Case Summaries

North Central Rental & Leasing, LLC v. United States, No. 3:10-cv-00066 (D. N.D. Sept. 3, 2013)

(petitioner is subsidiary of business that sold construction equipment and machinery and conducted equipment rental and leasing which parent company previously did in-house; parent had working relationship with major equipment manufacturer and like-kind exchange program created with petitioner; transaction involved petitioner conveying equipment to qualified intermediary (QI) which then sold equipment to unrelated third party with parent buying replacement property from manufacturer; QI used sale proceeds to buy the replacement property from parent who then transferred replacement property to petitioner; result was petitioner ended up with replacement property, third party had relinquished property and parent corporation had proceeds and manufacturer’s bill not due for six months; in essence, parent ordered replacement parts in purported like-kind exchange from manufacturer without having to pay for six months; because third party and QI involved, petitioner argued that transaction was like-kind exchange; court determined that transactions were structured to avoid I.R.C. §1031(f) because both petitioner and subsidiary “cashed-out” on low-basis property; non-recognition treatment not allowed). 

Rev. Proc. 2013-30, I.R.B. 2013-36

(IRS provides relief to taxpayers requesting relief for S corporation elections; such relief had previously been provided in other revenue procedures, but IRS, with this notice, is consolidating the prior revenue procedures; provides the exclusive simplified methods for taxpayers to request relief for late S elections, ESBT elections, QSST elections and QSub elections and late corporate classification elections). 

Rev. Rul. 2013-17, I.R.B. 2013-38

(homosexual persons whose relationship is recognized as a legal "marriage" under state law will be treated as married persons for federal tax law purposes; thus such persons can later reside in state that does not recognize homosexual marriage and file a joint return; such persons can (but don't have to) amend returns to claim joint filing status for open tax years in which such persons married (but can't amend return to file single return); such persons can no longer file as single taxpayer; ruling inapplicable to state taxes; ruling specifically uses term "legal" to make clear that it is limited in application to states in which homosexual marriage is legal (and does not apply to civil unions, etc.), but is silent with respect to its application to homosexual marriage in states where such unions are not legal but are allowed; while U.S. Supreme Court opinion in Windsor directed at equal protection for homosexual couples, ruling uses phrase "same sex" rather than homosexual, and, therefore, has application to same-sex, non-homosexual marriages; ruling completely contrary to position of Social Security Administration (SSA) taken in Program Operations Manual System (POMS) in which SSA says that all claims filed on or after Jun. 26, 2013, or that were pending final determination as of that date, can be paid when the Number Holder was married in a state that permits homosexual marriage and is domiciled at the time of the application or while the claim is pending a final determination in a state that recognizes homosexual marriage;  SSA's position consistent with Sec. 216(h)(1)(A)(I) of SSA which determines family status by looking to courts of state in which individual domiciled and whether that state would consider applicant validly married at time of application; the 31 states that bar the state from recognizing a homosexual marriage granted in another state will need to enact legislation decoupling from federal definition).

Endicott v. Comr., T.C. Memo. 2013-199

(petitioner claimed trade or business treatment as a trader; petitioner held call options on average for one to five months and numerous stock positions for over a year; IRS deemed petitioner to be an investment portfolio manager rather than being in the trade or business of trading; petitioner had 204 trades in 2006 on 75 days, 303 trades in 2007 on 99 days (including seven months in 2006 in which petitioner executed less than three trades in any given month; in 2008, petitioner executed  1,543 trades but only on 112 days; petitioner claimed $300,000 deduction on Schedule C associated with trades including margin interest expense (should have been claimed on Schedule A and limited to investment income); IRS denied deductions and court agreed; trading days does not include days in which investments open; petitioner not attempting to swings in daily market due to overall holding period of call options).

Mitchell v. Comr., T.C. Memo. 2013-204

(in prior opinion, Mitchell v. Comr., T.C. Memo. 138 T.C. No. 16 (2012), court disallowed petitioner's charitable deduction for permanent conservation easement donation due to failure to satisfy mortgage subordination requirement of Treas. Reg. Sec. 1.170A-14(g)(2); in prior case, petitioner argued that conservation purpose of easement was protected in perpetuity even without subordination agreement because probability of default on mortgage negligible, but court rejected argument on basis that regulations require subordination agreement; in present case, petitioner argued that Kaufman v. Comr., 687 F.3d 21 (1st Cir. 2012) required Tax Court to reconsider prior decision; Tax Court disagreed, noting that Kaufman not binding on Tax Court because it addressed different legal issues - the "proceeds" regulation governing entitlement to proceeds on judicial extinguishment of easement while present case involved mortgage subordination regulation; court also noted that subordination regulation is specific and there is no "functional" subordination contemplated by the Regulation; court also rejected petitioner's argument that Carpenter v. Comr., T.C. Memo. 2012-1 creates a safe harbor and that the Regulation should be read as a safe harbor - court noted that Treas. Reg. Sec. 1.170A-14(g) is specific, mandatory and cannot be ignored; petitioner argued that court should create general rule with respect to perpetuity requirement of I.R.C. Sec. 170(h)(5)(A) based on Kaufman; court rejected argument on basis that Kaufman did not create general rule that protecting proceeds from extinguishment of conservation easement would satisfy perpetuity requirement of Treas. Reg. Sec. 1.170A-14(g)).

Humphrey v. Comr., T.C. Memo. 2013-198

(petitioner claimed medical expense deductions for purchase of various natural supplements and health foods to alleviate prostate cancer based on medical guidelines by Johns Hopkins Medical Urology, Harvard Medical School and Mayo Clinic; petitioner under care of two doctors since 2008 as part of phytotherapy treatment program; court noted that deductible medical expenses must be for treatment and purpose of alleviating prostate cancer in accordance with Treas. Reg. Sec. 1.213-1(e)(1)(ii); petitioner provided receipts to substantiate purchases and petitioners doctors suggested the supplements and health foods in accordance with medical guidelines; court determined that petitioner proved that health foods and supplements were for specific purpose of alleviating prostate cancer rather than simply for general health, and were deductible as medical expenses).

Jimastowlo Oil, LLC, et al. v. Comr., T.C. Memo. 2013-195

(petitioner owned working interests in oil leases that it purchased as "income programs" in TX wells from Energytec, Inc who was the primary worker of the wells; issue was whether Energytec and plaintiff were partners; no partnership agreement, just distribution of net income; plaintiff couldn't do anything with respect to wells; when operating agreement offered, plaintiff refused to sign; payment initially based on projected yields, but projections too optimistic and plaintiff ended up owing Energytec, Inc. money; plaintiff sued Energytec, Inc. for conducting Ponzi scheme and claimed deduction for theft loss; Energytec, Inc. filed bankruptcy; IRS claims plaintiffs not in partnership and plaintiffs argue court lacks jurisdiction because it is not a partnership; Energytec, Inc. did not file Form 1065 and Form 1120 stated company in oil business but did not refer to existence of partnership; court determines partnership exists with associated FPAA and notice of deficiency, and court lacks jurisdiction to redetermine affected items attributable to a source partnership  before source partnership-level proceeding complete; I.R.C. Sec. 469 issues not, therefore, before court).

Terry v. Comr., T.C. Sum. Op. 2013-69

(petitioners, married couple, purchased condo and wife responsible for managing condo; wife did not keep contemporaneous written record showing time spent on condo rental activities; petitioners' Schedule E showed rental loss for which petitioners claimed deduction; petitioners failed to satisfy 750-hour test of I.R.C. Sec. 469(c)(7) due to lack of substantiation of time spent on rental activities).

Superior Trading, LLC, et al. v. Comr., No. 12-3367, 2013 U.S. App. LEXIS 17814 (7th Cir. Aug. 26, 2013), aff'g., 137 T.C. 70 (2011)

(case involves sham partnership where IRS disallowed losses associated with tax shelter activities; court upholds imposition of 40 percent gross valuation misstatement penalty; court joins Third, Eleventh and First Circuits in holding that taxpayer that overstates basis and participates in sham transactions should be punished at least as severely as one who does only the former; opinion contrary to holding of Ninth and Fifth Circuits; court notes that U.S. Supreme Court has granted cert. to resolve conflict).

Triggiani v. United States, No. 12-697, 2013 U.S. Claims LEXIS 1170 (Fed. Cl. Aug. 26 2013)

(plaintiff, divorced, bought home in July of 2009 and claimed $8,000 FTHB tax credit; IRS disallowed credit because plaintiff had claimed deductions for real estate taxes and mortgage interest on prior joint return with wife within statutory time period and, thus, was not a first-time homebuyer; IRS also asserted that plaintiff’s wife had owned couple’s home as principal residence which ownership was attributed to plaintiff for purposes of FTHB tax credit; former spouse continues to own couple’s prior residence and divorce decree not final until after plaintiff purchased home in 2009; court noted that plaintiff could only qualify for FTHB tax credit if home purchased after divorce final and he no longer had any prior interest in marital home; settlement agreement entered into by couple in July not final adjudication of divorce; divorce not final under state law until September 28, 2009; plaintiff had beneficial interest in marital home within three years of purchase of new home and plaintiff does not qualify for FTHB tax credit).

Priv. Ltr. Rul. 201334005 (May 7, 2013)

(involves request for extension of time to file Form 8939 to make I.R.C. §1022 election and to allocate basis in accordance with I.R.C. §1022; decedent died in 2010; executor satisfied for requirements of extension of time to file Form 8939; 120-day extension granted).

Broz v. Comr., No. 12-1403, 2013 U.S. App. LEXIS 17636 (6th Cir. Aug. 23, 2013), aff'g., 137 T.C. 46 (2011)

(taxpayer invested in cell phone industry and obtained FCC licenses to serve rural areas; taxpayer formed S corporation and contributed license to it in exchange for stock; another S corporation created that acquired more licenses and transferred them to LLCs in exchange for LLC assuming debt for licenses; S corporation had no income except that allocated to it from first S corporation; all entities went bankrupt and taxpayer claimed it had sufficient basis to deduct losses because money was borrowed from one S corporation and loaned to another S corporation; IRS disallowed flow-through losses on basis that transfer of funds was not first loaned from the S corporation to the taxpayers and then to the other S corporation; step-transaction doctrine applied; payments recharacterized as loans only via year-end reclassifying journal entries and other documents; allocation of purchase price of equipment to depreciable assets not correct  and that some entities not actively engaged in trade or business and, thus, no amortization for deductions related to FCC licenses; on further review, court affirmed; appellate court determined that taxpayer had insufficient debt basis in S corp. to allow pass-through losses because taxpayer served merely as conduit for loans and there never was any direct indebtedness to the taxpayer; business expense deductions also disallowed because taxpayer did not operate any networks and, thus, not actively conducting business; relatedly, no amortization deductions under I.R.C. Sec. 197 for FCC licenses that taxpayer acquired because no active trade or business).

Fonteneaux v. Comr., No. 12-60418, 2013 U.S. App. LEXIS 17691 (5th Cir. Aug. 23, 2013)

(petitioner received early retirement plan distribution but didn’t report amount on timely filed return (for which he only signed return after filing deadline);  petitioner did not pay additional 10 percent penalty and didn’t show reasonable cause for failure to pay penalty; court did not err in allowing IRS agent to testify).

United States v. Holmes, No. 12-1164, 2013 U.S. App. LEXIS 17658 (10th Cir. Aug. 23, 2013)

(plaintiff's corporation (plaintiff was sole shareholder) went out of business in 1998 and was dissolved administratively in 2005; IRS assessed corporate taxes for tax years 1994-1996 and received Tax Court judgment; by the time judgment received, corporation not in existence and IRS sought to collect corporate tax liability from plaintiff; corporation had made distributions to plaintiff from 1995 to 2002 of over $3.6 million during time it was winding up operations; court determined that plaintiff liable for tax as "transferee of corporate assets; court indicates that outcome likely different if corporation liquidated without having made distributions to plaintiff).

Golit v. Comr., T.C. Memo. 2013-191 (2013)

(petitioner claimed head-of-household status and dependency deduction for a person she claimed was her son that was only two years younger than petitioner; petitioner’s testimony not credible that claimed son was adopted and no other family relationship existed;  alleged son not member of petitioner’s household during tax year in issue, but only lived with petitioner temporarily during tax year; “son” too old to be qualifying child and lack of evidence that “son” disabled; lack of evidence that petitioner provided more than 50 percent of support to “son”). 

Dunford v. Comr., T.C. Memo. 2013-189

(petitioners, married couple, resided in Quincy, IL, but traveled for business; I.R.C. Sec. 163 allows deduction for mortgage interest on principal residence and one other residence as elected by taxpayer; neither Code nor regulations detail how election to be made or timing of election; petitioners had motor home on which they claimed mortgage interest deduction; court agreed with IRS and all deductions other than for interest expense should be disallowed under I.R.C. Sec. 280A(a) due to lack of substantiation the identifiable portion of motor home used for business; while IRS asserted that petitioners couldn’t claim I.R.C. Sec. 162 travel-related expenses because petitioners lived in motor home and were, as a result never away from home, some expenses allowed during exam and court dismisses argument of IRS on this point). 

Direct Marketing Association v. Brohl, et al., No. 12-1175, 2013 U.S. App. LEXIS 17298 (10th Cir. Aug. 20, 2013)

(trial court held that state (CO) law subjecting out-of-state retailers to sales and use notification and reporting requirements (Colo. Rev. Stat. §39-21-112(3.5)) violated Commerce Clause; permanent injunction issued; court noted that Quill Corp. v. North Dakota, 504 U.S. 298 (1992) prohibits states from imposing the same obligations on out-of-state retailers with no physical presence in the taxing jurisdiction); defendant failed to meet “very high burden of proof under the strict scrutiny standard” to overcome facial invalidity of the Colorado law”; on appeal, court determined it couldn’t review trial court’s ruling because Taxpayer Injunction Act (TIA) divested trial court of jurisdiction over plaintiff’s claims because issue was whether case involved sought to bar CO from exercising sovereign power to collect revenues; state law provides procedures to challenge use tax notice and reporting requirements that, after administrative remedies exhausted, plaintiff could proceed to state court and ultimately to U.S. Supreme Court; case remanded for dismissal of Commerce Clause claims and dissolution of permanent injunction).

Gullion v. Comr. T.C. Sum. Op. 2013-65

(petitioner was a software designer with a six-figure income who also lost large sums in music endeavors; IRS denied deduction for substantial losses attributable to music activities under hobby loss rules; court disagreed on basis that factors favored petitioner; music activity was regular and continuous, petitioner had training in music, organized jazz festival, music industry has undergone change and petitioner attempted to change his music activity to become profitable; history of losses less persuasive in “art” field than in other fields and more time needed to achieve success in music than in other fields; court stated that petitioner’s six-figure income as software designer “modest”; elements of personal pleasure petitioner enjoyed in music activities did not negate profit motive). 

Williams v. Comr., T.C. Sum. Op. 2013-63

(petitioners, married couple, attempted to deduct losses from rental real estate activities; during years at issue, husband was real estate appraiser and wife had full time job at technology company; petitioners owned multiple real estate properties in various states and made grouping election via I.R.C. Sec. 469(c)(7)(A); real estate losses exceeded gross income on joint returns; IRS disallowed losses and court agreed; neither spouse satisfied real estate professional test due to lack of records and inconsistent testimony; active participation exception unavailable due to petitioners’ adjusted gross income exceeding $150,000; accuracy-related penalties imposed). 

Payne v. Comr., T.C. Sum. Op. 2013-64

(charitable deductions denied due to lack of substantiation; case involved tag-team of IRS employees attempting to defraud church and falsifying documents in order to claim deductions for non-existent contributions to church; accuracy-related penalty imposed). 

Kumar v. Comr., T.C. Memo. 2013-184

(petitioner was a 40 percent shareholder in an S corporation who received a Form K-1 for $215,000 of S corporation ordinary business income and $2,000 of interest; petitioner did not receive cash distribution and, after an accounting sold his stock to the S corporation in a complete redemption of his interest; petitioner did not report the K-1 income on the basis that he was not beneficial owner of his shares during year in question because he was frozen out as a shareholder; no agreement existed allowing other shareholder to take beneficial ownership away from petitioner and petitioner still had economic benefit of shares; petitioner liable for tax on share of S corporation income). 

Rev. Proc. 2013-29, I.R.B. 2013-33, modifying and clarifying Rev. Proc. 2011-18, 2011-5 I.R.B. 443

(IRS modifies rule for deferring income on pre-paid gift cards; IRS clarifies what happens when gift card redeemable by entity whose financial results are not included in taxpayer's applicable financial statement (AFS); for such taxpayers, payment recognized in income to extent gift card is redeemed; for taxpayer without an AFS, the taxpayer will recognize the payment in income when it is earned, which is when the gift card is redeemed; any payment received by the taxpayer that is not recognized in income in the year of receipt, must be recognized in the subsequent year).

Sean McAlary Ltd., v. Comr., T.C. Sum. Op. 2013-62

(solely-owned S corporation where petitioner was sole owner and real estate broker of S corporation’s real estate business; petitioner was also president, secretary, treasurer, sole director and most productive salesman of S corporation; petitioner also manager operations of S corporation; petitioner’s salary set at $24,000 annually, but was never paid; for tax year at issue, no wages paid or withheld, but shareholder received $240,000 in distributions; shareholder, for tax year at issue, reported share of S corporation’s income and loss on Schedule E - $231,454; court agreed with IRS that compensation level not reasonable; IRS utilized same “engineer” as in Eighth Circuit Watson case, and determined that $100,000 was reasonable compensation; court did not completely accept IRS salary computation, but determined reasonable compensation was $83,200 and payroll tax due on such amount; case represents first time where S corporation salary not paid any salary and court did not reclassify 100 percent of distributions as compensation). 

Priv. Ltr. Rul. 201332001 (May 10, 2013)

(taxpayer proposed that joint and survivor life insurance policy on married couple would be purchased by newly created irrevocable trust (second trust) from previously existing trust; both trusts were grantor trusts and on death of surviving spouse assets of initial trust to be distributed outright to couple's children; after creation of initial trust, one child diagnosed with disability impacting ability to manage property; taxpayer proposed to create second trust with children as beneficiaries, but that disabled child's property held in special needs trust; second trust t0 buy policy from initial trust at value as determined by interpolated terminal reserve plus last gross premium payment before sale date; IRS determined that proposed purchase would not constitute transfer for value with the result that no portion of insurance proceeds ordinary income to beneficiaries; both trusts grantor trusts, and husband treated as owner of second trust; thus computation of gain or loss with respect to second trust same as with first trust and transaction within exception to transfer for value rule under I.R.C. Sec. 101(a)(2)(B) to extent policy insures husband's life; to extent policy insures wife's life, that portion of policy transferred to husband as partner of insured under I.R.C. Sec. 101(a)(2)(B) under partnership theory).

Bartlett v. Comr., T.C. Memo. 2013-182

(petitioner developed landscaping business in Jackson, WY, and later purchased ranch property in ID about 220 miles from Jackson on which he started a bull breeding business; petitioner employed three of his landscaping business employees to work as ranch hands and had a local farmer to assist with cattle; petitioner testified that he spent more than 1,000 hours on the bull breeding activity during years at issue, but did not maintain contemporaneous log or the equivalent, but did create schedules post-audit; loss from bull breeding activities for years in issue exceeded $100,000 each year; court determined that petitioner did not satisfy any of the material participation tests under the passive loss rules and did not establish that bull breeding activity was engaged in on a basis that was regular and continuous; losses from bull breeding activity not deductible).  

Glass Blocks Unlimited v. Comr., T.C. Memo. 2013-180

(petitioner was S corporation that made and sold glass blocks for North American real estate market; S corporation president only full-time worker and was responsible for all operational and financial decisions; S corporation did not pay president salary or wages, but did make distributions which IRS treated as wages subject to FICA and Medicare; president's services generated all of S corporation's income; some of distributions not treated as loan repayments for advances president made to petitioner due to lack of substantiation; while transfers reported as loans on Forms 1120S, no supporting documentation and president did not treat such amounts as loans; court sustained IRS' wage classification of over $30,000 for each of 2007 and 2008 even though petitioner's net taxable income far less than $30,000 which meant that court expected corporation to incur taxable loss so as to generate payroll taxes). 

C.C.A. 201334041 (Aug. 6, 2013)

(taxpayer is married but temporarily living apart from spouse due to spouse’s employment and raised question as to whether filing status could be head of household (HOH); IRS determined that HOH status not available if spouse away by reason of business and planned to share common household with taxpayer in future – spouse’s absence merely temporary absence; taxpayer not unmarried at close of tax year in accordance with I.R.C. Sec. 7703(b) and Treas. Reg. Sec. 1.7703-1(b)(5)). 

Bagley v. United States, No. CV-10-00483-RT(FMOx), 2013 U.S. Dist. LEXIS 109801 (C.D. Ca. Aug. 5, 2013)

(plaintiff was accountant whistleblower and brought qui  tam lawsuit against employer under False Claims Act; plaintiff received $36.6 million in settlement proceeds and $9.4 million for attorney fees of $18.5 million actually incurred; plaintiff claimed $3.8 million deduction for attorney fees paid but not awarded in settlement as fully deductible business expenses not subject to 2 percent limitation on miscellaneous itemized deductions and as fully deductible for AMT purposes; court determined that plaintiff in trade or business of pursuing lawsuit and associated attorney fee expenses fully deductible; plaintiff provided services to government as activities as relator; court noted that plaintiff kept detailed log and put in 5,963 hours in pursuing lawsuit and that his litigation activities were regular and continuous). 

Hessing v. Comr., T.C. Memo. 2013-179

(petitioner held title to tracts of real estate to be used by father's construction business; because father could not obtain additional credit on own, father used petitioner's favorable credit rating to buy and develop the tracts; petitioner did not receive any payments, but served as conduit for payments to and from father; after expiration of three-year statute, IRS claimed petitioner had unrecognized income from sale of tracts resulting in omission from gross income that exceeded 25 percent thereby allowing six-year statute of limitations; court determined, based on testimony of witnesses, that petitioner only served as father's agent and that under assignment of income doctrine, father required to report income rather than petitioner as agent; six-year statute inapplicable). 

F.S.A. 20133101F (Aug. 2, 2013)

(no abandonment loss deduction for cost associated with proposed stock offering; while reorganization plan including stock offering was terminated, no abandonment actually occurred because taxpayer had intent to complete reorganization at future date in separate transaction; abandonment loss deduction only available if entire transaction abandoned, and costs of pursuing alternatives that are not consummated must be capitalized).  

Rogers v. Comr., T.C. Memo. 2013-177

(petitioner is a minister that paid $35,000 in mortgage and utility payments for the home he owned; church organization petitioner affiliated with did not comply with I.R.C. Sec. 107 but did incorporate petitioner and petitioner signed vow of poverty; no Form 4361 timely filed to obtain exemption from self-employment tax; petitioner assigned his income to the affiliated church organization which fed, housed and clothed petitioner; petitioner's salary not received from third party; instead petitioner received compensation for services rendered to affiliated religious organization; no income transferred to religious organization via vow of poverty; payments religious organization made on behalf of petitioner only benefited petitioner in meeting basic living expenses). 

T.D. 9625 (Jul. 31, 2013)

( IRS issuance of final regulations involving 50 percent deduction limitation for meal and entertainment expenses under I.R.C. Sec. 274; limit applies to reimbursement or other expense allowance arrangements between payor (could be agent of employer or third party) and employee; when independent contractor reimbursed, deduction limitation doesn't apply if contractor accounts to client under I.R.C. Sec. 274(d) and regulations; but limits to apply to independent contractor and not to client if contractor fails to account to client; multi-party reimbursement arrangements analyzed separately; effective to expenses paid or incurred in tax years beginning after Aug. 1, 2013, but regs. can be applied to expenses paid or incurred in tax years beginning on or before Aug. 1, 2013 for which the limitations period on credit or refund under I.R.C. Sec. 6511 remains open). 

Deseret Management Corporation v. United States, No. 09-273T, 2013 U.S. Claims LEXIS 987 (Fed. Cl. Jul. 31, 2013)

(in transaction structured as like-kind exchange, sole country music radio station in Los Angeles exchanged for various other radio stations; plaintiff claimed that Los Angeles radio station contained no appreciable goodwill and, as such, no taxes triggered by transaction; bulk of purchase price allocated to FCC license with nothing attributable to goodwill in accordance with appraisal; IRS claimed that LA station had $73.3 million of goodwill and FCC license worth less than allocated by parties; plaintiff claimed no goodwill because change in LA radio station format would completely change listener base and, as such, no inherent value inherent attributable to future customer patronage as required by I.R.C. Sec. 197 and Treas. Reg. Sec. 1.197-2(b)(1); while court disagreed with plaintiff's assertion that change in format that eliminates customer patronage erases goodwill, court noted that broadcast stations can still have goodwill independent of that circumstance; while goodwill possible, court that there actually was no goodwill involved in transaction based on value of other assets of the seller and use of residual method for determining goodwill). 

Carpenter, et al. v. Comr., T.C. Memo. 2013-172, reaffirming on reargument, T.C. Memo. 2012-1

(petitioner acquired tract in late 2003 in fee simple and conveyed conservation easement to qualified entity the next day; conservation easement deeds contained clause that easement could be terminated by mutual agreement of parties; gift to entity did not create charitable trust and remote possibility that easement would be terminated immaterial; transfer to entity is a restricted gift for preservation and protection of conservation of donated property; cy pres doctrine does not bar conservation easement in event it is not possible to carry out purpose of easement; conservation easement could be terminated by mutual agreement and easement fails to comply with perpetuity requirement of Treas. Reg. Sec. 1.170A-14(g); petitioner argued on reargument that court had not applied rule espoused in Kaufman v. Comr., No. 11-2017, 2012 U.S. App. LEXIS 14858 (5th Cir. Jul. 19, 2012), vac'g., 136 T.C. 294 (2011); however, court noted that Kaufman involved termination of scenic easement by reason of mortgagee's reservation of casualty insurance or condemnation proceeds (not involved in present case), and that deed of trust in Kaufman stated that nothing limited donee's right to give consent to changes in easement deed or abandon some or all of donee's rights; in present case, language in easement grant provided for extinguishment of easement by mutual agreement of parties, and nothing in easement grant limited discretion of parties to abrogate easement).

Azimzadeh, et al. v. Comr., T.C. Memo. 2013-169

(partnership formation case; case arose primarily due to petitioner's failure to report W-2 wages; petitioner claims partnership existence so as to broker tax liability with partner; federal, not state, law controls classification of "partners" and "partnerships" for federal tax purposes; hallmark of partnership existence is two or more persons carrying on a business and divide the profits; no written agreement; while "partner" could sign checks he never testified; petitioner's recordkeeping poor to non-existent; court unable to tell what petitioner contributed or what "partner" contributed, and petitioner admitted to changing dates on various receipts provided to IRS so testimony not credible; petitioner failed to prove partnership existence).

Priv. Ltr. Rul. 201330047 (Apr. 30, 2013)

(taxpayer sought waiver from 60-day period for rolling over distribution from retirement account; taxpayer received statement from former employer in December showing that distribution was made from account to taxpayer; taxpayer contacted former employer about the distribution because no check had been received and employer maintained that check had been mailed in December; check reissued in February and amount deposited into IRA in March - beyond 60 days after original check mailed; 60-day waiver not required because beginning of 60-day period not when check originally issued, but when taxpayer actually receives check). 

Priv. Ltr. Rul. 201330016 (Apr. 16, 2013)

(taxpayer's mother died naming taxpayer as beneficiary of non-qualified annuities that had not been annuitized; taxpayer elected to receive payout over taxpayer's life expectancy, but learned that she could obtain new annuity from a company with a higher payout than would be received from issuers of inherited annuities; taxpayer structured tax-deferred exchange under I.R.C. Sec. 1035 to obtain annuity with higher payout from different company with the money from original annuities sent directly to the different company; IRS approved transaction as tax-deferred if all requirements of I.R.C. Sec. 1035 satisfied; ruling provides additional option to taxpayers that inherit annuities other than either electing to annuitize the contract within 12 months or taking all of the money out within five years and pay tax on any deferred gains, or, in this instance since taxpayer was not spouse of decedent, wait at least five years and then liquidating the contract). 

Priv. Ltr. Rul. 201330011 (Mar. 5, 2013)

(decedent died owning several IRA accounts with estate named as beneficiary; decedent’s will specified that all residuary assets  to be paid into trust with a charities to split the residuary; estate’s  personal  representative sought to assign IRAs to  charities; IRS determined that charities to include in gross income the amounts of IRD of the IRAs assigned to them when distributions from IRAs are actually received by charities). 

Thorpe v. Comr., No. 8308-R, 2013 Minn. Tax LEXIS 35 (Minn. Tax Court Jul. 25, 2013)

(petitioners, married couple, inherited 5.5-acre farm and operated as a dairy until 1997 when property converted to petting zoo, go-cart track and home sale activities; petitioners lost money and claimed deductions for expenses related to activities which resulted in substantial Schedule C losses; deductions denied on state return due to lack of substantiation; court affirmed denial and also affirmed imposition of accuracy-related penalty). 

C.C.A. 201334039 (Jul. 25, 2013)

(question submitted on “contiguous parcel rule” and “enhancement rule” of Treas. Reg. Sec. 1.170A-14(h)(3)(i) with respect to donation of permanent conservation easements; under contiguous parcel rule, if easement covers portion of contiguous property donor (and donor’s family) owns, amount of deduction is difference between FMV of entire contiguous parcel before and after easement grant; under enhancement rule, if easement grant increases value of donor’s other property, deduction to be reduced by amount of increase in donor’s other property; advice provided insight on who is member of donor’s family in context of ownership of contiguous parcel; mother part of family as is disregarded entity owned by donor’s daughter because daughter is member of family; donor’s wholly owned LLC also member of family; LLC taxed as partnership owned entirely by donor, donor’s wife and donor’s son is also member of family; LLC classified as partnership where 40 percent owned by unrelated persons and donor’s wife owns 60 percent also deemed to be related party; LLC taxed as partnership owns contiguous parcel and donor owns 50 percent of LLC as does unrelated person – LLC unrelated party and deduction equals difference between FMV of only parcel that donor owns pre and post grant; contiguous parcel owned by tiered LLCs (taxed as partnerships) that will have enhanced value due to development restrictions on parcel that donor owns outright – donor owns more than 50 percent of tiered LLCs and deduction reduced by value of enhancement to tract LLCs own; contiguous parcel owned by tiered LLCs taxed as partnership of which donor owns less than 50 percent are not related to donor and deduction is difference in FMV before and after easement grant).

Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund, et al., No. 12-2312, 2013 U.S. App. LEXIS 15190 (1st Cir. Jul. 24, 2013)

(private equity funds that actively manage operations of their portfolio companies are engaged in trade or business under ERISA and are not merely passive investors; immaterial whether fund has employees or if its management company has such employees and offices, but key is whether fund's activities exceed those of typical investor; impact of decision is that private equity funds may be liable for unfunded pension liabilities of their portfolio companies, and income from such fund is potentially subject to UBIT or withholding taxes; in addition court's decision means that income of private equity managers taxed at ordinary income rates rather than capital gain rates)

Shaw v. Comr., T.C. Memo. 2013-170

(petitioner made advances during year in issue totaling $808,000 to family-owned business that petitioner was part owner of and later claimed bad debt deduction of $808,000 upon not being repaid; note called for 10 percent interest, but no collateral required and line of credit remained unsecured; petitioner failed to prove that advances were loans - no proof of repayment expectation or intent to enforce collection; no documentation of business's credit worthiness; petitioner's conduct inconsistent with outside third party lender; advances not worthless in 2009, the year deduction claimed; bankruptcy had not been filed even by mid-2011; no default occurred in 2009; deduction denied). 

IRS LB&I-04-0713-006 (Jul. 24, 2013)

(IRS guidance to auditors trying to determine which contracting party qualifies for I.R.C. Sec. 199 where one party contracts manufacturing out to another party; auditors to request information in writing explaining support for position that taxpayer bears burdens and benefits of ownership in tax year; certification statement to be completed by taxpayer as well as other contracting party; certification to be that taxpayer has determined it bears burdens and benefits of ownership over qualifying property and that taxpayer not required to record reserve for financial statement purposes for such determination; certification to be provided to auditor within 30 days of date information requested or by Sept. 30, 2013 if under exam as of July 24, 2013; once certification provided, IRS not to challenge taxpayer on benefits and burdens issue; if certification not provided, auditors to apply regular audit procedures to determine which taxpayer bears benefits and burdens of ownership; supersedes LB&I-4-0112-001). 

Bugarin v. Comr., T.C. Sum. Op. 2013-61

(passive loss case involving real estate professional test; petitioners, married couple, owned three rental houses that wife took care of and had no other paid employment (so 50 percent test automatically satisfied); log created using petitioner's cell phone and "Outlook" software; log not created contemporaneously with events described therein and with little to no explanation of how activity described related to particular property; log lacked sufficient detail; no grouping election made and many of the 750 hours required to satisfy second branch of real estate professional test did not count towards material participation test; 20 percent penalty applicable).

Williams v. Comr., T.C. Sum Op. 2013-60

(ordained minister began employment with church in 2005 and employment agreement showed monthly housing allowance of $500 for six months with possibility of extension as approved by church; no extension executed; audit of minister's return revealed unreported income,  and lack of substantiation for business deductions, charitable contributions and additional expenses; during audit, petitioner amended return to reflect "unreported income" identified in part by audit and claimed that $33,126 of the corrected amounts constituted housing allowance; such amount adjusted on amended return as "returns and allowances"; second agreement (dated in 2012) executed after the date of audit specifying additional items identified as parsonage allowance, not allowed as a retroactive agreement; petitioner did not establish entitlement to parsonage allowance; accuracy related penalty assessed, due to inadequate records to substantiate expenses or income). 

Craig v. Comr., T.C. Sum. Op. 2013-58

(petitioner worked 25-40 hours weekly as real estate agent and an additional 25-30 hours weekly in horse activity and worked part-time preparing tax returns; petitioner sustained losses in horse activity and claimed associated deductions; IRS denied deductions; while IRS didn't question hours petitioner spent in horse activity, IRS determined that petitioner lacked profit intent; petitioner prepared business plan for horse activity after IRS audit began and petitioner had only accomplished one of 10 items on business plan; no separate bank account maintained for horse activity, but expenses run through petitioner's personal account; gross receipts from activity only reported in one of seven years; court sustained IRS position and imposed 20 percent accuracy-related penalty). 

Merino v. Comr., T.C. Memo. 2013-167

(petitioner failed to satisfy real estate professional test under passive loss rules due to failure to establish that more than 50 percent of his services in were in real estate trade or business; facts indicated that taxpayer spent most of time in non-real estate beverage distribution business and home loan business; 750-hour test also not satisfied due to lack of substantiation even under lax standard of Treas. Reg. Sec. 1.469-5T(f)(4); fallback text of active participation not available due to AGI in excess of $150,000).

CCM 20133302F (Jul. 16, 2013)

(taxpayer is a pharmacy care provider that also processes photos for customers at its retail stores, and sought DPAD deduction attributable to photo processing activities; IRS determined photo processing constitutes MPGE of QPP because photos created from raw materials (paper, ink chemicals, etc.), but that affixing resulting processed photo and/or movie files onto photo CDs and movie DVDs is a non-qualified service activity because intangible files, CD or DVD not changed in form).

Pesky v. United States, No. CIV. 1:10-186 WBS, 2013 U.S. Dist. LEXIS 96097 (D. Idaho Jul. 8, 2013)

(plaintiffs entered into agreements with Nature Conservancy with respect to property adjacent to other Conservancy property; plaintiffs paid $50,000 to Conservancy, agreed to height limitations for structures, received option to buy adjacent Conservancy property for $1.6 million, and received easement over adjacent property for property access; plaintiffs agreed to pay $400,000 for new office building and agreed to convey at later date development rights to improve property; option exercised and plaintiffs then marketed the property for $6.5 million to $9.5 million; almost a decade later, plaintiffs granted Conservancy a conservation easement limiting development on property to one single-family residence and guest house; property then sold for approximately $7 million; plaintiffs claimed deduction of $3 million – appraised value of conservation easement on 2002-2004 returns; IRS denied deductions; plaintiffs paid deficiency and sued for refund; IRS asserted fraudulently claimed charitable deduction on basis that plaintiff did not disclose various agreements to IRS or local officials; court disagreed with IRS on basis that plaintiff’s counsel had legal basis for non-disclosure and fraud must be shown by clear and convincing evidence; summary judgment for plaintiff on fraud issue; on deduction issue, IRS argued that easement conveyance part of multiple transactions under which plaintiff received equal benefits to those given up; neither plaintiff nor IRS granted summary judgment on this issue; IRS not granted summary judgment on issue of contemporaneous written acknowledgment issue because fact issues remained as to whether Conservancy provided goods or services in exchange for easement; IRS denied summary judgment on qualified appraisal issue).

Priv. Ltr. Rul. 201326011 (Mar. 21, 2013)

(irrevocable trust paid net ordinary income to settlor for life, with settlor retaining limited testamentary power to appoint remainder (including gains realized during life that were allocated to principal) at death among specified class of people; settlor’s children were trustees and settlor’s brother-in-law as ”independent” trustee, had unlimited discretion to direct distributions of principal to settlor’s children or their descendants; settlor treated as owner of income and principal of trust in accordance with I.R.C. §671).