Annotations 04/2011

(proposed regulations concerning exclusion from gross income under I.R.C. Sec. 108 for CODI of grantor trust or disregarded entity; insolvency exception and bankruptcy exception available only to extent that owner is insolvent or under bankruptcy court's jurisdiction). 


(charitable deduction for donation of "qualified conservation contribution" of $6,570,000 disallowed for LLC that donated lot and townhouse constructed in 1894 in New York City to qualified organization for failure to meet perpetuity requirement of I.R.C. Sec. 170(h)(5)(A); lender agreement with respect to subject property clearly stated that lender retained a "prior claim" to all condemnation and insurance proceeds" in preference to donee until mortgage satisfied and discharged - thus, until mortgage repaid, possibility existed that lender could deprive donee of value that was required to be dedicated to conservation purpose - non-compliance with perpetuity requirements of Treas. Reg. Sec. 1.170A-14(g)(6)(ii)).


(taxpayer (attorney married to spouse who has an LLM in taxation) borrowed against life insurance policy, let policy lapse and insurance company applied cash value of policy to policy indebtedness; taxpayers did not report any gain or loss attributable to the policy; life insurance company sent taxpayer Form 1099-R showing a distribution of $37,365.06 with taxable amount of $29,093.30; accuracy-related penalty imposed). 


(payments taxpayer received for caring for parents not excludible under I.R.C. Sec. 131(b)(1) as a "qualified foster care payment;" parents not placed in taxpayer's home by "agency of a State or a political subdivision thereof;" taxpayer did not show that he operated a "foster family home" under state (WA) law; taxpayer showed entitlement to additional deduction for unreimbursed employee business expenses). 


(equitable innocent spouse relief available to spouse who knew about husband's inability to pay). 


(reduction in creditor's equity is not sufficient to satisfy the requirement of 11 U.S.C. Sec. 523(a)(2)(A) to have a debt declared non-dischargeable; debtor procured financing from creditor, but creditor did not record mortgage; subsequent lender did record mortgage and was not advised by debtor of creditor's prior, unrecorded mortgage; debtor did not fraudulently obtain creditor's equity). 


(case involves Chapter 12 debtors' motion to avoid liens in farm machinery and equipment (tools of the trade) in accordance with 11 U.S.C. Sec. 522(f)(1)(B); debtors (married couple) owned all farm equipment jointly and claimed exemption if farm equipment to extent of $20,000 allowed under Iowa law for tools of the trade of joint debtors engaged in farming (Iowa Code Sec. 627.6 (11) - now Sec. 627.6(12); lien avoidance motioned object to with respect to wife, who was middle school principal at Sioux Center middle school two hours away from farming operation; issue was whether debtor engaged in farming for purposes of Iowa exemption is the same as whether debtor is engaged in farming for lien avoidance purposes and whether wife was engaged in farming trade; wife paid approximately $60,000 annually (plus benefits) as middle school principal under 210-day contract (pro-rates to $104,285 plus benefits for full-year contract); court noted that Iowa has not adopted a "percentage of income" test or "percentage of time worked" test for claiming tools of trade exemption, but work must contribute to debtors' support; despite wife's substantial income from off-farm employment, teacher contract provides wife with substantial time to perform significant farm work, and not every activity of wife attributable to farm need generate revenue to be legitimate part of farming operation; wife engaged in farming and motion to avoid liens granted; while court noted, in dicta, that intent to farm in the future need be shown, no creditor challenged filing of debtors' Chapter 12 petition on the basis that debtors did not intend to farm in the future even though wife's personal website now indicates that "We moved off the farm in Kossuth County and never had some of the opportunities we now have available to us.  We love our new home and community...".). 


(taxpayer's receipt of $51,000 in payments during tax year which were not reported were not a non-taxable draw against future profits; partnership return filed reflected that amount as guaranteed payment; court held that payments were a draw against future earnings of the partnership because payment was not paid from profits and were not based on taxpayer's performance of duties; while payment intended as draw, but it resulted in liquidation of taxpayer's partnership interest and is fully taxable because taxpayer had no basis in partnership interest; amount taxable as capital gain, but not subject to self-employment tax). 


(deductions disallowed for business expenses of handyman due to lack of substantiation; Schedule C income of approximately $1,000 with expenses of over $19,000). 


(proposed transfer of farmland by non-corporate family farming operation held in trust for qualified heir to an LLC is eligible for special use valuation election under I.R.C. Sec. 2032A; later lease of elected land by LLC to partnership will not trigger recapture under I.R.C. Sec. 2032A(c)(1)(B); partnership's sole right to decide to pay either fixed cash rent or rent based on percentage of crops grown substantially similar to facts of Estate of Gavin v. Comr., 113 F.3d 802 (8th Cir. 1997) where court ruled that qualified heir's option to pay cash rent or crop share resulted in the qualified heirs being at production risk on their return from their land ownership; IRS points out that such leases are not disqualified per se as cash leases and reminds readers on page eight of the rulings that post-death leases must be "substantially dependent on production"; IRS, in no way, leaves impression in rulings that straightforward post-death cash leasing is permissible; in addition, while not mentioned in rulings, facts of rulings not within scope of I.R.C. 2032A(c)(7)(E) which specifies that rental of elected land on "net cash basis" by a lineal descendant of the decedent to a member of the family of the lineal descendant not a recapture triggering event because some lessees, while family members, not technically "members of the family" under I.R.C. Sec. 2032A and, therefore, not lineal descendant of decedent; result of rulings is very favorable to the spirit of the law and the intent of the Congress, but where IRS could, technically, disqualify the estate from I.R.C. Sec. 2032A).


(because taxpayer's Social Security benefits were reduced by amount of workers' compensation benefits that taxpayer received, such offset amount is treated as a Social Security benefit that is taxable under I.R.C. Sec. 86(d)(3)). 


(petitioner not entitled to deduct losses associated with rental properties because such losses subject to passive activity limitations of I.R.C. Sec. 469; no election made to treat multiple rental interests as a single rental activity, so requirements of I.R.C. Sec. 469(c)(7)(B) had to be satisfied with respect to each activity; taxpayer failed to corroborate his assertions that more than one-half of personal services he performed in trades or businesses for the years at issue were performed in real property trades or businesses, and did not satisfy 750-hour requirement; taxpayer did not qualify as a real estate professional; accuracy-related penalty imposed). 


(taxpayers engaged in farming activity (cattle operation) with actual and honest profit objective - claimed losses not limited by I.R.C. Sec. 183; taxpayers cleared land for use as pasture (hay cultivation) which bore "economic relationship" with later cattle operation; taxpayers sold hay until property fully ready for cattle grazing; advice of experienced farmed utilized in preparing cattle operation; no recreational aspect to activity present; taxpayers' activity added value to the property; no lengthy period of time with history of losses present; certain other factors, but not enough, favored the government). 


(petitioner not entitled to deduct losses associated with rental properties because such losses subject to passive activity limitations of I.R.C. Sec. 469; no election made to treat multiple rental interests as a single rental activity, so requirements of I.R.C. Sec. 469(c)(7)(B) had to be satisfied with respect to each activity; taxpayer failed to corroborate his assertions that more than one-half of personal services he performed in trades or businesses for the years at issue were performed in real property trades or businesses, and did not satisfy 750-hour requirement; taxpayer did not qualify as a real estate professional; accuracy-related penalty imposed). 


(taxpayers, married couple, donated qualified conservation easement to qualified organization and received state income tax credits in return; pursuant to state law, taxpayers later gave away $10,000 in credits and sold $110,000 credits (net return of $82,500 computed with basis in credits of $4,897); based on I.R.C. Sec. 1221, court held that credits are capital in nature, noting that taxpayers not eligible for refund on sale of credits; credits never part of taxpayers' property rights  and were short-term capital assets; I.R.C. Sec. 170 does not allow basis allocation in proportion to credit value, so taxpayers had no income tax basis in credits).


(conservation easement donation case involving plaintiff, a partnership that acquired undeveloped rural land and granted a conservation easement over portion of property; partnership, as taxpayer, claimed charitable deduction tied to land's value as if it were developed for condominium usage; IRS moved to exclude plaintiff's experts' report as unreliable and irrelevant under Fed. R. Evid. 702 and court held that the standards of reliability and relevance apply in non-jury trials - including the Tax Court - and are subject to discretion of trial court Judge; plaintiff's experts did not apply correct legal standard by not using the before-and-after valuation method, did not value contiguous parcels that the plaintiff owned, and assumed development that was not feasible on the property due to multiple zoning restrictions, wetland rules, population decline in the area and lack of land with development potential; court's opinion of major significance where property valuation based on appraisal at issue - appraisals being used and testimony from appraisers that are offered into evidence must withstand judicial scrutiny under Fed. R. Evid. 702 and as developed by U.S. Supreme Court in Daubert v. Merrell Dow Phamaceutical, Inc., 509 U.S. 579 (1993)). 


(grant of partial summary judgment to respondent affirmed - contribution of facade easement did not comply with the enforceability-in-perpetuity requirements of Treas. Reg. Sec. 1.170A-14(g)(6); cash payments to charity that accepted facade easement remained conditional at end of 2003 and are not deductible, but cash payments made in 2004 are deductible; facade easement not protected in perpetuity because donee organization not guaranteed proportionate share of proceeds in event of casualty or condemnation as required by Treas. Reg. Sec. 1.170A-14(g)(6)(ii); accuracy-related penalty applicable for deduction of cash payments in 2003). 


(petitioners' claimed deduction for rental real estate losses subject to passive activity loss limitations under I.R.C. Sec. 469 for failure to meet 750-hour test; neither petitioner qualified as real estate professional; but, active participation test satisfied and petitioners can offset non-passive income for years at issue by $25,000 each year, subject to phase-out limitation; no deduction allowed for use of business office in home for two separate businesses - can only get one deduction for business use of home; Schedule C deduction for rental of business property denied due to lack of substantiation; Schedule C deduction for amounts paid to paralegals allowed because amounts substantiated; accuracy related penalty involved). 


(deduction for gambling losses denied; taxpayer recreational gambler that had $7,000 of gambling winnings during tax year at issue, but kept no diary, log or record of gambling losses; use of bank account records to determine gambling losses insufficient). 


(Arizona taxpayers lack standing to challenge state law permitting taxpayers to receive tax credits for contributions to non-profit organizations; law provides tax credit for contributions to school tuition organizations (STOs) which use the contributions to provide scholarships to students attending private schools (including religious); plaintiffs lack standing because suit involves a tax credit rather than a government expenditure - credit offsets the cost of contribution; no decision rendered on law's constitutionality; dissent by Kagan (and joined by Ginsburg, Breyer and Sotomayor) claimed that law involved taxpayer funding of religious activity that, at least to the dissent, implicated the Constitution, and that majority's opinion offered "road map" for government to follow in insulating such financing from legal challenge; dissent did not, however, distinguish state law at issue from taxpayer funding of public schools which seemingly would be necessary in light of the Court's opinion inTorcaso v. Watkins, 367 U.S.468 (1961) and subsequent Court opinions).


(report shows more dismal news on the jobs front; while unemployment declined to 8.8% (which remains 10% higher than what the Administration promised unemployment would peak at if 2009 stimulus bill passed), nonfarm payrolls rose by only 216,000 in March which is far short of the 285,000 jobs that the labor market must add every month for 5 consecutive years to achieve pre-recession unemployment rate by 2016). 


(Obama Administration approved an additional 204 waivers (for 12 months) from certain provisions of the Patient Protection and Affordable Care Act during April 2011; 38 of the waivers are for businesses (including gourmet restaurants and hotels) in Congressional District of Rep. Nancy Pelosi (D-CA); waivers are in addition to 27 new waivers for health care or drug companies and the 31 new waivers for unions). 


(plaintiff's property had been disqualified from ag valuation because assessor believed tract was not in a farm use (3.96 acre orchard); plaintiff did not personally farm tract but leased it to a tenant who failed to keep the property up due to physical problems; property not for ag assessed valuation). 


(railroad acquired fee simple interest in disputed strip of land and subsequently conveyed the strip to defendant; strip did not revert to adjacent owner upon abandonment of rail line). 


(Obama Administration proposal to increase fuel efficiency standards of new vehicles (CAFE standards) to 56 mpg by 2025 would result in a 14 percent drop in U.S. sales of new vehicles based on price elasticity of demand; higher CAFE standard would cause price of vehicles to rise such that 35 percent of new vehicles purchased in 2025 would cost more than $35,000 (in 2009) dollars, and 91 percent of all new vehicles purchased in 2025 would cost more than $25,000 (in 2009 dollars); other reports note that consumers presently show little interest in hybrid vehicles with 30 hybrids accounting for only 2.4 percent of sales to date; in 2010, Ford sold nearly twice as many F-150 pickups than all of its hybrid vehicles combined). 


(debtor engaged in business of growing seed corn and seed beans for sale to farmers for planting; debtor contracted with farmer to grow seed beans for sale to debtor who would then sell seed beans to other farmers to produce soybean crops; plaintiff had been contracting with debtor for five years before controversy at issue arose in this case; debtor then changed its financing arrangement and notified growers of change in payment arrangements for payments to them; plaintiff, as one of affected contract growers did not object to delay in payment, did not try to recover seed beans or sue for contract price; debtor paid plaintiff approximately $160,000 during June 2003 and filed Chapter 11 bankruptcy on September 4, 2003 (which was later converted to Chapter 7 in March of 2004); trustee brought adversary proceeding against plaintiff under 11 U.S.C. §547(b) alleging that the June 2003 payments were preferential transfers that were recoverable by the trustee; plaintiff argued that payments involved contemporaneous exchange for new value or were entered into in the normal course of business and were, therefore, not preferential transfers; bankruptcy court ruled that payments were preferential transfers and that plaintiff failed to carry burden of proof on asserted defenses; amounts ordered by bankruptcy court to be paid back to trustee with interest; only issue on appeal is whether payments were in ordinary course of business under 11 U.S.C. §547(c)(2), and whether interest should have been applied;  district court determined that while payments made (debt incurred) in ordinary course of debtor’s business, buy payments not ordinary in relation to parties’ previous dealings (e.g., prior payments were substantially on time and without interest); facts indicated that debtor intended to prefer growers over other creditors; lack of evidence concerning credit arrangements in relevant industry). 


(Idaho Senate votes to not extend state tax subsidies to "renewable energy" projects through 2014; bill (H. 250) would have extended sales and use tax rebate on equipment and machinery used in the production of certain "renewable energy" (primarily wind) projects; state law already requires utilities to purchase power from renewable energy sources at fixed rates).


(technical report notes that at least 3,700 contract and grant recipients (about five percent of total) of tax dollars doled out by the American Recovery and Reinvestment Act of 2009 (which had been touted by partisan, Keynesian economists as necessary to stimulate the economy) were estimated to owe more than $750 million in unpaid federal taxes as of 9/30/2009; $750 million amount likely understated because IRS does not retain information on amounts owed by recipients who have not filed returns or understated their taxable income and for which IRS has not assessed tax amounts due; a single engineering firm that received $100,000 had $6 million in delinquent taxes).


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