Case Summaries

(I.R.C. §6324(a)(2) imposes personal liability on transferees of non-probate property to the extent of value of transferred property rather than imposing a lien on the transferred property; to enforce personal liability, IRS can bring action under I.R.C. §7402 or impose liens on transferee’s property). 

(petitioner’s employer restructured and petitioner received stock option restricted by SEC regulations and other sale restrictions; petitioner exercised stock option and received W-2; petitioner attempted to sell stock, but company never went public and eventually failed; petitioner lost everything except I.R.C. §83(a) deficiency and claimed theft loss based on company’s demise; I.R.C. §83 specifies that no income recognition when property that is received for services has no market value; petitioner had ownership and control over stock and restricted market for stock existed; petitioner claimed no income from sales that were facilitated, but did not establish primary offering price and did not introduce copy of Form S-11even though petitioner’s decision to exercise options based on fact form filed; court sustained deficiency but allowed $750,000 short-term capital loss (deductible over next 250 years).

(petitioner, dentist, claimed no income for years at issue; petitioner found to have engaged in tax fraud and subject to I.R.C. Sec. 6663 penalty (75 percent)).

(petitioners, married couple, were both employed full-time but also jointly operated a horse breeding activity and the husband was involved in a drag racing activity; both activities generated substantial losses since inception; under nine-factor analysis, court determined that horse breeding activity engaged in with requisite profit intent with seven of the factors in petitioners’ favor; losses sustained from 1998-2006 in horse breeding activity fully deductible; husband’s drag racing activity not engaged in with requisite profit intent because six of nine factors in government’s favor and continuous losses since 1990 resulted in 20-year timeframe of losses exceeded any reasonable start-up time; drag racing losses deductible only to extent of income). 

(partnerships can provide Forms K-1 electronically; IRS details how consents can be provided electronically, how partners to be informed about software changes and how partnership to provide instructions about accessing and printing electronic statements and partnership's responsibility if K-1 not electronically deliverable).

(overall facts and circumstances indicated that auto body shop workers, secretaries and shop trainee were employees and not independent contractors; petitioner retained right to control work and discharge at will and workers did not have home offices; petitioner should have withheld tax, and issued Forms W-2 and 1099-Misc; I.R.C. §520 safe harbor relief not available due to petitioner’s lack of filing any Forms 1099-Misc; additional workers properly classified as independent contractors). 

(coal produced from facility using set process is "refined coal" in accordance with I.R.C. Sec. 45(c)(7) if coal is from feedstock coal that is same source or "rank" as "tested coal" and satisfies emission reduction test of I.R.C. Sec. 45 (c)(7)(B).

(mortgage loan officer held to be independent contractor and not employee and, thus, could deduct business expenses; petitioner had been issued Form W-2 and was president and co-owner of company; common law factors (based on agency principles) showed that petitioner was independent contractor).

(petitioner failed to conduct international consulting activity with requisite profit intent under nine-factor analysis).

(petitioner operates cement manufacturing facility on its own private property that includes a limestone quarry from which it extracts raw material to use in initial step of cement manufacturing process; petitioner paid sales tax on purchase of repair parts for its loaders and haulers, but state Department of Revenue denied refund request; on review, Kansas Court of Tax Appeals (COTA) determined that equipment and repair parts exempt from sales tax as being integral or essential part of integrated production operation of cement manufacturing facility as required by Kan. Stat. Ann. §79-3606(kk)(2)(D); COTA decision affirmed on further review – defined boundaries of manufacturing or processing plant or facility extend beyond the area immediately surrounding the production line if there are contiguous areas at the single, fixed location where integrated production operations are conducted).

(income derived by publicly traded partnership from oil and gas "fracking" process is "qualifying income" under I.R.C. Sec. 7704(d)(1)(E) and, as a result, recipient of income not treated as corporation under I.R.C. Sec. 7704(a); publicly traded partnership not treated as corporation if at least 90% of gross income for tax year is certain types of passive income and income generated from fracking process is qualifying passive income). 

(state use tax appeal by feed mill operator assessed approximately $20,000 after audit found certain equipment purchased did not qualify under agricultural production exemption; exemption requires taxpayer to be business enterprise and using and consuming the property in breeding, raising or caring for livestock; Tax Tribunal decision affirmed because operator used equipment to make feed to sell to other business entities rather than using and consuming property to feed livestock and poultry).

(case involves proper place on tax return to deduct net operating loss (NOL) of $51,000 – whether on Schedule C or on Form 1040; petitioner received $131,660 in non-employee compensation from accounting business and didn’t file Form 1040; IRS filed substitute return and determined deficiency including self-employment tax of $15,207; petitioner had NOL carryover from prior years and parties agreed that income could be reduced by amount of carryover ($51,065), but disagreed as to whether carryover offset petitioner’s self-employment income; court determined that I.R.C. §1402(a)(4) operates independently of subsection (a)(5) such that NOL cannot be taken against self-employment tax – petitioner cannot reduce net earnings from self-employment by the NOL carryforward; thus NOL deduction to be taken on Form 1040). 

(petitioner received $57,500 payment pursuant to settlement agreement; amount not excludible from income under I.R.C. §104 because payment not based on physical injury or physical sickness). 

(IRS announces innocent spouse relief granting 10 years for innocent spouse to file application from IRS first collection activity on joint liability; IRS relaxes proof requirements for marital status, economic hardship, abuse and significant benefit). 

(petitioner worked part-time as clerical worker at drug addiction center on at-need basis in addition to janitorial job at a school; no written contract with part-time employer, but employer considered petitioner an independent contractor and did not withhold income tax; petitioner did not include amounts received from part-time job in income ($4,451) on basis that she should not have been issued Form 1099-Misc. or that payments were a gift; but, petitioner conceded that amounts received were for petitioner's services and, as such, are gross income from compensation; amounts are not gifts).

(petitioner was the father and non-custodial parent of child and claimed dependency exemption and earned income credit for the child; but, child live more than half of tax year with mother and failed to satisfy I.R.C. Sec. 152(c) residency test; petitioner also failed I.R.C. Sec. 152(d) qualifying relative test due to lack of proof of providing more than 50 percent of child's support; I.R.C. Sec. 152(e) requirement not satisfied due to failure to attach Form 8332 to return (or equivalent release) and mediation agreement allowing former spouses to alternate years to take deduction didn't satisfy Sec. 152(e) because it didn't designate which year belonged to which spouse; EIC similarly denied due to child's failure to meet qualifying child definition and petitioner's income exceeded limit for taxpayers without a qualifying child). 

(petitioners, married couple, not entitled to deduction for medical and dental expenses beyond amounts allowable by IRS; wife injured in auto accident and compensated by insurance for medical expenses; lack of substantiation with respect to dental expenses and no evidence offered to allow estimation of such expenses; photocopies of adding machine printouts not sufficient to substantiate other medical expenses). 

(petitioner failed to establish that Cessna airplane not used predominately in petitioner's business for purposes of I.R.C. Sec 179, and Sec. 179 recapture triggered; Sec. 274(d) substantiation requirements not satisfied to establish specific business purpose for use of plane - entries in spiral notebooks inadequate by merely listing date and destination of airplane and automobile trips; basis in S corporation not substantiated; accuracy-related penalty imposed).

(in letter from Deputy Commissioner's Office of Treasury to Senior V.P. of Retail Industry Leaders Association, IRS states that it will not require businesses to reconcile gross receipts to Form 1099s issued by credit card companies with respect to 2011 income tax returns; IRS states that they have no intent to require reconciliation in future years). 

(petitioner purchased three-acre lakefront property and had existing house demolished to build a new home; demolition conducted after house donated to local fire department for burning in firefighter training exercise; $76,000 charitable deduction claimed for donation; Tax Court disallowed deduction and Tax Court decision affirmed on appeal; fire department only got right to burn house down and return underlying tract to petitioner without house).

(irrevocable trust provides that beneficiary has lifetime power of appointment over trust to distribute any portion of trust income or principal during life or at death to charitable organizations; distribution of gross income from trust to charitable organizations made in accordance with power are made "pursuant to terms of the governing instrument" as required by I.R.C. Sec. 642(c)(1) and qualify for charitable deduction). 

(case involves appropriate valuation of donated conservation easements with specific issue of whether “highest and best use” of land subject to easements was gravel mining or agricultural use as irrigated farmland; petitioners, corporation and two couples, owned land with another corporation in undivided one-fourth interests; tract was 1,560 acres with part used for gravel mining; with help of local accounting firm (Kennedy & Coe), petitioners conducted series of like-kind exchanges impacting approximately 163 acres not zoned for mining gravel; after transactions, each petitioner owned about 55 acres outright; appraiser hired and each taxpayer claimed charitable contribution donation under “before and after” approach due to easement restrictions; petitioner claimed highest and best use was for gravel mining; IRS denied deductions; court determined that highest and best use of land was for agricultural use resulting in lower value of property before imposition of easement restrictions, resulting in deduction of $100,000 rather than $2,000,000; court opined that highest and best use of any land is its current use unless taxpayer shows compelling reason for different use; petitioners had also overstated demand for gravel; accuracy-related penalty not imposed; court noted that for post-8/17/06 filed returns, “reasonable cause” exception to penalties repealed).

(ag cooperative with farmer members with net proceeds distributable to farmer-members; some of net proceeds capitalized into inventory ("c-Check"); c-Check payments to members are PURPIMs and are to be reported in Box 3 of Form 1099-PATR; cooperative can disregard such payments when computing its Sec. 199 deduction).