Case Summaries

(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)).

(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).

(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). 

(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)).

(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 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).

(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).

(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). 

(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). 

(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). 

(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).

(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). 

(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).

(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)).

(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). 

(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). 

(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).

(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).

(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). 

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

(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).

(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)).

(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).

(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).