Annotations - Last 30 Days

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. 


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.


In this case, the Chapter 12 debtor proposed a reorganization plan that the court determined could not be confirmed because it was based on an assumption that a creditor's claim was less than what it actually was by almost $300,000.  The plan also did not have, as of the plan's effective date, a value on account of the creditor's allowed secured claim in an amount not less than the allowed amount of such claim.  The plan also delayed payment of principal and interest to the creditor until the plan's fourth year which the court determined was impermissible.  In addition, the plan made unrealistic assumptions concerning the debtor's ability to make payments.  In re Tucker Brothers, L.L.C., No. 13-22462, 2014 Bankr. LEXIS 4725 (Nov. 13, 2014).


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 defendant owned a farm with horses.  The defendant invited the plaintiff and his granddaughter to come to the defendant’s farm to ride horses.  The defendant saddled horses for the plaintiff and his granddaughter.  After a few minutes of riding in a fenced corral, the plaintiff and his granddaughter began to ride trails.  After some time of riding, the plaintiff’s saddle slipped resulting in the plaintiff’s injury.  The plaintiff sued, claiming that the defendant was liable for the plaintiff’s injuries because he allegedly failed to retighten the front girth of the saddle and utilize a cinch hobble to secure the saddle.  An expert witness testified that the accident was a result of the defendant’s failure to adequately tighten the plaintiff’s saddle.  The trial court held that the state (GA) Equine Activities Act barred the suit.  On appeal, the court affirmed on the basis that a slipping saddle was an inherent risk of horse riding.  Holcomb v. Long, No. A14A0815, 2014 Ga. App. LEXIS 726 (Ga. Ct. App. Nov. 10, 2014).


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 plaintiff composted horse and cow manure, horse and cow bedding, and fish waste, none of which was generated on-site. To conduct its business, the plaintiff received a conditional use permit from the town in which it was located because its use of the property was a nonconforming use. The permit required the plaintiff to submit to inspections and provide annual reports. The plaintiff refused to submit to the regulation, arguing that the town’s solid waste ordinance imposing the conditions was preempted by the Maine Agriculture Protection Act (APA), 7 M.R.S. §§ 151-163, and the Solid Waste Act (SWA), 38 M.R.S. §§ 1301-1319-Y. On appeal of the lower court’s finding that the town had acted within its authority in issuing the plaintiff a notice of violation, the Maine Supreme Court affirmed.   The Court determined that the APA's purpose was to support the viability of agriculture by ensuring that farms employing best management practices were not deemed to be public or private nuisances. The plaintiff was not a "farm" for purposes of the APA because it did not produce "agricultural products." The Court also found that the APA did not preempt the town ordinance because the Legislature had expressly allowed local regulation and thus had not expressed a clear intent to occupy the field. The ordinance did not frustrate the purpose of the APA. Furthermore, the Court ruled that the SWA did not preempt the ordinance because (1) the standards in the ordinance were not stricter than those in the SWA; (2) the ordinance's definitions were not inconsistent with those in the SWA; and (3) the ordinance's provisions did not frustrate the purpose of the SWA. Dubois Livestock, Inc. v. Town of Arundel, No. Yor-13-478, 2014 ME 122, 2014 Me. LEXIS 130 (Me. Sup. Ct. Nov. 4, 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 plaintiffs were cattle farmers, and the defendant was a neighboring landowner who sought to build a third pond on his property. The defendant initially stated that the pond was for recreational and aesthetic purposes, but later contended that it was to irrigate 3.5 acres of fruit trees that he intended to plant. The United States Army Corps of Engineers and the Environmental Protection Agency determined that the defendant was not required to obtain a permit to build the pond on his property due to the Clean Water Act’s farm pond exemption. 33 U.S.C. § 1344(f)(1)(C).  The plaintiffs filed a citizen suit contesting the agencies’ determination. The court granted the defendant’s motion for summary judgment, finding that because the defendant used the third pond for irrigation of his crops, he was entitled to a farm pond exemption and the agencies’ determination was not arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law.  The court also found that there was no evidence to establish that the recapture exception to the exemption applied. Finally, the court found there was nothing deceitful or illegal about the defendant’s actions.   Craig v. United States Army Corps of Eng'rs, 2014 U.S. Dist. LEXIS 154388 (D. S.C. Oct. 29, 2014).


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