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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. 

The petitioner owned rental properties and materially participated in their operation.  The petitioner also worked full-time in his company, ABS Glass.  Included on the petitioner’s Schedule C was NAICS Code No. 811120, “Automotive, Paint, Interior, and Glass Repair.” The petitioner incurred over $45,000 of losses from the real estate activities which he sought to fully deduct against the substantial income from the petitioner’s proprietorship which exceeded $700,000.  The petitioner did not maintain records to establish that he spent more than 750 hours in the rental activities, but claimed that the residential division of his company were services provided in a real estate trade as “construction” or “reconstruction” activities.  As such, the petitioner claimed that he qualified as a “real estate professional.”   The court disagreed, noting that the petitioner did not code the residential division of his business as 28150 – Glass and Glazing Contractors.  Cantor v. Comr., T.C. Sum. Op. 2014-103.

The plaintiff, an atheist organization, challenged as unconstitutional the cash allowance provision of I.R.C. §107(2) that excludes from gross income a minister’s rental allowance paid to the minister as part of compensation for a home that the minister owns.  The trial court determined that I.R.C. §107(2) is facially unconstitutional under the Establishment Clause based on Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989) because the exemption provides a benefit to religious persons and no one else, even though the provision is not necessary to alleviate a special burden on religious exercise.  The court noted that religion should not affect a person’s legal rights or duties or benefits, and that ruling was not hostile against religion.  The court noted that if a statute imposed a tax solely against ministers (or granted an exemption to everyone except ministers) without a secular reason for doing so, the law would similarly violate the Constitution.  The court also noted that the defendants (U.S. Treasury Department) did not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for non-minister taxpayers who must pay taxes on income used for housing expenses.  In addition, the court noted that the Congress could rewrite the law to include a housing allowance to cover all taxpayers regardless of faith or lack thereof.  On appeal, the court vacated the trial court's decision and remanded the case for dismissal because the plaintiff lacked standing.  While the plaintiff claimed that they had standing because they were denied a benefit (a tax exemption for their employer-provided housing allowance) that is conditioned on religious affiliation, the court noted that the argument failed because the plaintiff was not denied the parsonage tax break because they had never asked for it and were denied.  As such, the plaintiff's complaint is simply a general grievance about an allegedly unconstitutional tax provision.  Importantly, I.R.C. §107(1) is not implicated in this litigation and, as such, a church can provide a minister with a parsonage and exclude from the minister’s income the rental value of the parsonage provided as part of the minister’s compensation.  Freedom From Religion Foundation, Inc. v. Lew, No. 14-1152, 2014 U.S. App. LEXIS 21526 (7th Cir. Nov. 13, 2014), vacating and remanding, No. 11-cv-626-bbc, 2013 U.S. Dist. LEXIS 166076 (W.D. Wisc. Nov. 22, 2013).

The decedent was a famous Texas oil man that sold his stock in his company back to it for a price below its fair market value.  The sale increased the value of the stock of the remaining stockholders - five other individuals and trusts including a Grantor Retained Income Trust (GRIT), which paid income to a prior spouse that he was married to from 1931-1961.  As part of her divorce settlement, the former spouse received stock shares. In 1984, the prior spouse transferred all of her shares to a Living Trust, and a few years later, the Living Trust split those shares into four trusts. Slightly more than half of the shares were transferred into three Charitable Remainder Annuity Trusts (CRATs), and the remaining shares were put into the GRIT. The GRIT was designed to pay income to Stevens for ten years and then terminate, with one of the decedent's children as the remainder beneficiary. When the stock shares were transferred to the three CRATs and the GRIT, the shares were cancelled and then reissued in the name of the four trusts.  The IRS determined that the decedent's sale of stock back to the company at less than fair market value constituted indirect gifts to the remaining shareholders and triggered gift tax liability of over $3 million.  The trial court largely agreed.  On appeal, the donees argued that their were not independently liable for the gift tax and/or they weren't donees by virtue of their income interest in the GRIT and/or they weren't liable as fiduciaries for distributions from the Living Trust or the estate of the decedent's prior spouse.  The appellate court affirmed, and also held that interest accrued on the donee's liability for the unpaid gift taxes and that the interest is not limited to the extent of the value of the gift.  United States v. Marshall, No. 12-20804, 2014 U.S. App. LEXIS 21731 (5th Cir. Nov. 10, 2014).

The plaintiff distributes a locally grown farm products guide to approximately 50,000 households and helps segments of the local population receive fresh local food.  The Appellate Tax Board determined that the plaintiff was not exempt from property taxes because it found that the plaintiff's dominant purpose was to benefit farmers with only an incidental public benefit.  On appeal, the court reversed on the basis that the plaintiff more closely resembled a traditionally charitable organization that it does a commercial enterprise.  The court noted that the plaintiff's programs lessen the burden of many government agencies interested in food systems.  The plaintiff also did not impermissibly restrict membership and its membership fees are not unreasonable and comprise only a small portion of its overall revenue.  As such, the court determined that the plaintiff is a charitable organization and is exempt from property tax.  Community Involved in Agriculture, Inc. v. Board of Assessors, No. 13-P-1050, 2014 Mass. App. Unpub. LEXIS 1137 (Mass. Ct. App. Nov. 10, 2014). 

The adult plaintiff sought to recover damages from the defendant, a horse farm, for injuries she sustained when being thrown from a horse during a riding lesson conducted at the defendant’s facility. The defendant sought summary judgment on the grounds that the plaintiff had signed a waiver, acknowledging that she assumed all of the risk and danger incidental to the activity. The plaintiff argued that the defendant was aware of the horse’s vicious propensities and that it had failed to properly instruct her accordingly. In granting summary judgment to the defendant, the court found that the plaintiff’s claims were barred as a matter of law because she signed the unambiguous release form voluntarily. N.Y. General Obligations Law §50326 was inapplicable because the purpose of that statute was to prevent amusement parks and similar institutions from enforcing exculpatory clauses printed on tickets of which the public was generally unaware. Places of instruction and training are outside the scope of the statute. There was no evidence that the defendant concealed the alleged vicious propensities of the horse from the plaintiff.  Myers v. Doe, No. 11-20800, 2014 N.Y. Misc. LEXIS 4186 (N.Y. Sup. Ct. Sept. 15, 2014).

The debtor failed to pay employment taxes which ultimately resulted in the IRS filing a notice of federal tax lien against the debtor's property.  However, six days before the IRS filed its lien, the debtor had borrowed money from a bank giving the bank a note and deed of trust on two parcels of land adjacent to the tract on which the IRS filed its lien.  The bank recorded the deed of trust to secure repayment of the note five weeks after the IRS filed its lien.  Over six years later, the debtor filed Chapter 11 bankruptcy.  The IRS filed a proof of claim for over $60,000 in unpaid taxes, interest and penalties, and the bank brought an adversary proceeding to determine priority of the competing liens.  The bank relied on a state (MD) statue that relates back a deed of trust's effective date upon recordation to the date when the deed of trust was executed, and also claimed that they had a prior equitable lien.  Both the bankruptcy court and the district court agreed with the bank's reliance on the relations back theory under MD statutory law, with the bankruptcy court also stating that the bank had priority even if the deed of trust had never been recorded.  On appeal, the IRS argued that the lower courts erred in construing I.R.C. Sec. 6323(h)(1) because, according to the IRS, the key was whether a security interest existed at the time when the IRS filed its lien and that a security interest only exists when it has become protected under local law - which occurred when the deed of trust was recorded.  The appellate court noted that, under I.R.C. Sec. 6323(h)(1), a security interest must exist and be protected under state law to obtain priority over an IRS lien.  The court reasoned that the language of I.R.C. Sec. 6323(h)(1)(A) precluded the application of the relation back doctrine under MD law, but that the bank still had priority by reason of having an equitable security interest under the MD doctrine of equitable conversion which I.R.C. Sec. 6323(h)(1) incorporated.  In re Restivo Auto Body, Inc. v. United States, No. 13-2249, 2014 U.S. App. LEXIS 20927 (4th Cir. Oct. 31, 2014).


The petitioner bought a home for $300,000 and later refinanced it for $600,000 and then even later had the loan modified.  As a result of the modification, the interest rate was reduced.  Before the modification, the loan balance was $579,275 and after the modification it was $623,953.  The increased loan balance included $30,273 of past due interest that was added to principal.  The lender issued Form 1098 reflecting $9,253 of mortgage interest paid during the year.  The petitioner deducted $39,536 of interest for the year and IRS denied the additional $30,273 deduction because it had not yet been paid.  The court upheld the IRS position.  Copeland v. Comr., T.C. Memo. 2014-226.

The petitioner's brother owned a home but became unemployed and could no longer make the monthly mortgage payment.  The petitioner's made the mortgage payments for her brother and attempted to deduct the mortgage interest paid for the tax year at issue.  The IRS denied the deduction and the court agreed.  To deduct mortgage interest, the petitioner had to be the "owner" of the home.  The court noted that the petitioner's brother was the sole legal owner of the home under state (CA) law, and the brother was also the beneficial/equitable owner under CA law.  There was no agreement to give the petitioner an ownership interest in the home and the petitioner voluntarily made the payments, never contributed to the down payment and provided no other evidence of any ownership interest in the home.  Puentes v. Comr., T.C. Memo. 2014-224.

I.R.C. Sec. 6050P lists the events that trigger discharge of indebtedness reporting requirements, including a 36-month non-payment period.  The IRS has not proposed removing the reporting requirement associated with the 36-month non-payment period because the expiration of the 36-month period may not necessarily reflect that debt has been discharged.  Instead, the period may expire before any debt has been discharged and IRS may not then be notified when the debt is actually discharged.  Notice of Prop. Treas. Reg. 136676-13 (Oct. 14, 2014).   

 The plaintiff entered into a contract with the defendant to buy real estate that the defendant owned.  After moving onto the property, several of the plaintiff's livestock became sick and died.  After moving to the property, the plaintiff discovered that the defendant had operated a septic tank septic business and had dumped raw sewage and other unknown contents onto the property.  The plaintiff claimed that the seller and the seller's real estate agent fraudulently concealed this information from the plaintiff during negotiations for the sale of the property.  As a result, the plaintiff stopped making monthly payments and the defendant filed a foreclosure action.  No response was filed with the court within the appropriate timeframe (the plaintiff claimed that the County Court Clerk were deliberately lost by the Court Clerk) and the court entered a default judgment against the plaintiff.  The court ordered that the plaintiff's livestock be seized and sold at auction in satisfaction of the plaintiff's debt.  The plaintiff brought a pro se action in federal court claiming that their federal civil rights were violated due to "illegal proceedings in a circuit court hearing."  The court denied the plaintiff's motion and granted the defendant's motion to dismiss for lack of subject matter jurisdiction.  The court held that it lacked subject matter jurisdiction over challenges to state court judgments where, as here, the plaintiff's claim was "inextricably intertwined" with the state court claim because the relief requested would effectively reverse or void the state court's decision, and that such jurisdiction rested solely with the U.S. Supreme Court.    Morse v. Ozark County, No. 14-03348-CV-S-GAF, 2014 U.S. Dist. LEXIS 151381 (W.D. Mo. Oct. 24, 2014).

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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