Case Summaries

Date of Distribution Controls For IRA Distribution Penalty Purposes.

The petitioner suffered from Type 2 diabetes and lost his job as a result.  He made a withdrawal from his IRA before reaching age 59.5 and claimed that he was exempt from the 10 percent early distribution penalty.  Six weeks after the withdrawal, the petitioner went into a diabetic coma, was hospitalized for over a week and filed for disability.  The IRS claimed that the petitioner was not disabled on the date of the distribution as required b y I.R.C. Sec. 72(t)(2)(A)(iii) and, thus, owed the 10 percent penalty.  The court agreed with the IRS because the petitioner did not prove that he was disabled before and at the time of the distribution.  Trainito v. Comr., T.C. Sum. Op. 2015-37.        

Horse Activity Not Engaged In With Profit Intent.

The petitioner was a dressage trainer and rider and tried to deduct her horse-related expenses.  Based on the nine factor analysis of the regulations, the court concluded that the petitioner did not conduct the activity with a  profit intent.  Importantly, the petitioner had only tack as an asset in the activity and there was no expectation that it would increase in value.  The petitioner had no other successes in relevant businesses, and the horse-related expenses were far greater than income from the activity.  The petitioner also had significant income from other sources and derived pleasure from the horse activity.  McMillan v. Comr., T.C. Memo. 2015-109.

Loss on Stock Shares Was a Capital Loss and Not An Ordinary Loss.

The plaintiffs, a married couple, bought stock in a small company which later came under SEC scrutiny for a “pump and dump” scheme as a result of the corporate officers  releasing false information about sales that never occurred which enhanced the stock price before the officers sold their stock at a large gain.  The buyers of the stock, including the plaintiffs, suffered a total loss as a result of an SEC investigation that halted trading.  The company involved eventually filed bankruptcy.  The plaintiffs  claimed a deductible theft loss (ordinary loss that was fully deductible).  The IRS claimed that the loss was a capital loss (which would only offset other capital gains or $3,000 of other income annually).  The court noted that for the loss to qualify as a theft loss, the wrongdoers must have acted with the specific intent to deprive the taxpayer of their property, and the taxpayer must have transferred their property to the wrongdoers.  The court, agreeing with the IRS, determined that the second part of the test was not satisfied – the taxpayers’ stock was not transferred to the corporate officers but was sold to general investors in an open market.    Thus, the taxpayers’ stock had not been stolen.  Greenberger v. United States, No. 1:14-CV-01041, 2015 U.S. Dist. LEXIS 80643 (N.D. Ohio Jun. 19, 2015). 

Deductions Denied For Lack of Substantiation.

The petitioners claimed deductions for business travel and medical expenses.  However, they did not prepare mileage logs as the trips were incurred and did not record the business purpose of trips.  In addition, logs maintained did not provide the names and addresses of customers or the businesses that were visited or the business purpose of the trips.  Claimed medical expenses did not list the name of the patient, the medical purpose of the service or expense and did not list the doctor visited.  The court upheld the denial of the deductions.  Renner v. Comr., T.C. Memo. 2015-102.

Taxpayer Cannot Rely on Tax Preparer For Filing of Accurate Return.

The IRS claimed that the petitioner had a tax deficiency of $2,500.  The return was prepared by a return preparation service known as "Tax Whiz," and claimed a $2,500 American Opportunity Tax Credit (AOTC) which resulted in the return showing a $1,853 refund due to petitioner.  However, the petitioner admitted that he did not have any qualified educational expenses for the year in issue and was not entitled to the credit.  The petitioner also admitted that he did not examine the return before Tax Whiz filed it.  The petitioner did not receive the refund because IRS intercepted it and had it applied to the petitioner's outstanding child support debt.  The court held that the petitioner was not entitled to the AOTC, and was liable for the resulting deficiency.  Reliance on a tax return preparer does not absolve a taxpayer from the responsibility to file an accurate return, the court noted.  The court lacked jurisdiction to review the reduction of the petitioner's overpayment to pay his child support debt.  Devy v. Comr., T.C. Memo. 2015-110.

No Gift Splitting Allowed for Gifts to Spouse

As part of an estate plan, a husband created a trust for the benefit of his wife and their descendants.  The trustee could pay to or use for the benefit of any of the beneficiaries any amount of the trust income and principal as the trustee determined necessary for a beneficiary's support, health and education.  The husband also established two grantor retained income trusts (GRATs) with the remaining trust assets at the end of the GRAT term paid to the trust.  The couple filed gift tax returns and elected to split the gifts to the trusts such that one-half of each gift would be deemed to have been made by each spouse for purposes of gift tax.  The IRS, citing, I.R.C. Sec. 2513 and Rev. Rul. 56-439, denied split gift treatment because the spouse was a beneficiary of the trusts.  A split gift election is only permissible for gifts to someone other than a spouse.  No gifts were eligible for split gift treatment.  Priv. Ltr. Rul. 201523003 (Jan. 28, 2015).

Medical Issues Not Enough To Avoid Tax on IRA Rollover.

The taxpayer took a distribution from his IRA and then suffered a work-related injury that put him on medical leave.  The leave period expired after the 60-day IRA rollover period.  But, the taxpayer was also caring for his disable wife at the same time.  The taxpayer sought relief from the 60-day rule, but IRS determined that relief would not be granted because the taxpayer used the withdrawn funds to pay personal expenses during the 60-day period and didn't return the funds to the account for more than six months after the 60-day period had expired.  Thus, the funds had, in effect, been used as a short-term, interest-free loan that the taxpayer used to pay personal expenses.  U.I.L. 201523025 (Mar. 13, 2015). 

Landlord Has Taxable Income on Receipt of Up Front Lease Payments.

The petitioner built a commercial building and entered into a 10-year lease with the lessee.  Under the terms of the lease, monthly rent payments were to be paid but the lessee could make a one-time payment to the petitioner which could be used in calculating rent and thereby reduce the amount owed under the lease.  A $1 million payment was made and the IRS claimed that the petitioner should have reported it as income.  The petitioner claimed that the amount was a reimbursement of construction costs or, if it was rental income, could be reported over the life of the lease.  The Tax Court agreed with the IRS that the amount was rental income that was to be fully reported in the year received under I.R.C. Sec. 467.  The rental agreement did not specify any specific allocation of fixed rent.  Thus, the rent allocated to a rental period is the amount of fixed rent payable during that rental period.  The constant rental accrual and proportional rental accrual methods were inapplicable to the lease at issue.  Stough v. Comr., 144 T.C. No. 16 (2015).

Taxpayer Uses His IRA To Direct Himself Into a Huge Tax Bill.

The petitioner used funds in his IRA to start a business via an LLC.  The initial capital contribution to the LLC was $319,000 of the petitioner's IRA funds.  The IRA was created after the LLC with funds from the petitioner's 401(k) with a prior employer.  The LLC was created and the petitioner directed the IRA custodian to acquire LLC shares, reporting the transactions (there were two of them) as non-taxable rollover contributions with the IRA now owning LLC interests.  The LLC employed the petitioner as its general manager, and also employed the petitioner's spouse and children.  The LLC paid a salary to the petitioner for his services as general manager.  The IRS asserted a tax deficiency of $135,936 plus an accuracy-related penalty of over $26,000.  The Tax Court agreed with the IRS, holding that the payment of a salary and the directing of compensation from the LLC violated I.R.C. Sec. 4975(c)(1)(D) and I.R.C. Sec. 4975(c)(1)(E) as a prohibited transaction.  On appeal, the court affirmed.  The payment of salary amounted to an indirect transfer of the petitioner's income and assets of his IRA for his own benefit and indirectly dealt with the income and assets for his own interest or his own account in a prohibited manner.  As a result, the IRA was terminated with the entire amount taxable income, plus penalties.  Ellis v. Comr., No. 14-1310, 2015 U.S. App. LEXIS 9380 (8th Cir. Jun. 5, 2015), aff'g., T.C. Memo. 2013-245.

Legislation Tweaks Iowa Beginning Farmer Credit.

The Iowa legislature has passed HF 624 which allows custom farming contracts with beginning farmers to last for 24 months rather than the current requirement that they be an annual contract.  

Iowa Bill Provides Sales Tax Exemption for Ag ATVs.

SF 512 exempts all-terrain vehicles that are "used primarily in agricultural production" from sales tax.  

Iowa Bill Allows Expense Deductions on Fiduciary Income Tax Returns.

The Iowa legislature unanimously passed HF 661 which allows a deduction on the Iowa Form 1041 for administrative expenses that were not taken or allowed as a deduction in calculating net income for federal fiduciary income tax purposes.  Thus, deductions taken on the Federal Form 706 can be claimed on the Iowa 1041 (Iowa has no estate tax).  The bill also allows administrative expenses to be deducted that would otherwise be disallowed for exceeding the 2 percent of adjusted gross income floor.  The effective date of the Bill is for tax years ending on or after July 1, 2015.

S Corporation Did Not Have Passive Rental Income.

An S corporation had rental income from a property that it leased to others.  The S corporation, through its officers, employees and independent contractors, provides various services with respect to the property including janitorial and trash removal, maintenance and repairs and inspection services.  The S corporation also provided security services.  The IRS determined that the rental income was not passive.  Priv. Ltr. Rul. 201523008 (Feb. 4, 2015).

IRS Say Negative Easement Payments Are Rents.

The taxpayer was a corporation that received payments from a neighboring property owner for deed restrictions placed on the taxpayer's property that would restrict development.  These negative easement payments were paid to prevent the taxpayer from using its property in a manner that would diminish the value of the payor's property.  The question was whether the payments were rents or income from the sale of a capital asset or gains from the sale of I.R.C. Sec. 1231(b) property that would result in the taxpayer, a C corporation, having personal holding company (PHC) income in excess of 60 percent of its adjusted ordinary gross income for the tax year which would trigger the PHC tax of 20 percent on undistributed PHC income.  The IRS determined, based on the Eighth Circuit's holding in Morehouse,  that the payments were "rents" paid for the "use" of the taxpayer's property.  As such, the payments were PHC income.  However, the conclusion of the IRS would also have application in situation's involving the government's use of property to enhance wildlife and conservation which would mean that the payments would not be subject to self-employment tax.  Such payments would be "rents from real estate" and would be excluded from self-employment tax in the hands of a non-materially participating farmer, or a non-farmer.  CCM 20152102F (Feb. 25, 2015).

Sale of Real Estate Generates Ordinary Gain.

The petitioner operated a real estate investment partnership.  As part of the partnership's business it acquired a leasehold interest in a property with the intent to develop an apartment complex and retail space.  The lease originally ran for 20 years, but was extended for another 34 years.  The leasehold was transferred to another entity for development and management purposes.  The property generated only rental income and no substantial effort to sell the property was made for the first 13 years, when an offer to buy was received.  The property was sold for $14.5 million plus a share of the profits from the homes that would ultimately be developed on the property.  The partnership reported $628,222 of capital gain, but IRS took the position that the transaction triggered $7.5 million or ordinary income.  The court agreed with the IRS.  The court determined that the property was initially acquired for developmental purposes, and efforts to obtain financing and continue that development were made; the sale was to an unrelated party with the plan for the petitioner to develop the property; and efforts continued to develop the property up until the purchase date.  While there were some factors that favored the petitioner (only minor improvements made; no prior sales; no advertising or marketing performed), the court held that the factors weighed in the favor of the IRS and the sale was in the ordinary course of business under I.R.C. Sec. 1221(a)(1).  Fargo v. Comr., T.C. Memo. 2015-96.

Bankruptcy Trustee Shows That Debtor Used IRA Improperly.

The debtor, an LLC, bought about four aces of real estate.  The LLC was owned 50/50 by a husband and his wife, and the husband was a co-debtor on numerous LLC debts.  The husband's self-directed IRA also participated in a partnership with the LLC.  Pursuant to an agreement, the IRA made a cash contribution of just over $40,000 and a non-cash contribution of the real estate valued at $122,830.  The LLC's sole obligation was a cash contribution of $163,354.49, the amount of the IRA's cash and non-cash contribution values, to be made at an unspecified construction date.  The day after forming the partnership, the husband directed the IRA to sell off $123,000 of assets.  The purchase of the four acres occurred simultaneously.  Later, the partnership paid expenses of over $40,000 and the LLC filed bankruptcy claiming the IRA and the husband as unsecured parties.  The partnership was not listed.   The bankruptcy trustee objected to the IRA being treated as exempt, and the court agreed, finding that the IRA had engaged in numerous prohibited transactions, including serving as a lending source for the purchase and development of the real estate, which terminated the tax-exempt status of the IRA.  In re Kellerman, No. 4:09-bk-13935, 2015 Bankr. LEXIS 1740 (Bankr. E.D. Ark. May 26, 2015).


IRS Abates Excess Penalties and Treat Amended Return As A Refund Claim.

The IRS has concluded that it has the power to abate interest and penalties where they have been paid and an amended return seeking a refund of tax was filed late.  The facts indicated that a taxpayer had previously paid interest and penalties based on the tax liability shown on the taxpayer's original return.  However, the tax liability was discovered to have been substantially overstated and the amended return got the tax liability correct.  Unfortunately, the amended return was filed late - the statute of limitations for claiming a refund had already expired.  The question was whether IRS could, under I.R.C. Sec. 6404(a)(1), abate and refund any of the penalties where the underlying tax refund claim was not timely filed.  The IRS concluded that it could abate excess penalties and interest because I.R.C. Sec. 6404(a)(1) was permissive in nature which allowed IRS to abate the paid portion of any assessment.  Accordingly, the amended return is to be treated as a claim for refund of penalties and interest paid in the prior two years before the filing of the amended return, to the extent the amounts exceed the taxpayer's actual tax liability.  C.C.A. 201520010 (Apr. 23, 2015).

Disability Pension Payment Received By Former Spouse Are Taxable.

I.R.C. Sec. 104(a)(1) does not exclude from income payments that are made from a disability pension to a former spouse under a qualified domestic relations order (QDRO).  That is the result, the IRS determined, even if the amounts are excluded from income under I.R.C. Sec. 104(a)(1) when they are paid to the original recipient of the payments.  The facts involved a situation when a taxpayer receiving an income stream got divorced and the payment rights were divided under a QDRO.  The IRS determined that the entire amount paid to the former spouse is includible in taxable income.   The result is that non-taxable income is converted to taxable income.  Priv. Ltr. Rul. 201521009 (Feb. 9, 2015).

Deductible Loss Killed Because House Not Rented.

The petitioners, a married couple, bought a home in 2004 for $875,000 and used it as a seasonal residence.  They stopped using it as a seasonal residence in 2008 and converted it to a rental property.  A realtor hired to find a renter used the property as a "model" of similar units to show to prospective buyers.  The petitioners removed all of their personal belongings and converted a room to a child's room.  Two prospective renters expressed interest in renting the home, but ultimately did not do so.         The property was never rented before the petitioners sold the property in late 2010 at a loss.  On their 2010 return, the petitioners deducted the loss on sale under I.R.C. Sec. 165(c).  The IRS disallowed the loss under I.R.C. Sec. 262 because the petitioners failed to convert the house to a rental property before sale.  The court agreed with the IRS, determining that the facts illustrated that the petitioners had failed to change their intent from using the house as their personal residence to a rental property citing five factors - (1) length of time the house was occupied by the taxpayer as a residence before being placed on the market for sale; (2) whether all personal use of the home had been discontinued; (3) the character of the property ; (4) the number of offers to rent the home; and (5) the number of offers to sell the home.  The court noted that the petitioners had used the house for four years before moving out and there were only limited efforts to rent the property.  Had a deduction been allowed, it would have only been the amount of any further reduction in value after the conversion to rental.  No deduction is allowed for the decline in value while the house was used as a personal residence.    Redisch v. Comr., T.C. Memo. 2015-95. 


Tax Court Says When Foster Parent Relationship Ends For Tax Purposes

The petitioner was the guardian of a child that was placed in the taxpayer's home beginning in 1991 through 2004 when the child reached age 18.  In 2006, the child had a baby and the taxpayer continued providing support to the child and, now, the baby.  The taxpayer claimed dependency exemption deductions for the child and the baby (now five) on the taxpayer's 2011 return.  In addition, the petitioner claimed an earned income tax credit, child tax credit and head of household filing stats on the 2011 return.  The IRS denied the deductions and credits and head of household filing status, but later conceded that the child was the petitioner's qualifying relative which entitled the petitioner to a dependency exemption deduction.  The child's child was not, however, a qualifying child.  The "relationship" test was not satisfied and the child was no longer an eligible foster child after achieving majority.  Relationship of affinity did not apply, the court reasoned, because a foster relationship is not a relationship of affinity based on marriage and is only temporary.  Cowan v. Comr., T.C. Memo. 2015-85.

No Casualty Loss Deduction Because Reimbursement Still Possible.

In 2012, the petitioners' personal property contained in their rental home was destroyed by fire.  The loss was covered by insurance and the petitioners received $60,000 in insurance proceeds, the limits of the policy, and claimed a casualty loss in 2012 for the remaining amount of the loss not compensated for by insurance.  The petitioners sued the landlord for the excess loss not compensated by insurance.  The matter was set for trial in 2014 and in early 2015 mediation was scheduled.  The IRS denied the 2012 deduction and the court agreed with the IRS, noting that a casualty loss is only deductible in the year of occurrence if there is no reasonable prospect of recovery.  Because the petitioners' claim for reimbursement was alive after 2012, no casualty loss deduction could be claimed in 2012.  Hyler v. Comr., T.C. Sum. Op. 2015-34.

CPA Screws Up Basis Rules and Lands 40 percent Gross Valuation Misstatement Penalty.

The petitioner was a CPA with a Big Four firm.  The firm spun-off its consulting business to a new corporation while retaining an equity stake in the new corporation's shares.  Those shares were allocated among the firm's partners with the petitioner receiving shares and taking a zero income tax basis in the shares.  The petitioner resided in the U.K. and had been recently divorced.  Based on his fear that his ex-wife would attempt to get the shares because he received them during their marriage, the petitioner gave the shares to his second wife who was a U.K. resident (non-resident alien).  Ultimately, the stock is sold for a large gain without anything reported as taxable gain for either gift or income tax purposes.  The second wife ultimately receives U.S. residency and the petitioner files a Form 1040 and Form 709 three years late.  The petitioner then filed a Form 1040-X claiming the gift to the second wife was taxable in accordance with I.R.C. Sec. 1041(a) because she was a non-resident alien at the time of the gift (gifts to non-resident aliens are taxed as transfers at fair market value and the second wife would also have an income tax basis in the shares).  However, the court pointed out that I.R.C. Sec. 102(a) excludes the value of gifted property from the donee's gross income, and I.R.C. Sec. 1015(a) pegs the donee's basis at the lesser of the donor's basis or, for unrecognized losses, the property's fair market value for loss purposes.  In addition, the donor paid no gift tax that would have provided basis in the hands of the donee second wife.  The court upheld the imposition of a 40 percent penalty for a gross valuation misstatement because the petitioner's good faith arguments failed - he never sought review by the experts in the firm, and relied on the wrong tax treaty.  Hughes v. Comr., T.C. Memo. 2015-89. 


No Debt Discharge Income Because Debt Still Outstanding and Being Repaid.

The petitioner founded a communications company (Summit) in 1996.  In 1998, the petitioner executed an employment agreement with another communications problem (SIC).  Under the agreement, the petitioner personally received a loan of $450,000 which he was to loan to Summit to support its operations.  Summit then began receiving large contracts from SIC which within two years amounted to 60 percent of Summit's revenue.  In 1998, the petitioner also received a $20,000 loan from SIC's parent company.  In 2000, the petitioner resigned from SIC to manage the growth of Summit.  The resignation triggered the repayment obligation on the SIC loan.  SIC did not demand repayment at that time and did not issue a Form 1099-C, and the petitioner also did not receive a Form 1099 from SIC's parent company.  In 2001, SIC received a large USDA loan to provide telecommunication services to rural areas.  Consequently, SIC's reliance on Summit reduced substantially, which impacted Summit negatively.  Summit filed bankruptcy in 2002 and was dissolved in 2009.  In 2005, the petitioner was rehired by SIC.  The IRS audited the petitioner's 2007 return and claimed that the $20,000 loan had been forgiven and needed to be reported in income.  The IRS also claimed that the SIC loan constituted discharge of indebtedness income that should have been reported on the 2007 return based on the fact that SIC had not taken collection action and the loan became due and before the period of limitations for collection expired.  The IRS thought that such inaction manifested an intention on the part of SIC or its parent corporation to forgive the SIC loan.  The court disagreed, noting that credible testimony indicated that SIC did not consider the loan forgiven and that the petitioner was currently repaying the loan and that Form 1099-C was not issued.  In addition, the expiration of the state limitations period was not conclusively an identifiable event as to when a debt has been discharged.  However, the $20,000 loan from SIC's parent was forgiven in 2007.  However, the court noted that the petitioner was insolvent in 2007 at the time the $20,000 loan was forgiven and was, therefore excludible under the insolvency exemption of I.R.C. Sec. 108(a)(1)(B).  However, the court held that the petitioner was not entitled to a bad debt deduction as a result of the Summit loan becoming worthless in 2009.  The court did not have jurisdiction to hear the claim because the year under review was 2007.  An accuracy-related penalty was not imposed.  Johnston v. Comr., T.C. Memo. 2015-91.     


No Tax Liability Costs C Corporation Estimated Tax Safe Harbor and $95,000.

The plaintiff, a C corporation, filed a return for the year ending Aug. 31, 2008, reflecting a tax liability of "0.00."  Based on the 2008 return, the plaintiff did not make any estimated tax payments for its 2009 tax year based on the exemption contained in I.R.C. Sec. 6655(d)(1)(B)(ii) which says that estimated tax penalty is 100 percent of the tax shown on the return for the preceding tax year (which would be zero).  However, in 2011, the IRS levied a penalty of $94,671.53 plus interest of $301.34 (which ultimately grew to $1,284.70) for failure to pay estimated tax for the plaintiff's 2009 tax year.  The matter ultimately went to an IRS appeals conference which did not resolve the matter.  The plaintiff paid the tax and sued for refund.  The IRS claimed that because the plaintiff did not file a tax return for tax year 2008 that showed a liability for tax, the plaintiff could not rely on the safe-harbor of I.R.C. Sec. 6655(d)(1)(B)(ii).  The statutory language immediately after the safe-harbor states as follows:  "Clause (ii) shall not apply if the...corporation did not file a return for such preceding taxable year showing a liability for tax."  The plaintiff claimed that its 2008 return was a return that showed a liability for tax and that liability was zero.  The IRS claimed that the return did not show any liability for tax which eliminated the safe-harbor.  The court, based on a plain reading of the statute, agreed with the IRS.  The court noted that S corporations and individuals need not file a return to take advantage of the safe-harbor, which indicated that the Congress intended to treat C corporations differently.  The court reached this conclusion even though I.R.C. Sec. 6655(g)'s definition of "tax" for this Code section could result in "zero" meeting the definition, and the regulations do not provide otherwise.  IRS has never issued any formal or informal guidance on the definition of "tax" for this purpose, but has taken this position with respect to C corporations in litigation.  Nevertheless, the court gave the IRS position deference.  As a result of the court's ruling, had the plaintiff's 2008 return showed a tax liability of one cent, the estimated tax penalty would have been zero.  Cal Pure Pistachios, Inc. v. United States, No. CV 14-5237-DMG (PLAx) (C.D. Cal. Apr. 10, 2015).   

Taxpayer Wins Battle of Appraisers on Charitable Contribution.

The petitioners (a married couple) claimed a chartable deduction of $2.1 million resulting from the bargain sale of 63.39 acres of undeveloped land to a charitable foundation and their allocation and carryover of deductions from other years.  The issue in the case was the value of the contribution.  As is typical of cases like this, the result is fact-based with the outcome of which party had the better appraisal.  The court largely upheld the petitioner's claimed deduction, finding that the petitioners satisfied the contemporaneous written acknowledgment rule and had the better appraisal as to fair market value.  Davis v. Comr., T.C. Memo. 2015-88.

IRS Changes Mind On Corporate Tax Free Exchange Transaction.

Under the facts of this ruling, a parent corporation owned all of the stock of two foreign subsidiaries.  One of the subsidiaries was an operating company and the other a holding company.  The holding company owned all of the stock of three other operating companies that were also foreign companies.  The proposal was that all of the operating companies would be combined into a new subsidiary in the foreign country.  A new foreign corporation would be formed with the parent transferring all of the stock it held in the two subsidiaries in exchange for additional shares of voting common stock of the new corporation.  Then, the other operating subsidiaries will transfer all of their assets to the new corporation in exchange for additional shares of the new corporation's stock.  Then the subsidiaries and the operating company subsidiary will liquidate and distribute their stock to the holding company subsidiary.  Then the new corporation will continue to conduct the business that was formerly conducted by the operating subsidiary and the three subsidiaries that had been owned by the holding company subsidiary.  A gain recognition agreement will be entered into.  The IRS determined that the transaction would qualify for Sec. 1031 treatment as a Sec. 351 exchange followed by a type D reorganization.   Rev. Rul. 2015-9, 2015-21 I.R.B., revoking Rev. Rul. 78-130, 1978-1 C.B. 114.

Battle Over Federal Taxes Due is Not a Federal Court Concern.

A brother and sister, residents of Arkansas, were battling each other over who was responsible for paying an estate tax liability exceeding $2 million of their mother's estate.  The plaintiff was executor of the estate and the defendant was the trustee of the decedent's trust and received life insurance proceeds as a trust asset.  The plaintiff asked the defendant to disburse trust funds such that the estate tax liability triggered by the insurance could be paid.  The defendant refused, and the plaintiff sued in federal court to force the defendant to disburse trust funds.  The court ruled for the defendant, holding that the Code does not create a claim for the decedent's estate until the taxes are paid.  I.R.C. Sec. 2206 specifies that unless the decedent directs otherwise by will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the decedent's life receivable by a beneficiary other than the executor, the executor can recover from the beneficiary the portion of the total tax paid as the proceeds of the policies bear to the taxable estate.  No other direction was provided in the decedent's will.  Thus, the court lacked jurisdiction until the federal estate tax is paid.  The matter belonged in state court.  Manley v. DeVazier, No. 2:15-cv-54-DPM, 2015 U.S. Dist. LEXIS 58782 (E.D. Ark. May 5, 2015).     

Land Preservation Easement Granted To County Nets Taxpayer No Deduction and Big Penalties.

In 2006, the petitioners, a married couple, granted a land preservation easement to a county (under the county's Agricultural Land Preservation Program (AALP) in exchange for being entitled to sell to a developer the development rights on the tract - known as a "density exchange option."  As a result of the easement grant, the petitioners claimed a charitable deduction of $5.54 million which they carried over, in part, to 2007 and 2008 due to deduction limitations.  The IRS denied the deductions due to the petitioners' failure to satisfy the reporting requirement for this type of charitable contribution and because of the lack of donative intent because of a quid pro quo exchange.  As a result, the IRS asserted deficiencies of $1.3 million also levied accuracy-related penalties totaling almost $260,000.  The court sustained the IRS position.  The court determined that that the appraisal of the property was not a "qualified appraisal" as required by Treas. Reg. Sec. 1.170A-13(c)(3) because it lacked an accurate description of the property, the date of the contribution and the terms of the agreement.  The court also noted that the appraisal summary required by Treas. Reg. Sec. 1.170A-13(c)(2)(I)(B) that is submitted on Form 8283 did not have the donee's signature and did not disclose the consideration received.  Also, the court held that the petitioners were not entitled to substantial compliance.  The court also held that the transaction involved a quid pro quo and could not be re-characterized as a bargain-sale transaction.  As for computation of the gain from the sale of the development rights, the court held that it was not possible to determine the basis of the development right and, as such, the "equitable apportionment" doctrine did not apply.  The court upheld the imposition of the 20 percent accuracy-related penalty for a substantial valuation misstatement under I.R.C. Sec. 6662(b)(3) for which reasonable cause did not apply.  Costello v. Comr., T.C. Memo. 2015-87         

Court Points Out Tax Distinction Between A Lease and a Sale and Deals With Ability to Increase Partnership Basis

The petitioner, a doctor, had various entities that he controlled that utilized certain items of equipment.  The petitioner acquired a CT scanner with a five-year life.  The scanner was leased by one of the petitioner's entities that provided that the lessee could buy the scanner at a below market price.  One of the entities deducted the rent amount received for the "lease" of the scanner and another entity deducted depreciation, with both deductions flowing through to the petitioner.  The IRS denied the deductions and the court agreed.  The court determined that the substance of the transaction was a conditional sale primarily based on the fact that the lessee had the option at the end of the lease term to buy the scanner at a nominal (below market) price.  The petitioner also formed, with two others, a limited liability company (LLC) that was taxed as a partnership.  The LLC managed the scanner.  The LLC, for the tax year at issue, had a large loss which petitioner claimed on his own return.  IRS denied the denied the deductible loss due to lack of basis in the LLC.  The petitioner claimed he had sufficient basis in the LLC via the scanner "lease".  The court disagreed, holding that the lease was not a partnership liability because the "lease" transaction was a conditional sale that was not transferred to the LLC.  The scanner transaction was specifically non-transferable and non-assignable.  Coastal Heart Medical Group, Inc., et al. v. Comr., T.C. Memo. 2015-84.


IRA Distributions Includible in Income.

The petitioners are a married couple.  The husband was the sole beneficiary of his father's IRA.  He elected a lump sum option upon his father's death, and issued checks to both of his siblings totaling $37,000 based on what he thought his father wanted.  The payment was made out of the distribution that the husband had received in the previous months.  The petitioners filed a return for the year at issue but did not report the IRA distributions in income.  The IRS issued a deficiency notice for over $27,000 plus a penalty in excess of $5,000.  The court upheld the IRS position.  Morris v. Comr., T.C. Memo. 2015-82. 


No Alimony Deduction for Garnished Wages.

The petitioner had amounts garnished from his paycheck in order to satisfy a separation agreement with his ex-wife to pay child support that he had defaulted on to the extent of approximately $64,000.  In the Colorado proceeding utilizing Colorado law, the payments were not terminated upon death of either the payor or the payee.  The ex-wife sued in a Texas court to enforce the separation agreement where the court ordered garnishment.  Accordingly, the petitioner paid in excess of $50,000 in spousal support and child support, and claimed about a $39,000 alimony deduction.  The ex-wife also claimed about $13,000 in alimony income.  The court disallowed the deduction for failure to satisfy the conditions for deductible alimony contained in I.R.C. Sec. 71(b)(1), one of which is that the payments terminate upon death of the ex-wife.  Under CO law, spousal support payments that are in arrears are treated as money judgments, and are not affected by the payor or payee's death.  Iglicki v. Comr., T.C. Memo. 2015-80.

Oil and Gas Investment Generated Self-Employment Taxable Income.

The petitioner was a CEO of a computer company with no knowledge or expertise in oil and gas.  In the 1970s, the petitioner acquired working interests in several oil and gas ventures of about 2-3 percent each.  The ventures were not part of any business organization, but were established by a purchase and operating agreement with the actual operator of the interests.  The operator managed the interests and allocated to the petitioner the income and expense from the petitioner's interests.  The petitioner had no right to be involved in the daily management or operation of the ventures.  Under the agreement, the parties elected to be excluded from sub-chapter K.  For the year at issue, the petitioner's interests generated almost $11,000 of revenue and $4,000 of expenses.  The operator classified the revenues as non-employee compensation and issued the petitioner a Form 1099-Misc.  No Schedule K-1 was issued and no Form 1065 was filed.  The petitioner reported the net income as "other income" on line 21 of Form 1040 where it was not subject to self-employment tax.  The petitioner believed that his working interests were investments and that he was no involved in the investment activity to an extent that the income from the activity constituted a trade or business income.  The IRS claimed that the income was partnership income that was subject to self-employment tax.  The court agreed with the IRS because a joint venture had been created with the working interest owners (of which the petitioner was one) and the operator.  Thus, the petitioner's income was partnership income under the broad definition of a partnership in I.R.C. Sec. 7701(a)(2).  The trade or business was conducted, the court determined, by agents of the petitioner, and simply electing out of sub-chapter K did not change the nature of the entity from a partnership.  Also, the fact that IRS had conceded the issue in prior years did not bar IRS from changing its mind and prevailing on the issue for the year at issue.  Methvin v. Comr., T.C. Memo. 2015-81.

Penalty Upheld For Claiming Deduction Attributable to Worthless Historic Preservation Easement.

In an earlier action, the First Circuit upheld the Tax Court's partial summary judgment for the IRS which was then affirmed on reconsideration that the taxpayer's  contribution of a facade easement did not comply with the enforceability-in-perpetuity requirements of Treas. Reg. Sec. 1.170A-14(g)(6).  The cash payments to the charity that accepted the facade easement remained conditional at end of 2003 and, thus, were not deductible.  However, cash payments made in 2004 were deductible.  The facade easement was not protected in perpetuity because the donee organization was not guaranteed a proportionate share of the proceeds in the event of casualty or condemnation as required by Treas. Reg. Sec. 1.170A-14(g)(6)(ii).  An accuracy-related penalty was applicable for the deduction of cash payments in 2003.  On appeal, the appellate court vacated the lower court's opinion on the basis that the interpretation of the regulation at issue by the IRS and the Tax Court was unreasonable and inconsistent with Congressional intent.  While the lender retained priority to the insurance proceeds, the petitioner had no power to make the lender give up such protections.  The tax liens could potentially trump the donee's right to the funds upon extinguishment of the easement and, thus, the regulation's reference to "entitled" cannot be reasonable construed to give the donor an absolute right to any proceeds.  The court's opinion, thus called into question Tax Court opinions in Wall v. Comr., T.C. Memo. 2012-169 and 1982 East, LLC v. Comr., T.C. Memo. 2011-84).  On further review, the First Circuit held that the Tax Court correctly upheld the IRS imposition of a substantial valuation misstatement penalty for an underpayment of tax as a result of the donated easement.  The easement had no value because the façade was already subject to similar restrictions by reason of being in an historic district.  Kaufman v. Comr., No. 14-1863, 2015 U.S. App. LEXIS 6830 (1st Cir. Apr. 24, 2015), aff'g., T.C. Memo. 2014-52.

Calendar of Business Trip Expenses Good Enough For Court To Allow Deductions.

The petitioner managed construction projects and claimed employee business travel-related deductions.  He kept a calendar that detailed the trips and also recorded his business miles.  The IRS disallowed the deductions, but the court allowed the deductions because the calendar contained weekly mileage and detailed where petitioner was working and the dates he worked at various locations on a contemporaneous basis.  The court noted that the petitioner also recorded the beginning and ending mileage.  The court views the petitioner's testimony as credible and his records as adequate.  Ressen v. Comr., T.C. Sum. Op. 2015-32

Taxes on Loan Not Forgiven When Loan Is.

The petitioner was a doctor that was recruited to work for a hospital in a rural area and was offered a $260,000 loan to work for the hospital with the loan forgiven upon the satisfaction of certain goals.  The goals were met and the loan was forgiven over a four-year timespan.  The petitioner didn't report any income from the forgiveness and the IRS asserted a tax deficiency.  The court agreed with the IRS.  The petitioner argued that because the loan was non-recourse that he wasn't personally liable for repayment and, thus, didn't have income upon forgiveness.  The court noted that the loan terms made him liable and also rejected the petitioner's argument that the nature of the loan meant that he couldn't have cancelled debt income.  While the hospital issued the petitioner a Form 1099-Misc. rather than a Form 1099-C, the court held that was merely a bookkeeping error that had no bearing on the tax effect of the forgiveness.  Wyatt v. Comr., T.C. Sum. Op. 2015-31.

Payments for Unused Vacation Time and Sick Leave Were Taxable Income

The petitioner retired from the L.A. police force, but didn't report as gross income payment that he received on retirement for cashing out his unused vacation and sick leave time.  He claimed that at least some of the portions of the payments accrued when the petitioner was on temporary disability leave.  Under state law (CA), a temporarily disabled cop gets temporary disability equal to the employee's base pay.  Thus, the petitioner argued, some of the leave payments were excludible under I.R.C. Sec. 104(a)(1) as amounts received under a workmen's compensation act as compensation for personal injury or sickness.  The court disagreed.  None of the payments were excludible from income.  Speer v. Comr., T.C. Memo. 144 T.C. No. 14 (2015).

Passive Rents Recharacterized As Non Passive.

The petitioners, a married couple, owned an S corporation that held real estate and a medical C corporation.  The husband worked full-time for the C corporation and materially participated in its business activity.  The couple did not, however, materially participate in the S corporation and they were not engaged in a real estate trade or business.  For the years at issue, the S corporation lease commercial real estate to the C corporation.  The S corporation had rental income of about $50,000 in each of the two years at issue, which the petitioners reported as passive income, not subject to self-employment tax.  They also offset the rental income with passive losses from other S flow-through entities they owned as well as losses from other rental properties that they owned.  The IRS viewed the rental income as non-passive under Treas. Reg. Sec. 1.469-2(f)(6) (the "self-rental" rule) and disallowed passive losses that exceeded adjusted passive income for the years at issue.  The petitioners, however, argued that I.R.C. Sec. 469 did not apply to S corporations and was invalid.  The court disagreed even though I.R.C. Sec. 469, on its face, does not say that it applies to S corporations because it need not identify S corporation due to the S corporation shareholders are the taxpayers to whom I.R.C. Sec. 469 actually applies.  In addition, the court ruled that Treas. Reg. Sec. 1.469-4(a) validly interpreted "activity" as used in I.R.C. Sec. 469.  Thus, the rental activity was subject to I.R.C. Sec. 469.  The court also held that the self-rental rule applied and rejected the petitioners' argument that the self-rental rule didn't apply because the S corporation, as lessor, didn't participate in the C corporation's trade or business.  As such, the rental income was properly recharacterized as non-passive and couldn't be used with passive losses.  Williams v. Comr., T.C. Memo. 2015-76.      

Records and Credible Testimony Establish that Taxpayer Was Real Estate Pro.

The petitioners, a married couple, owned several rental properties approximately 26 miles from where they lived.  The wife managed the properties, which produced an approximate $70,000 loss for the year at issue.  The IRS claimed that the loss was passive and, thus, could not offset the petitioners' active income from other sources.  The wife claimed that she qualified as a real estate professional.  The IRS did not challenge that she put more than half of her time in the activity, but claimed that she didn't commit at least 750 hours to the rental activity.  The wife's log did not initially include commuting time to and from the rental properties (approximately 42-55 minutes each way), but a revised log did.  The revised log resulted in the wife putting in more than 750 hours into the activity.  The IRS challenged the revised log, but the court upheld its legitimacy due to the wife's testimony and the detailed nature of the log.  The revised log was within the guidelines of Treas. Reg. Sec. 1.469-5T(f)(4) and the loss from the activity was fully deductible.  O'Neill v. Comr., T.C. Sum. Op. 2015-27.

Photo Activity Not Engaged In With Profit Intent.

The petitioner started a photography business by creating a business plan and obtaining a sales tax permit.  However, the business did not show a profit for more than 10 years.  Thus, the state (IA) Department of Revenue (IDOR) could not grant the petitioner the presumption in accordance with I.R.C. Sec. 183 that the activity was engaged in with a profit intent.  Thus, in accordance with the nine-factor test set forth in Treas. Reg. Sec. 1.183-2(b), the activity would be evaluated.  The IDOR determined that none of the factors favored the petitioner other than the fact that the petitioner had expertise in photography.  Thus, deductions associated with the activity were disallowed.  In re Groesbeck, Doc. Ref. No. 15201018 (IA Dept. of Rev. Apr. 8, 2015).

Gift Giver Gets No Deduction and a Nice Penalty in Return.

The petitioner donated property (primarily clothing and household items) to various charitable organizations.  He attempted to keep many of the property gifts individually less than $250 on the belief that he didn't need a contemporaneous written acknowledgement from the charity.  For the contributions exceeding $500, the petitioner did not maintain written records and did not get an appraisal for gifts exceeding $5,000.  The IRS denied all of the claimed charitable deduction of $37,000 due to lack of substantiation and the court agreed.  The court, while not doubting that the gifts were made, held that the record was lacking to support the petitioners' statements and the petitioner maintained no written records and failed to have appraisals for the property gifts exceeding $5,000.  The petitioner didn't even maintain receipts for the under $250 gifts and had no evidence that the clothing gifted was "in good used condition or better."  The court upheld an accuracy-related penalty of 20 percent of the underpayment.  Kunkel v. Comr., T.C. Memo. 2015-71.

Crummey Trust Generates Large Gift Tax Exclusions.

The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust.  The trust named 60 beneficiaries, primarily family members.  The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice.  In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member.  The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees.  On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse.  The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions.  As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests.  The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests.  The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions.  Mikel v. Comr., T.C. Memo. 2015-64.

Paying the Tax Debts of Another.

A Nebraska C corporation sold all of its assets.  The sale triggered a substantial gain.  The shareholders sold their shares to a third party upon the third party's agreement to pay the corporation's tax liability triggered by the asset sale.  However, the third party did not pay the tax liability.  The IRS sought to recover the unpaid tax liability from the shareholders.  The court allowed the IRS to recover the tax liability from the shareholders by virtue of transferee liability via the NE Uniform Fraudulent Conveyance Act (UFCA).  The court determined that the transfer was fraud as to the IRS and was for the benefit of the shareholders.  Unmatured tax liabilities constituted "claims" under the NE UFCA and that the shareholders were "transferees" under the NE UFTA.  Stuart, et al. v. Comr., 144 T.C. No. 12 (2015).

Just Because A Partnership Has 10 or Fewer Partners Does Not Mean It Is Not a Partnership.

The petitioners claimed additional flow-through losses from an LLC that was taxed as a partnership for tax purposes.  To be able to do so, the LLC could not be subject to the procedural rules of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.  The petitioners argued that the LLC was not a partnership subject to TEFRA because it had 10 or fewer partners and, therefore, qualified for the "small partnership exception" of I.R.C. Sec. 6231(a)(1)(B)(i).  The LLC was owned 99.98 percent by two individuals and .02 percent by a partnership.  In addition, the LLC had previously filed a partnership return. The petitioners knew that the LLC could not qualify as a "small partnership" and use the "small partnership exception" because the LLC had a partnership as a partner, so they argued that they qualified for the "small partnership exception" because the partnership member held such a small ownership interest that it should be disregarded.  The court disregarded that argument and denied qualification for the "small partnership exception" on the basis that the LLC had a partner as a member.  The petitioners were not entitled to additional flow-through losses.  The court's opinion also stands for the proposition that simply having 10 or fewer partners does not mean that the entity is not a partnership for tax purposes.  Brumbaugh, et al. v. Comr., T.C. Memo. 2015-65.

No Investment Interest Deduction For Amounts Exceeding Deductibility Limit on Qualified Residence Interest.

The petitioners, a married couple, built a residence on a lot that they had purchased.  They paid cash for the lot and for the residence.  A year later, the petitioners borrowed approximately $1.75 million from a bank, pledging the house as collateral.  The bank transferred the loan funds directly to the husband's wholly-owned C corporation.  The loan was later refinanced for $2.5 million with the residence securing the debt.  In 2008 and 2009, over $150,000 of interest was paid on the loan in each year.  In 2008, the petitioners deducted approximately $7,000 of interest paid on the loan as home mortgage interest, carrying the remaining $166,000 forward as investment interest to 2009.  In 2009, the petitioners deducted $60,000 of the interest paid as mortgage interest and $97,835 as an investment interest expense deduction.   The IRS denied in full the investment interest deduction and made an adjustment to the home mortgage interest deduction.  The court agreed with the IRS because the petitioners did not show that the funds were used for investing as required by Treas. Reg. Sec. 1.163-8T.   Simply depositing the funds in the C corporation's bank account was insufficient.  The corporation's general ledger account treated the mortgage proceeds as a personal loan to the corporation from the husband.  Minchem International, Inc. v. Comr., T.C. Memo. 2015-56.

IRS Reiterates That Form 1099 Not Required For Freight Services

The IRS has issued another item of guidance stating that Form 1099 need not be issued for income from freight services.  Treas. Reg. 1.6041-3(c) exempts payments for "freight services" from the general requirement for payors to issue Form 1099 to independent contractors and others with which they do business.  Thus, trucking companies need not issue Form 1099s to owner-operators that are under lease for freight hauling services.  The same rule applies to farmers that make payments in connection with the trucking or hauling of livestock, grain or other farm products - no Form 1099 is required.  CCM 20151002F (Jun. 6, 2014).   

Co-op Partner in LLC Cannot Treat Partnership's Grain Purchases as the Co-op's PURPIM.

The taxpayer was a non-exempt cooperative and a partner in an LLC taxed as a partnership.  It wanted to treat the partnership's grain purchases as its per-unit retains paid in money (PURPIM) when the partnership bought grain from the taxpayer's current or former patrons.  The IRS determined that it could not.  Absent an agency relationship, the taxpayer did not satisfy the requirement that the grain be bought from the taxpayer's current or former patrons.  The fact that the LLC was taxed as a partnership and that the taxpayer's income from the partnership flowed through to its members was irrelevant because an LLC is not a cooperative and cannot ascribe to itself the attributes and ability of a member cooperative to issue PURPIMS.  CCM 20150801F (Apr. 22, 2014).

Family-Owned Real Estate Development Business Not Passive.

Passive losses cannot be used to offset income from non-passive activities.  The petitioners, a married couple, operated a family business that had its genesis in the husband's father who started a lumber company in the late 1970s.  For planning purposes, the business developed into a real estate development business comprised of an S corporation and a partnership.  The enterprise incurred losses and the issue was whether the separate entities comprised a single activity under Treas. Reg. Sec. 1.469-4(c) for purposes of the material participation 500-hour test.  The court examined the factors under the regulation for determining the presence of an "appropriate economic unit," and determined that the S corporation and the partnership had common control and conducted the same type of business activity.  The court also determined that the entities were interdependent, used common employees and combined their financial reporting.  The petitioners were able to satisfy the 500-hour test in the combined entities based on witness testimony and phone records of business activity.  Lamas v. Comr., T.C. Memo. 2015-59. 

Eye Doctor's Compensation Not Reasonable.

The petitioner, a C corporation that employed an eye doctor who also owned the C corporation, paid a $2,000,000 bonus to the eye doctor in 2007.  The payment of the bonus by the C corporation had the effect of eliminating corporate income, taxable at a 35 percent rate.  The petitioner also carried over an NOL from 2007 to 2008.  The IRS argued for a reduced bonus on the basis that $2,000,000 was not reasonable under the facts.  The court agreed with the IRS on the basis that the C corporation provided no methodology as to how the doctor's bonus was computed.  The court deemed $1 million of the bonus payment to be "excessive compensation" taxed at 32 percent.   The court also upheld the IRS determination of penalties in the amount of $62,000.  Midwest Eye Center, S.C. v. Comr., T.C. Memo. 2015-53.

Horsing Around Nets Millions of Dollars of Deductible Losses.

The petitioners, a married couple, came into millions of dollars when the husband's family baking company founded by the petitioner's grandfather was sold.  The husband had started working for the business after dropping out of college.  He used the proceeds from the buyout to get involved in raising Arabian horses.  His venture, which is still ongoing, proved overwhelmingly unsuccessful, losing millions of dollars from 2004 through 2007, the years under review.  The IRS denied the losses under the hobby loss rules.  The court weighed the nine factors (not all with the same weight) and ruled for the petitioners.  The court note that the petitioners had made various business moves designed to facilitate the profitability of the horse activity, including borrowing against non-farm investments to channel funds into the horse activity.  The petitioner also sold many investments that resulted in a multi-million dollar capital gain to try to generate funds for the horse activity.  Based primarily on these events, the court determined that the factors weighed in the petitioners' favor and the losses were not limited by the hobby loss rules.  Metz v. Comr., T.C. Memo. 2015-54. 

Burden is on Taxpayer to Substantiate Deductions.

The petitioner worked for Dupont in recruiting and human relations from 1968 to 1992, when he retied and created an S corporation through which, as a contractor, he offered many of the same services that he performed as an employee of Dupont.  Over the years, the s corporation income declined significantly, but the S corporation still had significant deductions. The IRS disallowed many of the deductions for lack of substantiation.  The court largely agreed with the IRS on the basis that the petitioner failed to show that the claimed deductions were ordinary and necessary expenses for the S corporation.  Instead, many of the expenses were for personal items.  The petitioner's automobile was also found to be used primarily for personal reasons and the petitioner failed to substantiate the extent of business use.  Consequently, only a small portion of claimed business deductions were  allowed.  Moyer v. Comr., T.C. Memo. 2015-45.