Case Summaries

(petitioner claimed $188,070 theft loss deduction for loss associated with home remodeling project; construction company found to have engaged in criminal statutory offense of home repair fraud under state (IL) law and petitioner's contract with construction company was for home repair; as such, petitioner was victim of "theft" for purposes of I.R.C. Sec. 165; loss claimed on 2007 return and court agreed inasmuch as petitioner had reasonable prospect of recovery in 2006 what expired in 2007 and, therefore, 2007 is correct year for theft loss to be claimed; while theft loss claimable in year theft discovered, under Treas. Reg. Sec. 1.165-1(d)(1) if there is a reasonable prospect of recovery in year of discovery no deduction allowed until tax year in which it can be ascertained with reasonable certainty that reimbursement cannot be received).

(plaintiff, small domestic wine producer, attempts to recover excise taxes on wine that plaintiff produces based on plaintiff's alleged improper claim to "Small Producers Tax Credit" of I.R.C. Sec. 5041(c); defendant claimed that plaintiff lacked standing to sue for requested relief on basis that another plaintiff was liable for assessment and that claim is time-barred; plaintiff contracted with another plaintiff to transport wine to place of storage before sale and parties agreed that transporter plaintiff would pay federal excise tax and then be reimbursed by plaintiff; parties agreed that transported would claim I.R.C. Sec. 5041(c) tax credit to which they believed plaintiff was entitled to; transported paid all taxes, less the credit, for tax years in issue; defendant determined that plaintiff not entitled to credit because wine never physically touched plaintiff's premises, so credit could not be transferred to transporter plaintiff; tax deficiency assessment issued against transporter plaintiff in amount of $433,238.37 and transporter plaintiff paid deficiency  and plaintiff reimbursed transporter plaintiff for such amount and sought reimbursement from defendant; plaintiff has standing to pursue refund because it has financial interest in outcome of litigation due to contractual obligation to reimburse transporter for excise taxes paid; statute of limitations not tolled). 

(petitioner operated construction company as sole proprietor; company engaged in business of home improvements and hired workers  when petitioner unable to perform work; petitioner supervised the workers, set deadlines and assigned tasks; all workers hired on a project-by-project basis and were paid flat fee for particular job; court determined, based on seven factor test, that workers were employees for year at issue; I.R.C. Sec. 530 relief unavailable due to lack of filing Forms 1099-Misc.). 

(petitioner, long-time pastor as independent contractor, claimed various Schedule C deductions attributable to ministry; many expenses not sufficiently substantiated and deductions denied or limited; no deduction allowed for travel, meals and entertainment due to lack of substantiation; charitable contribution deduction limited due to lack of substantiation; petitioner entitled to deduction for business use of home; petitioner conceded failure to include over $10,000 of income on 2008 return; accuracy-related penalty imposed). 

(petitioner took out variable rate loan on principal residence with ceiling on monthly payment; if rate causes ceiling to be exceeded, excess interest is capitalized; petitioner, cash basis taxpayer, deducted capitalized interest currently; court disallowed deduction on basis that interest not paid, but merely secured, and "paid or accrued" language of I.R.C. Sec. 163(h) not applicable because amount not actually paid and petitioner on cash method).

(petitioner, former NFL player, was advised by Denver lawyer to invest in horse breeding program which turned out to be a tax shelter; petitioners invested over $13 million into the program which generated large losses for seven years; petitioners attempted to deduct losses, but IRS denied them on grounds that activity was a hobby and losses subject to hobby loss rules; $4.4 million deficiency upheld; no accuracy-related penalty imposed because petitioner not sophisticated in tax and relied on attorney in good faith). 

(petitioner, former IRS employee and CPA, filed as MFS in 2007 and claimed a mortgage interest deduction of $47,477 on VA residence and second residence in WV; IRS disallowed the deduction in full on basis that it exceeded the allowable limitation for MFS return ($500,000 plus $50,000 of home equity indebtedness); parties agreed to deduction of $29,494 on 2007 return and petitioner sought to change filing status to MFJ; court determined that I.R.C. Sec. 6013(b)(2)(B) bars filing of joint return after filing of separate return if petitioner files a timely petition with Tax Court with respect to noticed of deficiency for year at issue, thus petitioner barred from filing MFJ return; petitioner then claimed that because she wasn't informed of the MFS limitation before filing Tax Court petition, she would have filed an amended return electing MFJ status; no authority cited to support petitioner's argument; court upholds parties agreement and imposes accuracy-related penalties). 

(petitioner purchased whole life insurance policy in 1976 with face value of $40,000 and annual premium payment of $556 for first 13 years; automatic premium loan provision selected; policy modified in 1986 by replacing old policy with new one with $125,000 of coverage and annual premium of $2,256 and automatic premium loan provision selected; petitioner made deposit of $7,582 into premium deposit account to cover premiums through 1990; from 1991-2009, company made premium payments automatically with loans against cash value of policy; policy lapsed in 2009 when outstanding loan balance exceeded policy's cash value and Form 1099-R issued showing gross distribution of $86,762 and taxable amount of $37,981 for 2009; petitioner claimed he never got the 1099-R, but it was mailed to petitioner's correct address; IRS position upheld and accuracy-related penalty upheld). 

(petitioners transferred to county more than 65 acres of undeveloped land for $1,550,000 in part-gift/part-sale transaction; land value reported at $2,950,000 and charitable contributions claimed; IRS rejected charitable deductions on basis that I.R.C. Sec. 170 requirements not satisfied; expert testimony involved issues of development rights, environmental legislation and appraisal methodology that used a statistical model involving polynomial regression analysis to correlate relationship between number of lots undeveloped parcel can be subdivided into and per lot selling price; court gave guidance as to proper role of expert witness in court and then rejected each witness' conclusion due to errors in analysis and application; court reconstructed FMV on its own; thus, appraisal attached to Form 8832 was flawed, but was excused due to reasonable cause; no penalty imposed and partial charitable deduction allowed). 

 (plaintiffs, brothers, established an employee plan for their construction business employees; plan was I.R.C. Sec. 419 plan that provided for death benefits for management  and unlimited deductions for payments to plan; plan bought life insurance for beneficiaries who could borrow against cash surrender value of their policies, but were required to pay back any loans (with interest) with any unpaid loans at death coming out of death benefit; if employment terminated, plan discontinued or employer discontinues, benefit eliminated; employee could make irrevocable designation of life insurance; plaintiffs borrow from plan and sign promissory notes, but made only nominal payment on loan; plan made no attempt to collect or hold plaintiffs in default; plan trustee disclosed loans to IRS on Form 5500 (Schedule G) claiming loans were secured and will be paid when mature and are not uncollectible; at answer stage of pleading, IRS claimed plaintiffs had cancellation of indebtedness income (CODI); IRS stipulates at trial that loans are bona fide and that trust had collection policy requiring demand letter to be issued to borrowers in default and that Forms 1099 would be sent to borrowers that remained delinquent; no demand letter sent to either plaintiff in 2002, so IRS concluded that trust intended to forgive loans and CODI resulted in 2002; however, court noted that trust had no policy for collection of delinquent loans until 2002; plaintiffs' right to receive proceeds not highly contingent; no CODI until company leaves plan, either or both of plaintiffs leaves company or plan ceases; Form 5500 did not necessary mean that loans uncollectible in year issued - merely in default). 

(petitioner not entitled to deduct expenses of horse activities because activity not engaged in for profit; evidence not presented to establish business-like record keeping, conformance with standard industry practices, or changes to improve profitability; petitioner did not seek expert advice, that she had any reasonable expectation that her stud horse would appreciate in value after eight years between siring any foals and lameness prohibiting dressage competitions, or that she has ever operated any horse business at a profit; court also held that death of horse was not a deductible casualty loss as losses resulting from diseases are not deductible; court also denied deductions for legal fees incurred in a lawsuit against her homeowner’s association because there was no evidence of any connection between lawsuit and any trade or business; petitioner not liable for accuracy-related penalties due to success in previous audits establishing reasonable cause and good faith efforts by petitioner).

(plaintiff family formed trusts that came to own stock in S corporation that owned C corporation stock; trust made QSub election so as to be able to disregard existence of C corporation (Treasury Regulations treat a QSub election as a deemed liquidation of the subsidiary, and under I.R.C. Secs. 332 and 337, the liquidation of a 100 percent subsidiary is not taxable - neither subsidiary nor parent has gain) and treat as division; appreciation in S corporation assets was $226 million and shareholders increased income tax basis in S corporation stock by like amount; taxpayer's argued that unrecognized gain be treated as tax-exempt income that subsidiary earned that passed through to shareholders resulting in basis increase; S corporate stock then sold for $230 million and shareholder reported loss on returns for year in issue; IRS determined that no basis increase should have occurred on QSub election - I.R.C. Sec. 337 does not result in exemption from income, but simply non-recognition because S corporation continued investment in subsidiary by holding assets directly rather than via stock ownership; court agreed with IRS  and noted that situation not analogous to discharge of indebtedness recognized by S corporation which results in basis increase; no accession to wealth when subsidiary liquidated; no basis increase in shareholders from $15 million to $241 million upon QSub election - non-recognition of $226 million gain under I.R.C. Sec. 337 did not involve tax-exempt income so no related basis increase under I.R.C. Sec. 1367(a)(1) result was cumulative gain of $215 million on stock sale and not $11 million loss). 

(decedent, before death, contributed 72 percent of capital stock in corporation that owned two apartment buildings to non-profit housing corporation and claimed charitable deduction of $1,045,289; due to deductibility limitation, taxpayer carried over excess amount to 2006; IRS denied carryover amount on basis that taxpayer failed to satisfy appraisal requirements; court determined that taxpayer's appraisals valued apartment units (which were not donated) rather than underlying stock that was actually donated; as a result of appraisals of wrong asset, IRS not given cannot determine whether interest actually contributed was properly valued; statutory requirements to obtain charitable deduction very specific and must be precisely followed). 

(petitioner owned bed and breakfast with spouse; $170,000 tax liability triggered upon sale for approximately $2 million because of failed I.R.C. Sec. 1031 exchange; before petitioner knew of tax liability sale proceeds used to buy apartment building; petitioner lived in one unit and elderly mother lived in another unit with three other units rented; IRS moved to seize apartment building and petitioner sought to pay on liability monthly while trying to find lender to refinance; IRS appeals rejected petitioner's offer and petitioner appealed; IRS conceded that appeals officer abused discretion by not asking for revised financial data; Tax Court remanded for supplemental hearing with appeals officer; new appeals officer failed to follow Tax Court's guidance and asserted that petitioner committed fraud and put lien on apartment building and suggested that IRS seize and sell building; IRS later determined that no fraud committed but rejected monthly payment arrangement because IRS claimed that petitioner could pay liability in full; case returned to Tax Court where court determined that IRS had made many errors and failed to gain sufficient information to support conclusion that petitioner's collection alternative not reasonable; IRS abused discretion by sustaining proposed levy against apartment building; Tax Court could not independently review whether proposed collection alternative is appropriate; case remanded to appeals for consideration of proposed payment arrangement, petitioner's financial information and whether hardship existed). 

(in response to Tax Court's opinion in Shiekh v. Comr., T.C. Memo. 2012-126, IRS points out that court decision could be incorrectly interpreted as stating that capital gain and ordinary losses offset each other for tax reporting purposes and for purposes of calculating amount of tax due outside scope and context of I.R.C. Sec. 469(d)(1); under I.R.C. Sec. 469 does not require offsetting of capital gain with ordinary losses for other tax purposes). 

(question raised as to whether CA residents can deduct the CA Fire Prevention Fee as a real property tax; fee enacted via 2011 legislation requiring State Board of Equalization to charge up to $150 as fire prevention fee on each structure in "state responsibility area"; under Treas. Reg. Sec. 1.164-4(a), to be deductible, real property tax must be levied for general public welfare at like rate against all real property in taxing authority's jurisdiction, and assessed amount on specific property benefitted by local benefit (such as for streets, etc.) not deductible as real property tax; fee at issue not deductible as real property tax because it is not a tax under either federal or CA law, is not levied at a like rate, is not imposed against all real property throughout taxing authority's jurisdiction, and is assessed only against specific property to provide local benefit). 

(eff. beginning with 2012 Forms W-2 to be given employees by end of January 2013)(IRS modifies prior interim guidance concerning health care act's reporting requirement for employer-sponsored health coverage; IRS notes that effective Jan. 1, 2011, aggregate cost of applicable employer-sponsored health insurance coverage must be reported on Form W-2; reporting optional for 2011 and IRS later provided relief for small employers (where less than 250 Forms W-2 filed for preceding calendar year) by making such reporting optional through at least 2012; IRS notes that reporting requirement does not apply to coverage under FSA if contributions occur only through employee salary reduction elections).

(professional consultant working for business on separate consulting projects could be an employee for one project and an independent contractor for the other project; relationship between worker and business to be examined separately).

(petitioner and brother appointed as co-executors of mother's estate and, as co-executors, transferred title in mother's residence to petitioner for $215,000; petitioner claimed FTHBC and IRS denied credit on basis that purchase was from a "related person"; court agreed, noting that while siblings are excluded from the definition of related persons under I.R.C. Sec. 36(c)(5) and Sec. 267(b)(1), the executor of an estate and a beneficiary is deemed to be a related person (See I.R.C. Sec. 36(c)(5) and Sec. 267(b)(13); home acquired by beneficiary of estate from executor of estate and substance of transaction agrees with the form of the transaction).

(petitioner (tax practitioner) and wife (real estate agent) owned rental properties; deduction for expenses related to one property allowed because petitioner had intent to rent property out during year at issue and expenses incurred were for purpose of producing income in conjunction with I.R.C. Sec. 212; petitioner rendered management services, advertised property for rent and sought insurance coverage). 

(court-ordered joint parenting agreement governed petitioners' illegitimate son; petitioners did not live together during year in issue but, mother had custody and father had visitation rights and was required to pay child support; dependency exemption altered between parents from year-to-year, but father's deductions dependent on paying child support; mother did not sign court order and father files return without Form 8332; mother signs form 8332 four years later; IRS denied dependency exemption for father because he was a non-custodial parent that failed to attach Form 8332 to the return; court agreed with IRS - no deductions or credits for the father). 

(petitioner divorced from wife and ex-wife given custody of couple's son; arbitration award and two state court orders in different years specified that petitioner entitled to dependency deduction and wife had to execute Form 8332 in petitioner's favor so long as petitioner paid child support; petitioner paid child support through 2007, but no Form 8332 executed; petitioner remarried and claimed dependency exemption for 2007 and attached arbitration award and signed child support orders; deduction disallowed because state court order signed by custodial parent not in compliance with I.R.C. Sec. 152(a) on account of failure to unconditionally specify that ex-wife would not claim child as dependent for 2007). 

(petitioners, married couple, moved into husband's house after marriage; wife had no ownership interest in house, but wife signed deed of trust when house refinanced; couple divorced in 2008 and wife buys new home in 2009 and claimed first-time homebuyer tax credit; IRS disallowed credit based on ownership interest in prior marital home due to signing of deed of trust; wife's attorney prevails in obtaining FTHBTC for wife of $8,000 at IRS appeals level on basis that she signed deed of trust due to state law requirement; petitioner not entitled to attorney fees because IRS position substantially justified at time statutory notice of deficiency issue). 

(petitioner, aeronautical engineer, owned several rental properties that he rented out and managed, and claimed losses from the rental activity for 2005-2007; IRS denied loss deductions on basis that petitioner subject to passive loss rules because petitioner failed to qualify as a real estate professional; court agreed with IRS because petitioner did not perform more than 50 percent of his personal services in real property trades or businesses; no contemporaneous log kept and testimony vague and indefinite; merely being on-call with respect to management services doesn't generate hours that can be counted toward 50 percent test).