Case Summaries
(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).
(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)).
(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).
(married couple subject to accuracy-related penalty for not reporting income that husband received as majority shareholder in family’s funeral home business; while wife’s non-employee compensation received was reported it was not reported as subject to self-employment tax and should have been).
(married couple bought beachfront property (vacant lot) in Florida in 2006; before construction of home could begin, permit had to be obtained; building contract entered into in 2007 and construction permit application filed in June of 2007 and considered complete in late September of 2007, and permit granted in early 2008; additional bank loan needed to cover cost of construction, but could not be obtained due to drop in real estate market; property sold in 2009 at $825,000 loss; taxpayers deduction home mortgage interest for 2006 and 2007, which IRS denied on basis that it was not “qualified residence interest” under I.R.C. Sec. 163(h); court held for taxpayers on basis that Treas. Reg. 1.163-10T(p)(5)(ii) which specifies that a residence that is under construction is a qualified residence for up to 24 months if the residence becomes a qualified residence as of the time the residence is ready for occupancy; taxpayers purchased property with intent to build qualified residence; taxpayers were equitable title holders at time existing home on lot demolished and property cleared for construction of new home and that work constitutes beginning of construction; taxpayers also completed extensive planning and preparatory work as part of construction permitting process such as surveys and drilling; mere fact that property sold before completion of residence not determinative of deduction issue inasmuch as Treas. Reg. allows qualified residence interest to be deducted for 24 month period after construction begins; events beyond taxpayers’ control in years after 24-month period not to be considered on deduction issue; mortgage interest deduction allowed for 2006 and 2007).
(petitioners, married couple, not entitled to deduction for donated facade easement on petitioners' home; "qualified appraisal" not obtained; issues of material fact remain with respect to donation of home's unused development rights and whether such donation was perpetual in nature).
(IRS disallowed short-term capital loss and capitalization of improvements that petitioner made to home before selling it; petitioner entitled to short term capital loss and increase in basis with respect to certain expenditures; petitioner liable for penalties associated with failure to file return, but no accuracy-related penalty).
(Principal Life Insurance Co. cannot claim more than $20 million in foreign tax credits that company claimed were based on $300 million payment to two French banks; no credible business purpose to transaction).
(sham partnership case; taxpayer was L.L.C. formed in connection with Chinese government-owned financial institution and a third party (as minimal investor) to acquire non-performing loans held by Chinese financial institution; U.S. investor contributes $180 million of securities to LLC and buys 90 percent of Chinese institution for $19.4 million; loans carried on LLC books at tax-loss to benefit of U.S. investor who supposedly has sufficient basis to deduct losses; Chinese institution fails to service the loans properly and IRS challenges losses claimed by U.S. investor; acquisition of loans lacked economic substance and LLC determined to be a sham; parties did not act in good faith or act with business purpose to share profits and losses; failure to force Chinese institution to service loans and Chinese institution characterized transaction as "package sale of bad debts"; U.S. investor deemed to have purchased loans directly from Chinese institution; penalties not imposed).
(division of family trusts that were then combined into trusts for children did not shift beneficial interests in trusts to beneficiary that skips a generation from prior beneficial owners, so no GSTT triggered; division also did not extend time for vesting of any beneficial interest beyond term specified in trust).
(mother and her child were homeless and petitioner took them into his home in January of 2007; they resided in spare room until October of 2007; mother was 21 and child was 2; no evidence that mother was full-time student for at least five months during year, so age requirement of I.R.C. Sec. 152 not satisfied and petitioner not entitled to claim mother as dependent; petitioner could claim mother's child as dependent).
(case involves C corporation management-fee arrangement designed to allocate income between controlled entities to optimize corporate and individual brackets; petitioner operated hauling business in C corporation and owned 30 trucks in a wholly-owned LLC which was reported on his individual Schedule C; the LLC paid management fees to C corp with fees deducted on petitioner's Form 1040 and added to C corporate income; IRS disallowed over 60 percent of fees over two-year period; court agreed with IRS and added on 20 percent accuracy-related penalty; no management contract, no detail of services provided, LLC had no customers other than petitioner's C corporation and LLC employed no drivers - thus, LLC would have consulted with no one other than petitioner; fees must be charged for services actually provided under written (preferably) contract).
(petitioner leased farmland from U.S. Navy for $191,520 annual rent, but later failed to make rent payments and notified Navy via letter that petitioner could no longer continue farming; Navy agreed to terminate lease and determined amount of past-due rent of over $200,000; debt later determined to be uncollectible and debt written off and 1099-C issued to petitioner showing CODI of $263,587 that petitioner did not report on tax return for year at issue; IRS failed to prove that petitioner's had CODI with respect to lease for year at issue (2006) because no evidence of substantive collection activities that occurred; from 1999 to 2006, petitioner never received any correspondence with respect to any debt pursuant to the lease; petitioner not liable for accuracy-related penalty).
(petitioner's unsubstantiated business expenses not deductible; IRS's use of amount of petitioner's unreported income via use of bank deposit method held to be reasonable).
(petitioner, a tax-exempt labor organization, publishes two magazines for its membership and derives unrelated business income of approximately $8 million from sale of ads; petitioner deducted circulation costs of approximately $7 million, but IRS disallowed the deduction because the magazines were available to all members which required petitioner to allocated portion of dues income to magazine income resulting in tax liability of $1.1 million; court agreed with IRS - NEA members had right to receive the magazine because their dues paid for it.).
(case involved whether petitioner liable for 10 percent additional tax on early distributions from qualified retirement plan under I.R.C. Sec. 72(t)(1); petitioner participated in employer's qualified retirement plan and retired at age 53; after attaining age 55 (but before attaining age 59.5), petition received over $30,000 in two distributions from retirement plan and reported the amount in income for the year, but did not pay additional 10 percent penalty due to exception contained in I.R.C. Sec. 72(t)(2)(A)(v) which specifies that the additional penalty does not apply to "distributions which are...made to an employee after separation from service after attainment of age 55"; court upheld IRS interpretation of statutory provision that employee must retire on or after age 55 to be eligible for the exception; court expressed empathy for petitioner's situation and specifically noted that the IRS deficiency notice language that "Payment made from the Plan after you separate from service if you will be at least 55 during the year of the payment" is confusing; but, based on prior caselaw, court upholds IRS position and notes that only the Congress can change the statute).
(travel expenses of married couple not deductible due to failure to meet heightened substantiation requirements of I.R.C. Sec. 274(d) and amounts claimed were lavish and violated I.R.C. Sec. 162(a)(2); timeshare activity not engaged in with profit intent - deductions limited to gross income from activity).
(petitioner granted innocent spouse relief from joint tax liability with ex-spouse; petitioner did not "meaningfully participate" in deficiency proceeding; petitioner relied on ex-spouse to contest deficiencies because it was her gambling income that was at issue and an attorney represented them, but didn't tell petitioner that he could seek innocent spouse relief).
(petitioner purchased brush hog to maintain weed control so that weeds would not spread to tillable land and claimed that purchase was exempt from sales tax; exemption denied because bush hog not used directly in crop production activity; fact that weed control improved crop yield only an indirect effect).
(private foundation entitled to maintain exempt status upon construction and maintenance of recreational path limited to residents of municipality on island that had only one paved road; path provided safe access for pedestrians and bicyclists to portions of island that were private and benefited general public).
(petitioner, self-employed office manager for mortgage company, filed Schedule C with gross receipts that almost matched reported expenses - almost half of which were commission expenses; petitioner entitled to deduct small portion of commission expenses; self-employment income underreported; petitioner liable for accuracy-related penalty).
(petitioner, contract maintenance laborer who also works maintenance jobs at nuclear power plants and other utility sites, worked only temporary jobs for tax year in issue did not have a principal place of work, but did have his residence as a tax home; petitioner was union member and was contacted for work through the union and at his home; no jobs that petitioner worked lasted more than one year; sometimes, petitioner stayed overnight at job site because of distance from home; substantiated unreimbursed employee business expenses deductible - business miles driven, auto expenses and miscellaneous expenses; accuracy-related penalty imposed for deductions claimed for unsubstantiated expenses).
(warrants issued to shareholder of closely-held, family S corporation created second class of stock which resulted in termination of S corporation status; case involves tax shelter strategy developed by KPMG known as "SC2").
(taxpayer earned pension income in Nebraska and included it in computing the out-of-state tax credit on Iowa return for taxes paid to Nebraska; only wages earned in Nebraska are to be used in computing out-of-state tax credit).
(agricultural cooperative's payments to members are PURPIMs under definition of I.R.C. Sec. 1382(b)(3); for cooperative's purpose of computing I.R.C. Sec. 199 deduction, cooperative's QPAI and taxable income computed without regard to any deduction for payments to members).
(petitioner engaged in high-performance glider activities (providing rides and flight instruction) in a manner that established that the activity was engaged in with an intent to make a profit, but did not substantiate deductions for unreimbursed employee expenses; petitioner did not maintain thorough books and records beyond flight logs, did not prepare budgets or other financial statements, but did review expenses and employed cost-cutting measures; petitioner held himself out as a glider instructor; petitioner not a wealthy individual and incurred substantial expense in acquiring glider and other associated expenses; petitioner worked in aviation field; accuracy-related penalties imposed for the unsubstantiated deductions associated with unreimbursed employee expenses).
(capital gain deduction denied on 2006 state return because such gain was ordinary income and not capital in nature; amount shown was from line 13 of Form 4797 and line 7 of IA 1040; property held for more than 10 years, 100 percent of business sold and material participation test satisfied; line 13 of Form 4797 refers to "ordinary income" and only gains reported as capital gains qualify for capital gains deduction; no relief for costs and fees).
(tax protest; issue involved whether capital gains deductions should be allowed for 2006-2008 attributable to investments reported on Forms 1099-B and 1099-Div; protest denied, but IDOR acknowledges that instructions not clear and have been clarified, but that instructions on forms not controlling; capital gains deduction not applicable to investment income, but rather sale of business assets and sale of real estate).
(IRS provides guidance on treatment of cell phones (or similar equipment) that employers provide to employees primarily for non-compensatory business purposes; before 2010, log of cell phone usage required to substantiate business use for deduction purposes on employer-provided cell phones and separate out amount included as compensation to employee; 2010 legislation (eff. Jan. 1, 2010) removed cell phones from definition of "listed property" which require logs; in Notice, IRS states that value of employer-provided cell phone excludible from employee's income as working condition fringe to extent that, if employee personally paid for use of cell phone, the payment would be allowable as an I.R.C. Sec. 162 deduction for employee; employer considered to have provided cell phone to employee primarily for noncompensatory business purposes if substantial reasons exist relating to employer's business other than providing compensation to employee with cell phone; Notice is effective as applied to employer-provided cell phones occurring after December 31, 2009).
(while IRS conceded that petitioner's daughter was qualifying child for earned income tax credit purposes, petitioner not entitled to EITC because petitioner did not have same principal place of abode with daughter for more than half of the tax year due to being incarcerated; but petitioner still entitled to partial EITC due to low income).
(Administration's plan continues application of $1.2 trillion in discretionary spending cuts that were already included in debt ceiling law previously enacted which is estimated to cut $350 billion from defense budget over next 10 years, and adds $1.1 trillion in defense cuts and unspecified spending reductions on benefits for military personnel; plan includes no structural reforms to existing major entitlement programs; no increase in age of eligibility for Medicare enrollment (remains at 65) instead of going to 67 which the President had supported during debt ceiling negotiations and which CBO estimates would save $124 billion from 2012 to 2021; proposal cuts Medicare spending by changing payments to rural providers and applying Medicaid rebate (i.e., price control system) for drug payments to Medicare Part D, among other things; proposal includes increase in Part B and Part D Medicare premiums for upper income retirees and increases from 5% to 25% the percentage of seniors paying such premiums; federal workers to contribute extra 1.2% of compensation toward their retirement; new fee on military retirees to participate in Tri-Care health program; no proposal to repeal any portion of the Patient Protection and Affordable Care Act of 2010 which CBO revised projections show an increase in deficit spending significantly in the out years; proposal includes $1.5 trillion tax increase, including a tax increase on families and businesses with AGI over $250,000 annually, and a 5.4 percent surcharge on families earning more than $1 million per year. (MFJ return); [Note: the proposal does not account for the fact that IRS data shows that, for all taxpayers, the current average tax rate is 11 percent (once credits and deductions are accounted for) and that the highest average tax rate paid by persons earning less than $100,000 annually is 8 percent and the average tax rate for persons between $1 million and $10 million is 25 percent with those earning more than $10 million paying an average of tax rate of 26 percent; no mention made of fact that top 0.1 percent of all income earners paid 16.4 percent of total tax burden and the bottom 80 percent of all income earners paid 10.9 percent of total tax burden; no mention made that top 0.1 percent of income earners paid more in total taxes than did the bottom 80 percent even though the bottom 80 percent made more than six times as much money as the top 0.1 percent.]; minimum 10-year term for grantor retained annuity trusts with such trusts having a remainder interest greater than zero; elimination of valuation discounts; reversion to 2009 estate and gift tax law; increased depreciation period for privately-owned jets; repeal of deduction for intangible drilling costs for five largest oil companies; repeal of I.R.C. §199 for domestic producers of oil and gas; President's extension of tax cuts to expire at end of 2012 on families earning more than $250,000; elimination of carried interest; no mention made of 1843 account established by U.S. government to accept gifts to the United States that is for general use by the federal government that can be made available for budget needs; many parts of proposal have bi-partisan opposition in the Congress and proposal likely dead on arrival).
(overstatement of basis does not constitute an omission from gross income; six-year statute of limitations for assessment specified in I.R.C. Sec. 6501(e)(1)(A) not triggered; opinion follows court's prior holding in Burks v. United States, 633 F.3d 347 (5th Cir. 2011)).
(taxpayer that provides telecommunication services derives gross receipts from services to customers, leasing or renting property and does not derive income from the manufacture, production, growth or extraction of qualified production property for purposes of the Sec. 199 deduction and does not constitute domestic production gross receipts).
(occupational tax enacted via Nebraska Law Bill 701 constitutional; tax constitutes an excise tax levied on irrigation activities rather than a property tax; legislation underlying tax arose out of Republican River Basis compact with states of Kansas and Colorado in attempt to provide cash fund to help state comply with compact, and initial version of tax enacted in 2007 as a property tax was declared unconstitutional; while case on appeal, state Natural Resource Districts adopted occupation tax under different provision of same legislation to provide funds to comply with compact; occupation tax provision determined to be excise tax on irrigation activity and applied to small portion of land that had been subject to property tax that had been declared unconstitutional and was not tied to land's value and could be avoided by landowner certifying that land not irrigated).
(as a supplement to IRS Publication 555, IRS provides additional information concerning common questions relating to registered domestic partners in CA, NE and WA and homosexual couples in CA that are subject to community property law).
(purported securities loan (securities purchased with fixed rate of return and paid for at price derived from variable interest rate) with fixed term of 250-450 days entered into for purpose of avoiding taxable income to the lender rather than provided borrower with access to loaned securities does not qualify for nonrecognition treatment as a securities loan under I.R.C. Sec. 1058; under facts of case, taxpayers relinquished all control over securities for all except two days in 450-day period and during those two days could not have taken advantage of spike in securities market value due to lack of ability to call securities back and sell them at increased price as a normal borrower would have been able to; interest deduction of $7.8 million attributable to fee payment denied).
(overstatement of basis constitutes omission from gross income that triggers six-year statute of limitations specified in I.R.C. Sec. 6501(e)(1)(A)).
(sale of state (MA) tax credit triggers capital gain to seller; upon use of credit, buyer has gain recognition if credit purchased for less than face value).
(IRS solicits public comment on a proposed affordability safe harbor for employers under the shared responsibility provisions of the Patient Protection and Affordable Care Act (Act); under Act, employers with 50 or more full-time employees that don't offer government-determined "affordable" health care are subject to a penalty (deceptively termed a "shared responsibility payment"); under Act, coverage is deemed unaffordable if the employee's required plan contribution for self-only coverage exceeds 9.5 percent "of the applicable taxpayer's household income"; how employers are to legally obtain household income is unknown, and IRS, in the Notice, says that Treasury expects to propose a safe harbor that would determine affordability of an employer's coverage by referring to an employee's wages from the employer reported on Box 1 of Form W-2).
(taxpayer's receipt of income in real estate investment trust from mining company operating under surface use agreement were not mineral royalty payments, but rather were rents from real property via I.R.C. Sec. 856(c)(2)(C) and (c)(3)(A)).
(announcement details the tax increases contained in the "American Jobs Act of 2011" designed to pay for nearly $500 billion in additional spending; most provisions are simply re-proposals of tax increases that have been previously rejected by legislators in both parties and are likely "dead on arrival" in the Congress; taxation of partnership carried interests (i.e., earnings by hedge fund managers and various types of partnerships) as ordinary income (which has been previously rejected by Charles Schumer (D-NY); 28 percent limitation deduction phase-out (which accelerates other rate increases on taxpayers subjected to the phase-out) on itemized deductions for individuals with adjusted gross income exceeding $200,000 in a year ($250,000 for families) (similar provision rejected as part of the Patient Protection and Affordable Care Act when Democrats had control of both bodies in Congress and a super-majority in the Senate); elimination of bonus depreciation on private jets; tax increase on the U.S. oil and gas industry by eliminating the domestic production deduction (which is presently allowed to all taxpayers that manufacture, grow, produce or extract products in the United States (but is allowed at a lower rate to domestic producers of oil and gas); proposal also includes provision extending 100 percent bonus depreciation through 2012, and other temporary tax provisions including a "returning heroes" tax credit of up to $5,600, up to a $9,600 credit for business that hire an unemployed or injured veteran, and up to a $4,000 tax credit for hiring a worker unemployed longer than six months; proposal finances tax hikes by providing "stimulus" via temporary payroll tax cuts including cut in employee Social Security payroll tax from 6.2 percent to 3.1 percent, and temporary elimination of payroll taxes for companies that increase their payroll by up to $50 million).
(taxpayer entitled to deduct losses without limitation set forth in I.R.C. Sec. 469 on real estate under real estate professional exception for two out of six properties because taxpayer spent at least 750 hours on the two properties combined and spent more time on those properties than he did in his day job as harbor pilot in San Francisco Bay; no election to aggregate activities made and court did not require taxpayer to work at least 750 hours in any particular rental activity for purposes of counting hours worked on rental activities toward the 750-hour test; taxpayer did not put 750 hours into any particular rental activity; court rejects (without saying so) holding of Bahas v. Comr., T.C. Sum. Op. 2010-115 where court said that taxpayer had to meet 750-hour test with respect to each activity where an election to not aggregate activities is not made; thus, only two requirements must be satisfied to be a real estate professional under I.R.C. Sec. 469 - participation of more than 750 hours in a real estate trade or business, and real estate activities comprise most of the taxpayer's activities).
(new proposed Treasury Regulation codifies U.S. Supreme Court opinion in Knight v. Comr., 552 U.S. 181 (2008) to specify the type of costs an estate or non-grantor trust incurs that are subject to the two percent floor for miscellaneous itemized deductions under I.R.C. Sec. 67(a); to make the decision, the issue is whether the expenses are ones that would normally be incurred by a hypothetical person owning the property; thus, the type of the product or service rendered to the estate is determinative and not the cost or the description of the service; costs not tied to identify of payor are deductible; commonly incurred investment advice fees are subject to 2 percent floor, but incremental investment costs beyond amounts normally charged are not; bundled fees must be allocated and such fees not calculated on hourly basis are not subject to 2 percent limit unless it is for investment advice; ownership costs subject to two percent floor; tax return preparation fees for estate, and GSST returns, along with fiduciary income tax returns and decedent's final tax return not subject to two percent floor; but, fees associated with commonly prepared returns are subject to floor; comments on proposed regulation must be submitted by Dec. 6, 2011, and outline of topics to be discussed at Dec. 19, 2011, hearing by Dec. 7, 2011; regulations to apply to tax years beginning on or after date regulations published as final in Federal Register).
(taxpayers’ debt on variable life insurance policy exceeded cash surrender value; insurance company notified taxpayers if they did not make minimum loan repayment, policy would terminate resulting in taxable event and filing of 1009-R; taxpayers claimed discharge of indebtedness excludable from gross income due to insolvency; IRS assessed $171,631 income tax deficiency against taxpayers for 2004 tax year, determining taxpayers joint return mischaracterized proceeds from termination of life insurance contract as discharge of debt; U.S. tax court agreed with IRS position, and 10th Circuit Court of Appeals affirmed; discharge of indebtedness only occurs when debts are legally discharged; taxpayers did not prove discharge or insolvency, and were required to report gain as income).
(taxpayer proposes to sell 99-year conservation easement on farmland; land acquired in 1991; taxpayer has owned undivided 1/4 interest in land until gifting 1/2 of such interest to spouse; portion of land enrolled in CRP from 1991 to 2010; balance of land farmed by taxpayer's sibling since 1991; taxpayer farmed other land and reported farm income on Schedule F; aggregation election could be made under Treas. Reg. Sec. 1.469-4(c) for all farming activities; test for material participation requirement of state law exclusion of capital gain upon sale of easement is whether totality of participation in all farming activities that are aggregated; material participation test satisfied overall even if not satisfied with respect to specific farmland at issue; as long as 10-year holding period satisfied, Iowa capital gain exclusion available).
(taxpayer invested in cell phone industry and obtained FCC licenses to serve rural areas; taxpayer formed S corporation and contributed license to it in exchange for stock; another S corporation created that acquired more licenses and transferred them to LLCs in exchange for LLC assuming debt for licenses; S corporation had no income except that allocated to it from first S corporation; all entities went bankrupt and taxpayer claimed it had sufficient basis to deduct losses because money was borrowed from one S corporation and loaned to another S corporation; IRS disallowed flow-through losses on basis that transfer of funds was not first loaned from the S corporation to the taxpayers and then to the other S corporation; step-transaction doctrine applied; payments recharacterized as loans only via year-end reclassifying journal entries and other documents; allocation of purchase price of equipment to depreciable assets not correct and that some entities not actively engaged in trade or business and, thus, no amortization for deductions related to FCC licenses).
(petitioner (self-employed, licensed, clinical social worker and psychotherapist) provided services at various assisted living facilities; petitioner failed to keep adequate records separating business and personal expenses; petitioner blamed flood for inadequate records, but did not attempt to recreate records; court granted some business deductions, but denied others for lack of substantiation; petitioner entitled to charitable contribution deduction of slightly over $1,000).
(no Sec. 179 deduction allowed for airplane owned by spouse's S corporation which husband used only for flying lessons for himself; airplane never used in trade or business; no additional penalty levied because taxpayer acted in good faith reliance on advice of competent tax advisor).
(taxpayers, married couple, entered into offer-in-compromise with IRS pertaining to 2007 tax year; taxpayers sought refund of additional child tax credit, earned income tax credit and economic stimulus rebate; OIC contained provision that any refund or overpayment in 2007 would be retained by the IRS; court dismissed claim related to overpayment; court agreed with plaintiff that stimulus payment was advance payment for 2008 tax year and not covered by OIC).
(value of catered meals provided to flight crew members that are prepared by independent third party vendor at ground facility excludible from crew members' gross income under I.R.C. Sec. 119 and are taxpayer may deduct 50% of costs associated with providing meals).