Case Summaries

(landowner challenged disqualification of property from farm use special assessment; a three acre portion of entire seven acre parcel used for dumping of organic material for composting which produced weeds and plants beneficial for quality soil; property not eligible for farm use assessment because lessee using property only for dumping and composting and operates seed production on other location; also, previous state case held growing weeds not accepted farming practice, so not “farm use” eligible for assessment).


(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).


(petitioners, married couple, used personal residence for developmentally disabled adults; husband served as general contractor for project that converted residence according to county standards, and petitioners started business and got paid by county and claimed exclusion from income under I.R.C. Sec. 131; petitioners owned other homes and had family get-togethers in one of them and the wife recovered from foot surgery in the home, and other family members along with petitioners lived in the home; mere ownership of home in which services rendered insufficient to exclude payments; to meet requirement of I.R.C. Sec. 131(b)(1)petitioners must prove that they lived in the home distinct from merely working in the home, citing Dobra v. Comr., 111 T.C. 339 (1998); negligence penalty not imposed).


(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)).


(real estate developer had apartment complex and used component depreciation approach (i.e., claiming MACRS depreciation by class life on every separate depreciable item in 366 apartments in over 40 buildings); petitioner deconstructed the building in attempt to get out of 27.5-year class life; court ruled for government). 


(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). 


(cash reimbursements (so-called "Section 1603 payment" received in lieu of claiming an energy tax credit not includible in gross income and taxpayer's basis in specified energy property reduced by 50 percent of payment; all project costs properly capitalized for purposes of determining depreciation deduction included in cost basis of specified energy property).


(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).


(for purposes of I.R.C. §199, taxpayer cannot aggregate computer software programs offered by third parties to customers by tangible medium or download to determine if the property taxpayer offers satisfies “third-party comparable exception” under Treas. Reg. §1.199-3(i)(6)(iii)(B); taxpayer can apply third-party comparable exception to components of property taxpayer offers in normal course of business).


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


(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).


(petitioner received lottery ticket as tip while working as waitress in Alabama (state which did not have lottery at the time); petitioner formed S corporation with family members to receive lottery proceeds; proceeds received, but no Form 709 filed to report gift to other family members; IRS asserted gift tax deficiency of $771,570 plus interest; court upholds IRS deficiency determination - petitioner could not prove existence of contract to share lottery proceeds, and such contract would have been illegal under state law).


(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).


(husband was pilot who flew from various airports near his home and was reimbursed by employer for travel between airports, but not from home to airport flying out of; claimed deductions for travel expense from home to departure airport disallowed as personal expense; wife was schoolteacher who bought various items supposedly for her job and expensed the items; wife could have been reimbursed for the items but chose not to; fact that wife could have been reimbursed eliminated deductibility because items then deemed to be not "necessary"). 


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


(petitioner, homeowner’s association, had earned income from beach club and parking lot rentals; such income subject to unrelated business taxable income; beach club and parking lot not open to public and, as such, were not related to promotion of community welfare (petitioner’s tax-exempt purpose)). 


(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).


(petitioner established partnership with another person to operate a restaurant, but got frozen out of the business by the partner; partner issued K-1 to, but distributed no cash; petitioner didn't report income; court pointed out that petitioner subject to tax on distributive share whether or not received; no penalty imposed). 


(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). 


(petitioner filed Schedule C claiming $14,027 in expenses, but no income; claimed expenses were for such things as "training costs," "telephone and internet," "dues and subscriptions," but expenses denied because petitioner not engaged in business with requisite profit intent). 


(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).


(taxpayer, limited partnership, filed partnership return but did not attach statement to return electing out of 50 percent bonus depreciation for qualified 5, 7 and 15-year property placed in service during year; taxpayer granted 60-day extension to file return with appropriate statement electing out of bonus depreciation because taxpayer acted reasonably and in good faith; accounting firm hired to prepare return failed to notify taxpayer of required opt-out statement). 


(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 invested in Nevada limited partnership involved in growing jojoba beans and claimed a resulting loss on the investment (on petitioner’s 1982 return) which the Tax Court disallowed and held that petitioner negligent in claiming loss; appellate court reversed on basis that Tax Court committed clear error in determining that petitioner failed to engage in sufficient research to determine if investment had reasonable prospect of making a profit; petitioner not negligent under former version of I.R.C. §6653(a); Tax Court’s decision ordering additions to tax of $32,596 reversed; court implied that consultation with accountant sufficient to justify deduction; lengthy dissent). 


(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). 


(petitioner utilized specialized trucks and "belly-dump" trailers in its business; use of trucks and trailers occurred on-road and off-road; trucks and trailers were street legal, but had been modified for heavy use; approximately 40 percent of use was off-highway; petitioner claimed I.R.C. Sec. 34(a)(3) and 6427(l)1) credits for off-highway business use; court upholds IRS determination that credits disallowed; tractors and trailers not analyzed together for purpose of interpreting statutory term "vehicle" because tractors and trailers could each perform designed functions with other vehicles; tractors not specifically designed for off-highway use and could operate at normal highway speeds; tractors do not qualify for "off-highway transportation" exception of I.R.C. Sec. 48.4061(a)-1(d)(2)(ii); for post-2006 tax years I.R.C. Sec. 7701(a)(48) defines "highway vehicle" more narrowly).


(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). 


(IRS announcement that maximum energy savings percentages for purposes of I.R.C. Sec. 179D deduction for energy efficient commercial buildings placed in service on or after March 12, 2012 is 25 percent for interior lighting systems, 15 percent for heating ventilation and air conditioning and hot water systems, and 10 percent for the building envelope). 


(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).


(taxpayers, married couple, allowed extension of 120 days to file election to group taxpayers' interests in various rental real estate activities as a single activity for purposes of the passive loss rules).


(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). 


(convictions under I.R.C. Sec. 7206 for aiding and assisting in preparation of false tax return constitutes aggravated felony if government’s revenue loss exceeds $10,000 (6-3 opinion written by Thomas)). 


(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 not entitled to deduct claimed Schedule C expenses; petitioner operated sign business but had also obtained real estate license and did some work as real estate agent; petitioner never had revenue from real estate business, but claimed expenses attributable to real estate business; no objective evidence that petitioner intended to make profit from real estate business; no supportive evidence that decline in housing market barred petitioner from making real estate sales).


(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).


(IRS guidance specifying that Schedule K-1 can be filed electronically; effective Mar. 5, 2012).


(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). 


(owner of wholly-owned disregarded entity cannot split entity interest into separate classes of interests so as to be able to allocate basis and income, loss, deduction and credit among the separate classes; IRS noted that Rev. Rul. 99-5, 1999-1 C.B. 434 governs taxation of single-member owner of disregarded entity and provides that taxpayer selling portion of interest in disregarded entity treated as selling pro-rata share of each asset entity owns; I.R.C. does not provide for “split eligible entity interest transaction”). 


(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).


(petitioners (married couple) did not timely file returns from 1998 through 2003; upon filing returns, petitioners claimed large deductions including NOL carryovers, business losses and office expenses - including Sec. 179 deduction for fish tank and dining room furniture; IRS disallowed all losses and expenses for lack of substantiation and assessed additional tax and penalties; petitioners claimed they maintained adequate records but didn't produce any at trial; court failed to believe that petitioners were credible; penalties upheld - petitioners put blame on return preparer for late-filed returns due to preparer serving prison sentence for murdering spouse and person who took over for preparer made numerous mistakes, but court upheld penalties). 


(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). 


(self-employed real estate agent contributed to pension plan and deducted contribution on line 19 of Schedule C rather than line 18 of Schedule C on belief that she could deduct pension contributions in the same manner as a corporation; court determined that petitioner’s contribution not an I.R.C. §162 business expense for self-employment tax purposes, but it is an AGI adjustment for income tax purposes; petitioner owes self-employment tax on contribution, but not income tax; no accuracy-related penalty imposed).


(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).


(under sublease agreement, lessee agreed to construct building on land lessor’s land; construction financed by lessor in addition to lessee’s contribution; lessor to own all of real property and most constructed improvements and lessee to own all personal property and some real property improvements to be constructed; agreement required lessee to incur specified indirect costs associated with construction (not substitute for rent); costs must be capitalized in accordance with I.R.C. §263A – statute denies deductions for amounts paid for new buildings or permanent improvements that enhance property value).


(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).


(plaintiff seeks judgment for unpaid tax liability of $4,941,722.94 from taxpayer’s wholly owned corporation; corporation formed in 1977, but dissolved by Secretary of State on July 31, 2005; tax obligation at issue is for years 1994-1996 in total amount of $923,049, but with interest and penalties is now just under $5 million; plaintiff seeks value of all assets transferred after 1994, but defendant argued that only the distributions made between 1997 and 2002 should be considered because that’s the only time the corporation had sufficient assets to pay tax liability; court determined that defendant liable for taxes to extent of funds withdrawn from corporation; defendant potentially liable for penalties and interest based on timing of distributions and asset values according to state law). 


(plaintiff claimed an income tax deduction for the costs of installing meteorological tower; tower installed to determine if adequate wind resources on plaintiff’s site to start new wind farm business, which proved site not feasible; deductions not allowable as business expenses to investigate new trade or business ; not deductible start-up costs because no actual trade or business resulted).


(petitioners purchased a home in 1974 and claimed to have moved from it, by listing it for sale and moving in with the wife's parents; but, petitioners maintained utility service at old house, often stayed overnight, hosted family events, kept personal belongings in the home, used the Internet at the home (because wife's parents did not have Internet at their home) and maintained mail service; wife renewed driver's license using old home's address and petitioners filed a joint income tax return using listing the old home's address after supposedly moving out; petitioner's sold the home a year after they claimed they had moved out; slightly more than three years after claiming to have moved out, petitioners bought new home and claimed first time homebuyer credit; IRS denied FTHBC on basis that old house was still petitioners' principal residence within three years of purchase of new home; court agreed with IRS based on facts and circumstances test).


(petitioner, stockbroker, could not exclude discharge of indebtedness income attributable to interest on loan forgiven by employer; I.R.C. Sec. 108(e)(2) only excludes from income interest that would have given rise to a deduction; petitioner used loan for income production purposes, but failed to prove deductibility under I.R.C. Sec. 212 as an expense associated with income production; in any event, interest deduction would have been limited by I.R.C. Sec. 163(d)).


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