Case Summaries

(Mormon group formed as religious trust to preserve and advance religious doctrines of Mormonism as espoused by founder Joseph Smith, Jr., sought tax-exempt status under I.R.C. Sec. 501(a) as an organization described in I.R.C. Sec. 501(d); IRS denied exemption on basis that group's belief in and promotion of polygamy via "Celestial Marriage" was illegal under state and federal law and a charitable trust cannot be created for an illegal purpose). 


(petitioner provided security services to businesses during his time when he was an off-duty police officer; petitioner reported his service income on "other income" line on return; petitioner determined to be independent contractor and income subject to self-employment tax; petitioner also failed to qualify as real estate professional under I.R.C. Sec. 469(c)(7)(B) for failure to meet the 750-hour test and failure to meet the more than 50 percent test).


(bank made bonus payments to IRAs of new customers; such payments not subject to information reporting, but payments to new I.R.C. Sec. 529 plans are subject to information reporting if of $600 or more). 


(petitioner was insurance salesman before losing his job due to low sales; prior to termination petitioner enrolled in employer's defined benefit plan which required petitioner to stay with employer for five years and meet certain (unattainable) sales quotas; petitioner never contributed to defined benefit plan and never joined company's defined contribution plan; petitioner made $6,000 catch-up contribution to an IRS; company issued W-2 to petitioner stating he was enrolled in company's plan; consequently IRS denied deduction for contribution to IRA under I.R.C. Sec. 219 because petitioner was "actively enrolled" in employer's retirement plan; court upheld IRS determination even though petitioner didn't know he was enrolled, received nothing from "enrollment" and never made any contributions; "actively enrolled" means petitioner's name was on the books irrespective of whether any contributions made or whether there is any right to receive anything from the employer's plan). 


(buy-sell agreement entered into before Oct. 8, 1990, not subject to valuation restrictions of I.R.C. Sec. 2703; such agreements not subject to I.R.C. Sec. 2703 if not substantially modified after Oct. 8, 1990; here, agreement modified to extend repayment term and IRS viewed extension as merely de minimis change to quality, timing or value of rights of parties to agreement because agreement required reasonable interest rate to be paid; agreement also modified  to specify that "prime rate" is rate to be adjusted semiannually, and this was also not substantial modification because resulting payments would more closely approximate fair market value; requirements of Treas. Reg. Sec. 20.2031-2(h) must still be satisfied to control valuation issues at death).


(lawnmower sales to farmers did not qualify for exemption from state sales and use tax because they would not be used in the direct production of agricultural commodities; lawnmowers at issue were to be used for grounds keeping and maintenance of pathways, cutting brush to install fence lines and mowing). 


(petitioners, married couple, filed separate returns for separate principal residences on same tax lot with each claiming an $8,000 first-time homebuyer tax credit; however, new homes purchased within three years of selling prior principal residence; petitioners' claim that Turbo Tax software allowed the credit, but no evidence presented that result from Turbo Tax instructional error or error in programming; use of Turbo Tax not defense to accuracy-related penalty; court noted, however, that "We leave for another day whether reliance on tax preparation software such as Turbo Tax is sufficient to avoid the accuracy-related penalty where the taxpayer has provided evidence demonstrating a programming flaw or an instructional error").


(buy-sell agreement entered into before Oct. 8, 1990, not subject to valuation restrictions of I.R.C. Sec. 2703; such agreements not subject to I.R.C. Sec. 2703 if not substantially modified after Oct. 8, 1990; here, agreement modified to extend repayment term and IRS viewed extension as merely de minimis change to quality, timing or value of rights of parties to agreement because agreement required reasonable interest rate to be paid; agreement also modified  to specify that "prime rate" is rate to be adjusted semiannually, and this was also not substantial modification because resulting payments would more closely approximate fair market value; requirements of Treas. Reg. Sec. 20.2031-2(h) must still be satisfied to control valuation issues at death). 


(boat slips at marina leased by REIT are real estate assets in accordance with I.R.C. Sec. 856(c)(4); rental income from boat slips qualified as rents from real estate under I.R.C. Sec. 856(c)(2) and 856(c)(3); such assets count toward requirement that 75 percent of value of REIT's total assets represented by real estate, cash and government securities).


(petitioner, an international oil pipeline consultant, charged with criminal tax fraud and pled guilty; petitioner also challenged limitations to charitable deduction for artwork donated to charity; court determined that deductions were properly limited by IRS in accordance with I.R.C. Sec. 170(e)(1)(A) to petitioner's basis in the artwork because petitioner did not hold the artwork for more than a year, and signed purchase agreement which petitioner entered into more than a year before donation was merely option to buy and not a contract for purchase because no title passed and artwork not delivered at time agreement entered into and petitioner not obligated to ultimately make purchase under agreement).


(petitioner could not show existence of claimed NOL simply by filing return with statement setting forth amount of NOL deduction claimed and schedule setting forth NOL computation; court noted that NOL must be used in the two preceding years prior to carryforward year unless an election is made to waive carryback, and that petitioner didn't do either one; taxpayer failed to carry burden of proof of establishing existence of NOL). 


(petitioner's property destroyed in fire and petitioner received damage award as part of settlement of lawsuit; petitioner claimed that rash received from ash as result of fire and associated breathing problems and stress occurred; no doctor visited for treatment of alleged conditions; court determined that settlement intended to compensate taxpayer for property damage and income loss, and was not excludible under I.R.C. Sec. 104).


(hobby loss case; petitioner was experienced auto racer who was employed as telecommunications specialist; petitioner started motorsports company and lost enormous sums over 11-year period, finally showing profit in final year; petitioner kept meticulous records to satisfy recordkeeping requirements rather than assist in making profit; no testimony that CPA consulted to render financial advice; four of nine factors favored IRS, two favored taxpayer and three were neutral; court emphasized significant losses over long period of time and petitioner's failure to reduce expenses or increase income; losses from autoracing activity disallowed). 


(petitioner and wife transferred approximately $250,000 to their corporation over three-year period, and used personal credit cards for both personal and business purchases; corporation paid credit card expense of almost $900,000; no records separating out business from personal expenses; court disallowed corporate deduction for personal expenses and such amounts included in couple's gross income; transfers to corporation constituted capital contributions rather than loans because no debtor-creditor relationship intended, and payment of personal expenses by corporation characterized as dividends; accuracy-related penalty imposed). 


(mobile billboards constitute tangible personal property that qualify for I.R.C. Sec. 199 deduction, but traditional and modern billboards are real property (inherently permanent structure) not qualified for I.R.C. Sec. 199; under facts of CCA, taxpayer installed traditional and modern billboards on leased land with leases ranging from 30 days to 20 years and leases continued until billboards no longer profitable; mobile billboards relocated on frequent basis; mobile billboard attached to truck that is moved to various locations; traditional billboard attached to wooden pole; modern billboard attached to steel frame attached to steel poles; mobile billboard not attached to real property and not intended to remain stationary indefinitely; traditional billboard an inherently permanent structure; modern billboard inherently permanent structure). 


(special rule for government contracts contained in I.R.C. Sec. 199(c)(4)(C) eliminates requirement that DPGR must be attributable to disposition of QPP that taxpayer produces; consequently, taxpayer had DPGR from contracts to extent attributable to QPP, but not to extent attributable to services or non-qualified property). 


(IRS specifies situations where filing Form 8275 and disclosing position on return is adequate for reducing penalties under I.R.C. Sec. 6662(d) or I.R.C. 6694(a)). 


(petitioner sold partnership interest on installment basis; under installment contract, petitioner entitled to receive $7 million in 2004, but actually received $1 million of it in 2003 and $6 million in 2004; petitioner reported no gain in 2003 attributable to contract on basis that $1 million constituted loan; court determined that no evidence of loan present and $1 million was part of installment sale with result that capital gain produced in 2003 under contract).


(IRS anticipates issuing final regulations in 2013 on the deduction and capitalization of expenses related to tangible property; final regulations will differ from temporary regulations in certain ways including the de minimis rule, dispositions and the safe harbor for routine maintenance; final regulations will apply to tax years beginning on or after Jan. 1, 2014, and can, at a taxpayer's option, be applied to tax years beginning on or after Jan. 1, 2012). 


(petitioner founded an S corporation that provided janitorial services; petitioner and employees along with petitioner’s girlfriend vacationed at exotic location where girlfriend died of cocaine overdose; decedent’s mother sued petitioner and employees on basis that they provided drugs that caused death; S corporation paid approximately $2.3 million (including $250,000 paid by petitioner for which he is reimbursed by S corporation; S corporation claims $180,000 deduction for legal fees associated with settling claims; amount not deductible because it did not arise out of business operations of S corporation; merely naming S corporation as defendant does not make legal fees or settlement costs deductible business expenses; petitioner stipulated that trip was not a business trip; evidence did not support constructive dividend treatment of $250,000 reimbursement to petitioner). 


(estate's attorney failed to file Form 8939 to make I.R.C. Sec. 1022 election for estate for death in 2010; extension of time granted to file Form 8939 because requirements of Sec. 301.9100-3 of Procedure and Administration Regulations satisfied). 


(petitioner received income from settlement related to employment discrimination lawsuit and did not report it on basis that it was excluded under I.R.C. Sec. 104(a)(2) as compensation for physical injury or sickness; plaintiff claimed that harassment incurred during employment caused heart attack; Tax Court held that settlement agreement made no allocation for compensation for petitioner's physical injuries  and employer didn't intend to compensate petitioner for physical sickness; Tax Court decision upheld - settlement agreement specified that payment was in return for dismissal of discrimination lawsuit).


(petitioner claimed he was a minister of a tax-exempt church, and used ministry's bank accounts to pay personal expenses; upon filing no returns for several years, IRS reconstructed income and asserted deficiencies and asserted penalties; court held that petitioner not exempt from tax as minister and that ministry was not a tax-exempt church; petitioner taxable on gain from sale of real estate and had self-employment tax; fraud penalty imposed). 


(petitioners, married couple, claimed first-time homebuyer tax credit on marital home purchased by husband on March 31, 2009; IRS denied credit because husband had owned home in prior three years; while wife did not own home in prior three years, husband could not claim qualification as long-term homeowner because purchase of marital home occurred before effective date of long-term homeowner provision in I.R.C. Sec. 36(c)(6) which applied only to purchases after November 6, 2009; thus, both spouses had to qualify as first-time homeowners under I.R.C. Sec. 36(c)(1) because statute includes parenthetical phrase "and if married, such individual's spouse" in the definition of the term "first-time homebuyer").


(petitioner filed a "Notice of Affidavit Statement in Rebuttal to Internal Revenue Code Section 6011 For Year Period Ending December 31, 2003"; petitioner later filed Form 1040 for 2003; IRS filed statutory notice of deficiency; petitioner's affidavit not a valid return, but did file a late proper return; petitioner subject to late-filing and late-paying additions to tax, but not subject to penalty under I.R.C. Sec. 6673 for filing frivolous return because affidavit is not a "return").


 (the plaintiff claimed that the IRS wrongfully disclosed its tax information to the Japanese National Tax Administration, and brought a wrongful disclosure action in accordance with I.R.C. Sec. 7431(d) more than two years after it discovered the alleged wrongful disclosure; the court held that the statute required that the action be brought within two years of the date of discovery of the improper disclosure (i.e., the date the plaintiff knew or should have reasonably known of the unauthorized disclosure - inquiry notice) rather than two years from the date that the plaintiff realized the disclosure was unauthorized; some claims were time-barred, but others were not). 


(petitioner reported negative adjusted gross income and NOL carryforward on 1040X; IRS claimed that petitioner failed to substantiate NOL and court agreed, determined that petitioner had failed to present sufficient evidence to put burden of proof on IRS; NOL disallowed).


(partnership provided services to clients trying to accomplish I.R.C. Sec. 1031 exchange; partnership provided in-house developed software to clients so they could track and manage their exchanges; partnership not disqualified person).


(plaintiff, chairman of bank and real estate agent failed to qualify as real estate professional for purposes of exception to passive loss rules as applied to rental real estate activities; failure to meet 750-hour test due to lack of proof; burden of proof not shifted to IRS). 


(petitioner participated in medical study and was compensated in amount of $5,500; petitioner received 1099-Misc, but failed to report income on return; during audit, petitioner reported $5,500 amount on amended return; IRS did not process return and petitioner argued that $5,500 amount was either excludible under I.R.C. Sec. 104 as compensation for personal or sickness or constituted a gift; court disagreed and noted that because Form 1099 issued indicated that payment not a gift; amount fully taxable).


(irrespective of whether LLC treated as partnership or disregarded entity, guarantor of LLC debt can be at risk for purposes of I.R.C. Sec. 465(loss deductibility) even if guarantor does not waive rights of subrogation and right to be reimbursed from LLC; but, to extent debt is co-guaranteed, guarantor not at risk; IRS views guaranteeing debt as being "at risk" and personally liable for the debt; IRS following approach of 2d, 8th and 11th Circuits - taxpayer ultimately liable as payor of last resort and taxpayer not protected against loss; where loan co-guaranteed, taxpayer protected against loss and not at risk).


(self-rental rule of Treas. Reg. 1.469-2(f)(6) held inapplicable to income petitioner received from wholly-owned S corporation for use of telecommunication towers and land leased to S corporation(which, in turn, leased towers to phone companies) because corporation's use of property constituted rental activity rather than trade or business; income from leases was income from passive activity and petitioner can offset losses against gains).


(trust not a grantor trust where it contained a "distribution committee" that barred grantor from retaining sufficient powers to cause trust to be treated as grantor trust under I.R.C. Sec. 677; it might be possible that sufficient power to cause trust to be treated as grantor trust existed under I.R.C. Sec. 675, but determination only possible after returns filed; trust contributions not completed gifts until time of distribution from trust).


(petitioner received distribution from IRA before reaching age 59.5 and asserted that he was not subject to additional 10 percent tax because, in accordance with I.R.C. Sec. 72(t)(2), the distribution was taken to comply with qualified domestic relations order (QDRO) in divorce case; court ruled that to come within exception for QDRO, distribution must be made by plan administrator to alternate payee (spouse, former spouse, child or other dependent) in response to QDRO that recognizes such person as having the right to receive all or a portion of the benefits payable under a plan with respect to the participant; QDRO not created in connection with petitioner's retirement plan and distributions actually made to petitioner rather than alternate payee; exception to 10 percent penalty inapplicable). 


(petitioner and wife married in late 2008 and purchased marital home in late 2009; before purchase, wife had owned principal residence and resided in it for more than five consecutive years as required by I.R.C. Sec. 36(b)(1)(D) to qualify as long-term homeowner, and petitioner had not owned a home during the prior three-year period to qualify as first-time homeowner; on joint tax return for 2009, couple claimed $6,500 long-term homeowner tax credit; IRS denied credit in full on basis that spouses did not both qualify for long-term homeowner credit; IRS conceded that petitioner would qualify for first-time homeowner credit in own right and that wife would qualify for long-term homeowner credit in her own right, but read statute to require both spouses to satisfy either long-term homeowner requirement or first-time homeowner requirement on joint return; court reasoned that such statutory construction "absurd"; both spouses qualify and credit limited to $6,500).


(petitioner indicted for and plead guilty to tax evasion, but testified before trial that petitioner's 2000 income offset in full by NOL carryforward; petitioner's tax preparer testified to making an error during the petitioner's criminal investigation that he failed to carry the NOL forward to offset the unreported income in full which would have exonerated petitioner; evidence did not support petitioner's arguments). 


(petitioner formed corporation to perform engineering consulting work and steel fabrication; steel fabrication business ultimately transferred into LLC and businesses separated; corporation used advanced funds from LLC and bank loans to continue operations; LLC claimed bad debt deduction on Form 1065 for 2006 and 2007 for amounts not repaid by corporation; IRS disallowed deductions on basis that they weren't bona fide debt; court agreed with IRS - advances not bona fide debt because no use of promissory note, lack of definitive maturity date, lack of repayment schedule, no collateral pledged and no interest paid or accrued).


(IRS takes the position that casualty loss in preceding tax year must be made on tax return, an amended return or refund claim; IRS notes that in some situations, an election made on a document that satisfies requirements  of informal refund claim may also be effective to satisfy election deadline if followed-up with subsequently filed formal refund claim). 


(petitioners were pastors and had signature authority over pastoral expense account; one petitioner wrote checks on account with funds used to buy personal groceries, make payments on personal vehicles and pay personal living expenses including mortgage payments along with costs of repairs and maintenance on personal residence; IRS claimed that petitioners had unreported income, but petitioners claimed that deposits into account were nontaxable gifts from church donors and that they weren't subject to tax on such amounts due to vows of poverty; court upheld determination of IRS that petitioners had unreported income).


(U.S. Supreme Court grants certiorari in case to resolve split between U.S. Circuit Courts of Appeal on issue of whether U.K. windfall profits tax paid by plaintiff’s U.K. subsidiary is creditable under I.R.C. §901; Third Circuit held that it was not and Fifth Circuit held that it was).


(petitioners were members of LLC that made bargain sales of open-space conservation easements to qualify charity (portion of purchase price paid by charity is gain to seller and below-market portion is contribution); IRS denied charitable contribution on basis that easements not perpetual because government agencies that funded purchase entitled to recapture upon condemnation of land and extinguishment of easement, and because appraisal not qualified and no contemporaneous written acknowledgement of gift; court disagreed with IRS – upon extinguishment taxpayers would not reap windfall and done can use its proportionate share of proceeds to advance cause of historic preservation on different property; while qualified appraisal must include statement that it was prepared for income tax purposes, appraisal report included required information either in appraisal or in summaries; contemporaneous written acknowledgement can be comprised of a series of documents).


(claimed business deductions not substantiated and denied; court upheld denial of deductions, including deduction for expenses related to office in home; petitioner provided no explanation of why documentation not provided). 


(married couple entitled to deduct legal expenses as ordinary and necessary business expense, but could not deduct expenses attributable to rental property and could not deduct as a bad debt amount of loans they claimed were worthless because there was no bona fide indebtedness; rental property expenses not claimed on correct place on return and didn't raise issue with IRS at administrative level).


(petitioner served on local bank board; board supervised management of bank, but did not participate in daily bank operations; bank provided liability coverage, life and disability insurance and retirement benefits, but not health insurance; petitioner vested in bank’s retirement plan for board members; petitioner put in less than 5 hours a week on board member business, did not hold himself out as contractor and did not claim any tax deductions for business expenses because bank paid all expenses; IRS took position that petitioner was independent contractor in accordance with employment tax regulations and earnings subject to self-employment tax; court agreed with IRS position based on multi-factor analysis).


(case involves value of historic structure permanent facade easement donated to charity and corresponding charitable deduction; before and after appraisal utilized to value easement at $7.445 million; IRS allowed $1.15 million charitable deduction and assessed 40% penalty for gross misstatement; at Tax Court petitioner’s appraiser used replacement cost and income approach to value easement and determined easement value to be $10 million, and IRS determined easement to have no value; Tax Court utilized comparable sales method to value easement at $1.8 million; on further review by Fifth Circuit noted that Tax Court should have included impact of easement on associated building’s fair market value and whether penalty appropriate based on whether satisfied reasonable cause burden of proof; on remand, Tax Court determined that the easement value (and corresponding deduction overstated by more than 400% and that petitioner failed to establish basis for valuation or properly utilize comparable sale approach; gross valuation misstatement occurred; no reasonable cause exception applicable and accuracy-related penalty imposed).


(adult juice bar appealed decision of Tax Appeals Tribunal; bar contends admission and dance performance charges are state tax exempt because they are dramatic or musical arts performances; state imposes tax on any admission charges for entertainment establishments not meeting this exemption; plaintiff failed to prove its performances were choreographed performances entitled to the exemption; plaintiff’s expert unable to provide personal knowledge evidence of choreography of dances in private rooms; no error in tax appeals tribunal’s finding that public dances in club also failed to meet this test as expert’s opinion was based on conclusion of public dances were same as private dances of which expert stated she had no personal knowledge; court also held that decision was not irrational as pairs ice dancing was not by statute exempt, so “performances by women gyrating on a pole to music, however artistic or athletic their practiced moves are” did not qualify either; decision of tax tribunal upheld; dissent filed arguing court makes impermissible distinction between high-brow and low-brow dance performances and choreography in statute was meant to apply to all dance performances).


(petitioner denied Schedule C deductions for charitable contributions due to lack of evidence that such contributions were ordinary and necessary business expenses; petitioner also denied deductions for utility expenses associated with claimed business use of apartment due to lack of evidence as to business use; related mortgage interest deduction denied attributable to loan on home where petitioner worked and lived due to lack of evidence that mortgage interest at issue paid or even existed).


(petitioner, web designer, not able to deduct wages paid with respect to repairs and lawn maintenance due to lack of substantiation that wages had actually been paid; auto expenses disallowed above IRS-prescribed rate due to lack of substantiation; other business deductions denied for same reason).


(petitioner bought yacht for his charter fishing company operating in the Gulf Opportunity Zone area in Alabama; petitioner took delivery of yacht in Florida (outside of the GO Zone) and, due to various problems, it took almost a year to get the yacht to petitioner’s business site in AL; yacht chartered for 43 days in non-GO Zone waters while enroute to AL and remained available for charter for 74 days during tax year once in GO Zone; petitioner claimed 50 percent bonus depreciation  (for property purchased, placed in service and used in a trade or business substantially all of which is conducted in Go Zone) on basis that use outside of GO Zone was at time when yacht not in business use; IRS disagreed citing Notice 2006-77 which specified that “substantially all” meant 80 percent or more of use had to be in Go Zone; while court upheld IRS position on basis that 43 days of charter outside of GO Zone of 117 total constituted substantial non-GO Zone use, court stated that IRS Notices do not have force of law and are not entitled to Chevron deference). 


(petitioner started career selling insurance for local bank in Harvey, ND, but bought out the bank’s C corporation insurance operation over a period of time; bank ultimately buys-out petitioner and enters into six-year employment agreement with petitioner; IRS claims that transaction is disguised capital gain taxable at corporate rates and generates taxable dividends to petitioner; bank’s insurance agency dropped its name in favor insurance agency in petitioner’s name because of greater name recognition of petitioner; petitioner served as manager for six-year term of employment agreement; bank reported petitioner’s compensation as FICA wages; petitioner rewrote existing policies, accepted new applications, supervised and trained employees, attended bank training sessions, negotiated commissions and did bookkeeping for agency; petitioner’s workload increased substantially; at end of term, bank asked petitioner to continue to manage on year-to-year basis which petitioner agreed to do; petitioner trained replacement and retired; court rejected IRS position noting that there is no salable goodwill where the business of a corporation depends on the personal relationships of a key individual (Martin Ice Cream Co. v. Comr., 110 T.C. 189 (1998)); based on facts of case, court noted that insurance business was personal and petitioner had unique ability to keep large insurance companies interested in a small insurance market; petitioner did not have agreement with his agency at time of its sale to bar him from taking his clients and skills elsewhere; IRS did not denote what other intangible assets were purchased in the name of petitioner’s agency; minor unsubstantiated deductions with respect to not from petitioner’s wholly-owned corporation).


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