Case Summaries

Diaz v. Comr., T.C. Sum. Op. 2011-103

(taxpayers, married couple, entitled to deduct some business expenses under I.R.C. Sec. 162; as for deduction for business miles driven, mileage log showed beginning and ending miles, beginning and ending location and mileage for each trip - even though log did not show total mileage for all auto use during tax year in question or the business purpose of the auto's use, log substantially complied with "adequate records" requirement of Treas. Reg. Sec. 1.274-5T(b)(6) and to extent log deficient, taxpayer provided corroborative evidence sufficient to establish required elements for deductibility of $6,675 attributable to vehicle expense; amounts paid for tolls not deductible because taxpayer couldn't show tolls attributable to business trips; no deduction for uniform and shoe expenses - clothing and shoes adaptable for general, personal use; as to cell phone expense taxpayers did not allocate payments between personal and business use - no deduction available; expenses for office supplies not deductible due to lack of substantiation). 

Howard v. United States, 448 Fed. Appx. 752 (9th Cir. 2011)

(petitioner sold incorporated dental practice and claimed that goodwill proceeds were personal assets subject to tax at long-term capital gain rates; court disagreed). 

Nordeen v. Comr., 2011 Tax Ct. Summary LEXIS 100

(Schedule C deductions disallowed due to lack of substantiation in excess of what IRS allowed). 

Equipment Holding Co. LLC v. Comr., 439 Fed. Appx. 368 (5th Cir. 2011)

(taxpayer's understatement in income (i.e., omission of gross income exceeding 25 percent of gross income) caused by overstating income tax basis does not trigger the six-year statute of limitations set forth in I.R.C. Sec. 6501(e)(1)(A); three-year statute of limitations applies; opinion follows court's prior opinion in Burks v. United States, 633 F.3d 347 (5th Cir. 2011), and also consistent with opinions from the Fourth, Ninth and Federal Circuit Courts of Appeal; Seventh Circuit has decided to the contrary). 

Freda, et ux. v. Comr., 656 F.3d 570 (7th Cir. 2011), aff'g., T.C. Memo. 2009-191

(money paid in accordance with settlement agreement is taxable as income rather than capital gains; money was paid for lost profits rather than for the sale of exchange of trade secrets or to terminate rights to a trade secret). 

Combs v. Texas Entertainment Association, et al., 347 S.W.3d 277 (Sup. Ct. Tex. 2011)

(respondents challenge Texas statute requiring business offering live nude entertainment and consumption of alcohol on premises to remit $5 fee for each customer admitted to state comptroller; Texas Supreme Court concluded fee was “content-neutral” and satisfied four-part “O’Brien” test, thus, did not violate First Amendment; $5 fee was minimal restriction on business and business seeking to avoid fee need only bar alcohol consumption; state met “O’Brien” factors, because state’s interest unrelated to suppression of free expression and restriction on freedoms under First Amendment no greater than essential to further state’s interest; Texas Court of Appeals ruling reversed and case remanded to trial court to consider issues raised by respondents).

Freda, et ux. v. Comr., 656 F.3d 570 (7th Cir. 2011), aff'g., T.C. Memo. 2009-191

(money paid in accordance with settlement agreement is taxable as income rather than capital gains; money was paid for lost profits rather than for the sale of exchange of trade secrets or to terminate rights to a trade secret).

Weatherly v. Comr., T.C. Memo. 2011-206

(some deductions for contract labor expenses disallowed due to lack of substantiation; taxpayer operated bailiff consulting business and hired daily workers to perform evictions, move property and serve process; no 1099-Misc returns filed with IRS until prepared for audit). 

Shellito v. Comr., 437 Fed. Appx. 665 (10th Cir. 2011), vacating, T.C. Memo. 2010-41

(court rejected Tax Court's finding that wife of taxpayer not bona fide employee for purposes of medical reimbursement plan; immaterial that reimbursements originated from joint checking account of taxpayer and spouse; taxpayer carefully followed rules for establishing employment relationship and deducting amounts paid under plan; court rejected IRS position that deductibility of medical reimbursements hinges on whether or not expenses might be paid from another source, even if that source has an obligation to pay, as lacking any support in caselaw; on remand, Tax Court is to determine whether wife was bona fide employee by applying common law principles of agency). 

Missouri Dept. of Rev. (Ltr. Rul. 6865, Aug. 23, 2011)

(retailer's sales of farm items are exempt from state sales and use tax if they are used solely for planting, harvesting, processing or transporting a forestry product; exempt items include such things as chainsaws and hand pruners). 

Intermountain Insurance Service of Vail LLC, et al. v. Comr., No. 10-1204, 2011 U.S. Dist. LEXIS 26424 (D.C. Cir. Aug. 18, 2011)

(court reverses Tax Court and holds that treasury regulations establishing that overstatement of basis constitutes omission from gross income triggering six-year statute of limitations under I.R.C. Sec. 6501(e)(1)(A) and Sec. 6229(c)(2); regulations entitled to Chevron deference). 

Bulas v. Comr., T.C. Memo. 2011-201

(petitioner uses a bedroom in home as office for accounting business and built bathroom across from bedroom for client use which is also used by family on occasion; petitioner entitled to deduct expenses to portion of home used exclusively for business; 8.45 percent of total area of home used exclusively for business; no Schedule C deduction for wages paid to daughters because no W-2 or 1099 issued). 

Moore v. Comr., T.C. Memo. 2011-200

(petitioner and wife divorced and divorce decree stated that petitioner was to pay the mortgage on the former marital home and receive the tax deduction for doing so with such payment not being taxable to former spouse; if former spouse sold home, she was to pay off the mortgage balance and be reimbursed by petitioner; she sold home and petitioner and her entered into settlement agreement as a result of court action with result  that petitioner would pay her $20,000 and petitioner's maintenance obligation would terminate; during tax year in issue, petitioner paid former spouse over $21,000 and deducted the amount as alimony; amount not deductible because obligation to continue making payments did not terminate in the event of former wife's death, but just by satisfaction or mortgage or reimbursement to former wife of mortgage payoff amount). 

Sucilla v. Comm’r, T.C. Memo 2011-197

(IRS determined deficiencies for 2007 and 2008 of $60,227 and 9,869, respectively, and assessed accuracy-related penalties against petitioners, farm labor contractors; deficiencies resulted from disallowance of expense deductions on Sch. C which petitioners failed to substantiate; petitioners did not keep separate books for business; relied on bank statements, subcontractor checks and receipts for expenses, some of which were lost; tax court upheld deficiencies and penalties).

Van Wickler v. Comr., T.C. Memo. 2011-196

(petitioners, married couple, improperly deducted horse-breeding expenses; husband not in trade or business of breeding horses; lack of evidence with respect to services).

I.L.M. 201147001 (Aug. 15, 2011)

(under amended Sec. 108(f)(4), loan repayments received by participants in state program for healthcare professionals working in underserved areas are not includible in income of recipient).

Warren Buffet Editorial (N.Y. Times, Aug. 14, 2011)

(author incorrectly claims in editorial (in an attempt to justify tax increase on the "wealthy") that he pays less taxes than his office staff; while author's Form 1040 may show an effective rate of 17.4 percent (which author claims was the effective rate for his most recently filed return), such rate is largely comprised from income generated from sale of stock taxed at capital gain rates; author fails to note that retained corporate earnings have already been subjected to tax at 35 percent rate in addition to capital gain rate imposed at time author sells stock; author also fails to note that tax is imposed on "phantom income"  - the inflation of the rise in stock value; effective federal rate actually near 50 percent; the Tax Foundation , a non-partisan tax research group has shown that Mr. Buffet's proposition that taxes should be raised on the "wealthy"  to would raise insignificant revenue.

Harnett, et ux. v. Comr., T.C. Memo. 2011-191

(petitioners' rental activities were passive due to failure to satisfy 750-hour test; no qualification as real estate professional). 

Gustashaw, et ux. v. Comr., T.C. Memo. 2011-195

(taxpayer participated in custom-rate adjustable debt structure (CARDS) tax shelter which generated a permanent tax loss for taxpayer; CARDS developed and promoted by Chenery and Associates (investment consultants); tax opinion letter given by Brown & Wood LLP law firm; petitioner liable for 40 percent underpayment penalty contained in I.R.C. Sec. 6662; transaction lacked economic substance; taxpayer also liable for negligence penalty for 2003 because they acted without reasonable cause and had no reasonable basis for claiming NOL carryover deduction on return - unreasonable to rely on tax opinion letter of Brown & Woods LLP due to firm's conflict of interest). 

Wood v. Com’r, T.C. Memo. 2011-190

(IRS issued petitioners notice of deficiency for tax years 2001, 2002, and 2003 ($68,029, $79,941, and $6,661, respectively); IRS also assessed accuracy-related penalty for each year at issue;  petitioners seek review of IRS determination and claim liability for only parts of deficiency and penalty; tax court affirmed IRS deficiency and penalties; §61(a) includes in gross income all income from whatever source derived, including income from illicit means (i.e. embezzlement); IRS claimed embezzled funds should be included as income, because petitioner misappropriated funds as an employee of corporation and had dominion and control over funds; using stolen funds as contribution to capital does not relieve responsibility to report funds as income; court affirmed penalties as petitioners offered no reasonable cause or substantial authority for failure to report income).

Priv. Ltr. Rul. 201144030 (Aug. 10, 2011)

(agricultural organization's only activity (since 1928( involves promoting and improving a certain breed of livestock in the northeastern U.S. for the benefit of the organization's members; I.R.C. Sec. 501(c)(3) status revoked; organization not organized and operated exclusively for charitable or educational purposes).

Miller v. Comr., T.C. Memo. 2011-189

(petitioner, shareholder in S corporation, gave majority of shares petitioner held in S corporation to son and received distributions that were in excess of petitioner's remaining adjusted basis in S corporation stock; once shares are no longer owned, there is no basis attributable to those shares in the taxpayer's hands; distributions exceeded taxpayer's basis and were long-term capital gain in nature). 

Blackwell v. Comm'r, T.C. Memo 2011-188

(hobby loss case; IRS determined deficiencies for 2005 and 2006 in respective amounts of $46,504 and $34,500; issue was whether petitioners’ horse breeding activity constituted activity for profit under IRC §183; tax court found facts of case did not indicate petitioners’ horse activity was motivated or driven by personal pleasure alone; though petitioners’ business plan did not work out and income did not exceed expenses, there were actual hopes for horse sales at a profit and petitioners’ were operating as a “business”; sufficient profit objective present).

Iowa Dept. of Revenue Ruling (No. 11201042 (Aug. 4, 2011)

(taxpayer, non-resident of Iowa, received income from various Iowa sources; IDOR notes that non-residents must file an Iowa return if Iowa-source income is greater than $1,000 (Iowa Code Sec. 422.13); taxpayer works in Albia one week per month as chiropractor and sells nutritional products).

IRS Info. 2011-0070 (Aug. 3, 2011)

(expenses incurred in attempt to obtain property are deductible as an ordinary loss; facts involved taxpayer's attempt to obtain Japanese patent; transaction entered into for profit).

Ledger, et ux. v. Comr., T.C. Memo. 2011-183

(maturation of life insurance policy triggered inclusion in gross income in amount equal to excess of policy proceeds over taxpayer's investment in policy; application of policy proceeds to repay policy loans is constructive distribution). 

Nagel v. Comr., T.C. Memo. 2011-184

(petitioners not entitled to theft loss deductions arising from alleged illegally foreclosed mortgage on personal residence because petitioners actually defaulted on loan and failed to prove that foreclosure was illegal). 

IRS Notice 2011-58, 2011-31 IRB 85 (Aug. 1, 2011)

(pursuant to I.R.C. Sec. 613A(c)(6)(C), IRS publishes the applicable percentages for marginal production for calendar years 1991-2011; for 2011, applicable percentage remains at 15 percent (where it has been since 2001; reference price for crude oil is $74.71 for 2010).

Missouri Dept. of Revenue (Priv. Ltr. Rul. 6855, Jul. 29, 2011)

(materials a dairy farmer buys that are used to build a manure containment facility are subject to sales tax; Mo. Rev. Stat. Sec. 144.020.1 imposes sales tax on retails sales of tangible personal property and Sec. 144.030.2(15) exempts certain equipment and devices used solely for water pollution abatement; permanent structure on real estate does not qualify as "machinery, equipment, appliances or devices under the exemption; thus, materials used in construction are not exempt). 

Wickersham, et tux. v. Comr., T.C. Memo. 2011-178

(IRS determined $98,201 deficiency in petitioners’ Federal income tax and $19,640 accuracy-related penalty for 2005 regarding petitioners’ sale of interests in home and towing business; petitioners operated towing business from farmhouse; in 2005, petitioners granted county highway easement on front portion of five-acre parcel and were paid nearly $160,000; in same year, competing business bought towing operation , easement, and five-acre parcel for a total sales price of $669,000 (minus prior rents paid); court held petitioners’ sale of permanent easement to buyers was a sale of property; court agreed with petitioner’s argument that 1/3 of the property was attributable to business use and 2/3’s was attributable to residential use; business portion of property determined to be both I.R.C. §1231 and I.R.C. §1250 property and amount of long-term capital gain under §1231 must be reduced by amount of §1250 gain recaptured at ordinary rates and at 25% rate; petitioners must recognize gain with respect to business percentage of sale of easement and treat property as §1231 property; as to sale of residential portion to buyers, court held petitioners satisfied requisite use requirements and home was petitioners’ “personal residence” and entitled to exclude up to $500,000 gain from sale of residential portion; petitioners’ income from sale of residential portion of permanent easement exempt to extent permitted under §121; tax preparer had sufficient expertise to justify petitioners’ reliance  and relied in good faith on preparer’s advice; petitioners not liable for I.R.C.§6662(a) accuracy-related penalty).

I.L.M. 201144023 (Jul. 28, 2011)

(transfer of fishing rights by partnership not taxed at long-term capital gain rates because transfer does not involve sale or exchange of capital asset under I.R.C. Sec. 1222; transferred rights did not constitute "property" as defined under I.R.C. Sec. 1221)

Recovery Group, Inc., et al. v. Comr., 652 F.3d 122 (1st Cir. 2011), aff'g., T.C. Memo. 2010-76

(covenant not to compete is 15-year amortizable property as an interest in a trade or business in accordance with I.R.C. Sec. 197(d)(1)(E)). 

Notice 2011-70, IR-2011-80

(IRS has issued proposed regulations extending two-year statute of limitations to 10 years for new equitable relief requests from joint liability filed by "innocent spouses; proposed regulations also apply to requests that are currently under consideration; previously denied requests due to two-year limitation may reapply via filing Form 8857 if collection statute of limitations for tax year(s) involved not yet expired; two-year rule not applicable to any pending litigation involving equitable relief, and if litigation final IRS to suspend collection action in certain circumstances; regulations to be issued to formally remove two-year limitation; effective for innocent spouse relief filed on or after Jul. 25, 2011).

Aldridge v. Comr., T.C. Sum. Op. 2011-96

(petitioner not entitled to deduct certain business expenses under I.R.C. §162(a) and liable for additional tax under I.R.C. §6651(a)(1) for failure to timely file; petitioner, self-employed realtor, reported no Sch. C business income for 2005 tax year and kept no records of business expenses; IRS included $21,745 as Sch. C income; petitioner claimed he was entitled to deduct certain business deductions, such as insurance and mileage; petitioner failed to establish entitlement to deductions due to lack of reliable evidence to establish amount and nature of deductions and actual payment thereof). 

Isaacs v. Comr., T.C. Memo. 2011-175

(petitioner liable for 10 % additional tax under I.R.C. §72(t) for early distributions from qualified retirement plans; exception of I.R.C. §72(t)(2)(A)(iii) for disability of taxpayer inapplicable; evidence of petitioner’s disability lacking in consideration of his continued business activity). 

IRS Notice 2011-70 (eff., Jul. 25, 2011)

(IRS announces that it is eliminating the regulations established under I.R.C. Sec. 6015(f) that establish a two-year statute of limitations (from time of first collection activity of IRS against "innocent" spouse) for innocent spouse claims, and that taxpayers that had claims denied due to the statute of limitations may reapply if claim is not being litigated; even though Third, Fourth and Seventh Circuit Courts of Appeal had upheld the validity of the regulations, IRS noted that many taxpayers were unaware of tax liability until after two-years had passed; pending requests submitted after two-year statute of limitations will still be considered ).

Iowa Dept. of Rev. Ruling No. 11201051 (Jul. 22, 2011)

(IA tuition and textbook credit applies to items listed on school supply list as being necessary to attend government elementary and secondary schools; such items include pens and pencils, Kleenex, rulers and crayons; credit equals 25 percent of first $1,000 paid for tuition and textbooks of each dependent attending an elementary or secondary school in IA; such amounts fit definition of "tuition").

U.S. Senate Refusal to Consider H.R. 2560 (Cut, Cap and Balance Act of 2011, Jul. 21, 2011)

(historic, bi-partisan compromise measure passed U.S. House on Jul. 19, 2011, to deal with federal debt and balance budget failed to receive a vote in the Senate; in partisan vote on Jul. 21, 2011, U.S. Senate voted 51-46 (with three Senators not voting) to not vote on the measure; all 51 votes to not allow the measure to come to a vote on the Senate floor were cast by Democratic Senators and all 46 votes to allow the measure to come for a vote on the Senate floor were cast by Republican Senators). 

Minnesota State Budget (HF 20, signed into law on Jul. 20 2011)

(MN Gov. Dayton (DFL) signed into law a state budget that, among other things, exempts up to $4 million in qualified farms and small businesses from state estate tax). 

Kaider v. Comr., T.C. Memo. 2011-174

(petitioner received four personal checks from uncle via loan agreements that designated them as "loans" and "loan" written on face of checks; debtor-creditor relationship established such that amount of loans not income to petitioner). 

Baker, et ux. v. Comr., T.C. Sum. Op. 2011-95

(married couple could not claim travel expenses as deductions on return for traveling from residence in state of Washington to respective places of work; husband worked in Hawaii as tug master and wife worked as flight attendant for employer whose flights originated in New York; each spouse had a different tax home). 

IRS Announcement 2011-42 (Jul. 19, 2011)

(IRS noted that it received no comments on whether it should continue allowing the high-low method for substantiating lodging, meal and incidental expenses incurred while traveling away from home; IRS to discontinue authorizing use of the method and will publish a Rev. Proc. on the matter in 2011). 

U.S. House passage of H.R. 2560 (Cut, Cap and Balance Act of 2011, Jul. 19, 2011)

(Act passed House by vote of 234-190; compromise measure that authorizes an increase in the federal debt limit to $16.7 trillion, cuts total federal spending by $111 billion in fiscal year 2012, reduces non-defense discretionary spending below fiscal year 2008 (pre-"stimulus") levels, implements statutory spending caps (but exempts Social Security, Medicare, Veterans' Benefits and Services, and Net Interest from such caps) designed to bring federal spending in line with historic average of 20 percent of GDP by 2021; also requires Congressional passage of a Balanced Budget Amendment to the Constitution be submitted to the states, and that any tax increase measure be approved by two-thirds vote in both Houses of Congress; nine Republicans voted against the measure because it increased the debt limit and five Democrats voted in favor of the measure). 

Moore v. Comr., T.C. Memo. 2011-173

(petitioner did not qualify as a professional gambler such that he could treat gambling expenses as business expenses; loss deduction limited to gambling winnings; accuracy-related penalty imposed; petitioner did receive some favorable adjustments due to not claiming them on return initially). 

CCM 201128024 (Jul. 15, 2011)

(points redeemed by customer in exchange for indoor tanning services are not subject to 10% tax on indoor tanning services included in health care act of 2010 which became effective on Jul. 1, 2010; to extent cash paid in addition to points in exchange for indoor tanning services, 10% tax applies only to cash paid for those services; as for computing tax when fee for indoor tanning service bundled with other services, other methods of computing the portion of the fee subject to the tax may exist apart from the IRS-prescribed ratio method). 

IRS News Release IR 2011-77 (Jul. 15, 2011)

(for truckers and other owners of heavy highway vehicles, next federal highway use tax return (Form 2290) due Nov. 30, 2011, rather than Aug. 31, 2011; extension due to scheduled expiration of highway use tax on September 30, 2011, and need to eliminate confusion if the Administration signs any reinstatement or modification into law; IRS specifies that returns should not be filed nor payments made before Nov. 1, 2011; states must accept Schedule 1 that was stamped by IRS for previous year's return, thus farmers can register covered vehicles with state or local authority). 

Nicolas v. Comr., T.C. Sum. Op. 2011-91

(amount petitioner ordered by court to pay ex-wife to cover her attorney fees and costs are not deductible as alimony because obligation lasted beyond ex-wife's death). 

Morgan v. Comr., T.C. Sum. Op 2011-92

(petitioner deemed to be engaged in trade or business of renovating and selling homes; entitled to substantiated business deductions under I.R.C. Sec. 162; but cannot claim IRS standard business mileage expense deduction on pickup truck because truck also subject to expense method depreciation election under I.R.C. Sec. 179 (court noted that property that is held only for production of income is not eligible for Sec. 179 expensing). 

Byers v. Comr., 420 Fed. Appx. 658 (8th Cir. 2011)

(in subsequent opinion, court holds that Tax Court did not err in determining taxpayer collaterally estopped from challenging finding that he was self-employed truck driver rather than employee of trucking company with result that income subject to self-employment tax; petitioner determined route to take and order of pick-ups; taxpayer not paid pre-determined wage, but percentage of gross and did not accrue vacation or pension benefits; taxpayer never sent a W-2 and did not object to receiving Form 1099; certain truck-lease payments would have been treated as deductible business expenses if IRS had examined return before issuing deficiency; case remanded on this sole issue). 

Abdi v. Comr., T.C. Sum. Op. 2011-89

(petitioner's 11-year old sister satisfied definition of "qualified child" under I.R.C. Sec. 152(c) such that petitioner could claim dependency exemption, EIC and child tax credit on behalf of sister; mother unable to claim petitioner as dependent for tax year at issue under facts of case).