Case Summaries

Davis, et al. v. Comr., T.C. Memo. 2011-286

(exercise of stock options and resulting receipt of stock occurred in connection with performance of petitioner's services to company and is includible in petitioner's income; value of stock generated taxable deduction to company).

Ruffin v. Comr., T.C. Sum. Op. 2011-136

(Democratic Organization of Cook County (Chicago) denied plaintiff various job applications by engaging in various politically discriminatory hiring practices; City of Chicago paid plaintiff $12,500 in settlement of her claims which plaintiff did not report on her return for year in question; court holds that such amounts are taxable as payment in redress for lost wages (and would be taxable even if they weren't) and did not involve physical sickness or injury; political discrimination award not excludible under Sec. 104(a)).

In re Stoos, No. 11 DORFC031-33 (IA Dept. of Inspections and Appeals, Adm. Law. Dec., Dec. 7, 2011)

(plaintiff not entitled to capital gain deduction on sale of farm; material participation test not satisfied; land had been cash-rented and owners’ work on farm consisting of clearing timber, removal of fallen trees and repairing fences not substantiated; work done as investor not considered to be material participation).

Massachusetts Dept. of Ag Notice (Dec. 6, 2011)

(announcement that state will distribute approximately $3 million in dairy tax credits in January of 2012 to dairy farmers; amount results from recalculation of dairy tax credit allowed for 2010 which allows a credit to be claimed when milk price falls below "trigger" price).

Dennis v. Comr., T.C. Sum. Op. 2011-134

(petitioner received $82,500 (including $3,674.24 for legal expenses and $35,471.59 for legal fees) from settlement of lawsuit tied to her resigning job at care center due to unpleasant work environment and her claimed damages for "loss of self-esteem, humiliation, emotional distress, mental anguish and pain and related compensatory damages"; petitioner did not suffer any physical injuries; petitioner's lawyers informed her that payment for non-physical injuries generally taxable, but that law unsettled; lawyers referred petitioner to court case that held that emotional damages not always taxable, but failed to refer her to subsequent opinion issued in same case after first opinion vacated which held that emotional distress award taxable; lawyers informed petitioner to seek tax advice; petitioner received Form 1099-Miscellaneous and took her taxes to Jackson Hewitt who never answered the question as to whether award taxable; petitioner called another tax preparer at 47th and Troost who told petitioner that award not taxable; petitioner then advised by Jarods Accounting Services who prepared return omitting settlement income; petitioner also received wages for caretaking but did not report those wages because no Form W-2 received; court held that settlement and wage income taxable; petitioner not liable for accuracy-related penalty).

Chief Counsel Adv. 201203015 (Dec. 2, 2011)

(IRS has no authority to assert an excessive claim penalty under I.R.C. §6675 for credits claimed on Forms 4136, 6478 or 8864; specific mention made of federal tax paid on fuels which is claimed on Form 4136). 

Chief Counsel Memo. 201208029 (Dec. 1, 2011)

(taxpayer’s gross receipts derived from sale of leasehold rights in natural gas properties do not constitute DPGR under I.R.C. Sec. 199(c)(4)(A)(ii); leasehold rights not part of well (real property) that taxpayer constructed; any gross receipts attributable to unsevered oil, natural gas and minerals relate to the leasehold rights and not to the well; qualifying disposition of natural gas only occurs after taxpayer produces natural gas). 

Priv. Ltr. Rul. 201210046 (Dec. 1, 2011)

(IRS granted waiver from 60-day rollover requirement for taxpayer’s withdrawal of funds from IRA that weren’t rolled over into another IRA; taxpayer deeply involved in caring for spouse and event beyond taxpayer’s reasonable control; taxpayer’s mental and emotional condition impacted by spouse’s condition; taxpayer presented sufficient documentation to show impacts of spouse’s condition on taxpayer). 

Grosso v. United States, No. 11-1758, 2011 U.S. Dist. LEXIS 137842 (E.D. Pa. Nov. 30, 2011)

(long-term homeowner credit not available against purchase of townhome for petitioners' son, because parents did not use home as their primary residence; fact that television commercial that petitioners saw failed to mention that purchased home must be used as principal residence of no effect).

C.C.M. 201313020 (Nov. 30, 2011)

(taxpayer publishes books and printed materials; taxpayer conducts market research, resource planning, content and layout development and editing which allows for the creation of electronic version of book; taxpayer uses contract manufacturers to produce books in mass; issue is whether taxpayer is eligible for the domestic production deduction of I.R.C. Sec. 199 for its activities; IRS concluded that while contract manufacturer's activities constitute the MPGE of QPP, taxpayer's activities related to producing electronic version of book do not result in QPP because it involves the production of an intangible asset that is not QPP; print specification activities are non-MPGE activities; related packaging activities are not MPGE of QPP because other activities are not qualified activities). 

Priv. Ltr. Rul. 201222004 (Nov. 29, 2011)

(taxpayer acquired ranch for development purposes, but did not develop due to presence of two endangered species; taxpayer negotiated Mitigation Bank Agreement with government agency pursuant to which taxpayer will grant perpetual conservation easement to government in return for mitigation banking credits to allow development of other, similarly situated, land; transaction constituted sale or exchange of property under I.R.C. Sec. 1001). 

Olsen v. Comr., T.C. Sum. Op. 2011-131

(petitioner's mistake in using tax preparation software sufficient excuse to eliminate imposition of penalties for underreporting income on tax return; petitioner failed to properly report income from trust for which wife was beneficiary and which was reported on K-1 issued to wife, but petitioner unfamiliar with Schedule K-1; petitioner had upgraded software to account for trust income, but made data entry error that barred interest income from being correctly reported; court noted that tax preparation software only as good as information that is input, and error was isolated and source of income correctly reported; court viewed petitioner's job with U.S. Department of Energy which required security clearance persuasive as it provided petitioner with substantial motivation to report income on return properly).

Priv. Ltr. Rul. 201210004 (Nov. 22, 2011)

(“all events” test pegs time when taxpayer incurs expenses for purposes of first-year bonus election; qualified property is deemed acquired when taxpayer pays or incurs cost of property; ruling involved contract construction work and IRS determined that costs are incurred when all event have occurred establishing fact of liability, amount of liability can be ascertained with reasonable certainty, and property provided to taxpayer; an acquired component of larger self-constructed property is “acquired” when taxpayer incurs cost of acquired component). 

Menefee v. Comr., T.C. Sum. Op. 2011-130

(distribution received by taxpayer from employee annuity plan of parent includible in income; no transfer of distribution to eligible retirement plan within 60 days of transfer and non trustee-to-trustee transfer).

Wagner v. Kansas, et al., 265 P.3d 577 (Kan. Ct. App. 2011)

(real estate appraisers can take into consideration the listing price of a property when determining that property's fair market value; decision upholds Kansas Department of Revenue position set forth in Directive 98-033).

Pilgrim’s Pride Corp. v. Morris, 723 S.E.2d 642 (W.Va. Sup. Ct. 2011)

(poultry manufacturer that contracts with independent farmers for facilities and labor to raise chickens off manufacturer’s premises does not qualify for exemption from ad valorem taxes under state code because not a “producer” of agricultural products under statute; manufacturer also not qualified for “subsistence of livestock” exemption; statute requires personal property seeking exemption and livestock both be “on hand”, meaning in manufacturer’s physical possession and on the premises; dissent filed, reminding that vertical integration is reality in poultry industry and poultry manufacturer is producer who retains possession of poultry through all phases of production, it should be entitled to both exemptions)

Chief Counsel Advice 201212020 (Nov. 16, 2011)

(estate fiduciary without enough property to pay all claims of estate must pay federal tax claim before other claims; if other claims paid first, fiduciary personally liable to extent of payments turned over to creditors other than U.S. if fiduciary had notice of claim of U.S. before distribution to other creditors made).

Priv. Ltr. Rul. 201206019 (Nov. 15, 2011)

(private foundation with expectancy in decedent’s estate not engaging in self-dealing upon estate’s sale to disqualified person in exchange for promissory note; sale qualifies as transaction occurring during administration of estate under 53.4941(d)-1(b)(3) of foundation regulations). 

IRS C.C.M. 20115101F (Nov. 14, 2011)

(income received from compelled lease of property that was held as rental property is includible in income and the involuntary conversion rules of I.R.C. Sec. 1033 do not apply; on the question of whether I.R.C. Sec. 1033 applies to a temporary taking of property, IRS reasoned that it did not because a fee interest was not taken and proceeds allocable to property was in nature of rent taxable as ordinary income in year of receipt).

Karlen v. Comr., T.C. Sum. Op. 2011-129

(petitioner withdrew amounts from Section 529 plan established for petitioner’s children without consulting wife; after receiving distributions, petitioner consulted with wife and then endorsed distribution checks and redeposited withdrawn amounts; petitioner received Forms 1099-Q; petitioner’s argument that Forms 1099-Q issued in error because he had not cashed the distribution checks rejected; transaction did not constitute rollover because no distribution transferred to different Sec. 529 plan for original beneficiary or beneficiary in petitioner’s family).

Nipps v. Comr., T.C. Memo. 2011-267

(petitioner inherited funds from non-spousal IRA and transferred funds into IRA; on same day of transfer, petitioner withdrew contributed funds; no valid trustee-to-trustee transfer made and petitioner subject to income tax on distributions from IRA; no accuracy-related penalty imposed because petitioner believed that bank holding IRA account would make correct withholding and petitioner not experienced in tax law).

Burley v. Comr., T.C. Memo. 2011-262

(petitioners, married couple, were determined to have unreported income by virtue of use of bank deposit analysis; automobile expenses denied due to failure to substantiate).

Gutierrez v. Comr., T.C. Memo. 2011-263

(amount petitioner received in settlement from former employer included in income; amount did not represent payment for physical injury or physical sickness).

Bryen v. United States, 449 Fed. Appx. 165 (3rd Cir. 2011), aff'g, 433 B.R. 503 (Bankr. E.D. Pa. 2010)

($19 million tax liability of CPA not discharged in bankruptcy; debtor willfully attempted to evade or defeat tax liability).

Failure of Rebuild America Jobs Act (S. 1769, Nov. 3, 2011)

(by 51-49 vote (60 votes needed to move forward) 0.7 percent surtax on MAGI in excess of $1 million for individuals and married couples filing jointly ($500,000 for married couple filing separately) fails in the Senate; bill designed to raise tax revenue to allow $60 billion to be spent on "infrastructure-related" spending, but where only 10 percent would be authorized to be spent in 2012 and 50 percent to be spent in 2015 or later; bill represents third failed attempt to enact a "millionaire's surtax" (other two bills were S. 1660 and S.1723); Democrats rejected Republican alternative (S.1786) that would have provided a two-year extension for federal highway and safety programs and trust fund authority by using $40 billion in unobligated federal funds rather than raising taxes).

Priv. Ltr. Rul. 201205005 (Nov. 3, 2011)

(taxpayer, an LLC is in the midst of developing wind power facility and sought to not be limited in "placed in service" treatment for each aerogenerator as for purposes of I.R.C. Secs. 45 ("renewable energy production credit), 167 and 168 (depreciation provisions) by reason of temporary limited capacity of a transmission line in the event a transmitter failed to complete upgrades by specified date; IRS agreed  - no limitation on placed in service date due to problems with transmission including congestion).

Wall Street Speculation Fee Bill (introduced Nov. 2, 2011 by Senators Harkin (D-IA), DeFazio (D-OR), Sanders (I-Soc-VT) and Brown (D-OH))

(bill would impose European-style "financial transaction" tax of three basis points ($.03 on $100 of value) that sponsors claim would be limited to market transactions such as stock, currency and commodity transaction; however, language of bill sufficiently vague to allow imposition of tax on any transaction between financial institutions, including interbank transactions such as direct deposited checks, credit card and debit card transactions; upon announcement of bill, NYX dropped largest amount since Aug. 18, 2011 and CME had largest drop since Aug. 10, 2011; effective date would be Jan. 1, 2013, and essentially amounts to a tax on investors; proposal believed to be dead on arrival in House).

I.R.S. Chief Counsel Advice 201201017 (Nov. 1, 2011)

(taxpayer may use any reasonable method, including exact method, to determine amount deductible as qualified residence interest when debt exceeds acquisition and/or home equity debt limitations; if exact method used, taxpayer need not make election under Treas. Reg. 1.163-10T(o)(5) in order to allocate interest on part of debt that exceeds qualified residence interest limitations; if simplified method used, taxpayer may allocate excess interest under interest tracing rules without making election). 

IRS A.O.D. 2011-03, 2011-47 I.R.B. 1

(IRS announces acquiescence in O'Donnabhain v. Comr., 134 T.C. 34 (2010) in which the court held that petitioner's medical expenses associated with psychological discomfort deductible medical expenses under I.R.C. Sec. 213; hormone therapy and sex reassignment surgery were expenses associated with curing petitioner's psychological disorder and were not non-deductible cosmetic surgery; but breast augmentation surgery was directed at improving petitioner's appearance and not associated with petitioner's psychological disorder; no mention of whether such expenses, if incurred by parents of newborn baby on behalf of baby, would be deductible medical expenses).

Roberts v. Comr., T.C. Sum. Op. 2011-127

(taxpayer resided in Roanoke, AL, and started a sole proprietorship offering vocational rehabilitation services and got referrals from LA; taxpayer incurred travel expenses between home and LA locations (flights); home office determined to be principal place of business and taxpayer entitled to deduction for ordinary and necessary transportation expenses paid or incurred for travel away from home in pursuit of sole proprietorship's business; portion of home converted to home office). 

Woods v. Comr., 137 T.C. 159 (2011)

(taxpayer entered into contract for deed to buy house in 2008; taxpayer planned to use first-time homebuyer tax credit amount to renovate home before moving in; credit received in 2009 and used for renovations on home; IRS later disallows credit and issues deficiency notice on basis that taxpayer had not "purchased" home as defined under I.R.C. Sec. 36, but had acquired home under contract for deed and lacked equitable or legal title; court determined that under state (TX) law, benefits and burdens of ownership passed to taxpayer under contract; contract constituted financing agreement under which seller maintained legal title until payments complete under contract; court also rejected IRS argument that home not used as taxpayer's principle residence on basis that there is no occupancy requirement contained in I.R.C. Sec. 36; prospective analysis to be applied in determining whether home will be occupied as primary residence; recapture provision of I.R.C. Sec. 36(f) not supportive of IRS argument; taxpayer gave credible testimony that he was going to live in the house after completing necessary renovations funded with the credit, but couldn't complete them until uncertainty over credit cleared-up).

Kansas Dept. of Rev. Info. Guide No. 2011-22855 (Oct. 27, 2011)

(Kansas Department of Revenue provides table of what purchases associated with crematories, funeral homes and cemeteries are subject to state sales or compensating use tax; for purchases subject to tax, the tax must be paid to the vendor or accrued and remitted directly to the Department).

Priv. Ltr. Rul. 201208035 (Oct. 27, 2011)

(device used to store energy from aerogenerators is deemed to be part of the qualified property at a "qualified investment facility" in accordance with I.R.C. Sec. 48(a)(5); investment credit applicable against entire cost).

Tax Foundation Report (Oct. 18, 2011)

(for 2008 and 2009, based on IRS data, average taxpayer in top 1 percent (filers earning at least $343,927 annually) made less than in prior year and were subjected to a higher effective tax rate; drop in income from 2007-2009 was 20.41 percent while effective tax rate rose 6.95 percent). 

Kansas Department of Revenue Letter Ruling, No. O-2011-010 (Oct. 18, 2011)

(wind farm's equipment purchases of wind turbines and support towers (among other items) are not subject to sales tax; items used in production of electricity).

Priv. Ltr. Rul. 201207002 (Oct. 18, 2011)

(proposed redemption of some of S corporation shareholder's non-voting stock is tax-free; second class of stock not created; distribution conditioned on total distribution of stock during tax year not in excess of amount of company's accumulated adjustments account as of year end; distributions not to exceed shareholder's stock basis). 

Alarcon v. Comr., T.C. Memo. 2011-245

(petitioner and wife separated and wife given temporary possession of marital home and appointed joint managing conservator with husband over two children; children resided with wife for greater portion of tax year; petitioner not entitled to dependency exemptions or child tax credits which wife also claimed on her return; no Form 8332 attached to return; simply paying all costs on marital home for tax year in issue insufficient to allow dependency exemption; child tax credit not allowed because children not "qualifying children"). 

Bonds v. Comr., T.C. Summ. Op. 2011-122

(petitioner earned six-figure income as vice principal of high school in MN, but owned single-family house in K.C. near K.C. airport; house rented to tenants in 2004 and 2005; house has appreciated in value but is unfurnished; petitioner would post signs that house available to rent; claimed expenses on home for 2006 and 2007 exceeded income from home which IRS disallowed because home not held for production of income and losses were from passive activity; court held that house held for production of income and thus all ordinary and necessary expenses paid or incurred during tax year are deductible under I.R.C. Sec. 212; active participation test of I.R.C. Sec. 469(i) satisfied which allows petitioner to deduct up to $25,000 of rental real estate losses (subject to phase-out starting at AGI of $100,000; deductions allowed for substantiated expenses; court estimated some unsubstantial expenses under Cohan rule; deductions allowed totaled 413,000; 20 percent accuracy-related penalty imposed). 

Wuerth v. Comr., T.C. Sum. Op. 2011-121

(petitioners, married couple, not entitled to greater casualty loss deduction for tornado damage to home than what IRS allowed due to lack of substantiation; petitioners received insurance reimbursements of $37,524 and paid contractors $27,353 for cleanup and repairs; $40,355 casualty loss claimed on joint return and husband's business claimed casualty loss deduction of $7,121 for residence on Form 1065 attributable to office in home; petitioners attempted to calculate before and after value of home and subtract insurance proceeds and estimate of damage caused by tornado; subsequently hired appraiser producer report with numerous valuation errors; all property and casualty loss involved personal assets; cost of actual repairs must be substantiated if repair costs to be used in valuing loss rather than estimates; petitioner hypothesized values and amount of loss; accuracy-related penalty imposed). 

TIGTA Report (No. 2011-40-115, Sept. 22, 2011)

(report details that revenue generated during first three quarters that "tanning tax" was in effect (which was contained in the 2010 health care act) is approximately 25 percent of what Obama Administration anticipated would be collected; 10,300 business, rather than the anticipated 25,000 business providing indoor tanning services filed excise tax returns reporting the additional 10 percent tax; provision is difficult for IRS to administer).

Lakeview Farms v. Washington County Assessor, No. TC-MD 100443D, 2011 Ore. Tax LEXIS 368 (Ore. Tax Court Oct. 13, 2011)

(at issue were whether various items of plaintiff's personal property subject to state personal property tax; plaintiff operated a farm and a pumpkin patch of about 16-18 acres that attracted approximately 50,000 people to the farm; wheelbarrows used to transport pumpkins from field to store used exclusively for transporting pumpkins and qualified as "farm machinery" exempt from personal property tax; however, sternwheelers, trains, train cars and traffic safety equipment not entitled to exemption because such items not used primarily in harvesting activities). 

TIGTA News Release (2011-41-097, Oct. 12, 2011)

(TIGTA notes that IRS reported total of $29.7 billion in first-time homebuyer credit claims were made by over 4 million taxpayers as of May 7, 2011; TIGTA notes that IRS issued incorrect notices or failed to send notices to 61,427 households; errors caused by programming errors or wrong information on tax account; much information provided to IRS by taxpayers was incomplete or inaccurate). 

Bradley v. Comr., T.C. Sum. Op. 2011-120

(petitioner not entitled to charitable deduction for $660 expenditure to rent bus for use of non-profit cheerleading team; petitioner failed to substantiate contribution by producing written acknowledgement from donee as required by Treas. Reg. Sec. 1.170A-13(f)(10); money order receipt insufficient to substantiate contribution of more than $250). 

American Jobs Act of 2011 (S. 1660)

(on procedural vote to proceed, bill fails 50-49 (60 votes needed to get to vote on measure; all Republicans voted against the bill as did three Democrats (Nelson of Nebraska, Tester of Montana and the bill's sponsor, Reid of Nevada); both Nelson and Tester are up for re-election in 2012, and additional Democrats are on record stating that they would not vote for the bill in an actual vote on the bill itself). 

American Jobs Act of 2011 (S. 1660, introduced on Oct. 5, 2011 and set for vote on Oct. 11, 2011)

(sponsored by Sen. Reid (D-NV) with no co-sponsors; represents Administration's stimulus proposal as announced before joint session of Congress on Sept. 8, 2011; extends several stimulus measures beyond 2011 and CRS estimates that bill provides for $35 billion to local governments and $100 billion in various infrastructure improvement programs; bill extends 100 percent bonus depreciation through 2012 and cuts employer portion of Social Security tax in 2012 from 6.2 percent to 3.1 percent on first $5 million of wages paid (presently 4.2 percent for 2011, but would otherwise be 6.2 percent for 2012) which would also apply to earnings of self-employed persons;  OMB projects that bill would add $447 billion to deficit over next ten years; establishes credit that fully offsets employer portion of Social Security tax on wages that exceed wages paid in immediately prior year (up to $50 million of excess wages); creates credit for hiring of unemployed veterans worth up to $9,600; establishes 5.6% surtax on individual taxpayers with MAGI exceeding $500,000 (single and MFS) ($1,000,000 otherwise) beginning in 2013 (adjusted for inflation) which would also apply to capital gains and dividends (which would effectively raise the capital gain rate for such persons from 15 percent to 29.4 percent in 2013 (expiration of 2001 tax cuts would increase capital gain rate to 20 percent, plus 3.8 percent surtax contained in health care legislation plus the 5.6 surtax); result would be a top marginal rate of 55 percent in 2013; bill faces bi-partisan opposition on numerous provisions that have not received bi-partisan support in the past; bill not expected to pass either the Senate or the House). 

Estate of Gallagher v. Comr., T.C. Memo. 2011-244, revising T.C. Memo. 2011-148

(valuation of decedent's 15 percent interest in LLC at issue; estate valued interest at $34,936,000 and, on audit, IRS valued interest at $49,500,000; court determined that proper value was less than what estate valued interest at - $32,601,640; estate entitled to refund of $861,422; in revised opinion; court recalculated LLC units used the correct present value factor to value the present value of a reversion to be received at the end of the fifth year and adjusted the value of the LLC units upward by $3,160,120).

Ani v. Comr., T.C. Sum. Op. 2011-119

(married couple did not qualify as a real estate professional for purposes of the passive loss rules; husband was barber and wife a nurse; couple owned five rental properties and reported rental income on Schedule E and claimed that he was a real estate professional; husband's own documents showed he spent 1,377 hours barbering and 956 hours on rental activities in 2005 and 1,380 hours on barbering and 886 hours on rental activities in 2006; more time spent on non real estate rental activities; accuracy-related penalty imposed). 

I.R.S. Chief Counsel Adv. 201203013 (Oct. 7, 2011)

(deposit paid to manufacturer for purchase of product via agreement was ultimately returned to taxpayer on termination of agreement because manufacturer not able to supply product; amount returned not includible in income except for interest; return to taxpayer's capital not accession to wealth).

C.C.A. 201212009 and 20122010 (Oct. 7, 2011)

(taxpayer proposed to make charitable contribution of taxpayer's "appropriative interest" in water rights; such interest treated as separate property interest under state law, but contribution of less than taxpayer's entire interest in property not deductible unless it is a remainder interest in annuity or unitrust, taxpayer's undivided interest in entire property, a remainder interest in a farm or residence or a conservation easement; unidentified Rev. Rul. (probably Rev. Rul. 88-37 (overriding interest in oil and gas lease same as underlying working interest)) referenced leading to conclusion that interest at issue not to be treated as distinct property interest from taxpayer's underlying water right and that deduction not allowable; second ruling notes that taxpayer should have argued that contribution was of a conservation easement because conservation easement deductible under partial interest rule because it is considered to be gift of undivided portion of donor's entire interest in subject property (Treas. Reg. Sec. 1.170A-7(b)(1)(ii)).

Lack of vote on American Jobs Act (Oct. 4, 2011)

(Senate majority leader Reid (D-NV) used procedural move known as "filling the tree" (loading bill with amendments until limit is reached) to block Republican attempt to bring President's Job's bill to vote in Senate; majority leader confirmed that Senate Democrats not fully supportive of President's bill; bill has no co-sponsors in either House or Senate).