Case Summaries

Simmons v. Dept. of Revenue, No. TC-MD 110834D, 2012 Ore. Tax LEXIS 38 (Ore. Tax Magistrate Div. Jan. 31, 2012)

(plaintiff claimed an income tax deduction for the costs of installing meteorological tower; tower installed to determine if adequate wind resources on plaintiff’s site to start new wind farm business, which proved site not feasible; deductions not allowable as business expenses to investigate new trade or business ; not deductible start-up costs because no actual trade or business resulted).

Foster v. Comr., 138 T.C. 51 (2012)

(petitioners purchased a home in 1974 and claimed to have moved from it, by listing it for sale and moving in with the wife's parents; but, petitioners maintained utility service at old house, often stayed overnight, hosted family events, kept personal belongings in the home, used the Internet at the home (because wife's parents did not have Internet at their home) and maintained mail service; wife renewed driver's license using old home's address and petitioners filed a joint income tax return using listing the old home's address after supposedly moving out; petitioner's sold the home a year after they claimed they had moved out; slightly more than three years after claiming to have moved out, petitioners bought new home and claimed first time homebuyer credit; IRS denied FTHBC on basis that old house was still petitioners' principal residence within three years of purchase of new home; court agreed with IRS based on facts and circumstances test).

Brooks v. Comr., T.C. Memo. 2012-25

(petitioner, stockbroker, could not exclude discharge of indebtedness income attributable to interest on loan forgiven by employer; I.R.C. Sec. 108(e)(2) only excludes from income interest that would have given rise to a deduction; petitioner used loan for income production purposes, but failed to prove deductibility under I.R.C. Sec. 212 as an expense associated with income production; in any event, interest deduction would have been limited by I.R.C. Sec. 163(d)).

T.D. 9573 (Jan. 20, 2012)

(IRS issuance of Final Regulations (Treas. Reg. §1.104-1) concerning whether amounts received for physical injury or sickness are excludible from income under I.R.C. §104; pursuant to the Small Business Job Protection Act of 1996, Final Regulations eliminate requirement that, to be excluded from income, damages received pursuant to legal action or settlement agreement have to be based on “tort or tort type rights” – result of U.S. v. Burke, 504 U.S. 229 (1992),reversed insomuch as the regulations allow the exclusion of damages awarded under no-fault statutes; receipt of non-punitive damages as compensation for personal physical injury or sickness excluded from income). 

Samarasinghe v. Comr., T.C. Memo. 2012-23

(petitioner’s rental income derived from rental of commercial office building to related professional corporation in 2005 and 2007 was properly recharacterized as non-passive income under the self-rental rule of Treas. Reg. Sec. 1.469-2(f)(6) which treats net rental income received by taxpayer for use of an item of the taxpayer’s property in a business in which the taxpayer materially participates as income not from a passive activity with the result that petitioner cannot offset such income against accumulated and unused passive losses; transitional relief not available even though lease entered into before February 19, 1988; determination had to be made whether lease was still in effect for tax years in issue under state (NJ) law; NJ law does not distinguish between a renewal and a lease extension; lease was binding and enforceable at time executed in 1980, but record contained no credible evidence regarding history and enforceability of lease for periods after initial rent term which ended in 1981; for years in issue, parties paid no attention to terms of lease and ignored rent provision and rental arrangement for years at issue completely ad hoc and determined after analysis of petitioner’s financial situation; accuracy-related penalty not imposed).

Iverson v. Comr., T.C. Memo. 2012-19

(petitioner, controlling owner of MN company with business in many countries and income over several million dollars for years in issue (2005 and 2006) had purchased 14,000-acre Colorado ranch in 1998 which operated total of 42, 000 acres and had 300 head of cattle and 30 horses; petitioner employed ranch manager to carry out day-to-day duties of ranch; ranching activity incurred losses for years in issue and IRS claimed loss deductions limited by passive activity rules; petitioner spent little time at ranch and typically took family with him to ranch on flights paid for by petitioner’s MN company; petitioner claimed that he materially participated in cattle ranching activity by controlling actions of ranch manager and spent over 500 hours on ranching activity for years in issue via phone and electronic transmissions; petitioner could not produce any logs substantiating involvement in ranching activities or phone records; petitioner’s conduct at ranch often affiliated with MN company; ranch essentially a corporate retreat for MN company; petitioner subject to passive activity loss rules and ranching loss deductions denied).

Santa Clara Valley Housing Group, Inc. v. United States, No. 5:08-cv-05097-WHA, 2012 U.S. Dist. LEXIS 5651 (N.D. Cal. Jan. 18, 2012)

(case involves whether warrants issued by an S corporation to shareholders in connection with shareholders participating in tax shelter constituted second class of stock that would disqualify the corporation from S corporation status; court noted that instruments, obligations and arrangements are not treated as second class of stock unless they are instruments, obligations or arrangements that are treated as equity in accordance with Treas. Reg. §1.1361-1(l)(4)(ii) or call options, warrants or similar instruments under Treas. Reg. §1.1361-1(l)(4)(iii); on reconsideration, court ruled that safe harbor of Treas. Reg. §1.1361-1(l)(4)(iii)(C) for call options applies if strike price of warrants is at least 90 percent of fair market value of underlying stock on date warrants issued; case to proceed to trial on issue of application of safe harbor; court’s previous ruling modified). 

Bronson v. Comr., T.C. Memo. 2012-17

(petitioner's horse-related activity not engaged in for profit; petitioner was bankruptcy lawyer whose wife was a college professor; petitioner had no prior experience in horse activities; significant time involved in the activity; no expectation that asset values would increase; no evidence of success in related activities; lengthy period of substantial losses and only occasional profits; elements of personal pleasure present).

Peco Foods v. Comr., T.C. Memo. 2012-18

(petitioner purchased poultry processing facilities in 1995 for over $27 million and in 1998 for almost $11 million; purchase agreements included purchase price allocations for acquired assets as agreed to by parties, with most of them being listed as real property depreciable as 39-year, non-residential real estate property using the straight-line method; in 1999 petitioner had CPA firm prepare "cost segregation study" which would appraise the real estate component by component, resulting in reallocation of purchase price of buildings to shorter-lived assets, and petitioner then filed amended return changing depreciation method used on buildings to account for shorter lives of components and generating additional depreciation deductions of $5.3 million for years in issue (due to use of double-declining balance method over 15  and seven year lives for the components; government disallowed any modification to original purchase price allocations on the basis that I.R.C. Sec. 1060(a) mandates that the allocations specified in the purchase contract controls; petitioner claimed that I.R.C. Sec. 338(b)(5) allows use of residual method; court agreed with government and noted that allowing subsequent change could put government in "whipsaw" position; residual method only available where contracting parties do not agree in writing to allocation of consideration of acquired assets (citing West Covina Motors, Inc. v. Comr., T.C. Memo. 2009-291)).

Priv. Ltr. Rul. 201216011 (Jan. 17, 2012)

(taxpayer, farmers' cooperative, marketed farm products by "agreement sales" which involve the co-op buying the products and reselling them with net profits accounted for on cooperative basis; such payments to patrons constitute PURPIMS and that co-op's DPAD to be computed without regard to any deduction for such payments). 

In re Edmiston Oil Company, Inc., et al., 269 P.3d 833 (Kan. Ct. App. 2012)

(oil and gas producers appeal state tax appeals court decision denying a sales and use tax exemption for down-hole machinery and equipment in addition to surface pumping equipment; statute at issue (Kan. Stat. Ann. §79-3606(kk)) requires that machinery and equipment be used as integral part of integrated production operations by processing plant or facility operated by processing business where extracted oil and gas is then treated or prepared before transmission to refinery or wholesale distribution; tax court decision affirmed). 

IRS issuance of Form 8937 (posted to IRS website on Jan. 13, 2012)

(IRS issues new Form 8937 and instructions for use by corporations to report transactions that impact shareholder stock basis; Form issued in accordance with tax reporting rules that became effective Jan. 1, 2011; Form must generally be filed by the earlier of January 15 of the year after the year in which transaction occurs or within 45 days after transaction; filing requirement applicable to public, private, domestic and foreign corporations; filing requirement applicable when corporate transaction impacts basis of all stockholders or holders of particular class of stock (or specified securities); S corporations satisfy reporting requirements by including impact of corporation transaction on timely-filed Schedule K-1; filing requirement avoidable if corporation posts "completed Form 8937" on corporate website; failure to comply with filing requirement results in $100 penalty per information return (up to $1.5 million annual maximum and additional $100 penalty for each shareholder (up to $1.5 million annual maximum).

Rev. Proc. 2012-13

(IRS notes that for business automobiles that employee drives home, value of personal use to be reported on W-2; value of personal use can be computed via IRS-specified business mileage rate for automobiles costing $15,900 or less (trucks and vans costing $16,700 or less); for vehicles valued in excess of such amount, annual lease value computation must be used as determined by IRS annual lease value table; for fleet-average valuation rule to apply, the amount for automobiles is $21,000 and $21,900 for trucks and vans).

Vandegrift v. Comr., T.C. Memo. 2012-14

(petitioners owned nine real estate properties and rented six of them but sold the other three before they were rented; all nine properties treated as rental properties with loss deductions  claimed against gains from sale of three properties; plaintiff claimed he qualified as real estate professional, but didn’t maintain records and couldn’t prove that he spent more than 50 percent of his time in real estate activities; properties that were sold were part of same passive real estate activity and proceeds to be netted with rental loss to determine passive income for year; 20 percent penalty of I.R.C. Sec. 6662 imposed to extent excess basis and expenses claimed on return). 

Caltex Oil Venture, et al. v. Comr., 138 T.C. 18 (2012)

(plaintiff, a partnership, paid $5.1 million for turnkey oil and gas well drilling venture; site preparation occurred during 1999 (tax year in issue), but no drilling occurred within 90 days after end of 1999; plaintiff deducted full $5.1 million in 1999 as intangible drilling costs, but amount denied because economic performance requirement of I.R.C. Sec. 461(h) not satisfied; IRS position affirmed – commencement of drilling occurs upon actual penetration of ground for well drilling purposes; 3.5 month rule of Treas. Reg. Sec. 1.461-4(d)(6(ii) does not allow plaintiff to treat any of service due under contract as having been economically performed in 1999 – all services required must be rendered within 3.5 months of payment; in any event, deductions allowed under 3.5 month rule limited to cash payments (or equivalents) but not payments by notes).

Priv. Ltr. Rul. 201216017 (Jan. 12, 2012)

(coal produced under particular process and certain chemical additives satisfies definition of “refined coal” in accordance with I.R.C. §45(c)(7) if such coal produced from feedstock coal that is same source or rank as “tested coal” and satisfies I.R.C. §45(c)(7)(B) qualified emission reduction test). 

Goyak v. Comr., T.C. Memo. 2012-13

(contribution of company controlled by petitioner to I.R.C. §419A(f)(6) plan in attempt to provide covered employees with severance and other benefits funded via whole life insurance not deductible business expense, but was constructive dividend to company’s only covered employee (petitioner’s spouse) for petitioner’s personal benefit; attempt to provide tax-free income to petitioner and spouse; accuracy-related penalty imposed). 

Iowa Department of Revenue Policy Letter (No. 12300002, Jan. 11, 2012)

(under Iowa Code Sec. 423.2(6), only enumerated services are subject to sales tax; software training is not an enumerated service and is not subject to tax regardless of how it is delivered; gross receipts of software provider from hosted software and web-based training services are "cloud computing" services that are not subject to sales tax).

Priv. Ltr. Rul. 201216034 (Jan. 11, 2012)

(power of trust beneficiary to withdraw trust contributions causes beneficiary to be treated as owner of part of trust over which withdrawal power has not lapsed; beneficiary can be treated as owner of balance of trust; trust is permissible S corporation shareholder if, based on facts, beneficiary treated as owner of entire trust; beneficiary’s estate includes amount from trust that beneficiary can withdraw in year of death less what has already been withdrawn in year of death). 

Feder v. Comr., T.C. Memo. 2012-10

(petitioner received Form 1099-R reporting insurance policy distribution; petitioner believed that policy had been canceled many years earlier, but didn't provide evidence that cancellation done in accordance with policy terms and premiums continued to be paid in accordance with automatic loan provision of policy until loan balance equaled cash value of policy; policy lapsed and triggered constructive dividend equal to value exceeding petitioner's investment in contract). 

Gallant v. United States, T.C. Sum. Op. 2012-7

(petitioner contributed $5,000 to IRA in 2007 and also participated in employer's qualified retirement plan; petitioner claimed deduction for IRA contribution; deduction denied due to application of I.R.C. Sec. 219(g) phaseout triggered by petitioner's participation in employer's qualified plan and because MAGI over phaseout limitation; petitioner's don't challenge facts but claimed that law treats them unfairly because only allowed a small IRA contribution due to participation in employer's qualified plan; argument rejected). 

Davila v. Comr., T.C. Sum. Op. 2012-6

(petitioner not entitled to dependency exemptions, child tax credit, earned income credit or head-of-household filing status; qualifying child or qualifying relative definition not met; children did not live with petitioner requisite time period). 

Cohan v. Comr., T.C. Memo. 2012-8

(family partnership received interests in various properties as consideration for transfer (bargain sale) of right-of-first refusal on encumbered farmland to charity (conservation organization); court redetermined fair market value such that each tract included value of beach rights; valuation approach of IRS expert generally upheld except that expert should have accounted for public access over one tract that would decrease value; gain attributable to beach rights not taxable to partners due to lack of capital interest in petitioner; petitioner's charitable deduction denied due to deficiencies of acknowledgement letter from charity; letter did not disclose certain items that donor received in return for gift and petitioner's reliance on letter not reasonable; accuracy-related penalty upheld).

Priv. Ltr. Rul. 201216007 (Jan. 9, 2012)

(real estate investment trust (REIT) can qualify for non-recognition treatment under I.R.C. §1031; facts involved series of like-kind exchanges involving related parties where receipt by the parties of some non-like-kind property did not disqualify transactions from non-recognition treatment under I.R.C. §1031(f); each related party must transfer replacement property into series of exchanges that also enter into like-kind exchange; REIT and related parties must hold replacement properties for at least two years after date of last transfer of property in the series of exchanges). 

Oros v. Comr., T.C. Memo. 2012-4

(petitioner not in trade or business of being book author for year in issue; no deductions for related expenses under I.R.C. Sec. 162; petitioner was full-time employee of Intel and had no experience writing or publishing books; no book income reported for year in issue; accuracy-related penalty not imposed because petitioner had good faith reliance on tax advisor with 36 years' experience). 

I.R.S. Notice 2012-03 (Jan. 5, 2012)

(IRS proposes a new revenue procedure in which IRS revises threshold equitable and/or innocent spouse relief requests; such requests are to be granted when facts and circumstances warrant and are to be granted in such circumstances at initial state of administrative process; IRS accepting comments until Feb. 21, 2012).

Martinez v. United States, 101 Fed. Cl. 688 (Fed. Cl. 2012)

(plaintiff owns a trucking firm and improperly classified drivers as independent contractors; plaintiff failed to qualify for "Section 530" relief for lack of filing Forms 1099 for six years; mailbox rule exception inapplicable due to lack of proof).

Hand, et al. v. Comr., T.C. Sum. Op. 2012-1

(petitioner not entitled to business expense deductions for expenses associated with flight lessons; accuracy-related penalty applied; petitioner provided no evidence that it was normal, usual or customary for commercial realtors to take flight lessons).

Carpenter, et al. v. Comr., 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)).

Roumi v. Comr., T.C. Memo. 2012-2

(petitioner engaged in mortgage banking business, but not entitled to deductions for mileage, car lease and fuel due to lack of substantiation; same result for petitioner's advertising business - not a going concern during tax year at issue (no TIN issued and no gross receipts or sales); petitioner's claim that he lost records in fire not convincing). 

Marshall v. Commonwealth, 41 A.3d 67 (Pa. Commw. Ct. 2012)

(plaintiff, a non-resident of Pennsylvania was subject to PA state income tax on income plaintiff received from foreclosure of commercial property; plaintiff was partner of partnership and partnership property disposed of as result of foreclosure of commercial property in the partnership; plaintiff responsible for tax on plaintiff's share of partnership's tax liability on gain which was triggered upon foreclosure of property in the partnership; plaintiff could not offset gain from sale or disposition of partnership property with partnership NOL; plaintiff's loss on liquidation not PA-sourced income and, as such, could not offset plaintiff's PA income tax liability). 

Chief Counsel Adv. 201202028 (Dec. 30, 2011)

(recapture tax under payroll extension act applies both to reduced FICA tax on employees and reduced RRTA tax on employees, but not the reduced RRTA tax on employee representatives). 

Diallo v. Comr., T.C. Memo. 2011-300

(petitioner denied head-of-household filing status for tax years that various members of extended family lived with him; petitioner could not prove that he provided over one-half of cost of maintaining household; but, petitioner could claim dependency deductions for two minor nieces; petitioner also had unreported income and court upheld IRS bank deposit method of reconstructing petitioner's income along with petitioner's profit and loss statements from limousine-driving business no additional Schedule C deductions allowed). 

Kansas Dept. of Rev. Priv. Ltr. Rul. P-2011-009 (Dec. 28, 2011)

(labor services performed in connection with dirt disposal associated with drilling of deep disposal wells not subject to KS sales and use tax; purchase of fly ash not exempt; tangible property purchased or rented or used in disposal process not exempt). 

IRS Announcement (IR-2011-26, Dec. 27, 2011)

(IRS announcement of temporary regulations on whether certain expenses can be currently deducted as a repair expense or must be capitalized and added to basis; written comments due March 26, 2012).

Anschutz Company v. Comr., No. 11-9001 (10th Cir. Dec. 27, 2011), aff'g, 135 T.C. 78 (2010)

(case involves tax ramifications of prepaid forward contracts under which holder of substantially appreciated public stock can receive payment of large percentage of holder's shares, and benefit if stock appreciates and tax deferment on funds paid until transaction closes in future years via Rev. Rul. 2003-7; under facts of case, plaintiff entered into prepaid forward contracts and lent shares subject to the transaction so that investment entity involved could sell the shares short or hedge risk; court holds that plaintiff not entitled to gain deferral because the contracts, in combination with share lending transaction, resulted in taxpayer giving up practically all incidents of ownership; decision likely impacts similar transactions presently under audit, in litigation, or those for which statute of limitations has been extended).

Estate of Moragne v. Comr., T.C. Memo. 2011-299

(theft loss deduction denied for assets held in joint tenancy between husband and wife that wife used or transferred due to failure to substantiate amount of loss).

Feldman v. Comr., T.C. Memo. 2011-297

(transaction did not constitute bona fide sale of ranch for corporate stock, but rather constituted corporate liquidation followed by distribution of cash to shareholders and payment to third party of a fee for facilitating sham sale; facts involved Wisconsin dude ranch in which shareholders wanted to sell their interests, but could only find a buyer for the operating assets; operating assets sold to LLC at $750,000 tax cost, but petitioner entered into "no-cost liquidation", a multi-step transaction consisting of nominal sale of corporate stock to facilitator followed by transfer by facilitator to shareholders of cash plus a premium; facilitator used bad debt losses acquired from other companies to offset gain on asset sale; transaction lacked economic substance).

Priv. Ltr. Rul. 201212021 (Dec. 27, 2011)

(surviving spouse could transfer pre-deceased wife’s IRA to separate IRA established in his own name via trustee-to-trustee transfer in spite of the fact that wife died before changing beneficiary designation forms from her estate to him; IRS did not apply general rule that would have treated IRA as inherited IRA because surviving spouse was sole beneficiary and estate executor; wife fell ill before getting beneficiary designation changed). 

Ahmed v. Comr., T.C. Memo. 2011-295

(petitioner's receipt of proceeds from settlement of employment discrimination suit not excludible from income under I.R.C. Sec. 104; amount not paid as result of physical injury).

Wilmot v. Comr., T.C. Memo. 2011-293

(petitioner's photography activity not engaged in with requisite profit intent under nine-factor analysis).

Bell v. Comr., T.C. Memo. 2011-296

(some of petitioner's claimed business expense deductions from landscaping business denied due to lack of substantiation; petitioner claimed that records lost; failure to file penalty upheld along with accuracy-related penalty).

I.R.S. Notice 2012-7, 2012-4 IRB 1 (Dec. 21, 2011)

(announcement by IRS that, as applied to property in Iowa, it is suspending some I.R.C. Sec. 42 requirements that normally apply to taxpayers that have property eligible for the low-income housing credit; suspension relates to flooding damage occurring between May 25 and August 1; rules suspended for taxpayers with affected property in Iowa; suspended rules include income limitation requirements, available unit rule, non-transient requirement, and other rules).

Chief Counsel Advice 201213023 (Dec. 21, 2011)

(cost of conversion kits used to improve casino slot machine’s productivity need not be capitalized under the pre-2012 repair regulations, but is unclear under present regulations). 

A.O.D. 2011-06, 2012-3 I.R.B. 1 (Dec. 20, 2011)

(IRS announces acquiescence in the following case: Mayo Foundation for Medical Education & Research v. United States, 131 S. Ct 704. (U.S. 2011)(Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) is the appropriate review standard under which Treasury Regulations underlying an ambiguous Code provision are to be evaluated; using the Chevron standard, Treas. Reg. Sec. 31.3121(b)(10)-2 upheld with result that medical residents are to be considered employees rather than students and, as such, cannot receive exemption from Social Security tax)).

Priv. Ltr. Rul. 201213016 (Dec. 20. 2011)

(rider option in annuity contract that couldn't be cancelled and would provide long-term care benefits during coverage period constituted "insurance" in accordance with I.R.C. Sec. 7702B(b)(1), and such long-term care benefits not included in owner's income by virtue of I.R.C. Sec. 104(a)(3); under policy, monthly long-term care benefits provided for reimbursement of long-term care services while insured chronically ill and benefits ceased if insured recovered from chronic illness).

Vetere v. Comr., T.C. Sum. Op. 2011-138

(petitioner not subject to 10% penalty for early withdrawal of funds from IRA because evidence sufficient to establish that petitioner unemployed for a year and used withdrawn amount to pay for medical and education expenses).

IRS Info. 2011-0005 (Dec. 16, 2011)

(IRS does not have the authority to issue guidance on the deductibility of medicinal marijuana; such expenses are barred from being deductible under the Controlled Substances Act and no exception is provided in I.R.C. Sec. 280E).

Kansas Dept. of Rev. Self-Audit Fact Sheet (Doc. No. 2011-26614, Dec. 16, 2011)

(fact sheet summarizes the application of Kansas sales or compensating use tax to sales, purchases and services by pet stores, pet supply stores and pet care service industries).

In re Does, No. 2:10-mc-00130-MCE-EFB, 2011 U.S. Dist. LEXIS 144516 (E.D. Cal. Dec. 15, 2011)

(court grants motion of U.S. government (IRS) for ability to serve "John Doe" summons on California State Board of Equalization to obtain names of CA residents who transferred property to family members from 2005-2010; IRS is attempting to ensure that gift tax returns are filed when required; state of CA had claimed that state law prohibited the state from disclosing such information without court approved summons; IRS has already received information about intra-family property transfers from county or state officials in CT, FL, HI, NE, NH, NJ, NY, NC, OH, PA, TN, TX, VA WA and WI).