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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and that he did not otherwise qualify as a dependent under I.R.C. Sec. 152, which would have avoided the penalty on the withdrawn amount to the extent of what the taxpayer could have claimed as a deduction for qualified medical expenses under I.R.C. Sec. 213.  Unlike a health savings account, where the withdrawn amounts used to pay for the son’s medical expenses would have also been tax-free if the son had been a dependent, the withdrawn amounts from the IRA are taxable.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 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 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.


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 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.

The plaintiff owns and operates an oil refinery in Texas.  After a 2002 inspection of the facility, the Environmental Protection Agency (EPA) filed a criminal indictment against the defendant for Clean Air Act violations for failure to cover tanks with emission-control equipment, and for "taking" migratory birds in violation of the Migratory Bird Treaty Act (MBTA).  The trial court found the defendant guilty of three violations of the MBTA on the basis that liability under the MBTA could result irrespective of the defendant's intent simply based on proximate cause.  On appeal, the court reversed.  The appellate court applied the well-understood common law meaning of "take" (when not combined with "harass" or "harm") so as to preclude events that cause mere accidental or indirect harm to protected birds.  The court determined that the evidence did not show that the equalization tanks were utilized with the deliberate intent to cause bird deaths.  In so holding, the court rejected contrary holdings of the Second and Tenth Circuits on the issue.  The court also noted that an MBTA violation would not arise from bird collisions with electrical transmission lines, thus power companies would not need to seek an incidental take permit  from  the USFWS in the Fifth Circuit.  United States v. Citgo Petroleum Corp, et al., No. 14-40128, 2015 U.S. App. LEXIS 15865 (5th Cir. Sept. 4, 2015), rev'g. and remanding, 893 F. Supp. 2d 841 (S.D. Tex. 2012).

The IRS, with this private letter ruling, granted a surviving spouse (as executor) the right to make a late portability election for the amount of the deceased spouse's unused exclusion amount (DSUEA).  The IRS determined that it had discretion to allow a late election in this situation because the estate was not required to file Form 706.  The IRS has no discretion to allow a late election when the due date is set by statute as it is, for example, for estates that have a filing requirement due to being a taxable estate.  The IRS also noted that if it is later determined that the estate exceeded the amount required to file an estate tax return that portability would not be allowed because the IRS, in that situation, would be unable to grant relief.  Priv. Ltr. Rul. 201536005 (Jun. 4, 2015).

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.

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