Case Summaries

IRS Instructions Come Back To Bite the IRS in Debt Discharge Case.

The petitioner defaulted on a car loan in 2005 with the car also being repossessed that year.  After the car was sold, an unpaid balance remained on the loan.  The lender submitted the account balance due to five collection agencies over several years to collect.  However, the balance due on the loan was not able to be collected.  In 2011, the lender wrote cancelled the debt and issued Form 1099-C to the petitioner in 2011.  The petitioner had moved, however, and the 1099-C was returned as undeliverable.  The petitioner did not report the income from the discharged debt on the 2011 return.  The IRS received a copy of the 1099-C and sought to collect the amount from the petitioner as income that should have been reported on the 2011 return.  While the petitioner argued that the income wasn't reportable due to the lack of receiving Form 1099-C, that argument failed.  However, the petitioner also argued that the income should have been reported in 2008 which was a tax year now closed.  The petitioner reached that conclusion based on the instructions for Form 1099-C which create a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on a debt at any time during a testing period ending at the close of the year.  The testing period is a 26-month period.  The last payment date on the loan was June 20, 2005, and the 36-month period expired on June 20, 2008.  The IRS bore the burden of proof under I.R.C. Sec. 6201(d) and was required to produce evidence of more than just receipt of Form 1099-C because the petitioner raised a reasonable dispute at the accuracy of the 1099-C and cooperated with the IRS.  Clark v. Comr., T.C. Memo. 2015-175.


The Cost of Acquiring An Internet Domain Name Is To Be Amortized Over 15 Years.

When an internet domain name is acquired from the secondary market (where it is already constructed and where the taxpayer will maintain it) for use in the taxpayer's trade or business, the IRS has stated that the cost of the acquisition is to be amortized over 15 years for non-generic domain names - those specific to a company, and generic domain named - those not tied to a specific company.  The costs are to be capitalized under Treas. Reg. Sec. 1.263(a)-4.  Non-generic domain names are amortizable intangibles under Treas. Reg. Sec. 1.197-2(b)(10) or 1.197-2(b)(6).  Generic domain names are amortizable intangibles under Treas Reg. Sec. 1.197-2(b)(6).  The IRS did not provide guidance on the result if the domain name was purchased from someone not currently using the domain name.  That would also seem to be amortizable over 15 years via the safe harbor of Treas. Reg. Sec. 1.167(a)-3(b).  C.C.A. 201543014 (Sept. 10, 2015).  

Crummey Trust Generates Large Gift Tax Exclusions But No Attorney Fees.

The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust.  The trust named 60 beneficiaries, primarily family members.  The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice.  In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member.  The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees.  On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse.  The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions.  As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests.  The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests.  The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions.  In subsequent litigation, the Tax Court held that the IRS position was sufficiently justified to defeat the petitioners' claim for attorney fees.  Mikel v. Comr., T.C. Memo. 2015-64.  The subsequent litigation involving the fee issue is Mikel v. Comr., T.C. Memo. 2015-173.

No Partial Bad Debt Deduction Allowed Taxpayer Had a Reserve For Anticipated Collections.

In this Field Attorney Advice from the IRS, the taxpayer loaned money against real estate that subsequently declined in value.  The real estate was foreclosed upon and the taxpayer lost money.  The taxpayer determined the loss in value of the remaining loans it held by estimating the date it expected to receive cash from the sale of the note or the sale of the real estate at foreclosure and then discounting that amount by the current appraised value to the present by using the discount rate of interest on the loan.  The IRS determined that a partial bad debt deduction was not allowed because Treas. Reg. Sec. 1.166-3(a)(2) requires the deduction be tied to an amount that is charged off during the year.  Here, the taxpayer had merely increased its reserve account for bad debts, which decreased its balance sheet assets.  It is insufficient to expect that some debts will be repaid at less than what the underlying note lists as the repayment terms.  An amount must actually be charged off.  F.A.A. 20153501F (Apr. 22, 2015).

Excluded Gain On Home Sale Recaptured When Buyer Defaults and Seller Reacquires Home.

In this case, the petitioner sold his home and 80-acres of land on the installment basis for a gain of $657,796.  The petitioner calculated the gain by excluding $500,000 of gain attributable to the home sale exclusion of I.R.C. Sec. 121.  The buyers defaulted and the petitioner reacquired the property in full satisfaction of the debt.  The IRS claimed the petitioner had to recognize gain upon repossession to the extent of money and other property received before repossession, which would, in essence, recapture the Sec. 121 exclusion previously claimed.  The court agreed with IRS that the general rules of I.R.C. Sec. 1038 applied  and noted that the petitioner was actually in a better position than before the sale because he had received some payments for the sale before the buyer's default and recouped the property.  On appeal, the court affirmed.  The court noted that there are two types of gain involved on reacquisition of real estate in accordance with I.R.C. Sec. 1038(b)(1) - gain "returned as income" on a prior return, and gain not yet "returned as income."  Here, the court noted that the petitioner had reported $56,920 as income.  The petitioner had not reported the $500,000 of gain attributable to the house, thus it was not "returned as income" on a prior return.  Thus, by failing to resell the property within a year, the petitioner recognizes $505,000 received in cash, less the $56,920 already recognized as income.  Debough v. Comr., 142 T.C. No. 17 (2014), aff'd.,No. 14-3036, 2015 U.S. App. LEXIS 15194 (8th Cir. Aug. 28, 2015).

IRS and White House Cannot Hide Behind Tax Code Confidentiality Provision.

The plaintiff filed  a Freedom of Information Act (FOIA) request with the IRS to determine whether the Obama White House had sought private taxpayer information from the IRS after the White House had made remarks on the tax status of Koch Industries (a private company).  The IRS refused to release any information, citing Internal Revenue Code Sec. 6103 which bars the IRS from divulging tax return information and divulging requests for taxpayer information.  The plaintiff then sued and the court disagreed with the IRS position, denying IRS' motion to dismiss the case.  The court held that I.R.C. Sec. 6103 does not allow IRS to shield records that might indicate that the White House misused confidential taxpayer information or that White House officials made an improper attempt to access that information.  Cause of Action v. Internal Revenue Service, No. 13-0920, 2015 U.S. Dist. LEXIS 114203 (D. D.C. Aug. 28, 2015).

Dependency Established To Claim Exemption for Common Law Spouse.

The petitioner resided in Hawaii with his common law wife.  He claimed a dependency deduction for her as she was listed as his common law wife on their return.  The IRS stipulated to an "affidavit of dependency" that she signed in which she said that during the tax year in question that she lived in the petitioner's home, had gross income of less than $3,500, and that the petitioner provided more than 50% of her support.  The court accepted the affidavit as evidence of the petitioner being entitled to the dependency deduction.  Shimanek v. Comr., T.C. Memo. 2015-165.

Real Estate Sales Activity Not Engaged In With Profit Intent.

The petitioners, a married couple, was deemed not be in the real estate sales business with a profit intent for the years at issue based on an analysis of multiple factors.  The court also determined that the petitioners did not substantiate their expenses for their deductions claimed on Schedule C.  Pouemi v. Comr., T.C. Memo. 2015-161.

Payments To Ex Are Not Alimony.

The petitioner received payments under a divorce agreement and claimed that they constituted alimony.  However, the payments were not terminated upon death as required by I.R.C. Sec. 71(b)(1)(D).  Thus, the payments did not constitute alimony.  Crabtree v. Comr., T.C. Memo. 2015-163.

Donee of Gift Liable For Gift Tax To Extent of Gift Value.

The decedent made taxable gifts during life, but failed to pay the associated gift tax.  Upon death, the estate did not pay the gift tax either.  The IRS claimed that the donees of the gifts owed the gift tax and interest on the gifts.  The donees argued that the interest on the gift tax was limited to the value of the gift to any particular done under I.R.C. Sec. 6324(b).  The court agreed that the interest on the gift cannot exceed the amount of the gift.  United States v. Marshall, No. 12-20804, 2015 U.S. App. LEXIS14584 (5th Cir. Aug. 19, 2015), aff'g in part and rev'g in part, In re Marshall, 721 F.3d 1032 (9th Cir. 2013) and withdrawing 771 F.3d 854 (5th Cir. 2014).

Pro Se Taxpayer Creates Taxable Income Out of Loss on Annuity Transaction.

The petitioner and wife bought an annuity in 2003 with proceeds they received from selling securities that triggered a $158,000 capital loss.  The annuity was purchased for $228,800 and additional contributions of $346,154 were made through 2006.  In 2007, the petitioner entered into an I.R.C. Sec. 1035 exchange for a different annuity with a start date of Feb. 3, 2047.  In 2010, the petitioner and wife withdrew $525,000 from the annuity to buy their current home.  At the time of the withdrawal, the cash value of the annuity was $761,256 with accrued earnings of $186,302.  The petitioner was issued a Form 1099R showing a taxable distribution of $186,302.  The petitioner did not report the taxable amount of the distribution, claiming instead that the income on the contract arose from capital gains incurred in the annuity that offset the capital loss and also because they hadn't made any money on the contract.  The court upheld the IRS position that the petitioner had "earned" $186,302 on the invested funds.  The court also imposed a 10 percent early withdrawal penalty and a 20 percent accuracy related penalty.  Tobias v. Comr., T.C. Memo. 2015-164.

No Interest Expense Deduction Due To Inadequate Records.

The petitioner was a sole proprietor landscaper that claimed an interest expense deduction on Schedule C.  IRS denied the deduction and the court agreed.  The petitioner failed to show a business purpose for the loans at issue, and his logs were not credible because they didn't show the purpose of the travel, time spent or amount of expense.  Ocampo v. Comr., T.C. Memo. 2015-150.


Inherited Asset Basis Information Reporting Deadline Pushed Forward.

I.R.C. Sec. 6035 was added to the Code by the Surface Transportation and Veterans Health Care Improvement Act of 2015 (STVHCIA).  Section 6035 specifies that a decedent's estate that is required to file Form 706 after July 31, 2015, must provide basis information to the IRS and estate beneficiaries by the earlier of 30 days after the date Form 706 was required to be filed (including extensions, if granted) or 30 days after the actual date of filing of Form 706  However, the STVHCIA allowed IRS to move the filing deadline forward and the IRS did move the date forward to February 29, 2016 for statements that would be due before that date under the 30-day rule contained in the STVHCIA.  IRS stated that executors and other persons are not to file or furnish basis information statements until the IRS issues forms or additional guidance.  Relatedly, the STVCIA modifies I.R.C. Sec. 1014(f) to require beneficiaries to limit basis claimed on inherited property to either the value of the property as finally determined for federal estate tax purposes, or the value reported to the IRS and beneficiary under I.R.C. Sec. 6035.  I.R.S. Notice 2015-57. 


IRS Botches Arguments and Disposition Was of a Partnership Interest Resulting in Capital Gain.

In 2003, an LLC bought oil and gas properties from another corporation and asked the corporate executives to manage the wells.  The executives, which included the defendant, founded a limited partnership to manage exploration and production of the properties.  The LLC loaned made a $6 million non-recourse loan to the LP for working capital.  Ultimately, the LP wound up with a 20 percent interest in the sale revenue after the LLC recovered expenses and had a 10 percent return on investment.  the LP partners limited tied their salaries to profits such that if the LLC earned nothing the partners did not have any profit.  The LP arranged for the LLC to sell the properties with the LP's interest being approximately $20 million which it reported as ordinary income.  Two years later, the LP filed an amended return reporting the $20 million as capital gain resulting from the sale of a partnership interest.  Amended K-1s were issued to the partners, including the defendant.  IRS issued refunds, but then later changed its mind and asserted that the income ordinary in nature as compensation for services rendered.  The issue before the court was whether the LP had a profits interest for services, or whether the relationship with the LLC meant that the arrangement was compensation for services provided in arranging the sale of the oil and gas properties (i.e., a commission for sale).  The IRS claimed that a partnership did not exist for tax purposes because the entity agreement disclaimed the existence of a partnership, the LLC contributed the funds and controlled the funds, owned the assets and the LP was not at risk.  The IRS also argued that the LP was a mere contract employee.  The LP claimed that it was a partnership for tax purposes and that it had exchanged the partners time and talent for a profit share.  The court determined that the LP was a partnership for tax purposes based on the objective facts of the parties' relationship and ownership interest in the value of the oil and gas operation.  Thus, because a partnership interest is a capital asset, the resulting income from the sale is capital gain.  The IRS did not argue that the LP partners had actually received a partnership interest for services which would result in ordinary income when the interest was issued.  United States v. Stewart, et al., No. H-10-294, 2015 U.S. Dist. LEXIS 110055 (S.D. Tex. Aug. 20, 2015).         

No Determination Made of Eligibility For Ag Chemical Credit.

The IRS declined to determine whether the subsidiary of a taxpayer was an eligible agricultural business in the trade or business of distributing specified agricultural chemicals under I.R.C.  Sec. 450(e)(2).  The IRS determined that the issue was inherently factual.  Tech. Adv. Memo. 201532034 (May 13, 2015).

Income Tax Addback For Fuel Credits To Occur on Quarterly Basis.

I.R.C. Secs. 6426(a) and (c) allow a taxpayer that blends biodiesel to claim a $1/gallon credit under I.R.C. Sec. 4081.  Also, I.R.C. Sec. 6426(e) provides for a $.50/gallon credit for a taxpayer that blends alternative fuel.  The credits expired for sales and uses after 2013, but TIPRA of 2014 extended them through 2014.  In this Notice, the IRS specified that taxpayers claiming the credits submit all claims for 2014 biodiesel and alternative fuel credits on a single Form 8849.  To the extent the credits reduce the claimant's fuel tax liability, the credits produce an income tax addback by reducing the excise tax deduction that the taxpayer can claim as part of its cost of goods sold or any other relevant tax income tax deduction.  That addback is to be done on a quarterly basis in accordance with the biodiesel or alternative fuel mixture sold or used during the quarter.  The credits are treated for 2014 as if they had never expired.  IRS Notice 2015-56, IRB 2015-35.

Person Not Designated As Tax Matters Partner Could Extend Tax Statute of Limitations.

A partnership can consent to allow the IRS to extend the statute of limitations by signing Form 872-P.  Normally, the Form would have to be signed by a designated tax matters partner.  However, in this case, the signer was no the designated tax matters partner.  The court held that the signature was effective to allow the statute of limitations to be extended because the signer had apparent authority and the IRS was reasonable in believing that the signer had the authority to act on the partnership's behalf.  The signed had also signed the partnership's tax return and was a managing member.  Summit Vineyard Holdings, LLC, et al. v. Comr., T.C. Memo. 2015-140.

Subordination of Mortgage Fails To Salvage Conservation Easement Donation.

The petitioner, a lawyer who practiced tax law, donated a permanent conservation easement on 80 percent of a 74-acre parcel to a qualified land trust.  The land was subject to a mortgage at the time of the donation and the mortgage was not subordinated until two years after the petitioner received a statutory notice of deficiency from the  IRS.  The petitioner argued that the state (ID) Uniform Conservation Easement Act protected the charitable use of the property, but the Tax Court noted that the Act would have only protected whatever interest remained after the lender was satisfied.  The Tax Court noted that the subordination agreement had to be in place at the time of the grant of the conservation easement.  The Tax Court upheld the imposition of a negligence penalty.  The appellate court affirmed.  The court held that Treas. Reg. Sec. 1.170A-14(g)(2) clearly required the subordination agreement to be in place at the time of the easement grant for the donor to claim a tax deduction for the value of the contributed easement.  The court noted that an easement cannot be deemed to be "in perpetuity" if it is subject to extinguishment at essentially any time by a mortgage holder who was not party to or aware of the agreement between the taxpayer and the donee.  Minnick, et al. v. Comr., No. 13-73234, 2015 U.S. App. LEXIS 14097 (9th Cir. Aug. 12, 2015), affn'g., T.C. Memo. 2012-345.     

IRS Eliminates Automatic Extension for Filing Certain Information Returns

In response to increased identity fraud instances, the IRS has announced that it is shortening the time period for extending certain information returns by eliminating the automatic 30-day extension option that is available for Form W-2s.  IRS will adopt a single non-automatic extension.  The IRS has removed Treas. Reg. Sec. 1.6081-8 and is adding Temp. Treas. Reg. Sec. 1.6081-8T.  The IRS has also published proposed regulations that would make permanent the changed contained in Temp. Treas. Reg. Sec. 1.6081-8T.  The new rule will also apply in the future to other information returns.  The new rule is effective for Forms W-2 due after 2016, and other information returns due on or after January 1 of the year the regulations are adopted as final, or if later, those due on or after January 1, 2018.  T.D. 9780.

No Deduction For Seized Drugs Because Value Not Included in Sales.

The petitioner operated a medical marijuana dispensary in West Hollywood, CA.  Federal Drug Enforcement Agency agents raided the dispensary and seized $600,000 worth of marijuana.  The petitioner, for the year at issue, reported $1,700,000 of gross sales and $1,429,614 in cost of goods sold.  The petitioner is entitled to deduct the cost of goods sold, but cannot deduct any other operating costs.  The petitioner claimed to have included the $600,000 amount in both gross sales and cost of goods sold.  However, the petitioner could not substantiate any of the income or deduction items and was not entitled to reduce his reported sales amount by the $600,000 he included in cost of goods sold.  In addition, the petitioner could not claim an I.R.C. Sec. 165 loss for the seized marijuana because I.R.C. Sec. 280A bars a deduction for any amount incurred in connection with trafficking in a controlled substance.  The court upheld the imposition of an accuracy-related penalty.  Beck v. Comr., T.C. Memo. 2015-149.

World Travel Expenses Disallowed Under Hobby Loss Rules.

The petitioner listed his business on his tax return as "World Travel Guide" and showed a net business loss of $39,138.  As he traveled, the petitioner blogged about his travels and hoped to profit from income generated via affiliate sales from the blog.  When that didn't pan out, the petitioner shifted to writing books about his travels.  The IRS disallowed the loss under the hobby loss rules of I.R.C. Sec. 183.  The court agreed with the IRS, noting that the petitioner did not maintain books or records, had no written business plan, no estimate as to when his website would be operational or when he would begin to earn money from the activity.  Pingel v. Comr., T.C. Sum. Op. 2015-48.

Rental Real Estate Losses Disallowed For Failure to Meet Fifty Percent Test.

The petitioner, a schoolteacher, also owned and managed various real estate rental properties on which he lost money in 2005-2007.  The petitioner claimed the losses were fully deductible because he satisfied the tests to be a real estate professional contained in I.R.C. Sec. 469(c)(7)(B) - more than fifty percent of his personal services for the years in question were spent in real property trades or business and he spent more than 750 hours each year in rental activities.  While the petitioner's logs showed that he satisfied both tests, the court found the logs to not be credible.  The petitioner did not include any "off-site" time as his teacher hours, and exaggerated his time on rental activities, including work for certain days on rental activities exceeding 24 hours.  Escalante v. Comr., T.C. Sum. Op. 2015-47.

Deduction for Home Office Expenses Denied and No Deductions For Autos.

The petitioner was an accountant that provided tax return preparation services to clients.  In addition to an office in town, the petitioner also met with clients at their businesses or homes and then did accounting work for them out of her residences.  For the years in issue, the petitioner rented out one residence to a friend and also occasionally stayed there overnight.  The petitioner claimed business-related deductions for both of her homes which the IRS denied.  The court upheld the IRS position on the basis that the taxpayer did not satisfy the principal place of business test and also because the petitioner did not use the home as a place to meet clients or customers and did not have a separate structure or part of the home set aside for business use.  Instead, the taxpayer had an office in town - another fixed location where she could perform substantial administrative or management activities.  The court also disallowed deduction for alleged business autos on the grounds that the petitioner could not show that she either owned or leased the vehicles in question.  Sheri Flying Hawk v. Comr., T.C. Memo. 2015-139.

State Excise Tax on Mary Jane Deductible.

The taxpayer paid the state (WA) excise tax on marijuana and questioned how to account for it for tax purposes.  The IRS noted that marijuana is a Schedule I controlled substance, but that the last sentence of I.R.C. Sec. 164(a) allows state-level taxes that are incurred in a trade or business or in an income-producing activity and that are connected with the acquisition or disposition of property to be capitalized.  As such, the state excise tax on marijuana could treat the payment for the tax as a reduction in the amount realized on the sale of property instead of as either a part of the inventoriable cost of the property or a deduction from gross income.  C.C.A. 201531016 (Jun. 9, 2015).

Passive Loss Material Participation Test Satisfied.

The petitioner chartered boats and entered into a management agreement with another organization that was responsible for marketing boats, setting charter prices, booking charters, maintaining records, collecting money and cleaning and maintaining the boats.  The petitioner was paid "net charter revenue," and the petitioner paid the organization a "turnaround fee" for each charter.  The petitioner also had the use of each of his two boats for two, two-week periods annually, paying for various expenses.  The activity encountered a loss, and the issue was whether the petitioner could satisfy the material participation test of Treas. Reg. Sec. 1.469-5T(a)(3)(the "more than others" test - more than 100 hours with more participation in the activity than anyone else).  The petitioner (and spouse) reconstructed their time to show 470 hours for one year and 732.5 hours in the activity for another year.  While the 470 was less than the 500 hours required by Treas. Reg. Sec. 1.469-5T(a)(1), but did meet the 100 hour test.  The petitioner was able to establish that their hours exceeded the hours of any other person in the activity.  Kline v. Comr., T.C. Memo. 2015-144.      

Mortgage Interest Deduction Limits Apply on an Individual Basis.

The petitioners, homosexual domestic partners, had $2.7 million in mortgage debt attributable to two homes that they jointly owned.  More than $2 million of the mortgage debt was associated with an 8,554 square foot home in Beverly Hills that they purchased for $3.2 million in 2002.  One petitioner claimed $194,599 in mortgage interest deduction for the two years at issue which IRS limited to $79,701, and limited the other petitioner to a deduction of $66,558 out of the $162,597 he had paid during the two years.  The IRS approach was to take the mortgage interest debt limit of $1.1 million contained in I.R.C. Sec. 163()(3) and apportion it between the two unmarried owners (based on the average outstanding mortgage balance).  The Tax Court agreed with the IRS, holding that the I.R.C. §163(h)(3) limitations on mortgage interest deductibility are to be applied on a per-mortgage basis rather than on per-individual basis.  As a result, unmarried co-owners, collectively, are limited to an interest deduction of $1.1 million ($1million of acquisition indebtedness and $100,000 of home equity indebtedness).  This is the same result that would apply to married taxpayers that co-own a residence.  On appeal, however, the appellate court reversed.  The court determined that the limitations are to be applied on a per-taxpayer basis (for a total of $2.2 million of mortgage debt).  A dissenting judge pointed out the absurdity of the majority opinion and noted that IRS was reasonable in limiting unmarried taxpayers to deducting the same amount as married taxpayers that file jointly.  Voss v. Comr., No. 12-73257, 2015 U.S. App. LEXIS 13827 (9th Cir. Aug. 7, 2015), rev'g., and remanding sub. nom., Sophy v. Comr., 138 T.C. 204 (2002).

Small Partnership Exception Is Only For TEFRA Purposes and Applies to Non-S Corporation Partners.

The IRS determined that Treas. Reg. Sec. 301.6231(a)(1)-1 means that any corporation, including those created under state law, that is not an S corporation is deemed to be a C corporation solely for the purpose of applying the small partnership exception to TEFRA.  The TEFRA exception applies to a partnership with 10 or fewer partners, all of whom are individuals or C corporations, absent an affirmative election to be subject to TEFRA.  C.C.A. 201530019 (Jun. 17, 2015).

Farming Operation Can Deduct Cost of Fieldpacking Materials When Purchased.

The petitioner is a C-corp. California farming operation utilizing the cash method of accounting (and the accrual method of keeping books for purposes of lenders with the result that inventory exists for each year at issue) that deducts the cost of various fieldpacking materials (clamshells, cardboard trays and cartons, etc.) that it uses to pack raspberries, strawberries and similar fruits and vegetables.  The IRS claimed that the petitioner could not deduct the cost of the fieldpacking materials until they were actually used, rather then when the petitioner purchased them.  Both parties agreed that the petitioner was not a "farming syndicate" as defined by I.R.C. Sec. 464 which would bar the use of the cash method of accounting, and prevent the deduction for "seed, feed or fertilizer, or other similar farm supplies" in a year before they are consumed.  However, IRS argued that Treas. Reg. 1.162-3 allowed a deduction only for those fieldpacking materials only to the extent they were used or consumed during the tax year.  The court disagreed with the IRS position.  The court noted that the fieldpacking materials are not "similar" to seed, feed or fertilizer because they aren't necessary to grow agricultural crops.  The court noted that I.R.C. Sec. 464 was aimed at tax shelters, not the type of taxpayer involved in the case, and that the fieldpacking materials are not "on hand" and are subject to cash accounting rules.  Thus, the cost of the materials were deductible when purchased.  The court held that Treas. Reg. Sec. 1.162-3 does not require a cash method taxpayer to defer deductions until they are used or consumed, if the cost of such items is deducted in a prior tax year.  The court did note that a limit on deductibility could apply if the materials were not used or consumed within one year.  Agro-Jal Farming Enterprises, Inc., et al. v. Comr., 145 T.C. No. 5 (2015).


Tax Court Says How to Determine Charitable Deduction of NIMCRUT.

The decedent created two irrevocable charitable remainder trusts during his life, one for each of his sons.  The decedent was the income beneficiary during his life, with each son then being the beneficiary of that son's trust.  The amount paid to the decedent during life and each son after the decedent's death, was the lesser of the net trust accounting income for the tax year or 11% of the net value of the trust assets for trust one or 10% for trust two.  If trust income exceeded the fixed percentage for that trust, the trustee was directed to make additional distributions to make up for prior years when the trust income was insufficient to satisfy a distribution of the fixed percentage for that particular trust (hence, the trusts were a "net income with makeup charitable remainder unitrust" - NIMCRUT).  The payout period was the latter of 20 years from the time of creation of the trusts or the date of death of the last beneficiary to die.  The decedent died about one year after creating the trusts, and his estate reduced the taxable value of the estate by the amount it deemed to be charitable (note - the estate did not claim a charitable deduction).  The IRS denied the deduction because the trusts did not satisfy the requirement that the value of the charitable remainder interest be at least 10% of the net fair market value of the property contributed to the trust on the date of the contribution as required by I.R.C. Sec. 664(d)(2)(D).  The estate claimed that it was entitled to a charitable deduction under I.R.C. Sec. 664(e) because the distributions were to be determined according to the applicable I.R.C. Sec. 7520 rate so long as the rate is above 5%.   The court determined that I.R.C. Sec. 664(e) was ambiguous, but that the legislative history supported the IRS position that the value of a remainder interest in a NIMCRUT is to be based on the fixed percentage stated in the trust instrument.  As such, the trusts failed the 10% test.  The court also noted that the IRS regulations on the matter were not helpful.  Schaefer v. Comr., 145 T.C. No. 4 (2015).   

Charitable Contributions Made Via Corporate Advances Generate Deduction To Extent Repayment Of Advances Occurs.

The taxpayer sold S corporation stock to an ESOP and remained involved in the S corporation business after the sale.  The taxpayer also paid for non-business expenses from the corporate account which were recorded in a ledger account.  The corporation, on behalf of the petitioner, made significant charitable contributions and IRS denied a charitable deduction because the taxpayer fully paid the ledger account balances with personal funds and was the party that bore the economic burden of the contributions.  In the latter half of the year in which the contributions were made, the taxpayer used corporate funds to pay off the ledger account balances previously incurred.  The Tax Court determined that the S corporation actually bore the economic burden of the contributions.  However, the court determined that the taxpayer did not prove the portion of contributions made in the latter half of the tax year were made with personal funds and did not establish with sufficient evidence that ledger account balances were bona fide debt of petitioner; as a result, the associated deductions were denied.  However, the taxpayer was allowed a charitable deduction for the amounts he had actually repaid the corporation.  He was not allowed to deduct the contributions where his repayments were immediately paid for by a new corporate advance.  On appeal, the appellate court affirmed.   Zavadil v. Comr., No. 14-1053, 2015 U.S. App. LEXIS 12262 (8th Cir. Jul. 16, 2015), aff'g., T.C. Memo. 2013-222).

No Casualty Loss For Damaged Autos.

A car rental company claimed a casualty loss for losses sustained when rental customers purchased the company's damage waiver and then had an accident and the company decided not to repair the vehicle and return it to their fleet.  The IRS determined that the loss was not deductible as a casualty loss because the loss was not sudden, unexpected and unusual in nature.  Instead, the costs associated with accidents are an ordinary and necessary expense of the car rental business.  C.C.M. 201529008 (Feb. 4, 2015).

Statute Of Limitations Not Extended on Refund Claim.

The taxpayer is a tax-exempt voluntary employees' beneficiary association (VEBA) insurance trust that did not have to file a federal income tax return unless it had unrelated business income.  The taxpayer obtained a membership in a mutual insurance company that later demutualized.  As a result of the demutualization, in 2004 the taxpayer received approximately $1.5 million in cash that IRS characterized as long-term capital gain with no income tax basis in accordance with Rev. Rul. 71-233.  For 2004, the taxpayer filed a Form 990T reporting the income as UBIT and paid the associated tax.  Two additional demutualization proceeds were reported similarly in 2006 and 2008. Later Fisher v. United States, 82 Fed. Cl. 780 (2008) was decided rejecting the IRS position on amounts received in demutualization.  The taxpayer filed an amended return for 2006 and 2008 based on the Fisher case.  The IRS disallowed the refund claims, but later approved the refunds based on the affirmance of the Fisher case on appeal (333 Fed. Appx. 572 (Fed. Cir. 2009).  However, the IRS Appeals Office determined that the refund claim was not timely filed with respect to the 2004 refund and the plaintiff sued for a refund on Mar. 28, 2013.  The trial court noted that the taxpayer's 2004 return was filed on Oct. 15, 2004, and that a refund claim had to be filed within three years in accordance with I.R.C. §6511.  The taxpayer argued that I.R.C. Sec. 6511 was inapplicable because the taxpayer was a non-profit entity who was not required to file a return.  The trial court noted that numerous other courts have rejected the same argument.  On the issue of whether the mitigation provisions of I.R.C. §§1311-1314 provided equitable relief from the statute of limitations, the court noted that IRS had made a final determination which established a basis (by referring to the Fisher case) which meant that, but for the statute of limitations, the taxpayer would have been entitled to a refund.  In addition, the trial court noted that IRS had taken an inconsistent position between its position taken in the final determination and the IRS's position that demutualization payments are taxable (due to the taxpayer's lack of basis in the payments).  Thus, the taxpayer satisfied the mitigation provisions of I.R.C. §§1311-1314 (the taxpayer satisfied its burden of proof that (1) IRS made a determination that barred it from correcting its erroneous filing; (2) the determination concerned a specific adjustment; and (3) the IRS had adopted a position in the final determination and maintained a position inconsistent with the erroneous inclusion or recognition of taxable gain.  The trial court granted the taxpayer's motion for summary judgment and IRS is required to make a return for the plaintiff.  However, on further review, the appellate court reversed.  The court noted that a timely refund claim was a jurisdictional prerequisite to a tax refund lawsuit, with the only exception being the mitigation provisions.  On those provisions, the court focused on I.R.C. Sec. 1312(7) which regards a determination that "determines the basis of property, and in respect of any transaction on which such basis depends, or in respect of any transaction which was erroneously treated as affecting such basis.  The appellate court determined that the denial of the 2004 claim was due to timeliness and was not a determination that "determined the basis of property."  The court held that IRS had not taken an inconsistent position and had not actively changed its longstanding position that mutual policyholders' proprietary interests have a zero basis when an insurance company demutualizes.  Instead, the court determined that the IRS had merely acquiesced in the 2009 decision of the Federal Circuit.  Thus, the taxpayer couldn't use the mitigation provisions the reopen a closed tax year based on a favorable change in or reinterpretation of the law.  Illinois Lumber and Materials Dealers Association Health Insurance Trust v. United States,  No. 14-2537, 2015 U.S. App. LEXIS 12675 (8th Cir. Jul. 23, 2015), rev'g., No. 13-CV-715 (SRN/JJK), 2014 U.S. Dist. LEXIS 59716 (D. MInn. Apr. 30, 2014).      


Tax Court Correctly Refused To Recognize Settlement Between Estate and IRS.

The decedent married his wife in 1955, had four children together, but later divorced in 1978.  Under the marital separation agreement, the decedent agreed to leave one-half of his eventual estate equally to the children.  The decedent remarried in 1979 and later executed a will and trust.  Under the trust terms, sufficient funds were to be set aside to buy an annuity that would pay the ex-wife $3,000 monthly.  The balance of the trust assets were to pass to the children, with six percent passing to each of three daughters and 16 percent to the son and the balance to the surviving spouse.  After the decedent's death, the children waived all potential claims they might have against the estate.  As a result, each daughter received approximately $3.5 million and the son received $9.5 million.  The estate claimed a deduction of $14 million for the payments to the children under I.R.C. Sec. 2053(a)(3).  The IRS denied the deduction in full and the estate filed a Tax Court petition.  Before trial, the IRS agreed to allow 52.5 percent of the $14 million deduction and informed the Tax Court.  Some of the children then sued the estate for fraudulent procurement of their waiver.  The estate settled by paying each child at issue an additional $1.45 million.   The decedent's estate then sought to set aside the settlement agreement based on mutual mistake of fact or because the IRS knew that at least one child was going to sue the estate before the Tax Court was advised of the settlement.  The Tax Court refused to set aside the settlement agreement between the parties.  On appeal, the court held that the estate could not set aside the settlement agreement on the grounds of mutual mistake because the doctrine didn't apply.  The estate simply failed to see that any of the children would sue the estate.  Also, the court held that the allegation that the IRS didn't reveal a statement by one of the children indicating the child would sue was not a misrepresentation that would allow the estate to set aside the settlement.   The settlement established the amount of the deduction.  Billhartz v. Comr., No. 14-1216, 2015 U.S. App. LEXIS 12730 (7th Cir. Jul. 23, 2015).    

Installment Agreements Are Not For Everyone.

The petitioner was before the IRS appeals office arguing that the appeals officer should have considered the petitioner's health and/or age or give the petitioner additional time to file a delinquent tax return when the appeals officer denied the petitioner the ability to satisfy his unpaid tax liability via an installment agreement.  The court agreed with the IRS because the petitioner did not submit the return that the IRS requested, nor the necessary financial information or any type of evidence of health or age claims within a reasonable time.  As such, the IRS did not abuse its discretion in denying the petitioner an installment agreement.  Hartmann v. Comr., T.C. Memo. 2015-129.

Home Office Deduction Disallowed.

The petitioner, a real estate agent, claimed a home office deduction for a dwelling unit that she claimed to use for business purposes.  The petitioner supported her claim with "aerial view" photos from Google coupled with handwritten notes.  The petitioner provided no other documents, canceled checks or receipts to bolster the claimed rental arrangement she had with her sister concerning the dwelling unit.  The court agreed with the IRS and denied any deduction for a home office because the petitioner couldn't show that any part of the dwelling unit was used regularly and exclusively for business purposes.  The court also disallowed expense deductions for telephone and internet, again for lack of substantiation.  The court also upheld the IRS assessment for failure to file based on receipt of a Form 1099 showing over $17,000 of income before the expenses at issue were claimed.  Grossnickle v. Comr., T.C. Memo. 2015-127. 


Corporate Overpayment Interest Rates Apply to S Corporations

The plaintiff, an S corporation coal mining company, overpaid excise taxes on coal sales which triggered refunds, plus interest for tax years 1990 through 1996.  The refund payments were made in 2009, but the plaintiff claimed that more interest should have been applied - to the tune of $6 million.  The plaintiff claimed that it was due the statutory rate of interest applicable to a non-corporate taxpayer - the federal short-term rate plus three percentage points.  The IRS claimed that the corporate rate applied - the federal short-term rate plus two percentage points.  However, a reduced rate of interest applies to overpayment refunds exceeding $10,000.  In that event, the interest rate is the federal short-term rate plus .5 percentage points.  The court agreed with the IRS that I.R.C. Sec. 6621(a)(1) treats an S corporation as a "corporation" for purposes of determining the applicable interest rate.  The court refused to follow a U.S. Tax Court decision that reached the opposite conclusion, and refused to give much weight to an Internal Revenue Manual provision that somewhat supported the plaintiff's argument.  The court did note, however that I.R.C. Sec. 6621(c) treats S and C corporations differently for purposes of determining underpayment interest.  Eaglehawk Carbon, Inc., et al. v. United States, No. 13-1021T, 2015 U.S. Claims LEXIS 862 (Fed. Cl. Jul. 16, 2015). 

Another Botched Conservation Easement Deduction Case.

The petitioner owned land that included the habitat of the golden-cheeked warbler, and endangered bird species.  The petitioner granted a conservation easement over the property to the North American Land Trust (NALT), claiming a multi-million dollar charitable deduction for the easement donation.  The easement deed allowed the petitioner and NALT to change the location of the easement restriction, and the petitioners retained the right to raise livestock on the property as well as hunt the property, cut down trees, construct buildings and recreational facilities, skeet shooting stations, deer hunting stands, wildlife viewing towers, fences, ponds, roads and wells.  The petitioners also sold partnership interests to unrelated parties who received homesites on adjacent land.  The appraisal at issue was untimely and inaccurately described the property subject to the easement, and a NALT executive failed to clarify the inconsistencies.  The court denied the charitable deduction and also imposed the additional 40 percent penalty for overvaluation (the easement was actually worth nothing).  Bosque Canyon Ranch, L.P., et al. v. Comr., T.C. Memo. 2015-130.   

No Deductible Loss on Property Transferred Incident to Divorce.

The petitioner divorced her husband.  Later the ex-couple agreed to modify their divorce settlement whereby the petitioner transferred property to her ex-husband in satisfaction of the petitioner's alimony obligation.  The petitioner claimed a deductible loss on the transfer.  The IRS disallowed the loss and the court agreed.  The loss wasn't deductible because the transfer was incident to a divorce, and the transfer was not deductible as alimony because it was not in the form of cash or its equivalent.  Mehriary v. Comr., T.C. Memo. 2015-126.

Gambling Losses Not Fully Deductible.

The petitioner had no permanent home and lived in casino hotels and gambled at the associated casinos.  He lost money gambling and attempted to fully deduct his losses on the basis that he was a professional gambler.  The IRS disagreed and the court agreed with the IRS.  The court noted that the factors under I.R.C. section 183 are relevant in determining whether the gambling activity is engaged in with the requisite profit intent and that the petitioner could not satisfy the tests.  The court noted that the petitioner did not maintain complete and accurate books and records, did not adjust his system of gambling or try to improve "profitability" by changing methods, did not have and did not develop any level of expertise, had no history of success in any business, had substantial income from non-gambling sources which funded his gambling addiction, and enjoyed gambling.  As such, the petitioner's gambling losses were deductible only to the extent of his gambling winnings as a miscellaneous itemized deduction.  Boneparte v. Comr., T.C. Memo. 2015-128.

Early Withdrawal From IRA To Pay Mortgage Triggers Penalty.

The petitioner withdrew funds from his IRA before reaching age 59.5 to pay delinquent mortgage payment so as to avoid a mortgage foreclosure on his home.  The exception from the 10 percent penalty under Treas. Reg. Sec. 1.401(k)-1(d)(3)(iii)(B)(4) for withdrawals so the funds can be used to prevent eviction from the taxpayer's principal residence due to foreclosure did not apply.  The exception has no application, the court held, to financial hardship.  Kott v. Comr., T.C. Sum. Op. No. 2015-42.

Court Blows Up Corporate Welfare Benefit Plan.

This case involved multiple cases that were consolidated involving the "Sterling Benefit Plan."  The plan was a purported welfare benefit plan consisting of separate plan that each employer that participated in the plan tailored to its employees concerning the payment of death, medical, and disability benefits.  An employee would designate a beneficiary that the plan would pay benefits to, and the death benefit was the face amount of the life insurance policy that the plan bought on the employee's life.  The premiums were paid by the employer via plan payments and the policy typically had a cash value that increased on an annual basis.  Non-death benefits were limited to cash value, and an employer could end plan participation and trigger full vesting of an employee in the life insurance policy.  An employee could take the policy in satisfaction of a post-death retirement death benefit upon retirement.  The case involved three corporations that were each wholly owned by a sole person, and an S corporation owned by three other persons.  The court determined that the plan was a split-dollar arrangement under which the shareholder/employees with insurance on their lives had compensation income in accordance with Treas. Reg. Sec. 1.61-22.  In addition, the payments to the plan were not deductible and the policies did not qualify as group term policies because they were individually underwritten.  The plan was a listed transaction, and the 30 percent accuracy-related penalty applied.  Our Country Home Enterprises, Inc., et al. v. Comr., 145 T.C. 1 (2015). 

IRS Wins Its Argument That Amount Was a Taxable Advance and Not a Loan, But Assessed Deficiency in Wrong Year.

The petitioner, an ex-NFL player, co-founded a non-profit business in 1997 to train at-risk persons to be automotive technicians.  Upon the death of the co-founder, the petitioner handled fundraising until he resigned in 2010.  The petitioner received a base salary and a business credit card for payment of business expenses.  However, the petitioner also charged personal expenses on the card.  The non-profit treated the personal expense charges as advances for future wages or business expenses.  Beginning in 2005, the non-profit started withholding money from the petitioner's salary for purposes of paying back the advances.  The petitioner resigned in 2010 at the time that the balance due on the credit card was $83,000.  The non-profit issued a Form 1099 to the petitioner for 2010 for the $83,000.  The petitioner did not include the $83,000 in income and IRS, upon audit, assessed additional taxes and penalties for 2010 based on the $83,000 being an advance and not a loan.  The court agreed that the $83,000 was taxable as an advance, but that it was taxable in the years received.  Those years were 2003 through 2006.  However, the only year in issue was 2010, so the case was dismissed.  If the tax years 2003-2006 were closed due to the statute of limitations, the IRS is barred from assessing any additional tax for those years (unless, of course, fraud (no SOL) or substantial understatement of tax is involved (six year SOL) - which also requires fraud to be present).  Starke v. Comr., T.C. Sum. Op. 2015-40. 

Circuit Court Agrees With Tax Court and Disallows All Expenses Other Than Sales Costs for Pot Facility.

The plaintiff is a medical marijuana facility operating in a state where such activity is legal.  It sold medical marijuana and provided vaporizers, food and drink, yoga, games, movies and counseling at no cost to patrons.  I.R.C. Sec. 280E disallows a deduction for amounts incurred by a business that traffics in a controlled substance.  The Tax Court noted that marijuana is a controlled substance and held that it was irrelevant that 15 states had legalized marijuana sales for medical purposes. Accordingly,  the Tax Court denied 100 percent of the petitioner's deductions associated with operating the vapor room were not deductible business expenses.  The Tax Court held that the petitioner failed to adequately substantiate revenue (and was not entitled to keep less formal documentation because the business is primarily a cash business) and must include all revenue in income that was reflected on its business ledgers (which exceeded the amount on the return).   The Tax Court did allow the petitioner to deduct it cost of goods sold (COOGS) as estimated by the court pursuant to the Cohan Rule, with a reduction of COGS by the amount of products given away. No operating expenses were deductible.  On appeal, the court affirmed.  The appellate court determined that the petitioner's business activity solely consisted of selling medical marijuana.  The other activities were not conducted for-profit.  As such, the petitioner's only business activity involved trafficking in a controlled substance, the I.R.C. Sec. 162 expenses for which were disallowed under I.R.C. Sec. 280E.  The court viewed it as immaterial that medical marijuana facilities did not exist at the time I.R.C. Sec. 280E was enacted.     Olive v. Comr., No. 13,-70510, 2015 U.S. App. LEXIS 11812 (9th Cir. Jul. 9, 2015), aff'g., 139 T.C. No. 2 (2012).

Weekly Market Sales of Foundation Were Unrelated Business Income

A foundation was established to develop and support an alumni association, with most of its income derived from sales at a weekly art and craft bazaar that includes a farmers' market and refreshment booths held at a parking lot on campus every weekend throughout the year.  The university allowed the foundation to use the parking lot, and associated rest rooms and utilities without cost for two of the three years under examination.  Vendors at the bazaar had to pay an application fee and then a monthly fee for space at the bazaar.  The IRS, on examination asserted unrelated business income tax and rejected the foundation's view that the bazaar advanced the recruiting of students as mere speculation.  The IRS also rejected the foundation's claim that the bazaar lessened the burdens of government, citing Rev. Rul. 85-2 primarily because the bazaar is not required by the associated community college district.  Nor did the bazaar, as claimed by the foundation, relieve the distress of the elderly because they were the primary attendees at the bazaar.  The IRS rejected this claim primarily based on Rev. Rul. 77-246 and its factual distinctions.  The foundation made a fall-back claim that it was exempt from UBIT on the basis that its bazaar income was rent from real estate under I.R.C. Sec 512(b)(3).  The IRS rejected this view because the vendor fees were paid to have the opportunity to sell merchandise rather than to use real property.  Tech. Adv. Memo. 201544025 (Jul. 10, 2015).  

IRS Sets 80 Percent Threshold For Capitalization or Current Deduction.

Under the tangible personal property regulations that became effective in 2014, the IRS declined to provide a percentage test for determining when there has been a replacement of a major component (or unit of property if the item has no major components) or substantial structural part of an asset (Treas. Reg. Sec. 1.263(a)-3) which would cause the associated expense to be capitalized.  However, in a guidance to examining agents, the IRS has established an 80 percent threshold for steam or electric generation property.  Thus, if 80 percent or more of a component (or unit of property if there is no component) of such property is replaced, then the expense must be capitalized under Treas. Reg. Sec. 1.263(a)-3(k). If less than 80 percent is replaced, the associated expenses are currently deductible.  LB&I-04-0315-002, impacting IRM 4.51.2 (Jul. 6, 2015). 

LLC Not Subject to Partnership Rules When Determining Status of Debt.

The taxpayer at issue in this advice from the National IRS office invested in a real estate transaction via a multi-member LLC taxed as a partnership.  The transaction was financed and the creditors ultimately foreclosed.  The foreclosure triggered income to the taxpayer that the taxpayer treated as cancelled debt income potentially excludible from income under the insolvency exception of I.R.C. Sec. 108(a)(1)(B) because, as the taxpayer claimed, the debt was recourse and the I.R.C. Sec. 752 rules applied due to the borrower being the LLC.  On audit, the examining agent claimed that the debt was nonrecourse resulting in the income triggered on foreclosure being nonexcludible.  On review by the National Office, the IRS did not make a determination as to the classification of the debt because that issue needed to be developed further, particularly because the debt did not impose an unconditional personal liability on the LLC.  The National Office stated that the debt could be recourse because of the existence of guarantees and pledges, however.  In addition, the National Office concluded that the regulations under I.R.C. Sec. 752 have no application in determining the classification of debt to a partnership.  The National Office pointed out that it is improper to determine the status of debt at the partnership level for I.R.C. Sec. 1001 purposes based on whether the partners personally guarantee the debt.  Taxpayers cannot rely on footnote 35 of Great Plains Gasification Associates v. Comr., T.C. Memo. 2006-276.   In this situation, if the debt is nonrecourse, the entire amount of the debt is realized income eligible for long-term capital gain treatment, but cannot be excluded from income.  CCM 201525010 (Mar. 6, 2015).

Log Book Showed That Activities Were Of Investor Type.

The petitioners, a married couple, owned five rental properties and had a $30,146 net loss on the properties which they deducted in full. The IRS disallowed over $28,000 of the loss on the basis that the loss was a passive loss.  The court agreed with the IRS. The petitioners’ logbook, while showing that the petitioners spent 764 hours in rental activities during the tax year, illustrated that the work the petitioners performed were more akin to investor activities rather than material participation in the activity.  A management company was hired to manage four of the properties and a separate company was hired to find tenants and lease the other property.  The petitioners performed research activities with respect to investment opportunities.  Padilla v. Comr., T.C. Sum. Op. 2015-38.

Too Much Control Over Trusts Cause Bad Tax Result.

The petitioner was a venture capitalist who had numerous start-up companies.  He had a Cayman Island insurer establish two variable life policies on elderly relatives of the petitioner where there was no fixed premium and no fixed benefit.  The petitioner put up the cash of approximately $700,000 to buy the policies through a grantor trust.  The cash could be invested in hedge funds and privately owned companies, and the policy income is not income to the petitioner if the petitioner did not direct the investments of the policies.  Here, all of the investments were in the petitioner's start-up companies and the evidence showed over 70,000 emails between the petitioner, his lawyer and the investment advisors.  One of the trust's was named "Jeff's Wallet" - the petitioner's first name was Jeff.  Via the investments, the petitioner generated about $12.3 million of wealth in eight years.  The court held that under the "investor control" doctrine of Rev. Rul. 82-54, 1982-1 C.B. 11, the petitioner was taxable on the income earned on the assets during the tax years in issue - amounting to about $1 million in tax.  Webber v. Comr., 144 T.C. No. 171 (2015).   

No Charitable Deduction For Donated Fossils.

The petitioner, a veterinarian, donated trilobite fossils and claimed a charitable deduction for the donation of $136,500 in one year and $109,800 in another year.  The petitioner claimed that he had donated long-term capital gain property allowing for the deduction of the FMV of the trilobites with no inclusion of the appreciation in value in income.  Trilobites have been found on every continent in the world, from mountaintops to deserts to oceans with many being instantaneously fossilized.  The petitioner's expert appraiser recognized his signature on Form 8283, but could not remember signing it, and could not recognize the appraiser letters that contained his signatures.  In any event, the appraisals were not contemporaneous because they did not state whether the charity had received any goods or services in exchange for the gift.  Isaacs v. Comr., T.C. Memo. 2015-121.

Capital Gains in Brokerage Account Belong To Taxpayer.

The petitioner claimed that the capital gains generated by a brokerage account in the petitioner's name need not be reported by her because the account was opened in her ex-husband's name.  The IRS claimed the gains should be reported by the petitioner.  The court agreed with the IRS, noting that the account required her signature and photo i.d. to open.  The petitioner had authorized her ex-husband to buy and sell stocks on the account, and it was implausible that ex-husband forged petitioner's signature.   The petitioner also received monthly account statements and had knowledge of the account balances.  The court held that the accounts and the income therein belonged to the petitioner.  Read v. Comr., T.C. Memo. 2015-115.