Annotations 02/2011

(taxpayer's payments to former wife deemed child support rather than deductible alimony; state court decision to allocate family support payment equally as child support and spousal support not binding on IRS; payment agreement contains contingency related to a child - child's high school graduation reduces taxpayer's obligation from $2,000 per month to $1,000 per month per child in college). 

(ex-mother-in law defendant's filing of Form 1099-C with her tax return reporting debt forgiveness income of ex-son-in-law not actionable fraud; even though defendant not "applicable entity" under I.R.C. Sec. 6050P that is required to make such filing, such filing not actionable under I.R.C. 7434 if filing is truthful and accurate - it wasn't per se fraudulent).

(case involves defendants' motion to dismiss plaintiff's motion seeking declaratory judgment that restrictive covenants prohibiting subject property to be put to commercial uses or uses that are "offensive, dangerous or obnoxious" to property owners within one mile, were violated based on defendants' use of property and receipt of licenses to install and maintain "antenna farm" on property; motion granted in part and denied in part - plausible claim stated concerning noise problems which violated restrictive covenant, but plaintiff lacks standing to asset claim based on "commercial enterprises" covenant, and plaintiff's due process claim dismissed).

(state of Utah's decision to reform plaintiff's trust containing commingled assets of members which was formed based on tenet of Mormon Church unconstitutional; trust property inextricably tied to fundamental Mormon belief of commingling of assets and state's attempt to separate the two violated Constitution; preliminary injunction entered barring sale of 700-acre ranch known as "Berry Knoll Farm"). 

(engineering and heavy construction company that builds or rehabilitates streets, bridges, airport runways, etc. that have suffered from various casualties and claimed that its gross receipts were domestic production gross receipts (DPGR) eligible to be included in computing deduction under I.R.C. Sec. 199 resulting in a deduction of $63,435; court holds that such amounts are DPGR to extent firm erected or substantially renovated real property by materially increasing its value, substantially prolonging its life or adapting the property to a new or different use and was not a repair).

(petitioner, TV news reporter, deducted costs for wardrobe expenses including costs for lounge wear, robe, lingerie, cotton bikini and cotton thong; court disallowed deduction for such costs because they were nondeductible personal expenses as were costs for drycleaning such clothing items; deductions also disallowed for contact lenses, makeup and grooming expenses including cost of Softsoap morning mist pump soap; court disallowed deduction for manicures, grooming, teeth whitening and skin care as inherently personal expenses; expenses for gym membership to maintain good health likewise nondeductible as unrelated to business; professional association fees and dues deductible; expenditures for subscriptions to cable television, magazines (including Cosmopolitan and Glamour) not deductible; deduction for cell phone and vehicle expenses disallowed due to lack of credible evidence that would show compliance with substantiation requirement; deduction for business gifts disallowed; expenses for meals and entertainment disallowed; accuracy-related penalties imposed). 

(taxpayers cannot exclude interest received on amount awarded for taking of property via eminent domain; of $40,900,000 award, $24,638,555 attributable to principal and $16,261,445 to interest). 

(in accordance with Rev. Proc. 87-56, taxpayer's property determined to be 15-year MACRS property as service station).

(homeowner entitled to compensation due to defendant city's inverse condemnation of home caused by backup of raw sewage into home which caused substantial interference with homeowner's property rights). 

(notes that increased biofuel production impacts food production and inflates food prices:  "If you produce more biofuels, you produce less food.  Well, that means food prices will be even higher and we’ll have more food riots.”; at same meeting USDA chief economist Joseph Glauber noted that corn used for ethanol in 2011-2012 will exceed more than one-third of U.S. corn production). 

(case involves issue of first impression in Florida - whether a prank can give rise to a negligence action against the prankster; plaintiff was dating defendant when defendant induced plaintiff to climb to top of cliff at lakeshore; plaintiff scared to come down alone and defendant tricked plaintiff to jump into lake by deceiving her that he had fallen into the lake and that she should jump in to save him; plaintiff did so and was injured; trial court dismissed case on basis that defendant had no legal duty to prevent plaintiff from jumping into lake; appellate court reversed, reasoning that defendant created foreseeable zone of risk in the form of a fall due to terrain, gravity or a combination thereof; case reversed and remanded). 

(disbursements to homeowners under state forgivable loan program constitute payments to homeowners rather than disbursements of proceeds; thus, such payments can be excluded under exclusion for welfare payments and payments not subject to information reporting requirements). 

(in absence of any U.S. Supreme Court precedent supporting it's reasoning, court holds that health insurance mandate included in Patient Protection and Affordable Care Act is legitimate exercise of Congress' power under Commerce Clause because court determined that choosing not to purchase health insurance is an "economic activity"; court argues that "health care is special" by defining relevant market as health care rather than health insurance; no explanation given as to constitutional relevance of health care providers being required to provide emergency health care; mandate provision upheld under Necessary and Proper Clause with no explanation of why the arguments against the mandate are wrong; court did not address how mandate either violates or does not violate five factor test set forth in United States v. Comstock; court did find that mandate is a "penalty" and not a "tax" and, thus, cannot be upheld under Congress' power to tax).

(palimony case involving claim for federal estate tax deduction; couple lived together (never married) for 22 years before splitting up; she files for palimony under implied contract that couple agreed to pool assets; before trial, he died and trial court ultimately determined no such implied contract existed; his estate paid estate tax exceeding $10 million and filed refund claim for about $5 million on basis that estate was worth less due to palimony suit; trial court awards government summary judgment on basis that what she gave (love and support) was inadequate consideration to support enforceable contract and that there was no contract to begin with, and that estate was estopped on basis that estate claimed at trial that there was no enforceable contract; reversed on appeal - her love and support were valid consideration under state (Nevada) law and issues of genuine fact remained about value of her claim; thus, estate may be entitled to refund; dissent claims that state law immaterial - I.R.C. provides no deductions for palimony claims based solely on love and support). 

(employee lost toes in accident with auger; plaintiff's case submissible as negligence per se under state law (Mo. Rev. Stat. Sec. 292.020) because evidence showed that protective guard was not in place or even available and would have likely prevented the injury; state statute applied even though employee not working on "farm" at time of injury; case remanded). 

(inverse condemnation action brought nine years ago involving plaintiff's claim that defendant took his leased property by removing bridge used to access northern portion of property; Ninth Circuit held that exclusive jurisdiction rested in U.S. Court of Federal Claims and remanded case for transfer; court denies government's motion to dismiss, but government's motion for summary judgment granted, in part - factual issues remain as to whether legally recognizable property interest exists under the Fifth Amendment such that a taking by loss of access occurred, and as to whether regulatory taking occurred via Penn Central analysis; summary judgment proper for government on plaintiff's claim that Lucas-type categorical taking has occurred). 

(defendant gas stations did not illegally price gouge motorists in the wake of Hurricane Katrina, but merely engaged in parallel pricing known as "conscious parallelism"; plaintiffs failed to prove a "gross disparity" in prices; local market was oligopolistic and highly conducive to parallel pricing; lack of proof of whether parallel pricing was achieved by agreement or independent decisions).

(court refused to block defendant's plan to create snow using purified wastewater from mountainous area considered by some local Indian tribes to be sacred; plaintiffs failed to show that irreparable harm would result).

(court consolidated three separate Chapter 12 petitions and confirmed reorganization plan; trustee filed motion to modify plan to include 16 unsecured creditors (none of whom objected to plan) that had been excluded before confirmation; trustee bound by confirmed plan - lack of evidence of unforeseen circumstances or unforeseen difficulties after date of original confirmation). 

(petitioners not engaged in activity of selling science fiction memorabilia with requisite profit intent - deductions limited by I.R.C. Sec. 183). 

(petitioners did not conduct Amway distributorship with requisite profit intent based on analysis of all nine factors, thus deductions from activity limited by I.R.C. Sec. 183; substantiation of some business expenses insufficient; petitioners not entitled to claimed Schedule E rental expense deductions due to lack of evidence to substantiate the deductions; additional penalty for failure to timely file applied). 

(accountant who prepared estate's Form 706 attempted to file Form 4768 to extend filing deadline, but failed to enter appropriate extension period in space provided on Form and did not indicate on Form that payment extension necessary; taxes didn't get paid on time (because accountant thought extension had been filed), but IRS assessed penalty and interest; trial court's determination that substantial compliance doctrine inapplicable upheld; executor's reliance on accountant was not reasonable cause for failure to timely pay estate tax; actual tax due was more than 12 times size of estimated tax included on extension form). 

(foreclosure action against debtor, owner of condominium; state law provides that condominium associations have "a lien on a unit for any unpaid assessments levied against a unit from the time the assessment is due" and lien need not be recorded to be perfected; lien automatically attached at time assessment is due, and statute provides for judicial and non-judicial methods of foreclosing lien; plaintiff's seeking of judicial foreclosure does not negate fact that plaintiff could have pursued non-judicial foreclosure of lien at any time after lien arose; thus, lien was choate and superior to federal tax lien until time federal tax lien recorded). 

(executor of decedent's estate sued defendant for wrongful death and medical malpractice; decedent had heart bypass surgery and valve replacement, but became ill and died after discharge from defendant's medical center; res ipsa loquitur not applicable because there was no evidence of deviation from standard of care). 

(petitioners' real estate transaction did not qualify for tax-deferred status under I.R.C. Sec. 1031; petitioners owned undeveloped Arizona parcel that was held for investment and sold the property with the intent to execute a Sec. 1031 exchange for California property; property was sold with petitioners receiving $10,000 and $66,000 placed in escrow account with instructions from petitioners to hold $61,743.25 to be held in escrow account; escrow agreements made no reference to Sec. 1031 and did not limit petitioners' right to receive, pledge, borrow or obtain benefits of account funds; while properties involved were like-kind, transactions involved a sale and reinvestment of proceeds in California property; petitioners constructively received proceeds of sale of Arizona property; escrow accounts were not qualified escrow accounts and transaction did not qualify for I.R.C. Sec. 1031). 

(payments made by farmers' cooperative to members and others qualify under I.R.C. Sec. 1382(b)(3) as PURPIMs; cooperative's DPAD computed without deduction for grain payments). 

(partition action involving the issue of award of attorney fees).

(trial court did not err in ordering defendant to pay $65,721.29, plus interest, as defendant's share of federal estate tax owed by decedent's estate; subject real estate titled in joint tenancy between decedent and defendant; defendant could not prove that joint tenancy created due to decedent's obligation to provide decedent with retirement program and that value of retirement program equaled joint tenancy interest; face of deed creating joint tenancy stated, "This is a bona fide gift and the grantor received nothing in return"; decedent required to pay pro-rated estate tax). 

(IRS, reiterating what had been previously stated in Notice 2011-14, states that expenses incurred to purchase breastfeeding equipment qualify as medical care expenses under I.R.C. Sec. 213; such equipment is for the purpose of affecting a body structure or function for lactating women; such expenses are reimbursable under a flexible health spending account).

(debtor claims that automatic stay was violated; court holds that sale of subject horses violated automatic stay, but conduct of other parties not violative of stay). 

(announcement that Seahawk would file Chapter 11 bankruptcy and sell its 20 shallow-water rigs to rival Hercules Offshore; Seahawk noted that it was sustaining heavy losses due to the Obama Administration's refusal to issue drilling permits (for which the Administration has been held in contempt by federal court order of Feb. 2, 2011 - court had previously ordered the Administration to cease the drilling moratorium in the Gulf of Mexico which the court had previously struck down as "arbitrary and capricious"); refusal to issue permits resulting in estimated loss of $3.7 million in royalty revenue to the federal government each day according to the Energy Information Administration). 

(report notes that biodiesel production would not exist if not for tax subsidies from U.S taxpayers; report notes that industry is inefficient and remains dependent on tax incentives and renewable fuels standard mandates). 

(taxpayers rented out 40 acres of farmland for over 10-year period with cash rent received that last five years of rental arrangement; land then placed in CRP; taxpayers maintained the property during period of ownership including repairing and mowing waterways, maintaining fences collecting and negotiating rent and paying all bills associated with the property; on sale, taxpayer claimed capital gains deduction; deduction denied because taxpayer failed to present evidence indicating participation in farming activities; no self-employment tax paid on CRP income). 

(taxpayer not entitled to individual income tax refund request due to failure to file request in timely manner). 

(court dismissed CERCLA “arranger” claim against potentially responsible party - company that conducted operations on land adjacent to dump site; only “arrangement” was that hazardous substances released on company’s property unintentionally migrated to adjacent tract – “arrange” implies action directed to a specific purpose; as such, court’s opinion in line with Northern and Santa Fe Railway v. U.S. Railroad, 129 S. Ct. 1870 (2009); court also held that three-year statute of limitations applicable to CERCLA contribution actions against potentially responsible parties).

(verbal farm pasture lease agreement; plaintiffs permitted to graze cattle, harvest hay, hunt and ride ATV’s under lease; parties got into dispute and agreed to terminate lease; settlement agreement allowed plaintiffs to access property to remove cattle, but defendants refused to allow removal of all cattle; plaintiffs filed suit for conversion and breach of settlement agreement; defendants appealed trial court judgment in favor of plaintiffs for $28,000 damages and allege insufficient evidence to support damage award, and no evidence to support defendant’s wife liability under any claims; appellate court found substantial evidence to prove wife’s liability and to support trial court damages award because facts presented basis for rational estimate of damages without resorting to speculation).

(breast pumps and supplies that assist lactation are "medical care" and expenses for such items are deductible as medical expenses provided requirements of I.R.C. Sec. 213(a) is satisfied (or reimbursed under an FSA or similar plan)). 

(loan servicer for bank motioned for relief from automatic stay to foreclose on secured interest in debtor's real estate; debtor claimed that bank only received its interest via assignment from Mortgage Electronic Registration System as original lender's nominee and, thus, had no enforceable right against debtor's property; court held that under Rooker-Feldman doctrine court accepts state court judgment of foreclosure as evidence of bank's secured creditor status which gave servicer standing to seek relief from stay; court granted servicer's motion). 

(plaintiff did not establish ownership of disputed tract via easement by prescription over past 30-years). 

(IRS position that 6-year statute of limitations specified in I.R.C. Sec. 6501(e)(1)(A) applied to omission of gross income exceeding 25 percent of gross income as a result of overstated basis rejected; three-year statute of limitations applies; court's opinion consistent with opinions from the Fourth, Ninth and Federal Circuit Courts of Appeal and contrary to the Seventh Circuit).

(law firm's allocation of some partners' income to tax-exempt ESOP (which was also a partner) lacked economic reality and IRS properly reallocated income to other partners in firm; self-employment tax applied to partners' income because it derived from conduct of trade or business).

(non-conventional fuel source credits, along with business and investment expense deductions associated with investment in landfills, denied; court determined that investment was a tax sham). 

(estate must file inheritance tax because two checks issued by insurance company to decedent's brother represented death claim proceeds from on annuity contract held by the decedent at the time of death; amounts subject to state inheritance tax).

(IRS announces non-acquiescence in Robinson Knife Manufacturing Co. and Subs. v. Comr., 600 F.3d 121 (2d Cir. 2010), rev'g., T.C. Memo. 2009-9, in which court held that sales-based royalties that taxpayer paid for right to use trademarks on kitchen tools that it manufactured and sold were not production costs "allocable to property produced" (inventory) within meaning of Treas. Reg. Sec. 1.263A-1(e), but are deductible expenses under I.R.C. Sec. 162).

(plaintiff's claim was dischargeable under 11 U.S.C. Sec. 523(a)(2)(B); debtor's financial statements not materially false and plaintiff did not rely on such statements; debtor did not intend to deceive plaintiff). 

(petitioners participated in trust arrangement known as "multiple-employer welfare-benefit fund - a non-qualified employee-benefit plan; the trust was funded with multi-million dollar life insurance policies and petitioners paid the initial premiums; petitioners were advised that if plan was allowed to terminate, they would be taxed on net cash surrender value of policies; policies had large death benefits, had surrender charges that exceeded their stated values and petitioner's wife allowed her policy to lapse; plan was terminated and life insurance policies distributed to petitioners at time when flexible-premiums policies were not paid up and petitioners did not include stated policy values in income; IRS asserted deficiency in accordance with Treas. Reg. Sec. 1.402(b)-1(c) and I.R.C. Sec. 402(b); issue before court was proper valuation of the two variable life insurance policies; court concluded that values to be based on guaranteed cost of insurance to time of termination of first policy and until second policy's premium paid; deficiency ultimately less than $5,000).

(vehicle and miscellaneous expenses disallowed due to lack of substantiation; no evidence provided of actual miles driven or actual expenses incurred; mileage logs that were kept were not basis for claimed deductions). 

(first-time homebuyer credit not allowed for purchase of home from taxpayer's parents; taxpayer appeared before court pro se; no explanation on Form 5405 that credit not available for home purchased from family member nor in IRS Pub. 4819, but court (mistakenly) ruled that I.R.C. Sec. 36(c) clear on the matter in barring related-party sales; IRS publications have no effect on the Code); no ability to appeal and case of no precedential value). 

(payments made under separation agreement to former spouse and designated as not alimony are not deductible by payor spouse because payments survived payee spouse's death and were made as part of property division between the spouses).