3 and put it on the envelope containing the petition and dropped off the envelope at the post office.  The post office affixed a post-mark of March 4 and the IRS claimed that the petition was late based on the USPS post-mark.  The court agreed with the IRS based on Treas. Reg. Sec. 301.7502-1(b)(3) which says that the USPS postmark controls when it is combined with a different postmark.  Under the facts of the case, the taxpayer actually went to the post-office and mailed the petition certified, but because of long lines, put the envelope in a box and didn't get a hand-stamped receipt.  Sanchez v. Comr., T.C. Memo. 2014-223. 


In this case, the claimant thought that that decedent was her biological father, but learned after his death that she was not his biological child.  The claimant sought a determination that she was the decedent's heir based on the theory of "equitable adoption."    The court noted that state (WY) probate law did not allow stepchildren and foster children and their descendants to inherit.  Based on that, and because the court determined that the purpose of the probate code was to simplify and clarify the administration of the law, the court held that it would not judicially recognize the doctrine of equitable adoption.  In re Estate of Scherer, 336 P.3d 129 (Wyo. 2014).


The petitioner made mortgage payments on her brother's behalf.  The IRS denied the deduction because the petitioner couldn't prove that she had either a legal or equitable interest in the home under state (CA) law.  The court agreed with the IRS, noting that the petitioner failed to overcome the presumption that because the brother's name was on the deed to the home he was presumed to be the full legal owner of the home.  The petitioner could not show that there was any agreement or understanding between the petitioner and her brother that demonstrated an intent that was contrary to the deed.  The only thing that the petitioner did was pay for the house.  Lourdes v. Comr., T.C. Memo. 2014-224.   


The petitioners, a married couple, had an S corporation with an office in Virginia.  The husband worked full time in the oil industry, but bought a 79-acre tract in North Carolina in 2004 and completed the construction of a warehouse on part of the property.  The warehouse was built to store hops for distribution to local breweries.  In 2008 and 2009, the husband planted hop seeds, but weather problems stalled crop growth and no hops were harvested or sold during these years.  During this time, the husband also called local breweries to determine their interest in buying hops.  The petitioners deducted business losses on Schedule C for both 2008 and 2009 related to the hop crop.  The court upheld the IRS denial of Schedule C deductions because the court determined that the North Carolina activity was not functioning as a going concern in either 2008 or 2009 because the petitioners did not engage in the activity with the requisite continuity, regularity and with the primary purpose of deriving a profit.  However, the court agreed with the IRS that some related expenses were deductible as personal expenses related to their investment in the North Carolina property.  Powell v. Comr., T.C. Memo. 2014-235.   


The petitioners bought a vacation home in 2007 over 300 miles from their home, and spent time remodeling it over the next three years.  The petitioners stayed overnight on numerous trips to the vacation home with some of those trips being exclusively for the purpose of remodeling the vacation home.  However, some trips were exclusively for personal purposes and others were for both business and pleasure.  The petitioners claimed deductions for rental real estate losses, but the IRS limited the loss deductions in accordance with I.R.C. §280A which bars deductions for expenses associated with a personal residence unless business use (including a rental use but not including repairs and maintenance) can be established.  At issue was how many days the petitioners spent at the vacation home were personal use days, and how the first and last days of each trip were to be characterized.  The court determined that days traveling to the vacation home would not be classified as personal days if the principal purpose of the trip was to perform repairs and maintenance.  Based on the evidence, the court determined that six of the 12 days at issue were for the purposes of repairing and maintaining the vacation home. Thus, the first and last day of the trip counted as business days. The balance of the trips was for a combination of business and personal purposes.  For those trips where most days were devoted to repairing and maintaining the vacation home, the court counted the first and last days of the trip as business days.  The converse was also true with respect to some trips.  While the petitioners claimed that a relative paid approximately $1,000 to rent the home for a week, the petitioners could not substantiate the alleged payment.  Thus, the relative’s days were counted as personal use days of the petitioners.  The bottom line was that the petitioners were able to counter, based on records, some of the IRS assertions.  Van Malssen v. Comr., T.C. Memo. 2014-236.   


The defendants owned a bull that escaped and wandered onto the highway, causing a three-vehicle accident. The defendants’ homeowners’ insurer filed an action seeking a declaration that it was not liable for damages flowing from the accident because (1) the damage caused by the bull was excluded from coverage by the policy’s business pursuits exclusion and (2) that the property from which the bull escaped was not owned by the defendants and was thus not insured property. The court rejected the insurer’s claim, finding that the business pursuits exclusion did not apply to the defendants’ raising of 11 cattle because they were not raising the cattle (which they had been given) as a business, but rather as a hobby. The court also found that although the bull had been housed on another owner’s property across the road from the defendants’ property, the property was used “in connection with” the defendants’ property and was thus insured. State Farm Fire & Cas. Co. v. Nivens, No. 0:12-00151-MBS, 2014 U.S. Dist. LEXIS 134976 (D. S.C. Sept. 24, 2014)


The plaintiff, a real estate developer, entered into a contract with another party to buy land on which the plaintiff was planning on building a high-rise condominium building.  The plaintiff hired architects, sought a zoning permit, printed promotional materials about the condominium, negotiated contracts with purchasers of condominium units and obtained deposits for units.  However, the seller of the land unilaterally terminated the contract.  The plaintiff sued for specific performance and the trial court ordered the seller to honor the contract.  While the trial court's decision was on appeal, the plaintiff sold his position as the plaintiff in the contract litigation to a buyer for $5.75 million.  The IRS characterized the $5.75 million as ordinary income rather than capital gain.  The Tax Court agreed with the IRS on the basis that the plaintiff held the property (which the court said was the land subject to the contract) primarily for sale to customers in the ordinary course of business.  On appeal, the court reversed on the basis that the taxpayer never actually owned the land and instead sold a right to buy the land - a contractual right.  Accordingly, there was no intent to sell contract rights in the ordinary course of business.  The plaintiff intended the contract to be fulfilled and develop the property, and the sale of the right to earn future undetermined income was a capital asset.  Long v. Comr., No. 14-10288, 2014 U.S. App. LEXIS 21876 (11th Cir. Nov. 20, 2014).   


The petitioners, a married couple, operated a concrete business but also got involved in breeding and racing horses.  The court determined that they were entitled to the presumption that they were operating the horse activity for a profit in accordance with I.R.C. Sec. 183 based on an analysis of all of the nine factors set forth in the regulations.  They did keep business records of the horse activity, had a business plan (although it was unwritten), conducted the horse activity comparable to horsing activities conducted by other persons, undertook efforts to improve profitability, and generally conducted the activity in a manner indicating it was a legitimate business intended to turn a profit.  The court also noted that the assets were likely to appreciate in value significantly.  Certain factors did predominate in the government's favor, such as many years of losses that were used to offset income from other activities, and the high level of pleasure the petitioners derived from the activity.  However, the factors predominating in the government's favor were insufficient to overcome the other factors in the petitioners' favor.  Annuzzi v. Comr., T.C. Memo. 2014-233. 


CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

RSS​ Facebook Twitter