Case Summaries

(petitioner created C corporation to provide management services to S corporations that petitioner owned; S corporations sold and C corporation purchased airplane and Chevy Tahoe and petitioner claimed expense deductions for plane and vehicle along with supplies and meals; deductions disallowed because petitioner failed to establish usage in taxpayer's business; petitioner derived personal benefit from plane and vehicle and received constructive dividend via rent payments made by corporation).


(petitioners purchased residence via family LLC owned by themselves and their children and claimed FTHBTC; IRS denied credit and court agreed on basis that LLC not an individual; court unwillingly to pierce corporate veil in absence of fraud; multi-member LLC not disregarded entity under tax law, but single-member LLC is by default). 


(petitioners held various rental properties in Wyoming S corporation and properly filed Form 1120 for S corporation for many years prior to tax year at issue; petitioners resided in rental properties; petitioners purchased home in Nevada with $7,500 of their own money and $319,500 from S corporation; title to home taken in name of S corporation, but petitioners claimed first-time homebuyer tax credit (FTHBTC) on their Form 1040; IRS denied credit (after petitioners had been told by IRS that they could claim the credit even though S corporation owned home) on basis that S corporation not an individual and I.R.C. Sec. 36 only applies to individuals; court upholds IRS position on basis that corporations taxed under entirely different section of Code than individuals).


(petitioner defaulted on credit card; debt charged off on 9/12/96 and collection agency subsequently acquired account which was later acquired by another collection agency on 12/28/07; automated attempts to collected continued until 2008 even though statute of limitations for collection had expired on 2/15/01; collection agency issued Form 1099-C for 2008 tax year for $8,570.71, but petitioner's tax return did not report CODI; court determined that debt discharged in 1999, the year it became clear that debt would not be repaid - 36-month nonpayment period; issuance of Form 1099-C not determinative of discharged debt). 


(petitioner and father-in-law purchased principal residence for petitioner and spouse; spouse lived in home with petitioner, but was not included on title and did not sign note or mortgage on residence - mortgage was $1.35 million; petitioner files as MFS and deducted the interest on the full $1.1 million allowed by I.R.C. Sec. 168(h) (entire debt, including interest, paid off in 2007) ; court holds that petitioner's deduction limited to interest paid on $500,000 of home acquisition indebtedness and $50,000 of home equity indebtedness; 20 percent accuracy-related penalty imposed).


(petitioners' charitable contribution deduction denied due to failure to strictly comply with substantiation requirements of I.R.C. Sec. 170(f)(8)(A); petitioners contributed $22,517 to their church and statement provided by church acknowledged donated amount, but did not state whether petitioners had received any goods or services in return; upon notice by IRS of problem with church's acknowledgement, petitioners received corrected acknowledgement from church stating that petitioners had not received any goods or services; Tax Court held that first acknowledgement failed due to lack of required statement, and that second acknowledgement failed because it was not received by petitioners before they filed their tax return for year at issue and was, therefore, not contemporaneous as required by Treas. Reg. Sec. 1.170A-13(f)(2)).


(accounting firm founded by three accountants that owned over 80 percent of firm and attempted to organize as C corporation, but organization never accomplished; for tax years 2001-2003, firm paid over $850,000 in "consulting fees" to three entities that founding shareholders owned, and "consulting entities" paid founders for consulting services rendered to firm's clients (in addition to annual salaries totaling $323,076); fees classified as "salary expenses" which reduced taxable income; firm had revenues of $5-7 million annually but only $11,279 taxable income in 2001 and loss of $53,271 in 2002 and no taxable income in 2003; amounts reclassified as dividends that were not deductible salary expenses; substantial understatement of corporate tax liability resulted ($300,000 annually); accuracy-related penalty imposed; court commented that it was "puzzling" why firm not reorganized as pass-through, and stated, "That an accounting firm should screw up its taxes is the most remarkable feature of the case.").


(court issued order denying reconsideration of Kansas Court of Tax Appeals decision that granted property tax exemption for Kansas portion of Keystone pipeline because pipeline qualifies for exemption). 


(non-exempt cooperative’s net earnings derived from services provided to shareholders by single-member LLC that cooperative wholly owned treated as patronage-sourced; income deemed as earned directly from cooperative business with patrons; income qualifies as patronage-sourced and treated as deductible patronage dividends upon distribution).


(petitioner loaned $200,000 in 1988 to distant relative and received promissory note in return; monthly payments were not initially made until 1990 and only partial interest payments were made from 1990-2000; last payment of any kind made in 2003; borrower died in 2004 and efforts to collect from decedent’s sons failed; petitioner deducted loan as non-business bad debt on 2006 return; court denied deduction because debt became worthless before 2006; no formal claim made in decedent’s estate or that decedent’s sons legally obligated to pay loan; court determined that petitioner’s decision not to enforce debt was for personal reasons). 


(three oil and gas property exchanges failed to qualify for I.R.C. Sec. 1031 treatment; exchanges facilities through third-party intermediary, but taxpayer didn't sufficiently prove receipt of like-kind property - inconsistent documents, lack of proof of payments or that mortgages assumed, assignments not recorded and no income or expense on properties for years at issue). 


(petitioner, at age 56, moved funds from employer’s retirement plan to IRA and then withdrew about $240,000 from IRA before reaching age 59 and ½; even though petitioner not subject to 10 percent penalty for withdrawal of funds before rolling them into IRA the funds were withdrawn from an IRA before age 59 and ½ and are subject to 10 percent penalty in accordance with I.R.C. §72(t)(3)A); accuracy-related penalty imposed).


(individual taxpayer planted vineyard in 2005 and placed vines in service during 2009; taxpayer capitalized cost of land preparation (but not any non-depreciable land costs), labor, rootstock and planting over three years); when plants became viable in 2009, taxpayer claimed I.R.C. Sec. §179 deduction for costs incurred in planting vineyard; vineyard classified as 10-year MACRS property under I.R.C. §168(e)(3)(D)(ii) and is, therefore, property to which I.R.C. §168 applies; vineyard is “other tangible personal property” under I.R.C. §1245(a)(3)(B)(i) because it is an inherently permanent structure and satisfies the definition of “other tangible property” under Treas. 48-(1)(d) and would be tangible personal property if it is not an inherently permanent structure because it meets definition of tangible personal property under Treas. Reg. §1.48-1(c); thus, vineyard is I.R.C. §1245 property as required by I.R.C. §179(d)(1); Rev. Rul. 67-51 no longer applicable for purposes of I.R.C. §179; vineyard acquired by purchase for use in taxpayer’s trade or business; vineyard meets all requirements to be depreciable under I.R.C. §179).


(bill would have applied payroll tax to taxpayers with incomes over $250,000 by requiring such persons to include for payroll tax purposes income received from an  S corporation or limited partnership interest in a professional services business where 75 percent or more of the gross revenue is derived from the services of three or fewer shareholders or where the S corporation is a partner in a professional services business; bill failed on cloture vote by garnering only 52 votes; no Republicans voted for the bill and only one Democrat voted against it (Reid (D-NV)).


(upon distribution of encumbered assets in an S corporation to a shareholder in exchange for the shareholder’s stock in the corporation in a complete liquidation, the liabilities are accounted for in calculating the S corporation’s gain or loss in accordance with I.R.C. §336; there is no adjustment to shareholder stock basis associated with the assumption of liability).


(IRS intends to delay effective date of proposed regulations for reporting of debt instruments and options by brokers (and others) in accordance with I.R.C. Sec. 6045B from Jan. 1, 2013 to Jan. 1, 2014). 


(minor child of ex-spouses lived with mother but was primarily supported by father and separation agreement specified that father entitled to dependency exemption; mother never signed a Form 8332 specifying that she wouldn't claim exemption for child; father attached separation agreement to tax return which was signed by both mother and father; separation agreement complies substantially with basic requirements of Form 8332 - immaterial that spouse's Social Security agreement not on agreement nor was fact that separation agreement not incorporated into divorce decree, nor was fact that mother's relinquishment of exemption dependent on father being current with child support; I.R.C. does not require mother to give father signed Form 8332).


(plaintiffs owned NYC condominiums and sold donated facade easement to charitable organization; appraiser failed to testify at trial and appraisal not entered into evidence; facade already protected by NYC's Landmarks Preservation Commission, so easement not worth anything as easement restrictions not more restrictive than existing regulations applicable to subject condominiums; charitable deduction denied, but penalties not applied). 


(all parts of Medicare constitute medical care for purposes of I.R.C. Sec. 162(l); self-employed persons must pay Medicare premiums directly in order for premiums to be deductible; deductible Medicare premiums include amounts for self-employed person's spouse, dependent or child who has not attained age 27 by the end of the tax year; failure to deduct Medicare premiums by self-employed person in prior years can be deducted on amended return for open tax years; instructions for 2009 Form 1040 failed to mention that Medicare premiums can be used to compute medical care deduction). 


(IRS inflation adjusted figures for HSAs for 2013; annual contribution limitation for persons with self-only coverage will be $3,250 and for family coverage it is $6,450; HDHP defined (for 2013) as having annual deductible of at least $1,250 for self-only coverage and $2,500 for family coverage and where annual out-of-pocket expenses do not exceed $6,250 for self-only coverage and $12,500 for family coverage). 


(three-year statute of limitations under I.R.C. Sec. 6501(e)(1)(A) (instead of 6-year statute under I.R.C. Sec. 6501(e)(1)(A)) applies to omission of income exceeding 25 percent of gross income as a result of overstated basis; Fourth Circuit decision affirmed, which is consistent with opinions of Ninth Circuit and Federal Circuit).


(state (IL) “Amazon” tax law enacted in 2011 ruled unconstitutional). 


(IRS proposed regulations concerning the deductibility of expenses incurred for lodging when not traveling away from home and when such lodging is for the employer and constitutes a working condition fringe; effective on or after date published as final regulations in the Federal Register). 


(I.R.C. §1031 case; petitioners, married couple, established investment intent with respect to replacement property; time interval between acquisition of replacement property and sale of principal residence critical, along with petitioners' attempt to rent replacement property before establishing occupancy; petitioners acquired house with intent to rent out, but inability to satisfactorily do so resulted in taxpayers selling present home and moving into house they acquired with intent to rent out). 


(subject to review by U.S. Tax Court, IRS determined that some estate assets not part of closely-held business where I.R.C. §6166 election made and resulting amount eligible of tax eligible to be deferred accordingly reduced; estate’s eligibility to make I.R.C. §6166 election subject to ruling by U.S. Tax Court on deficiency; no refund of excess estate taxes paid until total estate tax bill paid where some payment made in installments, but an overpayment of an installment amount would be allowed). 


(petitioner made movie and deducted production expenses; IRS disallowed deduction under hobby loss rules, but court found requisite profit intent present under I.R.C. Sec. 183; petitioner also made Sec. 181 election to expense production costs and established substantial compliance with statutory requirements for election; IRS post-trial brief detailing petitioner's lack of conformity with requirements of regulations not admissible evidence and too lengthy). 


(portion of unused NOL generated while taxpayer taxed as U.S. resident that would have been allocated and apportioned to gross income of taxpayer's wholly-owned LLC business activity had taxpayer been taxed on the income as a nonresident alien may be used to offset gross income that is effectively connected to LLC's business activity in the U.S.; taxpayer can carry over an unused NOL from the business activity to apply against business gross income after reacquiring U.S. residency; any remaining amount can offset taxpayer's gross income). 


(federal law and not state law controls the determination of whether property involved in a like-kind exchange satisfies the definition of "like-kind"; while state law property classifications are relevant for determining whether property is real or personal, federal law determines whether the properties are of the same nature or character; natural gas pipeline, while real property in one state and personal property in another state, are of the same nature and character and are like-kind for purposes of I.R.C. Sec. 1031 and will be treated as real property land improvements; but, associated steam turbines are not to be treated as real property and are not part of the exchange group under I.R.C. Sec. 1031).


(when an S corporation makes its subsidiary a QSSS before the year in issue, the subsidiary is treated as a disregarded entity whose items get reported on the parent's return; the presence of a disregarded entity as a partner removes the partnership from the exception for small partnerships that could have been used to avoid late filing penalties applicable to partnership tax returns (10 or fewer partners; all items of income, deductions, credits, etc., from the partnership are properly reported on timely basis on partners' individual returns; partnership allocation percentages are identical for all partnership tax attributes).


(petitioner's postnuptial agreement specified that, in the event of divorce, ex-spouse entitled to retain ownership of petitioner's MLB proceeds and $50,000 annual payments and specified that agreement inured to benefit of parties and was binding on heirs, executors, legal representatives and assigns; after divorce, petitioner claimed payments under agreement as alimony; deduction denied because payments survived death of ex-spouse; court agreed with IRS resulting in no alimony deduction for payor spouse and no taxable income for ex-spouse). 


(petitioner, lawyer, incurred $72,000 in horse-related expenses in purported attempt to stimulate horse-law related practice; petitioner showed only $2,000 in horse-related income for year in question with balance of income from non-horse related clients or former clients; horse activity and law activity not combinable pursuant to Treas. Reg. Sec. 1.183-1(d)(1) due to lack of sufficient interconnection; court rejected petitioner's argument that combined horse activity and law practice was "capital asset" that might increase in value; petitioner's lack of records, lack of profit motive, lack of participating in any equestrian events resulted in lack of profit motive; burden of proof not shifted to government).


(medical service corporation made contributions to I.R.C. Sec. 419 multi-employer benefit plan; contributions not deductible as ordinary and necessary business expenses under I.R.C. Sec. 162 because facts indicated that contributions made on behalf of owner of corporation and owner's wife to fund personal investment in whole life insurance policies that largely accumulated cash value just for them; petitioner had full control over policies). 


(petitioner purchased life insurance policy for undisclosed face amount through employer in 1992 and paid approximately $22,000 via payroll withholding; petitioner thought he had abandoned the policy upon ending employment and taking different job with different employer, but policy remained in force; life insurance company issued petitioner Form 1099-R for difference between gross distribution and petitioner's investment in policy - $3,089.92; insurance company, upon petitioner's request, explained that policy had lapsed with an outstanding loan that exceeded basis in policy and that distribution code 7 in box 7 of 1099-R was a "normal distribution" not subject to early withdrawal penalties; second letter sent to petitioner that policy issued with "automatic premium loan provision" meaning that any premium payment not paid would be treated as loan against cash value of policy if sufficient value present (with interest accruing), and that when insufficient value present to support loan to cover premium, policy would lapse and outstanding loan would trigger income reportable on Form 1099-R; petitioner claimed that he didn't owe tax on funds he never received; court disagreed on basis that petitioner benefitted from loan against value of policy even though petitioner had the insurance coverage under the policy that he did not know about; amount received not received as an annuity as required under I.R.C. Sec. 72(e)(1)(A)). 


(petitioners purchased solar panels from vendor under a "buy one get two free" promotion; promotion also allowed petitioner to find another customer ("ratepayer") or let vendor hook petitioner up with ratepayer; petitioner purchased installations on installments and any associated ratepayer would pay utility bill to vendor-provided entity with any profit after payment of taxes and debt service remitted to petitioner; petitioner claimed Sec. 179 deduction for installation cost and also claimed Sec. 48 energy credit; several petitioners admitted to not doing anything except claiming tax deductions; while one petitioner claimed to have sold five other units for vendor, nothing else done with respect to the units; one petitioner claimed to have visited his ratepayer's residence monthly to inspect equipment and consult with ratepayer concerning solar service; court holds that none of petitioners satisfy any of the material participation tests under Sec. 469; no business records maintained; Sec. 179 deduction not allowed for lack of trade or business).


(petitioner was a real estate professional as a full-time real estate broker (worked at least 750 hours in real estate trades or businesses as an owner and worked more in real estate than in all of petitioner's other jobs), but did not satisfy the material participation test in either of petitioner's rental real estate activities; petitioner did not keep daily log of time spent on rental activities; accuracy-related penalties not imposed). 


(for innocent spouse purposes, denial of first-time homebuyer credit (FTHBC) is to be treated as deficiency under I.R.C. §6211 (b)(4); manner in which denied FTHBC allocated between spouses depends on reason for denial and the subsection of I.R.C. §6015 under which innocent spouse relief is sought).


(enrollment and freeze fees are subject to the 10 percent excise tax on indoor tanning services contained in the Administration’s health care legislation; enrollment fees charged in connection with membership program, and freeze fees allows individual paying fee to either skip one or more months of membership dues without being charged enrollment fee upon restarting monthly membership or waive required contract cancellation fee).


(petitioners, married couple, established FLP and via FLP donated an easement to qualified done; donated land subject to purchase money mortgage, but at time of donation deed of trust securing debt not subordinated to easement held by qualified donee; when petitioner ultimately got debt subordinated two years after donation; easement required to be perpetual  - chance that easement would cease must be “so remote as to be negligible; court holds that remoteness has nothing to do with subordination, and subordination must be in place at time of donation – Treas. Reg. §1.170A-14(g)(2); until time of subordination, foreclosure proceedings could have been brought which would have eliminated the easement; immaterial that petitioner had funds at all times to pay off debt because mortgages are never too remote to be negligible ; accuracy-related penalty not imposed). 


(petitioner invested in oil and gas leasing partnership by contributing $110,000 cash and $200,000 note (termed “subscription note”); petitioner claimed non-passive loss of $275,045 on 2001 return; on 2002 return, petitioner deducted $15,003 and reported $16,000 income from partnership; in 2003, partnership distributed $32,407 to petitioner in termination of petitioner’s partnership interest; note not paid-off; court determined that note was genuine debt in 2002 and not 2003 due to lack of payments made after 2002 and termination and liquidation of partnership; under at-risk rules of I.R.C. §465, petitioner had zero risk in 2003 and amount at risk became non-genuine and petitioner had $200,000 gain for 2003 under I.R.C. §465(e)). 


(petitioner, employee of Sheriff’s Department, sustained career-ending injury on-the-job; petitioner had several retirement plans to choose from; petitioner initially chose plan that didn’t take his injury into account, but then switched to plan that did take into account his injury and was awarded retroactive coverage to beginning of initial plan; petitioner received full service retirement amount of $12,861 monthly; 1099-R issued showing service-connected amount taxable, followed by amended 1099-R stating that taxability had not been determined; five years later County told petitioner that 50 percent of pension taxable, but petitioner never reported the income; income exemption of I.R.C. §104(a)(1) inapplicable to payments determined by reference to employee’s age or length of service; petitioner’s pension set payments at greater of 50 percent of final compensation or full retirement allowance and is based on age or length of service; petitioner’s service retirement benefit exceeded guaranteed amount so benefit amount increased to service retirement benefit amount reference by length of service; thus, portion in excess of guaranteed amount included in income; understatement penalty not imposed).


(state (CO) law subjecting out-of-state retailers to sales and use notification and reporting requirements (Colo. Rev. Stat. §39-21-112(3.5)) violated Commerce Clause; permanent injunction issued; court noted that Quill Corp. v. North Dakota, 504 U.S. 298 (1992) prohibits states from imposing the same obligations on out-of-state retailers with no physical presence in the taxing jurisdiction); defendant failed to meet “very high burden of proof under the strict scrutiny standard” to overcome facial invalidity of the Colorado law”). 


(petitioners, married couple, claimed deductions for vehicle, meals, entertainment and home office expenses alleged to be related to husband’s construction business; no evidence offered to substantiate claimed amounts; petitioners failed to establish that they didn’t understand communications from IRS in English).


(decedent was IRA owner with trustee of revocable trust named as remainder beneficiary; under terms of trust, IRA passed to marital portion over which surviving spouse had right to income and principal distribution; IRA treated as having passed directly to surviving spouse and, as such, IRA funds could be rolled into IRA in surviving spouse’s name without inclusion in surviving spouse’s income). 


(as a result of failure of MF Global, taxpayers that hedged through MF Global may have received forms 1099 late; such late 1099s posed particular problem for farmers filing by March 1 without need to pay estimated tax; news release notes that IRS forgiving late penalties for affected farmers; IRS specifies that procedure to receiving waiver of estimated tax penalty is to complete Form 2210-F and attach short statement to Form stating that taxpayer received late Form 1099 from MF Global and write at top of Form “MF Global; electronic submission not possible; if return already filed and penalty assessed, IRS should be contacted and relief potential identified). 


(associate attorneys in law firm were employees rather than independent contractors; degree and extent of control key issue; no mention of whether earning passed through to attorneys on K-1 such that Medicare tax avoided).


(petitioner was real estate professional who owned 14 single-family homes in Columbus, Ohio, but lived in Dayton, Ohio;  petitioner traveled between homes and showed them to prospective tenants, handling complaints, working with contractors and handling paperwork with respect to homes; petitioner claimed time driving between Dayton and Columbus toward 750-hour test; IRS claimed that driving time not part of real estate activity, but is commuting; losses limited to $3,000 annually; petitioner made no mention of whether office in the home existed that was used exclusively for the rental activities; petitioner make I.R.C. §7430(c)(4)(E) qualified offer and doesn’t receive response from IRS; petitioner raises point concerning existence of home office and that it was mentioned from the beginning of the litigation; at time of petition, petitioner had not mentioned office in the home existed; court determined that “substantial justification” of IRS position is measure at petitioner date, and home office not mentioned by petitioner at that time and IRS under no obligation to inquire about existence of home office; IRS position upheld as reasonable and petitioner’s attorney fees denied). 


(petitioners’ S corporation restaurant business sustained losses for multiple years and didn’t deduct loss in year in which basis existed to allow deduction, but rather reported income in like amount and claimed income amount added to basis; court determined that reporting S corporation income that wasn’t actually earned does not increase basis under I.R.C. §1367; no capital contributions made in year in which stock basis increase claimed; no upward adjustment to basis for amounts incorrectly reported as pass-through income which doesn’t correspond to shareholder’s actual pro-rata share of such income; basis reduced even if shareholder does not actually claim pass-through losses on return; petitioners could not deduct NOL in year with lack of evidence showing correct computation of income/NOLs in prior years - issue first raised after trial).


(petitioner ineligible for S corporation status because its shareholder was a Roth IRA, an ineligible shareholder; petitioner taxable as C corporation for tax year at issue; ownership of custodial IRA and Roth IRA could not be attributed to shareholder for purposes of S corporation eligibility; S corporation status terminated at time custodial IRA acquired corporate stock).


(on remand from 9th Circuit Court of Appeals (626 F.3d 520 (9th Cir. 2010)), district court held that meals and medical expenses provided to employees of religious corporation are deductible business expenses in accordance with I.R.C. Sec. 162; religious community functions largely without wages, in wage-less community (regardless of religious nature), compensation takes different form, such as housing, food, and medical care, because employees would not be able to work long and hard for no wages absent these benefits).


(petitioner, NASA employee, in spare time developed communications system but was unable to secure patent; petitioner incurred many expenses and claimed records destroyed in hurricane; losses non-deductible due to lack of profit intent and failure to satisfy I.R.C. Sec. 183).


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