Case Summaries

C.C.A. 201321021 (May 1, 2013)

(IRS points out that IRS has authority to accept amended returns required by Sec. 4.02 of Rev. Proc. 2011-34 to make late election to treat all interests in rental real estate as a single rental real estate activity by attaching statement required by Treas. Reg. Sec. 1.469-9(g)(3) to the amended return for the most recent tax year). 


Priv. Ltr. Rul. 201327009 (May 1, 2013)

(QSST purchased stock from third party in exchange for note:  QSST made payments on note, including interest; interest passes through to beneficiary and is deductible as investment interest expense on beneficiary’s return in accordance with Notice 89-35 and 88-37).


Vlach v. Comr., T.C. Memo. 2013-116

(petitioner had alternative medicine practice and established trusts purportedly in furtherance of medical practice and asset protection; petitioner's corporation made payments to trusts and claimed deductions for such payments; deductions denied on basis that trusts where shams; trusts lacked independent trustee, taxpayer's relationship to trust property not materially changed after property transferred to trusts, no economic interest in trusts passed to other beneficiaries (except for minor instance), no meaningful restrictions imposed on petitioner, and trusts paid petitioner's personal expenses; trusts disregarded as shams for tax purposes). 


Oliver v. Comr., T.C. Memo. 2013-117

(petitioner cared for twin son of petitioner's half-brother as one of several persons that provided support for child, but did not substantiate amount of support; court determined that child not qualifying relative of petitioner (or anyone else) because petitioner could not establish provision of more than one-half of child's support; petitioner entitled, however, to dependency deduction because child qualifying child under I.R.C. Sec. 152(a)(1) by virtue of meeting tests contained in I.R.C. Sec. 152(c)(1)(B); on this point, court noted that IRS conceded that child met relationship test, satisfied age requirement and did not provide over one-half of own support; on issue of whether child shared same abode as petitioner, court noted that petitioner had stated on multiple occasions that child lived with petitioner for more than one-half of tax year, and discounted IRS arguments to the contrary). 


Vlach v. Comr., T.C. Memo. 2013-116

(petitioner had alternative medicine practice and established trusts purportedly in furtherance of medical practice and asset protection; petitioner's corporation made payments to trusts and claimed deductions for such payments; deductions denied on basis that trusts where shams; trusts lacked independent trustee, taxpayer's relationship to trust property not materially changed after property transferred to trusts, no economic interest in trusts passed to other beneficiaries (except for minor instance), no meaningful restrictions imposed on petitioner, and trusts paid petitioner's personal expenses; trusts disregarded as shams for tax purposes).


IRS Notice 2013-26, 2013-18 I.R.B.

(transitional relief provided with respect to certain fuel tax credits; taxpayers granted until July 1, 2013, to file refund claims in situations where claimed credits exceed tax liability; claim is timely filed if claim relates to credit under I.R.C. Sec. 6426 or payment under I.R.C. 6427, claim is filed on Form 8849, and claimant has or will not make the claim on any other form or at any other time except for a claim that has been previously rejected by IRS due to untimeliness or was repaid by claimant on amended tax return).


Cole v. Comr., T.C. Sum. Op. 2013-34

(petitioner bought Mercedes in 2001 and wrecked it in 2007; petitioner received $15,376 in insurance proceeds for total loss of car; petitioner claimed casualty loss deduction but did not establish basis in car at time of damage or car's FMV; IRS presumed adjusted basis was zero - precluding any casualty loss deduction). 


Tech. Adv. Memo. 201317010 (Jan. 18, 2013)

(two trusts each owned an interest in an S corporation with the balance of the interests in the S corporation owned by taxpayer; S corporation owned another corporation which was a qualified S subsidiary which the individual was the president and was directly involved in daily operations; trusts had income from their interests in the S corporation; individual, spouse, children and grandchildren are beneficiaries of trusts and taxpayer was special trustee of trusts and controlled all decisions regarding disposition of S corporation stock and voting of that stock; taxpayer not able to distinguish between time spent conducting business as corporate president and time spent as special trustee; IRS took position that trusts did not materially participate in S corporation business and, as a result, trusts' share of research or experimental expenses incurred by the S corporation had to be amortized over 10 years by the trusts; IRS claimed that only participation of trustee of trusts in fiduciary capacity counts toward material participation test; IRS ignored interrelated role of taxpayer as special trustee and corporate president for purposes of material participation test; Treasury has never promulgated regulations for trusts for purposes of the material participation test and has lost the only court decision addressing how a trust establishes material participation for purposes of I.R.C. Sec. 469; litigation on issue currently pending in the U.S. Tax Court).


Priv. Ltr. Rul. 201316009-10 (Jan. 18, 2013)

(taxpayer is 50 percent partner in LLC, and LLC executed loan modification agreement with bank resulting in debt cancellation income to taxpayer which wasn't reported on Form 1065 or Schedule K-1; taxpayer's Form 1040 prepared by different preparer unaware of taxpayer's debt discharge income and, as result, no election made under I.R.C. Sec. 108(c)(3)(C) and Treas. Reg. Sec. 1.108-5(b) to reduce basis of depreciable property and exclude debt discharge from qualified real property business debt; request for extension of time to make election granted; 45-day extension granted). 


Field v. Comr., T.C. Memo. 2013-111

(petitioner claimed I.R.C. Sec. 23(a) credit for qualified adoption expenses but petitioner did not file joint return with spouse for tax year in which credit claimed (as required by Sec. 23); IRS denied credit and petitioner claimed denial of credit violated petitioner's equal protection rights under Constitution; court disagreed with petitioner on basis that law clear and reasonable basis existed for requiring joint return to claim credit). 


Martin v. Comr., T.C. Sum. Op. 2013-31

(petitioner got divorced and decree required him to pay $1,000 monthly spousal support; three years later ex-wife fell on financial hard times and sought increased support; petitioner increased support by $1,300 and sought alimony deduction without any modification of divorce decree; ex-wife did provide letter explaining situation a year later; under I.R.C. Sec. 71(b)(1), payment must be received by or on behalf of spouse under divorce or separation instrument; court determined that letters did not demonstrate "meeting of minds" between former spouses to constitute written separation agreement; no deduction allowed and ex-wife did not report increased amount as income).


Ugwuala v. Comr., T.C. Memo. 2013-105

(petitioner not entitled to deduction for reasonable and necessary travel expenses (e.g., meals, lodging) while allegedly away from home in pursuit of petitioner's trade or business; tax home determined to be Los Angeles rather than Georgia on basis that petitioner's wife employed in Los Angeles and petitioner's employment indefinite rather than temporary, and petitioner attending college in Los Angeles during applicable timeframe). 


Lakeview Farms, Ltd. v. Dept. of Revenue, No. TC 5041, 2013 Ore. Tax LEXIS 66 (Ore. Tax Ct. Apr. 12, 2013)

(case involves taxpayer’s appeal of assessment of taxes on personal property used in pumpkin patch; taxpayer argued boats, trains, and wheelbarrows used by visitors to harvest pumpkins should be exempt as "farm property"; court disagreed that items used by paying patrons of farm were farm equipment; court held such items were used to sell entertainment to patrons; county provided valuation of items and taxpayer did not, so court adopted county’s valuation; court declined to assess penalties because taxpayer’s arguments were objectively reasonable and not brought to delay or frustrate collection).


Qwest Corporation v. Iowa State Board of Tax Review, 829 N.W.2d 550 (Iowa Sup. Ct. 2013)

(plaintiff (recently purchased by CenturyLink) challenged on equal protection grounds the constitutionality of Iowa Code §§ 476.95-.101 that imposes taxes on equipment of traditional telephone companies, but imposes tax only a portion of some equipment of long-distance providers and practically no equipment of wireless providers; Court upheld statute on basis that plaintiff continued to maintain "monopoly power" and, as such, it was rational for legislature to conclude that taxing plaintiff's personal property was "an appropriate way to capture some of their monopoly rent" while "relieving potential developers of competing infrastructure from a similar burden"). 


Priv. Ltr. Rul. 201315031 (Jan. 15, 2013)

(taxpayer established trust for supporting religious organizations and then converted trust to private foundation; trust acquired ranch property in furtherance of charitable purposes - a retreat property and associated programs for clergy including free room and board; ranch also raised sheep and sheep studies on ranch made available for students in journals with purpose of improving U.S. sheep production; trust sold sheep to farmers and slaughterhouses; significant losses realized; IRS determined that trust not subject to I.R.C. Sec. 4942(a) penalty of 30 percent on undistributed income because ranch property held for use directly in carrying out trust's exempt purpose).


Boone Operations Co., LLC, et al. v. Comr., T.C. Memo. 2013-101

(petitioner operated landfill adjacent to city landfill; neighboring landowners complained about dust and odors; petitioner and city landfill reached court settlement and negotiated a deal resulting in the closing of the city landfill via a bargain-sale transaction; bargain-sale involved transfer of dirt to city worth $1 million for which city paid slightly over $700,000; city issued Form 8283 to petitioner along with appraisal which was attached to petitioner's return on which charitable contribution claimed; IRS denied charitable deduction due to receipt of significant cash and non-cash consideration in exchange for fill-dirt and for lack of proof that value of fill exceeded value of consideration received; IRS also argued the petitioner didn't receive contemporaneous written acknowledgement (2003 settlement agreement was not contemporaneous written acknowledgment and Form 8283 did not suffice as contemporaneous written acknowledgment because city completed only Part IV of Form 8283 which does not contain statement as to whether any goods or services provided in exchange; court determined that 2003 court settlement agreement only amount of cash city agreed to pay for fill-dirt and did not denote value that petitioner received and Form 8283 insufficient to substantiate deduction for failure to make mention of any benefits petitioner received; accordingly, requirements of I.R.C. Sec. 170(f)(8)(B) not satisfied and deduction denied; Tax Court also questioned appraisal). 


Aries Communications Inc. & Subsidiaries v. Comr., T.C. Memo. 2013-97

(case involves reasonableness of compensation paid to radio executive; over his career in radio and television, executive started to buy radio stations and would become owner/operator/general manager; management style was active involvement overseeing personnel, oversight of programming, negotiating with lenders, participating in sales meetings and communicating with lawyers, accountants and others on behalf of company; ultimately, executive gave himself substantial bonus and company claimed associated deduction; issue was reasonableness of compensation and court gets into detailed mathematical computational process of experts of the parties; court set reasonable compensation level at amount higher than what IRS sought due primarily to executive being compensated for underpayments that occurred in prior years; deduction approximately one-third of amount paid to executive; 20 percent accuracy-related penalty imposed).


In re Marriage of Looney, No. 2-903, 2013 Iowa App. LEXIS 372 (Iowa Ct. App. Apr. 10, 2013)

(appeal of child support modification; at trial, wife showed difference in farmer’s income if straight line depreciation used; farmer’s income would have been double; and court adopted these figures and a five-year average; on appeal, modification affirmed). 


Bishop v. Comr., T.C. Memo. 2013-98

(case involves deductibility of business bad debt; petitioner established existence of bona fide debt, but unable to establish worthlessness in 2006 absent testimony from disinterested party or other supportive evidence; court believed petitioner's testimony of poor state of real estate market caused petitioner's business to struggle, but court unable to measure decline based on evidence presented; debt not worthless for year in issue). 


Aries Communications Inc. & Subsidiaries v. Comr., T.C. Memo. 2013-97

(case involves reasonableness of compensation paid to radio executive; over his career in radio and television, executive started to buy radio stations and would become owner/operator/general manager; management style was active involvement overseeing personnel, oversight of programming, negotiating with lenders, participating in sales meetings and communicating with lawyers, accountants and others on behalf of company; ultimately, executive gave himself substantial bonus and company claimed associated deduction; issue was reasonableness of compensation and court gets into detailed mathematical computational process of experts of the parties; court set reasonable compensation level at amount higher than what IRS sought due primarily to executive being compensated for underpayments that occurred in prior years; deduction approximately one-third of amount paid to executive; 20 percent accuracy-related penalty imposed).


The Vancouver Clinic, Inc. v. United States, No. 3:12-cv-05016-RBL, 2013 U.S. Dist. LEXIS 51802 (W.D. Va. Apr. 9, 2013)

(plaintiff provides medical treatment at various locations and hires physicians under five-year contracts in exchange for advances during the first two years of employment which must be repaid if employment ceases within five-year term; while advances accrue interest, physicians not required to pay interest; plaintiff did not withhold income or payroll tax on advances and advances not reported on Form W-2 but were reported on Form 1099-Misc. upon date amount no longer needed to be repaid; IRS assessed withholding and FICA tax plus interest for total amount over $600,000; court determined that advances were compensation for services; no intention that repayment be made, but that physicians would work five-year term; no fixed schedule for repayment at time agreements signed; advances were wages subject to withholding of employment and income tax). 


McAllister v. Comr., T.C. Memo. 2013-96

(petitioner borrowed $78,849.07 from employer in return for promissory notes; petitioner to repay loans via his compensation incentives with employer also paying taxes on incentives; loan lacked repayment date and did not specify interest; petitioner made no payment on loan; and petitioner within two years, employer sold out to another business and new employer issued petitioner Form 1099-Misc. denoting amount of loan and reporting loan as non-employee compensation; IRS took position that petitioner received constructive bonus that was then used to repay loan; petitioner disagreed with IRS position and claimed loan was either canceled or that he was insolvent at time of cancellation; Tax Court determined that amount reported on Form 1099-Misc. was cancellation of debt income and 1099-Misc. issued in error; petitioner's liabilities exceeded assets by over $20,000 thereby reducing amount of CODI, which was $56,207.65). 


Barnes v. Comr., No. 12-1284, 2013 U.S. App. LEXIS 6868 (D.C. Cir. Apr. 5, 2013)

(petitioners, married couple, filed joint return for 2003; petitioners held partial ownership in S corporation and claimed $279,289 loss as pro-rata share of S corporation's loss; IRS allowed loss to extent of petitioners' basis in S corporation - $153,282.93; issue was whether petitioners’ basis in S corporation reduced by suspended losses in the first year that the basis is adequate to absorb the losses; petitioners, in 1997, did not claim deduction for suspended loss even though, in 1997, they had sufficient basis to absorb the loss, and hence, petitioners claim, there was no basis reduction at that time; court disagreed with petitioners because I.R.C. Sec. 1367 requires basis reduction to occur in first tax year when there is sufficient basis to absorb a loss, and basis is still reduced even if shareholder fails to take deduction for loss; language in I.R.C. Sec. 1367(b)(1) providing that basis is increased by corporate income only to extent of inclusion in shareholder's income bolster's position of IRS because no comparable exception for corporate losses provided; substantial understatement penalty upheld).


HIE Holdings, Inc., et al. v. Comr., No. 10-72588, 2013 U.S. App. LEXIS 6952 (9th Cir. Apr. 5, 2013)

(founder and controlling shareholder of plaintiff incurred legal fees for criminal defense against tax fraud and tax evasion charges and plaintiff paid such fees and deducted them as business expenses; plaintiff also omitted refunds from returns for certain years and reported them in later years and claimed an NOL for the income eliminated in earlier years; Tax Court determined that most of legal fees were nondeductible and that NOLs disallowed; on appeal, court determined that legal fees not ordinary and necessary business expense and are not theft losses; NOLs denied). 


Barnes v. Comr., No. 12-1284, 2013 U.S. App. LEXIS 6868 (D.C. Cir. Apr. 5, 2013)

(petitioners, married couple, filed joint return for 2003; petitioners held partial ownership in S corporation and claimed $279,289 loss as pro-rata share of S corporation's loss; IRS allowed loss to extent of petitioners' basis in S corporation - $153,282.93; issue was whether petitioners’ basis in S corporation reduced by suspended losses in the first year that the basis is adequate to absorb the losses; petitioners, in 1997, did not claim deduction for suspended loss even though, in 1997, they had sufficient basis to absorb the loss, and hence, petitioners claim, there was no basis reduction at that time; court disagreed with petitioners because I.R.C. Sec. 1367 requires basis reduction to occur in first tax year when there is sufficient basis to absorb a loss, and basis is still reduced even if shareholder fails to take deduction for loss; language in I.R.C. Sec. 1367(b)(1) providing that basis is increased by corporate income only to extent of inclusion in shareholder's income bolster's position of IRS because no comparable exception for corporate losses provided; substantial understatement penalty upheld).


Adams v. Comr., T.C. Memo. 2013-92

(petitioner was employed as consultant and also operated an interior design business out of her home; no deduction for claimed business expenses - no documentation of purpose of legal fees and lack of substantiation for office expenses; no deduction for home mortgage interest beyond what IRS allowed; while petitioner paid additional amounts for points, petitioner didn't establish that points were for use or forbearance of money as opposed to services performed in connection with loan; no medical expense deduction above amounts allowed due to lack of substantiation). 


Johnson, et al. v. Comr., T.C. Memo. 2013-90

(petitioner claimed deduction for office in the home; court upheld IRS denial of deduction on basis that only evidence of deduction was petitioner's own testimony which was insufficient to establish that office used exclusively for business purposes; court disallowed meal and travel expenses due to lack of substantiation). 


Hassanipour v. Comr., T.C. Memo. 2013-88

(petitioner worked full-time as research associate, but also owned multiple rental apartments; petitioner incurred losses on apartment rentals and claimed loss deductions; IRS denied losses on basis that petitioner couldn't satisfy real estate professional test under I.R.C. Sec. 469; court upheld IRS position and rental real estate losses disallowed). 


I.R.S. Notice 2013-18, 2013-14 IRB; Rev. Proc. 2013-20, 2013-14 IRB

(blackberries, raspberries, and papayas no longer in the list of plants (published in Notice 2000-45) that have a preproductive period of two years or more for purposes of the UNICAP rules of I.R.C. Sec. 263A that cash method farmers are subject to; also, effective for tax years beginning after Feb. 15, 2013, with respect to an accounting method change, the procedures for obtaining automatic consent such that I.R.C. Sec. 263A does not apply to the production of plants that IRS has removed from the list of plants having a nationwide weighted average preproductive period exceeding two years, or to a revocation of an election to not apply I.R.C. Sec. 263A to the production of plants that have been removed from the list; scope limits of Sec. 4.02(1)-(4) and (7) of Rev. Proc. 2011-14 inapplicable to taxpayers wanting to make change for first or second tax year ending after Feb. 15, 2013; taxpayer not applying I.R.C. Sec. 263A to blackberry, raspberry or papaya plants in compliance with I.R.C. Sec. 263A(d)(1) won't have their method of accounting raised as issue by IRS in tax year ending on or before Feb. 15, 2013; likewise, existing method of accounting issues under exam by IRS for years ending on or before Feb. 15, 2013, will be dropped). 


Gail Vento LLC v. United States, No. 09-03, 2013 U.S. Dist. LEXIS 48472 (D. V.I. Apr. 1, 2013)

(case involved transfer of LLC interests; LLC owned stock in closely held corporation; corporation sold its stock on Nov. 24 and LLC owners sold their interests to three corporations in Cayman Islands in exchange for annuities on same day; stock sale publicly announced on Nov. 27 with closing on Jan. 8; court determined that sale of LLC interests subject to assignment of income doctrine such that gains from sale of corporate stock taxable to LLC owners; court based opinion on Ferguson v. Comr., 174 F.3d 997 (9th Cir. 1999); basic principle involved is that appreciated property transferred where transferee sells the property, any resulting gain taxed to original transferor if original transfer is too close in time to date property sold).   


Gail Vento LLC v. United States, No. 09-03, 2013 U.S. Dist. LEXIS 48472 (D. V.I. Apr. 1, 2013)

(case involved transfer of LLC interests; LLC owned stock in closely held corporation; corporation sold its stock on Nov. 24 and LLC owners sold their interests to three corporations in Cayman Islands in exchange for annuities on same day; stock sale publicly announced on Nov. 27 with closing on Jan. 8; court determined that sale of LLC interests subject to assignment of income doctrine such that gains from sale of corporate stock taxable to LLC owners; court based opinion on Ferguson v. Comr., 174 F.3d 997 (9th Cir. 1999); basic principle involved is that appreciated property transferred where transferee sells the property, any resulting gain taxed to original transferor if original transfer is too close in time to date property sold).


Schoppe v. Comr., 711 F.3d 1190 (10th Cir. 2013)

(petitioner was real estate agent, broker and instructor of real estate licensing classes in addition to financial planner and insurance agent; petitioner failed to file income tax returns and didn't pay tax; petitioner filed Tax Court petition, but court upheld determinations of IRS including penalties; petitioner filed appeal and also filed bankruptcy during pendency of appeal; automatic stay inapplicable to case because Tax Court petition is independent judicial proceeding initiated by debtor; decision agrees with decisions of the 1st, 3rd, 5th and 11th Circuits, but is opposite to a decision of the 9th Circuit).


Overstock.com, Inc., et al. v. New York State Department of Taxation and Finance, et al., Nos. 33 and 34, 20 N.Y.3d 586 (N.Y. Ct. App. 2013)

(plaintiffs, online retailers, claim that NY statute subjecting internet sales in excess of $10,000 cumulative during previous four quarterly periods to taxation is facially unconstitutional in violation of Commerce Clause because it subjects online retailers without physical presence in state to NY sales and compensating use tax, and also violates Due Process Clause;  court noted that with respect to facial challenges plaintiff must show that tax is unconstitutional on its face and that statute will be presumed constitutional; court noted that resident of NY would be compensated for referrals resulting in purchases under plaintiff's program and court presumed that some of those solicited would reside in NY; dissent noted that court's decision completely contrary to established U.S. Supreme Court precedent set forth in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and other cases; dissent noted that while solicitation of customers for retailer by in-state sales representatives counts as physical presence, even where the sales representatives are independent contractors, but mere advertising by out-of-state retailer in in-state media does not count as physical presence; dissent reasoned that NY-based websites affiliated with plaintiffs are not the equivalent of sales agents that solicit business for the plaintiffs, but are merely media in which plaintiffs advertise their products; dissent noted that no website owner promoted the plaintiffs because potential customers can simply go to the plaintiffs' websites directly  - media is not the same thing as having an in-state sales force and the presumption that every website having an agreement to carry a link to the plaintiffs' website does not make website a sales agent of plaintiffs and is contrary to rule that advertising in in-state media does not equate to physical presence; dissent would hold that statute unconstitutional under Commerce Clause). 


Loving, et al. v. Internal Revenue Service, et al., No. 13-5061 (D.C. Cir. Mar. 27, 2013), stay pending app. den., No. 12-385 (JEB), 2013 U.S. Dist. LEXIS 13878 (D. D.C. Feb. 1, 2013), upholding court's refusal to lift injunction, No. 12-385 (JEB), 2013

(court imposed injunction against defendant's preparer regulations and creation of Registered Tax Return Preparer that must pass a "competency" test and complete 15 hours of CE annually and pay annual fee).


Meinhardt v. Comr., T.C. Memo. 2013-85

(petitioner, an architect, purchased farmland and associated farmhouse in 1976 and rented out the land separate from the farmhouse; attempts to rent the farmhouse were unfruitful and farmhouse never rented for cash; various family members lived in the farmhouse over the years in exchange for improvements made to farmhouse; petitioner claimed deductions associated with the farmhouse which IRS denied; issue before court was whether deductions allowable under either I.R.C. Secs. 212 or 162; petitioners failed to present evidence that they incurred claimed expenses; no deductions allowed under Sec. 162 because petitioner failed to establish existence of real estate rental business; no deduction allowed under Sec. 212 because petitioner failed to establish that farmhouse held for production of income; no evidence that value of services for improvements to farmhouse approximated fair rental value; potential application of I.R.C. Sec. 280A not in issue; accuracy-related penalty not imposed). 


Miller Foundation v. Big Marsh Intercounty Drain Drainage Board, No. 306272, 2013 Mich. App. LEXIS 576 (Mich. Ct. App. Mar. 26, 2013)

(case involves dispute under state (MI) drainage law that authorizes county road commission to petition county drain commission to lay out and designate drainage district, locate and establish drain, clean out, widen, deepen, straighten or extend established drain if it is necessary for construction or maintenance of highway to take surplus water across adjacent lands; petition filed on behalf of county road commission in accordance with statute with county drain commission; trial court invalidated petition on basis that county road commission not property petitioner because most road within proposed project not under commission's jurisdiction and party actually filing petition on behalf of county not authorized; plaintiff's request for injunctive and declaratory relief granted; trial court's ruling affirmed on appeal). 


IRS "Dirty Dozen" Tax Scams for 2013 (Mar. 25, 2013)

(identity theft, phishing, return preparer fraud, hiding income offshore, "free money" from the IRS and Social Security tax scams, impersonation of charitable organizations, false or inflated income and expenses, false Form 1099 refund claims, frivolous arguments, falsely claiming zero wages, disguised corporate ownership, misuse of trusts).


I.R.S. Notice 2013-14, IRB 2013-13

(IRS provides transitional relief for eligible employers wanting to claim the WOTC by providing until Apr. 29, 2013 to file necessary form for claiming WOTC for eligible workers; extension of time is beyond the 28-day deadline contained in I.R.C. Sec. 51(d)(13) for submission of IRS Form 8850; thus employer hiring qualified employee other than qualified veteran on or after 1/1/12 and on or before 3/31/13 has until 4/29/13 to submit Form 8850; for qualified veterans hired on or after 1/1/13 and on or before 3/31/13, Form 8850 must be submitted by 4/29/13). 


Iowa League of Cities v. EPA, 711 F.3d 844 (8th Cir. 2013)

(plaintiff brought suit that agency’s letters regarding Clean Water Act and municipal water systems written to Senator were rulemaking in violation of Administrative Procedures Act (APA); court held plaintiff had sufficient standing to bring claim; court agreed with 9th Circuit precedents that no deference should be granted to agency when determining whether APA has been followed and de novo review should be given in determining whether agency action was legislative rulemaking imposing new rights or duties requiring notice and comment procedures versus interpretive rules which state what the agency thinks the statute means and reminds affected parties of existing duties; court held agency has no preexisting legal norm or lawfully promulgated legislative rule supplying the basis for the agency’s prohibition on bacteria mixing zones, which violated APA in bypassing notice and comment procedures; likewise the agency’s new blending rule was also in violation of APA for same reasons; court also granted plaintiff’s request to strike down agency’s blending rule as exceeding its statutory scope by imposing secondary treatment regulations on flows within facilities even if APA rulemaking followed; issue remanded to agency for further consideration).


K & K Veterinary Supply, Inc. v. Comr., 2013 T.C. Memo 84

(petitioner was family business corporation operated by family members with over 80 employees that was wholesale distributor of animal health products for large animals, lawn and garden products, farm hardware, pet supplies and products for farm stores and related dealers; family patriarch was sole shareholder and decided compensation for family members and employees; petitioner showed gross profit of $9 million and taxable income of $100,000 with expenses being salaries of family members and property rentals; IRS claimed that compensation was excessive based on comparability factors; on gross profit of $9 million, only $30,000 in dividends paid, and salary of $200,000 paid to patriarch's wife who was vice president , secretary and CFO who worked 30-hour week; court upheld IRS determination that all family members over-compensated and adjusted salaries and deductions accordingly).


Goeller v. United States, No. 10-731I, 2013 U.S. Claims LEXIS 197 (Fed. Cl. Mar. 20, 2013)

(taxpayer sought refund for “theft” loss after losing investment money from company that went bankrupt after selling tandem investments and unsecured promissory notes in violation of state law governing “securities”; IRS denied plaintiffs refund claim and plaintiffs brought suit; summary judgment motion brought on issue of whether theft loss occurred; court disclaimed legal notion that “theft” under in section 165(c)(3) is dependent on state law and that it means “the fraudulent taking of property belonging to another from his possession, or from the possession of some person holding the same for him, without his consent, with the intent to deprive the owner of the value of the same, and to appropriate it to the use or benefit of the person taking”; in determining the issue, four questions must be answered: whether the conduct in question constitutes a theft, whether the theft loss was discovered the year the deduction is claims, whether in the year discovered, there was still a reasonable prospect of recovering funds lost, and the amount of loss; court determined factual questions existed regarding the four questions, so summary judgment denied).


Billion, et al. v. Comr., 827 N.W.2d 773 (Minn. Ct. App. 2013)

(plaintiffs claimed deduction for carryover passive activity losses incurred by S corporation; plaintiffs were passive investors in S corporation; while state (MN) law recognizes deduction for net operating losses (including carryover amounts), MN law does not recognize losses for passive activity losses).


Dorrance v. United States, No. CV-09-1284-PHX-GMS, 2013 U.S. Dist. LEXIS 37745 (D. Ariz. Mar. 19, 2013)

(plaintiff obtained shares of stock upon demutualization of insurance company; plaintiff later sold shares of stock and defendant asserted that plaintiff's income tax basis in stock was zero triggering 100 percent gain on sale of shares; court rejected defendant's position, and set forth computation for calculating basis in stock shares received upon demutualization; court grounded computation of stock basis in manner in which insurance company determined value of demutualized shares for initial public offering (IPO) for purposes of determining how many shares to issue to a policyholder; based on that analysis, court noted that company calculated fixed component for lost voting rights based on one vote per policy holder and variable component for other rights lost based on shareholder's past and anticipated future contributions to company's surplus; court estimated that 60 percent of plaintiff's past contributions were to surplus and 40 percent was for future contributions to surplus which plaintiff had not actually yet paid before receiving shares and are not part of stock basis; thus, plaintiff's basis in stock comprised of fixed component for giving up voting rights and 60 percent of variable component representing past contributions to surplus; end result was the plaintiff's stock basis is slightly over 60 percent of IPO value of stock).


Longino v. Comr., T.C. Memo. 2013-80

(petitioner was lawyer and non-custodial parent of children; petitioner not allowed child tax credit and additional child tax credit for year in which children lived with former spouse who had custody because children not "qualifying" children in accordance with I.R.C. Sec. 152(c); no dependency exemption allowed for same tax year because no attached Form 8283 to return or other written declaration of exemption release from former spouse and divorce decree not signed by former spouse; no deduction for telephone expenses allowed attributable to petitioner's business due to lack of substantiation; other claimed business deductions associated with law practice denied due to lack of substantiation; no charitable deduction due to lack of contemporaneous written acknowledgement for contributions above $250; no DPAD allowed for grading and surveying expenses on property claimed to be held for timber harvesting because no timber harvested and, hence, property didn't generate any gross receipts or QPAI; medical expense deductions associated with in vitro fertilization treatments denied for lack of proof that petitioner sterile; deduction denied for payment of child's college tuition and fees due to lack of substantiation; no business mileage deduction allowed due to lack of substantiation; partial deduction allowed for expenses attributable to office in the home - partial denial due to lack of substantiation).


W.E.R. v. Comr., No. 11-13758, 2013 U.S. App. LEXIS 5214 (11th Cir. Mar. 15, 2013)

(the plaintiff, a minor represented by his legal guardian, was denied a first-time homebuyer tax credit (FTHBC); the plaintiff received proceeds from settlement of lawsuit arising from medical complications at birth that left plaintiff handicapped; guardian appointed to handle settlement proceeds and received court approval to loan some settlement proceeds to plaintiff's parents for purposes of refinancing mortgage, but lender would not accept payment from guardian; guardian then purchased home and sold it to plaintiff and claimed FTHBC on plaintiff's return; Tax Court viewed transaction as plaintiff buying home from plaintiff's parents and, with no statutory analysis, disallowed credit as a related party transaction (note:  the statutory language of I.R.C. Sec. 36(c) does not bar FMV purchases from related persons; only prohibition is acquisition of homes via inheritance or gift); appellate court affirmed on basis that evidence didn't support plaintiff's argument that lender wouldn't accept payment from plaintiff, and guardian used plaintiff's funds to buy home rather than plaintiff's such that investment purpose not supported; burden of proof not shifted to IRS). 


Garcia v. Comr., 140 T.C. No. 6 (2013)

(petitioner is a professional golfer that is a resident of Switzerland; petitioner entered into endorsement agreement with a sponsor allowing the sponsor to use petitioner's image, name and voice in return for petitioner performing personal services for the sponsor; petitioner and sponsor allocated 85 percent of petitioner's compensation to royalties and 15 percent to personal services; petitioner created LLC in U.S. to receive royalty payments and pay a portion of the royalties to another LLP established in Switzerland; petitioner did not pay tax on royalty payments, but did pay tax on personal service payments; court readjusted allocation such that it was attributable 65 percent royalties and 35 percent personal services; royalty income exempt from U.S. taxation via treaty with Switzerland; personal services payments subject to U.S. taxation).


Dodds v. Comr., T.C. Memo. 2013-76

(based on nine-factor analysis, petitioner failed to engage in horse breeding activity with objective of making profit; activity not conducted in business-like manner, petitioner did have requisite expertise in activity and did put sufficient time into the activity, appreciation in value factor neutral, petitioner did not have success in similar activities on previous occasions, petitioner had losses for 17 straight years from activity, petitioner never had any profit from the activity, petitioner had substantial income from his accounting firm and enjoyed the activity; substantial understatement penalty imposed).


Rehman v. Comr., T.C. Memo. 2013-71

(petitioner claimed deductible travel expenses for business trips away from home; IRS disallowance of deductions upheld because home not principal place of business and trips not away from home; meal expenses also disallowed because not incurred in travel away from the home; travel log did not substantiate deductions and was not prepared contemporaneously).


Castillo v. Comr., T.C. Memo. 2013-72

(petitioner used various automobiles in real estate business and claimed that they were used 100 percent for business purposes; one vehicle, a Hummer, was purchased in 2006 for $34,799; petitioner, inexplicably, claimed $56,000 of depreciation on Hummer in 2006 via I.R.C. Sec. 179; petitioner ceased using Hummer for business use in 2007, and IRS claimed that petitioner had depreciation recapture of $53,200 for 2007; Hummer is listed property in accordance with I.R.C. Sec. 280F(d)(4)(A), so Hummer subject to recapture in any year that business use falls below 50 percent; petitioner failed to present sufficient evidence to shift burden of proof under I.R.C. Sec. 7491(a)(2) and failed to prove that he was not subject to depreciation recapture because he failed to substantiate use of Hummer that exceeded 50 percent during 2007).


Villareale v. Comr., T.C. Memo. 2013-74

(charitable contributions denied due to lack of contemporaneous written acknowledgment and statement that donor did not receive any goods or services in return for contributions; substantial compliance doctrine inapplicable). 


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