March 2013 – Significant Developments

March 1, 2013 | Roger McEowen

During March there were several major developments in the courts and with the IRS that are important to pay attention to.  We highlight those in the case and rulings annotations list on the website and draw your attention to them here.

A couple of key court cases have yet to be decided that we are waiting on and watching for.  The Tax Court is set to decide whether a residuary trust involved in rental real estate activities can claim associated losses - in other words, can a trust qualify as a real estate professional by satisfying the material participation test under the passive loss rules.  The Tax Court has never decided the issue, but the one federal district court that has considered it, has ruled that the trust is the taxpayer for purposes of the passive loss rules and that the participation of the employees (in that case) of the trust are to be included in determining whether the trust’s participation is “regular, continuous and substantial.”  In another case still to be decided by the Tax Court, the domestic production activities deduction (DPAD) is at issue.  That case involves the question of whether a U.S. company can claim the DPAD on products that it sells that were actually manufactured by a U.S.-based contract manufacturer.  The third-party contract manufacturing issue is a huge DPAD issue with the IRS.  You will note that among our highlighted annotations is one where the IRS, in a Chief Counsel Memo, ruled against a book publisher by saying that the publisher could not claim the DPAD for income from book sales that were produced by a contract manufacturer.

The saga of the attempt of the IRS to regulate tax preparers continues in the judicial system.  In March, the D.C. Circuit Court of Appeals upheld the injunction that a lower court had entered against the IRS enforcing the test-taking and CPE requirements of the preparer regulations.  IRS can still require Registered Tax Return Preparers to register with the IRS, however.

Also in March, a federal court in Arizona set forth how to compute income tax basis in shares of stock received in an insurance company demutualization.  We highlight that case in the annotation list, and have updated our article on the matter to include discussion of the court’s decision and the computation process that it utilized.

As usual, there were numerous state court opinions in March that are important to agriculture.  We have several articles detailing those developments that were added to the website in March.

In Iowa, the legislature is working on legislation that would abrogate the Iowa Supreme Court’s decision involving the recreational use statute to make it clear that landowner’s have liability protection for injuries occurring on the premises related to recreational activities where the landowner did not charge the entrant a fee and did not act willfully or maliciously.

Most recently, British Petroleum tossed in the towel on wind energy by announcing that it was going to try to sell its U.S. wind power stations.  BP is one of the largest companies involved in wind projects in the U.S.  BP had previously given up on other “renewable” energy ventures when it folded its venture into solar energy and its investment in trying to capture carbon and the associated storage business.  Even with the tax subsidies, BP decided that the investment just simply wasn’t worth it.  The cost effectiveness of “alternative” energy sources didn’t pencil out.